<PAGE> 1
Form 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to______________
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COMMISSION FILE NUMBER 1-7534
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STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2270 South 88th Street, Louisville, Colorado 80028-4309
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ YES / / NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK ($.10 PAR VALUE) - 61,425,502 SHARES OUTSTANDING AT APRIL 28, 1997.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
MARCH 28, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
</TABLE>
<PAGE> 3
Form 10-Q
Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
<TABLE>
<CAPTION>
03/28/97
(Unaudited) 12/27/96
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash, including cash equivalents $ 521,651 $ 388,401
Short-term investments 16,962 29,176
Accounts receivable, net 420,979 554,159
Inventories (Note 2) 289,339 288,615
----------- -----------
Total current assets 1,248,931 1,260,351
Spare parts for maintenance, at cost (net) 28,303 29,625
Property, plant and equipment, at cost (net) 328,138 327,534
Deferred income tax assets, net 130,217 122,190
Other assets 131,533 144,576
----------- -----------
$ 1,867,122 $ 1,884,276
=========== ===========
LIABILITIES
Current liabilities:
Current portion of other long-term debt $ 4,637 $ 4,451
Accounts payable 88,886 82,949
Accrued liabilities 319,124 369,309
Income taxes payable 71,548 79,471
----------- -----------
Total current liabilities 484,195 536,180
8% Convertible subordinated debentures (Note 4) 125,677
Other long-term debt 21,692 25,129
Deferred income tax liabilities 22,713 16,307
----------- -----------
Total liabilities 528,600 703,293
----------- -----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000 shares authorized; 62,004,350 shares
issued at March 28, 1997, and 58,175,120
shares issued at December 27, 1996 6,200 5,818
Capital in excess of par value 1,579,886 1,444,939
Accumulated deficit (225,845) (265,434)
Treasury stock of 487,016 shares at March 28, 1997, and 62,514
shares at December 27, 1996 (18,390) (790)
Unearned compensation (3,329) (3,550)
----------- -----------
Total stockholders' equity 1,338,522 1,180,983
----------- -----------
$ 1,867,122 $ 1,884,276
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
Form 10-Q
Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
03/28/97 03/29/96
--------- ---------
<S> <C> <C>
Sales revenue $ 297,670 $ 317,298
Maintenance revenue 140,925 136,183
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Total revenue 438,595 453,481
--------- ---------
Cost of sales revenue 165,405 187,046
Cost of maintenance revenue 76,267 72,521
--------- ---------
Total cost of revenue 241,672 259,567
--------- ---------
Gross profit 196,923 193,914
Research and product development costs 45,699 49,622
Marketing, general, administrative and
other income and expense, net 102,538 108,114
--------- ---------
Operating profit 48,686 36,178
Interest income 6,962 8,240
Interest expense (1,359) (9,429)
--------- ---------
Income before income taxes and
extraordinary item 54,289 34,989
Provision for income taxes (14,700) (9,400)
--------- ---------
Income before extraordinary item 39,589 25,589
Extraordinary gain on sale of lease assets, net
of income taxes of $8,200 (Note 3) 9,535
--------- ---------
Net income $ 39,589 $ 35,124
========= =========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENTS (Note 8)
Primary:
Income before extraordinary item $ 0.64 $ 0.48
Extraordinary gain, net 0.18
--------- ---------
$ 0.64 $ 0.66
========= =========
Weighted average common shares and
equivalents 62,207 53,540
========= =========
Fully Diluted:
Income before extraordinary item $ 0.47
Extraordinary gain, net 0.15
---------
$ 0.62
=========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 5
Form 10-Q
Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
03/28/97 03/29/96
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers $ 558,904 $ 674,178
Cash paid to suppliers and employees (379,541) (411,685)
Interest received 6,522 8,240
Interest paid (1,220) (7,646)
Income taxes paid, net (21,614) (1,617)
--------- ---------
Net cash from operating activities 163,051 261,470
--------- ---------
INVESTING ACTIVITIES
Short-term investments, net 12,214
Purchase of property, plant and equipment (21,178) (6,628)
Other assets, net 1,607 (1,701)
--------- ---------
Net cash used in investing activities (7,357) (8,329)
--------- ---------
FINANCING ACTIVITIES
Repurchases of common stock (Note 7) (17,600)
Repayments of nonrecourse borrowings (Note 3) (33,533)
Repayments of other debt (Note 3) (1,919) (60,652)
Proceeds from employee stock plans 7,072 2,976
--------- ---------
Net cash used in financing activities (12,447) (91,209)
--------- ---------
Effect of exchange rate changes on cash (9,997) 6,461
--------- ---------
Increase in cash and cash equivalents 133,250 168,393
Cash and cash equivalents - beginning of the period 388,401 264,502
--------- ---------
Cash and cash equivalents - end of the period $ 521,651 $ 432,895
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Net income $ 39,589 $ 35,124
Depreciation and amortization expense 41,976 36,210
Translation loss 11,454 167
Other adjustments to income 4,795 5,590
(Increase) decrease in accounts receivable 120,309 (30,861)
Decrease in notes receivable and sales-type leases (Note 3) 234,593
Increase in inventories (12,878) (23,996)
Increase in equipment held for sale or lease, net (13,533)
Increase in spare parts for maintenance, net (914) (2,747)
(Increase) decrease in net deferred income tax asset 682 (7,526)
Increase (decrease) in accounts payable and accrued liabilities (34,366) 4,940
Increase (decrease) in income taxes payable (7,596) 23,509
--------- ---------
Net cash from operating activities $ 163,051 $ 261,470
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
Form 10-Q
Page 6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Capital in
Common Excess of Accumulated Treasury Unearned
Stock Par Value Deficit Stock Compensation
