FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
COMMISSION FILE NUMBER 1-7534
STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2270 South 88th Street, Louisville, 80028-4309
Colorado
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock ($.10 par value), including
related preferred stock purchase rights New York Stock Exchange
8% Convertible Subordinated Debentures
due 2015 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 3, 1997, there were 61,821,180 shares of common stock of the
registrant outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant was $1,948,866,520 based on the last reported
sale price of the common stock of the registrant on the New York Stock
Exchange's consolidated transactions reporting system on March 3, 1997. For
purposes of this disclosure, shares of common stock held by persons who hold
more than 5% of the outstanding common stock and common stock held by
executive officers and directors of the registrant have been excluded in that
such persons may be deemed to be "affiliates" as that term is defined under
the rules and regulations promulgated under the Securities Act of 1933. This
determination is not necessarily conclusive for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days of
the end of its fiscal year ended December 27, 1996. Portions of the
registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 22, 1997 are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
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Storage Technology Corporation and its subsidiaries ("StorageTek(R)" or the
"Company") design, manufacture, market and maintain information storage
systems and network products. The Company's three principal product lines
are serial access storage subsystems (Nearline(R)), random access storage
subsystems (online) and network products. Nearline products include magnetic
tape storage devices and automated library systems. Online products consist
of rotating magnetic disk devices which utilize fault-tolerant array
technology (RAID). Network products include connectivity and security
products. The Company also offers professional consulting services with a
focus on information storage management. (See "MARKETING AND DISTRIBUTION;
SERVICES" below). StorageTek also maintains a customer service organization
to install, maintain and service its own and third-party equipment.
StorageTek operates in one principal industry segment. The Company sells its
products and services worldwide through its direct sales force located in
offices in major metropolitan areas of the United States, Europe, Canada,
Australia, Japan, Mexico, New Zealand, Singapore, and Brazil, and through
distributors located in other international markets in Africa, Asia, Europe
and other countries in South America. The Company also sells its products
through other indirect distribution channels, including original equipment
manufacturers (OEMs) and value-added resellers (VARs). In particular, in
1996, the Company changed its mainframe online technology business model to
focus on the OEM channel.
StorageTek's business model is focused on delivering information storage
solutions for the mainframe, open-systems and network-attached storage
marketplaces. The Company's strategy includes: identifying significant new
storage solution technologies; investing in identified opportunities through
research and development activities and the development of strategic
relationships; and delivering these solutions through the most effective
distribution channels. To this end, the Company continues to establish
strategic alliances with other manufacturers, developers, distributors and
suppliers. As a result of these alliances, it is possible for other
companies to be at various times collaborators, competitors and customers in
different markets.
Significant changes were made to the Company's business model during 1996 and
early 1997. The Company sold substantially all of its lease assets in March
1996. In connection with the sale, the Company formed a worldwide lease
financing alliance with Leasetec Corp. to provide lease financing for
products manufactured or sold by the Company. (For a discussion of the sale,
see Note 2, Sale of Midrange Business and Lease Assets, of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.) In June 1996, the
Company entered into a three-year, non-exclusive, worldwide OEM agreement
under which the Company develops and manufactures mainframe online storage
products for International Business Machines Corporation (IBM). IBM serves
as the Company's primary worldwide distribution channel for these
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products, and the Company does not anticipate that it will sell these
products directly to end-user customers during the term of the agreement.
(For a discussion of this arrangement, see Note 3, IBM OEM Agreement, of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.) In September
1996, the Company repurchased 4.5 million shares of common stock for a
purchase price of approximately $195.5 million.
On December 12, 1996, the Company announced that it had called for redemption
all of its outstanding 8% Convertible Subordinated Debentures on January 13,
1997. (For a discussion about this redemption, see "8% Convertible
Debentures", below, and Note 8, Debt, Banking Arrangements and Lease
Obligations, of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.)
On February 20, 1997, the Company announced a stock repurchase program. Under
the program, the Company may repurchase up to 1.5 million shares of its common
stock on an annual basis. (For a discussion of this program, see "Recent
Developments" below, and Note 18, Subsequent Events, of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, of this Form 10-K.)
Storage Technology Corporation was incorporated in Delaware in 1969. Its
principal executive offices are located at 2270 South 88th Street,
Louisville, Colorado 80028-0001, telephone (303) 673-5151.
THE STATEMENTS IN THE FOLLOWING DESCRIPTION THAT REGARD THE COMPANY'S FUTURE
PRODUCT AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE
FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS. ACTUAL
RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THE RISKS DETAILED IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS," OF THIS FORM 10-K.
PRINCIPAL PRODUCTS
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Product sales, including software license revenue, accounted for
approximately 73% of total revenue in 1996, while maintenance revenue
accounted for the balance. The following table presents revenue by product
line, which includes both product sales and maintenance revenue:
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REVENUE BY PRODUCT LINE
FISCAL YEAR ENDED DECEMBER
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1996 1995 1994
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$ million % $ million % $ million %
--------- ---- -------- ---- -------- ----
Nearline Products $1,328.2 65.1 $1,197.7 62.1 $1,033.0 55.2
Online Products 429.3 21.1 375.9 19.5 254.2 13.6
Network Products 183.7 9.0 208.9 10.8 249.8 13.3
Other Products 98.4 4.8 147.0 7.6 334.4 17.9
------- ----- ------- ----- ------- -----
Total $2,039.6 100.0 $1,929.5 100.0 $1,871.4 100.0
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Additional information concerning revenue from each of the Company's product
lines is found in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and geographic information is
found in Part IV, Item 14, Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, of this Form 10-K.
In January 1997, the Company organized its business into four separate
business groups designed to augment activities focused on providing new
solutions to customers and expanding into non-traditional markets. These
business groups consist of the Enterprise Nearline Business Group, Enterprise
DASD Business Group, Network Systems Group and Multi-Platform Systems
Business Group.
NEARLINE PRODUCTS
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StorageTek's Nearline products include its Automated Cartridge System (ACS)
library and associated tape cartridge storage products. The Company's
current library products include: the PowderHorn 9310 (PowderHorn(R)), an ACS
library, which became available in the second quarter of 1993; the TimberWolf
9710 library and the TimberWolf 9714 library (TimberWolfTM), smaller capacity
libraries designed for the open-systems market, which became available in the
second quarter of 1996 and the third quarter of 1996, respectively; the
WolfCreek 9360 (WolfCreek(R)), a smaller, high-performance library, which
became available in the fourth quarter of 1993; and the Company's first
generation 4410 ACS library, which has been available since 1988.
The Company's tape cartridge storage products include: the Timberline 9490
(Timberline(R)), a high-performance 36-track cartridge subsystem, which
became available in the fourth quarter of 1994; the Silverton 4490
(Silverton), a 36-track cartridge subsystem, which became available in the
third quarter of 1993; RedWood SD-3 (RedwoodTM), a high-capacity cartridge
subsystem, which became available in the first quarter of 1995; the Twin
Peaks 4890 36-track cartridge subsystem (Twin Peaks), a cartridge subsystem
designed for the open-systems market, which has been available since the
second quarter of 1996; and the 4480 18-track cartridge subsystem, which has
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been available since 1987. The Company also develops and licenses software
designed to expand the range of applications for and enhance the performance
of its Nearline products.
In addition, the Company is developing other new Nearline products and
enhancements, all of which are in the design or preliminary engineering phase
and for which no firm availability dates have been set. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of this Form 10-K, which is incorporated by reference into Item
1 of Part I, for a discussion of operating results and certain risks
associated with the development and introduction of new products that may
affect future results.
ONLINE PRODUCTS
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StorageTek's online products consist of online direct access storage device
(DASD) products. The Company's current product line is targeted at the
mainframe and open-systems marketplace. The characteristics of these
products differ principally in information storage capacity, transfer rate,
access time, attachment protocol and cost. In 1996, the Company changed its
business model for distributing mainframe online storage products. Under the
Company's non-exclusive worldwide OEM agreement with IBM, the Company
develops and manufactures mainframe online storage products, including
software enhancements, for IBM. IBM serves as the primary distribution
channel for this technology, and StorageTek does not anticipate continuing to
sell this technology directly to end-users during the term of the agreement.
As part of changing its business model for online products, the Company is
redirecting resources to other product lines, as well as to emerging products
and services outside its traditional markets. The Company has formed a new
business unit, the Multi-Platform Systems Business Group, that is focusing on
products targeted for the open-systems marketplace and establishing new
distribution channels for these products. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Form 10-K for a discussion of operating results and certain risks that
may affect future results.
NETWORK PRODUCTS
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The Company's principal computer network product offerings consist of:
network connectivity and security products. Network connectivity products
include the Data Exchange (DXETM) series host and device controller, which
became available in the first quarter of 1993. The DXE series controllers
support a variety of channel interface options and media connections. The
Company's network security products include the BorderGuardTM 1000 and
BorderGuardTM 2000 products, which became available in the first half of
1995, and are targeted at branch office and enterprise-wide security
applications, respectively. The Company also offers the Central Archive
Management (CAMTM), a software application designed to provide backup and
recovery to a variety of network client systems, which has been available
since 1995. Other new products designed to support network attached storage
for the client-server environment are currently in the design or preliminary
engineering phase, and no firm availability dates have been set. See Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", of this Form 10-K for a discussion of
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operating results and certain risks associated with the development and
introduction of new products that may affect future results.
MARKETING AND DISTRIBUTION; SERVICES
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StorageTek is committed to a worldwide marketing and product maintenance
strategy. StorageTek sells its hardware and software products and services
to customers worldwide through a combination of direct and indirect channels.
The direct sales and service force operates in offices located in major
metropolitan areas in the United States, Europe, Canada, Australia, Japan,
Mexico, New Zealand, Singapore, and Brazil. In 1996, direct sales revenue
accounted for approximately 74% of the Company's total product sales revenue.
The Company also sells its products in certain international markets through
distributors, sometimes in tandem with other direct sales operations, located
in Africa, Asia, Europe and South America.
Indirect channels include: OEMs, system vendors that integrate the Company's
products with other hardware and software and provide independent marketing,
service and support programs to their customers; VARs, companies that add
value in the form of proprietary products, training and installation for sale
to their customers; independent distributors, who primarily serve markets in
which StorageTek does not have a direct presence; and telesales. Indirect
channel distribution accounted for approximately 26% of the Company's total
product sales revenue in 1996. Significant OEMs include IBM, in the
mainframe online products market, and NCR with respect to the TimberWolf 9710
ACS library. The Company's marketing activities include advertising in
business and computer publications, direct mailings and participating in
trade shows. Further development of the Company's indirect sales channels is
critical to gaining additional market penetration in a cost-effective manner
for current and future products targeted for the open-systems marketplace.
Revenues from outside the U.S. accounted for approximately 41% of total
revenue in 1996, 41% in 1995, and 39% in 1994. International operations
account for significant revenue contribution, and the Company is subject to
various risks associated with conducting business outside the United States.
See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - International Sales and Operations and
Hedging Activities," of this Form 10-K for a discussion of risk factors
associated with the Company's international business.
As of December 27, 1996, the order backlog was approximately $43 million,
compared to approximately $57 million as of December 29, 1995. In 1996,
approximately 53% of the backlog amount was attributable to the Company's
library and tape products, as compared to 37% in 1995. In addition to these
backlog amounts, the Company also had approximately $90 million of equipment
shipped awaiting revenue recognition as of December 27, 1996, compared to
approximately $88 million as of December 29, 1995. Backlog amounts are
calculated on an "if sold" basis and include orders from end-users, OEMs,
VARs and distributors for products that StorageTek expects to deliver during
the following 12 months. Units being evaluated or covered by letters of
intent or awaiting customer acceptance are not included in backlog amounts.
Unfilled orders and orders with respect to equipment shipped awaiting revenue
recognition may be canceled by the customer. Accordingly, backlog levels are
not a reliable indicator of future results, and
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there can be no assurance that orders in backlog or equipment shipped
awaiting revenue recognition will ultimately be recognized as revenue.
The Company believes that the installed base of products under maintenance
agreements and the expertise of the Company's customer service engineers are
valuable assets of the Company. These assets are expected to continue to be
important competitive elements of the Company's business. The Company's
worldwide customer support organization includes field service engineers, and
product support and administrative support personnel. The customer support
organization installs, maintains and services StorageTek-manufactured
equipment, as well as equipment manufactured by third parties. The Company
provides local customer support services from its offices located in major
metropolitan cities, with spare parts stored at regional locations. The
Company generally warrants the performance of products for a specified period
of time, after which it services those products under maintenance agreements.
In response to continuing competitive pressures, many of the Company's
products include extended warranty periods, which may reduce future
maintenance revenue opportunities. The Company also has transitioned its
mainframe online business model to primarily serve as an OEM supplier. This
change may affect future maintenance revenue, as OEM customers generally
maintain their own products. Extending warranty periods has in the past and
may in the future adversely affect profit margins. In 1996, maintenance
revenue accounted for 27% of total revenue, compared to 30% in 1995 and 31%
in 1994.
In 1996, the Company expanded its offerings of professional services through
its Teris Consulting Group. The Company provides consulting and technical
services and technology as part of providing single point-of-contact
solutions. The Company's consultants help clients plan, implement, and
manage computing and storage environments.
MANUFACTURING AND MATERIALS
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The Company's primary manufacturing facilities are currently located in
Colorado, Minnesota, Puerto Rico and France. The Company is in the process
of consolidating some of its manufacturing facilities located in Colorado.
This consolidation will be completed during the second quarter of 1997. A
significant portion of the Company's European requirements for both
Timberline and Iceberg products are manufactured at the Company's facility
located in Toulouse, France. In connection with the restructuring activities
announced in the fourth quarter of 1995, the Company ceased manufacturing
operations at its facilities in Florida and the United Kingdom during 1996.
All of the Company's manufacturing facilities are currently in compliance
with the ISO 9001 or 9002 international quality standard.
The Company manufactures certain key components for its products. In
addition, a substantial portion of the Company's production costs are related
to the purchase of subassemblies, parts and components for its products from
outside vendors. The balance of the Company's production costs relate to
in-house assembly and testing. Certain of the parts and components included
in the Company's products are obtained from a single source or a limited
group of suppliers. In particular, a key component of the Company's tape
drive heads is supplied by Sumitomo Corporation on a sole source
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basis. The Company has long-term supply contracts with certain vendors and
suppliers; the remaining parts and components are obtained by delivering
purchase orders to vendors specifying the required components. These vendors
that are not obligated to supply products for an extended period at specific
quantities and prices. See Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors that
May Affect Future Results," of this Form 10-K for a discussion of factors
that may affect the Company's ability to obtain materials, which information
is incorporated by reference into Part I, Item 1 of this Form 10-K.
COMPETITION
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The markets for the Company's products and services are intensely competitive
and are subject to rapid technological change, frequent product performance
improvements and price reductions. In the mainframe information storage
system marketplace, competition comes from companies that have substantially
greater resources, including IBM, Fujitsu Ltd. and Hitachi Ltd., as well as
several similarly sized companies, including Amdahl Corp. and EMC Corp. In
the network connectivity and security products marketplace, the competition
includes a number of large companies with significant market presence and
resources, including IBM, Hewlett-Packard Company and Channel Network
Technologies Corp., as well as a number of other companies.
The Company believes that its ability to compete successfully in its
traditional markets depends on a number of factors, both within and outside
of its control, including the quality, performance, and price of the
Company's and its competitors' products, the timing and success of new
product introductions by the Company and its competitors, and general
economic conditions within and outside the U.S. The strong competition faced
by the Company's product lines has in the past, and may in the future, result
in price discounting.
The Company is focusing significant resources on product offerings for the
open-systems market, emerging technologies and other non-traditional markets,
including professional services. The open-systems marketplace includes a
broad spectrum of customers, many that are outside the Company's traditional
customer base. The Company has established a new business group to focus on
multi-platform systems. Competition in this segment is robust, and the
Company will face competition from its traditional rivals, as well as new
sources. Competition is based primarily on system performance, product
quality, system scalability and price. The Company's ability to successfully
compete is dependent upon a number of factors, including the timely and
successful introduction of products designed for the open-systems marketplace
and the development of new distribution channels. In the professional
services marketplace, the Company competes against a number of large
companies with an established presence in the professional services industry,
including a number of equipment manufacturers. The Company's competitors in
this market include: IBM, Electronic Data Systems Corp. and Computer
Sciences Corporation. The Company anticipates that its ability to compete in
the professional services market will depend upon a number of factors within
and outside its control, including the effective management of the Company's
consulting arrangements, the strength of the Company's storage solution
offerings, and the competitiveness of its pricing for these solutions.
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The Company expects that both the markets for its products and services, and
its competitors within such markets, will continue to change as customer
buying patterns continue to migrate to the open-systems and networking
environments. The Company expects that competition will likely intensify as
the Company and its competitors aggressively position themselves. The
ability to continue to develop and successfully market leading products will
continue to have a significant impact upon the Company's competitiveness and
its operating results.
NEW PRODUCT DEVELOPMENT
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The Company invests substantial resources in its product development efforts
in order to maintain and enhance the competitiveness of its products. In
1996, 1995 and 1994, the Company devoted approximately $176 million, $187
million and $206 million, or 9%, 10%, and 11%, respectively, of its total
revenue to develop new products and enhance the performance of existing
products. In an attempt to expand the Company's access to new technologies
and reduce the amount of time necessary to bring new products to the market,
the Company in the past has acquired other companies and has entered into
joint development and other similar relationships. For example, in 1995 the
Company acquired Network Systems. In 1996, the Company entered into a three-
year OEM agreement with IBM under which IBM will finance certain research and
development activities associated with future development and enhancements to
mainframe online products. The Company anticipates that its research and
development expenditures for new products outside its traditional businesses
will increase in the future.
Current research and development projects include: the development of
enhancements for online products; development activities related to new
Nearline tape products and enhancements; network security software; and the
development of network-attached storage products. As of December 27, 1996,
approximately 1,250 employees were engaged on a full-time basis in
engineering and product development activities, primarily at facilities in
Colorado and France. Simultaneously, the Company is seeking to reduce
manufacturing costs and improve product development lead times. For further
discussion of risk factors concerning product development, see Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Risk Factors that May Affect Future Results," of this Form
10-K.
INTELLECTUAL PROPERTY
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StorageTek's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its intellectual property
rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection, when it develops new or improved
technology that is important to its business. StorageTek currently holds
over 280 U.S. patents, as well as foreign counterparts to many of these
patents in relevant markets, covering various aspects of its products. One
of these patents will expire in 1997 and the remainder will expire from 1998
through 2015. The Company also has pending approximately 100 U.S. patent
applications, including approximately 30 that have been allowed and are
expected to be formally issued soon, as well as pending foreign counterparts
to many of these applications. StorageTek also has licenses to use
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patents held by others. StorageTek owns, has license rights to, and/or has
applied to register, over 45 trademarks, as well as copyrights. Taken as a
whole, these intellectual property assets are material to StorageTek's
business. However, no individual patent, trademark, license or other item of
proprietary information is singularly material to StorageTek's business.
Under the OEM agreement with IBM, certain research and development activities
will be funded by IBM; any technology that is developed will be owned by IBM,
subject to licensing rights by the Company. For a discussion of certain
legal proceedings relating to the Company's intellectual property, see Part
I, Item 3, "Legal Proceedings" of this Form 10-K. For a discussion of
certain risk factors concerning intellectual property see Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors that May Affect Future Results," of this Form 10-K.
ENVIRONMENT
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Compliance by StorageTek with the provisions of federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material adverse
affect on StorageTek. For 1996, StorageTek did not have any material
expenditures for environmental control facilities. To date in 1997,
StorageTek does not have pending and has not budgeted any material estimated
expenditures for environmental control facilities. However, potential
liability under environmental legislation is ongoing, regardless of whether
or not StorageTek has complied with existing governmental guidelines.
Government regulation of the environment and related compliance costs have
increased in recent years. StorageTek cannot predict the nature or scope of
future environmental laws or regulations, how they will be administered, or
whether compliance will require substantial expenditures. Based upon
currently available information, StorageTek does not expect that future
compliance with environmental regulations will have a material effect on the
financial results and operations of StorageTek.
RESTRUCTURING PLAN
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In the fourth quarter of 1995, the Company incurred restructuring charges of
$167.2 million, to cover the cost of work force reductions of approximately
1,700 employees, facility closings and consolidations affecting its
facilities located in Colorado and other facilities located both within and
outside the U.S., and asset writedowns. This restructuring was adopted in an
effort to establish a more competitive cost structure in response to slower
revenue growth and increasing price competition. In connection with the
restructuring, the Company is focusing on core businesses and is outsourcing
non-strategic activities and re-architecting its distribution processes both
within and outside the U.S. Additional information concerning the 1995
restructuring plan is found in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Part IV, Item
14, Note 15 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.
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8% CONVERTIBLE DEBENTURES
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In December 1996, the Company called for redemption, on January 13, 1997, of
all outstanding 8% Convertible Subordinated Debentures due 2015 (8%
Convertible Debentures). Debentures in the principal amount of $145.2
million were converted at a price of $35.25 per share into 4,118,906 shares
of the Company's common stock on or before January 13, 1997. The remaining
8% Convertible Debentures were redeemed for cash on January 13, 1997.
RECENT DEVELOPMENTS
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On February 20, 1997, the Company announced a program to repurchase up to
1.5 million shares of the Company's common stock on an annual basis. The
repurchase program is expected to offset dilution associated with the
Company's stock purchase and stock option plans.
EMPLOYEES
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The Company employed approximately 8,300 persons on a full-time basis
worldwide as of December 27, 1996. The Company's future success will depend,
in part, on its ability to continue to attract, retain and motivate skilled
personnel.
OTHER MATTERS
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The Company historically has experienced increased sales revenue in the
fourth quarter compared to other quarters due to customers' tendencies to
make purchase decisions near the end of the calendar year. There can be no
assurance that this historical trend will continue in 1997 and that revenue
during the fourth quarter will be higher than any other quarter.
For the year ended December 27, 1996, no single customer accounted for 10% or
more of the Company's consolidated total revenue. The Company anticipates
that in 1997, sales of mainframe online products to IBM under the OEM
agreement may account for over 10% of the Company's consolidated total
revenue.
No material portion of the Company's business is subject to contract
termination at the election of the U.S. government.
Reference is made to the following NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS set forth in Part IV, Item 14, of this Form 10-K for certain
additional information, which information is incorporated by reference
herein:
Note 2 Description of the Company's sale of its lease assets.
Note 3 Description of the Company's OEM Agreement with IBM.
Note 8 Description of the Company's debt and banking arrangements.
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Note 16 Information on the geographic operations of the Company's
single business segment. See also Part II, Item 7,
"Management's Discussion and Analysis of Financial
Condition and Results of Operations -- International
Operations and Hedging Activities," for further discussion
of the risks associated with the Company's foreign
operations.
Reference is also made to Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this Form
10-K, for information regarding liquidity, including working capital
practices, restructuring plans and risk factors that may affect future
results.
ITEM 2. PROPERTIES
StorageTek occupies facilities in 16 separate buildings in Boulder County,
Colorado, comprising approximately 2.4 million square feet. The company owns
facilities with approximately 2.2 million square feet; the remaining space is
leased. These facilities include StorageTek's executive offices, as well as
manufacturing, research and development, and spare parts storage facilities.
Substantially all of the Boulder County space is fully utilized with the
exception of the research and manufacturing facility located in Longmont,
Colorado, comprising approximately 500,000 square feet. The Longmont
operations are being consolidated into the Company's Louisville, Colorado
facilities and the Company is pursuing efforts to sell the Longmont
facilities. The Company plans to move substantially all of its operations
out of the Longmont facility by the end of the second quarter of 1997.
StorageTek owns approximately 199,000 square feet of manufacturing facilities
in the Palm Bay/Melbourne, Florida, area. A majority of this space is leased
to a third party. The Company owns 200,000 square feet of manufacturing,
research and development, and administrative facilities in the Minneapolis,
Minnesota area, which are approximately 85% utilized. StorageTek leases
approximately 200,000 square feet of engineering, manufacturing and marketing
facilities in Toulouse, France, which are approximately 60% utilized. The
Company occupies manufacturing facilities in Puerto Rico, of which
approximately 78,000 square feet are owned and 50,000 square feet are leased.
The facilities in Puerto Rico are approximately 95% utilized.
In addition, StorageTek leases facilities at approximately 286 locations
throughout the world, primarily for sales and customer support activities,
spare parts storage, and limited research and product development activities.
Of these leased offices, approximately 197 offices are located in North
America, with combined office and warehouse space totaling approximately
1,348,000 square feet. The Company maintains approximately 77 offices in
Europe comprising approximately 515,000 square feet, and 12 offices in the
Asia/Pacific region comprising approximately 68,000 square feet.
PAGE
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Page 13
Many of the Company's leases throughout the world contain renewal rights,
cancellation rights and rights of first refusal on contiguous expansion
space. At the present time, such facilities are adequate for the Company's
purposes.
ITEM 3. LEGAL PROCEEDINGS
In 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. Oral
argument on the appeal is scheduled for March 1997.
On February 15, 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and Tandem filed their answer
and also filed counterclaims against the Company alleging breach of contract
and claiming damages. On June 10, 1994, the court ordered Array and Tandem
to continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been set for
October 1997.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "pass-through" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the "151
Patent"). The complaint asked the court to impose injunctive relief, treble
damages in an unspecified amount, and an award of attorney fees and costs. A
trial commenced on January 22, 1996, and on February 1, 1996, a jury found
that the Company's products did not infringe the 151 Patent. A notice of
appeal to the U.S. Court of Appeals for the Federal Circuit was filed by
Odetics, Inc. on March 8, 1996. Oral arguments were held in January 1997. A
decision is expected in the second or third quarter of 1997.
On December 8, 1995, Odetics, Inc. filed a second patent infringement suit in
the U.S. District Court for the Eastern District of Virginia against the
Company. The complaint alleges that the "cartridge access port" in certain
of the Company's tape library products infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorney fees and costs. This case has been stayed pending
the outcome of the appeal to the U.S. Court of Appeals for the Federal
Circuit with respect to the case filed by Odetics, Inc. in June 1995.
PAGE
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Page 14
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division concerning the OEM
agreement with IBM for mainframe online storage subsystems. The Company
received two additional CIDs in October 1996 and one additional CID in
February 1997. The CIDs requested production of documents and testimony in
connection with a review of the agreement for compliance with the Sherman
Act.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the actions cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of these actions
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material effect on the Company's
financial position or reported results of operations in a particular quarter.
An adverse decision, particularly in patent litigation, could require
material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
Information concerning certain of these legal proceedings is also contained
in Note 13 of NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS included in Part
IV, Item 14, of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of StorageTek security holders during the
fourth quarter of the fiscal year ended December 27, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company
as of March 7, 1997.
NAME POSITION WITH COMPANY AGE
- ------------------------------------------------------------------------
David E. Weiss..... Chairman of the Board, President and
Chief Executive Officer 52
Lowell Thomas Gooch Executive Vice President and General
Manager of Network Systems 52
David E. Lacey..... Executive Vice President and Chief
Financial Officer 50
John V. Williams... Executive Vice President of Worldwide
Field Operations 53
W. Russell Wayman.. Corporate Vice President, General
Counsel and Secretary 52
PAGE
<PAGE>
Page 15
Mr. Weiss has served as Chairman of the Board, President and Chief Executive
Officer since May 23, 1996. Prior to that, he served as Chief Operating
Officer of the Company from March 1995 to May 1996, Executive Vice President
of Systems Development from January 1993 to March 1995, Senior Vice President
of Marketing and Program Management Process from June 1992 to January 1993,
and Corporate Vice President of Market Planning from August 1991 to
June 1992. Mr. Weiss joined the Company in March 1991 as Staff Vice
President.
Mr. Gooch was appointed as Executive Vice President and General Manager of
the Company's Network Systems Group in November 1995. From January 1989 to
November 1995, Mr. Gooch was Executive Vice President of Operations of the
Company. Mr. Gooch has been employed by the Company in various capacities
since 1972.
Mr. Williams was appointed Executive Vice President of Worldwide Field
Operations on January 1, 1995. From August 1993 through December 1994, he
served as Senior Vice President, Americas. Mr. Williams was Corporate Vice
President from February 1992 through August 1993 and Vice President of North
America from September 1990 through February 1992.
Mr. Lacey was appointed Executive Vice President and Chief Financial Officer
on May 23, 1996. From February 1995 to May 1996, Mr. Lacey served as Interim
Chief Financial Officer and Corporate Vice President. Mr. Lacey was
appointed a Corporate Vice President in December 1990 and served as Corporate
Controller of the Company from October 1989 to February 1995.
Mr. Wayman has served as Corporate Vice President since March 1991, General
Counsel since January 1990 and Corporate Secretary of the Company since
February 1990.
PAGE
<PAGE>
Page 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Storage Technology Corporation is traded on the New York
Stock Exchange under the symbol STK. The table below reflects the high and
low closing sales prices of the common stock on the New York Stock Exchange
composite tape as reported by The Wall Street Journal during each fiscal
quarter of 1996 and 1995. On December 27, 1996, there were 14,832 record
holders of common stock of StorageTek.
1996 High Low
--------------------------------------------------
First Quarter $31.250 $22.375
Second Quarter 42.875 24.375
Third Quarter 40.000 31.875
Fourth Quarter 51.000 38.000
1995 High Low
--------------------------------------------------
First Quarter $32.625 $18.625
Second Quarter 26.750 17.875
Third Quarter 29.500 23.750
Fourth Quarter 27.625 22.250
Dividends
- ---------
StorageTek has never paid cash dividends on its common stock. The Company
currently plans to continue to retain future earnings for use in its
business. The Company's existing $150 million credit agreement contains
provisions restricting the payment of cash dividends.
PAGE
<PAGE>
Page 17
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1994
through 1996 (except for the 1994 Balance Sheet Data), has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 27, 1996, and December 29,
1995, and the related Consolidated Statement of Operations for each of the
three years in the period ended December 27, 1996, and notes thereto. The
data, insofar as it relates to the Balance Sheet Data as of December 30,
1994, December 31, 1993, and December 25, 1992, and the Statement of
Operations Data for the fiscal years 1993 and 1992, has been derived from the
historical financial statements of the Company for such periods, restated as
appropriate to reflect mergers accounted for as poolings of interests.
The following table data (in thousands of dollars, except per share amounts)
should be read in conjunction with the consolidated financial statements and
notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $2,039,550 $1,929,485 $1,871,350 $1,617,691 $1,774,325
Cost of revenue 1,192,777 1,217,622 1,186,942 1,072,784 1,179,756
--------- --------- --------- --------- ---------
Gross profit 846,773 711,863 684,408 544,907 594,569
Research and product development costs 176,422 187,275 206,083 191,048 177,699
Marketing, general, administrative and
other income and expense, net 444,870 445,889 425,490 393,991 388,496
Restructuring and other charges (Note 15) 212,207 8,000 90,414(a) 60,310(b)
--------- --------- --------- --------- ---------
Operating profit (loss) 225,481 (133,508) 44,835 (130,546) (31,936)
Interest income (expense), net 1,211 8,978 6,103 18,585 25,894
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
accounting change and extra-
ordinary item 226,692 (124,530) 50,938 (111,961) (6,042)
Provision for income taxes (55,900) (17,800) (18,900) (9,500) (27,200)
--------- --------- --------- --------- ---------
Income (loss) before accounting
change and extraordinary item 170,792 (142,330) 32,038 (121,461) (33,242)
Cumulative effect of accounting change 40,000
Extraordinary item, net of taxes (Note 2) 9,535
--------- --------- --------- --------- ---------
Net income (loss) $ 180,327 $ (142,330) $ 32,038 $ (81,461) $ (33,242)
========= ========= ========= ========= =========
Primary earnings (loss) per common share:
Income (loss) before accounting
change and extraordinary item $ 3.00 $ (2.91) $ 0.38 $ (2.59) $ (0.66)
Net income (loss) 3.17 (2.91) 0.38 (1.80) (0.66)
Fully diluted earnings per common share:
Income before extraordinary item 2.84
Net income 2.98
BALANCE SHEET DATA
Working capital $ 724,171 $ 425,351 $ 501,065 $ 492,576 $ 402,876
Total assets 1,884,276 1,888,629 2,144,458 2,064,851 2,011,007
Total debt 155,257 449,222 464,690 469,490 447,747
Stockholders' equity 1,180,983 962,833 1,265,285 1,215,877 1,138,927
(a) In 1993, the Company recognized restructuring charges of $77,832,000; acquired research
and development expenses of $7,060,000; and merger expenses of $5,522,000.
(b) In 1992, the Company recognized restructuring charges of $60,310,000.
</TABLE>
PAGE
<PAGE>
Page 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in the following discussions regarding the Company's
future product and business plans, financial results, performance and events
are forward-looking statements and are based on current expectations. Actual
results may differ materially due to a number of risks and uncertainties,
including the risks detailed below in "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS."
GENERAL
- -------
The Company reported net income for the year ended December 27, 1996, of
$180.3 million on revenue of $2.04 billion, compared to a net loss for the
year ended December 29, 1995, of $142.3 million on revenue of $1.93 billion
and net income for the year ended December 30, 1994, of $32.0 million on
revenue of $1.87 billion. The Company's results include an extraordinary
gain on sale of lease assets of $9.5 million in 1996, and restructuring and
other charges of $212.2 million in 1995, and $8.0 million in 1994.
Revenue increased 6% in 1996 compared to 1995. The Company received
increased sales revenue from the TimberLine 9490 (TimberLine(R)) 36-track
cartridge subsystem in 1996. RedWood SD-3 (RedWood(TM)), a high-capacity
cartridge subsystem; PowderHorn 9310 (PowderHorn(R)), an Automated Cartridge
System (ACS) Library; and TimberWolf 9710 (TimberWolf), an open-systems ACS
Library, also contributed to increased revenue during the year. As
anticipated, revenue from older generation Nearline(R) products decreased
during 1996 as compared to 1995. Revenue from mainframe online products
increased during 1996 as compared to 1995, as a result of increased sales
volumes under the OEM agreement with International Business Machines
Corporation (IBM) in the second half of 1996, coupled with end-user sales of
the Company's 9200 Virtual Storage Facility (Iceberg(R)) in the first half of
1996. Revenue contribution from network products decreased during 1996
primarily due to the continued decline in revenue from a number of older
network products and the sale of a non-strategic network business during the
third quarter of 1996. Revenue contribution from other products declined in
1996 as compared to 1995, due primarily to the sale of substantially all of
the Company's midrange lease assets and midrange service business in the
second and third quarter of 1995, respectively.
Revenue increased 3% in 1995 compared to 1994, primarily due to incremental
sales revenue from TimberLine and increased sales revenue from Iceberg.
These increases were partially offset by a decline in sales revenue from
other products as well as anticipated declines in revenue from older
generation Nearline products. The decline in other product revenue was
primarily due to the sale of substantially all of the Company's midrange
lease assets and midrange service business in 1995.
