Form 10-Q
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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Commission File Number 1-7534
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STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One StorageTek Drive, Louisville, 80028-4309
Colorado
(Address of principal executive (Zip Code)
offices)
Registrant's Telephone Number, including area code: (303) 673-5151
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ YES / / NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock ($.10 Par Value) - 100,179,257 shares outstanding at July 30, 1999.
<PAGE>
Form 10-Q, Page 2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 25, 1999
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 6 - Exhibits and Reports on Form 8-K 28
Exhibit Index 30
<PAGE>
Form 10-Q, Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
06/25/99 12/25/98
-----------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 233,043 $ 231,985
Accounts receivable 766,749 755,931
Inventories (Note 2) 348,166 261,808
Deferred income tax assets 117,061 114,715
---------- ----------
Total current assets 1,465,019 1,364,439
Property, plant and equipment, net 336,318 320,946
Spare parts for maintenance, net 36,558 33,395
Deferred income tax assets 16,205 15,875
Other assets 121,748 108,289
---------- ----------
$1,975,848 $1,842,944
========== ==========
LIABILITIES
Current liabilities:
Credit facilities $ 390,140 $ 276,673
Current portion of long-term debt 12,211 1,722
Accounts payable 125,454 136,555
Accrued liabilities 403,515 332,758
Income taxes payable 66,908 78,400
----------- -----------
Total current liabilities 998,228 826,108
Long-term debt 20,491 17,260
----------- -----------
Total liabilities 1,018,719 843,368
----------- -----------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
100,279,772 shares issued at June 25, 1999, and
100,338,353 shares issued at December 25, 1998 10,027 10,034
Capital in excess of par value 824,343 834,778
Retained earnings 126,587 159,254
Treasury stock of 113,774 shares at June 25, 1999,
and 117,271 shares at December 25, 1998 (2,334) (2,409)
Unearned compensation (1,494) (2,081)
------------ -----------
Total stockholders' equity 957,129 999,576
------------ -----------
$1,975,848 $1,842,944
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Form 10-Q, Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended
---------------------------------------------
06/25/99 06/26/98 06/25/99 06/26/98
---------------------------------------------
Revenue $654,402 $542,306 $1,171,905 $1,027,197
Cost of revenue 383,960 284,746 678,046 538,135
------- ------- --------- ---------
Gross profit 270,442 257,560 493,859 489,062
Research and product development
costs 72,624 54,947 146,100 110,920
Selling, general, administrative
and other income and
expense, net 151,702 118,041 289,561 232,863
Litigation expense (Note 4) 82,308 82,308
Restructuring expense (Note 5) 20,246 20,246
------- ------- --------- ---------
Operating profit (loss) (56,438) 84,572 (44,356) 145,279
Interest expense (4,733) (1,320) (8,632) (2,449)
Interest income 1,091 4,578 2,021 10,370
------- ------- ---------- ---------
Income (loss) before income
taxes (60,080) 87,830 (50,967) 153,200
Benefit (provision) for income
taxes 21,600 (33,400) 18,300 (58,200)
------- ------- --------- ---------
Net income (loss) $(38,480) $ 54,430 $ (32,667)$ 95,000
======= ======= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share $ (0.38) $ 0.51 $ (0.33)$ 0.89
======= ======= ========= =========
Weighted-average shares 100,081 106,945 99,931 106,777
======= ======= ========= =========
Diluted earnings (loss) per share $ (0.38) $ 0.50 $ (0.33)$ 0.87
======= ======= ========= =========
Weighted-average and dilutive
potential shares 100,081 109,939 99,931 109,650
======= ======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Form 10-Q, Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Six Months Ended
------------------------
06/25/99 06/26/98
------------------------
OPERATING ACTIVITIES
Cash received from customers $ 1,136,902 $1,065,374
Cash paid to suppliers and employees (1,156,059) (907,386)
Interest received 2,021 10,370
Interest paid (7,531) (1,878)
Income tax refunded (paid), net 6,535 (81,379)
---------- ---------
Net cash provided by (used in) operating
activities (18,132) 85,101
---------- ---------
INVESTING ACTIVITIES
Short-term investments, net 56,271
Purchases of property, plant and equipment, net (59,438) (44,140)
Business acquisitions, net (6,400)
Other assets, net (2,272) (3,541)
---------- ---------
Net cash provided by (used in) investing
activities (68,110) 8,590
---------- ---------
FINANCING ACTIVITIES
Proceeds from credit facilities, net 116,022
Repayments of other debt, net (1,331) (2,841)
Repurchases of common stock (26,080) (118,561)
Proceeds from employee stock plans 14,346 21,713
---------- ---------
Net cash provided by (used in) financing
activities 102,957 (99,689)
---------- ---------
Effect of exchange rate changes on cash (15,657) (2,771)
---------- ---------
Increase (decrease) in cash and cash equivalents 1,058 (8,769)
Cash and cash equivalents - beginning
of the period 231,985 256,319
---------- ---------
Cash and cash equivalents - end of the period $ 233,043 $ 247,550
========== =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (32,667) $ 95,000
Depreciation and amortization expense 62,475 62,016
Translation loss 11,499 5,178
Litigation expense 82,308
Restructuring 16,008
Other non-cash adjustments to income 5,584 (3,922)
(Increase) decrease in accounts receivable (32,148) 38,799
Increase in inventories (87,027) (43,517)
Increase in spare parts, net (10,881) (10,593)
(Increase) decrease in deferred income tax
assets, net (6,660) 14,091
Decrease in accounts payable and accrued
liabilities (20,077) (32,181)
Decrease in income taxes payable (6,546) (39,770)
---------- ---------
Net cash provided by (used in)
operating activities $ (18,132) $ 85,101
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Form 10-Q, Page 6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION / SIGNIFICANT ESTIMATES
The accompanying consolidated financial statements of Storage Technology
Corporation and its subsidiaries (StorageTek or the Company) have been prepared
in accordance with the Securities and Exchange Commission requirements for Form
10-Q. In the opinion of management, these statements reflect all adjustments
necessary for the fair presentation of results for the periods presented, and
such adjustments are of a normal, recurring nature. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 25, 1998.