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 27, 1996 $ 5,818 $ 1,444,939 $ (265,434) $ (790) $ (3,550)
Shares issued in exchange for 8%
Convertible Subordinated
Debentures (3,553,204 shares)
(Note 4) 355 123,560
Shares issued for stock option
exercises (276,030 shares) 27 11,387
Repurchases of common stock
(424,500 shares) (Note 7) (17,600)
Net income 39,589
Other 221
----------- ----------- ----------- ----------- -----------
Balances, March 28, 1997 $ 6,200 $ 1,579,886 $ (225,845) $ (18,390) $ (3,329)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 7
Form 10-Q
Page 7
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The accompanying consolidated financial statements of Storage Technology
Corporation and its subsidiaries (StorageTek or the Company) have been prepared
in accordance with the Securities and Exchange Commission requirements for Form
10-Q. In the opinion of management, these statements reflect all adjustments
necessary for the fair presentation of results for the periods presented, and
such adjustments are of a normal, recurring nature. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 27, 1996.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
03/28/97 12/27/96
------------------------
<S> <C> <C>
Raw Materials $ 56,725 $ 76,152
Work-In-Process 96,346 78,834
Finished Goods 136,268 133,629
-------- --------
$289,339 $288,615
======== ========
</TABLE>
NOTE 3 - SALE OF LEASE ASSETS
In March 1996, StorageTek sold substantially all of the Company's net
investment in sales-type leases, installment receivables, and equipment held
subject to operating leases. The sale was a result of the Company's efforts to
focus on the core business and outsource its capital intensive lease financing
business. The Company used a portion of the cash proceeds to retire its
remaining nonrecourse borrowings and 9.53% Senior Secured Notes. The
transactions resulted in an extraordinary gain of $9,500,000, net of applicable
taxes of $8,200,000, in the first quarter of 1996.
NOTE 4 - DEBT AND CREDIT AGREEMENT
In December 1996, the Company called for redemption on January 13, 1997, all
outstanding 8% Convertible Subordinated Debentures due 2015 (8% Convertible
Debentures). During January 1997, 8% Convertible Debentures in the principal
amount of $125,258,000 were converted at a price of $35.25 per share into
3,553,204 shares of common stock. The remaining 8% Convertible Debentures were
redeemed for cash.
On April 9, 1997, the Company's $150,000,000 secured credit agreement was
terminated concurrent with the execution of a new $150,000,000 unsecured credit
agreement (the
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Form 10-Q
Page 8
Revolver) which expires in May 2000. The interest rates under the Revolver
depend on the type of advance selected. The primary advance rate is the agent
bank's prime lending rate. 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.
NOTE 5 - RESTRUCTURING RESERVES
During the fourth quarter of 1995, the Company adopted a formal action plan for
restructuring its enterprise and network businesses. The restructuring was
adopted in an effort to establish a more cost efficient business structure in
response to competition. Elements of the Company's restructuring plan include
focusing on its core businesses, outsourcing non-strategic activities,
rearchitecting its distribution processes and accelerating the integration of
Network Systems Corporation.
The following table summarizes the activity associated with the Company's
restructuring reserves during the quarter ended March 28, 1997 (in thousands of
dollars):
<TABLE>
<CAPTION>
Employee Lease Other
Severance Abandonments Exit Costs Total
-----------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 27, 1996 $ 16,152 $ 15,477 $ 1,980 $ 33,609
Cash payments (672) (500) (382) (1,554)
-------- -------- -------- --------
Balances, March 28, 1997 $ 15,480 $ 14,977 $ 1,598 $ 32,055
======== ======== ======== ========
</TABLE>
While the majority of these remaining accruals are expected to result in future
cash outflows, these outflows are not expected to have a material effect on the
Company's liquidity.
NOTE 6 - LITIGATION
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court against the
Company and certain subsidiaries. The suit alleged that the Company breached a
1990 settlement agreement that had resolved earlier litigation between the
parties. The suit sought injunctive relief and damages in the amount of
$2,400,000,000. On December 28, 1995, the court dismissed the complaint. Stuff
appealed the dismissal to the Colorado Court of Appeals. In April 1996, the
trial court stayed discovery on the Company's counterclaim for breach of the
covenant not to sue pending resolution of the appeal. In March 1997, the Court
of Appeals reversed the District Court's judgment and remanded the case back to
the District Court for further proceedings.
On February 15, 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array and
Tandem to either support certain disk drives purchased from them or provide the
Company with technical data necessary for StorageTek to provide such customer
support. In March 1994, Array and Tandem filed their answer and also filed
counterclaims against the Company alleging breach of contract and claiming
damages. On June
<PAGE> 9
Form 10-Q
Page 9
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 October 1997.
On June 29, 1995, Odetics, Inc. (Odetics) 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 on March 8, 1996. Oral arguments were held in
January 1997. A decision is expected in the second or third quarter of 1997.
On December 8, 1995, Odetics 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
the appeal to the U.S. Court of Appeals for the Federal Circuit with respect to
the case filed by Odetics, Inc. in June 1995.
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division concerning the original
equipment manufacturer (OEM) agreement with IBM for mainframe online storage
subsystems. The Company received two additional CIDs in October 1996 and one
additional CID in February 1997. The CIDs requested production of documents and
testimony in connection with a review of the agreement for compliance with the
Sherman Act.