The Company's future revenue and operating results are significantly
dependent upon sustained demand for TimberLine and PowderHorn; successfully
identifying and capitalizing on product and service markets outside the
Company's traditional marketplace, including solutions targeted for the open-
systems market; achieving the milestones and reducing the costs associated
with the Company's manufacture of mainframe online products under the OEM
PAGE
<PAGE>
Page 19
agreement with IBM; and expanding its 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 $123.9 million during 1996. Net cash
flows generated from operations of $464.7 million includes cash generated
from the sale of substantially all of the Company's lease assets. These
operating cash flows were partially offset by the repurchase of 4.5 million
shares of the Company's common stock for $195.5 million, net repayments of
debt of $100.0 million, and investments in property, plant and equipment of
$68.9 million. The Company's cash balances increased $36.4 million during
1995 as cash generated from operations of $306.0 million was partially offset
by net repayments of debt of $201.9 million, and investments in property,
plant, and equipment of $58.0 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.
Year Ended December
---------------------------------
1996 1995 1994
---------------------------------
Revenue:
Nearline Products 65.1% 62.1% 55.2%
Online Products 21.1 19.5 13.6
Network Products 9.0 10.8 13.3
Other Products 4.8 7.6 17.9
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 58.5 63.1 63.4
----- ----- -----
Gross profit 41.5 36.9 36.6
Research and product development costs 8.6 9.7 11.0
Marketing, general, administrative
and other income and expense, net 21.8 23.1 22.8
Restructuring and other charges 11.0 0.4
----- ----- -----
Operating profit (loss) 11.1 (6.9) 2.4
Interest income (expense), net 0.4 0.3
----- ----- -----
Income (loss) before income
taxes and extraordinary item 11.1 (6.5) 2.7
Provision for income taxes (2.7) (0.9) (1.0)
----- ----- -----
Income (loss) before extraordinary
item 8.4 (7.4) 1.7
Extraordinary gain, net of income taxes 0.4
----- ----- -----
Net income (loss) 8.8% (7.4)% 1.7%
===== ===== =====
REVENUE
- -------
NEARLINE PRODUCTS
Revenue from Nearline products increased 11% in 1996 compared to 1995,
primarily due to increased sales revenue from TimberLine. RedWood,
PowderHorn, and TimberWolf also contributed to increased revenue during 1996.
As anticipated, revenue from earlier generation Nearline products, such as
4480 18-Track Tape Cartridge Subsystem (4480 18-Track), and Silverton 4490
36-Track Tape Cartridge Subsystem (Silverton), declined during 1996 as
PAGE
<PAGE>
Page 20
compared to 1995. Revenue from the first generation 4410 ACS library also
declined slightly in 1996.
Revenue from Nearline products increased 16% in 1995 compared to 1994,
primarily due to incremental sales of TimberLine, which became available in
the fourth quarter of 1994. Revenue from PowderHorn also increased in 1995
compared to 1994. As anticipated, revenue from the 4480 18-Track and
Silverton declined in 1995. Revenue from the 4410 ACS library also declined
slightly in 1995.
Future results of the Nearline product line are significantly dependent upon
the continued demand for TimberLine and PowderHorn; gaining market acceptance
for other new Nearline products, including products targeted for the open-
systems market; expanding the Company's distribution channels; and
effectively managing pricing pressures. During the third quarter of 1996,
the Company announced an OEM agreement with NCR Corporation for its open-
systems TimberWolf products. Sales of TimberLine, PowderHorn and other new
Nearline products are expected to offset anticipated further declines in
revenue from earlier generation Nearline products. There can be no assurance
that TimberLine and PowderHorn will continue to sustain their historical
market growth or that other new Nearline products and enhancements will be
developed in a timely manner or gain market acceptance in the future.
ONLINE PRODUCTS
Revenue from online products increased 14% in 1996 as compared to 1995. This
online revenue increase is primarily due to increased sales volume of
mainframe online storage products under the OEM agreement with IBM in the
second half of 1996, coupled with end-user sales of Iceberg in the first half
of 1996. These increases were partially offset by a decrease in revenue
contribution from earlier generation online products.
Revenue from online products increased 48% in 1995 compared to 1994,
primarily due to incremental sales of Iceberg, which became available during
the second quarter of 1994. While Iceberg sales revenue increased during
1995, the rate of revenue growth fell short of the Company's expectations,
primarily due to rapid price erosion in the online marketplace, and slower
than expected customer acceptance of Iceberg.
On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM
agreement with IBM under which the Company develops and manufactures
mainframe online storage products for IBM. IBM serves as StorageTek's
primary distribution channel for this technology and StorageTek does not
anticipate that it will continue to sell this technology directly to end-user
customers during the term of the agreement. The agreement, which expires in
1999, contains certain minimum purchase commitments on behalf of IBM. The
agreement also contains product quality, availability, supply, delivery, and
development milestones. The Company's failure to achieve these milestones
may result in reduced purchase commitments, the imposition of penalties and,
under certain circumstances, IBM may terminate the agreement.
The Company anticipates the OEM agreement with IBM will benefit the Company
in 1997 through increased sales revenue contribution from the mainframe
online product line, due to increased market penetration. Additionally, the
OEM arrangement is expected to allow the Company to redirect resources to
other products and services outside the Company's traditional marketplace,
including products targeted for the open-systems market. There can be
PAGE
<PAGE>
Page 21
no assurance that the Company will achieve the milestones provided for in the
OEM agreement, that the Company will realize the anticipated benefits
associated with the agreement, or that the Company will succeed in its
efforts outside its traditional marketplace.
NETWORK PRODUCTS
Revenue from network products decreased 12% in 1996 as compared to 1995.
This decrease is due primarily to the continued decline in revenue from a
number of older network products and the sale of a non-strategic network
business in the third quarter of 1996 as the Company continued the
implementation of restructuring actions aimed at increasing the focus on core
network products for the information storage systems marketplace. The
Company's 1995 restructuring activities resulted in the realization of cost
savings associated with the manufacture of network products during 1996.
Revenue from network products decreased 16% in 1995 compared to 1994. This
decrease reflects declines in older network products, coupled with slower
than expected market acceptance of internetworking products which support
communication between networks. Revenue and operating results associated
with network products during 1995 were adversely affected by difficulties
encountered with the integration of Network Systems Corporation (Network
Systems), which was acquired in March 1995.
Future revenue and operating results from the Company's network products are
significantly dependent upon increasing the market penetration for network
connectivity and security products; successfully expanding the network
product line; and establishing new distribution channels. There can be no
assurance that new network products will be successfully and timely developed
or gain market acceptance, or that the network product line will generate any
significant profits in the future.
OTHER PRODUCTS
Revenue from other products decreased 33% in 1996 compared to 1995;
representing less than 5% of total revenue. Revenue from other products
decreased 56% in 1995 compared to 1994. These declines are primarily the
result of the sale of the midrange lease assets during the second quarter of
1995 and the sale of substantially all of the midrange service business
during the third quarter of 1995. No material gain or loss resulted from the
sale of the midrange lease assets as the gain on the lease asset sale was
largely offset by transaction and integration costs. A one-time gain of
approximately $8.8 million was recognized in 1995 in connection with the sale
of the midrange service business.
GROSS PROFIT
- ------------
Gross profit on sales increased to 39% in 1996, compared to 37% in 1995,
principally as a result of cost savings achieved in connection with the
Company's 1995 restructuring, increased manufacturing volumes, and lower
purchase costs associated with components for online and Nearline products.
Product sales margins in 1996 also benefited from reduced sales revenue
contribution from lower margin midrange products as a result of the sale of
this business.
Gross profit on product sales of 37% in 1995 was unchanged, compared to 1994.
Gross profit improvements were obtained in 1995 from product cost
improvements, principally from Iceberg,
PAGE
<PAGE>
Page 22
and cost savings associated with the increased manufacturing volumes during
1995 for online and Nearline products. Product sales margins also benefited
from reduced sales revenue contribution from lower margin midrange products
as a result of the sale of this business. The improvements in 1995 were
offset by the continuation of price declines in the online marketplace, and a
significant decrease in margin contribution from higher margin network
products.
Gross profit on maintenance revenue increased to 47% in 1996, compared to 36%
in 1995. This increase is primarily due to cost savings associated with the
1995 restructuring and reduced maintenance revenue contribution from lower-
margin midrange services as a result of the sale of the midrange service
business in 1995. Gross profit on maintenance revenue was unchanged at 36%
in 1995, as compared to 1994.
The Company's ability to sustain or improve product sales margins during 1997
is significantly dependent upon the Company's continued success in reducing
manufacturing costs in all of its product lines. The Company anticipates
that sales margins for its mainframe online products will be pressured due to
lower OEM pricing and scheduled price reductions over the term of the OEM
agreement with IBM. While pricing pressures are expected to be partially
offset by lower manufacturing costs resulting from increased volumes and
operating expense savings, the Company must further reduce costs and expenses
associated with manufacturing these products in order to achieve expected
benefits. Product sales margins also may be adversely affected by inventory
writedowns resulting from rapid technological changes and delays in gaining
market acceptance for new products. Maintenance margins may be adversely
affected in the future by increased price competition.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures decreased 6% in 1996 as
compared to 1995. The decrease in expenditures during 1996 reflects IBM's
agreement to finance the development of enhancements to mainframe online
products, effective July 1, 1996, pursuant to the OEM agreement. Research
and product development expenditures decreased 9% in 1995 compared to 1994 as
a result of the completion of several major product development programs in
1994 and the implementation of cost-control measures directed at achieving
targeted expense ratios. The Company anticipates that its research and
development investments in new products outside its traditional markets will
increase in future periods.
PAGE
<PAGE>
Page 23
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A and
Other) remained relatively unchanged and decreased 1% as a percent of revenue
in 1996 compared to 1995, as cost savings associated with the 1995
restructuring were partially offset by increased marketing expense resulting
from higher sales volumes. MG&A and Other increased 5% in 1995 compared to
1994 due primarily to increased marketing expenses resulting from higher
sales volumes. MG&A and Other expense for 1995 includes a charge of $13.7
million associated with the 1995 restructuring activities and a gain of $8.8
million realized on the sale of the Company's midrange service business.
Gains and losses associated with foreign currency transactions and
translation adjustments, net of associated hedging results, are included in
MG&A and Other and aggregated a net loss of $0.5 million for 1996, compared
to net losses of $4.3 million in 1995 and $1.2 million in 1994. See
"INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES," below, for further
discussion of the foreign exchange risks associated with the Company's
international operations and the related foreign currency hedging activities.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 37% in 1996, compared to 1995, primarily due to a
reduction in the Company's net investment in sales-type lease balances.
Interest expense decreased 24% in 1996, as compared to 1995, due primarily to
a reduction in nonrecourse borrowings and other long-term debt. The decrease
in interest expense was partially offset during the first six months of 1996
by incremental interest expense associated with the exchange of the Company's
7% Convertible Subordinated Debentures for its $3.50 Convertible Exchangeable
Preferred Stock in the fourth quarter of 1995. As further discussed in Note
8 to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the 7% Convertible
Subordinated Debentures were called for redemption in June 1996, and were
either converted into shares of the Company's common stock or redeemed for
cash on or before July 12, 1996.
Interest income decreased 8% in 1995, compared to 1994, principally due to a
reduction in the Company's net investment in sales-type lease balance.
Interest expense decreased 16% in 1995 compared to 1994, primarily due to a
reduction of nonrecourse borrowings and other long-term debt in the second
half of 1995.
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 $122.2 million of deferred income tax assets as of December 27,
1996. The Company's valuation allowance of approximately $100.5 million as
of December 27, 1996, 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 marketplace in which the Company
competes.
PAGE
<PAGE>
Page 24
The Company's provision for income taxes relates primarily to U.S. state
taxes and taxable earnings associated with its international operations in
certain foreign countries. The Company's effective tax rate can be subject
to significant fluctuations due to dynamics associated with the mix of its
U.S. and international taxable earnings. See Note 9 of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for information with respect to the current status of
the Internal Revenue Service examinations.
EXTRAORDINARY GAIN
- ------------------
As more fully discussed in Note 2 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, in March 1996, StorageTek sold to Leasetec Corporation (Leasetec)
substantially all of the Company's net investment in sales-type leases,
installment receivables, and equipment held subject to operating leases. The
sale was part of the Company's efforts to focus on core businesses and
outsource non-core activities, including its capital intensive lease
financing business. Leasetec assumed approximately $6.0 million of
associated nonrecourse borrowings and the Company used a portion of the cash
proceeds to retire its remaining nonrecourse borrowings and 9.53% Senior
Secured Notes. The transactions resulted in an extraordinary gain of $9.5
million, net of applicable taxes of $8.2 million, in 1996.
RESTRUCTURING AND OTHER CHARGES
- -------------------------------
Restructuring and other charges consist of the following (in thousands of
dollars):
Year Ended
----------------------------
December 29, December 30,
1995 1994
----------------------------
Restructuring charges $167,175 $8,000
Litigation settlement 30,680
Merger and consolidation charges 14,352
------- -----
$212,207 $8,000
======= =====
See Note 15 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a discussion of
the $30.7 million charge associated with the settlement of litigation in
1995. See Note 4 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a
discussion of the $14.4 million charge associated with the merger with
Network Systems in 1995. During the fourth quarter of 1994, Network Systems
recorded a restructuring charge of $8.0 million in connection with an expense
reduction plan.
PAGE
<PAGE>
Page 25
The following table summarizes the activity in the Company's restructuring
reserves (in thousands of dollars):
<TABLE>
<CAPTION>
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
--------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S>
Balances, December 31, 1993 $ 6,239 $ 0 $ 5,257 $ 3,796 $ 15,292
Restructuring charges 3,000 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------- ------- ------ ------ -------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------- ------- ------ ------ -------
Balances, December 29, 1995 42,688 0 18,538 10,172 71,398
Cash payments (26,837) (2,907) (9,414) (39,158)
Reclassifications 301 (154) 1,222 1,369
------- ------- ------ ------ -------
Balances, December 27, 1996 $ 16,152 $ 0 $15,477 $ 1,980 $ 33,609
======= ======= ====== ====== =======
</TABLE>
RESTRUCTURINGS
As more fully discussed in Note 15 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the fourth quarter of 1995, the Company recorded a
restructuring charge of $167.2 million related to the adoption by the Company
of a formal action plan for restructuring its enterprise and network
businesses. The restructuring was adopted in an effort to establish a more
cost efficient business structure in response to competition. Elements of
the Company's restructuring plan include focusing on core businesses,
outsourcing non-strategic activities, rearchitecting its distribution
processes and accelerating the integration of Network Systems.
Cash payments during 1996 are primarily the result of termination payments
associated with the reduction in the number of employees by approximately
1,700 people. Reclassifications during consist principally of reclassifying
a restructuring accrual as other exit costs of approximately $1.4 million,
which was previously recorded as a direct write-off of a fixed asset. The
reclassifications had no effect on the Company's reported results within the
Consolidated Statement of Operations. 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. The Company anticipates that
substantially all restructuring activities will be completed in 1997. While
the Company is evaluating various outsourcing and automation projects in
order to gain
PAGE
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Page 26
further improvements in operating efficiencies, the Company does not
anticipate that any material incremental costs have been or will be incurred
as part of the restructuring which would offset the anticipated expense
reductions.
The Company believes that its restructuring programs have eliminated certain
non-essential functions and excess costs. Based on current short- and long-
term forecasts, the Company believes that such cost reductions will benefit
future operations. While the Company does not currently foresee any
significant additional restructuring charges, the continuing 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 generate improved operating results in future periods. It is
possible that changes in the Company's business or in its industry may
necessitate future restructuring charges, which may be significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances increased $123.9 million from December 29, 1995,
to December 27, 1996. The increase in cash balances in 1996 primarily
resulted from cash generated from operations of $464.7 million which was
offset by net repayments of nonrecourse borrowings and other debt of $100.0
million, the repurchase of 4.5 million shares of common stock for a purchase
price of approximately $195.5 million, investments in property plant and
equipment of $68.9 million, and an increase of short-term investments of
$29.2 million. Net cash from operating activities during 1996 includes cash
received from the sale of lease assets and cash payments associated with the
1995 restructuring. In connection with the sale of lease assets, the Company
used a portion of the cash proceeds to retire its remaining nonrecourse
borrowings and its 9.53% Senior Secured Notes.
The Company's cash balances increased $36.4 million from December 30, 1994,
to December 29, 1995. The increase in cash during 1995 primarily resulted
from cash generated from operations of $306.0 million; offset by net
repayments of debt of $201.9 million and investments in property, plant and
equipment of $58.0 million. Net cash from operating activities during 1995
includes cash generated from the sale of midrange lease assets and the
midrange service business, offset by a one-time payment associated with the
settlement of shareholder litigation. The net repayment of debt for 1995 of
$201.9 million was primarily due to the repayment of borrowings associated
with the sale of midrange lease assets.
The current ratio increased to 2.4 as of December 27, 1996, from 1.8 as of
December 29, 1995, principally due to an increase in cash of $123.9 million
and accounts receivable of $157.7 million. Accounts receivable increased
from $396.5 million as of December 29, 1995, to $554.2 million as of December
27, 1996, primarily due to the Company's OEM agreement with IBM and its exit
from the leasing business during 1996. As a result of the arrangement with
IBM, the Company has experienced an increase in concentration of credit risk
associated with the Company's accounts receivable. The Company monitors this
concentration and does not believe any significant credit risk exists as of
December 27, 1996. Inventories increased from $214.6 million as of December
29, 1995, to $288.6 million as of December 27, 1996, due to the
PAGE
<PAGE>
Page 27
reclassification of inventory consigned for sale to customers (see Note 2 of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
AVAILABLE FINANCING LINES
The Company has a $150 million secured credit agreement (the Revolver) which
expires in May 1998. The interest rates available under the Revolver depend
on the type of advance selected. The current primary advance rate is the
agent bank's prime lending rate plus 0.125% (8.375% as of December 27, 1996).
Under the Revolver, the Company is required to comply with certain financial
and other covenants, including restrictions on the payment of cash dividends
on its common stock. As of December 27, 1996, the Company had issued letters
of credit for approximately $25.4 million and had approximately $124.6
million of available credit under the Revolver.
In December 1996, the Company entered into a financing agreement with a bank
which provides for the issuance of promissory notes in the principal amount
of up to $25 million at any one time. The agreement, which expires on
January 15, 1998, provides for commitments by the bank to purchase promissory
notes denominated in a variety 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% (6.12% as of December 27, 1996). Under the terms of the
agreement, the Company is required to comply with certain covenants which
can, under certain circumstances, include the maintenance of compensating
cash balances. As of December 27,1996, the Company had not committed to any
future borrowings under this agreement.
In January 1996, the Company entered into a financing agreement with a bank
which provides for the sale of certain U.S. and foreign based accounts
receivable on a recourse basis. This agreement, which expires on January 31,
1998, allows for receivable sales of up to $40 million at any one time and
the Company's obligations under the agreement are secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables is partially determined based upon foreign currency exchange
rates and any gains or losses on the sales are recognized within marketing,
general, administrative and other income and expense, net, in the
Consolidated Statement of Operations at the time the receivables are sold.
During 1996, the Company sold approximately $202.3 million of receivables in
connection with this agreement. As of December 27, 1996, the outstanding
balance associated with receivables sold on a recourse basis, but not
collected, was approximately $25.0 million and the Company had committed to
future cumulative sales of approximately $378.7 million. Gains and losses
associated with the receivable sales are not expected to have a material
effect on the Company's reported financial results after taking into
consideration other transactions associated with the Company's international
operations. Based upon the Company's past credit and collection experience
with respect to the receivables that it expects to sell, the Company believes
that no material credit risk exists under the recourse provisions of the
agreement.
The Company believes it has adequate working capital and financing
capabilities to meet its anticipated operating and capital requirements for
the next 12 months. Over the longer term, the Company intends to continue to
commit substantial resources to research and development
PAGE
<PAGE>
Page 28
projects and may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The Company may seek to fund these activities or possible
transactions through the issuance of additional equity or debt. The issuance
of equity or convertible debt securities could result in dilution to the
Company's stockholders. There can be no assurance that such additional
financing, if required, can be completed on terms acceptable to the Company.
TOTAL DEBT-TO-TOTAL CAPITALIZATION
The Company's total debt-to-total capitalization ratio decreased from 32% as
of December 29, 1995, to 12% as of December 27, 1996. This decrease resulted
from the conversion of 7% Convertible Subordinated Debentures in the
principal amount of $171.1 million into 7.3 million shares of common stock,
the increase in stockholders' equity resulting from net income earned by the
Company during 1996 of $180.3, and the repayment of its nonrecourse
borrowings and 9.53% Senior Secured Notes. This decrease was partially
offset by a reduction in stockholders' equity resulting from the repurchase
of 4.5 million shares of the Company's common stock. In December 1996, the
Company called for redemption on January 13, 1997, all outstanding 8%
Convertible Subordinated Debentures (8% Convertible Debentures). With the
conversion of the 8% Convertible Debentures into 4.1 million shares of common
stock on or before January 13, 1997, the Company is effectively free of debt.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
During 1996, approximately 41% of the Company's revenue was generated by its
international operations, and the Company expects that it will generate a
significant portion of its revenue from international operations in the
future. The majority of the Company's international operations involve
transactions denominated in the local currencies of countries within Western
Europe, principally Germany, France and the United Kingdom; Japan; Canada and
Australia. An increase in the exchange value of the U.S. dollar reduces the
value of revenue and profits generated by the Company's international
operations. As a result, the Company's operations and financial results can
be materially affected by changes in foreign currency exchange rates.
In an attempt to mitigate the impact of foreign currency fluctuations, the
Company employs a hedging program which takes into account operating and
financing activities to reduce exposures and utilizes foreign currency
options and forward exchange contracts to further reduce exposures. The
Company utilizes foreign currency options, generally with maturities of less
than one year, to hedge a portion of its exposure to exchange-rate
fluctuations in connection with anticipated revenue from its international
operations. Gains and losses on the options are deferred and recognized as
an adjustment to the associated revenue. The Company also utilizes forward
exchange contracts, generally with maturities of less than two months, to
hedge its exposure to exchange-rate fluctuations in connection with net
monetary assets held in foreign currencies. The forward contracts are
marked-to-market each month with any gains or losses recognized within MG&A
and Other as an adjustment to the foreign exchange gains and losses on the
translation of net monetary assets.
The Company's international business may be affected by changes in demand
resulting from localized economic and market conditions. For example, in the
past, the Company's business has been adversely affected by recessions in
Europe. In addition, the Company is subject to
PAGE
<PAGE>
Page 29
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
- -------------------------------------------
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company's results of operations and competitive strength depend upon the
successful and rapid development of new products and enhancements to existing
products. The market for the Company's products is characterized by rapid
technological advances and changes in customer demand, which necessitate
frequent product introductions and enhancements. These factors can result in
unpredictable product transitions and shortened product life cycles, and can
render existing products obsolete or unmarketable. The Company must make
significant investments in research and product development and successfully
introduce competitive new products and enhancements on a timely basis. The
success of new product introductions is dependent on a number of factors,
including the rate at which a new product gains acceptance and the Company's
ability to effectively manage product transitions. The development of new
technology, products, and enhancements is complex and involves uncertainties,
which increases the risk of delays in the introduction of new products and
enhancements. From time to time the Company has encountered delays that have
adversely affected the Company's financial results and competitive position
in the market. There can be no assurances that the Company will not
encounter development or production delays, or that despite intensive testing
by the Company, flaws in design or production will not occur in the future.
Design flaws could result in the Company experiencing a rate of failure in
its products that delays the shipment or sale of its products, triggers
substantial repair or replacement costs, damages the Company's reputation and
causes material adverse effect upon the Company's financial results.
The Company has historically generated a significant portion of its revenue
and operating profits from the sale and maintenance of products for the
mainframe marketplace. The Company is focusing resources on expanding into
new marketplaces including: investing in research and development of new
products for the open-systems marketplace; developing network-attached
storage solutions; establishing a professional services consulting group to
capitalize on the Company's expertise in information storage management; and
expanding the Company's distribution channels. There can be no assurances
that the Company will be successful in expanding into new markets.
DEPENDENCE ON IBM
Many of the Company's products are designed to be compatible with certain IBM
operating systems, and many of its products function like IBM equipment due
to the significance of the IBM computer operating environments. Future
revenue from products and maintenance is therefore dependent on the
marketplace's continued widespread acceptance of, and IBM's continued support
of, these products.
PAGE
<PAGE>
Page 30
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 this technology. This OEM arrangement
represents a significant change from the Company's past business model. The
Company's success in its mainframe online storage business is now
significantly dependent upon achieving certain milestones contained in the
OEM agreement and IBM's continuous support for and success in marketing these
products to end-user customers. Because of lower OEM pricing and scheduled
price reductions 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 under the agreement. In addition, subject to
required lead times and minimum purchase commitment terms, the OEM business
model arrangement may cause the Company to incur additional costs associated
with unanticipated increases or decreases in manufacturing volumes. The
agreement includes termination provisions. The Company may elect to
terminate the agreement if IBM fails to meets its minimum volume commitments
and would be entitled to receive certain amounts from IBM. IBM may elect to
terminate the agreement for convenience, or on the occurrence of certain
other conditions, in each case making payment to the Company. IBM may also
elect to terminate the agreement on the occurrence of certain instances of
change in control of the Company or for cause.
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division concerning the OEM
agreement with IBM for mainframe online storage subsystems. The Company
received two additional CIDs in October 1996 and one additional CID in
February 1997. The CIDs requested production of documents and testimony in
connection with a review of the agreement for compliance with the Sherman
Act. While the Company believes that the agreement is in compliance with
antitrust laws, it is unable to predict the outcome of the investigation. In
the event of an unfavorable outcome, the Company could be required to pay
penalties, modify the agreement or terminate the agreement.
COMPETITION
The market for the Company's products is intensely competitive and subject to
continuous, rapid technological change, frequent product performance
improvements and price reductions. In the mainframe marketplace, competition
comes from companies that have substantially greater resources, including
IBM, Fujitsu Ltd., and Hitachi, Ltd., as well as several similarly sized
companies, including Amdahl Corp. and EMC Corp. As it moves into the open-
systems marketplace, the Company will face competition both from its
traditional rivals and new sources. In the network connectivity and security
product marketplace, the competition includes a number of large companies
with significant market presence and resources, including IBM, Hewlett-
Packard Company, Computer Network Technologies Corp. as well as a number of
other companies. The Company expects that the markets for its products will
continue to change as customer buying patterns migrate to the open-systems
and network environments, and as a result of focusing on emerging products
and technologies. The Company's ability to compete will depend to a
considerable extent on its ability to continuously develop and introduce new
products and enhancements to existing products and expand its distribution
channels. The Company's competitiveness could also be affected by
cooperative alliances between the Company's competitors or other
relationships between its competitors, who may emerge and rapidly acquire
market share. These alliances and acquisitions may result in companies with
increased market presence or proprietary technology in the Company's markets,
as well as other companies being
PAGE
<PAGE>
Page 31
at various times, collaborators, competitors and customers in different
markets. Increased competition may result in price reductions, reduced
margins and declining market share, which may have a material adverse effect
on the Company's business and financial results.
INTELLECTUAL PROPERTY
The Company's intellectual property rights are material assets and key to its
business and competitive strength. StorageTek protects its intellectual
property rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection, when it develops new or improved
technology that is important to its business. Such protection, however, may
not preclude competitors from developing products similar to the Company's
products. In addition, competitors may attempt to restrict the Company's
ability to compete by advancing various intellectual property legal theories
which could, if enforced by the courts, restrict the Company's ability to
develop and manufacture interoperable products. Also, the laws of certain
foreign countries do not protect the Company's intellectual property rights
to the same extent as the laws of the United States. The Company also relies
on certain technology that is licensed from others. The Company is unable to
predict whether its license arrangements can be renewed on terms acceptable
to the Company. The failure to successfully protect its intellectual
property rights or obtain licenses from others as needed could have a
material adverse effect on the Company's business and financial results. In
1996, the Company entered into an OEM agreement with IBM under which certain
research and development activities will be funded by IBM; any technology
that is developed will be owned by IBM, and subject to licensing rights by
the Company.
The high technology industry is characterized by vigorous pursuit and
protection of intellectual property rights or positions, which in some
instances has resulted in significant litigation that is often protracted and
expensive. From time to time, StorageTek has commenced actions against other
companies to protect or enforce its intellectual property rights. Similarly,
from time to time, StorageTek has been notified that it may be infringing
certain patent or other intellectual property rights of others. Licenses or
royalty agreements are generally offered in such situations. Litigation by
or against the Company may result in significant expense and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation results in any determination unfavorable to the Company. In
the event of an adverse result, the Company could be required to pay
substantial damages; cease the manufacture, use and sale of infringing
products; expend significant resources to develop non-infringing technology;
or discontinue the use of certain processes if it is unable to enter into
royalty arrangements. There can be no assurances that litigation will not be
commenced in the future regarding patents, copyrights, trademarks or trade
secrets or that any license, royalty or other rights can be obtained on
acceptable terms, or at all. StorageTek is currently engaged in certain
proceedings relating to its intellectual property and alleged patent
infringements. See Note 13 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
additional information with respect to the Company's legal proceedings.
INFORMATION SYSTEMS
The Company is currently in the process of replacing certain transaction
systems, including the order management, distribution, and finance systems.
While the Company expects that the new integrated system will increase
operational efficiencies and support future growth, future operating
PAGE
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Page 32
results and financial condition could be adversely affected by functional or
performance difficulties with the new system during the transition period.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company generally uses standard parts and components for its products and
believes that, in most cases, there are a number of alternative, competent
vendors for most of those parts and components. The Company manufactures key
components for its products and purchases certain important components and
products. Some of these components and products are purchased from single
suppliers that the Company believes are currently the only manufacturers of
the particular components that meet the Company's qualification requirements
and other specifications or for which alternative sources of supply are not
readily available. In particular, a key component of the Company's tape
drive heads is supplied by Sumitomo Corporation on a sole source basis.
Certain of the Company's suppliers have experienced occasional technical,
financial or other problems in the past that have delayed deliveries, but
without significant effect on the Company. An unanticipated failure of any
sole source supplier to meet the Company's requirements for an extended
period, or an interruption of the Company's ability to secure comparable
components, could have a material adverse effect on its revenue and results
of operations. In the event a sole source supplier was unable or unwilling
to continue to supply components, the Company would have to identify and
qualify other acceptable suppliers. This process could take an extended
period, and no assurance can be given that any additional source would become
available or would be able to satisfy the Company's production requirements
on a timely basis.
EARNINGS FLUCTUATIONS
The Company's reported earnings have fluctuated significantly in the past and
may continue to fluctuate significantly in the future from quarter to quarter
due to a variety of factors, including, among others, the effects of (i)
customers' historical tendencies to make purchase decisions near the end of
the calendar year, (ii) the timing of the announcement and availability of
products and product enhancements by the Company and its competitors, (iii)
fluctuating foreign currency exchange rates, (iv) changes in the mix of
products sold, (v) variations in customer acceptance periods for the
Company's products, and (vi) global economic conditions.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock has fluctuated and in the
future may fluctuate substantially in response to anticipated or reported
operating results, 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, international currency fluctuations and other events or factors.
Further, the volatility of the stock markets in recent years has caused wide
fluctuations in trading prices of stocks of high technology companies
independent of their individual operating results. In the future, the
Company's reported operating results may be below the expectations of stock
market analysts and investors, and in such events, there could be an
immediate and significant adverse effect on the trading price of the
Company's common stock.
PAGE
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the Index to
Consolidated Financial Statements at Item 14 of this Form 10-K are
incorporated by reference into this Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements with the Company's independent accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
As described in the Company's current report on Form 8-K dated as of April 3,
1995, and amended by Forms 8-K/A dated April 7, 1995, and April 12, 1995, at
a meeting of the Company's Audit Committee held on March 16, 1995, the
Committee determined to engage the accounting firm of Price Waterhouse LLP
(Price Waterhouse) as independent accountants for all subsidiaries of the
Company for 1995, subject to approval of shareholders. The shareholders
ratified the appointment on May 24, 1995, at the Annual Meeting of
Shareholders. As a result, the Company's subsidiary, Network Systems,
disengaged the accounting firm of Ernst & Young LLP (Ernst & Young) and
retained the accounting firm of Price Waterhouse, who had been auditing the
Company and all subsidiaries except Network Systems. Price Waterhouse has
expressed reliance upon Ernst & Young's report in their report on the
consolidated financial statements of the Company for the year ended December
30, 1994. Ernst & Young's report on the financial statements for 1994
contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty or audit scope. Additionally, there were no
report modifications for accounting principles in the year ended December 30,
1994.
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Page 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the Company's directors required by this Item is
incorporated by reference from the information set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement
concerning the Annual Meeting of Stockholders to be held May 22, 1997 (the
"Proxy Statement"). Also, the information concerning executive officers
required by this Item is set forth under the caption "Executive Officers of
the Registrant," in Part I of this Form 10-K and is incorporated herein by
reference.
The information required by this Item concerning compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference to the information under the caption "Compensation of Executive
Officers -- Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the captions "Compensation of Executive Officers" and
"Standard Arrangements for Compensation of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information under the caption "Voting Securities of the Company -- Security
Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the captions "Standard Arrangements for Compensation of
Directors" and "Compensation of Executive Officers" in the Proxy Statement.
PAGE
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Page 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements: PAGE
--------------------
Consolidated Balance Sheet at December 27, 1996,
and December 29, 1995 F-1
Consolidated Statement of Operations for the
Years Ended December 27, 1996, December 29, 1995
and December 30, 1994 F-2
Consolidated Statement of Cash Flows for the
Years Ended December 27, 1996, December 29, 1995
and December 30, 1994 F-3
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended December 27, 1996,
December 29, 1995, and December 30, 1994 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants for Storage
Technology Corporation F-27
Report of Independent Accountants for
Network Systems Corporation F-28
2. Financial Statement Schedules:
-----------------------------
Schedule II - Valuation and Qualifying Accounts and Reserves F-29
All other schedules are omitted because they are not applicable, or the
required information is included in the consolidated financial statements or
notes thereto.
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Page 36
3. Exhibits:
--------
The exhibits listed below are filed as part of this Annual Report on Form
10-K or are incorporated by reference into this Annual Report on Form 10-K:
2.1 Restated Agreement and Plan of Merger by and among the
Registrant, StorageTek Eagle Corporation and Network Systems
Corporation dated as of August 8, 1994, as amended as of
August 25, 1994 and September 9, 1994, and Restated on
November 15, 1994 (filed November 16, 1994, as Exhibit 2.1 to
the Company's Registration Statement on Form S-4, File No. 33-
55343, and incorporated herein by reference).
2.2 Amendment to Restated Agreement and Plan of Merger among
Storage Technology Corporation, StorageTek Eagle Corporation
and Network Systems Corporation dated as of February 8, 1995
(filed as an Exhibit to the Company's Current Report on Form
8-K dated February 8, 1995, and incorporated herein by
reference).
3.1 Restated Certificate of Incorporation and Restated Bylaws of
Storage Technology Corporation dated July 28, 1987 (filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 25, 1987, and as Exhibit 3.1(ii) to
the Company's Quarterly Report on Form 10-Q, for the quarter
ended September 29, 1995, filed on November 13, 1995, and
incorporated herein by reference).
3.2 Certificate of Amendment dated May 22, 1989 to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as
Exhibit (c)(1) to the Company's Current Report on Form 8-K
dated June 2, 1989, and incorporated herein by reference).
3.3 Certificate of Second Amendment dated June 2, 1992, to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 26, 1992, and incorporated
herein by reference).
3.4 First Amendment dated February 2, 1988, to the Restated Bylaws
of Storage Technology Corporation, amending Section IV (filed
as Exhibit 3(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 25, 1987, and incorporated
herein by reference).
