Form 10-Q
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________to_______________
-----------------------------
COMMISSION FILE NUMBER 1-7534
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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, 80028-4309
Colorado (Zip Code)
(Address of principal executive offices)
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) - 53,538,897 SHARES OUTSTANDING AT
OCTOBER 31, 1997.
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 26, 1997
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 6 - Exhibits and Reports on Form 8-K 28
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Form 10-Q
Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
09/26/97
(Unaudited) 12/27/96
-----------------------
ASSETS
Current assets:
Cash, including cash equivalents $ 454,535 $ 388,401
Short-term investments 246,010 29,176
Accounts receivable, net 492,689 554,159
Inventories (Note 2) 276,007 288,615
--------- ---------
Total current assets 1,469,241 1,260,351
Spare parts for maintenance, at cost (net) 23,866 29,625
Property, plant and equipment, at cost (net) 301,857 327,534
Deferred income tax assets, net 135,450 122,190
Other assets 101,322 144,576
--------- ---------
$2,031,736 $1,884,276
========= =========
LIABILITIES
Current liabilities:
Current portion of other long-term debt $ 3,295 $ 4,451
Accounts payable 109,945 82,949
Accrued liabilities 354,589 369,309
Income taxes payable 63,872 79,471
--------- ---------
Total current liabilities 531,701 536,180
8% Convertible subordinated debentures (Note 4) 125,677
Other long-term debt 20,352 25,129
Deferred income tax liabilities 32,245 16,307
--------- ---------
Total liabilities 584,298 703,293
--------- ---------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000
shares authorized; 62,233,176 shares issued
at September 26, 1997, and 58,175,120 shares
issued at December 27, 1996 6,223 5,818
Capital in excess of par value 1,597,280 1,444,939
Accumulated deficit (117,331) (265,434)
Treasury stock of 879,015 shares at September 26, 1997,
and 62,514 shares at December 27, 1996 (36,099) (790)
Unearned compensation (2,635) (3,550)
--------- ---------
Total stockholders' equity 1,447,438 1,180,983
--------- ---------
$2,031,736 $1,884,276
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Nine Months Ended
---------------------------------------------
09/26/97 09/27/96 09/26/97 09/27/96
---------------------------------------------
Sales revenue $371,235 $348,122 $1,038,764 $1,006,202
Maintenance revenue 153,933 137,963 442,023 412,669
------- ------- --------- ---------
Total revenue 525,168 486,085 1,480,787 1,418,871
------- ------- --------- ---------
Cost of sales 201,818 222,101 567,016 607,568
Cost of maintenance 83,565 71,450 243,323 218,539
------- ------- --------- ---------
Total cost of revenue 285,383 293,551 810,339 826,107
------- ------- --------- ---------
Gross profit 239,785 192,534 670,448 592,764
Research and product
development costs 52,445 36,898 149,403 135,515
Marketing, general,
administrative and other
income and expense, net 120,597 104,384 338,251 317,014
------- ------- --------- ---------
Operating profit 66,743 51,252 182,794 140,235
Interest income 8,807 6,626 23,693 21,510
Interest expense (820) (4,378) (3,484) (21,396)
------- ------- --------- ---------
Income before income taxes
and extraordinary item 74,730 53,500 203,003 140,349
Provision for income taxes (20,200) (14,000) (54,900) (37,400)
------- ------- --------- ---------
Income before extraordinary
item 54,530 39,500 148,103 102,949
Extraordinary gain on sale of
lease assets, net of income
taxes of $8,200 (Note 3) 9,535
------- ------- --------- ---------
Net income $ 54,530 $ 39,500 $ 148,103 $ 112,484
======= ======= ========= =========
EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENTS (Note 8)
Primary:
Income before extraordinary
item $ 0.87 $ 0.65 $ 2.38 $ 1.83
Extraordinary gain, net 0.17
------ ------ ------ ------
$ 0.87 $ 0.65 $ 2.38 $ 2.00
====== ====== ====== ======
Weighted average common shares
and equivalents 62,598 61,080 62,359 56,336
====== ====== ====== ======
Fully Diluted:
Income before extraordinary item $ 1.75
Extraordinary gain, net 0.15
------
$ 1.90
======
The accompanying notes are an integral part of the consolidated financial
statements.
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Form 10-Q
Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Nine Months Ended
--------------------------
09/26/97 09/27/96
--------------------------
OPERATING ACTIVITIES
Cash received from customers $ 1,540,974 $ 1,657,036
Cash paid to suppliers and employees (1,162,562) (1,257,128)
Interest received 22,738 21,450
Interest paid (2,667) (16,093)
Income taxes paid, net (52,089) (24,570)
---------- ----------
Net cash from operating activities 346,394 380,695
---------- ----------
INVESTING ACTIVITIES
Short-term investments, net (216,834) (87,017)
Purchase of property, plant and equipment, net (39,824) (49,320)
Other assets, net 16,243 12,825
---------- ----------
Net cash used in investing activities (240,415) (123,512)
---------- ----------
FINANCING ACTIVITIES
Repurchases of common stock (Note 7) (40,726) (163,350)
Repayments of nonrecourse borrowings
and other debt (3,513) (97,091)
Proceeds from employee stock plans 17,373 18,748
---------- ----------
Net cash used in financing activities (26,866) (241,693)
---------- ----------
Effect of exchange rate changes on cash (12,979) 2,915
---------- ----------
Increase in cash and cash equivalents 66,134 18,405
Cash and cash equivalents - beginning
of the period 388,401 264,502
---------- ----------
Cash and cash equivalents - end of the period $ 454,535 $ 282,907
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Net income $ 148,103 $ 112,484
Depreciation and amortization expense 86,728 123,561
Translation loss 16,432 2,306
Other adjustments to income 14,146 16,109
(Increase) decrease in accounts receivable 37,603 (15,944)
Decrease in notes receivable and sales-type
leases 238,607
(Increase) decrease in inventories 13,233 (48,724)
Increase in equipment held for sale or
lease, net (33,025)
Increase in spare parts for maintenance, net (2,043) (6,085)
(Increase) decrease in net deferred income
tax asset 15,537 (32,942)
Increase (decrease) in accounts payable and
accrued liabilities 29,381 (29,624)
Increase (decrease) in income taxes payable (12,726) 53,972
---------- ----------
Net cash from operating activities $ 346,394 $ 380,695
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION> Form 10-Q
Page 6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
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 under stock purchase plan and
for exercises of stock options (638,160
shares, including 133,022 shares of
treasury stock) 50 28,743 5,417
Repurchases of common stock
(949,500 shares) (Note 7) (40,726)
Net income 148,103
Other 38 915
----- --------- -------- ------- ------
Balances, September 26, 1997 $6,223 $1,597,280 $(117,331) $(36,099) $(2,635)
===== ========= ======== ======= ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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Form 10-Q
Page 7
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
- -----------------------------
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):
09/26/97 12/27/96
-----------------------------
Raw Materials $ 51,040 $ 76,152
Work-In-Process 90,662 78,834
Finished Goods 134,305 133,629
------- -------
$276,007 $288,615
======= =======
NOTE 3 - SALE OF LEASE ASSETS
- -----------------------------
In March 1996, StorageTek sold substantially all of its investment in sales-
type leases, installment receivables, and equipment held subject to operating
leases resulting in an extraordinary gain of $9,535,000, net of applicable
taxes of $8,200,000.