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 actions cited above and intends to vigorously defend against
these actions. However, it is reasonably possible that these actions 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 these actions is inherently
difficult to predict. In the event of an adverse outcome, the ultimate
potential loss could have a material effect on the Company's financial position
or reported results of operations in a particular quarter. An adverse decision,
particularly in patent litigation, could require material changes in production
processes and products or result in the Company's inability to ship products or
components found to have violated third-party patent rights.
NOTE 7 - REPURCHASES OF COMMON STOCK
In February 1997, the Company announced a program to repurchase up to 1,500,000
shares of the Company's common stock on an annual basis. The intent of the
repurchase program is to offset dilution associated with the Company's stock
purchase and stock option plans. As of March 28, 1997, the Company had
repurchased 424,500 shares of common stock for an
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Form 10-Q
Page 10
aggregate purchase price of $17,600,000. The repurchased shares are included
within treasury stock on the accompanying Consolidated Balance Sheet.
NOTE 8 - EARNINGS PER COMMON SHARE
Fully diluted earnings per common share for the first quarter of 1996 reflects
the assumed conversion of the Company's 7% Convertible Subordinated Debentures
and the 8% Convertible Debentures, whereas these convertible securities were
either not outstanding or were not dilutive in the first quarter of 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128, which is effective for periods ending after
December 15, 1997, requires changes in the computation, presentation, and
disclosure of earnings per share. All prior period earnings per share data must
be restated to conform with the provisions of SFAS No. 128. The Company will
adopt SFAS No. 128 for the year ended December 26, 1997, but does not expect
the new accounting standard to have a material impact on the Company's reported
financial results.
<PAGE> 11
Form 10-Q
Page 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 28, 1997
CERTAIN STATEMENTS IN THE FOLLOWING DISCUSSIONS REGARDING THE COMPANY'S FUTURE
PRODUCTS AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE
FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS. ACTUAL
RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THE RISKS DETAILED BELOW IN "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS."
GENERAL
Storage Technology Corporation (StorageTek or the Company) reported net income
for the first quarter ended March 28, 1997, of $39.6 million on revenue of
$438.6 million, compared to net income for the first quarter ended March 29,
1996, of $35.1 million on revenue of $453.5 million. The Company's reported net
income for the first quarter of 1996 includes an extraordinary gain of $9.5
million, net of taxes, associated with the sale of substantially all of the
Company's lease assets.
Revenue decreased 3% during the first quarter of 1997 as compared to the same
period in 1996. The decrease in revenue is a result of anticipated declines in
revenue from earlier generation Nearline products, delays in customer decisions
to purchase current generation Nearline products as they evaluated new
technology under development and competitive offerings, unfavorable foreign
currency exchange rate movements, and the sale of a non-strategic network
business in 1996. This decrease was partially offset by increased sales revenue
associated with sales of mainframe online products to IBM, as well as increased
sales of smaller-scale libraries for client/server attachment and open storage
disk products. The overall gross profit increased to 45% in the first quarter
of 1997 as compared to 43% in the first quarter of 1996 as a result of
increased gross profit margins on product sales, which were partially offset by
a decrease in gross profit margins on maintenance.
The Company's future revenue and operating results are significantly dependent
upon continuing demand for the Company's current Nearline product offerings;
successfully identifying and capitalizing on product and service markets
outside the Company's traditional marketplace, including solutions targeted for
the open-systems markets; achieving the milestones and reducing the costs
associated with the Company's manufacture of mainframe online products under
the OEM agreement with IBM; and expanding its distribution channels. For
discussion of these factors and other risk factors, see "Risk Factors That May
Affect Future Results," below.
The Company's cash balances increased $133.3 million during the first quarter
of 1997 primarily due to cash generated from operations of $163.1 million, which
was partially offset by investments in property, plant and equipment of $21.2
million and repurchases of common stock in the aggregate amount of $17.6
million.
<PAGE> 12
Form 10-Q
Page 12
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, maintenance, and software revenue.
<TABLE>
<CAPTION>
Quarter Ended
-------------------
03/28/97 03/29/96
-------- --------
<S> <C> <C>
Revenue:
Nearline products 64.3% 65.3%
Online products 23.7 18.5
Network products 7.3 10.5
Other products 4.7 5.7
------- -------
Total revenue 100.0 100.0
Cost of revenue 55.1 57.2
------- -------
Gross profit 44.9 42.8
Research and product development costs 10.4 11.0
Marketing, general, administrative and
other income and expense, net 23.4 23.8
------- -------
Operating profit 11.1 8.0
Interest income (expense), net 1.3 (0.3)
------- -------
Income before income taxes
and extraordinary item 12.4 7.7
Provision for income taxes (3.4) (2.1)
------- -------
Income before extraordinary item 9.0 5.6
Extraordinary gain on sale of lease assets, net
of income taxes 2.1
------- -------
Net income 9.0% 7.7%
======= =======
</TABLE>
REVENUE
Nearline Products
Revenue from Nearline products decreased 5% in the first quarter of 1997
compared to the same period in 1996. This decrease reflects a decline in sales
revenue mainly from PowderHorn 9310 (PowderHorn(R)), an Automated Cartridge
System (ACS) Library, and earlier generation Nearline products, such as 4480
18-Track Tape Cartridge Subsystem (4480 18-Track), Silverton 4490 36-Track Tape
Cartridge Subsystem (Silverton), and 4410 ACS Library. Sales of PowderHorn
decreased primarily due to delayed customer purchasing decisions in the face of
new technology under development and competitive product offerings. Sales of
TimberLine 9490 (TimberLine(R)) a 36-track cartridge subsystem and RedWood SD-3
(RedWood(TM)), a high-capacity cartridge subsystem also decreased slightly
during the first quarter of 1997. All Nearline sales revenue was unfavorably
impacted by foreign currency exchange rate movements during the quarter. These
decreases were partially offset by increased sales of the TimberWolf 9710/9714
(TimberWolf), a smaller-scale library designed for client/server attachment,
and increased maintenance revenue from Nearline products. The Company realized
incremental sales revenue through the development of new business applications
for its Nearline products such as electronic imaging of documents.