3.5 Second Amendment dated May 25, 1995, to the Restated Bylaws of
Storage Technology Corporation, amending Article II (filed as
Exhibit 3.3(ii) to the Company's Quarterly Report on Form 10-Q,
for the quarter ended September 29, 1995, filed on November 13,
1995, and incorporated herein by reference).
PAGE
<PAGE>
Page 37
4.1 Specimen Certificate of Common Stock, $0.10 par value of
Registrant (filed as Exhibit (c)(2) as to the Company's Current
Report on Form 8-K dated June 2, 1989, and incorporated herein
by reference).
4.2 Indenture dated as of May 31, 1990, between Storage Technology
Corporation and Manufacturers Hanover Trust Company of
California, Trustee, relating to the Company's 8% Convertible
Subordinated Debentures due May 31, 2015 (filed as Exhibit 4.6
to the Company's Registration Statement on Form S-3 filed
May 11, 1990, File No. 33-34876, and incorporated herein by
reference).
4.3 Registration Statement of the Registrant on Form 8-A dated
August 13, 1981 (filed as Exhibit 4.7 to the Company's
Registration Statement on Form S-3 filed January 29, 1993, File
No. 33-57678, and incorporated herein by reference).
4.4 Rights Agreement dated as of August 20, 1990, between Storage
Technology Corporation and First Fidelity Bank, N.A., New
Jersey, Rights Agent, (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated August 20, 1990, and
incorporated herein by reference).
4.5 Certificate of Designations of Series B Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 8, 1990, and
incorporated herein by reference).
10.1 (1) 1987 Employee Stock Purchase Plan, as amended (filed as part of
the Company's Registration Statement on Form S-8 filed
September 8, 1994, File No. 33-42818, and incorporated herein
by reference).
10.2 (1) 1987 Equity Participation Plan (filed as part of the Company's
Registration Statement on Form S-8, filed December 28, 1987,
File No. 33-19426, and incorporated herein by reference).
10.3 (1) Amendment to the 1987 Equity Participation Plan (filed as
Exhibit 10(h) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1990, File No. 1-7534, and
incorporated herein by reference).
10.4 (1) 1995 Equity Participation Plan (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, for the quarter ended
June 30, 1995, filed on August 11, 1995, and incorporated
herein by reference).
- -------------------
(1) Contract or compensatory plan or arrangement in which directors and/or
officers participate.
PAGE
<PAGE>
Page 38
10.5 (1) Storage Technology Corporation MBO Plan (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 1, 1994, filed on August 12, 1994, and incorporated
herein by reference).
10.6 (1) Storage Technology Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors (filed as an Exhibit to
the Company's Registration Statement on Form S-8, filed
September 18, 1991, File No. 33-42817, and incorporated herein
by reference).
10.7 (1) Employment Agreement between the Company and Ryal Poppa dated
December 13, 1989, as amended on March 8, 1995 and July 27,
1995, (filed as Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995, and as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, respectively, and incorporated
herein by reference).
10.8 (1) Employment Agreement between the Company and L. Thomas Gooch,
dated February 17, 1995 (filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K, for the fiscal year ended
December 30, 1994, and incorporated herein by reference).
10.9 (1) Amendment to Employment Agreement between the Company and L.
Thomas Gooch, dated December 1, 1995 (filed as Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1995, and incorporated herein by reference).
10.10 (1) Employment Agreement between the Company and W. Russell Wayman,
dated February 17, 1995 (filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1994, and incorporated herein by reference).
10.11 (1) Employment Agreement between the Company and John V. Williams,
dated February 17, 1995 (filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1994, and incorporated herein by reference).
10.12 Multicurrency Credit Agreement dated as of March 31, 1993,
among the Registrant, Storage Technology De Puerto Rico, Inc.,
XL/Datacomp, Inc. and StorageTek Financial Services Corporation
as Borrowers and Bank of America National Trust and Savings
Association as Agent, Swing Line Bank and Issuing Bank, and the
other banks and financial institutions parties thereto (filed
as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q
for the
- -------------------
(1) Contract or compensatory plan or arrangement in which directors and/or
officers participate.
PAGE
<PAGE>
Page 39
quarter ended March 26, 1993, and incorporated herein by
reference).
10.13 Amended and Restated Multicurrency Credit Agreement dated as of
September 28, 1994 (filed as Exhibit 10.0 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, filed on November 14, 1994, and
incorporated herein by reference).
10.14 First Amendment and Waiver dated as of April 20, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as of
September 28, 1994 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, filed on August 11, 1995, and incorporated herein by
reference).
10.15 Second Amendment and Waiver dated as of June 27, 1995, to
Amended and Restated Multicurrency Credit Agreement (filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995, filed on August 11, 1995, and
incorporated herein by reference).
10.16 Third Amendment and Waiver dated September 28, 1995, to Amended
and Restated Multicurrency Credit Agreement dated as of
September 28, 1994 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995, filed on November 13, 1995, and
incorporated herein by reference).
10.17 Fourth Amendment dated as of December 22, 1995, to Amended and
Restated Multicurrency Credit Agreement dated as of
September 28, 1994 (filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
29, 1995, and incorporated herein by reference).
10.18 Multicurrency Receivables Transfer Agreement dated as of
January 29, 1996 (filed as Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
29, 1995, and incorporated herein by reference).
10.19 Second Amended and Restated Credit Agreement dated as of March
28, 1996, among the registrant, Storage Technology de Puerto
Rico, Inc., Bank of America National Trust and Savings
Association and the other financial institutional parties there
(filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1996, filed on May
10, 1996, and incorporated herein by reference).
PAGE
<PAGE>
Page 40
10.20 (1) Tenth Amendment and Restatement of Storage Technology
Corporation 1987 Employee Stock Purchase Plan (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1996, filed on August 12, 1996, and
incorporated herein by reference).
10.21 (1) Storage Technology Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors (filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1996, filed on August 12, 1996, and incorporated
herein by reference).
10.22 (1) Employment Agreement between the Company and David E. Weiss,
dated June 24, 1996 (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28,
1996, filed on August 12, 1996, and incorporated herein by
reference).
10.23 (1) Employment Agreement between the Company and David E. Lacey,
dated June 24, 1996 (filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28,
1996, filed on August 12, 1996, and incorporated herein by
reference).
10.24 OEM Agreement between the Company and International Business
Machines Corporation ("IBM"), dated June 7, 1996 (filed as
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 28, 1996, filed on October 30, 1996,
and incorporated herein by reference). The OEM Agreement
contains certain confidential information which has been
omitted pursuant to an order of the Securities and Exchange
Commission granted to the Company under Rule 24b-2 of the
Securities Exchange Act of 1934.
10.25 Amendment dated July 26, 1996, to Multicurrency Receivables
Transfer Agreement dated January 29, 1996 (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 27, 1996, filed on November 8, 1996,
and incorporated herein by reference).
10.26 Amendment dated August 26, 1996, to Multicurrency Receivables
Transfer Agreement dated January 29, 1996 (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 27, 1996, filed on November 8, 1996,
and incorporated herein by reference).
- -------------------
(1) Contract or compensatory plan or arrangement in which directors and/or
officers participate.
PAGE
<PAGE>
Page 41
10.27 (1) Storage Technology Corporation 1995 Equity Participation Plan,
as amended September 1996 (filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 27, 1996, filed on November 8, 1996, and incorporated
herein by reference).
10.28 (2) Amendment dated December 12, 1996 to Multicurrency Receivables
Transfer Agreement dated January 29, 1996.
10.29 (2) Contingent Multicurrency Note Purchase Commitment Agreement
dated as of December 12, 1996, between the Company and Bank of
America National Trust and Savings Association.
11.0 (2) Computation of Earnings (Loss) per Common Share.
21.0 (2) Subsidiaries of Registrant.
23.1 (2) Consent of Price Waterhouse LLP.
23.2 (2) Consent of Ernst & Young LLP.
24.0 (2) Power of Attorney (See Page 42).
27.0 (2) Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On December 13, 1996, the Company filed a Current Report on Form 8-K
dated December 11, 1996, concerning the redemption, on January 13, 1997,
of all of the Company's outstanding 8% Convertible Subordinated
Debentures due May 31, 2015.
(c) Exhibits.
--------
The Exhibits listed in Item 14(a)(3) hereof are filed as part of this
Annual Report on Form 10-K.
(d) Financial Statement Schedules.
-----------------------------
See Item 14(a)(3) above.
- -------------------
(1) Contract or compensatory plan or arrangement in which directors and/or
officers participate.
(2) Indicates exhibits filed within this Annual Report on Form 10-K.
PAGE
<PAGE>
Page 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 7, 1997 STORAGE TECHNOLOGY CORPORATION
By: /s/ David E. Weiss
--------------------------------
David E. Weiss
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David E. Weiss, David E. Lacey and W. Russell
Wayman, jointly and severally, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ------- ------
/s/ David E. Weiss Chairman of the Board March 7, 1997
- ------------------- (Director), President and Chief
David E. Weiss Executive Officer (Principal
Executive Officer)
/s/ David E. Lacey Executive Vice President and March 7, 1997
- ------------------- Chief Financial Officer
David E. Lacey (Principal Financial Officer
and Principal Accounting
Officer)
PAGE
<PAGE>
Page 43
SIGNATURE TITLE DATE
--------- ------- ------
/s/ Judith E.N. Albino Director March 7, 1997
- ------------------------
Judith E.N. Albino
/s/ William L. Armstrong Director March 7, 1997
- ------------------------
William L. Armstrong
/s/ Robert A. Burgin Director March 7, 1997
- ------------------------
Robert A. Burgin
/s/ Paul Friedman Director March 7, 1997
- ------------------------
Paul Friedman
/s/ William R. Hoover Director March 7, 1997
- ------------------------
William R. Hoover
/s/ Stephen J. Keane Director March 7, 1997
- ------------------------
Stephen J. Keane
/s/ Robert E. LaBlanc Director March 7, 1997
- ------------------------
Robert E. LaBlanc
/s/ Robert E. Lee Director March 7, 1997
- ------------------------
Robert E. Lee
/s/ Harrison Shull Director March 7, 1997
- ------------------------
Harrison Shull
/s/ Richard C. Steadman Director March 7, 1997
- ------------------------
Richard C. Steadman
PAGE
<PAGE>
<TABLE>
<CAPTION>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 27, December 29,
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash, including cash equivalents of $315,795 in 1996 and
$190,451 in 1995 $ 388,401 $ 264,502
Short-term investments 29,176
Accounts receivable, net of allowance for doubtful accounts
of $12,907 in 1996 and $14,665 in 1995 554,159 396,499
Notes and installment receivables 10,766
Net investment in sales-type leases (Note 2) 88,668
Inventories (Note 5) 288,615 214,553
--------- ----------
Total current assets 1,260,351 974,988
Notes and installment receivables 10,113
Net investment in sales-type leases (Note 2) 150,751
Equipment held for sale or lease, at cost net of accumulated
depreciation of $117,377 in 1995 (Note 2) 139,629
Spare parts for maintenance, at cost net of accumulated
amortization of $53,872 in 1996 and $87,980 in 1995 29,625 29,468
Property, plant and equipment, at cost net of accumulated
depreciation (Note 6) 327,534 333,021
Deferred income tax assets, net of valuation allowance (Note 9) 122,190 74,902
Other assets 144,576 175,757
--------- ----------
$1,884,276 $1,888,629
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease commitments (Note 8) $ 19,415
Current portion of other long-term debt (Note 8) $ 4,451 65,844
Accounts payable 82,949 93,129
Accrued liabilities (Note 7) 369,309 361,286
Income taxes payable (Note 9) 79,471 9,963
--------- ---------
Total current liabilities 536,180 549,637
Nonrecourse borrowings secured by lease commitments (Note 8) 20,980
Other long-term debt (Note 8) 150,806 342,983
Deferred income tax liabilities (Note 9) 16,307 12,196
--------- ---------
Total liabilities 703,293 925,796
--------- ---------
Commitments and contingencies (Notes 8 and 13)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 150,000,000 shares authorized;
58,175,120 shares issued in 1996, and 53,352,087 shares
issued in 1995 5,818 5,335
Capital in excess of par value 1,444,939 1,414,551
Accumulated deficit (265,434) (445,761)
Treasury stock of 62,514 shares in 1996 and 43,773
shares in 1995 (790) (777)
Unearned compensation (3,550) (6,427)
Notes receivable from stockholders (4,088)
--------- ---------
Total stockholders' equity 1,180,983 962,833
--------- ---------
$1,884,276 $1,888,629
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-1
PAGE
<PAGE>
<TABLE>
<CAPTION>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
-------------------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Sales revenue $1,478,685 $1,345,260 $1,289,271
Maintenance revenue 560,865 584,225 582,079
--------- --------- ---------
Total revenue 2,039,550 1,929,485 1,871,350
--------- --------- ---------
Cost of sales revenue 897,548 841,583 812,228
Cost of maintenance revenue 295,229 376,039 374,714
--------- --------- ---------
Total cost of revenue 1,192,777 1,217,622 1,186,942
--------- --------- ---------
Gross profit 846,773 711,863 684,408
Research and product development costs 176,422 187,275 206,083
Marketing, general, administrative and other income
and expense, net 444,870 445,889 425,490
Restructuring and other charges (Note 15) 212,207 8,000
--------- --------- ---------
Operating profit (loss) 225,481 (133,508) 44,835
Interest income 27,333 43,325 46,935
Interest expense (26,122) (34,347) (40,832)
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item 226,692 (124,530) 50,938
Provision for income taxes (Note 9) (55,900) (17,800) (18,900)
--------- --------- ---------
Income (loss) before extraordinary item 170,792 (142,330) 32,038
Extraordinary gain on sale of lease assets net of
income taxes of $8,200 (Note 2) 9,535
--------- --------- ---------
Net income (loss) 180,327 (142,330) 32,038
Preferred dividend requirement (Note 10) (11,544) (12,075)
--------- --------- ---------
Income (loss) applicable to common shares $ 180,327 $ (153,874) $ 19,963
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Primary:
Income (loss) before extraordinary item $ 3.00 $ (2.91) $ 0.38
Extraordinary gain, net .17
--------- --------- ---------
$ 3.17 $ (2.91) $ 0.38
========= ========= =========
Weighted average common shares and equivalents 56,943 52,798 52,410
========= ========= =========
Fully Diluted:
Income before extraordinary item $ 2.84
Extraordinary gain, net .14
---------
$ 2.98
=========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
PAGE
<PAGE>
<TABLE>
<CAPTION>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Year Ended
-------------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash received from customers $ 2,158,927 $ 2,036,789 $ 1,820,260
Cash paid to suppliers and employees (1,662,990) (1,715,669) (1,760,344)
Interest received 26,448 53,362 55,484
Interest paid (21,866) (30,401) (38,480)
Income taxes paid, net (35,819) (38,056) (1,675)
---------- ---------- ----------
Net cash from operating activities 464,700 306,025 75,245
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (68,946) (58,003) (120,057)
Short-term investments, net (29,176) 5,508 18,804
Business acquisitions, net of cash acquired (11,165) (11,161)
Other assets, net 10,059 (8,842) (37,246)
---------- ---------- ----------
Net cash used in investing activities (88,063) (72,502) (149,660)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 2,593 167,237
Repayments of nonrecourse borrowings (33,533) (150,818) (147,632)
Proceeds from other debt 1,104 847 17,839
Repayments of other debt (67,607) (54,536) (46,977)
Repurchases of common stock (195,498) (442)
Proceeds from employee stock plans and warrants 39,154 12,443 24,394
Preferred stock dividend payments (12,075) (12,075)
---------- ---------- ----------
Net cash from (used in) financing activities (256,380) (201,546) 2,344
---------- ---------- ----------
Effect of exchange rate changes on cash 3,642 4,444 19,179
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 123,899 36,421 (52,892)
Cash and cash equivalents - beginning of the year 264,502 228,081 280,973
---------- ---------- ----------
Cash and cash equivalents - end of the year $ 388,401 $ 264,502 $ 228,081
========== ========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
FROM OPERATING ACTIVITIES
Net income (loss) $ 180,327 $ (142,330) $ 32,038
Depreciation and amortization expense 174,763 208,991 203,372
Translation (gain) loss 4,193 (2,910) (10,424)
Restructuring and other charges (Note 15) 91,609 2,200
Other non-cash adjustments to income 16,208 40,975 10,191
Increase in accounts receivable (143,103) (41,351) (92,165)
Decrease in notes receivable and sales-type leases 246,297 149,158 49,232
(Increase) decrease in inventories 11,886 36,615 (44,210)
Increase in equipment held for sale or lease, net (24,080) (59,773) (93,263)
Increase in spare parts, net (9,316) (7,243) (32,143)
(Increase) decrease in net deferred income tax asset (42,689) (22,750) 7,914
Increase (decrease) in accounts payable (9,360) (31,699) 22,872
Increase (decrease) in accrued liabilities (11,396) 85,102 10,320
Increase in income taxes payable 70,970 1,631 9,311
---------- ---------- ----------
Net cash from operating activities $ 464,700 $ 306,025 $ 75,245
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
PAGE
<PAGE>
<TABLE>
<CAPTION>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Notes
Capital in Receivable
Preferred Common Excess of Par Accumulated Treasury Unearned From
Stock Stock Value Deficit Stock Compensation Stockholders
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $ 35 $5,088 $1,529,352 $(311,319) $(735) $(6,544)
Shares issued under stock purchase
plan, and for exercises of options
(1,684,570 shares) 168 32,037 (33)
Shares purchased and retired (11,574
shares) (1) (441)
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Notes receivable from stockholders
for the purchase of shares (Note 11) $(4,291)
Net income 32,038
Other (3) 1,620 (5) 394
--- ----- --------- -------- ---- ------ ------
Balances, December 30, 1994 35 5,252 1,562,568 (291,356) (773) (6,150) (4,291)
Preferred stock exchanged and
retired (3,450,000 shares) (Note 10) (35) (165,194)
Shares issued under stock purchase
plan, and for exercises of options
(743,432 shares) 74 14,620
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Net loss (142,330)
Other 9 2,557 (4) (277) 203
--- ----- --------- -------- ---- ------ ------
Balances, December 29, 1995 0 5,335 1,414,551 (445,761) (777) (6,427) (4,088)
7% Convertible Subordinated
Debentures exchanged for stock
(7,282,536 shares) (Note 8) 728 168,273
8% Convertible Subordinated
Debentures exchanged for stock
(566,410 shares) (Note 8) 57 19,628
Shares issued under stock purchase
plan, and for exercises of options
(1,472,312 shares) 147 37,555
Repurchase of common stock
(4,500,000 shares) (450) (195,048)
Net income 180,327
Other 1 (20) (13) 2,877 4,088
--- ----- --------- -------- ---- ------ ------
Balances, December 27, 1996 $ 0 $5,818 $1,444,939 $(265,434) $(790) $(3,550) $ 0
=== ===== ========= ======== ==== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
PAGE
<PAGE>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Storage Technology Corporation and its wholly owned subsidiaries
(collectively hereinafter referred to as StorageTek or the Company). All
intercompany accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
StorageTek designs, manufactures, markets and maintains information storage
systems and network products. StorageTek sells its products to end-user
customers, original equipment manufacturers (OEMs), and value-added resellers
of computer systems. The principal markets for the Company's products and
services are located in the United States and Europe.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenue and expenses during the periods.
Significant estimates have been made by management in several areas including
the realizability of the Company's deferred tax assets, the possible outcome
of outstanding litigation, and future obligations associated with the
Company's 1995 restructuring. Actual results could differ from these
estimates making it reasonably possible that a change in these estimates
could occur in the near term. See Notes 9, 13 and 15, respectively, for
additional information with respect to these estimates.
REVENUE RECOGNITION
Revenue from end-user equipment sales, and associated software licenses, is
recognized at the time of acceptance by the customer, generally after
installation at a customer site. Revenue from certain customer-installable
products, as well as revenue from OEMs and value-added resellers, is
generally recognized at the time of shipment. Costs associated with post-
installation warranty obligations are estimated and accrued at the time of
revenue recognition.
StorageTek customers generally contract with the Company for equipment
maintenance and software support, which includes normal maintenance and
repair or replacement of product components. Maintenance revenue is
recognized as earned and the costs associated with these activities are
expensed as incurred.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have remaining maturities of three months or
less at the time of acquisition. The carrying value of the Company's cash
equivalents approximates fair value. Investments that do not qualify as cash
equivalents are classified as short-term investments. Short-term
F-5
PAGE
<PAGE>
investments are principally comprised of commercial paper and are recorded at
cost plus accrued interest, which approximates fair value.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $510,000 in 1996, $25,463,000 in 1995, and
$30,607,000 in 1994 associated with acquiring and developing software
products to be marketed to customers. Other assets as shown on the
Consolidated Balance Sheet include unamortized software costs of $33,988,000
as of December 27, 1996, and $54,034,000 as of December 29, 1995.
Amortization expense is calculated based on the greater of straight-line
amortization over estimated useful lives, generally three to four years, or
the percentage of actual revenue versus total anticipated revenue.
Amortization expense and write-offs associated with capitalized software
costs were $20,556,000 in 1996, $26,627,000 in 1995, and $15,671,000 in 1994.
The Company evaluates the realizability of the carrying value of the
capitalized software based upon estimates of the associated future revenue.
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment is computed using the straight-
line method over the estimated useful lives of the related assets. Other
assets as shown on the Consolidated Balance Sheet include unamortized
goodwill of $32,226,000 as of December 27, 1996, and $52,298,000 as of
December 29, 1995. Amortization of goodwill is calculated on a straight-line
basis over a period not exceeding 10 years. The Company evaluates the
realizability of the carrying value of goodwill based upon estimated future
cash flows calculated on an undiscounted basis.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for StorageTek's foreign subsidiaries is the U.S.
dollar, reflecting the significant volume of intercompany transactions and
associated cash flows which result from the fact that the majority of the
Company's products sold worldwide are manufactured in the United States.
Accordingly, monetary assets and liabilities are translated at year-end
exchange rates while non-monetary items are translated at historical exchange
rates. Revenue and expenses are translated at the average exchange rates in
effect during the year, except for cost of sales and depreciation, which are
translated at historical exchange rates. See Note 14 for information with
respect to the Company's accounting policies for financial instruments
utilized in its foreign currency hedging program.
STOCK-BASED COMPENSATION PLANS
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", rather than applying the fair
value method prescribed in Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation."
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed using the treasury stock method
based upon the weighted average number of common shares and dilutive common
stock equivalent shares outstanding during the year. The Company's
convertible debentures (see Note 8) are not common stock equivalents and,
therefore, have been excluded from the computation of primary
F-6
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<PAGE>
earnings (loss) per common share. Fully diluted earnings per common share
for the year ended December 27, 1996, reflects the assumed conversion of the
convertible debentures outstanding during the period. These convertible
debentures were not outstanding or not dilutive for all other periods
presented.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125, which is effective for
transactions occurring after December 31, 1996, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a consistent application of a
financial-components approach that focuses on control. The adoption of SFAS
No. 125 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
NOTE 2 - SALE OF MIDRANGE BUSINESS AND LEASE ASSETS
In June 1995, the Company completed the sale of substantially all of its net
investment in sales-type leases associated with its midrange business.
During the second quarter of 1995, the Company also announced plans to fully
integrate StorageTek Distributed Systems Division, Inc., the Company's wholly
owned midrange subsidiary, into StorageTek. The gain associated with the
lease asset sale was largely offset by transaction and integration costs. In
September 1995, the Company completed the sale of substantially all of its
midrange service business. A gain of approximately $8,800,000 was recognized
in connection with this transaction and has been included within marketing,
general, administrative and other income and expense on the Consolidated
Statement of Operations.
In March 1996, StorageTek sold all of the issued and outstanding stock of its
wholly owned lease financing subsidiary, StorageTek Financial Services
Corporation (SFSC), as well as the lease assets of certain of the Company's
foreign subsidiaries to Leasetec Corp. (Leasetec). These transactions
resulted in the sale of substantially all of the Company's net investment in
sales-type leases, installment receivables, and equipment held subject to
operating leases. Leasetec assumed approximately $6,000,000 of associated
nonrecourse borrowings, and the Company used a portion of the cash proceeds
to retire its remaining nonrecourse borrowings and 9.53% Senior Secured
Notes. The transactions resulted in an extraordinary gain of $9,535,000, net
of applicable taxes of $8,200,000, in the first quarter of 1996.
Prior to the sale of the lease assets, the Company offered lease financing to
its customers to support the acquisition of StorageTek products. Lease
financings were made under both sales-type leases and, to a lesser extent,
operating leases. These leases typically provided for a lease term of up to
five years and the retention of title to the equipment by StorageTek. The
majority of StorageTek's lease financings were made within the United States.
Because of the sale of lease assets to Leasetec during 1996, all remaining
equipment held for sale to customers is classified as inventory on the
Consolidated Balance Sheet as of December 27, 1996.
F-7
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<PAGE>
The components of net investment in sales-type leases as of December 29,
1995, were as follows (in thousands of dollars):
Total minimum lease and maintenance payments $324,678
Less: Executory costs (maintenance payments) (61,860)
-------
Net minimum lease payments 262,818
Estimated unguaranteed residual values 5,070
Less: Unearned interest income (28,469)
-------
239,419
Less: Current portion (88,668)
-------
$150,751
=======
Equipment held for sale or lease to customers as of December 29, 1995,
consisted of the following (in thousands of dollars):
Equipment shipped awaiting revenue
recognition $ 88,337
Equipment off-rent 40,143
Equipment on-rent 11,149
-------
$139,629
=======
NOTE 3 - IBM OEM AGREEMENT
On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM
agreement with International Business Machines Corporation (IBM) under which
the Company develops and manufactures mainframe online storage products for
IBM. IBM serves as StorageTek's primary worldwide distribution channel for
this technology, and StorageTek does not anticipate that it will continue to
sell this technology directly to end-user customers during the term of the
agreement. The agreement, which expires in 1999, contains certain minimum
purchase commitments on behalf of IBM. The agreement also contains product
quality, availability, supply, delivery, and development milestones. The
Company's failure to achieve these milestones may result in reduced purchase
commitments, the imposition of penalties and, under certain circumstances,
IBM may terminate the agreement. StorageTek is required to perform, and IBM
will fund, certain research and development activities associated with the
development of enhancements to these products. The technology which is
developed will be owned by IBM, and subject to licensing rights by
StorageTek.
NOTE 4 - NETWORK SYSTEMS MERGER
In March 1995, the Company issued approximately 8,000,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock
of Network Systems Corporation (Network Systems). The Company also reserved
approximately 500,000 shares for issuance in connection with Network Systems'
outstanding employee stock purchase and option plans. The transaction was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements for 1995 and 1994 include the operations of Network
Systems, adjusted to conform with StorageTek's accounting policies and
presentation. Merger and consolidation expenses in the amount of
$14,352,000, included within restructuring and other charges on the
Consolidated Statements of Operations (see Note 15), were recognized in 1995
and consist
F-8
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<PAGE>
principally of change in control payments, financial advisor fees, legal
fees, and accounting fees.
NOTE 5 - INVENTORIES
Inventories include material, labor and factory overhead and are accounted
for at the lower of cost (first-in, first-out method) or market. The Company
evaluates the need for reserves associated with obsolete, slow-moving, and
nonsalable inventory by reviewing net realizable values on a quarterly basis.
Equipment shipped awaiting revenue recognition as of December 29, 1995 was
included within equipment held for sale or lease to customers on the
Consolidated Balance Sheet (see Note 2). The components of inventories are
as follows (in thousands of dollars):
December 27, December 29,
1996 1995
-------------------------------
Raw materials $ 76,152 $ 75,673
Work-in-process 78,834 92,487
Finished goods 43,279 46,393
Equipment shipped awaiting
revenue recognition 90,350
------- -------
$288,615 $214,553
======= =======
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 27, December 29,
1996 1995
-------------------------------
Machinery and equipment $ 640,932 $ 667,425
Buildings and building improvements 169,327 174,742
Land and land improvements 18,863 18,701
-------- --------
829,122 860,868
Less: Accumulated depreciation (501,588) (527,847)
-------- --------
$ 327,534 $ 333,021
======== ========
Machinery and equipment includes capitalized leases of $34,940,000 as of
December 27, 1996, and $51,039,000 as of December 29, 1995. Accumulated
depreciation includes accumulated amortization on such capitalized leases of
$12,228,000 as of December 27, 1996, and $24,653,000 as of December 29, 1995.
F-9
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<PAGE>
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 27, December 29,
1996 1995
-------------------------------
Restructuring costs (see Note 15) $ 33,609 $ 71,398
Deferred revenue 66,813 44,549
Other 268,887 245,339
------- -------
$369,309 $361,286
======= =======
Other accrued liabilities consists of items which are individually
immaterial.
NOTE 8 - DEBT, BANKING ARRANGEMENTS AND LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations consists of the
following (in thousands of dollars):
December 27, December 29,
1996 1995
-------------------------------
8% Convertible Subordinated
Debentures due 2015 $125,677 $145,645
7% Convertible Subordinated
Debentures due 2008 171,205
9.53% Senior Secured Notes due 1996 55,000
Capitalized lease obligations 27,420 32,659
Other 2,160 4,318
------- -------
155,257 408,827
Less: Current portion (4,451) (65,844)
------- -------
$150,806 $342,983
======= =======
8% CONVERTIBLE DEBENTURES
In December 1996, the Company called for redemption on January 13, 1997, all
outstanding 8% Convertible Subordinated Debentures due 2015 (8% Convertible
Debentures). As of December 27, 1996, 8% Convertible Debentures in the
principal amount of $19,968,000 had been converted at a price of $35.25 per
share into 566,410 shares of common stock. Debentures in the principal
amount of $145,201,000 were converted into 4,118,906 shares of the Company's
common stock on or before January 13, 1997. The remaining 8% Convertible
Debentures were redeemed for cash on January 13, 1997.
7% CONVERTIBLE DEBENTURES
In June 1996, the Company called for redemption on July 12, 1996, all
outstanding 7% Convertible Subordinated Debentures due 2008 (7% Convertible
Debentures). Debentures in the principal amount of $171,140,000 were
converted at a price of $23.50 per share into 7,282,536 shares of the
Company's common stock on or before July 12, 1996. The remaining 7%
Convertible Debentures were redeemed for cash on July 12, 1996.
F-10
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<PAGE>
9.53% SENIOR SECURED NOTES
As further discussed in Note 2, in March 1996 the Company used a portion of
the cash proceeds from the sale of lease assets to retire its 9.53% Senior
Secured Notes due August 31, 1996, in the principal amount of $55,000,000.
FINANCING ARRANGEMENTS
The Company has a $150,000,000 secured credit agreement (the Revolver) which
expires in May 1998. The interest rates available under the Revolver depend
on the type of advance selected. The current primary advance rate is the
agent bank's prime lending rate plus 0.125% (8.375% as of December 27, 1996).
Under the Revolver, the Company is required to comply with certain financial
and other covenants, including restrictions on the payment of cash dividends
on its common stock. As of December 27, 1996, the Company had issued letters
of credit for approximately $25,413,000 and had approximately $124,587,000 of
available credit under the Revolver.
In December 1996, the Company entered into a financing agreement with a bank
which provides for the issuance of promissory notes in the principal amount
of up to $25,000,000 at any one time. The agreement, which expires on
January 15, 1998, provides for commitments by the bank to purchase promissory
notes denominated in a number of foreign currencies with the foreign currency
exchange rate applicable to each note set at the time the Company commits to
a future borrowing. The promissory notes, together with accrued interest,
are payable in U.S. dollars within 90 to 110 days from the date of issuance
and will bear interest at rates equal to the Eurodollar rate plus at least
0.50% (6.12% as of December 27, 1996). Under the terms of the agreement, the
Company is required to comply with certain covenants which can, under certain
circumstances, include the maintenance of compensating cash balances. As of
December 27, 1996, the Company had not committed to any future borrowings.
In January 1996, the Company entered into a financing agreement with a bank
which provides for the sale of certain U.S. and foreign based accounts
receivable on a recourse basis. This agreement, which expires on January 31,
1998, allows for receivable sales of up to $40,000,000 at any one time, and
the Company's obligations under the agreement are secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables is partially determined based upon foreign currency exchange
rates, and any gains or losses on the sales are recognized within marketing,
general, administrative and other income and expense, net, in the
Consolidated Statement of Operations at the time the receivables are sold.
During 1996, the Company sold approximately $202,300,000 of receivables in
connection with this agreement. As of December 27, 1996, the outstanding
balance associated with receivables sold on a recourse basis, but not
collected, was approximately $25,000,000, and the Company had committed to
future cumulative sales of approximately $378,700,000. Gains and losses
associated with the receivable sales are not expected to have a material
effect on the Company's reported financial results after taking into
consideration other transactions associated with the Company's international
operations.
F-11
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<PAGE>
SCHEDULED DEBT MATURITIES
Scheduled maturities of debt as of December 27, 1996, are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Capitalized Other Total Debt
Leases Debt Commitments
---------------------------------------------
<S> <C> <C> <C>
1997 $ 6,215 $ 1,007 $ 7,222
1998 5,540 766 6,306
1999 3,650 116 3,766
2000 2,702 124 2,826
2001 2,380 147 2,527
Thereafter 21,282 125,677 146,959
------- ------- -------
41,769 $127,837 $169,606
======= ======= =======
Less: Amount representing interest (14,349)
-------
Present value of capitalized lease
obligations (including $3,444
classified as current) $ 27,420
=======
</TABLE>
OPERATING LEASE OBLIGATIONS
StorageTek has various operating leases in effect for certain buildings,
sales offices, and machinery and equipment. Rent expense was $41,144,000 in
1996; $50,643,000 in 1995; and $50,095,000 in 1994. Future minimum rental
commitments required under all noncancellable operating leases with terms of
one year or more as of December 27, 1996, were as follows: $37,437,000 in
1997; $29,647,000 in 1998; $21,509,000 in 1999; $15,562,000 in 2000;
$9,804,000 in 2001; and $21,879,000 thereafter.
NOTE 9 - INCOME TAXES
Income (loss) before income taxes and extraordinary item consists of the
following (in thousands of dollars):
Year Ended
--------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
--------------------------------------------
United States $220,495 $ (98,450) $ 69,949
International 6,197 (26,080) (19,011)
------- -------- -------
$226,692 $(124,530) $ 50,938
======= ======== =======
F-12
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<PAGE>
The provision for income taxes attributable to the amounts shown above
consists of the following (in thousands of dollars):
Year Ended
--------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
--------------------------------------------
Current tax provision:
U.S. federal $ 44,400 $ 11,900 $ 3,300
International 38,800 14,200 11,600
State 15,100 11,900 3,100
------- ------- -------
98,300 38,000 18,000
------- ------- -------
Deferred tax provision
(benefit):
U.S. federal (31,300) (12,100) 2,300
International (11,200) (7,300) (100)
State 100 (800) (1,300)
------- ------- -------
(42,400) (20,200) 900
------- ------- -------
$ 55,900 $ 17,800 $ 18,900
======= ======= =======
The provision for income taxes attributable to income (loss) before income
taxes and extraordinary item includes benefits of $53,900,000 in 1996;
$4,098,000 in 1995; and $34,325,000 in 1994 from the utilization of net
operating loss carryforwards. The provision for income taxes also includes a
net expense of $1,815,000 in 1996; and net benefits of $8,558,000 in 1995,
and $7,236,000 in 1994, as a result of the Company's Grant of Industrial Tax
Exemption issued by the Commonwealth of Puerto Rico (the Tax Grant). On a
per common share basis, the Tax Grant resulted in a net expense of $0.03 in
1996; and net benefits of $0.16 in 1995, and $0.14 in 1994. The benefits
from the Tax Grant include reduced tax rates and, through 1995, included the
ability to utilize U.S. net operating losses to further reduce Puerto Rico
tax liabilities. To the extent U.S. net operating losses used to reduce
Puerto Rico taxable income are subsequently used to also reduce U.S. taxable
income, the Puerto Rico benefit from the utilization of these operating
losses must be repaid to Puerto Rico. As of December 27, 1996, no cumulative
benefit has been realized with respect to this provision of the Tax Grant due
to repayments made to Puerto Rico as a result of the utilization of U.S. net
operating losses to reduce U.S. taxable income. The Tax Grant provision
allowing reduced tax rates expires in 2007.