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
replaced with a new $150,000,000 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 (8.5% as of September 26, 1997). 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.
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Form 10-Q
Page 8
As of September 26, 1997, the Company had issued letters of credit for
approximately $35,613,000 and had approximately $114,387,000 of available
credit under the Revolver.
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 included focusing on its core businesses, outsourcing non-
strategic activities, rearchitecting its distribution processes and channels,
and accelerating the integration of Network Systems Corporation.
The following table summarizes the activity associated with the Company's
restructuring reserves during the nine months ended September 26, 1997 (in
thousands of dollars):
Employee Lease Other
Severance Abandonments Exit Costs Total
--------------------------------------------------
Balances, December 27, 1996 $16,152 $15,477 $1,980 $33,609
Cash payments (3,222) (1,304) (569) (5,095)
------ ------ ----- ------
Balances, September 26, 1997 $12,930 $14,173 $1,411 $28,514
====== ====== ===== ======
The remaining restructuring reserves relate principally to the Company's
plans to further integrate its sales administration organization and
rearchitect its distribution processes in the United States and Europe.
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. In
July 1997, the Company filed a petition for certiori with the Colorado
Supreme Court seeking a reversal of this decision. The remand to the trial
court has been stayed pending a decision on the petition for certiori.
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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Form 10-Q
Page 9
them or provide the Company with technical data necessary for StorageTek to
provide such customer support. In March 1994, Array and Tandem filed their
answer and also filed counterclaims against the Company alleging breach of
contract and claiming damages. In June 1994, the court ordered Array and
Tandem to continue to provide support for these products and to maintain, in
an independent escrow account, the materials necessary to enable the Company
to support the products in the event Array and Tandem failed to provide such
services. In May 1995, the Company filed an amended complaint seeking
damages. A trial commenced on October 14, 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. In February 1996, a jury found that the Company's
products did not infringe the 151 Patent. Odetics appealed and in June 1997,
the U.S. Court of Appeals for the Federal Circuit reversed the district
court's ruling and remanded the case back to the district court for further
proceedings. A new trial date has not been set.
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 infringes 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 case filed by Odetics, Inc. on June 29, 1995, which is further
described above.
On July 30, 1996, the Company received Civil Investigative Demands (CIDs)
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 additional CIDs in October 1996,
February 1997, May 1997, and June 1997. The CIDs requested production of
documents and testimony in connection with a review of the agreement for
compliance with the Sherman Act. Since June 1997, the Department of Justice
has requested the Company to provide it with further information. The
Company has provided information and is engaged in discussions with the
Department of Justice regarding the resolution of the investigation. In the
event of an unfavorable outcome, the Company could be required to pay
penalties, or modify or terminate the agreement.
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.
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Form 10-Q
Page 10
NOTE 7 - REPURCHASES OF COMMON STOCK
- ------------------------------------
In February 1997, the Company announced a program to repurchase up to
1,500,000 shares of 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 September 26, 1997, the Company had
repurchased 949,500 shares of common stock at a cost of $40,726,000 under
this program.
NOTE 8 - EARNINGS PER COMMON SHARE
- ----------------------------------
Fully diluted earnings per common share for the nine months ended September
27, 1996, reflects the assumed conversion of the Company's 7% and 8%
Convertible Subordinated Debentures, whereas these convertible securities
were either not outstanding or were not dilutive for all other periods
presented.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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 during the fourth quarter 1997, but does not expect the
new accounting standard to have a material impact on the Company's reported
earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130, which is effective for all periods beginning after December 15,
1997, establishes standards for reporting and displaying comprehensive income
and its components with the same prominence as other financial statements.
All prior periods must be restated to conform with the provisions of SFAS No.
130. The Company will adopt SFAS No. 130 during the first quarter of 1998,
but does not expect the new accounting standard to have a material impact on
the Company's reported financial results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997, establishes new disclosure
requirements for operating segments, including products, services, geographic
areas, and major customers. The Company will adopt SFAS No. 131 for the 1998
fiscal year, but does not expect the new accounting standard to have a
material impact on the Company's reported financial results.
NOTE 10 - SUBSEQUENT EVENTS
- ---------------------------
In October 1997, the Company announced a program to repurchase up to
$800,000,000 of its common stock through open market purchases and privately
negotiated transactions. The repurchases are expected to be complete by the
end of fiscal year 1998. In connection with this plan, the Company
repurchased and retired 8,000,000 shares of its common stock in October 1997
for an initial purchase price of $431,261,000 through a privately negotiated
transaction. The final purchase price of the common stock is subject to
adjustment based on
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Form 10-Q
Page 11
the trading price of the stock during a defined period. Any price adjustment
will be reflected as an adjustment to capital in excess of par value on the
Consolidated Statement of Changes in Stockholders' Equity.