<PAGE> 13
Form 10-Q
Page 13
Future sales of the Nearline product line are significantly dependent upon
continued customer demand for TimberLine and PowderHorn in the face of
competitive offerings; the timely development of new technology to complement
and enhance the existing product line; capturing market share for new Nearline
products targeted for client/server markets; and expanding the Company's
distribution channels for these products. The Company anticipates that the
marketplace for mainframe library and tape products will continue to experience
a slower rate of growth as customers transition to the client/server
environment. In order to continue to generate revenue growth for its Nearline
products, the Company must expand its share of the market for mainframe library
and tape products and successfully introduce new products for the client/server
marketplace. There can be no assurance that the mainframe library and tape
products will expand market share or that Nearline products targeted for the
client/server marketplace will continue to gain market acceptance in the
future.
Online Products
Revenue from online products increased 24% in the first quarter of 1997
compared to the same period in 1996. This increase is primarily due to
increased sales of mainframe online products, including software products that
enhance customer productivity, in the first quarter of 1997, as compared to the
same period in 1996. The sales of mainframe online products in the first
quarter of 1997 were under the OEM agreement with IBM, whereas the sales in the
first quarter of 1996 were to end-users. Sales revenue of open storage disk
products also increased in the first quarter of 1997 as compared to the first
quarter of 1996.
The Company anticipates the OEM agreement with IBM will continue to benefit the
Company through increased market penetration for mainframe online products.
Additionally, the OEM agreement is expected to allow the Company to redirect
resources to other products and services outside the Company's traditional
marketplace.
Network Products
Revenue from network products decreased 32% in the first quarter of 1997
compared to the same period in 1996. This decrease is due primarily to the
continued decline in revenue from older network products and channel extension
products, as well as the sale of a non-strategic network business in the third
quarter of 1996. The Company realized cost savings associated with the
manufacture of network products during the first quarter of 1997, however, the
revenue generated by the network business did not meet management expectations.
GROSS PROFIT
Gross profit increased to 45% in the first quarter of 1997, compared to 43% for
the first quarter of 1996, due to an increase in product sales margins. This
increase was partially offset by a decrease in maintenance margins.
Gross profit on product sales increased to 44% in the first quarter of 1997,
compared to 41% in the first quarter of 1996. This increase is primarily due to
improved margins associated with mainframe online products as a result of
increased sales of higher margin software products and benefits associated with
increased manufacturing volumes. Gross profit margins associated with Nearline
product sales also increased in the first quarter of 1997 as compared to the
first quarter of 1996. These increases were partially offset by decreased
<PAGE> 14
Form 10-Q
Page 14
margins from network products. Gross margins in the first quarter of 1997 also
benefited from a change in classification of approximately $8.3 million of
advanced manufacturing costs which are now included within research and product
development expenses in the Consolidated Statement of Operations.
Gross profit on maintenance revenue decreased to 46% in the first quarter of
1997, compared to 47% in the first quarter of 1996, primarily due to costs
associated with the Company's entry into the professional consulting services
business.
The Company's ability to sustain or improve product sales margins during 1997
is significantly dependent upon the Company's continued success in reducing
manufacturing costs in all of its product lines. The Company anticipates that
gross profit margins on sales of its mainframe online products will be
pressured due to lower OEM pricing and scheduled price reductions over the term
of the agreement with IBM. While pricing pressures are expected to be partially
offset by lower manufacturing costs resulting from increased volumes and
operating expense savings, the Company must further reduce costs and expenses
associated with manufacturing these products in order to achieve expected
benefits. Gross profit margins on product sales also may be adversely affected
by inventory writedowns resulting from rapid technological changes and delays
in gaining market acceptance for new products. Gross profit margins on
maintenance may be adversely affected in the future by increased competition.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenditures decreased 8% in the first quarter
of 1997, compared to the same period of 1996, and decreased as a percent of
revenue to 10% in the first quarter of 1997 from 11% in 1996. The decrease in
expenditures during the first quarter of 1997 reflects IBM's agreement to
partially fund the development of enhancements for mainframe online products
pursuant to the OEM agreement. This decrease was partially offset by
approximately $8.3 million of costs associated with certain advanced
manufacturing activities which were classified as research and product
development expenditures in the first quarter of 1997, whereas in 1996 these
costs were included within cost of sales in the Consolidated Statement of
Operations.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
Marketing, general, administrative and other income and expense (MG&A and
Other) decreased 5% in the first quarter of 1997, compared to the first quarter
of 1996. This decrease is primarily a result of gains realized on the sale of
accounts receivable of approximately $5.3 million, coupled with decreased
marketing expenses associated with lower sales volume.
INTEREST INCOME AND EXPENSE
Interest income decreased 16% in the first quarter of 1997, as compared to the
same period of 1996, as additional interest income associated with higher cash
and investment balances in the first quarter of 1997 was more than offset by a
decrease in interest income associated with lease assets which were sold in
March 1996. Interest expense decreased 86% in the first quarter of 1997, as
compared to the same period of 1996, primarily due to the redemption of all
<PAGE> 15
Form 10-Q
Page 15
outstanding 7% and 8% Convertible Subordinated Debentures in July 1996 and
January 1997, respectively.