The deferred income tax balances on the Consolidated Balance Sheet consist of
the following (in thousands of dollars):
December 27, December 29,
1996 1995
-------------------------------
Deferred income tax assets, net
of valuation allowance $122,190 $ 74,902
Deferred income tax liabilities (16,307) (12,196)
------- -------
Net deferred income tax asset $105,883 $ 62,706
======= =======
F-13
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<PAGE>
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 27, December 29,
1996 1995
-------------------------------
Gross deferred income tax assets:
Net operating loss carryforwards $ 15,482 $ 57,617
Capitalized rental equipment 86,886
Tax credit carryforwards 37,205 86,231
Restructuring accruals 9,939 36,226
Other accrued liabilities
and reserves 56,265 63,410
Capitalized inventory costs 47,103 9,383
Deferred intercompany profit 12,172 18,099
Other 45,424 32,895
-------- --------
223,590 390,747
Less: Valuation allowance (100,523) (189,483)
-------- --------
123,067 201,264
-------- --------
Gross deferred income tax liabilities:
Deferred income from sales-type
leases (80,518)
Depreciation (11,148) (34,609)
Other (6,036) (23,431)
-------- --------
(17,184) (138,558)
-------- --------
Net deferred income tax asset $ 105,883 $ 62,706
======== ========
The net change in the valuation allowance for deferred income tax assets was
a decrease of $88,960,000 in 1996 and an increase of $32,705,000 in 1995.
The valuation allowance relates primarily to net deductible temporary
differences, tax credit carryforwards, and net operating loss carryforwards.
The Company evaluates a variety of factors in determining the amount of the
deferred income tax assets to be recognized pursuant to SFAS No. 109,
"Accounting for Income Taxes," 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 earnings
expectations, and the highly competitive nature of the marketplace in which
the Company competes. Approximately $62,000,000 of the Company's deferred
deductions relate to tax deductions associated with stock option plans and,
accordingly, the related benefit will be credited to stockholders' equity
when realized. StorageTek is also subject to alternative minimum tax and had
approximately $28,000,000 of alternative minimum tax credit carryforwards
available as of December 27, 1996. Although realization is not assured,
management believes it is more likely than not that all of the net deferred
income tax asset will be realized.
StorageTek has not provided for income taxes on the cumulative undistributed
earnings of its foreign subsidiaries to the extent they are considered to be
reinvested indefinitely (approximately $31,900,000 as of December 27, 1996).
The amount of the unrecognized deferred tax liability for these unremitted
earnings was $10,600,000 as of December 27, 1996.
F-14
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<PAGE>
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 35% to income (loss) before income taxes
and extraordinary item for the following reasons (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------
December 27, December 29, December 30,
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $ 79,342 $(43,586) $ 17,828
Increase (decrease) in income taxes
resulting from:
Unrecognized net operating losses,
future deductions and credits (72,755) 39,209 (22,254)
Foreign tax rate and exchange rate
differentials 29,325 9,989 14,605
Nondeductible items 4,644 13,362 7,567
State income taxes, net of federal benefits 13,545 2,467 6,158
Effect of Puerto Rico operations 5,190 (4,075) (3,634)
Other, net (3,391) 434 (1,370)
------- ------- -------
Income tax expense attributable to
income (loss) before extraordinary item $ 55,900 $ 17,800 $ 18,900
======= ======= =======
</TABLE>
The Internal Revenue Service is currently auditing the Company's federal
income tax returns for 1991 through 1994. In addition, the Internal Revenue
Service is currently auditing Network Systems' federal income tax returns for
1992 and 1993.
NOTE 10 - EXCHANGE OF PREFERRED STOCK
In December 1995, the Company exercised its right to exchange 7% Convertible
Subordinated Debentures due 2008 for all of its 3,450,000 outstanding shares
of $3.50 Convertible Exchangeable Preferred Stock, $.01 par value. In
conjunction with the exchange, the Company issued 7% Convertible Debentures
in the aggregate principal amount of $171,205,000. As further discussed in
Note 8, the Company redeemed all outstanding 7% Convertible Debentures on
July 12, 1996.
NOTE 11 - EMPLOYEE BENEFIT PLANS, OPTIONS AND WARRANTS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1987 Employee Stock Purchase Plan (Purchase Plan), as
amended, employees may be offered the option to collectively purchase a
maximum of 300,000 shares of StorageTek's common stock, plus any remaining
shares from earlier offering periods, in consecutive six-month offering
periods. As of December 27, 1996, the Company had an aggregate of 960,709
common shares reserved for issuance under the Purchase Plan. Eligible
employees may contribute up to 10% of their pay toward purchase of StorageTek
common stock at a price equal to 85% of the lower of the market price on the
first or the last day of each offering period. Proceeds received from the
issuance of shares are credited to stockholders' equity in the fiscal year
the shares are issued. Under the purchase plan, the Company issued 558,750,
622,810 and 503,179 shares of StorageTek common stock in 1996, 1995 and 1994,
F-15
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<PAGE>
respectively. The weighted average fair value of options granted under the
Purchase Plan are estimated as $9.35 per share during 1996 and $5.55 per
share during 1995, using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 0%; volatility of
37.60% in 1996 and 37.84% in 1995; risk-free interest rate of 5.68% in 1996
and 5.84% in 1995; and an expected life of 0.5 years.
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 27, 1996, the Company had an aggregate of 3,393,872 common
shares reserved for issuance under its equity plans (Equity Plans). These
plans provide for the issuance of common shares pursuant to stock option
exercises, restricted stock awards and other equity based awards. There were
985,496 shares available for grant under the Equity Plans as of December 27,
1996.
Stock options have been granted under the Equity Plans at the fair market
value of the common stock on the date of grant and generally vest over a
period of between three and six years. Options granted under the Equity
Plans must be exercised no later than 10 years from the date of grant.
Restricted stock awards of the Company's common stock are made pursuant to
its Equity Plans at a purchase price per share equal to par value. Unearned
compensation, which is determined as the difference between par value and
market value of the Company's common stock on the date of the award, is
charged to stockholders' equity and amortized to expense over the vesting
period of the stock. No restricted stock shares were awarded during 1996. A
total of 70,237 shares of restricted stock with a weighted average grant-date
fair value of $25.92 per share using the Black-Scholes option pricing model
were awarded during 1995. Total compensation expense recognized in the
Consolidated Statement of Operations for restricted stock awards was
$2,057,378 and $538,570 during 1996 and 1995, respectively. A total of
225,810 shares of restricted stock were outstanding as of December 27, 1996.
The Company also has a Nonemployee Director Stock Option Plan (Director Plan)
under which the Company grants stock options to nonemployee directors for the
purchase of an aggregate maximum of 530,000 shares of common stock. Stock
options are granted at the fair market value of the common stock on the date
of grant. There were 75,000 shares available for grant under the Director
Plan as of December 27, 1996.
F-16
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<PAGE>
The following summarizes information with respect to options granted under
the Company's Equity and Director Plans:
Weighted Average
Exercise Price of
Number of Shares Shares Under Plan
-----------------------------------------
Outstanding, December 30, 1994 2,912,019 $29.36
Granted 1,665,591 25.84
Exercised (162,363) 20.53
Forfeited or expired (1,004,204) 33.73
----------
Outstanding, December 29, 1995 3,411,043 26.77
Granted 618,725 41.62
Exercised (913,562) 26.00
Forfeited or expired (325,378) 31.16
---------- -----
Outstanding, December 27, 1996 2,790,828 $29.81
========== =====
The following table summarizes information concerning outstanding and
exercisable options as of December 27, 1996:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life in Years Price Exercisable Price
- ------------------------------------------------------------------------------
$ 0 - $20 216,475 3.94 $16.16 216,475 $16.16
20 - 30 1,835,011 7.85 26.80 869,496 26.22
30 - 45 409,764 8.22 35.31 113,564 37.62
45 - 76 329,578 9.82 48.69 9,103 55.66
--------- ---------
2,790,828 1,208,638
========= =========
NOTES RECEIVABLE FROM STOCKHOLDERS
In connection with the Network Systems merger (see Note 4), the Company
assumed Network Systems' notes receivable from stockholders. These notes
related to loans made by Network Systems to certain of its officers prior to
the merger to fund the exercise price of employee stock options pursuant to a
restricted stock purchase program and were secured by the shares purchased
and any other collateral required to maintain 100% collateralization at the
time of each loan. All notes receivables from stockholders had been
collected as of December 27, 1996.
WARRANTS
In connection with a merger in 1993, the Company assumed obligations with
respect to warrants for the purchase of 324,000 shares of common stock at a
price of $30.86 per share. All of these warrants expired unexercised on
December 16, 1996.
F-17
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<PAGE>
EMPLOYEE PROFIT SHARING AND THRIFT PLAN
StorageTek has a Profit Sharing and Thrift Plan whereby participants may
contribute a percentage of compensation, but not in excess of the maximum
allowed under the Internal Revenue Code. Effective January 1, 1996, the plan
provides for a matching contribution by the Company equal to 50% of the
participant's contribution for each pay period, up to a maximum of 3% of the
participant's compensation for the pay period. The Company's matching
contribution for 1996 was $7,463,000. Company contributions in excess of the
matching contribution are contingent upon realization of profits by the
Company which, at the sole discretion of the Board of Directors, are adequate
to justify a corporate contribution. The Board authorized additional
contributions of $5,550,000 and $3,000,000 in 1996 and 1995, respectively.
No contributions from StorageTek were authorized for 1994.
SFAS NO. 123
The Company applies the intrinsic value method set forth in APB No. 25 in
accounting for its stock-based compensation plans. Net income and earnings
per share as reported and as calculated pursuant to SFAS No. 123 to reflect
the fair value method of accounting for stock-based compensation plans (SFAS
123) were as follows (in thousands, except per share amounts):
Year Ended
-------------------------
December 27, December 29,
1996 1995
-------------------------
Net Income: As Reported $180,327 $(142,330)
SFAS 123 169,703 (147,036)
Primary Earnings
Per Share: As Reported $ 3.17 $ (2.91)
SFAS 123 3.01 (3.00)
Fully Diluted Earnings
Per Share: As Reported $ 2.98
SFAS 123 2.85
The weighted average fair value of options are estimated as $21.91 per option
granted during 1996 and $13.29 per option granted during 1995, using the
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0%; volatility of 52.00% in 1996 and 60.60% in
1995; risk-free interest rate of 6.28% in 1996 and 5.91% in 1995; and an
expected life of 5.4 years in 1996 and 4.2 years in 1995. Compensation cost
for the options granted is computed reflecting the actual forfeitures of
options with the respective years.
NOTE 12 - STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a new Stockholder Rights Plan (Rights
Plan). The Rights Plan is designed to deter coercive or unfair takeover
tactics and to prevent an acquiring entity from gaining control of the
Company without offering a fair price to all of the Company's shareholders.
Each right would entitle the holder of the Company's common stock to purchase
one one-hundredth of a share of Series B Junior Participating Preferred Stock
at an exercise price of
F-18
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<PAGE>
$150, subject to adjustment to prevent dilution. The rights are evidenced by
the common stock certificates and will not separate from the common stock
until the earlier of (i) 20 days following the date on which any person or
entity acquires beneficial ownership of 15% or more of the common stock (an
Acquiring Person) and the right of redemption has not been reinstated; or
(ii) 10 days after a public announcement of a tender or exchange offer by any
person or entity if upon consummation such person would be an Acquiring
Person. Further, upon the occurrence of certain events described below, the
rights generally entitle each right holder (except the Acquiring Person) to
purchase that number of shares of the Company's common stock which equals the
$150 exercise price of the right divided by one-half of the current market
price of the common stock. Those events generally include (i) 20 days after
any person or entity becomes an Acquiring Person; and (ii) if any person or
entity becomes an Acquiring Person and thereafter, (a) the Company is merged
with or into an Acquiring Person and the Company's common stock is changed,
converted or exchanged; or (b) 50% or more of the Company's assets or earning
power is sold; or (c) an Acquiring Person engages in one or more "self-
dealing" transactions as described in the Rights Agreement.
The Company is generally entitled to redeem the rights for $.01 per right at
any time prior to the earlier of the date on which any person or entity
becomes an Acquiring Person or August 31, 2000. The rights will expire on
August 31, 2000, unless redeemed or exchanged earlier by the Company pursuant
to the Rights Plan.
NOTE 13 - 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. Oral
argument on the appeal is scheduled for March 1997.
On February 15, 1994, the Company filed suit in Boulder County, Colorado,
District Court against Array Technology Corporation (Array) and Tandem
Computers Incorporated (Tandem). The suit asked that the court order Array
and Tandem to either support certain disk drives purchased from them or
provide the Company with technical data necessary for StorageTek to provide
such customer support. In March 1994, Array and Tandem filed their answer
and also filed counterclaims against the Company alleging breach of contract
and claiming damages. On June 10, 1994, the court ordered Array and Tandem
to continue to provide support for these products and to maintain, in an
independent escrow account, the materials necessary to enable the Company to
support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been set for
October 1997.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "pass-through" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the "151
Patent"). The complaint asked the court to impose injunctive relief, treble
F-19
PAGE
<PAGE>
damages in an unspecified amount, and an award of attorneys fees and costs.
A trial commenced on January 22, 1996, and on February 1, 1996, a jury found
that the Company's products did not infringe the 151 Patent. A notice of
appeal to the U.S. Court of Appeals for the Federal Circuit was filed by
Odetics, Inc. on March 8, 1996. Oral arguments were held in January 1997. A
decision is expected in the second or third quarter of 1997.
On December 8, 1995, Odetics, Inc. filed a second patent infringement suit in
the U.S. District Court for the Eastern District of Virginia against the
Company. The complaint alleges that the "cartridge access port" in certain
of the Company's tape library products infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorneys fees and costs. This case has been stayed pending
the outcome of the appeal to the U.S. Court of Appeals for the Federal
Circuit with respect to the case filed by Odetics, Inc. in June 1995.
On July 30, 1996, the Company received Civil Investigative Demands (CID) from
the U.S. Department of Justice Antitrust Division concerning the OEM
agreement with IBM for mainframe online storage subsystems. The Company
received two additional CIDs in October 1996 and one additional CID in
February 1997. The CIDs requested production of documents and testimony in
connection with a review of the agreement for compliance with the Sherman
Act.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the actions cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these actions
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of these actions
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material effect on the Company's
financial position or reported results of operations in a particular quarter.
An adverse decision, particularly in patent litigation, could require
material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
NOTE 14 - FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
FOREIGN CURRENCY OPTIONS AND FORWARD EXCHANGE CONTRACTS
A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's operations and
financial results can be materially affected by changes in foreign currency
exchange rates. In an attempt to mitigate the impact of foreign currency
fluctuations, the Company employs a hedging program which utilizes foreign
currency options and forward exchange contracts. The Company does not hold
or issue foreign currency options or forward exchange contracts for trading
purposes.
The Company periodically utilizes purchased foreign currency options,
generally with maturities of less than one year, to hedge its exposure to
exchange-rate fluctuations in connection with anticipated revenue from its
international operations. The Company utilizes hedge accounting for its
foreign currency options with gains and losses associated with the options
recognized at the same time as the underlying anticipated transactions. The
Company held no foreign
F-20
PAGE
<PAGE>
currency options as of December 27, 1996. Purchased foreign currency options
with a face value of approximately $168,997,000 were held as of December 29,
1995. Deferred realized and unrealized losses associated with the foreign
currency options held as of December 29, 1995, which aggregated approximately
$2,498,000, were recognized as an adjustment to the associated revenue in
1996 in the Consolidated Statement of Operations.
The Company also utilizes forward exchange contracts, generally with
maturities of less than two months, to hedge its exposure to exchange-rate
fluctuations in connection with monetary assets and liabilities held in
foreign currencies. The carrying amounts of these forward foreign exchange
contracts equal their fair value as the contracts are adjusted at each
balance sheet date for changes in exchange rates. Realized and unrealized
gains and losses on the forward contracts are recognized currently within
marketing, general, administrative and other income and expense, net, on the
Consolidated Statement of Operations as adjustments to the foreign exchange
gains and losses on the translation of net monetary assets. The Company held
forward foreign exchange contracts with a face value of approximately
$87,513,000 as of December 27, 1996, and $114,644,000 as of December 29,
1995.
The forward exchange contracts and foreign currency options do not subject
the Company to risk due to exchange rate movements, as gains and losses on
the contracts offset gains and losses on the transactions being hedged. The
foreign currency hedging instruments utilized by StorageTek are generally
traded over the counter. The Company does not believe there is significant
credit risk associated with these contracts, as the counterparties consist of
major international financial institutions, and the Company monitors the
amount of the contracts it enters into with any one party. There was no
credit exposure with respect to the Company's foreign currency forward
contracts as of December 27, 1996, as the fair value of these contracts was
approximately zero.
Losses associated with foreign currency translation adjustments and foreign
currency transactions, net of associated hedging results, aggregated $447,000
in 1996, $4,303,000 in 1995, and $1,178,000 in 1994.
CONCENTRATIONS OF CREDIT RISK
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, trade receivables, and outstanding letters of credit under the
Company's Revolver. The Company has a cash investment policy which restricts
investments to ensure preservation of principal and maintenance of liquidity.
The majority of the Company's trade receivable balances are not required to
be collateralized and are therefore unsecured. As of December 27, 1996,
approximately 19% of the Company's outstanding accounts receivable balance
was due from IBM. The Company monitors this concentration and does not
believe any significant credit risk exists at December 27, 1996. The
concentration of credit risk with respect to the remaining trade receivables
is limited due to the large number of customers comprising the Company's
customer base, and their dispersion across many different industries and
geographic areas. As further discussed in Note 8, the Company's outstanding
letters of credit of approximately $25,413,000 relate principally to the sale
of certain U.S. and foreign based accounts receivable on a recourse basis.
Based upon the Company's past credit and collection experience with respect
to the receivables that it expects to sell, the Company believes that no
material credit risk exists under the recourse provisions of the agreement.
F-21
PAGE
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's 8% Convertible
Subordinated Debentures were $125,677,000 and $165,894,000, respectively.
The fair value of the 8% Convertible Subordinated Debentures was based upon
the closing sales prices on the New York Stock Exchange as of December 27,
1996. The carrying amounts of the Company's accounts receivable, accounts
payable and accrued liabilities are either equal to or approximate their fair
values. The Company's foreign currency forward contracts, which are an off-
balance-sheet financial instrument, were entered into on December 27, 1996,
and accordingly, had a carrying value and fair value approximating zero.
NOTE 15 - RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges consist of the following (in thousands of
dollars):
Year Ended
----------------------------
December 29, December 30,
1995 1994
----------------------------
Restructuring charges $167,175 $8,000
Litigation settlement 30,680
Merger and consolidation charges 14,352
------- -----
$212,207 $8,000
======= =====
In 1995, the Company and the plaintiffs in a shareholder class action and
derivative litigation reached an agreement to settle the litigation. The
settlement provided that, without admitting any wrongdoing, the Company would
pay $30,680,000 for its portion of the settlement. The Company's insurance
policies paid $24,320,000 as part of the total settlement of $55,000,000.
See Note 4 for a discussion of the $14,352,000 charge associated with the
merger with Network Systems in 1995.
F-22
PAGE
<PAGE>
The following table summarizes the activity in the Company's restructuring
reserves (in thousands of dollars):
<TABLE>
<CAPTION>
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $ 6,239 $ 5,257 $ 3,796 $ 15,292
Restructuring charges 3,000 $ 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------- ------- ------ ------ -------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------- ------- ------ ------ -------
Balances, December 29, 1995 42,688 0 18,538 10,172 71,398
Cash payments (26,837) (2,907) (9,414) (39,158)
Reclassifications 301 (154) 1,222 1,369
------- ------- ------ ------ -------
Balances, December 27, 1996 $ 16,152 $ 0 $15,477 $ 1,980 $ 33,609
======= ======= ====== ====== =======
</TABLE>
RESTRUCTURINGS
During the fourth quarter of 1995, the Company recorded a restructuring
charge of $167,175,000 related to the adoption by the Company of a formal
action plan for restructuring its enterprise and network businesses. The
restructuring was adopted in an effort to establish a more cost efficient
business structure in response to competition. Elements of the Company's
restructuring plan include focusing on core businesses, outsourcing non-
strategic activities, rearchitecting its distribution processes and
accelerating the integration of Network Systems.
In connection with the plan, the Company incurred employee severance costs of
approximately $49,265,000.
Asset writedowns incurred in connection with the restructuring included a
charge of approximately $21,310,000 associated with the planned disposal of
excess spare parts in connection with the consolidation of maintenance
depots; a charge of approximately $19,600,000 primarily associated with the
writedown of manufacturing equipment which will be scrapped or sold; a charge
of approximately $18,484,000 associated with goodwill and other investment
writedowns on business activities which are being discontinued; a charge of
approximately $16,361,000 associated with the shutdown of manufacturing and
research facilities; a charge of approximately $10,758,000 associated with
excess and obsolete inventories resulting from the decision to discontinue
various product lines; and a charge of approximately $5,096,000 associated
with other asset writedowns resulting from discontinued business activities.
Charges of approximately $16,660,000 were incurred in connection with the
abandonment of real estate leases. Other exit costs of approximately
$9,641,000 were incurred principally
F-23
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<PAGE>
related to equipment lease terminations and the discontinuation of
engineering support agreements.
During 1994, Network Systems recorded a restructuring charge of $8,000,000 in
connection with an expense reduction plan.
NOTE 16 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
BUSINESS SEGMENTS
StorageTek operates in one principal business segment - the design,
manufacturing, marketing, and maintenance of information storage systems and
network products.
GEOGRAPHIC AREAS
StorageTek operates principally in the United States and Europe. Operations
in geographic areas other than the United States and Europe individually
account for less than 10% of the consolidated revenue and identifiable
assets, and have been combined and shown in the table below as "Other."
Information regarding each geographic area on an unconsolidated basis is
shown below (in thousands of dollars):
<TABLE>
<CAPTION>
Consolidated
1996 United States Europe Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,281,118 (1) $587,951 $170,481 $2,039,550
Transfers between areas 370,814 $(370,814)
--------- ------- ------- -------- ---------
Total revenue $1,651,932 $587,951 $170,481 $(370,814) $2,039,550
========= ======= ======= ======== =========
Operating profit (loss) $ 243,447 $ (886) $ (4,400) $ 17,424 $ 255,585
========= ======= ======= ========
Interest income (expense), net 1,211
General corporate expenses (30,104)
---------
Income before income taxes $ 226,692
=========
Identifiable assets $1,060,243 $560,993 $156,062 $(252,975) $1,524,323
========= ======= ======= ========
General corporate assets 359,953
---------
Total assets $1,884,276
=========
</TABLE>
F-24
PAGE
<PAGE>
<TABLE>
<CAPTION>
Consolidated
1995 United States Europe Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,227,509 (1) $553,064 $148,912 $1,929,485
Transfers between areas 380,194 $(380,194)
--------- ------- ------- -------- ---------
Total revenue $1,607,703 $553,064 $148,912 $(380,194) $1,929,485
========= ======= ======= ======== =========
Operating loss $ (22,769) $(27,296) $ (7,047) $ (7,631) $ (64,743)
========= ======= ======= ========
Interest income (expense), net 8,978
General corporate expenses (68,765) (2)
---------
Loss before income taxes $ (124,530)
=========
Identifiable assets $1,304,606 $494,499 $122,149 $(233,300) $1,687,954
========= ======= ======= ========
General corporate assets 200,675
---------
Total assets $1,888,629
=========
</TABLE>
<TABLE>
<CAPTION>
Consolidated
1994 United States Europe Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers $1,242,166 (1) $499,939 $129,245 $1,871,350
Transfers between areas 308,978 $(308,978)
--------- ------- ------- -------- ---------
Total revenue $1,551,144 $499,939 $129,245 $(308,978) $1,871,350
========= ======= ======= ======== =========
Operating profit (loss) $ 90,529 $(17,640) $ 4,321 $ (11,604) $ 65,606
========= ======= ======= ========
Interest income (expense), net 6,103
General corporate expenses (20,771)
---------
Income before income taxes $ 50,938
=========
Identifiable assets $1,764,903 $380,999 $ 79,917 $(216,858) $2,008,961
========= ======= ======= ========
General corporate assets 135,497
---------
Total assets $2,144,458
=========
(1) U.S. revenue from unaffiliated customers includes international export sales to customers of $67,636,000
in 1996; $79,714,000 in 1995; and $94,959,000 in 1994.
(2) General corporate expenses in 1995 include a charge of $30,680,000 associated with the settlement of
litigation, as well as merger and consolidation expenses of $14,352,000.
</TABLE>
Sales between geographic areas are generally priced to reflect market value
and to provide an appropriate gross margin to the affiliate. Operating
profit, for the purpose of this footnote, consists of total revenue less
operating expenses, and excludes interest income, interest expense and
general corporate expenses for all years presented. U.S. operating profit
includes profit recognized in the United States on transfers to other
geographic areas. Identifiable assets are those assets that are associated
with the operations in each geographic area. General corporate assets are
primarily cash and short-term investments not used in the operations of the
individual geographic regions.
F-25
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<PAGE>
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
The consolidated results of operations on a quarterly (13-week) basis were as
follows (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended 1996
-------------------------------------------------------------
March 29 June 28 September 27 December 27
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $453,481 $479,305 $486,085 $620,679
Cost of revenue 259,567 272,989 293,551 366,670
------- ------- ------- -------
Gross profit 193,914 206,316 192,534 254,009
Operating expenses 157,736 153,511 141,282 168,763
------- ------- ------- -------
Operating profit 36,178 52,805 51,252 85,246
Interest income (expense), net (1,189) (945) 2,248 1,097
------- ------- ------- -------
Income before income taxes 34,989 51,860 53,500 86,343
Provision for income taxes (9,400) (14,000) (14,000) (18,500)
------- ------- ------- -------
Income before extraordinary item 25,589 37,860 39,500 67,843
Extraordinary gain, net of income taxes 9,535
------- ------- ------- -------
Net income $ 35,124 $ 37,860 $ 39,500 $ 67,843
======= ======= ======= =======
Income per common share:
Primary $ 0.66 $ 0.70 $ 0.65 $ 1.16
======= ======= ======= =======
Fully diluted $ 0.62 $ 0.65 $ 1.12
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended 1995
-------------------------------------------------------------
March 31 June 30 September 29 December 29
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $450,186 $480,702 $439,596 $ 559,001
Cost of revenue 288,089 306,942 276,228 346,363
------- ------- ------- --------
Gross profit 162,097 173,760 163,368 212,638
Operating expenses 157,233 159,651 135,207 181,073
Restructuring and other charges 14,352 30,680 167,175
------- ------- ------- --------
Operating profit (loss) (9,488) 14,109 (2,519) (135,610)
Interest income (expense), net 1,574 2,246 3,038 2,120
------- ------- ------- --------
Income (loss) before income taxes (7,914) 16,355 519 (133,490)
Provision for income taxes (1,000) (4,500) (7,500) (4,800)
------- ------- ------- --------
Net income (loss) $ (8,914) $ 11,855 $ (6,981) $(138,290)
======= ======= ======= ========
Income (loss) per common share $ (0.23) $ 0.17 $ (0.19) $ (2.65)
======= ======= ======= ========
</TABLE>
NOTE 18 - SUBSEQUENT EVENT
On February 20, 1997, the Company announced a program to repurchase up to 1.5
million shares of the Company's common stock on an annual basis. The
repurchase program is expected to offset dilution associated with the
Company's stock purchase and stock option plans.
F-26
PAGE
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
FOR STORAGE TECHNOLOGY CORPORATION
----------------------------------
To the Stockholders and
Board of Directors of
Storage Technology Corporation
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14.(a)1. and 2. on page 35 present fairly, in all material respects, the
financial position of Storage Technology Corporation and its subsidiaries at
December 27, 1996 and December 29, 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
27, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the consolidated financial statements of
Network Systems Corporation, a wholly owned subsidiary, which statements
reflect total revenue of $231,756,000 for the year ended December 31, 1994.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Network Systems Corporation is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Denver, Colorado
February 21, 1997
F-27
PAGE
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
FOR NETWORK SYSTEMS CORPORATION
--------------------------------
Board of Directors and Stockholders
Network Systems Corporation
We have audited the consolidated statement of operations, stockholders'
equity and cash flows for year in the period ended December 31, 1994 (not
presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of its operations and its
cash flows for the year in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 10, 1995
F-28
PAGE
<PAGE>
<TABLE>
<CAPTION>
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
------------------------------------------------
SCHEDULE II
----------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
(In Thousands of Dollars)
Additions -
Balance Charged to Deductions -
Beginning of Cost of Spare Parts Balance End
Year Maintenance Written Off of Year
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amortization of spare parts for
maintenance:
For the year ended:
December 27, 1996 $87,980 $ 9,159 $43,267 $53,872
====== ====== ====== ======
December 29, 1995 $74,685 $43,378 $30,083 $87,980
====== ====== ====== ======
December 30, 1994 $65,350 $27,526 $18,191 $74,685
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Additions -
Balance Charged to Deductions -
Beginning of Cost of Spare Parts Balance End
Year Maintenance Written Off of Year
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory reserves:
For the year ended:
December 27, 1996 $45,290 $55,771 $49,723 $51,338
====== ====== ====== ======
December 29, 1995 $51,803 $37,353 $43,866 $45,290
====== ====== ====== ======
December 30, 1994 $40,208 $44,852 $33,257 $51,803
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Additions -
Balance Charged to Deductions -
Beginning of Cost of Spare Parts Balance End
Year Maintenance Written Off of Year
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts on
accounts receivable:
For the year ended:
December 27, 1996 $14,665 $ 3,838 $ 5,596 $12,907
====== ====== ====== ======
December 29, 1995 $13,387 $ 8,198 $ 6,920 $14,665
====== ====== ====== ======
December 30, 1994 $13,196 $ 6,678 $ 6,487 $13,387
====== ====== ====== ======
</TABLE>
F-29
PAGE
<PAGE>
<PAGE>
EXECUTION COPY
AMENDMENT TO
MULTICURRENCY RECEIVABLES TRANSFER AGREEMENT
--------------------------------------------
THIS AMENDMENT (this "Amendment"), dated as of December 12, 1996, is
---------
made to the Multicurrency Receivables Transfer Agreement, dated as of January
29, 1996 (as heretofore or hereafter amended, modified or supplemented from
time to time and in effect, the "Transfer Agreement"), between Storage
------------------
Technology Corporation (the "Transferor") and Bank of America National Trust
----------
and Savings Association (the "Transferee"). Capitalized terms used but not
----------
otherwise defined herein shall have the meanings assigned to such terms by
the Transfer Agreement.
WHEREAS, the Transferor and the Transferee desire to amend and
supplement the Transfer Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO TRANSFER AGREEMENT
SECTION 1.1 Amendment to Section 8.01. Section 8.01 of the Transfer
-------------------------
Agreement is hereby amended to delete the word "or" at the end of subsection
(m) thereof; to change the period at the end of subsection (n) thereof to
read ", or", and to insert the following new subsection (o) at the end of
said Section 8.01:
"(o) Any "Termination Event", as defined in the Contingent Multicurrency
Note Purchase Commitment Agreement dated as of December 12, 1996 between
Transferor and Transferee (as such Agreement may be amended,
supplemented or otherwise modified from time to time), shall occur and
be continuing provided, that if the only such "Termination Event" is a
--------
Change in Control Termination Event, Transferee's remedies will be limited
as set forth in Section 8.02(e)."
-------------------
SECTION 1.2 Amendment to Exhibit 5.01(d). Exhibit 5.01(d) of the
----------------------------
Transfer Agreement is replaced in its entirety with Exhibit 5.01(d) hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties. Transferor hereby
------------------------------
represents and warrants to Transferee that:
(a) Representations and Warranties. The representations and
------------------------------
warranties contained in the Transfer Agreement are true and correct on and
as of the date of this Amendment as though made on and as of such date;
and
(b) No Termination Event. Both before and after giving effect to
--------------------
this Amendment, no event shall have occurred and be continuing that
constitutes a Termination Event or an Unmatured Termination Event.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Agreement Document Pursuant to Transfer Agreement. This
-------------------------------------------------
Amendment is an Agreement Document executed pursuant to the Transfer
Agreement and shall be construed, administered and applied in accordance with
all of the terms and provisions of the Transfer Agreement.
SECTION 3.2 Successors and Assigns. This Amendment shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 3.3 Execution in Counterparts. This Amendment may be executed
-------------------------
by the parties hereto in several counterparts, each of which shall be deemed
to be an original and all of which shall be taken together as one agreement.
SECTION 3.4 Governing Law. THIS AMENDMENT SHALL BE A CONTRACT MADE
-------------
UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 3.5 Reaffirmation of Transfer Agreement. As amended and
-----------------------------------
supplemented by this Amendment, the Transfer Agreement remains in full force
and effect and is hereby reaffirmed, ratified and confirmed in all respects.
From and after the date hereof, all references to the Transfer Agreement in
any agreement, instrument or document shall be references to the Transfer
Agreement as amended and supplemented hereby.
SECTION 3.6 Headings. The various captions in this Amendment are
--------
provided solely for convenience of reference and shall not affect the meaning
or interpretation of any provision of this Amendment.
SECTION 3.7 Complete Agreement. The Transfer Agreement (including this
------------------
Amendment and the Exhibits and Schedules to the Transfer Agreement and this
Amendment) and the other Agreement Documents contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and thereby and supersedes all prior arrangements or understandings
with respect thereto.