In October 1997, the Company replaced its $150,000,000 unsecured credit
agreement with a new $350,000,000 unsecured credit agreement which expires in
October 2001. The credit limit available under this facility will be reduced
by $12,500,000 per quarter beginning January 1999. The interest rates under
the new credit agreement depend on the type of advance selected. The primary
advance rate is the agent bank's prime lending rate. The new credit
agreement requires that the Company comply with certain financial and other
covenants, including restrictions on the payment of cash dividends on its
common stock.
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Form 10-Q
Page 12
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 26, 1997
CERTAIN STATEMENTS IN THE FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE
PRODUCTS AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE
FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS. ACTUAL
RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THE RISKS DETAILED BELOW IN "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS."
GENERAL
- -------
Storage Technology Corporation (StorageTek or the Company) reported net
income for the third quarter ended September 26, 1997, of $54.5 million on
revenue of $525.2 million, compared to net income for the third quarter ended
September 27, 1996, of $39.5 million on revenue of $486.1 million. Net
income of $148.1 million was reported for the nine months of 1997 on revenue
of $1.48 billion, compared to net income of $112.5 million for the nine
months of 1996 on revenue of $1.42 billion. The Company's reported net
income for the nine months of 1996 includes an extraordinary gain of $9.5
million, net of taxes, associated with the sale of substantially all of the
Company's lease assets.
Revenue increased 8% and 4% during the third quarter and nine months of 1997,
respectively, compared to the same periods in 1996. The increase in revenue
in the third quarter of 1997 is primarily due to increased sales revenue from
smaller-scale libraries designed for client/server attachment and sales of
mainframe Nearline products associated with the Company's applications
initiatives. This increase was partially offset by decreased sales revenue
from mainframe online, network, and earlier generation mainframe Nearline
products. The increase in revenue for the nine months of 1997 is primarily
due to increased sales of client/server tape and disk storage products,
mainframe online products, and application sales. The increase during the
nine month period was partially offset by decreased sales revenue from
earlier generation mainframe Nearline and network products. Revenue for the
third quarter and nine months of 1997 was reduced by unfavorable foreign
currency exchange rate movements. Overall gross profit margin increased to
46% and 45% during the third quarter and nine months of 1997, respectively,
compared to 40% and 42% for the same periods in 1996. The increase was
primarily a result of increased product sales margins which was partially
offset by a decrease in maintenance margins.
The Company's future revenue and operating results are significantly
dependent upon the continued demand for its mainframe Nearline product
offerings in their traditional markets; expanding the markets for its
mainframe Nearline products through the development of new products and
applications; increasing sales of products targeted for the client/server
market; satisfying its obligations under the OEM agreement with IBM; and
expanding its product distribution channels. For discussion of these and
other risk factors, see "Risk Factors That May Affect Future Results" below.
The Company's cash balances increased $66.1 million during the nine months of
1997. Cash generated from operations of $346.4 million was partially
utilized by short-term investments of
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Form 10-Q
Page 13
$216.8 million, repurchases of common stock at a cost of $40.7 million, and
net investments in property, plant and equipment of $39.8 million.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by product line
which includes product sales, maintenance, and software revenue.
Quarter Ended Nine Months Ended
-----------------------------------------
09/26/97 09/27/96 09/26/97 09/27/96
-----------------------------------------
Revenue:
Nearline products 66.8% 61.7% 65.7% 65.0%
Online products 21.5 25.1 22.6 20.4
Network and other products 11.7 13.2 11.7 14.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 54.3 60.4 54.7 58.2
----- ----- ----- -----
Gross profit 45.7 39.6 45.3 41.8
Research and product development
costs 10.0 7.6 10.1 9.6
Marketing, general, administrative
and other income and expense, net 23.0 21.5 22.9 22.3
----- ----- ----- -----
Operating profit 12.7 10.5 12.3 9.9
Interest income, net 1.5 0.5 1.4 0.0
----- ----- ----- -----
Income before income taxes and
extraordinary item 14.2 11.0 13.7 9.9
Provision for income taxes (3.8) (2.9) (3.7) (2.6)
----- ----- ----- -----
Income before
extraordinary item 10.4 8.1 10.0 7.3
Extraordinary gain on sale of lease
assets, net of income taxes 0.6
----- ----- ----- -----
Net income 10.4% 8.1% 10.0% 7.9%
===== ===== ===== =====
REVENUE
- -------
NEARLINE PRODUCTS
Revenue from Nearline products increased 17% and 6% during the third quarter
and nine months of 1997, respectively, compared to the same periods in 1996.
These increases are primarily due to increased sales of TimberWolf, a family
of smaller-scale libraries designed for client/server attachment, and RedWood
SD-3 (RedWood), a high-capacity cartridge subsystem. The success of the
Company's initiative to develop new applications was a significant
contributor to the increase in RedWood sales. The Company's new applications
include document management, scientific, check imaging, broadcast and medical
applications. Sales of the Company's TimberLine 9490 (TimberLine), a 36-
track cartridge subsystem, and PowderHorn 9310 (PowderHorn), an Automated
Cartridge System (ACS) Library, also increased in the third quarter of 1997,
as compared to the same period in 1996. Sales revenue from TimberLine and
PowderHorn in the first half of 1997 was reduced due to delays in customer
purchase decisions associated with their evaluation of new mainframe
technology and the expansion of the client/server market. Nearline revenue
for both the third quarter and
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Page 14
nine months of 1997 was reduced by declining sales of earlier generation
products. Nearline sales and maintenance revenue were unfavorably impacted
during the third quarter and nine months of 1997 by foreign currency exchange
rate movements, as compared to the same periods of 1996.