INCOME TAXES
Statement of Financial Accounting Standards (SFAS) No. 109 requires that
deferred income tax assets be recognized to the extent realization of such
assets is more likely than not. Based on the currently available information,
management has determined that the Company will more likely than not realize
$130.2 million of deferred income tax assets as of March 28, 1997. The
Company's valuation allowance of $85.3 million as of March 28, 1997, was
established based upon the consideration of a variety of factors, including the
Company's earnings history, the number of years the Company's operating loss
and tax credits can be carried forward, the existence of taxable temporary
differences, near-term expectations, and the highly competitive nature of the
high-technology marketplace.
The provision for income taxes relates primarily to U.S. federal and state
taxes. The Company anticipates that the effective tax rate will increase in the
future as remaining net deductible temporary differences, tax credit
carryforwards, and net operating loss carryforwards in the United States become
fully recognized.
EXTRAORDINARY GAIN
In March 1996, StorageTek sold substantially all of the Company's net
investment in sales-type leases, installment receivables, and equipment held
subject to operating leases. The sale was a result of the Company's efforts to
focus on the core businesses and outsource its capital intensive lease
financing business. The transactions resulted in an extraordinary gain of $9.5
million, net of applicable taxes of $8.2 million, in the first quarter of 1996.
RESTRUCTURING
During the fourth quarter of 1995, the Company adopted a formal action plan for
restructuring its enterprise and network businesses. The restructuring was
adopted in an effort to establish a more cost efficient business structure in
response to competition. Elements of the Company's restructuring plan include
focusing on core businesses and outsourcing non-strategic activities,
rearchitecting its distribution processes and accelerating the integration of
Network Systems Corporation.
The following table summarizes the activity associated with the Company's
restructuring reserves during the quarter ended March 28, 1997 (in thousands of
dollars):
<TABLE>
<CAPTION>
Employee Lease Other
Severance Abandonments Exit Costs Total
----------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 27, 1996 $ 16,152 $ 15,477 $ 1,980 $ 33,609
Cash payments (672) (500) (382) (1,554)
-------- -------- -------- --------
Balances, March 28, 1997 $ 15,480 $ 14,977 $ 1,598 $ 32,055
======== ======== ======== ========
</TABLE>
<PAGE> 16
Form 10-Q
Page 16
While the majority of these remaining accruals are expected to result in future
cash outflows, these outflows are not expected to have a material effect on the
Company's liquidity.
The elimination of recurring costs associated with the restructuring was
expected to yield expense reductions on an annual basis of approximately $125
million at the time of the restructuring. During 1996, the Company exceeded
these expected expense reductions. While the Company is evaluating various
outsourcing and automation projects in order to gain further improvements in
operating efficiencies, the Company does not anticipate that any material
incremental costs will be incurred as part of the restructuring which would
offset the anticipated expense reductions.
The Company believes that its restructuring programs have eliminated certain
non-essential functions and excess costs. Based on current short- and long-term
forecasts, the Company believes that such cost reductions will benefit future
operations. The continued success of the Company's ongoing restructuring
activities 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 continue 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.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's cash balances increased $133.3 million from December 27, 1996, to
March 28, 1997. The increase in cash during the first quarter of 1997 primarily
resulted from cash generated from operations of $163.1 million, which was
partially offset by investments in property, plant and equipment of $21.2
million and repurchases of common stock of approximately $17.6 million. Net
cash from operating activities of $261.5 million during the first quarter of
1996 included cash received from the sale of lease assets, which was partially
offset by net repayments of nonrecourse borrowings and other debt of $94.2
million.
The current ratio increased to 2.6 as of March 28, 1997, from 2.4 as of
December 27, 1996, principally due to a $50.2 million decrease in accrued
liabilities as a result of reduced employee benefit related accruals and a
decrease in product warranty obligations. Accounts receivable decreased $133.2
million, from $554.2 million as of December 27, 1996, to $421.0 million as of
March 28, 1997, principally due to reduced sales revenue in the first quarter
of 1997, as compared to the fourth quarter of 1996. Inventory balances as of
March 28, 1997, of $289.3 million were largely unchanged as compared to the
balance as of December 27, 1996.
Available Financing Lines
On April 9, 1997, the Company's $150 million secured credit agreement was
terminated concurrent with the execution of a new $150 million unsecured credit
agreement (the Revolver) which expires in May 2000. The interest rates under
the Revolver depend on the type of advance selected. The primary advance rate
is the agent bank's prime lending rate. Under the
<PAGE> 17
Form 10-Q
Page 17
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.
In December 1996, the Company entered into a financing agreement with a bank
which provides for the issuance of promissory notes in the principal amount of
up to $25 million at any one time. The agreement, which expires on January 15,
1998, provides for commitments by the bank to purchase promissory notes
denominated in a number of foreign currencies with the foreign currency
exchange rate applicable to each note set at the time the Company commits to a
future borrowing. The promissory notes, together with accrued interest, are
payable in U.S. dollars within 90 to 110 days from the date of issuance and
will bear interest at rates equal to the Eurodollar rate plus at least 0.50%
(6.27% as of March 28, 1997). Under the terms of the agreement, the Company is
required to comply with certain covenants which can, under certain
circumstances, include the maintenance of compensating cash balances. As of
March 28, 1997, the Company had not committed to any future borrowings.