SECTION 3.8 Severability. Whenever possible, each provision of this
------------
Amendment will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Amendment is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Amendment, except to the extent that such
prohibition or invalidity would constitute a material change in the terms of
this Amendment taken as a whole.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark McGregor
---------------------------------------
Title: Vice President and Treasurer
-----------------------------------
2270 South 88th Street
Louisville, Colorado 80028-4308
Attention: Treasurer
Facsimile No.: (303) 673-2837
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Kevin McMahon
---------------------------------------
Title: Vice President
-----------------------------------
555 California Street, 41st Floor
San Francisco, California 94104
Attention: Kevin McMahon
Facsimile No: (415) 622-2514
EXECUTION COPY
CONTINGENT MULTICURRENCY NOTE PURCHASE
COMMITMENT AGREEMENT
DATED AS OF DECEMBER 12, 1996
BETWEEN
STORAGE TECHNOLOGY CORPORATION
AND
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
|| TABLE OF CONTENTS
ARTICLE I
TRANSFERS AND PAYMENTS
Page
1.01 Commitments to Sell and Purchase Notes 2
1.02 Procedures for Entering Into Supplements and Sale of Notes 2
1.03 Delivery of Notes; Purchase Price Calculation 10
1.04 Interest on Notes 10
1.05 Facility Limit and Note Limit 12
1.06 Voluntary Termination of Facility; Reduction of Facility
Limit 13
1.07 Termination Date; Extension of Termination Date 13
1.08 Early Termination or Reduction Payments 14
1.09 Certain Forward Contracts. 15
ARTICLE II
SETTLEMENT
2.01 Maturity Date Payment Procedures 16
2.02 Settlement of Forward Contracts on Maturity Dates 16
2.03 Netting of Payments on Certain Issuance Dates 17
2.04 Payments and Computations, Etc 17
ARTICLE III
FEES AND YIELD PROTECTION
3.01 Fees 18
3.02 Yield Protection 19
3.03 Inability to Determine Eurodollar Rate; Failure to Specify
Maturity Date 20
3.04 Funding Losses 20
3.05 Taxes, Etc 21
3.06 Set-off 22
ARTICLE IV
CONDITIONS TO EFFECTIVENESS AND PURCHASES
4.01 Conditions Precedent to Effectiveness 22
4.02 Conditions Precedent to All Purchases of Notes. 23
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Representations and Warranties of Borrower 24
ARTICLE VI
GENERAL COVENANTS OF BORROWER
6.01 Affirmative Covenants of Borrower 26
ARTICLE VII
TERMINATION EVENTS
7.01 Termination Events 30
7.02 Remedies 32
ARTICLE VIII
INDEMNIFICATION; EXCULPATION
8.01 Indemnities by Borrower 34
8.02 Exculpation 35
ARTICLE IX
MISCELLANEOUS
9.01 Amendments, Waivers, Etc 36
9.02 Notices, Etc 36
9.03 Binding Effect; Assignability; Survival of
Provisions 36
9.04 Governing Law 37
9.05 Costs, Expenses and Taxes 37
9.06 Execution in Counterparts 38
9.07 Confidentiality 38
9.08 Severability of Provisions 40
9.09 Conflict in Agreement Documents. 40
9.10 Legal Representation of Parties. 40
9.11 Recording. 40
9.12 Judgments 40
9.13 Submission to Jurisdiction 41
9.14 Integration 41
9.15 Waiver of Jury Trial 41
LIST OF SCHEDULES AND EXHIBITS
------------------------------
SCHEDULE I Definitions
SCHEDULE II Determination Dates
EXHIBIT 1.01 Form of Promissory Note
EXHIBIT 1.02(b) Form of Supplement
EXHIBIT 1.02(f) Form of Deficiency Certificate
EXHIBIT 1.07(c) Form of Amendment
EXHIBIT 4.01(d) Form of Opinion of Counsel for Borrower
EXHIBIT 4.02(b) Form of Officer's Certificate on Purchase Date
EXHIBIT 5.01(d) Schedule of Litigation
EXHIBIT 6.01(g)(vii) Compliance Certificate
||
THIS CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
(this "Agreement"), dated as of December 12, 1996, is between STORAGE
TECHNOLOGY CORPORATION, a Delaware corporation ("Borrower"), and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association ("BofA").
RECITALS
A. Borrower and BofA may from time to time wish to enter into
Supplements pursuant to which Borrower will agree to issue and sell to
BofA, and BofA will agree to purchase from Borrower, on the Purchase
Dates specified in such Supplements, certain Notes issued by Borrower.
B. The issuance and sale of such Notes by Borrower, and the
purchase of such Notes by BofA, will be subject to the conditions set
forth in this Agreement, including without limitation the condition
that at the time of such issuance, sale and purchase, Borrower and its
Subsidiaries taken as a whole will own at least the aggregate amount of
Receivables specified in Sections 1.02(f) or (g).
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
DEFINITIONS AND RELATED MATTERS
In this Agreement, unless otherwise specified:
(a) capitalized terms, "currency", and "foreign currency" are
used as defined in Schedule I;
(b) accounting terms shall be interpreted, and accounting
determinations and computations made, in accordance with GAAP;
(c) references to any Article, Section, Exhibit or Schedule
refer to such Article or Section of, or Exhibit or Schedule to,
this Agreement, and references in any Article, Section or
definition to any subsection or clause refer to such subsection or
clause of such Article, Section or definition;
(d) "herein", "hereof", "hereto", "hereunder" and similar
terms refer to this Agreement as a whole and not to any particular
Section, paragraph or provision of this Agreement;
(e) "including" means including without limitation, and other
forms of the verb "to include" have correlative meanings;
(f) for purposes of calculating interest, any fee, discount
or any other amount accrued over a period of time, the first day
of such period shall be included and the last day excluded;
(g) a reference to any Person includes such Person's
successors and assigns, unless such successors and assigns are not
permitted by this Agreement, and reference to a Person in a
particular capacity excludes such Person in any other capacity or
individually;
(h) a reference to any law, rule or regulation refers to such
law, rule or regulation as amended from time to time and includes
any successor law, rule or regulation; and
(i) captions are solely for convenience of reference and
shall not affect the meaning of this Agreement.
ARTICLE I
TRANSFERS AND PAYMENTS
----------------------
SECTION 1.01 Commitments to Sell and Purchase Notes. On the
terms and subject to the conditions hereinafter set forth, including
Section 1.02(f), from time to time on each Purchase Date occurring on
or prior to the Termination Date, Borrower agrees to issue and sell to
BofA, and BofA agrees to purchase from Borrower, promissory notes in
the form of Exhibit 1.01 (each, a "Note"), duly completed and executed
by Borrower to the order of BofA, each of which will be denominated in
one or more foreign currencies (or, if provided in any amended
Supplement, Dollars). Such Notes shall be in the respective principal
amounts which are specified for each of such currencies in one or more
Supplements relating to such Purchase Date which are entered into by
Borrower and BofA from time to time. If Borrower and BofA wish to
denominate all or a portion of any Note in a currency which is not
listed in Annex 1 to Exhibit 1.02(b) hereto, they may by mutual
agreement specify such currency in the applicable Supplement. BofA and
Borrower may, from time to time by mutual agreement, amend any
Supplement to provide that all or any portion of any Note will be
denominated in Dollars, by executing and delivering an appropriately
completed Amendment.
SECTION 1.02 Procedures for Entering Into Supplements and Sale of
Notes.
(a) Certain Definitions. As used herein:
(i) "Determination Date" means each date set forth in
Schedule II hereto, as in effect from time to time, or, if any
such date is not a Business Day, the immediately preceding
Business Day.
(ii) "Purchase Date" means each date designated in any
Supplement as a Purchase Date. No Purchase Date shall fall less
than four Eurodollar Business Days after the immediately preceding
Determination Date. Not more than thirteen Purchase Dates may
fall in any twelve-month period. The Purchase Date applicable to
any Note is the Purchase Date designated in the Supplement which
originally created the obligation to issue such Note.
(iii) "LIBOR Fixing Date" means, with respect to any
Purchase Date, the third Eurodollar Business Day preceding such
Purchase Date.
(iv) "Maturity Date" means with respect to any Note, the
Business Day specified by Borrower as the Maturity Date for such
Note in the notice delivered by Borrower pursuant to
Section 1.02(e)(i), or, if no such notice is given, in such Note,
provided, that:
(A) no Maturity Date may fall less than 90 days or more
than 110 days after the applicable Issuance Date;
(B) The Borrower will specify Maturity Dates so that it
will at all times be in compliance with the certification set
forth in Section 1.02(c)(v);
(C) if any Maturity Date specified by the Borrower
would otherwise fall on a day that is not a Eurodollar
Business Day, the Borrower will specify a new Maturity Date
for the applicable Note which falls on a later Eurodollar
Business Day; and
(D) the Maturity Date pertaining to a Note which is
issued to reduce any Carryforward Amount shall be the 90th
day after the Issuance Date thereof, or, if such 90th day is
not a Business Day, the next succeeding Business Day.
(b) Supplements.
(i) Each agreement by the parties that Borrower will issue
and sell to BofA, and that BofA will purchase from Borrower, one
or more Notes hereunder shall be made pursuant to a supplement to
this Agreement (a "Supplement") entered into by the parties hereto
from time to time prior to the third Business Day before the last
Determination Date which falls prior to the then Scheduled
Termination Date, in substantially the form of Exhibit 1.02(b),
specifying therein:
(A) each Purchase Date to occur pursuant to such
Supplement,
(B) the aggregate principal amount, expressed in each of
the applicable foreign currencies, of the Note to be issued
and sold on each such Purchase Date (each such amount of a
particular foreign currency for a particular Purchase Date
being herein called a "Required Foreign Currency Amount"),
(C) the total Purchase Price in Dollars that BofA is to
pay Borrower on such Purchase Date for the Note to be
purchased by BofA on such Purchase Date pursuant to such
Supplement, and
(D) the Dollar portion of such total Purchase Price that
is allocable to each Required Foreign Currency Amount for
such Purchase Date pursuant to such Supplement (each an
"Allocated Purchase Price Amount").
Subject to clause (iii), the parties may enter into more than
one Supplement with respect to any Purchase Date.
(ii) If Borrower wishes to enter into a Supplement, it will
deliver to BofA by facsimile at the address specified in
Section 9.02 a proposed Supplement, showing the Purchase Dates and
the applicable Required Foreign Currency Amounts requested by
Borrower. Following BofA's receipt of such proposed Supplement,
BofA will consult with Borrower and will notify it of the
Allocated Purchase Price Amount that BofA is prepared to pay on
each applicable Purchase Date in respect of each Required Foreign
Currency Amount shown on such proposed Supplement, and the total
Purchase Price in Dollars that BofA is prepared to pay on each
such Purchase Date. Such Allocated Purchase Price Amounts will be
determined by BofA in good faith based on market conditions. If
BofA and Borrower agree to each such Allocated Purchase Price
Amount and total Purchase Price, they will enter into a Supplement
reflecting such agreement. Neither Borrower nor BofA will have any
obligation to agree to any proposed Allocated Purchase Price
Amount or total Purchase Price. BofA will have no obligation to
notify Borrower of any Allocated Purchase Price Amount for any
Required Foreign Currency Amount proposed by Borrower if BofA
informs Borrower that such Required Foreign Currency Amount is not
freely available and commercially transferable in the relevant
amount and currency at such time or for any other relevant time or
period.
(iii) Notwithstanding anything contained herein to the
contrary, neither BofA nor Borrower shall be obligated to enter
into any Supplement at any time when any Carryforward Amount
exists, or at any time prior to, or in the absence of, agreement
by Borrower and BofA of all terms and provisions thereof.
(c) Certain Requirements which are Applicable to Supplements. By
proposing or entering into any Supplement, Borrower shall be deemed to
have certified that, on the day of such proposal and the date of such
Supplement:
(i) the representations and warranties contained in
Section 5.01 are correct on and as of the day of such proposal and
the date of such Supplement as though made on and as of such days,
(ii) no Termination Event or Unmatured Termination Event
exists or would result from entering into such Supplement,
(iii) the Termination Date shall not have occurred as of the
date of such Supplement,
(iv) the latest Purchase Date under such Supplement would
not fall after the Scheduled Termination Date,
(v) assuming issuance and sale by Borrower of all Notes then
outstanding or contemplated by all Supplements then in effect, and
payment in full of such Notes on the respective Maturity Dates
thereof, the payment by BofA of the total Purchase Price
contemplated by such Supplement will not cause the Aggregate
Purchase Price to exceed the Facility Limit, and
(vi) on the dates of such proposal and Supplement, no
Carryforward Amount is anticipated by Borrower to exist at any
time thereafter.
(d) Determination Date - Calculation of Required Dollar
Equivalent Receivables Amount. On each Determination Date, BofA will
after consultation with Borrower determine the Required Dollar
Equivalent Receivables Amount applicable to the Purchase Date which
immediately follows such Determination Date. The "Required Dollar
Equivalent Receivables Amount" applicable to any Purchase Date shall in
all cases be denominated in Dollars and equal the sum of the separate
Dollar amounts which would result from the conversion of each Required
Foreign Currency Amount shown on all the applicable Supplements for
such Purchase Date into Dollars at a rate of exchange for each
applicable currency, for value on such Purchase Date, which is
determined by BofA in good faith on the Determination Date based on
market conditions (each a "Determination Date Exchange Rate"). While
BofA will consult with Borrower in determining such rates of exchange
and the Required Dollar Equivalent Receivables Amount, any
determination by BofA of any Determination Date Exchange Rate or any
Required Dollar Equivalent Receivables Amount shall be conclusive and
binding on the parties for all purposes. Reference to the Purchase
Date or the Determination Date Exchange Rate applicable to any Note
(including any Note which is issued to reduce any Carryforward Amount,
irrespective of the Issuance Date, thereof) shall mean the Purchase
Date designated in the Supplement which originally created the
obligation to issue such Note, and the Determination Date Exchange Rate
applicable to such Purchase Date.
(e) LIBOR Fixing Date - Specification of Maturity Date and
Discount.
(i) On each LIBOR Fixing Date, no later than 10:00 a.m.,
San Francisco time, Borrower will notify BofA in writing of (A)
the Maturity Date which will be applicable to the Note issued on
the Purchase Date which immediately follows such LIBOR Fixing Date
and (B) whether the Dollar Equivalent Principal Amount of such
Note will be equal to the Required Dollar Equivalent Receivables
Amount, or whether Borrower will furnish a Deficiency Certificate
to BofA on such Purchase Date.
(ii) In the absence of any such notification pursuant to
clause (i), (A) the Maturity Date for such Note will be the date
specified in such Note, and (B) such Note shall bear interest
based on the Reference Rate rather than the Eurodollar Rate, as
provided in Section 3.03.
(iii) As used herein, the term "Dollar Equivalent Principal
Amount" of any Note means the sum of the Dollar Equivalents of the
unpaid principal amounts of such Note, calculated in the case of
foreign currencies at the Determination Date Exchange Rates
applicable to such Note.
(f) Delivery of Notes or Deficiency Certificate.
(i) The execution and delivery of any Supplement shall
obligate Borrower to issue and sell to BofA, and shall obligate
BofA to purchase from Borrower, on each Purchase Date, a Note in
the principal amounts, and in the currencies, equal to the
Required Foreign Currency Amounts specified in such Supplement for
such Purchase Date. However, if (A) the aggregate Dollar
Equivalent of the Unpaid Balance of all Receivables that are owned
by Borrower and its Subsidiaries taken as a whole on any Purchase
Date, excluding Transferred Receivables, is less than the Required
Dollar Equivalent Receivables Amount for such Purchase Date, and
(B) prior to 10:00 a.m. (San Francisco time) on such Purchase
Date, Borrower furnishes BofA with a certificate of Borrower's
chief financial officer, treasurer or assistant treasurer in the
form of Exhibit 1.02(f) (a "Deficiency Certificate") certifying
such deficiency, the aggregate principal amount of the Note which
Borrower will be required to issue and sell, and which BofA will
be required to purchase, on the related Purchase Date, shall be
reduced as set forth in clause (f)(iv) below. In such event, the
Purchase Price which BofA shall be required to pay for such
reduced Note shall be reduced as set forth in Section 1.03.
(ii) If Borrower does not deliver a Deficiency Certificate
to BofA before the time indicated in clause (f)(i), Borrower will
be required on such Purchase Date to issue and sell to BofA a Note
in an aggregate principal amount, and in the currencies, required
by all Supplements (as amended from time to time) which are
applicable to such Purchase Date.
(iii) If Borrower does deliver a Deficiency Certificate to
BofA in respect of any Purchase Date, Borrower will also deliver
to BofA at the same time a computation certified by Borrower's
chief financial officer, treasurer or assistant treasurer showing
the aggregate Unpaid Balance of all Receivables then owned by
Borrower and its Subsidiaries, taken as a whole, excluding
Transferred Receivables. On receipt of such certified computation,
BofA will calculate the aggregate Dollar Equivalent of such
aggregate Unpaid Balance, using the applicable Determination Date
Exchange Rates or (with respect to Receivables denominated in
currencies for which no Determination Date Exchange Rate was
calculated) such other exchange rates as BofA may determine in
good faith but in its sole discretion based on then applicable
market conditions. Any such calculation by BofA shall be
conclusive and binding for all purposes. Such Dollar Equivalent so
calculated is herein called the "Reduced Dollar Equivalent
Receivables Amount". BofA shall notify Borrower of such Reduced
Dollar Equivalent Receivables Amount, showing the exchange rates
used by BofA in the calculation thereof.
(iv) At the time BofA notifies Borrower of such Reduced
Dollar Equivalent Receivables Amount, BofA, after consultation
with the Borrower, will also deliver to Borrower a schedule to the
Note to be delivered by Borrower on such Purchase Date, showing
the different principal amounts of such Note in the currencies
applicable to such principal amounts. No such principal amount in
any currency shall exceed the aggregate Required Foreign Currency
Amount which is applicable for such currency on such Purchase Date
under all Supplements, and the aggregate Dollar Equivalent
(calculated at the applicable Determination Date Exchange Rates)
of all such principal amounts in such schedule shall equal the
Reduced Dollar Equivalent Receivables Amount. Subject to the
foregoing sentence, while BofA will consult with the Borrower when
preparing such schedule, such schedule as finally prepared by BofA
shall be conclusive and binding on Borrower, and Borrower will
promptly deliver to BofA a Note, dated the applicable Purchase
Date, in the principal amounts and currencies specified in such
schedule.
(v) The parties agree that the fact that Receivables are or
may be owned by a Subsidiary of Borrower and/or are or may be
subject to an Adverse Claim shall not relieve Borrower from its
obligation to issue and sell to BofA hereunder on any Purchase
Date a Note in the principal amounts and currencies which are
required by all Supplements applicable to such Purchase Date.
(vi) Unless otherwise permitted by BofA in its sole
discretion, no Deficiency Certificate may be delivered, and no
Carryforward Amount may be created or continue to exist, following
any Change in Control or Early Termination. On each Purchase Date
following any Change of Control, Borrower will be required to
issue and sell to BofA a Note having an aggregate Dollar
Equivalent Principal Amount equal to the Required Dollar
Equivalent Receivables Amount for such Purchase Date. If Borrower
fails for any reason to issue and sell to BofA a Note having such
Dollar Equivalent Principal Amount on any such Purchase Date
following a Change of Control, the parties will make payments to
each other, as applicable, calculated as set forth in Section
3.04(b).
(g) Carryforward Amount.
(i) If Borrower furnishes a proper Deficiency Certificate to
BofA for any Purchase Date, BofA will calculate, and will notify
Borrower of the difference between: (A) each Required Foreign
Currency Amount for such Purchase Date and (B) the portion of the
principal amount in such currency of the Note issued by Borrower
on such Purchase Date pursuant to Section 1.02(f)(iv). Each such
difference is herein called a "Carryforward Amount").
(ii) As long as any Carryforward Amount exists, Borrower
will deliver to BofA on Wednesday of each calendar week (or, if
any such Wednesday is not a Business Day, on the next succeeding
Business Day) a certificate signed by Borrower's chief financial
officer, treasurer or assistant treasurer showing the aggregate
Unpaid Balance of all new Receivables (excluding Transferred
Receivables) which were owned by Borrower and its Subsidiaries,
taken as a whole, as of the close of business on the preceding
Business Day. BofA will calculate the aggregate Dollar Equivalent
of such aggregate Unpaid Balance, using the same exchange rates
which were used in the calculation of the Reduced Dollar
Equivalent Receivables Amount for the applicable Purchase Date
pursuant to Section 1.02(f)(iii) (or other rates determined by
BofA in good faith based on market conditions as of the
Determination Date for such Purchase Date), and shall notify
Borrower of such calculation. On the Business Day following its
receipt of such notice, Borrower will execute and deliver to BofA
an additional Note, dated such Business Day and maturing 90 days
(or if such 90th day is not a Business Day, on the next succeeding
Business Day) from such date, in principal amounts and currencies
specified by BofA, after consultation in accordance with
Section 1.02(f)(iv) (but not to exceed the amounts specified in
the proviso of clause (g)(iii) below). BofA will pay to Borrower
the Reduced Purchase Price applicable to each such Note,
calculated as set forth in Section 1.03.
(iii) Delivery by Borrower of any Note pursuant to this
Section 1.02(g) shall reduce an outstanding Carryforward Amount by
an amount equal to the portion of the principal of such Note which
is denominated in the currency of such Carryforward Amount.
Borrower will continue to send BofA certified calculations of
Receivables,and will execute and deliver Notes to BofA pursuant to
this Section 1.02(g) with respect to each Purchase Date for which
a Deficiency Certificate was delivered until all Carryforward
Amounts relating to such Purchase Date have been reduced to zero
or cancelled by BofA, provided, that (1) the aggregate principal
amount in any currency of all Notes delivered hereunder which
relate to any Purchase Date shall not exceed the aggregate
Required Foreign Currency Amount specified for such currency and
such Purchase Date in all Supplements and (2) the aggregate Dollar
Equivalent of the foreign currency principal amounts of any such
Note which is issued to reduce a Carryforward Amount shall not
exceed the Dollar Equivalent of the Unpaid Balance of the
Receivables owned by Borrower and its Subsidiaries, taken as a
whole (excluding Transferred Receivables), as shown in the
certificate which was most recently delivered by Borrower pursuant
to clause (g)(ii), in each case calculated using same
Determination Date Exchange Rate or other exchange rates which
were used by BofA in calculating the Reduced Dollar Equivalent
Amount at the time the applicable Deficiency Certificate was
delivered.
(iv) The Reduced Purchase Price paid for Notes that are
issued and delivered to reduce any Carryforward Amount shall be
calculated as set forth in Section 1.03 based on the original
Purchase Price payable on the original Purchase Date from which
such Carryforward Amount arose, and the original Required Foreign
Currency Amounts and Determination Date Exchange Rates applicable
to such Purchase Date. BofA may also require the issuance and
sale by Borrower of Notes under this Section 1.02(g) after the
Termination Date. BofA may in its sole discretion at any time
cancel or reduce any Carryforward Amount then in effect.
(h) Deferral Compensation Amount. For each day during the period
from the Purchase Date on which a Carryforward Amount is created until
such Carryforward Amount has been reduced to zero or cancelled by BofA,
Borrower shall pay to BofA on the last Business Day of each calendar
month an additional amount in respect of each then-outstanding
Carryforward Amount (such additional amount being herein called the
"Deferral Compensation Amount") equal to the product of (x) the Dollar
Equivalent of the foreign currency amount of such outstanding
Carryforward Amount on such day calculated at the Determination Date
Exchange Rate which is applicable to such Purchase Date, multiplied by
(y) a percentage equal to the sum of the Reference Rate in effect on
such day plus 2.0% per annum.
(i) Borrower's Option to Make Payments in Lieu of Carryforward
Amount. If any Carryforward Amount shall (or would on any Purchase
Date) be outstanding at any time, the Borrower may, at its option,
reduce such Carryforward Amount to zero (or prevent such Carryforward
Amount from arising on such Purchase Date) by making a payment to BofA
equal to (x) the excess of (A) the Dollar Equivalent, calculated at the
applicable Determination Date Exchange Rate for the currency and
Purchase Date relating to such Carryforward Amount over (B) the Reduced
Purchase Price that would be applicable to such Carryforward Amount
(determined as set forth in Section 1.03(c)), plus (y) the Deferral
Compensation Amount (if any) which is accrued and unpaid at the date of
such payment with respect to such Carryforward Amount. If the amount
described in clause (x)(B) exceeds the sum of the amounts described in
clause (x)(A) and clause (y), then, provided no Termination Event or
Unmatured Termination Event shall have occurred and be continuing,
Borrower may at its option require BofA to pay the excess to Borrower.
Following any Change in Control or Early Termination, the parties will
make payments in respect of all outstanding Carryforward Amounts as
provided in Section 1.08(b).
SECTION 1.03 Delivery of Notes; Purchase Price Calculation.
(a) Delivery of Notes. Prior to 10:00 a.m. (San Francisco time)
on each Purchase Date, Borrower will deliver to BofA a duly completed
Note in the currencies and principal amounts required by Section 1.02.
Such Note may be delivered by facsimile, followed promptly by an
original; provided, that such facsimile shall be binding and effective
for all purposes.
(b) Payment of Purchase Price. By 11:30 a.m. (San Francisco time)
on each Purchase Date, BofA shall, upon satisfaction of the applicable
conditions set forth in Article IV, pay to Borrower in Dollars in
immediately available funds: (i) the Purchase Price specified for such
Purchase Date in the applicable Supplements, as such Supplement may be
amended from time to time, or (ii) if applicable, the Reduced Purchase
Price calculated pursuant to clause (c).
(c) Calculation of Reduced Purchase Price. If the principal
amount in any currency of any Note delivered on any Purchase Date (as
specified by BofA in accordance with Section 1.02(f)(iv)) is less than
the aggregate of the Required Foreign Currency Amounts in such currency
specified in all applicable Supplements for such Purchase Date, the
aggregate portion of the Purchase Price specified in the related
Supplements that is to be paid on such Purchase Date in respect of the
portion of such Note which is denominated in such currency {xe
"Original Purchase Price"}shall be reduced to a Dollar amount equal to:
(i) the aggregate of the Allocated Purchase Price Amounts applicable to
such currency for such Purchase Date in all Supplements, multiplied by
(ii) a fraction, the numerator of which is the Dollar Equivalent of the
portion of the principal amount of the Note which is denominated in
such currency, and the denominator of which is the Dollar Equivalent of
the Required Foreign Currency Amount for such currency, in each case
calculated using the Determination Date Exchange Rate for such Purchase
Date. The aggregate of all such Dollar amounts payable for any Note is
herein called the "Reduced Purchase Price".
SECTION 1.04 Interest on Notes.
(a) The different portions of the principal amount of each Note
may be denominated in different foreign currencies (or, if so provided
in any amended Supplement, in Dollars), which will be set forth in
Schedule I to such Note. Interest on each Note will be payable only in
Dollars, notwithstanding the currencies in which the principal of such
Note is denominated.
(b) Borrower will pay interest on each Note (other than a Note
which is issued to reduce a Carryforward Amount) for each day during
the period from the Issuance Date thereof until the Maturity Date
thereof (the "Period to Maturity") at a rate per annum equal to the sum
of (A) the Eurodollar Rate (Reserve Adjusted) applicable to such Note
plus (B) the Applicable Margin in effect from time to time, applied to
the Dollar Equivalent Principal Amount of such Note, calculated
according to the following formula:
Interest = DEPA x (ERRA + AM) x PTM
------------------------
360
WHERE:
DEPA = the Dollar Equivalent Principal Amount of such
Note;
ERRA = the Eurodollar Rate (Reserve Adjusted) for the
applicable Period to Maturity;
AM = The Applicable Margin in effect on such day; and
PTM = the number of days in such Period to Maturity.
Such interest shall be payable on the Maturity Date of such Note.
(c) Borrower further agrees to pay interest on each Note which is
issued to reduce a Carryforward Amount, and on any Note where the
circumstances specified in Section 3.03(b) apply, from the Issuance
Date thereof until the Maturity Date thereof at a rate per annum equal
to the sum of the Reference Rate plus the Applicable Margin in effect
from time to time, applied to the Dollar Equivalent Principal Amount of
such Note.
(d) Borrower further agrees to pay interest on any principal of
(and, to the extent permitted by applicable law, interest on) any Note
which is not paid when due, whether at the Maturity Date thereof or on
Early Termination, until such principal or interest is paid in full, at
a rate per annum equal to the sum of the Reference Rate plus the
Applicable Margin in effect from time to time plus 2.0 percent, applied
to the Dollar Equivalent Principal Amount of such unpaid principal or
to such unpaid interest, as the case may be.
(e) The "Applicable Margin" shall be
(i) 0.50%, in the case of interest calculated using the Eurodollar
Rate (Reserve Adjusted), and zero, in the case of interest
calculated using the Reference Rate, on any day when the Borrower
is in Collateral Status, and
(ii) a percentage determined as follows on any day when the
Borrower is in Cash Equivalent Investment Status. The Applicable
Margin will be determined by BofA from time to time in accordance
with the table set forth below based on the most recent Compliance
Certificate of Borrower delivered by Borrower pursuant hereto.
Such determination shall be based on the calculations (made on a
rolling four-quarter basis) of Consolidated Net Income of the
Borrower and its Subsidiaries set forth in such Compliance
Certificate of Borrower and shall apply from the first Business
Day after BofA receives such Compliance Certificate until and
through the Business Day when BofA receives the applicable
Compliance Certificate for the next fiscal quarter of Borrower.
Prior to the first Business Day after the date when BofA receives
the first Compliance Certificate delivered hereunder, the
Applicable Margin will be 1.125% in the case of interest
calculated using the Eurodollar Rate (Reserve Adjusted) and .125%
in the case of interest calculated using the Reference Rate.
Applicable Margin
-----------------
If interest is If interest is
calculated using calculated using
the Eurodollar Rate the Reference
Consolidated Net Income Reserve Adjusted Rate
- ----------------------- ------------------ ----------------
Less than or equal to $50,000,000 +1.375% +0.375%
More than $50,000,000 but less +1.125% +0.125%
than or equal to $90,000,000
More than $90,000,000 but less
than or equal to $150,000,000 +1.000% +0%
More than $150,000,000 +0.750% +0%
SECTION 1.05 Facility Limit and Note Limit.
(a) Facility Limit. BofA shall not be obligated to purchase any
Note on any Purchase Date to the extent that, after giving effect to
such purchase, the Aggregate Purchase Price at such date would exceed
the Facility Limit. Any outstanding Carryforward Amount shall continue
to be carried forward to the extent that a purchase by BofA of Notes in
respect thereof would result in such excess.
(b) Note Limit. If on any Purchase Date the Dollar Equivalent
Principal Amount of the Note to be issued on such Purchase Date exceeds
the Note Limit in effect on such Purchase Date (such excess being
called the "Note Limit Excess") then:
(i) BofA, after consultation with the Borrower, will specify
lower principal amounts in some or all of the required foreign
currencies in which such Note is to be denominated, such that the
aggregate Dollar Equivalent of such lower principal amounts of the
Note, calculated at the Determination Date Exchange Rates
applicable thereto, will equal such Note Limit;
(ii) the Borrower will issue and sell to BofA on such
Purchase Date a Note in such lower principal amounts, and BofA
will pay for such Note the full Purchase Price originally
applicable to such Purchase Date; and
(iii) the Borrower will pay to BofA on such Purchase Date in
Dollars in immediately available funds an amount equal to such
Note Limit Excess, which payment will be subject to the netting
provisions of Section 2.03, if applicable.
SECTION 1.06 Voluntary Termination of Facility; Reduction of Facility
Limit
(a) Borrower may, upon at least five days' (or ten days' in the
case of a reduction to zero) prior irrevocable written notice to BofA,
permanently reduce (including to zero) the Facility Limit; provided,
that the Facility Limit may not at any time be reduced by Borrower to
an amount that is (A) less than the sum of (i) the Aggregate Purchase
Price plus (ii) the sum of the Dollar Equivalents at the applicable
Determination Date Exchange Rates of all outstanding Carryforward
Amounts or (B) less than the Aggregate Purchase Price which would be
outstanding at any time if all Notes contemplated by all Supplements
then in effect were purchased by BofA on their respective Purchase
Dates and paid on their respective Maturity Dates (or, in the case of
any such Note where no Maturity Date has been specified, on the 90th
day after the Purchase Date thereof.
(b) Each partial reduction of the Facility Limit pursuant to
clause (a) shall be in an amount equal to $1,000,000 or an integral
multiple thereof.
(c) In the event of any termination of the Facility the parties
shall make the Early Termination Payments specified in Section 1.08.
(d) No Note may be prepaid prior to its Maturity Date unless such
Note is accelerated following a Termination Event.
SECTION 1.07 Termination Date; Extension of Termination Date.
(a) The "Termination Date" shall be the earliest to occur of
(i) January 15, 1998 (as such date may be extended from time to time,
the "Scheduled Termination Date"), (ii) the last Purchase Date
following the date of a termination of the Facility in whole pursuant
to Section 1.06(a), (iii) the date so declared pursuant to
Section 7.02, and (iv) the date that occurs automatically pursuant to
Section 7.02.
(b) Borrower, by written notice to BofA, may from time to time
request that the Scheduled Termination Date be extended. Borrower may
not make any such request more than once in any calendar quarter. Any
such request shall be accompanied or preceded by a proposed revised
Schedule II hereto, showing the proposed additional Determination Dates
which Borrower desires to make applicable during the period of the
requested extension. No such proposal shall modify the Purchase Dates
or Required Foreign Currency Amounts which are shown on any Supplement
which is then in effect. BofA will use reasonable efforts to notify
Borrower in writing, on or before the date which is 30 days after the
receipt by BofA of such request from Borrower, as to whether BofA will
consent to such extension and, if BofA does consent to such extension
in writing, the conditions of such consent (including conditions
relating to legal documentation). If BofA shall notify Borrower that
it does not consent to such extension or if BofA fails to notify the
Borrower in writing of its consent to such request within such 30 day
period, BofA shall be deemed to have not consented to such request and
the Scheduled Termination Date shall not be so extended. Borrower
acknowledges and agrees that the granting of any such request shall be
in the sole and absolute discretion of BofA.
(c) If BofA is willing, in its sole discretion, to extend the
Scheduled Termination Date as so requested by Borrower, the parties
will enter into an amendment hereto in the form of Exhibit 1.07(c),
including an amendment to Schedule II (collectively, an "Amendment"),
to effect such extension.
SECTION 1.08 Early Termination of Reduction Payments
(a) If the Termination Date occurs prior to the Scheduled
Termination Date (such occurrence being herein referred to as an "Early
Termination"), then the rights and obligations of Borrower to issue and
sell to BofA, and the rights and obligations of BofA to purchase, Notes
shall terminate and be discharged in full with respect to all Purchase
Dates that have not occurred prior to the Termination Date, provided,
that notwithstanding such discharge and termination, the parties will
remain obligated to make all payments set forth in this Section 1.08,
and Sections 3.04, and 7.02(b), and provided further, that BofA may
still require Borrower to issue and sell Notes to BofA after any
Termination Date in respect of any Carryforward Amount, as provided in
Section 1.02(g).
(b) Promptly following any Change in Control or Early
Termination, the parties will make payments to each other, as
applicable, calculated as set forth in Section 3.04(a) and (b). In
addition, promptly following any Change in Control or Early
Termination, Borrower will on demand pay to BofA in Dollars in
immediately available funds (x) the sum of all the amounts by which:
(A) the sum of the Dollar Equivalents, calculated at the applicable
Determination Date Exchange Rates, of all Carryforward Amounts then in
effect exceed (B) the Reduced Purchase Prices that would be applicable
thereto (determined as set forth in Section 1.03(c)), plus (y) the
aggregate of the Deferral Compensation Amounts that are accrued and
unpaid at the date of such payment. If the amounts described in clause
(x)(B) exceed the sum of the amounts described in clause (x)(A) and
clause (y), BofA will on demand pay the excess to Borrower.