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, the 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 possible
outcome of outstanding litigation (see Note 4) and future obligations associated
with the Company's restructuring activities (see Note 5). Actual results could
differ materially from these estimates making it reasonably possible that a
change in these estimates could occur in the near term.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands of dollars):
06/25/99 12/25/98
--------- ---------
Raw materials $ 77,397 $ 46,672
Work-in-process 77,349 76,839
Finished goods 193,420 138,297
------- -------
$348,166 $261,808
======= =======
NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $140,000,000 at any one time.
The agreement, which expires in January 2000, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of June 25, 1999, the Company had outstanding borrowings of $80,140,000 under
this financing agreement and had committed to borrowings between July 1999 and
December 1999 in the cumulative principal amount of approximately $212,074,000.
The notes must be repaid only to the extent of future revenue. Obligations under
the agreement are not cancelable by the Company or the bank. Gains and losses
associated with changes in the underlying foreign currencies are deferred during
the commitment period and recognized as an adjustment to the revenue supporting
the note repayment at the time the bank purchases the promissory notes. The
promissory notes, together with accrued interest, are payable in U.S. dollars
within 40 days from the date of issuance and bear interest at rates no less than
the LIBOR plus 0.35% (approximately 5.52%
<PAGE>
Form 10-Q, Page 7
as of June 25, 1999). Under the terms
of the agreement, the Company is required to comply with certain covenants and,
under certain circumstances, may be required to maintain a collateral account,
including cash and qualifying investments, in an amount not less than the
outstanding promissory notes.
See the Company's 1998 Form 10-K and "Liquidity and Capital Resources Available
Financing Lines" of this Form 10-Q, for additional information regarding the
Company's debt and financing arrangements.
NOTE 4 - 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 concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2,400,000,000. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court dismissed with prejudice Stuff's claims relating to the
Company's alleged use of the optical disk technology, and dismissed without
prejudice all of the remaining claims. The only course of legal action available
to Stuff with respect to the claims dismissed with prejudice is to appeal to the
Court of Appeals for a second time. While it is unclear what course of action
Stuff intends to take in this case, the Company continues to believe Stuff's
claims are wholly without merit and intends to vigorously defend any further
actions arising from this complaint.
On December 8, 1995, Odetics, Inc. (Odetics) filed a 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 infringes U.S. Patent No. 4,779,151 as
further described in the Odetics litigation dated June 29, 1995, below in this
section. The complaint seeks injunctive relief, treble damages in an unspecified
amount, and an award of attorney's fees and costs. This case has been stayed
pending the outcome of the June 29, 1995 Odetics litigation.
On October 3, 1995, certain former employees of the Company filed suit in the
U.S. District Court for the District of Colorado against the Company. The
amended suit alleges violations of the Age Discrimination in Employment Act
(ADEA) and the Employee Retirement Income Security Act (ERISA) between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the plaintiffs' request to proceed as a class action on the ADEA claims.
On November 9, 1998, the Court granted the plaintiffs' request to proceed as a
class on the ERISA claims. On March 1, 1999, the Court denied the Company's
appeal on the certification of the ERISA class. Approximately 1,300 persons are
eligible members of the ERISA class, which includes approximately 400 members of
the ADEA class. The plaintiffs seek, among other things, compensatory damages in
an unspecified amount, including the value of back pay and benefits;
reinstatement as employees or alternatively the value of future earnings and
benefits; and exemplary or liquidated damages. The Company has filed an answer
denying both the ADEA and ERISA claims. The case is in the discovery phase. The
Company has filed a number of motions which are pending before the court. A
trial date has been set for October 1999.
<PAGE>
Form 10-Q, Page 8
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. The Company is also involved in various other less
significant legal actions. 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 all of these actions is inherently difficult to
predict. In the event of an adverse outcome, the ultimate potential loss could
have a material adverse effect on the Company's financial position or reported
results of operations in a particular quarter. An unfavorable 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.