The Company anticipates a slow growth rate in the market for mainframe
Nearline products as customers continue to transition to the client/server
environment. Future revenue growth for Nearline products is dependent upon
the continued demand for mainframe Nearline products, successfully
introducing new products for the mainframe and client/server environments,
and the continuing success of the Company's applications development
initiative. The Company is developing new products and features designed to
increase functionality and reduce the cost of data storage. In October 1997,
the Company announced the Virtual Storage Manager (VSM) which is designed to
improve performance, cartridge utilization, and overall storage management.
VSM is planned to be compatible with most of the Company's current mainframe
Nearline products and incorporates the Company's Iceberg technology. There
can be no assurance that the Company will be successful in growing revenue
from its mainframe Nearline products or that Nearline products targeted for
the client/server and new applications markets will continue to gain market
acceptance in the future. Additionally, there can be no assurances that VSM
and new Nearline products and features currently under development will be
completed in a timely manner or gain significant market acceptance.
ONLINE PRODUCTS
Revenue from online products decreased 7% in the third quarter, but increased
16% in the nine months of 1997, compared to the same periods in 1996. The
decrease in revenue in the third quarter of 1997 as compared to 1996, is due
to reduced sales revenue from mainframe online products. Sales revenue in
the third quarter of 1996 included sales of mainframe online products both to
IBM under the OEM agreement and to end-users through the Company's existing
channels; whereas in the third quarter of 1997, mainframe online products
were sold only to IBM under the OEM agreement. The decrease in revenue
during the third quarter of 1997 was partially offset by increased sales of
software for mainframe online products and sales of open storage disk
products. The increase in online revenue for the nine months of 1997, as
compared to the same period in 1996, is due to increased hardware and
software sales revenue for mainframe online products under the OEM agreement
with IBM and increased sales of open storage disk products.
The Company anticipates the OEM agreement with IBM will continue to benefit
the Company through increased market penetration for mainframe online
products, provided that the Company continues to satisfy its obligations
under the agreement. See "Risk Factors That May Affect Future Results -
Dependence on IBM," for description of risks which could adversely impact the
success of the OEM agreement.
NETWORK AND OTHER PRODUCTS
Revenue from network and other products decreased 4% and 17% in the third
quarter and nine months of 1997, respectively, as compared to the same
periods of 1996. The decrease is primarily due to continued declines in
revenue from the network products. This decrease in sales of network products
was partially offset by an increase in revenue from professional consulting
services.
<PAGE>
Form 10-Q
Page 15
GROSS PROFIT
- ------------
Overall gross profit margins increased to 46% and 45% in the third quarter
and nine months of 1997, respectively, compared to 40% and 42% for the same
periods of 1996, due to an increase in product sales margins, attributable
to favorable product mix and reduced costs. This increase was partially
offset by a decrease in maintenance margins.
Product sales margins increased to 46% and 45% in the third quarter and nine
months of 1997, respectively, compared to 36% and 40% for the same periods of
1996. The improvement in 1997 is primarily due to increased manufacturing
volumes of mainframe online products and sales of higher margin software
products. Sales margins for Nearline products decreased slightly in the
third quarter and nine months of 1997 as compared to the same periods of
1996, primarily as a result of a decrease in margins associated with sales of
earlier generation mainframe Nearline products. Product sales margins in the
third quarter and nine months of 1997 benefited from a change in
classification of approximately $8.5 million and $25.2 million, respectively,
of advanced manufacturing costs, which are now included within research and
product development costs in the Consolidated Statement of Operations.
Maintenance margins decreased to 46% and 45% in the third quarter and nine
months of 1997, respectively, compared to 48% and 47% for the same periods of
1996. The decline is principally attributable to costs associated with the
Company's professional consulting services business.
The Company's ability to sustain or improve product sales margins is
significantly dependent upon the Company's continued success in reducing
manufacturing costs in all of its product lines. The Company anticipates
that the product sales margins for its mainframe online products will be
pressured due to scheduled price reductions over the term of the OEM
agreement with IBM. The Company expects that lower manufacturing costs
resulting from increased volumes and operating expense savings will partially
offset pricing pressures, but the Company must further reduce costs and
expenses associated with manufacturing these products in order to achieve
expected benefits. Product sales margins also may be affected by inventory
reserves and writedowns resulting from rapid technological changes and delays
in gaining market acceptance for new products. Maintenance margins may be
impacted in the future by increased competition and the Company's ability to
successfully establish its professional consulting services business.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development costs increased 42% and 10% in the third
quarter and nine months of 1997, respectively, compared to the same periods
in 1996. As a percent of revenue, research and product development costs
were 10% in both the third quarter and nine months of 1997, compared to 8%
and 10% in the third quarter and nine months of 1996, respectively. Research
and product development costs for the third quarter and nine months of 1997
include incremental costs of approximately $8.5 million and $25.2 million,
respectively, due to the reclassification of costs associated with certain
advanced manufacturing activities which were previously included within
cost of sales in the Consolidated Statement of Operations. The increase in
research and product development costs in the third quarter of 1997, after
<PAGE>
Form 10-Q
Page 16
considering this reclassification, reflects increased investments in products
outside the Company's traditional markets and new mainframe Nearline products.
The decrease in research and product development costs for the nine months of
1997, after considering this reclassification, reflects IBM's agreement to
partially fund the development of enhancements for mainframe online products.
The Company anticipates that research and product development costs will
increase in the future primarily due to investments made in products targeted
for the client/server environment.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A and
Other) increased 16% and 7% in the third quarter and nine months of 1997,
respectively, compared to the same periods in 1996. The increase is
primarily due to increased spending on internal business and financial
information systems; employee profit-sharing and bonus expenses associated
with higher levels of profitability; and increased advertising activities
associated with the Company's client/server storage initiative. The increase
was partially offset by gains realized on the sale of accounts receivable of
$10.5 million and $22.6 million in the third quarter and nine months of 1997,
respectively. See "Liquidity and Capital Resources - Available Financing
Lines" for further description of these account receivable sales.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income increased 33% and 10% in the third quarter and nine months of
1997, respectively, compared to the same periods in 1996, primarily as a
result of an increase in cash available for investment. Interest expense
decreased 81% and 84% in the third quarter and nine months of 1997,
respectively, compared to the same periods of 1996, due to the redemption of
all of the Company's outstanding 7% and 8% Convertible Subordinated
Debentures in July 1996 and January 1997, respectively.