(c) Upon the occurrence of an Early Termination, Borrower shall
pay to BofA or BofA shall pay to Borrower (as applicable) at the times
provided below amounts calculated as follows (each an "Early
Termination Payment"):
(i) The date on which an Early Termination occurs is herein
called the "Early Termination Date."
(ii) BofA will calculate the gross Dollar amount that it
would pay if it entered into forward contracts on the Early
Termination Date for purchase by BofA for Dollars of all the
Required Foreign Currency Amounts for each Purchase Date, in each
case with value dates that are the same as such Purchase Date and
using rates determined by BofA in good faith based on market
conditions;
(iii) BofA will calculate the sum of all the Dollar amounts
calculated in clause (ii) that would be payable with respect to
each Purchase Date.
(iv) If such aggregate Dollar amount for any Purchase Date
is greater than the sum of the applicable Purchase Prices
applicable to such Purchase Date, Borrower will pay to BofA,
within two Business Days after any demand therefor, the discounted
present value of the excess, discounted from the applicable
Purchase Date to the date on which such amount is paid at the
Eurodollar Rate.
(v) If such aggregate Dollar amount for any Purchase Date
is less than the sum of the applicable Purchase Prices applicable
to such Purchase Date, BofA will pay to Borrower, within two
Business Days after any demand therefor, the discounted present
value of the absolute value of the deficiency, discounted from the
applicable Purchase Date to the date on which such amount is paid
at the Eurodollar Rate (Reserve Adjusted).
To the extent that payments are to be made by both Borrower and BofA on
any day pursuant to this Section 1.08, Section 3.04, or Section 7.02(b)
such payments will be netted against each other and only the net amount
will be paid by the appropriate party. BofA will not be obligated to
make any payment to Borrower pursuant to this Section 1.08,
Section 3.04 or Section 7.02(b) until all Obligations then due and
owing have been paid in full and all Carryforward Amounts have been
reduced to zero or cancelled by BofA. BofA agrees to pay Borrower
interest on any amounts owing by BofA to Borrower that are not paid
pursuant to the preceding sentence for the period from: (A) the
applicable Purchase Dates from which such amounts are discounted or on
which such amounts are payable, as the case may be, to (B) the dates
such amounts are paid, at the Federal Funds Rate from time to time in
effect.
SECTION 1.09 Certain Forward Contracts.
In order to hedge the foreign currency exposure of Borrower with
respect to each Note which is delivered by Borrower hereunder, BofA and
Borrower agree to enter into certain forward contracts as follows:
(a) On each Purchase Date when a Note is delivered hereunder, or
other date on which a Note is delivered hereunder to reduce any
Carryforward Amount (each such Purchase Date or other date being herein
called an ("Issuance Date") Borrower and BofA will enter into forward
contracts with respect to each foreign currency in which any portion of
the Note delivered on such date is denominated, for value on the
Maturity Date of the Note issued on such date, pursuant to which, on
such Maturity Date, (i) BofA will deliver to Borrower (subject to full
payment by Borrower of such Note on such Maturity Date) amounts in the
same foreign currencies in which the principal of such Note is
denominated which are equal to the portions of such principal which are
denominated in such currencies, and (ii) Borrower will deliver to BofA
in Dollars the Dollar Equivalent of each of such foreign currency
amounts, calculated at the Determination Date Exchange Rate applicable
to such Note.
(b) If Borrower and BofA fail for any reason to enter into the
forward contracts specified in clause (a) on any date specified in
clause (a), they will be deemed for all purposes hereof (without
further action) to have entered into such forward contracts on such
day.
(c) All forward contracts which are entered into pursuant to
clause (a) or deemed to be entered into pursuant to clause (b) shall be
settled as provided in Section 2.02(a). All such settlements shall be
subject to the terms of Section 2.02(b), so that on each Maturity Date,
Borrower will be obligated to pay to BofA in Dollars the Dollar
Equivalent of each of the foreign currency principal amounts of the
Note which matures on such Maturity Date, calculated at the
Determination Date Exchange Rate applicable to such Note. Following
such payment, Borrower and BofA shall have no further obligations under
such forward contracts which have value dates falling on such Maturity
Date.
ARTICLE II
SETTLEMENT
----------
SECTION 2.01 Maturity Date Payment Procedures
(a) On each Maturity Date, Borrower shall pay the principal
amount of each Note which matures on such Maturity Date plus all
interest accrued thereon to BofA, subject, in the case of payments of
principal, to the forward contract settlement procedures set forth in
Section 2.02.
(b) Notwithstanding anything herein to the contrary, the
obligations of Borrower hereunder shall not be considered reduced by
any payment to BofA if at any time such payment is rescinded or must
otherwise be returned for any reason.
SECTION 2.02 Settlement of Forward Contracts on Maturity Dates.
(a) Settlement of Forward Contracts. On each Maturity Date,
Borrower shall:
(i) hold in trust for BofA all foreign currency principal
amounts payable by Borrower on the Note which matures on such
date;
(ii) release such foreign currency amounts to itself from
such trust against payment by Borrower to BofA of all Dollar
amounts which are payable by Borrower pursuant to all forward
contracts which were entered into or deemed entered into pursuant
to Section 1.09 and have value dates falling on such Maturity
Date; and
(iii) pay such Dollar amounts under such forward contracts
to BofA in immediately available funds, which payment shall
discharge Borrower's obligation to pay the principal amount of the
Note which matures on such date.
(b) Payment in Dollars by Borrower. Notwithstanding anything in
this Agreement, or in any forward contract which is or is deemed to be
entered into pursuant to this Agreement, and notwithstanding that the
Notes may be denominated in foreign currencies, it is of the essence
under this Agreement that all amounts payable to BofA hereunder or in
respect of any Notes shall be payable in Dollars, so that on each
Maturity Date, after giving effect to payment of the Note maturing on
such date and all payments by Borrower in respect of any forward
contracts with value dates on such Maturity Date which are or are
deemed to be entered into by BofA and Borrower pursuant to this
Agreement, Borrower (whether as Note issuer, forward contract
counterparty or otherwise) will pay to BofA in Dollars in immediately
available funds the Dollar Equivalent, calculated at the Determination
Date Exchange Rate applicable to such Note, of all foreign currency
principal amounts of the Note which matures on such Maturity Date.
SECTION 2.03 Netting of Payments on Certain Issuance Dates. If
any Maturity Date is also an Issuance Date, then (provided, that all
conditions precedent to any purchase of a Note to be made on such date
have been fulfilled prior to 10:00 a.m. (San Francisco time) on such
date): (a) BofA will calculate the total amounts payable by Borrower in
respect of such Maturity Date and by BofA and Borrower in respect of
such Issuance Date, (b) such payments will be netted against each
other, and (c) only the net amount will be paid by the appropriate
party on such date. However, if by such time on such date any condition
precedent to payment of Purchase Price or Reduced Purchase Price to a
Note applicable has not been fulfilled (including by non-receipt by
BofA of any properly completed and executed Note or other document
required hereby) then no such netting will be permitted and Borrower
will be required to pay BofA on such Maturity Date the full amount
payable in respect of such Maturity Date under all Notes maturing on
such Maturity Date and all forward contracts entered into or deemed
entered into hereunder with respect to such Notes. Failure to pay such
full amount within three Business Days after such Maturity Date shall
constitute a Termination Event under Section 7.01(a)(i).
<PAGE>
SECTION 2.04 Payments and Computations, Etc. All amounts to be
paid or deposited (A) to or for the account of BofA by Borrower
hereunder or (B) to or for the account of Borrower by BofA hereunder,
shall in each case be paid or deposited in accordance with the terms
hereof no later than 11:30 a.m. (San Francisco time) on the day when
due in Dollars in immediately available funds (i) if to BofA for
payment of the structuring fee referred to in Section 3.01(b) at Bank
of America ABA 1210-0035-8, BISD Account No. 3300683980, Attention:
Interest Rate Swap Operations, (ii) if to BofA for payment of other
amounts hereunder at Account No. 1233183980 at Bank of America National
Trust and Savings Association, Concord, California and (iii) if to
Borrower, at Account No. 4191706 at Harris Trust and Savings Bank,
Chicago, Illinois. Borrower shall pay to BofA interest on all amounts
not paid or deposited when due (without giving effect to any grace
period) until paid or deposited in full at 2% per annum above the sum
of Reference Rate plus the Applicable Margin from time to time in
effect, payable on demand; provided, that such interest rate shall not
at any time exceed the maximum rate permitted by applicable law.
Interest and all fees hereunder shall be made on the basis of a year of
360 days for the actual number of days elapsed.
ARTICLE III
FEES AND YIELD PROTECTION
-------------------------
SECTION 3.01 Fees
(a) Facility Fee. From the Initial Closing Date until the
Termination Date, Borrower shall pay to BofA a facility fee ("Facility
Fee") for each day in such period equal to (A) the excess of (i) the
Facility Limit over (ii) the Aggregate Purchase Price on such day times
(B) the Applicable Facility Fee Rate on such day divided by (C) 360.
Such Facility Fee shall be paid quarterly in arrears, on the last
Business Day of each calendar quarter and on the Termination Date.
(b) Structuring Fee. Borrower shall pay to BofA a structuring
fee of $100,000 payable prior to or on the Initial Closing Date.
(c) The "Applicable Facility Fee Rate" shall be:
(i) .25% on any day when the Borrower is in Collateral Status,
and
(ii) a percentage determined as follows on any day when the
Borrower is in Cash Equivalent Investment Status. For the period
from the Closing Date through the Business Day when BofA receives
the first Compliance Certificate hereunder, the Applicable
Facility Fee Rate will be .350%. Thereafter, the Applicable
Facility Fee Rate will be determined by BofA from time to time in
accordance with the table set forth below based on the most recent
Compliance Certificate delivered by the Borrower pursuant hereto.
Such determination shall be based on the calculations of
Consolidated Net Income (made on a rolling four quarter basis) set
forth in such Compliance Certificate and shall apply from the
first Business Day after BofA receives such Compliance Certificate
until and through the Business Day when BofA receives the
applicable Compliance Certificate for the next fiscal quarter as
provided herein.
Applicable Facility
Consolidated Net Income Fee Rate
----------------------- -------------------
Less than or equal to $50,000,000 0.400%
More than $50,000,000 but less 0.350%
than or equal to $90,000,000
More than $90,000,000 but less 0.300%
than or equal to $150,000,000
More than $150,000,000 0.250%
SECTION 3.02 Yield Protection
If (a) Regulation D of the Board of Governors of the Federal
Reserve System or (b) any Regulatory Change occurring after the date
hereof:
(i) shall subject any Affected Party to any tax, duty or
other charge with respect to its exercise of its rights or
performance of its obligations under any Agreement Document, or
shall change the basis of taxation of payments to any Affected
Party of any amounts payable to it under any Agreement Document
(except for changes in the rate of tax on the overall net income
of such Affected Party imposed by the jurisdiction in which such
Affected Party's principal executive office is located); or
(ii) shall impose, modify or deem applicable any reserve,
special deposit or similar requirement against assets of, or
deposits or obligations with or for the account of (or with or for
the account of any affiliate of), or credit extended by, any
Affected Party; or
(iii) shall change the amount of capital maintained or
required or requested or directed to be maintained by any Affected
Party; or
(iv) shall impose any other condition affecting any Affected
Party in connection with any Agreement Document;
and the result of any of the foregoing is:
(x) to increase the cost to (or to impose a cost on)
such Affected Party's participating in the transactions
contemplated in any Agreement Document,
(y) to reduce the amount of any sum received or
receivable by such Affected Party under any Agreement
Document, or
(z) in the sole determination of such Affected Party,
to reduce the rate of return on the capital of such Affected
Party as a consequence of its obligations arising in
connection herewith to a level below that which such Affected
Party could otherwise have achieved,
then upon written notice by the applicable Affected Party to Borrower,
Borrower shall pay directly to such Affected Party such additional
amount or amounts as will compensate it for such increased cost or such
reduction. Such written notice shall include calculations thereof in
reasonable detail and, in the absence of manifest error, be conclusive
and binding upon Borrower.
SECTION .03 Inability to Determibe the Eurodollar Rate; Failure to
Specify Maturity Date.
(a) If BofA shall have determined in good faith, that: (i) Dollar
deposits are not available to banks such as BofA in the London interbank
eurodollar market, or (ii) by reason of circumstances affecting the London
interbank eurodollar market, adequate means do not exist for ascertaining the
applicable Eurodollar Rate, or (iii) it would be contrary to any applicable law
or regulation for the applicable interest rate to be determined based on the
Eurodollar Rate, then BofA shall promptly so notify Borrower, which
determination shall be conclusive and binding on Borrower, and, so long as such
circumstances shall continue, Borrower shall pay interest to BofA as provided
in clause (c).
(b) In addition, if Borrower shall fail for any reason to notify
BofA prior to 10:00 a.m. (San Francisco time) on the third Eurodollar
Business Day preceding the Issuance Date of any Note of the precise
Dollar Equivalent Principal Amount and Maturity Date of such Note, the
Borrower will be obligated to pay interest on such Note Amount
calculated as provided in clause (c).
(c) If any of the circumstances described in clause (a) or (b)
above are applicable on the Issuance Date of any Note, Borrower shall
pay to BofA on the Maturity Date of such Note interest on such Note,
calculated for each day during the period from such Issuance Date to
such Maturity Date at a rate per annum equal to the sum of the
Reference Rate plus the Applicable Margin in effect on such day,
applied to the Dollar Equivalent Principal Amount of such Note.
SECTION 3.04 Funding Losses. (a) In the event BofA shall
incur any loss or expense (including any loss or expense incurred by
reason of the liquidation or reemployment of deposits or other funds
obtained by BofA in order to fund its purchase of Notes from Borrower)
as a result of:
(i) any termination of the Facility or any reduction of the
Facility Limit pursuant to Section 1.06 or the occurrence of an
Early Termination, or the principal amount of any Note in any
currency being less than the amount required hereby, or the Dollar
Equivalent Principal Balance of any Note being less than the
amount specified in the Borrower's notice delivered pursuant to
Section 1.02(e)(i), or the payment by BofA of a Reduced Purchase
Price pursuant to Section 1.03(c) or 1.09 (in the case of each of
the foregoing, to the extent not included in the Early Termination
Payments paid pursuant to Section 1.08);
(ii) the failure by Borrower to issue and sell to Bank of
America any Note which Borrower is required to issue and sell
under the terms of this Agreement, or
(iii) the failure by Borrower to pay in full to BofA on any
Maturity Date all amounts which are due on such date under any
Note and under all forward contracts which are entered into or
deemed entered into pursuant to Section 1.09 and which have value
dates falling on such Maturity Date, or the payment by Borrower of
any such amounts on any day other than the applicable Maturity
Date.
then, upon written notice by BofA to Borrower, Borrower shall pay
directly to BofA such amount as will reimburse BofA for such loss or
expense. Such written notice shall include calculations thereof in
reasonable detail and shall, in the absence of manifest error, be
conclusive and binding on Borrower.
(b) Without limiting the foregoing, if for any reason Borrower
fails on any Purchase Date to issue and sell to BofA a Note having
principal amounts at least equal to the Required Foreign Currency
Amounts applicable to such Purchase Date (or, but only if Borrower has
timely delivered to BofA a Deficiency Certificate in accordance with
Section 1.02(f), such lesser amount permitted by Section 1.02(f)), then
on such Purchase Date Borrower will pay to BofA as liquidated damages
for BofA's loss of profit for Borrower's breach of its agreement to
issue and sell such Note for the Purchase Prices applicable thereto an
amount equal to the excess, if any, of: (i) the Required Dollar
Equivalent Receivables Amount (or, if permitted by Section 1.02(g),
Reduced Dollar Equivalent Receivables Amount applicable to such
Purchase Date), over (ii) the Purchase Price or Reduced Purchase Price
applicable to such Purchase Date. Such damages are payable in addition
to, but without duplication of, any other amounts payable by Borrower
hereunder. If the amount described in clause (ii) exceeds the amount
described in clause (i), BofA will pay such excess to Borrower, subject
to the last paragraph of Section 1.08(c).
SECTION 3.05 Taxes, Etc. Borrower hereby covenants that all
payments by Borrower to BofA in respect of any Obligation, shall be
made without any set-off or counterclaim, and free and clear of and
without deduction or withholding for or on account of, any present or
future Taxes now or hereafter imposed on Borrower or BofA (as
applicable) with respect to such payments by any governmental or other
authority, except to the extent that such deduction or withholding is
compelled by applicable laws, rules or regulations. As used herein,
the term "Taxes" shall include all excise and other taxes of whatever
nature imposed on Borrower or BofA (as applicable) with respect to such
payments (other than taxes generally assessed on the overall net income
of BofA imposed by the jurisdiction in which BofA's principal executive
office is located), as well as all levies, imposts, duties, charges or
fees of whatever nature.
If Borrower is compelled by applicable laws, rules or regulations
to make any such deduction or withholding, Borrower will:
(a) pay to the relevant authorities the full amount required to
be so withheld or deducted;
(b) pay to BofA such additional amounts as may be necessary in
order that the net amount received by BofA, after such deduction or
withholding (including any required deduction or withholding on such
additional amounts) shall equal the amount BofA would have received had
no such deduction or withholding been made; and
(c) promptly forward to BofA an official receipt or other
documentation satisfactory to BofA evidencing such payment to such
authorities.
Moreover, if any Taxes are directly asserted against BofA with respect
to any payment made in respect of any Obligation, BofA may pay such
Taxes, and Borrower agrees promptly to pay such additional amount
(including, without limitation, any penalties, interest or expenses) as
may be necessary in order that the net amount received by BofA after
the payment of such taxes (including any Taxes on such additional
amount) shall equal the amount BofA would have received had no such
Taxes been asserted.
SECTION 3.06 Set-off. BofA is hereby authorized upon the
occurrence of any Termination Event, to appropriate and apply to the
payment of the Obligations owing to it (whether or not then due), any
and all balances, credits, deposits, accounts, or moneys of Borrower
then or thereafter maintained with BofA.
ARTICLE IV
CONDITIONS TO EFFECTIVENESS AND PURCHASES
-----------------------------------------
SECTION 4.01 Conditions Precedent to Effectiveness. The
effectiveness of this Agreement is subject to the condition precedent
that BofA shall have received the following, each in form and substance
satisfactory to BofA:
(a) Original executed copies of this Agreement;
(b) A certificate of the Secretary or an Assistant Secretary of
Borrower, certifying as to (i) resolutions of Borrower's Board of
Directors approving the Agreement Documents and the transactions
contemplated therein, (ii) the names and true signatures of the
officers authorized on its behalf to sign the Agreement Documents to be
delivered by it hereunder (on which certificate BofA may conclusively
rely until such time as BofA shall receive from Borrower a revised
certificate), (iii) a true, correct and complete copy of the
Certificate of Incorporation of Borrower duly filed with the Secretary
of State of its state of incorporation as in effect on the date of
delivery of such certificate, and (iv) a true, correct and complete
copy of the Bylaws of Borrower as in effect on the date of delivery of
such certificate;
(c) A good standing certificate for Borrower issued by the
Secretary of State of its state of incorporation;
(d) An opinion of counsel for Borrower, substantially in the
form of Exhibit 4.01(d);
(e) The fees payable to BofA pursuant to Section 3.01(b),
together with all costs and expenses due and payable pursuant to
Section 9.05, if then invoiced; and
(f) Such other approvals, opinions or documents as BofA may
reasonably request.
SECTION 4.02 Conditions Precedent to All Purchases of Notes. The
obligation of BofA to purchase any Note and to pay the Purchase Price
or Reduced Purchase Price related thereto on any Issuance Date shall be
subject to the further conditions precedent that:
(a) BofA shall have received such Note, in the principal
amounts in the applicable currencies specified in Section 1.02,duly completed
and executed on behalf of Borrower and satisfactory
in form and substance to BofA,
(b) BofA shall have received a certificate from the chief financial
officer, treasurer or assistant treasurer of Borrower in the form of Exhibit
4.02(b), and
(c) on the date of such purchase the following statements
shall be true (and Borrower, by accepting the Purchase Price or
the Reduced Purchase Price, shall be deemed to have certified
that):
(i) the representations and warranties contained in
Section 5.01 are correct on and as of such day as though made
on and as of such day,
(ii) no Termination Event or Unmatured Termination Event
(except, if permitted by Section 7.02(e) a Change of Control
Termination Event) exists or would result from such purchase,
(iii) after giving effect to such purchase, the
Aggregate Purchase Price at such time will not exceed the
Facility Limit,
(iv) the Termination Date shall not have occurred, and
(v) the Dollar Equivalent Principal Balance of such
Note will not exceed the Note Limit, and any Note Limit
Excess which is payable on such Purchase Date pursuant to
Section 1.05(b) shall be paid on such date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 5.01 Representations and Warranties of Borrower.
Borrower represents and warrants as follows:
(a) Organization and Good Standing. Borrower is validly
existing as a corporation in good standing under the laws of its state
of incorporation and possesses all necessary licenses and approvals,
and is duly qualified to do business in each jurisdiction in which the
nature of its business requires such licenses and approvals to own its
properties and to conduct its business or in which the failure so to
qualify would have a Material Adverse Effect.
(b) Power, Authorization and Non-Contravention. The execution,
delivery and performance by Borrower of the Agreement Documents to
which it is a party (a) are within Borrower's corporate powers, (b)
have been duly authorized by all necessary corporate action, (c) do not
contravene (i) Borrower's charter or by-laws, (ii) any contractual
restriction binding on or affecting Borrower or any of its property,
(except where such contravention would not give rise to any Material
Adverse Effect or render any Agreement Document unenforceable against
the Borrower or its creditors), or (iii) any law, rule, regulation,
order, judgment, injunction, decree, determination or award binding on
or affecting Borrower or its property, (d) do not result in the
imposition of any Adverse Claim on any of Borrower's material
properties and (e) do not require any authorization, approval or other
action by, or notice to or filing with, any Governmental Authority or
regulatory body or any other Person.
Without limiting the generality of the foregoing, (A) Borrower had
at all relevant times, and now has, all necessary power, authority and
legal right to issue and sell the Notes and to incur and perform its
obligations under the Notes and the other Agreement Documents, (B) the
use of funds obtained by Borrower under this Agreement will not violate
any of Regulations G, T, U and X of the Federal Reserve Board, and (C)
Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act
of 1940.
(c) Binding Obligations. This Agreement constitutes, and each
Note and each other Agreement Document to which Borrower is a party
when duly executed and delivered will constitute, a legal, valid and
binding obligation of Borrower enforceable against Borrower in
accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally and general principles of equity.
(d) Litigation. There is no action, suit or proceeding pending
or, to the best of Borrower's knowledge, threatened in any court or a
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (i) except as set forth on
Exhibit 5.01(d) that relates to Borrower or any of its Subsidiaries or
any of the properties of Borrower or any of its Subsidiaries and that,
if adversely determined, could create a Material Adverse Effect, or
(ii) that relates to any aspect of the transactions contemplated by
this Agreement.
(e) No Material Adverse Effect. Since September 27, 1996, no
event or occurrence that individually or in the aggregate is reasonably
likely to have a Material Adverse Effect has occurred, other than as
disclosed on Borrower's quarterly report on Form 10-Q dated as of
November 8, 1996 for the period ended September 27, 1996 and press
releases disseminated by Borrower and made available to BofA prior to
the date hereof.
(f) Accuracy of Information. All written information supplied
by or on behalf of Borrower to BofA for purposes of or in connection
with any Agreement Document or any transaction contemplated herein or
therein is true, complete and accurate in all material respects and
such information is not incomplete by omitting to state a material fact
or any fact necessary to make the statements contained therein not
misleading in any material respect on the date as of which such
information is dated.
(g) Taxes. Borrower has filed or caused to be filed all tax
returns and reports required by applicable laws, rules and regulations
to have been filed by it and has paid all taxes, assessments and
governmental charges thereby shown to be owing, except any such taxes,
assessments or charges which are being diligently contested in good
faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP shall have been set aside on its books.
(h) Compliance with Applicable Laws. Borrower is in compliance
with the requirements of all applicable laws, rules, regulations, and
orders of all Governmental Authorities (federal, state, local or
foreign, and including Environmental Laws, tax laws and laws with
respect to ERISA and laws, rules and regulations applicable to the
Contracts), a violation of any of which, individually or in the
aggregate for all such violations, would be reasonably likely to have a
Material Adverse Effect.
(i) ERISA. Borrower and its ERISA Affiliates have not incurred
and are not reasonably expected to incur any material liability in
connection with any Plan, other than ordinary liabilities for benefits;
neither Borrower nor any ERISA Affiliate has incurred or is reasonably
expected to incur any material Withdrawal Liability to any Plan; and no
Plan of Borrower or any ERISA Affiliate is reasonably expected to be in
reorganization or to be terminated, within the meaning of Title IV of
ERISA.
ARTICLE VI
GENERAL COVENANTS OF BORROWER
-----------------------------
SECTION 6.01 Affirmative Covenants of Borrower. Until the first
day following the Termination Date on which all Carryforward Amounts
have been reduced to zero or cancelled by BofA, and all Obligations are
paid in full in cash, Borrower will:
(a) Compliance with Laws, Etc. Comply, and cause each of its
Subsidiaries to comply, in all material respects with all applicable
laws (including Environmental Laws), rules, regulations, permits,
orders, consent decrees and judgments binding on Borrower and its
Subsidiaries, except where failure to so comply could not reasonably be
expected to have a Material Adverse Effect.
(b) Preservation of Corporate Existence and Name. (i) Preserve
and maintain, and cause its Material Subsidiaries to preserve and
maintain, its corporate existence, rights, franchises and privileges in
the jurisdiction of its incorporation; and (ii) qualify and remain
qualified in good standing as a foreign corporation in each
jurisdiction except where the failure to maintain a franchise or
privilege or to remain qualified would not have a Material Adverse
Effect.
(c) Audits. At the expense of Borrower, upon reasonable prior
notice at any time and from time to time during regular business hours,
permit, and cause its Subsidiaries to permit, BofA or its agents or
representatives (i) to examine and make copies of and abstracts from
the records of, and (ii) to visit the offices and properties of,
Borrower, and to discuss matters relating to the Receivables or
Borrower's performance hereunder with any of the officers or employees
of Borrower, provided, that unless a Termination Event or Unmatured
Termination Event shall have occurred and be continuing, only one such
audit in any calendar year shall be at the expense of Borrower.
(d) Keeping of Records and Books of Account. Maintain at all
times accurate and complete books, records and accounts relating to the
Receivables, in which timely entries shall be made.
(e) Taxes. Pay and discharge, and cause its Subsidiaries to
pay and discharge, all taxes and governmental charges imposed upon it
or its properties, prior to the date on which penalties attach thereto,
if failure to pay such taxes or governmental charges could reasonably
be expected to have a Material Adverse Effect; except any such tax or
charge which is being contested in good faith and by appropriate
proceedings if such contest shall operate to stay the Material Adverse
Effect of any such nonpayment.
(f) Availability of Receivables. Use and cause its
Subsidiaries to use, commercially reasonable efforts to manage its and
their Receivables so that it and they will own, on each Purchase Date,
Receivables (excluding Transferred Receivables) that have an aggregate
Unpaid Balance of not less than the Required Dollar Equivalent
Receivables Amount applicable to such Purchase Date.
(g) Reporting Requirements of Borrower. Furnish to BofA:
(i) Quarterly Financials. As soon as available and in any
event within 55 days after the end of each fiscal quarter (except
the fourth fiscal quarter of any fiscal year), consolidated
balance sheets of Borrower and its Subsidiaries as of the end of
such fiscal quarter and consolidated statements of operations and
cash flows of Borrower and its Subsidiaries for such fiscal
quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter, in
each case in reasonable detail and duly certified (subject to
year-end audit adjustments and without footnotes) by the chief
financial officer, treasurer or assistant treasurer of Borrower as
having been prepared in accordance with GAAP (applied on a
consistent basis).
(ii) Annual Financials. As soon as available and in any
event within 120 days after the end of each fiscal year, a copy of
Borrower's annual report on Form 10-K (or any successor form in
substantially the same format) for such fiscal year of Borrower
and its Subsidiaries, including therein a consolidated balance
sheet of Borrower and its Subsidiaries as of the end of such
fiscal year and consolidated statements of operations and cash
flows of Borrower and its Subsidiaries for such fiscal year,
certified in a manner acceptable to BofA by independent public
accountants of nationally recognized standing acceptable to BofA.
The Borrower acknowledges that (without limitation) BofA is
relying upon the financial statements delivered from time to time
pursuant to this Agreement, including the annual audited
financials referenced in this Section;
(iii) Termination Events. Within five Business Days after
Borrower discovers the occurrence of any Termination Event or
Unmatured Termination Event continuing on the date of such
statement, a statement of a Responsible Officer setting forth
details of such Termination Event or Unmatured Termination Event
and the action that Borrower proposes to take with respect
thereto;
(iv) ERISA Event. Promptly and in any event within ten days
after a Responsible Officer of Borrower or any ERISA Affiliate
knows or has reason to know that any material ERISA Event has
occurred, a statement of a Responsible Officer of Borrower
describing such ERISA Event and the action, if any, that Borrower
or such ERISA Affiliate proposes to take with respect thereto;
(v) Proceedings. Promptly after a Responsible Officer of
Borrower becomes aware of the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, affecting Borrower or any of its Subsidiaries
of the type described in Section 5.01(d);
(vi) SEC Reports. Promptly after the sending or filing
thereof, copies of all reports on Form 10-K, 10-Q or 8-K that
Borrower files with the Securities and Exchange Commission or any
governmental authority that may be substituted therefor;
(vii) Compliance Certificate. Concurrently with the
delivery of the financial statements referred to in clauses (g)(i)
and (g)(ii), a Compliance Certificate executed by the chief
financial officer, treasurer or assistant treasurer of Borrower.
(viii) Other Information. Such other information respecting
the business or properties or the condition, financial or
otherwise, or operations of Borrower or any of its Subsidiaries as
BofA may from time to time reasonably request.
BofA agrees that delivery to BofA under the Bank Credit Agreement of
any of the documents required by this clause (g) (other than clause
(g)(iii) and (g)(vii)) shall satisfy Borrower's obligation to deliver
such documents hereunder.
Notwithstanding the foregoing, upon the occurrence and during the
continuance of a Termination Event or a Unmatured Termination Event,
Borrower will, and will cause its Subsidiaries to, provide to BofA
additional information and any and all of the above information more
frequently to the extent requested by BofA.
(h) Maintenance of Cash Equivalent Investments or Cash
Collateral.
(i) The Borrower and its Subsidiaries will (unless the
Borrower has executed and delivered to the Bank the security
agreement referred to in clause (h)(ii)(B) below) own sufficient
Cash Equivalent Investments so that, on the last day of each
fiscal quarter of the Borrower, the Free Cash Equivalent
Investment Amount will be not less than $200,000,000. The term
"Free Cash Equivalent Investment Amount" means, with respect to
the last day of any fiscal quarter, the excess of (A) the U.S.
Dollar equivalent (determined in accordance with GAAP) of the Cash
Equivalent Investments owned by the Borrower and its Subsidiaries
on such day, as shown on the consolidated balance sheet of the
Borrower and its Subsidiaries for such day which is delivered
pursuant to Section 6.01(g)(i) or (ii) above, over (B) the sum of
(1) the aggregate of the Dollar Equivalent Principal Amounts of
all Notes which are outstanding or to be issued on such day, plus
(2) the aggregate outstanding principal amount of all loans and
advances which are outstanding or to be borrowed on such day under
the Bank Credit Agreement, plus (3) the aggregate face amount of
all letters of credit which are (or are deemed to be) outstanding
or to be issued on such day under the Bank Credit Agreement,
excluding any "Letter of Credit" as defined in the Receivables
Transfer Agreement, plus (4) the aggregate "Transferred
Receivables Amount", as defined in the Receivables Transfer
Agreement, which is outstanding on such day.
(ii) The Borrower and its Subsidiaries will not be required
to maintain Cash Equivalent Investments in the amounts specified
in clause (i) above if the Borrower:
(A) maintains a cash collateral account at BofA;
(B) executes and delivers to BofA a security agreement
in form and substance satisfactory to BofA covering all cash
and other investments which are from time to time maintained
in such account (which investments shall be in form and
substance approved by BofA at the time such security
agreement is delivered, shall be of the Required Credit
Quality, and shall, if required by BofA, be made in the name
of BofA);
(C) on each day maintains cash and other such approved
investments in such account at BofA in an aggregate amount
(or, in the case of investments, principal equivalent
amounts) which is not less than 102% of the aggregate of the
Dollar Equivalent Principal Balances of all Notes which are
outstanding or to be issued on such day (after giving effect
to any Notes which will be repaid on such day);
(D) delivers to BofA such consents as may be required
under the Bank Credit Agreement (and all other agreements or
instruments affecting the Borrower) to the delivery of such
security agreement and collateral; and
(E) delivers to BofA such resolutions, incumbency
certificates, opinions of counsel and other documents as BofA may
require with respect to authorization, enforceability, legality,
perfection, lack of conflict and other matters required by BofA
with respect to such security agreement and the collateral covered
thereby.
"Required Credit Quality" means, with respect to any
investment of collateral pursuant to this clause (h)(ii),
(i) that the maturity date of such investment
falls not more than 110 days after the date such
investment is made;
(ii) that such investment is rated not lower than
A-1 or A by S&P and not lower than P-1 or A by
Moody's Investors Service, Inc.; and
(iii) that such investment complies with Borrower's
corporate investment policy as amended from time to
time and as most recently approved by the lenders
under the Bank Credit Agreement.
(iii) If Borrower is required to maintain (along with its
Subsidiaries) Cash Equivalent Investments in the amounts specified
in clause (h)(i), the Borrower shall be deemed to be in "Cash
Equivalent Investment Status" for purposes of determining the
Applicable Margin and the Applicable Facility Fee Rate. If
Borrower has executed and delivered the security agreement
referred to in clause (h)(ii)(B), the Borrower shall be deemed to
be in "Collateral Status" for such purposes. If the Borrower is
in Collateral Status, it will be required to comply with all the
provisions of, and take all the actions specified in, clauses
(h)(ii)(A) through (E) above.
(iv) Following any Change in Control, Borrower will, within
one Business Day following any demand by BofA, execute and deliver
to BofA a security agreement as contemplated by clause (h)(ii)(B)
and otherwise comply in all respects with the provisions of, and
take all the actions specified in, clauses (h)(ii)(A), through (E)
above. Following delivery of such security agreement, Borrower
will be in Collateral Status. BofA will not be required to pay
the Borrower the Purchase Price or Reduced Purchase Price of any
Note following any such demand by BofA unless Borrower is in full
compliance with, and has taken all the actions specified in,
clauses (h)(ii)(A) through (E).