On June 29, 1995, Odetics filed a patent infringement suit in the U.S. District
Court for the Eastern District of Virginia (District Court) against the Company
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's fees and costs. In February 1996, a jury
found that the Company's products did not infringe the 151 Patent. Odetics
appealed and in June 1997, the U.S. Court of Appeals for the Federal Circuit
(Court of Appeals) reversed the District Court's ruling and remanded the case
back to the District Court for further proceedings. On March 27, 1998, a second
trial was held and a jury found that a pass-through port in certain of the
Company's tape library products infringed the 151 Patent and awarded actual
damages to Odetics of $70,600,000. On July 31, 1998, the District Court granted
the Company's motion for judgment as a matter of law, overturning the jury's
verdict, and entered judgment in favor of the Company. On August 10, 1998,
Odetics appealed the judgment. On July 6, 1999, the Court of Appeals reversed
the District Court's judgment as a matter of law, entered a judgment in favor of
Odetics, and remanded the case to the District Court for further proceedings. In
connection with this litigation, the Company recognized a pre-tax expense of
$82,308,000 during the second quarter of 1999 for the actual damages of
$70,600,000 as determined by the jury, plus $11,708,000 of estimated
post-judgment interest. On July 20, 1999, the Company filed a petition for
rehearing with the Court of Appeals. A decision on the petition is pending.
NOTE 5 - RESTRUCTURING
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the restructuring plan include a reduction in
headcount as well as the elimination of certain lower priority research and
product development projects. The headcount reductions were targeted in the area
of research and product development, administrative and manufacturing.
The Company's accounting policies with respect to its restructuring are in
accordance with the guidance provided in the consensus opinion of the Emerging
Issues Task Force (EITF) in connection with EITF Issues No. 94-3 (EITF 94-3) and
SFAS No 121. EITF 94-3 generally requires, with respect to recognition of
severance expenses, management approval of the restructuring plan, communication
of benefit arrangements to employees, and the determination of the employees to
be terminated. SFAS No. 121 generally requires that assets to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
During the second quarter of 1999, the Company incurred a pre-tax expense of
$20,246,000 related to the restructuring. The following table summarizes the
activity in the Company's reserves associated with the restructuring (in
thousands of dollars):
<PAGE>
Form 10-Q, Page 9
Employee Asset
Severance Writedowns Total
-----------------------------------------------
Restructuring expense $17,778 $ 2,468 $20,246
Cash payments (1,770) (1,770)
Asset writedowns (2,468) (2,468)
------ ------ ------
Balances, June 25, 1999 $16,008 $ 0 $16,008
====== ====== ======
The employee severance expense of $17,778,000 consist of separation payments of
$15,908,000 payable to approximately 475 employees who irrevocably elected to
participate in a voluntary separation program prior to the end of the fiscal
quarter; payments of $1,770,000 of employees salaries prior to their termination
date, but subsequent to their last day of work; and estimated outplacement costs
of $100,000. Payments of $13,859,000 associated with the severance charge were
subsequently paid on June 30, 1999, in connection with the employees'
termination. The remaining $2,049,000 of payments associated with the severance
charge as of June 30, 1999, relate to employees with extended termination dates
and are expected to be paid within the next six months.
The asset writedowns of $2,468,000 relate to engineering assets that will be
disposed of during the next six months in connection with the Company's decision
during the second quarter to discontinue certain lower priority research and
product development projects.
The Company expects to incur additional employee severance expense and related
asset writedowns during the third quarter of 1999. See "RESTRUCTURING" within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-Q for further discussion of the restructuring.
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the consolidated balance sheet and
be measured at their fair value. The corresponding change in fair value of the
derivative instrument will be recorded in the earnings of the Company, net of
any change in fair value of the related hedged item, or as a component of
comprehensive income depending upon the intended use and designation.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an amendment of FASB Statement No. 133." SFAS No. 137 has
the effect of delaying the required adoption date of SFAS No. 133 for the
Company until January 2001. The Company is currently evaluating the impact
of SFAS No. 133 on its financial statements and its plans for adopting the
new accounting standard.
NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS
The Company is organized into three reportable segments based on the definitions
of segments provided under SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information": storage products, storage services and
storage management software. The storage products segment sells information
storage tape, disk and network products. The storage services segment provides
support services for the Company's and third-party products, integration
services, storage consulting and managed services. The storage management
software segment sells and licenses software products.
<PAGE>
Form 10-Q, Page 10
The Company does not have any intersegment revenue and evaluates segment
performance based on gross profit. The segment gross profit equals the
consolidated gross profit and the Company does not allocate research and product
development costs; selling, general, administrative and other income and
expense; interest expense; interest income; or provision for income taxes to the
segments. The revenue and gross profit by segment are as follows (in thousands
of dollars):
Quarter Ended Six Months
------------------------- ------------------------
06/25/99 06/26/98 06/25/99 06/26/98
--------- -------- ----------- --------
Revenue:
Storage products $418,444 $367,394 $ 741,638 $ 695,985
Storage services 184,565 153,132 349,087 296,435
Storage management
software 51,393 21,780 81,180 34,777
------- ------- --------- ---------
Total revenue $654,402 $542,306 $1,171,905 $1,027,197
======= ======= ========= =========
Gross profit:
Storage products $170,306 $175,923 $ 305,049 $ 335,801
Storage services 61,335 65,933 128,380 128,518
Storage management
software 38,801 15,704 60,430 24,743
------- ------- --------- ---------
Total gross profit $270,442 $257,560 $ 493,859 $ 489,062
======= ======= ========= =========
<PAGE>
Form 10-Q, Page 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 25, 1999
All assumptions, anticipations, expectations and forecasts contained in the
following discussion regarding the Company's future product and business plans,
financial results, performance and events are forward-looking statements. The
Company's actual results may differ materially because of a number of risks and
uncertainties. Some of these risks are detailed below in "Risk Factors That May
Affect Future Results" and elsewhere in this Form 10-Q.