The Company anticipates its net interest income will decline in future
periods as a result of the Company's plan to repurchase up to $800 million of
its common stock. See "Liquidity and Capital Resources - Working Capital"
for further discussion of the Company's stock repurchase plan.
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 $135.5 million of deferred income tax assets as of September 26,
1997. The Company's valuation allowance of $37.5 million as of September 26,
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
1998 to the extent its remaining net
<PAGE>
Form 10-Q
Page 17
deductible temporary differences, tax credit carryforwards, and net operating
loss carryforwards in the United States become fully recognizable in future
periods.
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. This sale 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 included focusing on core businesses and outsourcing non-
strategic activities, rearchitecting its distribution processes and channels,
and accelerating the integration of Network Systems Corporation.
The following table summarizes the activity associated with the Company's
restructuring reserves during the nine months ended September 26, 1997 (in
thousands of dollars):
Employee Lease Other
Severance Abandonments Exit Costs Total
------------------------------------------------
Balances, December 27, 1996 $16,152 $15,477 $1,980 $33,609
Cash payments (3,222) (1,304) (569) (5,095)
------ ------ ----- ------
Balances, September 26, 1997 $12,930 $14,173 $1,411 $28,514
====== ====== ===== ======
The remaining restructuring reserves relate principally to the Company's
plans to further integrate its sales administration organization and
rearchitect its distribution processes in the United States and Europe.
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 has completed or is
evaluating various outsourcing and automation projects in order to gain
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
<PAGE>
Form 10-Q
Page 18
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 restructuring charges in the
future.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
During the nine months of 1997, the Company's cash and short-term investment
balances increased $66.1 million and $216.8 million, respectively. Operating
activities generated $346.4 million in net cash during the nine months of
1997, which was partially utilized by an increase in short-term investments
of $216.8 million, repurchases of common stock at a cost of $40.7 million,
and net investments in property, plant and equipment of $39.8 million.
During the nine months of 1996, net cash from operating activities was $380.7
million, which included cash received from the sale of lease assets. Cash
from operating activities during the nine months of 1996 was partially offset
by net repayments of debt of $97.1 million, repurchases of common stock at a
cost of $163.4 million, and an increase in short-term investments of $87.0
million.
In October 1997, the Company announced a program to repurchase up to $800
million of its common stock through open market purchases and privately
negotiated transactions. The repurchases are expected to be completed by the
end of fiscal year 1998 using existing cash and short-term investment
balances, anticipated cash flows from operations, and debt. In connection
with this plan, the Company repurchased and retired 8.0 million shares of its
common stock in October 1997 for an initial purchase price of $431.3 million
through a privately negotiated transaction. The final purchase price of the
common stock is subject to adjustment based on the trading price of the stock
during a defined period. Any price adjustment will be reflected as an
adjustment to capital in excess of par value on the Consolidated Statement of
Changes in Stockholders' Equity.
The current ratio increased to 2.8 as of September 26, 1997, from 2.4 as of
December 27, 1996. The increase was principally due to the increase in cash
and short-term investments. Accounts receivable decreased $61.5 million,
from $554.2 million as of December 27, 1996, to $492.7 million as of
September 26, 1997, primarily as a result of a decrease in the level of sales
in the third quarter of 1997, as compared to the fourth quarter of 1996.
Inventory balances decreased from $288.6 million as of December 27, 1996, to
$276.0 million as of September 26, 1997, principally as a result of a
reduction in raw materials.
AVAILABLE FINANCING LINES
In April 1997, the Company's $150 million secured credit agreement was
replaced with 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 (8.5% as of September 26, 1997). 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.
<PAGE>
Form 10-Q
Page 19
As of September 26, 1997, the Company had issued letters of credit for
approximately $35.6 million and had approximately $114.4 million of available
credit under the Revolver.
In October 1997, the Company replaced its $150 million unsecured credit
agreement with a new $350 million unsecured credit agreement which expires in
October 2001. The credit limit available under this facility will be reduced
by $12.5 million per quarter beginning January 1999. The interest rates
under the new credit agreement depend on the type of advance selected. The
primary advance rate is the agent bank's prime lending rate. The new credit
agreement requires that the Company comply with certain financial and other
covenants, including restrictions on the payment of cash dividends on its
common stock.
In August 1997, the Company amended an existing financing agreement with a
bank to provide for the issuance of promissory notes in the principal amount
of up to $120 million at any one time. The agreement will expire in
January 1999 and 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% (6.22% as of September 26, 1997). Under the terms of the agreement,
the Company is required to comply with certain covenants which include the
maintenance of compensating cash balances. As of September 26, 1997, the
Company had committed to cumulative future borrowings of approximately $176.1
million under this facility. These borrowings are expected to be outstanding
between February 1998 and January 1999.
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. The agreement expires on January 31, 1998,
and allows for receivable sales of up to $40 million at any one time. 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 third quarter and nine months ended September 26, 1997, the
Company sold approximately $74.3 million and $258.9 million, respectively, of
receivables in connection with this agreement. As of September 26, 1997, the
outstanding balance associated with receivables sold on a recourse basis, but
not collected, was approximately $35.1 million. As of September 26, 1997,
the Company had committed to future cumulative receivable sales of
approximately $95.9 million. These receivable sales are expected to occur
between October 1997 and January 1998. Gains and losses associated with
receivable sales have not historically had, and are not expected in the
future 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 does not believe that it has a material credit risk under
the recourse provisions included in 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 choose to
<PAGE>
Form 10-Q
Page 20
fund these activities 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 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 September 26, 1997. The decrease is primarily
a result of the redemption of the Company's 8% Convertible Subordinated
Debentures in January 1997, and was partially offset by repurchases of common
stock during the nine months of 1997. These repurchases were pursuant to a
program announced in 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 September 26, 1997, the
Company had repurchased 949,500 shares of common stock at a cost of $40.7
million. In October 1997, the Company announced a new program to repurchase
up to $800 million of its common stock. See "Liquidity and Capital Resources -
Working Capital" for a further description of this common stock repurchase
plan.