In January 1996, the Company entered into a financing agreement with a bank
which provides for the sale of certain U.S. and foreign based accounts
receivable on a recourse basis. This agreement, which expires on January 31,
1998, allows for receivable sales of up to $40 million at any one time, and the
Company's obligations under the agreement are secured by a letter of credit for
the amount of the receivables sold. The selling price of the receivables is
partially determined based upon foreign currency exchange rates, and any gains
or losses on the sales are recognized within MG&A and Other in the Consolidated
Statement of Operations at the time the receivables are sold. During the
quarter ended March 28, 1997, the Company sold approximately $109.1 million of
receivables in connection with this agreement. As of March 28, 1997, the
outstanding balance associated with receivables sold on a recourse basis, but
not collected, was approximately $34.6 million, and the Company had committed
to future cumulative sales of approximately $264.2 million. Gains and losses
associated with the receivable sales are not expected to have a material effect
on the Company's reported financial results after taking into consideration
other transactions associated with the Company's international operations.
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.
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company intends to continue to commit
substantial amounts of its resources to research and development projects and
may, from time to time, as business opportunities arise, 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 financing. Any equity or convertible debt financing
could result in dilution to the Company's stockholders. There can be no
assurance that such additional financing, if required, can be completed on
terms acceptable to the Company.
Total Debt-to-Capitalization
The Company's total debt-to-capitalization ratio decreased from 12% as of
December 27, 1996, to 2% as of March 28, 1997. The decrease resulted from the
redemption of the Company's 8% Convertible Subordinated Debentures (8%
Convertible Debentures) in January 1997, and was partially offset by the
repurchases of common stock in the first quarter of 1997. These repurchases
were pursuant to a program announced in
<PAGE> 18
Form 10-Q
Page 18
February 1997 to repurchase up to 1.5 million shares of the Company's common
stock on an annual basis to offset dilution associated with stock purchase and
stock option plans. As of March 28, 1997, the Company had repurchased 424,500
shares of common stock for an aggregate purchase price of $17.6 million. The
repurchased shares are included within treasury stock on the accompanying
Consolidated Balance Sheet.
Repayment Obligations and Conversion Features
In December 1996, the Company called for redemption on January 13, 1997, all
outstanding 8% Convertible Debentures due 2015. During January 1997, 8%
Convertible Debentures in the principal amount of $125.3 million were converted
at a price of $35.25 per share into approximately 3.6 million shares of common
stock. The remaining 8% Convertible Debentures were redeemed for cash.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
During the first quarter of 1997, approximately 35% of the Company's revenue
was generated from international operations, and the Company expects that it
will generate a significant portion of its revenue from international
operations in the future. The majority of the Company's international
operations involve transactions denominated in the local currencies of
countries within Western Europe, principally Germany, France and the United
Kingdom; Japan; Canada and Australia. An increase in the exchange value of the
U.S. dollar reduces the value of revenue and profits generated by the Company's
international operations. As a result, the Company's operating and financial
results can be materially affected by fluctuations 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 to further reduce exposures. The Company
utilizes foreign currency options, generally with maturities of less than one
year, to hedge a portion of its exposure to exchange-rate fluctuations in
connection with anticipated revenue from its international operations. Gains
and losses on the options are deferred and recognized as an adjustment to the
associated revenue. The Company also utilizes forward exchange contracts,
generally with maturities of less than two months, to hedge its exposure to
exchange-rate fluctuations in connection with net monetary assets held in
foreign currencies. The forward contracts are marked-to-market each month with
any gains or losses recognized within MG&A and Other as an adjustment to the
foreign exchange gains and losses on the translation of net monetary assets.
The Company's international business may be affected by changes in demand
resulting from localized economic and market conditions. For example, in the
past, the Company's business has been adversely affected by weak economic
conditions in Western Europe. In addition, the Company is subject to the risks
of conducting business outside the United States, including changes in, or
impositions of, legislative or regulatory requirements, tariffs, quotas,
difficulty in obtaining export licenses, potentially adverse taxes, the burdens
of complying with a variety of foreign laws and other factors outside the
Company's control. There can be no assurances that one or more of the foregoing
factors will not have a material adverse effect on the Company's business or
financial results in the future.
<PAGE> 19
Form 10-Q
Page 19
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Product Development and Technological Change
The Company's results of operations and competitive strength depend upon the
successful and rapid development of new products and enhancements to existing
products. The market for the Company's products is characterized by rapid
technological advances and changes in customer demand, which necessitate
frequent product introductions and enhancements. These factors can result in
unpredictable product transitions and shortened product life cycles, and can
render existing products obsolete or unmarketable. The Company must make
significant investments in research and product development and successfully
introduce competitive new products and enhancements on a timely basis. The
success of new product introductions is dependent on a number of factors,
including the rate at which a new product gains acceptance and the Company's
ability to effectively manage product transitions. The development of new
technology, products, and enhancements is complex and involves uncertainties,
which increases the risk of delays in the introduction of new products and
enhancements. From time to time the Company has encountered delays that have
adversely affected the Company's financial results and competitive position in
the market. There can be no assurances that the Company will not encounter
development or production delays, or that despite intensive testing by the
Company, flaws in design or production will not occur in the future. Design
flaws could result in the Company experiencing a rate of failure in its
products that delays the shipment or sale of its products, triggers substantial
repair or replacement costs, damages the Company's reputation and causes
material adverse effect upon the Company's financial results.
The Company has historically generated a significant portion of its revenue and
operating profits from the sale and maintenance of library and tape products
designed for the mainframe marketplace. The Company anticipates that the
marketplace for mainframe library and tape products will continue to experience
a slower rate of growth as customers transition to the client/server
environment. In order to continue to generate revenue growth for its Nearline
products, the Company must expand its share of the market for mainframe library
and tape products and successfully introduce new products for the client/server
marketplace. The Company is focusing resources on expanding into new
marketplaces including: investing in research and development of new
applications and products for the open-systems marketplace; developing
network-attached storage solutions; establishing a professional services
consulting group to capitalize on the Company's expertise in information
storage management; and expanding the Company's distribution channels. There
can be no assurances that the Company will be successful in expanding into new
markets.