Statements made herein are accurate only as of the date of filing this Form 10-Q
with the Securities and Exchange Commission and may be relied upon only as of
that date. The Company disclaims any obligation to update information on
forecasts contained herein, except as may be otherwise required by law.
GENERAL
The Company reported a net loss for the second quarter ended June 25, 1999, of
$38.5 million on revenue of $654.4 million, compared to net income for the
second quarter in 1998 of $54.4 million on revenue of $542.3 million. A net loss
of $32.7 million was reported for the six months of 1999 on revenue of $1.17
billion, compared to net income of $95.0 million for the six months of 1998 on
revenue of $1.03 billion. The Company's reported results for the second quarter
and six months of 1999 include one-time pre-tax expenses of $82.3 million and
$20.2 million associated with litigation and restructuring, respectively.
Excluding the one-time expenses during the second quarter, net of tax, the
Company would have earned net income of $27.2 million and $33.0 million during
the second quarter and six months of 1999, respectively.
Revenue increased 21% and 14% during the second quarter and six months of 1999,
respectively, compared to the same periods in 1998, due to revenue growth from
all of the Company's business segments. Gross profit margins decreased to 41%
and 42% during the second quarter and six months of 1999, respectively, compared
to 47% and 48% for the same periods in 1998, due to decreased profit margins on
storage products and storage services. The decreased margins from storage
products and services were partially offset by increased sales of higher-margin
storage management software.
Future revenue and operating results are significantly dependent upon the
Company's ability to effectively manage the introduction of new or enhanced tape
and disk products and software; successfully manage direct and indirect sales
channel activity; increase sales of the higher-margin software segment; drive
gross margin improvements in the product and services segments; successfully
implement the Company's storage area network (SAN) and other storage solution
strategies; and reduce operating expenses. For the discussion of these and other
risk factors, see "Risk Factors That May Affect Future Results" below.
The Company's cash balance increased $1.1 million during the six months of 1999
as cash proceeds from financing activities was offset by cash used in operating
and investing activities. Cash generated from financing activities of $103.0
million was mainly the result of increased borrowings of $116.0 million under
short-term credit facilities, and was partially offset by cash payments of $26.1
million associated with the Company's on-going common stock repurchase program
to offset dilution from employee stock and option plans. The Company's operating
<PAGE>
Form 10-Q, Page 12
activities used cash of $18.1 million during the six months of 1999, as compared
to cash of $85.1 million generated from operations during the six months of
1998. The decrease in cash generated from operations during 1999 was primarily
the result of decreased gross margins, increased operating expenses, and
increased levels of accounts receivable, inventory and spare parts. See
"Liquidity and Capital Resources - Working Capital" for additional discussion of
operating cash flows. Cash used in investing activities of $68.1 million was
primarily due to property, plant and equipment purchases of $59.4 million.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment.
Quarter Ended Six Months Ended
----------------------------------------
06/25/99 06/26/98 06/25/99 06/26/98
----------------------------------------
Storage products:
Tape products 43.9% 41.5% 44.7% 43.1%
Disk products 16.5 22.1 15.8 21.0
Network products 3.5 4.2 2.8 3.7
----- ----- ----- -----
Total storage products 63.9 67.8 63.3 67.8
Storage services 28.2 28.2 29.8 28.8
Storage management software 7.9 4.0 6.9 3.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 58.7 52.5 57.9 52.4
----- ----- ----- -----
Gross profit 41.3 47.5 42.1 47.6
Research and product development
costs 11.1 10.1 12.5 10.8
Selling, general, administrative
and other income and expense, net 23.2 21.8 24.7 22.7
Litigation expense 12.5 7.0
Restructuring expense 3.1 1.7
----- ----- ----- -----
Operating profit (loss) (8.6) 15.6 (3.8) 14.1
Interest income (expense), net (0.6) 0.6 (0.5) 0.8
----- ----- ----- -----
Income (loss) before income
taxes (9.2) 16.2 (4.3) 14.9
Benefit (provision) for income
taxes 3.3 (6.2) 1.5 (5.7)
----- ----- ----- -----
Net income (loss) (5.9)% 10.0% (2.8)% 9.2%
===== ===== ===== =====
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk, and network
products. Revenue generated from storage products increased 14% and 7% during
the second quarter and six months of 1999, respectively, compared to the same
periods in 1998, primarily due to increased revenue from tape products. The
increase in revenue from tape products was partially offset by a decrease in
revenue from disk products.
Tape Products
Tape product revenue increased 28% and 18% during the second quarter and six
months of 1999, respectively, compared to the same periods in 1998, primarily
due to increased sales of the 9840 high-performance tape drive and the related
tape media. Demand for the 9840 in the second quarter of 1999 was particularly
strong in the client-server market. Increased revenue from the TimberWolf(TM)
family of automated tape products designed for the client-server market also
contributed to the revenue increase during the six months of 1999. Revenue from
<PAGE>
Form 10-Q, Page 13
TimberLine(R) 9490, a 36-track cartridge subsystem; PowderHorn(R) 9310, an
automated cartridge system library; and other earlier generation tape products
declined during the second quarter and six months of 1999, compared to the same
periods in 1998, reflecting decreases in both the number of units sold and lower
selling prices.