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 third quarter and nine months of 1997, approximately 33% and 34%,
respectively, 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.
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
<PAGE>
Form 10-Q
Page 21
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. 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.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The Company operates in markets characterized by rapid technological advances
and changing customer demands, which necessitate frequent product
introductions and enhancements. The Company's results of operations and
competitive strength depend upon its ability to successfully and rapidly
develop new products and enhancements to its existing products. Short
product life cycles and product transitions are a recurring part of the
Company's business cycle and require the Company to manage the risks
inherent in the transition process. The Company must make significant
investments in research and product development and successfully introduce
competitive new products and enhancements on a timely basis. 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
product development 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 and trigger substantial repair or replacement costs
and damage the Company's reputation. As a result, the Company's operating
results could be adversely affected by these factors.
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. Future revenue growth for Nearline products is
dependent upon the continued customer demand for mainframe Nearline products,
successfully introducing new products for the mainframe Nearline and
client/server environments, and the continuing success of the Company's
application development initiative. The Company is focusing resources on
expanding into new markets including: investing in research and development
of new applications and products for the client/server marketplace; expanding
its professional consulting services activities; and expanding the Company's
distribution channels. There can be no assurance that the Company will be
successful in entering or gaining significant market share in these new
markets or expanding its distribution channels.
<PAGE>
Form 10-Q
Page 22
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 continued
widespread acceptance in the marketplace 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 products and
StorageTek does not anticipate that it will continue to sell these products
directly to end-user customers during the term of the agreement, which runs
through December 1999.
The Company's success in its mainframe online storage business is
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 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 Company may elect to terminate the agreement if IBM fails to meet 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 (CIDs)
from the U.S. Department of Justice Antitrust Division concerning the OEM
agreement with IBM for mainframe online storage subsystems. The Company
received additional CIDs in October 1996, February 1997, May 1997, and June
1997. The CIDs requested production of documents and testimony in connection
with a review of the agreement for compliance with the Sherman Act. Since
June 1997, the Department of Justice has requested the Company to provide it
with further information. The Company has provided information and is
engaged in discussions with the Department of Justice regarding the
resolution of the investigation. While the Company believes that the
agreement is in compliance with antitrust laws, it is unable to predict the
outcome of the investigation or the discussions. In the event of an
unfavorable outcome, the Company could be required to pay penalties, or
modify or terminate the agreement.
<PAGE>
Form 10-Q
Page 23
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. Competition in the mainframe marketplace
currently comes from companies with significant resources, including IBM, EMC
Corp., and Hitachi, Ltd. As the mainframe and client/server markets evolve,
the Company will encounter competition from its traditional rivals, as well
as new competitors with significant resources and presence in these markets.
The Company's ability to compete in both its existing and new markets will
depend to a considerable extent on its ability to continuously develop and
introduce new products and enhancements to existing products and expand the
distribution channels for all of its products. The Company's competitiveness
could also be affected by cooperative alliances between the Company's
competitors or other relationships between its competitors, who may emerge
and rapidly acquire market share or proprietary technology. These alliances
and acquisitions may result in companies being at various times,
collaborators, competitors and customers in different markets. Increased
competition may result in significant price reductions, delays in purchasing
decisions as customers evaluate new competitive product offerings, reduced
profit margins and declining market share, any of 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 are partially funded by IBM. Any
technology that is developed under this agreement will be owned by IBM,
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, other companies have commenced actions against StorageTek
claiming infringement of certain patent or other intellectual property
rights. 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
<PAGE>
Form 10-Q
Page 24
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.
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. 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 in the global financial markets has caused wide fluctuations
in trading prices of stocks of high technology companies independent of their
individual operating results.
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. Factors that may have a
significant affect on periodic revenue and operating results include, among
others: (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.
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
<PAGE>
Form 10-Q
Page 25
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.
COMPUTER SYSTEMS RISKS ASSOCIATED WITH THE YEAR 2000
The Company's product lines include information storage systems and network
products which store, retrieve and transmit data. In order to properly
process this data, the Company's products must manage and manipulate data
that includes both 20th and 21st century dates (Year 2000 Compliant). The
Company believes its products are Year 2000 Compliant provided they have been
upgraded to include all recommended engineering changes. There can be no
assurances, however, that the Company's products are fully Year 2000
Compliant. The inability of these products to properly manage and manipulate
data in the year 2000 could have a material adverse effect on the Company,
including increased warranty costs, customer satisfaction issues, and
potential lawsuits.
The Company is currently installing significant new internal business and
financial information systems in connection with operating its business.
These systems are believed to be Year 2000 Compliant. The Company is also
identifying and implementing changes to its other information systems in
order to make them Year 2000 Compliant. While the Company currently expects
that the year 2000 will not pose operational problems or result in the
Company incurring incremental costs; delays in the implementation of new
information systems, or a failure to fully identify all year 2000
dependencies in the Company's systems could result in material adverse
consequences, including delays in the delivery or sale of products or cause
the Company to incur material costs to make its information systems Year 2000
Compliant.
<PAGE>
Form 10-Q
Page 26
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, 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. In
July 1997, the Company filed a petition for certiori with the Colorado
Supreme Court seeking a reversal of this decision. The remand to the trial
court has been stayed pending a decision on the petition for certiori.
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. In June 1994, the court ordered Array and Tandem to
continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. In May 1995, the Company filed an amended complaint seeking
damages. A trial commenced on October 14, 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. In February 1996, a jury found that the Company's
products did not infringe the 151 Patent. Odetics appealed and in June 1997,
the U.S. Court of Appeals for the Federal Circuit reversed the district
court's ruling and remanded the case back to the district court for further
proceedings. A new trial date has not been set.