Dependence on IBM
Many of the Company's products are designed to be compatible with certain IBM
operating systems, and many of its products function like IBM equipment due to
the significance of the IBM computer operating environments. Future revenue
from products and maintenance is therefore dependent on the marketplace's
continued widespread acceptance of, and IBM's continued support of, these
products.
In June 1996, the Company entered into a worldwide non-exclusive OEM agreement
with IBM under which StorageTek develops and manufactures mainframe online
storage products for IBM. IBM serves as StorageTek's primary worldwide
distribution channel for mainframe online storage
<PAGE> 20
Form 10-Q
Page 20
products and StorageTek does not anticipate that it will continue to sell these
products directly to end-user customers during the three-year term of the
agreement. This OEM arrangement represents a significant change from the
Company's past business model. The Company's success in its mainframe online
storage business is now significantly dependent upon achieving certain product
quality, availability, supply, delivery and development milestones contained in
the OEM agreement and IBM's continued support for and success in marketing
these products to end-user customers. Because of lower OEM pricing and
scheduled price reductions over the term of the agreement, the Company must
reduce costs and expenses associated with manufacturing these products in order
to achieve the expected benefits. In addition, subject to required lead times
and minimum purchase commitment terms on behalf of IBM, the OEM arrangement may
cause the Company to incur additional costs associated with unanticipated
increases or decreases in manufacturing volumes. The agreement includes
termination provisions. The Company may elect to terminate the agreement if IBM
fails to meets its minimum volume commitments and would be entitled to receive
certain amounts from IBM. The agreement may be terminated by IBM for
convenience, or upon the occurrence of certain other conditions, in each case
IBM would be required to make a payment to the Company. IBM may also elect to
terminate the agreement upon the occurrence of certain instances of change in
control of the Company or for cause. The Company's failure to achieve the
milestones provided for in the agreement may result in reduced purchase
commitments, the imposition of penalties and, under certain circumstances, IBM
may terminate the agreement. There can be no assurances that the Company will
achieve the milestones or that the Company will realize the anticipated
benefits associated with the agreement.
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division concerning the OEM agreement
with IBM for mainframe online storage subsystems. The Company received two
additional CIDs in October 1996 and one additional CID in February 1997. The
CIDs requested production of documents and testimony in connection with a
review of the agreement for compliance with the Sherman Act. While the Company
believes that the agreement is in compliance with antitrust laws, it is unable
to predict the outcome of the investigation. In the event of an unfavorable
outcome, the Company could be required to pay penalties, modify the agreement
or terminate the agreement.
Competition
The market for the Company's products is intensely competitive and subject to
continuous, rapid technological change, frequent product performance
improvements and price reductions. In the mainframe marketplace, competition
comes from companies that have substantially greater resources, including IBM,
Fujitsu Ltd., and Hitachi, Ltd., as well as several similarly sized companies,
including Amdahl Corp. and EMC Corp. As it moves into the open-systems
marketplace, the Company will face competition both from its traditional rivals
and new sources. In the network connectivity and security product marketplace,
the competition includes a number of large companies with significant market
presence and resources, including IBM, Hewlett-Packard Company, and Computer
Network Technologies Corp., as well as a number of other companies. The Company
expects that the markets for its products will continue to change as customer
buying patterns migrate to the open-systems and network environments, and as a
result of focusing on emerging products and technologies. The Company's ability
to compete will depend to a considerable extent on its ability to continuously
develop and introduce new products and enhancements to existing products and
expand its distribution channels. The Company's competitiveness could also be
affected by cooperative alliances between the Company's
<PAGE> 21
Form 10-Q
Page 21
competitors or other relationships between its competitors, who may emerge and
rapidly acquire market share. These alliances and acquisitions may result in
companies with increased market presence or proprietary technology in the
Company's markets, as well as other companies being at various times,
collaborators, competitors and customers in different markets. Increased
competition may result in price reductions, delays in purchasing decisions as
customers evaluate new competitive product offerings, reduced profit margins
and declining market share, which may have a material adverse effect on the
Company's business and financial results.
Intellectual Property
The Company's intellectual property rights are material assets and key to its
business and competitive strength. 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 legal 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 its
license arrangements can be renewed on terms acceptable to the Company. The
failure to successfully protect its intellectual property rights or obtain
licenses from others as needed could have a material adverse effect on the
Company's business and financial results. In 1996, the Company entered into an
OEM agreement with IBM under which certain research and development activities
will be partially funded by IBM; any technology that is developed will be owned
by IBM, and subject to licensing rights by the Company.
The high technology industry is characterized by vigorous pursuit and
protection of intellectual property rights or positions, which in some
instances has resulted in significant litigation that is often protracted and
expensive. From time to time, StorageTek has commenced actions against other
companies to protect or enforce its intellectual property rights. Similarly,
from time to time, StorageTek has been notified that it may be infringing
certain patent or other intellectual property rights of others. Licenses or
royalty agreements are generally offered in such situations. Litigation by or
against the Company may 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, 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; or discontinue the
use of certain processes if it is unable to enter into royalty arrangements.
There can be no assurances 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 infringements. See Note 6 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS for additional information with respect to
the Company's legal proceedings.