Disk Products
Disk product revenue decreased 10% and 14% during the second quarter and six
months of 1999, respectively, compared to the same periods in 1998, primarily
due to a decrease in revenue from OEM sales to IBM of Iceberg(R), a disk storage
product designed for the mainframe market. While terabyte sales of Iceberg
increased in the second quarter and six months of 1999, as compared to the same
periods in 1998, the increase in terabytes sold was more than offset by product
price erosion. The Company anticipates that revenue from Iceberg sales to IBM
will continue to decrease in the future. See "Risk Factors That May Affect
Future Results - Dependence on IBM," for discussion of the risks associated with
IBM. The decrease in revenue from sales of Iceberg to IBM was partially offset
by an increase in direct sales of the 9393 Shared Virtual Array (SVA) and the
OPENstorage(TM) Disk products, a family of disk products for the client-server
market. SVA became available in April 1999. The Company is currently in the
engineering development phase with respect to a new family of virtual disk
products.
Network Products
Network product revenue was unchanged during the second quarter and decreased
13% during the six months of 1999, compared to the same periods in 1998. Revenue
from network products designed for the SAN market increased in the second
quarter and six months of 1999, compared to the same periods in 1998. The
increase in SAN network products was offset by decreased revenue from the
earlier generation network products.
Future revenue growth in the Company's storage products segment is significantly
dependent upon the continued demand for the TimberWolf and 9840 tape products,
successfully replacing the anticipated decline in OEM sales of Iceberg to IBM
with sales of the recently-introduced SVA disk product, the timely introduction
and acceptance of new disk products and enhancements, and gaining greater market
acceptance for SAN network products. There can be no assurances that the Company
will be successful in these endeavors. See "Risk Factors That May Affect Future
Results - New Products, Markets and Distribution Channels," for discussion of
the risks associated with the introduction and manufacture of new products.
STORAGE SERVICES
Storage services include support service revenue from the Company's and
third-party storage products, as well as integration service revenue associated
with new applications, storage consulting and managed storage services. Storage
services revenue increased 21% and 18% during the second quarter and six months
of 1999, respectively, compared to the same periods in 1998, due to growth in
storage consulting and integration services. Revenue from the Company's support
services increased slightly in the second quarter and six months of 1999,
compared to the same periods in 1998, primarily due to the Company's current
generation of products requiring less support services than earlier generation
of products.
Future revenue growth from storage services is significantly dependent on the
Company's ability to provide consulting and integration services as part of a
bundled solution with products and software as well as its new managed storage
services utility model. Storage services revenue is also dependent on
successfully expanding the support service offerings for third-party products.
<PAGE>
Form 10-Q, Page 14
STORAGE MANAGEMENT SOFTWARE
Storage management software revenue increased 136% and 133% during the second
quarter and six months of 1999, respectively, compared to the same periods in
1998, primarily due to increased revenue from the Virtual Storage Manager(TM)
(VSM). VSM is a data storage software solution designed to improve performance,
cartridge utilization, and overall storage management. Revenue from SnapShot,
which is currently designed for use with the Company's mainframe disk products,
was largely unchanged as decreased revenue from IBM was offset by increased
revenue associated with direct sales of SnapShot for SVA.
Future revenue growth from storage management software is significantly
dependent upon increasing market acceptance for VSM. Because VSM is a complex
system, it is difficult to predict the timing and extent VSM will increase
market acceptance. There can be no assurances that the Company will be
successful in increasing market acceptance for VSM. A significant portion of the
Company's storage management software revenue has been derived from sales of
SnapShot to IBM. The Company anticipates sales of SnapShot to IBM will continue
to decline in future periods. While the Company has developed SnapShot
capabilities for SVA in the mainframe marketplace, future revenue growth from
Snapshot is significantly dependent upon the timely introduction and market
acceptance of future releases of the SnapShot software. See "Risk Factors That
May Affect Future Results - Dependence on IBM," for discussion of the risks
associated with IBM.
GROSS PROFIT
Gross profit margins decreased to 41% and 42% during the second quarter and six
months of 1999, respectively, compared to 47% and 48% for the same periods in
1998, respectively, due to reduced margins associated with storage products and
storage services. The decreased margins were partially offset by increased sales
of higher-margin storage management software products. The gross profit margins
on storage products decreased primarily because of price erosion associated with
the Company's disk products and increased revenue contribution from the
lower-margin OPENstorage disk products. The decrease in storage products gross
profit margin was partially offset by increased margins associated with tape
products. The gross profit margins on storage services decreased primarily due
to increased revenue from lower-margin storage consulting services and increased
parts usage associated with certain tape products.
The markets for the Company's products and services are subject to intense price
competition. The Company anticipates that price competition for its products and
services will continue to have a significant impact on the Company's profit
margins. The Company's ability to sustain or improve gross margins is
significantly dependent upon its ability to continue to reduce product
manufacturing costs and increase sales of higher-margin storage management
software. Storage product and storage management software gross margins may be
affected in future periods by inventory reserves and writedowns resulting from
rapid technological changes or delays in gaining market acceptance for products.