ARTICLE VII
TERMINATION EVENTS
------------------
SECTION 7.01 Termination Events. Each of the following events
shall be a "Termination Event" hereunder:
(a) any amount payable by Borrower under any Note or any other
Agreement Document (including without limitation under any forward
contract which is entered into or deemed entered into pursuant to
Section 1.09) is not paid when due hereunder, which failure continues
for: (i) three Business Days, in the case of any payment required to be
made on any Maturity Date, or (ii) except as set forth in clause (c),
ten Business Days, in the case of any other payment hereunder;
(b) Any representation or warranty made or deemed to be made by
Borrower under or in connection with any Agreement Document, or any
other information or report delivered pursuant hereto or thereto shall
prove to have been incorrect in any material respect when made;
(c) Borrower: (i) shall fail on any Purchase Date to either:
(A) issue and sell to BofA Notes having principal amounts equal to all
Required Foreign Currency Amounts applicable to such Purchase Date, or
(B) deliver to BofA a Deficiency Certificate pursuant to
Section 1.02(f), and (ii) shall thereafter fail to make any payment
required by Section 1.02(g) or Section 3.04, and such failure to make
such payment shall continue for five Business Days,
(d) Borrower shall fail to perform or observe any term,
covenant or agreement contained in any Agreement Document (excluding
the terms, covenants and agreements described above in Sections 7.01(a)
and (c), which failure continues unremedied for (A) one Business Day in
the case of any failure to maintain collateral in the amounts required
by Section 6.01(h)(ii) or (h)(iv), and (B) thirty days in the case of
any other such failure, in each case after written notice by BofA to
Borrower;
(e) (i) Borrower or any of its Subsidiaries shall fail to pay
any principal of, premium or interest on, or any other amount payable
in respect of, (A) any Debt outstanding under the Bank Credit
Agreement, or (B) any other Debt outstanding in a principal or notional
amount of at least $25,000,000 in the aggregate (but excluding Debt
arising hereunder) when the same becomes due and payable (whether by
scheduled maturity, required prepayment, redemption, purchase,
defeasance, cash collateralization, acceleration, demand or otherwise),
and such failure shall continue (x) after the applicable grace period,
if any, in the case of a non-payment of principal or (y) for five
Business Days after the applicable grace period, if any, in the case of
non-payment of any other amount, in each case specified in the
agreement or instrument relating to such Debt and shall not have been
cured or waived; (ii) any failure to make any payment or any other
event shall occur or condition shall exist under any agreement or
instrument relating to any such Debt (including the Bank Credit
Agreement), if the effect of such failure, event or condition is to
accelerate, or to permit the acceleration of, the maturity of such Debt
or otherwise to cause, or to permit the holder thereof to cause, such
Debt to become due and payable (whether by required prepayment (other
than by a regularly scheduled required prepayment), purchase,
redemption, defeasance, cash collateralization, acceleration, demand or
otherwise) or an offer to prepay, redeem, purchase or defease such Debt
shall be required to be made, prior to its scheduled maturity, and,
unless such Debt has been accelerated or otherwise has become due and
payable prior to its scheduled maturity, such failure, event or
condition continues for ten Business Days after any grace period
specified in the applicable agreement or instrument relating to such
Debt; or (iii) any default, termination event, repurchase event or like
event by or relating to Borrower or any of its Affiliates shall have
occurred under any agreement (other than an Agreement Document) that
involves a commitment of $25,000,000 or more and provides for (x) the
sale, assignment or factoring of accounts receivables or (y) any other
structured financing or off-balance sheet financing and, in the case of
any such default, termination event or like event, shall have continued
for the grace period, if any, applicable thereto, and as a result (A)
in the case of clause (x) next above, the obligation to purchase, take
by assignment or factor such receivables shall have been terminated or
the transferee of receivables shall have the right (with or without the
passage of time or the giving of notice, or both) to terminate such
obligation or (B) in the case of clause (y) next above, the obligations
of the other party or parties to such other structured financing or
off-balance sheet financing shall terminate or such other party or
parties shall have the right to terminate such obligations.
(f) A Bankruptcy Event with respect to Borrower or any of its
Material Subsidiaries shall occur;
(g) There shall occur any event which materially and adversely
affects the ability of Borrower to perform its obligations under any
Agreement Document;
(h) The Internal Revenue Service shall file notice of a lien
pursuant to Section 6323 of the Internal Revenue Code with regard to
any of the assets of Borrower and such lien shall not have been
released within 30 days, or the PBGC shall, or shall indicate its
intention to, file notice of a lien pursuant to Section 4068 of ERISA
with regard to any of the assets of Borrower or any of its Affiliates.
(i) Any Change in Control shall occur;
(j) Any judgments, decrees, or orders shall be rendered against
Borrower or any of its Material Subsidiaries in excess of $15,000,000
in the aggregate and which are not, within a period of 30 days, either
satisfied or stayed pending appeal;
(k) Any Agreement Document shall (except in accordance with its
terms), in whole or in part, cease to be in full force and effect or
shall be declared to be null and void, or the validity or
enforceability thereof shall be contested by Borrower, any of its
Affiliates or any such Person shall deny that it has any obligation
thereunder; or
(l) Any "Termination Event", as defined in the Receivables
Transfer Agreement, shall occur and be continuing, provided, that if
the only such "Termination Event" is a Change in Control Termination
Event, BofA's remedies will be limited as set forth in Section 7.02(e).
SECTION 7.02 Remedies. (a) Upon the occurrence of a Termination
Event (other than a Termination Event described in Section 7.01(f) with
respect to Borrower), BofA may by notice to Borrower declare the
Termination Date to have occurred. The Termination Date shall be deemed
to have occurred automatically upon the occurrence of a Termination
Event described in Section 7.01(f) with respect to Borrower.
(b) Upon the occurrence of the Termination Date as a result of the
occurrence of any Termination Event,
(i) the commitment of Bank of America to purchase Notes and
enter into forward contracts hereunder shall terminate;
(ii) Bank of America may declare the unpaid principal amount
of all outstanding Notes, all interest accrued and unpaid thereon,
and all other amounts owing or payable hereunder or under any
other Agreement Documents to be immediately due and payable, and
may accelerate the value dates of all forward contracts which were
entered into or deemed entered into pursuant to Section 1.09, so
that all payments in respect of such forward contracts will be
payable on the dates on which the related Notes have been declared
to be due and payable, all without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived
by Borrower; and
(iii) BofA shall compute, as liquidated damages, the Early
Termination Payment to be paid in connection with the Termination
Date pursuant to Section 1.08, together with any amounts payable
to BofA pursuant to Section 3.04(a), and any amounts payable by
Borrower pursuant to Section 3.04(b) and such amounts shall become
immediately due and payable by Borrower; provided, that no Early
Termination Payment shall be paid to Borrower that results from
the occurrence of the Termination Date until all Carryforward
Amounts have been reduced to zero or cancelled by BofA and all
Obligations shall have been finally and fully paid and performed
in full and in cash.
(c) Upon termination of the Facility pursuant to this Section,
BofA shall have, in addition to all other rights and remedies under
this Agreement or otherwise, all other rights and remedies provided
under applicable laws, which rights shall be cumulative.
(d) BORROWER ACKNOWLEDGES AND AGREES THAT THE OBLIGATION OF BOFA
TO PURCHASE NOTES AND ENTER INTO FORWARD CONTRACTS HEREUNDER IS A
"FINANCIAL ACCOMMODATION", WITHIN THE MEANING OF 11 U.S.C.
SECTION365(C)(2), BUT ANY TERMINATION OF BOFA'S OBLIGATION HEREUNDER
SHALL NOT RELIEVE BORROWER OF ANY OBLIGATION TO MAKE ANY EARLY
TERMINATION PAYMENT OR OTHER PAYMENT DUE HEREUNDER.
(e)(i) Notwithstanding the foregoing, if (A) a Termination Event
under Section 7.01(i) or (B) a Termination Event under Section 7.01(i)
resulting from a breach of Section 6.01(b)(i) that is caused only by a
Change in Control (each a "Change in Control Termination Event") shall
have occurred, then, (but only if and so long as no other Termination
Event shall occur or be continuing) BofA's remedies with respect to
such Change in Control Termination Event shall be limited as set forth
in this clause (e).
(ii) If, following such Change in Control Termination Event,
each Surviving Entity shall have ratified and agreed to be bound
by this Agreement and the Agreement Documents to the same extent
as Borrower, by documents in form and substance satisfactory to
BofA, then BofA (A) will not specify an Early Termination and (B)
will continue to accept and pay the Purchase Price for Notes on
each Purchase Date as provided in this Agreement and any Agreement
Document, provided, that (1) all conditions precedent to such
Purchase and such payments that are set forth in Section 4.02
(other than the absence of a Change in Control Termination Event)
have been met, (2) the credit rating (or implied credit rating)
given by S&P to the senior unsecured and uncredit-enhanced long
term debt of each Surviving Entity is not lower than the credit
rating or implied credit rating that S&P gave to such debt of
Borrower immediately prior to such Change in Control, and (3) if
S&P does not issue a credit rating or implied credit rating for
any such debt of any Surviving Entity, then, in the reasonable
opinion of BofA, the combined financial condition of the Surviving
Entities is not materially worse than that of Borrower prior to
such Change in Control.
(iii) The term "Surviving Entity" means, with respect to any
Change in Control, (A) Borrower, if Borrower survives such Change
in Control, (B) any Person with or into which Borrower is merged
or consolidated, if Borrower does not survive such Change in
Control, (C) any Person that, following such Change in Control,
owns beneficially, directly or indirectly, securities (or
securities which are convertible into such securities)
representing more than 50% of the combined voting power of all
securities entitled to vote in the election of directors of
Borrower or any Person with or into which Borrower is merged or
consolidated, and (D) any Person or Persons to which all or
substantially all of Borrower's assets have been transferred.
(iv) Nothing herein shall obligate BofA to enter into any
Supplement following any Change in Control Termination Event.
ARTICLE VIII
INDEMNIFICATION; EXCULPATION
----------------------------
SECTION 8.01 Indemnities by Borrower. Without limiting any other
rights which any Indemnified Party may have hereunder or under
applicable law, Borrower hereby agrees to indemnify each of BofA and
each of its Affiliates, each of its and their respective successors,
transferees and assigns and all of its and their officers, directors,
shareholders, controlling persons, employees and agents (each an "{xe
"Indemnified Party"}Indemnified Party"), forthwith on demand, from and
against any and all damages, losses, claims (whether on account of
settlements or otherwise), judgments, liabilities and related costs and
expenses, including reasonable attorneys' fees and disbursements and
the allocated costs of in-house counsel, if any (all of the foregoing
being collectively called "{xe "Indemnified Amounts"}Indemnified
Amounts") that may be incurred by or asserted against any Indemnified
Party in each case arising out of or in connection with or by reason
of, or in connection with the preparation for a defense of, any
investigation, litigation or proceeding (whether or not an Indemnified
Party is a party thereto) arising out of, related to or in connection
with, any Contract or Agreement Document, or the transactions
contemplated herein or therein or the use of proceeds herefrom or
therefrom; provided that no Indemnified Party shall be indemnified
under this Section 8.01 with respect to (i) matters for which such
Indemnified Party has been compensated pursuant to any other provision
of this Agreement or (ii) Indemnified Amounts caused by or resulting
from the gross negligence or willful misconduct of such Indemnified
Party as finally determined by a court of competent jurisdiction. If
any action is brought against any Indemnified Party with respect to any
Contract, such Indemnified Party shall promptly notify Borrower in
writing of the institution of such action and Borrower shall thereupon
have the right, at its option, to elect to assume the defense of such
action. If Borrower so elects, it shall promptly assume the defense of
such action, including the employment of counsel (reasonably
satisfactory to such Indemnified Party) and payment of expenses. Such
Indemnified Party shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (i) the
employment of such counsel shall have been authorized in writing by
Borrower in connection with the defense of such action or (ii) Borrower
shall not have properly employed counsel reasonably satisfactory to
such Indemnified Party to have charge of the defense of such action, in
which case such fees and expenses shall be paid by Borrower. If such
Indemnified Party shall have reasonably concluded (based upon the
advice of counsel) that the representation by one counsel of the
Indemnified Party and Borrower creates a conflict of interest for such
counsel, the reasonable fees and expenses of such counsel shall be
borne by Borrower and Borrower shall not have the right to direct the
defense of such action on behalf of the Indemnified Party (but shall
retain the right to direct the defense of such action on behalf of
Borrower). Anything in this Section 8.01 to the contrary
notwithstanding, Borrower shall not be liable for the fees and expense
of more than one counsel for any Indemnified Party in any jurisdiction
as to any Indemnified Amounts or for any settlement of any Indemnified
Amounts effected without its written consent. All Obligations of
Borrower under this Section 8.01 shall survive the making and repayment
of the Obligations and the termination of this Agreement.
<PAGE>
If for any reason the indemnification provided in this Section
8.01 is unavailable to an Indemnified Party or is insufficient to hold
an Indemnified Party harmless, then Borrower shall contribute to such
Indemnified Party the maximum amount that can be paid to such
Indemnified Party as a result of such loss, claim, damage or liability.
SECTION 8.02 Exculpation. Notwithstanding anything contained
herein to the contrary, no Indemnified Party shall be liable to
Borrower or any other Person in any manner in respect of any
Indemnified Amounts awarded against or incurred by Borrower, any of its
Affiliates, any of its and their respective successors, transferees and
assigns or any of its and their officers, directors, shareholders,
controlling persons, employees and agents (each a "Borrower Party"), in
each case arising out of or in connection with or by reason of, or in
connection with the preparation for a defense of, any investigation,
litigation or proceeding (whether or not a Borrower Party is a party
thereto) arising out of, related to or in connection with, any Contract
or Agreement Document or the transactions contemplated herein or
therein or the use of proceeds herefrom or therefrom (collectively a
"Borrower Matter") except to the extent that a court of competent
jurisdiction finally determines that such Indemnified Amounts were
caused by or resulted from the gross negligence or willful misconduct
of such Indemnified Party. In no event, however, shall the Indemnified
Parties be liable for any indirect, special, punitive, exemplary or
consequential damages that may be incurred by or asserted against any
Indemnified Party in each case arising out of or in connection with or
by reason of, or in connection with the preparation for a defense of,
any Borrower Matter.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.01 Amendments, Waivers, Etc. No amendment,
modification or waiver of any provision of this Agreement or any other
Agreement Document nor consent to any departure therefrom shall in any
event be effective unless the same shall be in writing and signed by
(a) Borrower and BofA (with respect to an amendment or modification) or
(b) BofA (with respect to a waiver or consent by it) or Borrower (with
respect to a waiver or consent by it), as the case may be, and then
such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given. Subject to the
foregoing, any Agreement Document (including Schedule II hereto, Annex
I to Exhibit 1.02(b), and any Supplement) may be modified at any time
by mutual written consent of the parties, and, if required by BofA in
its discretion as a condition of its consent, the payment of such
amendment fees as may be agreed by the parties. No failure or delay on
the part of BofA or any Indemnified Party to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right hereunder preclude
any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by applicable law.
SECTION 9.02 Notices, Etc. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in
writing (including facsimile communication) and shall be personally
delivered or sent by certified mail, postage prepaid, by facsimile or
by overnight courier, to the intended party at the address or facsimile
number of such party set forth under its name on the signature pages
hereof or at such other address or facsimile number as shall be
designated by such party in a written notice to the other parties
hereto given in accordance with this Section 9.02. All such notices
and communications shall be effective, (a) if personally delivered,
when received, (b) if sent by certified mail, five Business Days after
having been deposited in the mail, postage prepaid and properly
addressed, (c) if transmitted by facsimile, when sent, receipt
confirmed by telephone or electronic means, and (d) if sent by
overnight courier, two Business Days after having been given to such
courier unless sooner received by the addressee; provided that
notwithstanding the foregoing, notices and communications pursuant to
Article I shall not be effective until received.
SECTION 9.03 Binding Effect; Assignability; Survival of
Provisions. This Agreement shall be binding upon and inure to the
benefit of Borrower and BofA and their respective successors and
assigns, and the provisions of Sections 3.02 and Article VIII shall
inure to the benefit of BofA and the Indemnified Parties, respectively,
and their respective successors and assigns. Borrower shall not assign
any of its rights hereunder or any interest herein without the prior
written consent of BofA. BofA may not, without the prior written
consent of Borrower (which consent may not be unreasonably withheld or
delayed), assign its rights and obligations hereunder at any time to
any Person, except that BofA may, without such consent, assign any of
such rights or obligations (i) to any present or future Affiliate of
BofA, and also (ii) at any time when any Termination Event or any
Unmatured Termination Event described in Section 7.01(f) shall have
occurred and be continuing, to any Person selected by BofA. This
Agreement shall create and constitute the continuing obligations of the
parties hereto in accordance with its terms, and shall remain in full
force and effect until the date following the Termination Date on which
any Carryforward Amount shall have been reduced to zero and all
Transferred Receivables and all Obligations that have ever been
outstanding hereunder have been finally and fully paid and performed.
The rights and remedies with respect to any breach of any
representation and warranty made by Borrower pursuant to Article V and
the indemnification and payment provisions of Article VIII and
Sections 3.02, 3.05 and 9.05 shall be continuing and shall survive any
termination of this Agreement.
SECTION 9.04 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA.
SECTION 9.05 Costs, Expenses and Taxes. In addition to its
obligations under Article VIII, Borrower agrees to pay to BofA and the
other Indemnified Parties on demand:
(a) all reasonable out-of-pocket and other costs and expenses
in connection with the preparation, execution, delivery and
administration of the Agreement Documents, including the reasonable
fees and expenses of counsel (including local counsel and the allocated
costs of in-house counsel, if any) for BofA and the other Indemnified
Parties with respect thereto, and all costs and expenses, if any
(including reasonable counsel fees and expenses (including local
counsel and the allocated costs of in-house counsel, if any)), in
connection with the enforcement of the Agreement Documents, or any
claim of breach of contract, breach of warranty or any other breach of
any Agreement Document or any tort claim relating to any of the
foregoing;
(b) all present and future stamp and other taxes and
governmental fees and charges payable or determined to be payable in
connection with the execution, delivery, filing, recording or
performance of the Agreement Documents (other than taxes on the overall
net income of the Person that is requesting payment under this
Section 9.05), and agrees to indemnify each such Person against all
penalties and interest with respect to or resulting from such taxes,
charges and fees and against all other liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes,
charges and fees;
(c) all reasonable costs and expenses of BofA in connection
with performing any of the obligations of Borrower under or in
connection with the Agreement Documents; and
(d) all other reasonable costs and expenses and all taxes
incurred by BofA in connection with the auditing of Borrower's books
relating to the Receivables by certified public accountants at any
time, provided, that unless a Termination Event or Unmatured
Termination Event shall have occurred and be continuing, Borrower shall
only be required to reimburse BofA for the cost of one such audit in
each calendar year.
SECTION 9.06 Execution in Counterpart. This Agreement may be executed in
separate counterparts, each of which shall be deemed to be an original and all
of which shall constitute one and the same Agreement.
SECTION 9.07 Confidentialty.
(a) Borrower acknowledges that BofA regards the structure of
the transactions contemplated by this Agreement to be proprietary, and
Borrower agrees that:
(i) it will not disclose without the prior consent of BofA
(other than to Borrower's directors, employees, auditors, counsel
or affiliates (collectively, "Borrower Representatives"), each of
whom shall be informed by Borrower of the confidential nature of
the Information (as defined below) and of the terms of this
Section 9.07), (A) detailed information regarding, or copies of,
the Agreement Documents and the attachments thereto or any
transaction specifically contemplated herein or therein, except to
other financial institutions providing services or funds to
Borrower who enter into a confidentiality agreement with respect
to the Agreement Documents and the above-described attachments and
the transactions specifically contemplated herein and therein
(which agreement shall be satisfactory in form and substance to
BofA) and who agree not to copy or duplicate the structure of the
transactions contemplated by this Agreement or otherwise to use
the information described above that is so disclosed to them for
any purpose other than their credit evaluations of Borrower or (B)
any information regarding BofA, which information is furnished by
BofA to Borrower and which is designated by BofA to Borrower in
writing as confidential or as not otherwise available to the
general public (the information referred to in clauses (A) and (B)
is collectively called the Information");
provided that Borrower may disclose any such Information as may be
required or requested by or to any municipal, state, federal or
other regulatory body having or claiming to have jurisdiction over
Borrower or in order to comply with any law, order, regulation,
regulatory request or ruling applicable to Borrower;
(ii) except as provided above, it will use the Information
solely to evaluate, administer and enforce the transactions
contemplated by the Agreement Documents and to make any necessary
business judgments with respect thereto; and
(iii) upon reduction of each Carryforward Amount to zero or
cancellation thereof and final payment in full of all Obligations,
it will, upon demand, return (and cause each of the Borrower
Representatives to return) to BofA all documents or other written
material received from BofA and all copies thereof made by
Borrower which contain the Information.
(b) BofA acknowledges that Borrower regards certain information with
respect to Borrower and the Receivables to be confidential, and BofA agrees
that:
(i) it will not disclose without the prior consent of
Borrower (other than to the assignees, participants, proposed
assignees, proposed participants, directors, employees, auditors,
counsel, agents or affiliates (collectively, the "BofA
Representatives") of BofA, each of whom shall be informed by BofA
of the confidential nature of Borrower Information (as defined
below) and of the terms of this Section 9.07), (A) any financial,
business, marketing or strategic information with respect to
Borrower which is not otherwise available to the general public
and which has been designated in writing by Borrower as "secret"
or "confidential" or which has been orally designated by Borrower
as confidential which designation is confirmed in writing by
Borrower within seven days, (B) the identity of the obligors of
the Receivables and the Unpaid Balances thereof, or (C) any other
information regarding Borrower or the Receivables which is
furnished by Borrower to BofA and which is designated by Borrower
to BofA in writing (or orally, confirmed in writing within seven
days) as "secret", "confidential" or as not otherwise available to
the general public (the information referred to in clauses (A),
(B) and (C) is collectively called the "{xe "Transferor
Information"}Borrower Information"); provided that BofA may
disclose any such Borrower Information as may be required or
requested by or to any municipal, state, federal or other
regulatory body having or claiming to have jurisdiction over BofA
or in order to comply with any law, order, regulation or ruling
applicable to BofA;
(ii) except as set forth above, it will use Borrower
Information solely for the purpose of evaluating, administering
and enforcing the transactions contemplated by the Agreement
Documents and making any necessary business judgments with respect
thereto; and
(iii) upon reduction of each Carryforward Amount to zero or
cancellation thereof and final payment in full of all Obligations,
it will, upon demand, return (and cause each of the BofA
Representatives to return) to Borrower all documents or other
written material received from Borrower in connection with
clause (b)(i) above and all copies thereof made by BofA which
contain Borrower Information, provided, that BofA may keep such
materials, subject to the confidentiality provisions hereof, as
required by applicable law or regulation.
(c) This Section 9.07 shall be inoperative as to such portions
of the Information or Borrower Information (as applicable) which are or
become generally available to the public or to a party to this
Agreement on a nonconfidential basis or were known to a party to this
Agreement on a nonconfidential basis prior to its disclosure by a party
to this Agreement.
(d) In the event that Borrower or anyone to whom Borrower or
any of Borrower Representatives transmits the Information is requested
or becomes legally compelled (by interrogatories, requests for
information or documents, subpoena, civil investigation demand or
similar process) to disclose any of the Information, Borrower will
provide BofA with prompt written notice so that BofA may seek a
protective order or other appropriate remedy and/or waive compliance
with the provisions of this Section 9.07. In the event that such
protective order or other remedy is not obtained, or BofA waives
compliance with the provisions of this Section 9.07, Borrower will
furnish only that portion of the Information which is legally required
to be furnished and will exercise its best efforts to obtain reliable
assurance that confidential treatment will be accorded the Information.
(e) This Section 9.07 shall survive termination of this
Agreement.
SECTION 9.08 Severability of Provisions. If any covenants,
agreements, provisions or terms of any Agreement Document shall for any
reason whatsoever be held invalid, then such covenants, agreements,
provisions or terms shall be deemed severable and shall in no way
affect the validity or enforceability of the other provisions of or any
Agreement Document.
SECTION 9.09 Conflict in Agreement Documents. If there is any
conflict between this Agreement and any other Agreement Document, this
Agreement and such other Agreement Document shall be interpreted, if
possible, so as to avoid or minimize such conflict but, to the extent
(and only to the extent) of such conflict, this Agreement shall prevail
and control.
SECTION 9.10 Legal Representation of Parties. This Agreement and
the other Agreement Documents were negotiated by the parties with the
benefit of legal representation and any rule of construction or
interpretation otherwise requiring this Agreement or any other
Agreement Document to be construed or interpreted against any party
shall not apply to any construction or interpretation hereof or
thereof. Without limiting the generality of the foregoing, Borrower
acknowledges that it has made an independent determination to enter
into the transactions contemplated by the Agreement Documents and has
not relied on any representation or other assurance by or on behalf of
BofA regarding any legal, tax, accounting or other treatment or effect
of such transactions.
SECTION 9.11 Recording. Borrower understands and agrees that
BofA in its sole discretion may record, on tape or otherwise, any
telephone conversation between Borrower and BofA. Borrower hereby
agrees and consents to such tape recording and waives any right
Borrower may have to object to the admissibility into evidence of such
recording in any legal proceeding between Borrower and BofA or in any
other proceeding to which Borrower is a party or in which BofA's
records are subpoenaed. BofA shall not be required to transcribe such
recordings or maintain such recordings or any transcripts thereof.
SECTION 9.12 Judgments. To the extent permitted by applicable
law, if any judgment or order expressed in any currency other than
Dollars is rendered (i) for the payment of any amount owing in respect
of this Agreement, or (ii) in respect of a judgment or order of another
court for the payment of any such amount, the party seeking recovery,
after recovery in full of the aggregate amount to which such party is
entitled pursuant to the judgment or order, will be entitled to receive
immediately from the other party the amount of any shortfall of the
Dollars received by such party as a consequence of sums paid in such
other currency and will refund promptly to the other party any excess
of the Dollars received by such party as a consequence of sums paid in
such other currency if such shortfall or such excess arises or results
(A) from any variation between the rate of exchange at which Dollars
are converted into the currency of the judgment or order for the
purposes of such judgment or order and the rate of exchange at which
such party is able, acting in a reasonable manner and in good faith in
converting the currency received into Dollars, to purchase Dollars with
the amount of the currency of the judgment or order actually received
by such party, such party not receiving (after such conversion) the
full amount of Dollars to which it is entitled hereunder. The term
"rate of exchange" includes, without limitation, any premiums and costs
of exchange payable in connection with the purchase of or conversion
into Dollars.
SECTION 9.13 Submission to Jurisdiction. BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CALIFORNIA STATE OR
FEDERAL COURT SITTING IN SAN FRANCISCO, CALIFORNIA OVER ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO ANY AGREEMENT DOCUMENT, AND
HEREBY (A) IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION
OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH CALIFORNIA STATE OR
FEDERAL COURT; AND (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH ACTION OR PROCEEDING.
SECTION 9.14 Integration. The Agreement Documents contain a
final and complete integration of all prior expressions by the parties
hereto with respect to the subject matter hereof and thereof and shall
together constitute the entire agreement among the parties hereto with
respect to the subject matter hereof and thereof, superseding all prior
oral or written understandings.
SECTION 9.15 Waiver of Jury Trial. BORROWER AND BOFA EACH HEREBY
EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER ANY AGREEMENT DOCUMENT
OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY
BE DELIVERED IN THE FUTURE IN CONNECTION HEREWITH OR THEREWITH OR
ARISING FROM OR RELATING TO ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN), ACTIONS OF EITHER OF THE
PARTIES HERETO OR ANY RELATIONSHIP EXISTING IN CONNECTION WITH ANY
AGREEMENT DOCUMENT, AND EACH OF THEM AGREES THAT ANY SUCH ACTION OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
IN WITNESS WHEREOF, Borrower and BofA have caused this
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
STORAGE TECHNOLOGY CORPORATION
as Borrower
By /s/ Mark McGregor
----------------------------
Title Vice President and Treasurer
-----------------------------
2270 South 88th Street
Louisville, Colorado 80028-4308
Facsimile No.: (303) 673-2837
Attention: Treasurer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION,
By /s/ Kevin McMahon
----------------------------
Title Vice President
---------------------------
555 California Street, 41st Floor
San Francisco, California 94104
Attention: Kevin McMahon
Facsimile No.: (415) 622-2514
EURODOLLAR OFFICE
Global Payment Operations
Domestic Account Administration, #5693
1850 Gateway Boulevard, 4th Floor
Concord, California 94520
Attention: John Gomez
Facsimile No.: (510) 675-7531
All Notices pursuant to the Agreement,
will be sent to BofA at both of the above
addresses except that Notices pursuant to
Sections 1.02(b) and 1.02(d) will not be
sent to the Concord, California address
listed above.
Notices Pursuant to Sections 1.02(b),
1.02(d), 1.02(e),1.02(f), 1.02(g), 1.06
and 1.08 will also be sent to BofA at:
555 California Street, 10th Floor
San Francisco, California 94104
Attention: Mike Bernal
Facsimile No.: (415) 622-0361
SCHEDULE I
----------
DEFINITIONS
"Adverse Claim" means any lien, security interest, charge,
encumbrance or right or claim of any Person, but excluding any of the
foregoing that arise under any Agreement Document in favor of BofA or
any other Indemnified Party.
"Affected Party" means BofA and any Person to whom BofA has
assigned an interest in BofA's rights under the Agreement.
"Affiliate" means, as to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with,
such Person.
"Agreement" is defined in the Preamble.
"Agreement Documents" means this Agreement, each Supplement, each
Note, each Deficiency Certificate, each Amendment, each forward
contract which is entered into or deemed to be entered into pursuant to
Section 1.09 of the Agreement, any security agreement or other document
delivered pursuant to Section 6.01(h), and all agreements, instruments,
certificates, reports and documents executed and delivered or to be
executed and delivered under or in connection with any of the
foregoing.
"Aggregate Purchase Price" means at any time the aggregate of the
Purchase Prices and Reduced Purchase Prices paid by BofA to Borrower in
respect of all Notes that as of such date have not been paid in full.
"Allocated Purchase Price" is defined in Section 1.02(b)(i)(D).
"Amendment" is defined in Section 1.07(c).
"Applicable Facility Fee Rate" is defined in Section 3.01(c).
"Applicable Margin" is defined in Section 1.04(e).
"Bank Credit Agreement" means the Amended and Restated
Multicurrency Credit Agreement dated as of March 28, 1996 among
Borrower, certain of its Subsidiaries, the banks and financial
institutions parties thereto, and Bank of America National Trust and
Savings Association, as Agent, Swing Line Bank and Letter of Credit
Issuing Bank, as amended and supplemented or otherwise modified from
time to time, and any restatement, renewal or replacement thereof.
"Bankruptcy Event" shall be deemed to have occurred with respect
to a Person if either:
(a) a case or other proceeding shall be commenced, without
the application or consent of such Person, under any law relating
to bankruptcy, insolvency, reorganization, dissolution, winding up
or composition or adjustment of debts (each, an "Insolvency Law"),
and such case or proceeding shall continue undismissed, or
unstayed and in effect, for a period of 60 days; or an order for
relief in respect of such Person shall be entered in an
involuntary case under an Insolvency Law; or
(b) such Person shall commence a voluntary case or other
proceeding under any Insolvency Law, or shall consent to the
appointment of or taking possession by a receiver, liquidator or
other similar official for such Person or for any substantial part
of its property, or shall make any general assignment for the
benefit of creditors.
"BofA" is defined in the Preamble.
"BofA Representatives" is defined in Section 9.07(b)(i).
"Borrower" is defined in the Preamble.
"Borrower Information" is defined in Section 9.07(b)(i).
"Borrower Matter" is defined in Section 8.02.
"Borrower Party" is defined in Section 8.02.
"Borrower Representatives" is defined in Section 9.07(a)(i).
"Business Day" means a day (a) that is not Saturday or Sunday and
on which commercial banks in San Francisco are not authorized or
required to be closed for business and (b) that is also a Eurodollar
Business Day, if the applicable Business Day is an Issuance Date or
relates to the determination of the Eurodollar Rate or any payment on
any Maturity Date.
"Carryforward Amount" is defined in Section 1.02(g).
"Cash Equivalent Investments" of any Person means, as of any date
of determination, all cash and short-term investments, in each case as
shown on the most recent balance sheet of such Person and determined in
accordance with GAAP.
"Cash Equivalent Investment Status" is defined in Section
6.01(h)(iii).
"Change in Control" means the occurrence, after the date of this
Agreement, of any of the following: (a) any Person or two or more
Persons acting in concert acquiring beneficial ownership (within the
meaning of Rule 13d-3 of the Securities and Exchange Commission under
the Securities Exchange Act of 1934), directly or indirectly, of
securities of Borrower (or other securities convertible into such
securities) representing 50% or more of the combined voting power of
all securities of Borrower entitled to vote in the election of
directors; (b) during any period of up to 12 consecutive months,
commencing after the Initial Closing Date, individuals who at the
beginning of such 12-month period were directors of Borrower ceasing
for any reason to constitute a majority of the Board of Directors of
Borrower unless the Persons replacing such individuals were nominated
by the Board of Directors of Borrower; (c) any Person or two or more
Persons acting in concert acquiring by contract or otherwise, or
entering into a contract or arrangement that upon consummation will
result in its or their acquisition of, or control over, securities of
Borrower (or other securities convertible into such securities)
representing 50% or more of the combined voting power of all securities
of Borrower entitled to vote in the election of directors; (d) Borrower
shall be a party to any merger or consolidation in which Borrower is
not a surviving entity or (e) Borrower shall directly or indirectly
transfer, assign, convey or lease, whether in one transaction or in a
series of transactions, all or substantially all of its assets,
(whether now owned or hereafter acquired) to any other Person or
Persons.
"Change in Control Termination Event" is defined in
Section 7.02(e)(i).
"Collateral Status" is defined in Section 6.01(h)(iii).
"Compliance Certificate" means a certificate substantially in the
form of Exhibit 6.01(g)(vii).
"Consolidated Net Income" means the consolidated net income of the
Borrower and each Subsidiary of the Borrower determined in accordance
with GAAP.
"Contract" means an agreement or arrangement between Borrower and
any Person, pursuant to or under which such Person shall be obligated
to make payments to Borrower from time to time.
"currency" means any currency which is authorized by the laws of
any nation to circulate as a medium of exchange in such nation.
"Debt" of any Person at any date means (a) all obligations,
contingent or otherwise, of such Person for borrowed money (whether or
not the recourse of the lender is to the whole of the property of such
Person or only to a portion thereof), (b) all obligations of such
Person evidenced by bonds, notes or other similar instruments, (c) all
obligations of such Person in respect of letters of credit or other
similar instruments (or reimbursement obligations with respect
thereto), (d) all obligations of such Person to pay the unpaid purchase
price of any property or services, (e) all obligations of such Person
as lessee under leases which under generally accepted accounting
principles would be capitalized, (f) all Debt secured by an Adverse
Claim on any property of such Person, whether or not such Debt is
assumed by such Person, (g) all Guaranties by such Person, and (h) all
net obligations in respect of Hedge Contracts.
"Deferral Compensation Amount" is defined in Section 1.02(h).
"Deficiency Certificate" is defined in Section 1.02(f).
"Determination Date" is defined in Section 1.02(a).
"Determination Date Exchange Rate" is defined in Section 1.02(d).
"Dollars" means lawful money of the United States of America.
"Dollar Equivalent" means (A) as to any amount denominated in
Dollars, such amount, and (B) as to any amount denominated in a foreign
currency, the equivalent amount in Dollars as determined by BofA on the
basis of the Determination Date Exchange Rate (or, if no Determination
Date Exchange Rate was determined by BofA for a particular foreign
currency, another exchange rate determined by BofA in good faith for
the purchase of Dollars with such foreign currency.
"Dollar Equivalent Principal Amount" is defined in
Section 1.02(e).