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 infringes 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 case filed by Odetics, Inc. on June 29, 1995, which is further
described above.
<PAGE>
Form 10-Q
Page 27
On July 30, 1996, the Company received Civil Investigative Demands (CIDs)
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 additional CIDs in October 1996,
February 1997, May 1997, and June 1997. The CIDs requested production of
documents and testimony in connection with a review of the agreement for
compliance with the Sherman Act. Since June 1997, the Department of Justice
has requested the Company to provide it with further information. The
Company has provided information and is engaged in discussions with the
Department of Justice regarding the resolution of the investigation. In the
event of an unfavorable outcome, the Company could be required to pay
penalties, or modify or terminate the agreement.
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 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.
<PAGE>
Form 10-Q
Page 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
10.1* First Amendment to Credit Agreement dated as of
September 26, 1997, among the Company, Bank of
America National Trust and Savings Association,
and other financial institutions party thereto.
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
September 26, 1997.
- ------------------------------------
* Indicates Exhibits filed with this Quarterly Report on Form 10-Q.
<PAGE>
Form 10-Q
Page 29
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
November 7, 1997 /s/ DAVID E. LACEY
- ----------------------- ------------------------------------
(Date) David E. Lacey
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 7, 1997 /s/ THOMAS G. ARNOLD
- ----------------------- ------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Chief Accounting Officer)
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated
as of September 26, 1997 is entered into among Storage Technology
Corporation, a Delaware corporation (the "Company"), the "Banks" party to the
Credit Agreement (collectively, the "Banks"), and Bank of America National
Trust and Savings Association, as Issuing Bank, Swingline Bank and as Agent
for the Banks.
RECITALS
--------
A. The parties hereto have entered into a Credit Agreement dated
as of April 9, 1997 (the "Credit Agreement"), pursuant to which the Banks
agreed to make available to the Company a revolving credit facility and
letter of credit subfacility.
B. The Company has requested that the Agent and Banks modify the
Credit Agreement as hereinafter provided, and the parties hereto are willing
to so modify the Credit Agreement subject to the terms and conditions of this
Amendment.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used in this Amendment
and not otherwise defined herein shall have the respective meanings set forth
in the Credit Agreement.
2. Amendments. The Credit Agreement is hereby amended as follows:
a. Section 7.13(a) of the Credit Agreement is hereby deleted
in its entirety and in its place is inserted the following:
Maintenance of Consolidated Tangible Net Worth. Maintain as
at the end of each fiscal quarter a Consolidated Tangible Net
Worth of the Borrower and its Subsidiaries of not less than at
any time the amount that is, (i)(A) $1,272,000,000, plus (B) 75% of
Consolidated Net Income (excluding any Consolidated Net Loss) of the
Borrower and its Subsidiaries earned in each fiscal quarter after such
June 27, 1997 fiscal quarter, plus (C) 75% of the amount of all
proceeds (net of costs and expenses) received pursuant to the issuance
of any equity securities issued by the Borrower after such June 27,
1997 fiscal quarter (excluding proceeds of any issuance made for the
purposes of fulfilling an employee stock purchase plan or compensatory
option plan), plus (D) 100% of the face amount of any Subordinated
Indebtedness that is converted into stock of the Borrower after such
June 27, 1997 fiscal quarter, minus (E) up to $400,000,000 for the
repurchase of Company stock.
<PAGE>
b. Section 8.4 of the Credit Agreement is hereby amended to
(i) delete the "and" following the semicolon at the end of clause (g), (ii)
delete the period at the end of clause (h) and insert in its place "; and",
and (iii) insert the following new clause (i) at the end of Section 8.4:
(i) repurchase of shares of Company stock.
3. Representations and Warranties. The Company hereby represents
and warrants to the Agent and the Banks as follows:
a. No Default or Event of Default has occurred and is
continuing.
b. The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any governmental
authority) in order to be effective and enforceable.
c. This Amendment and the Loan Documents, as amended by this
Amendment, constitute the legal, valid and binding obligations of the
Company, enforceable against it in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency
or similar laws affecting the enforcement of creditors' rights generally or
by equitable principles relating to enforceability.
d. All representations and warranties of the Company
contained in the Loan Documents are true and correct (except to the extent
such representations or warranties reference another specific date in which
case they shall have been true as of such other date).
e. The Company is entering into this Amendment on the basis
of its own investigations and for its own reasons, without reliance upon the
Agent, the Banks or any other Person.
4. Amendment Effective Date. This Amendment will become
effective on September 26, 1997 (the "Amendment Effective Date"), provided,
that, (a) the Agent has received from each of the Company and the Banks an
executed counterpart of this Amendment, and (b) the Agent has received for
the benefit of the Banks a fee relating to the execution and delivery of this
Amendment equal to .05% of the combined Commitments of the Banks.
5. Reservation of Rights. The Company acknowledges and agrees
that the execution and delivery by the Agent and the Banks of this Amendment
shall not be deemed to create a course of dealing or an obligation to execute
similar amendments or waivers under the same or similar circumstances in the
future.
<PAGE>
6. Miscellaneous.
a. Except as herein expressly amended, all terms, covenants
and provisions of the Loan Documents are and shall remain in full force and
effect, except as enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability. All
references to Loan Documents shall refer to the Loan Documents as amended by
this Amendment. This Amendment shall be deemed incorporated into, and a part
of, the Loan Documents.
b. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
No third party beneficiaries are intended in connection with this Amendment.
c. This Amendment shall be governed by and construed in
accordance with the law of the State of California; provided that the Agent
and the Banks shall retain all rights arising under Federal law.
d. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each
of the parties hereto understands and agrees that this Amendment (and any
other document required herein) may be delivered by any party thereto either
in the form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of the Company or any Bank will have the same force and
effect as the delivery of a hard copy original. Any failure by the Agent to
receive the hard copy executed original of such document shall not diminish
the binding effect of receipt of the facsimile transmitted executed original
of such document of the party whose hard copy page was not received by the
Agent.
e. This Amendment contains the entire and exclusive
agreement of the parties hereto with reference to the matters discussed
herein. This Amendment supersedes all prior draft and communications with
respect hereto or thereto. This Amendment may not be amended except in
accordance with the provisions of Section 11.1 of the Credit Agreement.
f. If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions of this
Amendment or the Loan Documents.
g. The Company covenants to pay or reimburse the Agent, upon
demand, for all reasonable costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their duly authorized officers as of the day and year first
written above.