Storage services margins may be adversely affected in the future as a result of
increased revenue contribution from lower-margin consulting, integration,
managed storage and multi-vendor support services.
<PAGE>
Form 10-Q, Page 15
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses increased 32% during the second
quarter and six months of 1999, respectively, compared to the same periods in
1998. This increase was primarily due to increased investment in new storage
software and storage products, as well as a reduction of approximately $10.0
million and $20.0 million in research and product development funding received
from third-parties in the second quarter and six months of 1999, respectively,
as compared to the same periods in 1998.
As further discussed under "Restructuring," below, the Company has announced
plans to eliminate lower priority research and product development programs. The
restructuring is expected to reduce research and product development expenses
during the second half of 1999.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
Selling, general, administrative and other income and expense (SG&A) increased
29% and 24% during the second quarter and six months of 1999, respectively,
compared to the same periods in 1998. The increase was primarily due to
increased selling expenses associated with increased revenue as well as expenses
associated with expanding and training the direct sales force, the addition of
application specialists associated with storage services, and increased
marketing efforts associated with the SAN initiative and a corporate branding
campaign.
LITIGATION
In the second quarter of 1999, the Company recorded litigation expense of $82.3
million as a result of the U.S. Court of Appeals for the Federal Circuit
reversal of a judgment as a matter of law by the U.S. District Court in a U.S.
patent infringement case originally brought against the Company in 1995 by
Odetics, Inc. The Company has filed a petition for rehearing with the Court of
appeals. A decision on the petition is pending. See Note 1 and 4 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS for further discussion of this case.
RESTRUCTURING
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the restructuring plan include a reduction in
headcount as well as the elimination of certain lower priority research and
product development projects. The headcount reductions were targeted in the area
of research and product development, administrative and manufacturing.
During the second quarter of 1999, the Company incurred a pre-tax expense of
$20.2 million related to the restructuring. The following table summarizes the
activity in the Company's reserves associated with the restructuring (in
thousands of dollars):
Employee Asset
Severance Writedowns Total
-----------------------------------------------
Restructuring expense $17,778 $ 2,468 $20,246
Cash payments (1,770) (1,770)
Asset writedowns (2,468) (2,468)
------ ------ ------
Balances, June 25, 1999 $16,008 $ 0 $16,008
====== ====== ======
<PAGE>
Form 10-Q, Page 16
The employee severance expense of $17.8 million consist of separation payments
of $15.9 million payable to approximately 475 employees who irrevocably elected
to participate in a voluntary separation program prior to the end of the fiscal
quarter; payments of $1.8 million of employees salaries prior to their
termination date, but subsequent to their last day of work; and estimated
outplacement costs of $100,000. Payments of $13.9 million associated with the
severance charge were subsequently paid on June 30, 1999, in connection with the
employees' termination. The remaining $2.0 million of payments associated with
the severance charge as of June 30, 1999, relate to employees with extended
termination dates and are expected to be paid within the next six months.
The asset writedowns of $2.5 million relate to engineering assets that will be
disposed of during the next six months in connection with the Company's decision
during the quarter to discontinue certain lower priority research and product
development projects.
The Company expects to incur additional employee severance expense of between
$12 million and $15 million during the third quarter of 1999 associated with
approximately 250 employees. The Company also expects to incur related asset
writedowns in the third quarter. While the Company does not expect it will incur
any incremental operating expenses on an on-going basis as a result of the
restructuring, the Company does anticipate hiring employees in other areas of
its business to address skills requirements to support new business initiatives
within the storage services and storage management software segments, as well as
to address the on-going requirements of natural attrition. The Company expects
annualized savings of approximately $40 million once the restructuring
activities are completed. The majority of these savings are expected to be
realized in the form of reduced research and product development expenses. There
can be no assurance that the future restructuring expense will be within the
range described above or that the targeted savings will be achieved. See Note 1
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for discussion of significant
estimates.
The Company has restructured its business in the past in order to re-align its
business with its products and market strategies, or establish a more cost
efficient business structure. There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved operating results in future periods. It is possible that
additional changes in the Company's business or in its industry may necessitate
additional restructuring expense in the future. The necessity for additional
restructuring activities may result in expenses that adversely affect reported
results of operations in the period the restructuring plan is adopted, and
require incremental cash payments.
INTEREST EXPENSE AND INCOME
Interest expense increased $3.4 million and $6.2 million during the second
quarter and six months of 1999, respectively, compared to the same periods in
1998, due to increased borrowings under the Company's credit facilities.
Interest income decreased $3.5 million and $8.3 million during the second
quarter and six months of 1999, respectively, compared to the same periods in
1998, primarily as a result of a decrease in cash available for investment
during the quarter. See "Liquidity and Capital Resources," for further
discussion of the Company's working capital and credit facilities.