"Early Termination" is defined in Section 1.08(a).
"Early Termination Date" is defined in Section 1.08(b)(i).
"Early Termination Payment" is defined in Section 1.08(c).
"Environmental Law" means any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, duly promulgated
policy or rule of common law now or hereafter in effect and in each
case as amended, and any judicial or administrative interpretation
thereof, including any order, consent decree or judgment, relating to
the environment, health, safety or any Hazardous Material.
"ERISA" means the Employee Retirement Income Security Act of 1974,
and any regulations thereunder.
"ERISA Affiliate" means any Person who for purposes of Title IV of
ERISA is a member of Borrower's controlled group, or under common
control with Borrower, within the meaning of Section 414 of the
Internal Revenue Code.
"ERISA Event" means (i) the occurrence of a reportable event,
within the meaning of Section 4043 of ERISA, unless the 30-day notice
requirement with respect thereto has been waived by the PBGC; (ii) the
provision by the administrator of any Plan of a notice of intent to
terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including
any such notice with respect to a plan amendment referred to in Section
4041(e) of ERISA); (iii) the cessation of operations at a facility in
the circumstances described in Section 4068(f) of ERISA; (iv) the
withdrawal by Borrower or an ERISA Affiliate from a Multiple Employer
Plan during a plan year for which it was a substantial employer, as
defined in Section 4001(a)(2) of ERISA; (v) the failure by Borrower or
any ERISA Affiliate to make a payment to a Plan required under Section
302(f)(1) of ERISA; (vi) the adoption of an amendment to a Plan
requiring the provision of initial or additional security to such Plan,
pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC
of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA,
or the occurrence of any event or condition which might constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, a Plan.
"Eurodollar Business Day" means a Business Day on which dealings
in Dollars are carried on in the London eurodollar interbank market.
"Eurodollar Office" means the office of BofA designated as such on
the signature page of the Agreement, or such other office or Affiliate
of BofA as BofA may from time to time specify to Borrower.
"Eurodollar Rate" means, for any period, a rate of interest per
annum equal to the rate per annum (rounded upwards to the nearest whole
multiple of 1/16 of 1% per annum, if such percentage is not a
multiple,) determined by BofA, at which deposits in Dollars are offered
by the Eurodollar Office in London to prime banks in the London
interbank market:
(a) for purposes of calculating the interest rate applicable
to any Note pursuant to Section 1.04, two Eurodollar Business Days
prior to the applicable Issuance Date for the number of days from
the Issuance Date to the Maturity Date of such Note and in an
amount equal to the Dollar Equivalent Principal Amount of such
Note, as applicable, and
(b) for purposes of calculating the discount on Early
Termination Payments pursuant to Section 1.08, on the date on
which such payment is made, for a period equal to the number of
days until the Purchase Date on which such payment is based, as
specified in Section 1.08, in an amount as specified in such
Section.
"Eurodollar Rate (Reserve Adjusted)" means, for any period, a rate
per annum (expressed as a decimal, rounded upward to the nearest whole
multiple of 1/100 of 1%, if such percentage is not a multiple) equal to
the quotient of:
(a) the applicable Eurodollar Rate; divided by
(b) a percentage equal to 100% minus the maximum reserve
percentage (expressed as a decimal, rounded upward to the nearest
whole multiple of 1/100 of 1%, if such percentage is not such a
multiple) determined by BofA as applicable on the first Business
Day of such period under regulations issued from time to time by
the Board of Governors of the Federal Reserve System or any
successor.
"Facility" means BofA's commitment to purchase Notes on each
Purchase Date.
"Facility Fee" is defined in Section 3.01(a).
"Facility Limit" means $25,000,000, as such amount may be reduced
pursuant to Section 1.06.
"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York
(including any such successor, "H.15 (519)") on the preceding Business
Day opposite the caption "Federal Funds (Effective)"; or, if for any
relevant day such rate is not so published on any such preceding
Business Day, the rate for such day will be the arithmetic mean as
determined by BofA of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (New York City time) on that
day by each of three leading brokers of Federal funds transactions in
New York City selected by BofA.
"foreign currency" means any currency other than Dollars.
"Free Cash Equivalent Investment Amount" is defined in Section
6.01(h)(i).
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board (or
agencies with similar functions of comparable stature and authority
within the accounting profession), or in such other statements by such
other entity as may be in general use by significant segments of the
U.S. accounting profession, which are applicable to the circumstances.
"Governmental Authority" means the United States of America, any
state or other political subdivision thereof and any entity in the
United States of America or any applicable foreign jurisdiction that
exercises executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Group" is defined in the definition of "Change of Control".
"Guaranty" means any agreement, undertaking or arrangement by
which any Person guarantees, endorses, agrees to purchase or otherwise
becomes or is contingently liable upon (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to
supply funds to, or otherwise to invest in, a debtor, or otherwise to
assure a creditor against loss) the indebtedness, obligation or any
other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of
dividends or other distributions upon the shares of any other Person.
"Hazardous Material" means (a) any hazardous substance and toxic
substance as such terms are presently defined or used in Section101(14)
of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 U.S.C. Section9601(14)), in 33 U.S.C.
Section1251 et seq. (Clean Water Act), or 15 U.S.C. Section 2601 et
seq. (Toxic Substances Control Act), (b) any additional substances or
materials that are now or hereafter hazardous or toxic substances under
any applicable laws relating to any real property owned or occupied by
Borrower or any of its Subsidiaries, and (c) as of any date of
determination, any additional substances or materials that are
hereafter incorporated in or added to the definition of "hazardous
substance" or "toxic substance" for purposes of any Environmental Law.
"Hedge Contract" means an interest rate swap, cap, floor or collar
agreement, currency exchange agreement or similar transaction entered
into by Borrower.
"Indemnified Amounts" is defined in Section 8.01.
"Indemnified Party" is defined in Section 8.01.
"Information" is defined in Section 9.07(a)(i).
"Initial Closing Date" means December 12, 1996.
"Insolvency Law" is defined in the definition of "Bankruptcy
Event".
"Internal Revenue Code" means the Internal Revenue Code of 1986.
"Issuance Date" is defined in Section 1.09.
"LIBOR Fixing Date" is defined in Section 1.02(a)(iii).
"Material Adverse Effect" means a materially adverse effect on (a)
the financial condition, business, assets, operations or prospects of
Borrower and its Subsidiaries, taken as a whole; (b) the ability of
Borrower to perform its obligations under any Agreement Document; or
(c) the validity or enforceability of, or collectibility of amounts
payable under, any Agreement Document.
"Material Subsidiary" means any Subsidiary of the Borrower that at
any time either: (a) owns or holds title to 5% or more of the
consolidated assets of the Borrower and its consolidated Subsidiaries,
or (b) accounts for 5% or more of the consolidated revenue of the
Borrower and its consolidated Subsidiaries, in each case as determined
in accordance with GAAP.
"Maturity Date" is defined in Section 1.02(a)(iv).
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which Borrower or any ERISA Affiliate
is making or accruing an obligation to make contributions, or has
within any of the preceding five plan years made or accrued an
obligation to make contributions.
"Multiple Employer Plan" means a single employer plan, as defined
in Section 4001(a)(15) of ERISA, that (i) is maintained for employees
of Borrower of any ERISA Affiliate and at least one Person other than
Borrower and its ERISA Affiliates or (ii) was so maintained and in
respect of which Borrower or an ERISA Affiliate could have liability
under Section 4064 or 4069 of ERISA in the event such plan has been or
were to be terminated.
"Note" is defined in Section 1.01.
"Note Limit" at any time means $35,000,000, or, if less, the
product of the Facility Limit at such time times 1.4.
"Note Limit Excess" is defined in Section 1.05(b).
"Obligations" means all obligations of Borrower to BofA, any
assignee of BofA, any Indemnified Party and their respective
successors, permitted transferees and assigns, that arise under or in
connection with the Agreement Documents (including under any forward
contract entered into or deemed entered into pursuant to Section 1.10),
howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, now or hereafter existing, or due or to become
due.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, partnership, corporation (including
a business trust), joint stock company, trust, unincorporated
association, limited liability company, joint venture, government or
any agency or political subdivision thereof or any other entity.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Purchase Date" is defined in Section 1.02(a).
"Purchase Price" means, with respect to each Note, the aggregate
of the amounts designated as the "Purchase Price" to be paid by BofA on
the Purchase Date applicable to such Note as specified in all
Supplements.
"Receivable" means any right to payment from a Person, arising
from any source whatsoever, which right is owned by the Borrower or any
of its Subsidiaries, and shall include all rights of the Borrower to
payment by any of its Subsidiaries.
"Receivables Transfer Agreement" means the Multicurrency
Receivables Transfer Agreement dated as of January 29, 1996, between
Borrower and BofA, as from time to time amended and supplemented.
"Reduced Purchase Price" is defined in Section 1.03(c).
"Reference Rate" means a fluctuating of interest per annum as
shall be in effect from time to time, which rate per annum shall at all
times be equal to the higher of:
(a) the rate of interest most recently announced from time
to time by BofA in San Francisco, California, as its "reference
rate", which is a rate set by BofA based upon various factors
including BofA's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans that may be priced at, above or below such
announced rate; and
(b) 0.50% per annum above the latest Federal Funds Rate.
"Regulatory Change" means, relative to any Affected Party, (a)
any change in (or the adoption, implementation, phase-in or
commencement of effectiveness of) any (i) United States federal or
state law or foreign law applicable to such Affected Party; (ii)
regulation, interpretation, directive, requirement or request (whether
or not having the force of law) applicable to such Affected Party of
(A) any court or Governmental Authority charged with the interpretation
or administration of any law referred to in clause (a)(i) or of (B) any
fiscal, monetary or other authority having jurisdiction over such
Affected Party; or (iii) GAAP or regulatory accounting principles
applicable to such Affected Party and affecting the application to such
Affected Party of any law, regulation, interpretation, directive,
requirement or request referred to in clause (a)(i) or (a)(ii) above;
or (b) any change in the application to such Affected Party of any
existing law, regulation, interpretation, directive, requirement,
request or accounting principles referred to in clause (a) above.
"Required Credit Quality" is defined in Section 6.01(h)(ii).
"Required Dollar Equivalent Receivables Amount" is defined in
Section 1.02(d).
"Required Foreign Currency Amount" is defined in
Section 1.02(b)(i)(B).
"Responsible Officer" means, with respect to any certificate,
report or notice to be delivered or given hereunder, unless the context
otherwise requires, the president, chief executive officer, chief
financial officer, treasurer or assistant treasurer of any Person, and,
in addition, in respect of Borrower, the Director of Treasury
Operations of Borrower.
"S&P" means Standard & Poor's Ratings Services.
"Scheduled Termination Date" is defined in Section 1.07(a).
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (i) is maintained for employees of
Borrower or an ERISA Affiliate and no Person other than Borrower and
its ERISA Affiliates or (ii) was so maintained and in respect of which
Borrower or an ERISA Affiliate could have liability under Section 4069
of ERISA in the event such plan has been or were to be terminated.
"Subsidiary" means, with respect to any Person, any other Person
of which such Person owns, directly or indirectly, more than 50% of the
outstanding capital stock or other equity interests (as applicable)
having ordinary voting power for the election of directors or
equivalent management personnel of such other Person.
"Supplement" is defined in Section 1.02(b)(i).
"Surviving Entity" is defined in Section 7.02(e).
"Taxes" is defined in Section 3.05.
"Termination Date" is defined in Section 1.07(a).
"Termination Event" is defined in Section 7.01.
"Transferred Receivables" has the meaning specified in the
Receivables Transfer Agreement.
"Unmatured Termination Event" means any event which, with the
giving of notice or lapse of time, or both, would become a Termination
Event.
"Unpaid Balance" of any Receivable means at any time the unpaid
amount thereof as shown on the books and records of Borrower,
calculated in accordance with GAAP and net of any applicable reserves
on Borrower's or the applicable Person's books and records.
"Withdrawal Liability" has the meaning given to such term under
Part I of Subtitle E of Title IV of ERISA.
SCHEDULE II
-----------
to Contingent Multicurrency Note Purchase Commitment Agreement
DETERMINATION DATES
December 27, 1996
January 24, 1997
February 21, 1997
March 21, 1997
April 25, 1997
May 23, 1997
June 20, 1997
July 25, 1997
August 22, 1997
September 19, 1997
October 24, 1997
November 21, 1997
December 26, 1997
EXHIBIT 1.01
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
FORM OF
PROMISSORY NOTE
---------------
,
FOR VALUE RECEIVED, the undersigned, STORAGE TECHNOLOGY
CORPORATION ("Borrower"), by this promissory note (this "Note"), hereby
unconditionally promises to pay to the order of Bank of America
National Trust and Savings Association ("BofA"), on (the
"Maturity Date"): (a) the principal amounts, in the specified
currencies, identified on Schedule I hereto. Borrower further promises
to pay interest on this Note from the date hereof until paid in full at
the rates, and calculated in the manner, provided in the Contingent
Multicurrency Note Purchase Commitment Agreement, dated as of December
12, 1996 (as amended, supplemented or otherwise modified from time to
time, the "Agreement"), among Borrower and BofA.
This Note is subject in all respects to all terms of the
Agreement. Terms defined in the Agreement are used herein with their
defined meanings therein unless otherwise defined herein. This Note
shall be governed by, and construed and interpreted in accordance with,
the laws of California (without regard to its conflict of laws
provisions).
STORAGE TECHNOLOGY CORPORATION
By:
Name:
Title:
SCHEDULE I
TO PROMISSORY NOTE
FOREIGN CURRENCY PRINCIPAL AMOUNTS
----------------------------------
Japanese Yen
French Francs
German Marks
Italian Lira
Spanish Pesetas
UK Pounds Sterling
Belgian Francs
Swiss Francs
Dutch Guilders
Canadian Dollars
Australian Dollars
Swedish Krona
Norwegian Krone
Danish Krone
Finnish Markka
Austrian Schillings
Mexican Peso
Singapore Dollars
Malaysian Ringgit
[OTHER CURRENCIES, INCLUDING U.S. DOLLARS, AS AGREED BY
BORROWER AND BOFA MAY BE ADDED]
EXHIBIT 1.02(B)
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
FORM OF
SUPPLEMENT
----------
THIS SUPPLEMENT (this "Supplement"), dated , 199 , is
between STORAGE TECHNOLOGY CORPORATION, as borrower ("Borrower"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as lender
("BofA").
RECITALS
A. Borrower and BofA have entered into the Contingent
Multicurrency Note Purchase Commitment Agreement, dated as of December
12, 1996 (as heretofore or hereafter amended, supplemented or otherwise
modified from time to time and in effect, the "Agreement"), pursuant to
which Borrower agrees to issue and sell to BofA, and BofA agrees to
purchase from Borrower, promissory notes from time to time.
B. Borrower and BofA wish to designate the Purchase Dates and the
Required Foreign Currency Amounts, Allocated Purchase Price Amounts and
total Purchase Prices applicable thereto set forth in Annex I.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein and in the Agreement contained, the parties hereto
agree as follows:
Section 1. Definitions. Capitalized terms used but not otherwise
defined herein shall have the meanings assigned to such terms by the
Agreement.
Section 2. Continuing Representations and Warranties. Borrower
represents and warrants to BofA that: (a) all of its representations
and warranties contained in Section 5.01 of the Agreement are true and
correct on and as of the date of this Supplement as though made on and
as of such date, (b) no event exists that constitutes a Termination
Event or an Unmatured Termination Event, and (c) all certifications of
Borrower set forth in Section 1.02(c) of the Agreement are true and
correct on the date hereof.
Section 3. Purchase Dates, etc. The Purchase Dates shown on
Annex I are hereby designated as Purchase Dates under the Agreement.
The Required Foreign Currency Amounts, Allocated Purchase Price Amounts
and total Purchase Prices set forth on Annex I shall be applicable to
such Purchase Dates.
Section 4. Warranty as to Delivery. Borrower hereby warrants to
BofA that it has no reason to believe that it and its subsidiaries
taken as a whole will not own Receivables (excluding Transferred
Receivables) having an aggregate Unpaid Balance at least equal to the
Required Dollar Equivalent Receivables Amount on each Purchase Date
designated in Annex I.
IN WITNESS WHEREOF, Borrower and BofA have caused this Supplement
to be executed by their respective officers thereunto duly authorized,
on the date first above written.
STORAGE TECHNOLOGY CORPORATION
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
Name:
Title:
ANNEX I
TO SUPPLEMENT
ALLOCATED PURCHASE
PRICE AMOUNT
NOTE REQUIRED FOREIGN APPLICABLE TO NOTE
PURCHASE DATE */ CURRENCY AMOUNTS */ PURCHASE DATE */
- -------------- ----------------- ------------------
Japanese Yen
French Francs
German Marks
Italian Lira
Spanish Pesetas
UK Pounds Sterling
Belgian Francs
Swiss Francs
Dutch Guilders
Canadian Dollars
Australian Dollars
Swedish Krona
Norwegian Krone
Danish Krone
Finnish Markka
Austrian Schillings
Mexican Peso
Singapore Dollars
Malaysian Ringgit
[OTHER CURRENCIES, INCLUDING U.S. DOLLARS, MAY BE ADDED
OR SUBSTITUTED BY AMENDMENT BY AGREEMENT OF THE PARTIES]
Total US$ Purchase $
Price Applicable to
Purchase Date */
ALLOCATED PURCHASE
NOTE PRICE AMOUNT
PURCHASE REQUIRED FOREIGN APPLICABLE TO NOTE
DATE */ CURRENCY AMOUNTS */ PURCHASE DATE */
- ------ ------------------ -----------------
Japanese Yen
French Francs
German Marks
Italian Lira
Spanish Pesetas
UK Pounds Sterling
Belgian Francs
Swiss Francs
Dutch Guilders
Canadian Dollars
Australian Dollars
Swedish Krona
Norwegian Krone
Danish Krone
Finnish Markka
Austrian Schillings
Mexican Peso
Singapore Dollars
Malaysian Ringgit
[OTHER CURRENCIES, INCLUDING U.S. DOLLARS, MAY BE ADDED
OR SUBSTITUTED BY AMENDMENT, BY AGREEMENT OF THE
PARTIES]
Total US$ Purchase $
Price Applicable to
Purchase Date */
*/ To be completed for each Purchase Date. Attach additional pages of
Annex I if necessary.
EXHIBIT 1.02(f)
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
FORM OF
DEFICI<PAGE>
ENCY CERTIFICATE
, 199
Bank of America National Trust
and Savings Association
Attention:
Re: Deficiency Certificate
Ladies and Gentlemen:
Reference is hereby made to the Contingent Multicurrency Note
Purchase Commitment Agreement, dated as of December 12, 1996 (as
heretofore or hereafter amended, supplemented or otherwise modified
from time to time and in effect, the "Agreement"), between you ("BofA")
and Storage Technology Corporation ("Borrower"). Capitalized terms
used but not otherwise defined herein shall have the meanings assigned
to such terms by the Agreement.
The undersigned is the [chief financial officer] [treasurer]
[assistant treasurer] [Delete as appropriate] of Borrower. Pursuant to
Section 1.02(f)(i) of the Agreement, the undersigned certifies to BofA
that the Dollar Equivalent (calculated at the exchange rates required
by the Agreement) of the aggregate Unpaid Balance of all Receivables
(excluding Transferred Receivables) that will be owned by Borrower and
its Subsidiaries taken as a whole on the , Purchase Date
will be less than the Required Dollar Equivalent Receivables Amount for
such Purchase Date.
STORAGE TECHNOLOGY CORPORATION
By:
Name:
Title:
EXHIBIT 1.07(c)
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
FORM OF AMENDMENT TO CONTINGENT
MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
THIS AMENDMENT (this "Amendment"), dated as of , 199 , is
made to the Contingent Multicurrency Note Purchase Commitment
Agreement, dated as of December 12, 1996 (as heretofore or hereafter
amended, modified or supplemented from time to time and in effect, the
"Agreement"), between Storage Technology Corporation ("Borrower") and
Bank of America National Trust and Savings Association ("BofA").
Capitalized terms used but not otherwise defined herein shall have the
meanings assigned to such terms by the Agreement.
WHEREAS, Borrower and BofA desire to amend and supplement the
Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO AGREEMENT
[DELETE/COMPLETE AS APPROPRIATE]
[Section 1.1 Amendment to Definition of "Scheduled Termination
Date". Section 1.07(a) of the Agreement is hereby amended to change the
Scheduled Termination Date set forth therein to , .]
[SECTION 1.1] [SECTION 1.2] [AMENDMENT TO SUPPLEMENT. ANNEX 1 TO
THE SUPPLEMENT DATED , TO THE AGREEMENT IS
AMENDED TO INSERT IN ITS PLACE ANNEX 1 HERETO.]
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties. Borrower hereby
represents and warrants to BofA that:
(a) Representations and Warranties. The representations and
warranties of Borrower contained in the Agreement are true and
correct on and as of the date of this Amendment as though made on
and as of such date, and
(b) No Termination Event. Both before and after giving
effect to this Amendment, no event shall exist that constitutes a
Termination Event or an Unmatured Termination Event.
ARTICLE III
MISCELLANEOUS
Section 3.1 Agreement Document Pursuant to Agreement. This
Amendment is an Agreement Document executed pursuant to the Agreement
and shall be construed, administered and applied in accordance with all
of the terms and provisions of the Agreement.
Section 3.2 Successors, Transferees and Assigns. This Amendment
shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, transferees and assigns.
Section 3.3 Execution in Counterparts. This Amendment may be
executed by the parties hereto in several counterparts, each of which
shall be deemed to be an original and all of which shall be taken
together as one agreement.
Section 3.4 Governing Law. THIS AMENDMENT SHALL BE A CONTRACT
MADE UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO ITS PRINCIPLES OF
CONFLICTS OF LAWS.
Section 3.5 Reaffirmation of Agreement. As amended and
supplemented by this Amendment, the Agreement remains in full force and
effect and is hereby reaffirmed, ratified and confirmed in all
respects. From and after the date hereof, all references to the
Agreement in any agreement, instrument or document shall be references
to the Agreement as amended and supplemented hereby.
Section 3.6 Headings. The various captions in this Amendment are
provided solely for convenience of reference and shall not affect the
meaning or interpretation of any provision of this Amendment.
Section 3.7 Complete Agreement. The Agreement (including this
Amendment and the Exhibits and Schedules to the Agreement and this
Amendment) and the other Agreement Documents contain the entire
understanding of the parties with respect to the transactions
contemplated hereby and thereby and supersedes all prior arrangements
or understandings with respect thereto.
Section 3.8 Severability. Whenever possible, each provision of
this Amendment will be interpreted in such a manner as to be effective
and valid under applicable law, but if any provision of this Amendment
is held to be prohibited by or invalid under applicable law, such
provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Amendment,
except to the extent that such prohibition or invalidity would
constitute a material change in the terms of this Amendment taken as a
whole.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
STORAGE TECHNOLOGY CORPORATION
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
Name:
Title:
ANNEX 1 TO
AMENDMENT
[COMPLETE AND ATTACH AS APPROPRIATE]
ANNEX 1 TO THE SUPPLEMENT DATED , IS
AMENDED TO INSERT THE FOLLOWING REVISED ANNEX 1 IN ITS PLACE:
[INSERT REVISED ANNEX]
EXHIBIT 4.02(b)
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
FORM OF OFFICER'S CERTIFICATE ON PURCHASE DATE
, 199
Bank of America National Trust
and Savings Association
555 California Street, 41st Floor
San Francisco, California 94104
Attention: Kevin Mc Mahon
Ladies and Gentlemen:
Reference is hereby made to the Contingent Multicurrency Note
Purchase Commitment Agreement, dated as of December 12, 1996 (as
heretofore or hereafter amended, supplemented or otherwise modified
from time to time and in effect, the "Agreement"), between you ("BofA")
and the undersigned ("Borrower"). Capitalized terms used but not
otherwise defined herein shall have the meanings assigned to such terms
by the Agreement.
The undersigned is the [chief financial officer] [treasurer]
[assistant treasurer] of Borrower.
To induce you to purchase the Note on , (the
"Issuance Date"), and provide the Purchase Price or Reduced Purchase
Price therefor, on the Issuance Date, the undersigned hereby certifies
to you that:
(a) the representations and warranties contained in
Section 5.01 of the Agreement are correct on and as of the date
hereof as though made on and as of such day,
(b) no Termination Event or Unmatured Termination Event
exists or will result from such purchase of a Note,
(c) after giving effect to such purchase of a Note, the
Aggregate Purchase Price will not exceed the Facility Limit,
(d) the Termination Date has not occurred, and
(e) the Dollar Equivalent Principal Balance of such Note does
not exceed the Note Limit, and any Note Limit Excess which is
payable on the Issuance Date pursuant to Section 1.05(b) of the
Agreement will be paid in full on such date.
STORAGE TECHNOLOGY CORPORATION
By:
Name:
Title:
EXHIBIT 5.01(d)
TO CONTINGENT MULTICURRENCY NOTE PURCHASE COMMITMENT AGREEMENT
SCHEDULE OF LITIGATION
----------------------
EXHIBIT 6.01(g)(vii)
to Contingent Multicurrency Note Purchase Commitment Agreement
FORM OF
COMPLIANCE CERTIFICATE
----------------------
To: Bank of America National Trust and
Savings Association
1455 Market Street, 12th Flr.
San Francisco, CA 94103
Attn: Kevin McMahon
Re: Storage Technology Corporation
Ladies and Gentlemen:
This Compliance Certificate is made and delivered pursuant to
Section 6.01(g)(vii) of the Contingent Multicurrency Note Purchase
Commitment Agreement, dated as of December 12, 1996 (as amended,
modified, supplemented, renewed or extended from time to time, the
"Agreement"), between Storage Technology Corporation and Bank of
America National Trust and Savings Association, and reference is made
thereto for full particulars of the matters described herein. All
capitalized terms used in this Compliance Certificate and not otherwise
defined herein shall have the meanings assigned to such terms in the
Agreement. This Compliance Certificate relates to the fiscal quarter
ending , .
The Borrower hereby certifies that the information set forth
on Schedule 1 hereto (and on any additional schedules hereto setting
forth further supporting detail) is true, accurate and complete as of
the end of such accounting period.
The Borrower further certifies that as of the date hereof no
Termination Event or Unmatured Termination Event exists, except as may
be set forth in a separate attachment hereto describing in detail the
nature of each condition or event constituting an exception to the
foregoing statements, the period during which it has existed and the
action which the Borrower is taking or proposes to take with respect to
each such condition or event.
IN WITNESS WHEREOF, the undersigned has signed this
Compliance Certificate this day of , .
STORAGE TECHNOLOGY CORPORATION
Name:
Title:
SCHEDULE 1
to the Compliance Certificate
Dated: , .
For the fiscal quarter ended , .
1. Consolidated Net Income
The Consolidated Net Income of Borrower and its Subsidiaries for
the four consecutive fiscal quarters ending with the fiscal quarter set
forth above, was US $ .
2. Free Cash Equivalent Investment Amount [TO BE COMPLETED ONLY IF
BORROWER IS IN "CASH EQUIVALENT INVESTMENT STATUS"]
The Free Cash Equivalent Investment Amount of the Borrower and its
Subsidiaries as of the last day of the fiscal quarter set forth above
was US $ .
EXHIBIT 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 27, December 29, December 30,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY (a)
Earnings (loss)
Income (loss) before extraordinary item $170,792 ($142,330) $32,038
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------ ------------ ------------
Net income (loss) 180,327 (142,330) 32,038
Preferred dividend requirement (11,544) (12,075)
------------ ------------ ------------
Income (loss) applicable to common shares $180,327 ($153,874) $19,963
============ ============ ============
Shares
Weighted average common shares outstanding 56,160 52,798 51,656
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 783 754
------------ ------------ ------------
Weighted average common shares
and equivalents 56,943 52,798 52,410
============ ============ ============
Earnings (loss) per common share:
Income (loss) before extraordinary item $3.00 ($2.91) $0.38
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 $0.17
------------ ------------ ------------
$3.17 ($2.91) $0.38
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 27, December 29, December 30,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
FULLY DILUTED
Earnings (loss)
Income (loss) before extraordinary item $170,792 ($142,330) $32,038
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 9,773 9,919 10,273
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 5,277 431
------------ ------------ ------------
Income (loss) before extraordinary item 185,842 (131,980) 42,311
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------ ------------ ------------
Net income (loss), as adjusted $195,377 ($131,980) $42,311
============ ============ ============
Shares
Weighted average common shares outstanding 56,160 52,798 51,656
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 1,467 163 754
Adjustment for shares issuable upon assumed
conversion of $3.50 Convertible
Exchangeable Preferred Stock 7,038 7,340
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,120 4,132 4,132
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 3,750 300
------------ ------------ ------------
Weighted average common shares
and equivalents, as adjusted 65,497 64,431 63,882
============ ============ ============
Earnings (loss) per common share:
Income (loss) before extraordinary item $2.84 ($2.05) $0.66
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 0.14
------------ ------------ ------------
$2.98(a) ($2.05)(b) $0.66
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 27,
1996
------------
<S> <C>
SUPPLEMENTARY (c)
Earnings
Income before extraordinary item $170,792
Adjustment for interest and amortization
of debt issue costs on 8% Convertible
Debentures, net of estimated tax effects 9,745
Adjustment for interest and amortization
of debt issue costs on 7% Convertible
Debentures, net of estimated tax effects 5,277
------------
Income before extraordinary item 185,814
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 9,535
------------
Net income, as adjusted $195,349
============
Shares
Weighted average common shares outstanding 56,160
Dilutive effect of outstanding options
and warrants (as determined under
the treasury stock method) 783
Adjustment for shares issuable upon assumed
conversion of 8% Convertible Debentures 4,108
Adjustment for shares issuable upon assumed
conversion of 7% Convertible Debentures 3,750
------------
Weighted average common shares
and equivalents, as adjusted 64,801
============
Earnings per common share:
Income before extraordinary item $2.87
Extraordinary gain on sale of lease assets,
net of income taxes of $8,200 0.14
------------
$3.01
============
(a) These figures agree with the related amounts in the Consolidated Statement of Operations.
(b) This calculation is submitted in accordance with Regulation S-K, Item 601(b)(11) although
it is contary to paragraph 40 of APB Opinion No. 15, because it produces an anti-dilutive
result.
(c) Storage Technology Corporation converted or redeemed all its outstanding 7% and 8%
Convertible Subordinated Debentures on July 12, 1996, and January 13, 1997, respectively.
The supplementary earnings per share amounts reflect the conversions as if they had occurred
at the beginning of 1996.
</TABLE>
EXHIBIT 21
STORAGE TECHNOLOGY CORPORATION
U.S. SUBSIDIARIES INCORPORATION
- ----------------- -------------
Bytex Corporation Delaware
NSC European Operations Company Minnesota
Storage Technology de Puerto Rico, Inc. Delaware
Storage Technology European Trade Corporation Delaware
Storage Technology Optical Disk Development Corporation Delaware
StorageTek Foundation Colorado
StorageTek Holding Corporation Nevada
StorageTek International Corporation Delaware
StorageTek International Services Corporation Delaware
Vitalink Communications Corporation Delaware
NON-U.S. SUBSIDIARIES
- ---------------------
Storage Technology of Australia Pty., Limited Australia
Network Systems Australasia Pty. Limited Australia
Storage Technology New Zealand Pty., Limited Australia
Network Systems Austria Gesellschaft m.b.h Austria
Network Systems Foreign Sales Corp Barbados
Storage Technology (Belgium) N.V./S.A. Belgium
StorageTek Brasil Ltda Brazil
StorageTek Canada, Inc. Canada
Amperif Canada, Ltd. Canada
StorageTek A/S Denmark
StorageTek OY Finland
Network Systems France S.A. France
Storage Technology Holding France S.A. France
Storage Technology France S.A. France
Storage Technology Formation France
Storage Technology European Operations France
Bytex GmbH Germany
Storage Technology Holding GmbH Germany
Storage Technology GmbH Germany
Storage Technology Network Systems GmbH Germany
Storage Technology OEM Vertrieb GmbH Germany
Network Systems Italia S.R.l. Italy
Storage Technology Italia, SpA Italy
Network Systems Japan K.K. Japan
Storage Technology of Japan, Ltd. Japan
Storage Technology Asia/Pacific K.K. Japan
StorageTek (Malaysia) Sdn. Bhd. Malaysia
StorageTek de Mexico, S.A. de C.V. Mexico
Storage Technology (The Netherlands) B.V. Netherlands
Storage Technology (The Netherlands) B.V. (Irish Branch) Ireland
Storage Technology Finance B.V. Netherlands
StorageTek III B.V. Netherlands
Storage Technology New Zealand Pty., Limited New Zealand
StorageTek A/S Norway
StorageTek Espana, S.A. Spain
StorageTek South Asia Pte. Ltd. Singapore
NSC Network Systems AB Sweden
Storage Technology Sweden AB Sweden
StorageTek AG Switzerland
D.M.L. StorageTek Ltd United Kingdom
Bytex DataCom Ltd. United Kingdom
Bytex Europe United Kingdom
Storage Technology Holding Limited United Kingdom
Storage Technology Limited United Kingdom
Storage Technology Manufacturing Limited United Kingdom
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-19426, 33-32235, 33-32243, 33-37464, 33-
42817, 33-42818, 33-51764, 33-51756, 2-60117, 2-80183, 2-61333, 2-76167,
2-89417, 33-50777, 33-59165, 33-61777 and 33-52197) of Storage Technology
Corporation of our reported dated February 21, 1997 appearing on Page F-27 of
this Form 10-K.
PRICE WATERHOUSE LLP
Denver, Colorado
March 6, 1997
EXHIBIT 23.2
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-19426, 33-32235, 33-32243, 33-37464, 33-
42817, 33-42818, 33-51764, 33-51756, 2-60117, 2-80183, 2-61333, 2-76167,
2-89417, 33-50777, 33-52197, 33-59165 and 33-61777) of Storage Technology
Corporation of our reported dated March 10, 1995 with respect to Network
Systems Corporation appearing on Page F-28 of this Form 10-K.
Ernst & Young LLP
Minneapolis, Minnesota
March 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-K DATED
DECEMBER 27, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000094673
<NAME> STORAGE TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-END> DEC-27-1996
<CASH> 388,401
<SECURITIES> 29,176
<RECEIVABLES> 567,066
<ALLOWANCES> 12,907
<INVENTORY> 288,615
<CURRENT-ASSETS> 1,260,351
<PP&E> 829,122
<DEPRECIATION> 501,588
<TOTAL-ASSETS> 1,884,276
<CURRENT-LIABILITIES> 536,180
<BONDS> 150,806
0
0
<COMMON> 5,818
<OTHER-SE> 1,175,165
<TOTAL-LIABILITY-AND-EQUITY> 1,884,276
<SALES> 1,478,685
<TOTAL-REVENUES> 2,039,550
<CGS> 897,548
<TOTAL-COSTS> 1,192,777
<OTHER-EXPENSES> 176,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,122
<INCOME-PRETAX> 226,692
<INCOME-TAX> 55,900
<INCOME-CONTINUING> 170,792
<DISCONTINUED> 0
<EXTRAORDINARY> 9,535
<CHANGES> 0
<NET-INCOME> 180,327
<EPS-PRIMARY> 3.17
<EPS-DILUTED> 2.98
</TABLE>