<PAGE> 22
Form 10-Q
Page 22
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. The Company manufactures key
components for its products and purchases certain important components and
products. Some of these components and products are purchased 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 or for which alternative sources of supply are not readily
available. In particular, a key component of the Company's tape drive heads is
supplied by Sumitomo Corporation on a sole source basis. Certain of the
Company's suppliers have experienced occasional technical, financial or other
problems in the past that have delayed deliveries, but without significant
effect on the Company. An unanticipated failure of any sole source supplier to
meet the Company's requirements for an extended period, or an interruption of
the Company's ability to secure comparable components, could have a material
adverse effect on its revenue and results of operations. In the event a sole
source supplier was unable or unwilling to continue to supply components, the
Company would have to identify and qualify other acceptable suppliers. This
process could take an extended period, and no assurance can be given that any
additional source would become available or would be able to satisfy the
Company's production requirements on a timely basis.
Earnings Fluctuations
The Company's revenue and reported earnings have fluctuated significantly in
the past and may continue to fluctuate significantly in the future from quarter
to quarter due to a variety of factors, including, among others, the effects of
(i) customers' historical tendencies to make purchase decisions near the end of
the calendar year, (ii) the timing of the announcement and availability of
products and product enhancements by the Company and its competitors, (iii)
fluctuating foreign currency exchange rates, (iv) changes in the mix of
products sold, (v) variations in customer acceptance periods for the Company's
products, and (vi) global economic conditions.
Volatility of Stock Price
The trading price of the Company's common stock has fluctuated significantly in
the past and, in the future, may continue to fluctuate. The Company's stock
price may also be affected by 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, broad market
trends unrelated to the Company's performance, general market and economic
conditions, and foreign currency exchange rate fluctuations. In the future, if
the Company's reported operating results are below the expectations of stock
market analysts and investors, there could be an immediate and significant
adverse effect on the trading price of the Company's common stock. 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.
<PAGE> 23
Form 10-Q
Page 23
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Part I, Item 3 - Legal Proceedings, of the Company's Form 10-K for the
fiscal year ended December 27, 1996, electronically filed with the Commission
on March 7, 1997.
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court against the
Company and certain subsidiaries. The suit alleged that the Company breached a
1990 settlement agreement that had resolved earlier litigation between the
parties. The suit sought injunctive relief and damages in the amount of
$2,400,000,000. On December 28, 1995, the court dismissed the complaint. Stuff
appealed the dismissal to the Colorado Court of Appeals. In April 1996, the
trial court stayed discovery on the Company's counterclaim for breach of the
covenant not to sue pending resolution of the appeal. In March 1997, the Court
of Appeals reversed the District Court's judgment and remanded the case back to
the District Court for further proceedings.
Information concerning legal proceedings is also contained in Note 6 of NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS identified in Part I of this Form 10-Q.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with respect
to each of the actions 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 these actions is inherently
difficult to predict. In the event of an adverse outcome, the ultimate
potential loss could have a material effect on the Company's financial position
or reported results of operations in a particular quarter. An adverse decision,
particularly in patent litigation, could require material changes in production
processes and products or result in the Company's inability to ship products or
components found to have violated third-party patent rights.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.0* Computation of Earnings Per Common Share.
27.0* Financial Data Schedule.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter
ended March 28, 1997.
- --------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
<PAGE> 24
Form 10-Q
Page 24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
May 9, 1997 /s/ DAVID E. LACEY
- ----------------------------- ------------------------------------------
(Date) David E. Lacey
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
May 9, 1997 /s/ THOMAS G. ARNOLD
- ----------------------------- ------------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Chief Accounting Officer)
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
11.0 Computation of Earnings Per Common Share
27.0 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.0
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 28, March 29,
1997 1996
--------- ---------
<S> <C> <C>
PRIMARY (a)
Earnings
Income before extraordinary item $39,589 $25,589
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------- -------
Net income $39,589 $35,124
======= =======
Shares
Weighted average common shares outstanding 61,222 53,314
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 985 226
------- -------
Weighted average common shares
and equivalents 62,207 53,540
======= =======
Earnings per common share:
Income before extraordinary item $ 0.64 $ 0.48
Extraordinary gain, net 0.18
------- -------
$ 0.64 $ 0.66
======= =======
FULLY DILUTED
Earnings
Income before extraordinary item $39,589 $25,589
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 2,604
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 255 2,465
------- -------
Income before extraordinary item 39,844 30,658
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------- -------
Net income, as adjusted $39,844 $40,193
======= =======
Shares
Weighted average common shares outstanding 61,222 53,314
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 993 226
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 7,284
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 578 4,132
------- -------
Weighted average common shares
and equivalents, as adjusted 62,793 64,956
======= =======
Earnings per common share:
Income before extraordinary item $ 0.63 $ 0.47
Extraordinary gain, net 0.15
------- -------
$ 0.63 $ 0.62(a)
======= =======
</TABLE>
(a) These figures agree with the related amounts in the Consolidated Statement
of Operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q DATED MARCH 28, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-END> MAR-28-1997
<CASH> 521,651
<SECURITIES> 16,962
<RECEIVABLES> 420,979<F1>
<ALLOWANCES> 0
<INVENTORY> 289,339
<CURRENT-ASSETS> 1,248,931
<PP&E> 328,138<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,867,122
<CURRENT-LIABILITIES> 484,195
<BONDS> 21,692
0
0
<COMMON> 6,200
<OTHER-SE> 1,332,322
<TOTAL-LIABILITY-AND-EQUITY> 1,867,122
<SALES> 297,670
<TOTAL-REVENUES> 438,595
<CGS> 165,405
<TOTAL-COSTS> 241,672
<OTHER-EXPENSES> 45,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,359
<INCOME-PRETAX> 54,289
<INCOME-TAX> 14,700
<INCOME-CONTINUING> 39,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,589
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0
<FN>
<F1>Asset values for the interim period represent net amounts.
</FN>
</TABLE>