INCOME TAXES
The Company's effective tax rate decreased from 38% for the second quarter of
1998, to 36% for the second quarter of 1999. 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
<PAGE>
Form 10-Q, Page 17
determined that the Company will
more likely than not realize $133.3 million of deferred income tax assets as of
June 25, 1999. The Company's valuation allowance of approximately $23.9 million
as of June 25, 1999, relates principally to net deductible temporary differences
and net operating loss carryforwards associated with the Company's foreign
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's cash balance increased $1.1 million during the six months of 1999
as cash proceeds from financing activities was offset by cash used in operating
and investing activities. Cash generated from financing activities of $103.0
million was mainly the result of increased borrowings of $116.0 million under
short-term credit facilities, and was partially offset by cash payments of $26.1
million associated with the Company's on-going common stock repurchase program
to offset dilution from employee stock and option plans. The Company's operating
activities used cash of $18.1 million during the six months of 1999, as compared
to cash of $85.1 million generated from operations during the six months of
1998. The decrease in cash generated from operations during 1999 was primarily
the result of decreased gross margins, increased operating expenses, and
increased levels of accounts receivable, inventory and spare parts. Cash used in
investing activities of $68.1 million was primarily due to increased investments
in property, plant and equipment of $59.4 million. Accounts receivable,
inventory and spare parts levels have been adversely impacted by issues
associated with the transition to new internal information systems and business
processes. See "Risks Factors That May Affect Future Results - Information
Systems Transition," for discussion of the risks associated with the transition
to new systems. Inventory and spare part levels also increased during the six
months of 1999 due to the introduction of inventory ramp-up for new products.
Available Financing Lines
The Company has an unsecured revolving credit facility (the Revolver) which
expires in October 2001. The credit limit available under the Revolver, $325
million as of June 25, 1999, is reduced by $12.5 million on the last day of each
calendar quarter. The interest rates under the Revolver depend on the type of
advance selected. The basic advance rate is not less than the London Interbank
Offered Rate (LIBOR) plus .625% (approximately 5.79% as of June 25, 1999). The
interest rate on the outstanding borrowings under the Revolver as of June 25,
1999, has varied from approximately 5.90% to 7.75%. As of June 25, 1999, the
Company had borrowings of $310 million and had issued letters of credit for
approximately $100,000 under the Revolver. The remaining available credit under
the Revolver as of June 25, 1999, was approximately $15 million. The Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
In January 1999, the Company entered into a $150 million unsecured revolving
credit facility (the $150 million Revolver) which expires in January 2000. The
interest rates under the $150 million Revolver depend on the type of advance
selected. The basic advance rate is not less than the LIBOR plus 1.00%
(approximately 6.17% as of June 25, 1999). As of June 25, 1999, the Company had
no borrowings issued against the $150 million Revolver. The $150 million
Revolver contains certain financial and other covenants, including restrictions
on the payment of the cash dividends on the Company's common stock.
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $140 million at any one time.
The agreement, which expires in January 2000, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of June 25, 1999, the Company had
<PAGE>
Form 10-Q, Page 18
outstanding borrowings of $80.1 million
under this financing agreement and had committed to borrowings between July 1999
and December 1999 in the cumulative principal amount of approximately $212.1
million. The notes must be repaid only to the extent of future revenue.
Obligations under the agreement are not cancelable by the Company or the bank.
Gains and losses associated with changes in the underlying foreign currencies
are deferred during the commitment period and recognized as an adjustment to the
revenue supporting the note repayment at the time the bank purchases the
promissory notes. The promissory notes, together with accrued interest, are
payable in U.S. dollars within 40 days from the date of issuance and bear
interest at rates no less than the LIBOR plus 0.35% (approximately 5.52% as of
June 25, 1999). Under the terms of the agreement, the Company is required to
comply with certain covenants and, under certain circumstances, may be required
to maintain a collateral account, including cash and qualifying investments, in
an amount not less than the outstanding promissory notes.
The Company intends to continue to commit substantial working capital to
research and product development projects, and the rollout of new products and
services. The Company may invest in or acquire complementary businesses,
products or technologies as market and business conditions warrant. 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 may choose to fund these activities through the
issuance of additional equity or debt financing. 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-capitalization ratio increased from 23% as of
December 25, 1998, to 31% as of June 25, 1999, primarily due to a net increase
in borrowings of $113.5 million under short-term credit facilities. See "Working
Capital" above for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
During the second quarter and six months of 1999, approximately 39% of the
Company's revenue was generated by its international operations, compared to
approximately 36% for the second quarter and six months of 1998. The Company
also sells products and software through domestic indirect distribution channels
that have end-user customers located outside the United States. The Company
expects that it will continue to 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 United States dollar reduces the value of revenue and profits
generated by the Company's international operations. As a result, the Company's
operating and financial results can be materially affected by fluctuations in
foreign currency exchange rates. In an attempt to mitigate the impact of foreign
currency fluctuations, the Company employs a foreign currency hedging program.
See "Market Risk Management / Foreign Currency Exchange Risk," below.
The Company's international business may be affected by changes in demand
resulting from global and localized economic and business conditions. The
Company is subject to the risks of conducting business outside the United
States, including changes in, or impositions of, legislative or regulatory
requirements, tariffs, quotas, difficulty in obtaining export licenses,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws, and other
<PAGE>
Form 10-Q, Page 19
factors outside the Company's control. There can be no
assurances these factors will not have a material adverse effect on the
Company's business or financial results in the future.