STORAGE TECHNOLOGY CORPORATION,
a Delaware corporation
By: /s/ Mark D. McGregor
-----------------------------------------
Title: Vice President and Treasurer
--------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By: /s/ Kevin McMahon
-----------------------------------------
Title: Managing Director
--------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank, as Issuing Bank
and as Swingline Bank
By: /s/ Kevin McMahon
-----------------------------------------
Title: Managing Director
--------------------------------------
BANK OF MONTREAL
By: /s/ Beverly Blucher
-----------------------------------------
Title: Senior Vice President
--------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ James D. Benko
-----------------------------------------
Title: Vice President
--------------------------------------
<PAGE>
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Jay L. Massimo
-----------------------------------------
Title: Vice President
--------------------------------------
ROYAL BANK OF CANADA
By: /s/ Stephen S. Hughes
-----------------------------------------
Title: Senior Manager
--------------------------------------
THE SUMITOMO BANK, LIMITED
By: /s/ Goro Hirai
-----------------------------------------
Title: Joint General Manager
--------------------------------------
FLEET NATIONAL BANK
By: /s/ Frank H. Benesh
-----------------------------------------
Title: Vice President
--------------------------------------
EXHIBIT 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY (a)
Earnings
Income before extraordinary item $54,530 $39,500 $148,103 $102,949
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------ ------------ ------------ ------------
Net income $54,530 $39,500 $148,103 $112,484
============ ============ ============ ============
Shares
Weighted average common shares outstanding 61,595 60,231 61,445 55,774
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 1,003 849 914 562
------------ ------------ ------------ ------------
Weighted average common shares
and equivalents 62,598 61,080 62,359 56,336
============ ============ ============ ============
Earnings per common share:
Income before extraordinary item $0.87 $0.65 $2.38 $1.83
Extraordinary gain, net 0.17
------------ ------------ ------------ ------------
$0.87 $0.65 $2.38 $2.00
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FULLY DILUTED (b)
Earnings
Income before extraordinary item $54,530 $39,500 $148,103 $102,949
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 216 5,329
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 2,450 255 7,350
------------ ------------ ------------ ------------
Income before extraordinary item 54,530 42,166 148,358 115,628
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------ ------------ ------------ ------------
Net income, as adjusted $54,530 $42,166 $148,358 $125,163
============ ============ ============ ============
Shares
Weighted average common shares outstanding 61,595 60,231 61,444 55,774
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 1,003 932 1,038 984
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 609 5,000
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,131 193 4,132
------------ ------------ ------------ ------------
Weighted average common shares
and equivalents, as adjusted 62,598 65,903 62,675 65,890
============ ============ ============ ============
Earnings per common share:
Income before extraordinary item $0.87 $0.64 $2.37 $1.75
Extraordinary gain, net 0.15
------------ ------------ ------------ ------------
$0.87 $0.64 $2.37 $1.90
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SUPPLEMENTARY (c)
Earnings
Income before extraordinary item $39,500 $102,949
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 216 5,329
------------ ------------
Income before extraordinary item 39,716 108,278
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------ ------------
Net income, as adjusted $39,716 $117,813
============ ============
Shares
Weighted average common shares outstanding 60,231 55,774
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 849 561
Adjustment for shares issuable assuming the
conversion of 7% Convertible Debentures
occurred at the beginning of the period 609 5,000
------------ ------------
Weighted average common shares
and equivalents, as adjusted 61,689 61,335
============ ============
Earnings per common share:
Income before extraordinary item $0.64 $1.77
Extraordinary gain, net 0.15
------------ ------------
$0.64 $1.92
============ ============
(a) These figures agree with the related amounts in the Consolidated Statement of Operations.
(b) Fully diluted earnings per common share for nine months ended September 26, 1997, and for
quarter and nine months ended September 27, 1996, reflect the assumed conversion of the
Company's 7% and 8% Convertible Subordinated Debentures.
(c) Supplemental earnings per common share for the quarter and nine months ended September 27, 1996,
reflect the assumed conversion of the Company's 7% Convertible Subordinated Debentures,
whereas these convertible securities were not outstanding or were not dilutive in the same
periods of 1997. The supplemental earnings per share amounts reflect the primary earnings
per share amounts as if the conversion had occurred at the beginning of the period.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED
SEPTEMBER 26, 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> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-END> SEP-26-1997
<CASH> 454,535
<SECURITIES> 246,010
<RECEIVABLES> 492,689 <F1>
<ALLOWANCES> 0
<INVENTORY> 276,007
<CURRENT-ASSETS> 1,469,241
<PP&E> 301,857 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,031,736
<CURRENT-LIABILITIES> 531,701
<BONDS> 20,352
0
0
<COMMON> 6,223
<OTHER-SE> 1,441,215
<TOTAL-LIABILITY-AND-EQUITY> 2,031,736
<SALES> 1,038,764
<TOTAL-REVENUES> 1,480,787
<CGS> 567,016
<TOTAL-COSTS> 810,339
<OTHER-EXPENSES> 149,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,484
<INCOME-PRETAX> 203,003
<INCOME-TAX> 54,900
<INCOME-CONTINUING> 148,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,103
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 0.00
<FN>
<F1> Asset values for the interim period represent
net amounts.
</FN>
</TABLE>