MARKET RISK MANAGEMENT / FOREIGN CURRENCY EXCHANGE RISK
The market risk inherent in the Company's financial instruments relates
primarily to changes in foreign currency exchange rates. To mitigate the impact
of foreign currency fluctuations, the Company seeks opportunities to reduce
exposures through financing activities. Foreign currency options and forward
exchange contracts are also used to reduce foreign currency exposures. All
foreign currency options and forward exchange contracts are authorized and
executed pursuant to the Company's policies. Foreign currency options and
forward exchange contracts that are designated as and qualify as hedging
transactions are subject to hedge accounting treatment. The Company does not
hold or issue derivatives or any other financial instruments for trading
purposes.
The Company has a financing agreement with a bank which provides for commitments
by the bank to purchase promissory notes denominated in a number of foreign
currencies. Gains and losses associated with changes in the underlying foreign
currencies are deferred during the commitment period and recognized as an
adjustment to the revenue supporting the note repayment at the time the bank
purchases the promissory notes. See "Liquidity and Capital Resources - Available
Financing Lines," for a description of the financing agreement.
The Company periodically 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 associated with the options are
deferred and recognized as an adjustment to the underlying revenue transactions.
To the extent an option is terminated or ceases to be effective as a hedge, any
gains and losses as of that date are deferred and recognized as an adjustment to
the underlying revenue transaction.
The Company also utilizes forward exchange contracts, generally with maturities
of less than two months, to hedge its exposure to exchange-rate fluctuations
associated with monetary assets and liabilities held in foreign currencies and
anticipated revenue from its international operations. The carrying amounts of
these forward exchange contracts equal their fair value as the contracts are
adjusted at each balance sheet date for changes in exchange rates. Gains and
losses on the forward exchange contracts used to hedge monetary assets and
liabilities are recognized as incurred within SG&A on the Consolidated Statement
of Operations as adjustments to the foreign exchange gains and losses on the
translation of net monetary assets. Gains and losses on the forward contracts
used to hedge anticipated revenue is recognized as incurred as adjustments to
revenue.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of June
25, 1999, and as of December 25, 1998, would result in a hypothetical loss of
approximately $51.3 million and $59.2 million, respectively. The decrease in the
hypothetical loss for the first six months of 1999 is primarily due to a
decrease in committed borrowings under the financing agreement. These
hypothetical losses do not take into consideration the Company's underlying
international operations. The Company anticipates that any hypothetical loss
associated with the Company's foreign currency exchange rate sensitive
instruments would be offset by gains associated with its underlying
international operations.
<PAGE>
Form 10-Q, Page 20
Risk Factors That May Affect Future Results
New Products, Services and Software; Markets; and Distribution Channels
The Company's results of operations and competitive strength depend upon its
ability to successfully develop, manufacture and market innovative new products,
services, and software. Short product life cycles are inherent to the
high-technology market. The Company must devote significant resources to
research and product development projects and effectively manage the risks
inherent in new product transitions. Developing new technology, products,
services and software is complex and involves uncertainties. Delays in product
development, manufacturing, or in customer evaluation and purchasing decisions
can make product transitions difficult. In addition, product transitions make
the process of production and inventory planning more difficult as the Company
must accurately anticipate product mix and configuration demands, and accurately
forecast approximate inventory levels. The Company has experienced product
development delays in the past that adversely affected the Company's financial
results and competitive position. There can be no assurances that the Company
will be able to successfully manage the development and introduction of new
products, services, and software in the future.
In December 1998, the Company's 9840 tape drive and VSM software became
generally available. The Company's financial results in the second half of 1999
are significantly dependent on increased market acceptance for the 9840 tape
drive and VSM. The manufacture of new products involves integrating complex
designs and processes, collaborating with sole source suppliers for key
components, and increasing manufacturing capacities to accommodate demand. A
design flaw, the failure to obtain sufficient quantities of key components or
manufacturing constraints could adversely affect the Company's operating and
financial results. For example, capacity constraints in manufacturing 9840 tape
drives and extended customer evaluation periods for the VSM software adversely
effected the Company's financial results in the first quarter of 1999.
The Company historically has generated a significant portion of its revenue and
operating profits from the mainframe market. The rate of revenue growth has
declined in the mainframe market as a result of significant price competition
and as customers' purchase patterns transition to the client-server environment.
The Company's future financial results are significantly dependent upon
successfully competing in the rapidly growing client-server and SAN markets. The
Company currently is making significant investments in developing new products,
services and software for these markets. There can be no assurances that the
Company will be successful in these activities.
The Company's business model involves the use of both its direct sales force, as
well as indirect distribution channels, such as OEMs, value-added resellers and
value-added distributors. In order to be successful with this model, the Company
must successfully manage the mix of these different sales channels. The
Company's operating and financial results may be adversely affected in the event
an indirect partner establishes a new relationship with a competitor, delays or
changes its purchasing patterns, or experiences financial difficulties.
Dependence on IBM
During the second quarter and six months of 1999, OEM sales of products and
software to IBM declined to 11% and 12%, respectively, of the Company's total
revenue. The Company anticipates that IBM will continue to reduce its purchases
from the Company and will not extend the relationship beyond the current
contract that expires in December 2000, with respect to future products and
software, as IBM has announced a competitive disk product. The
<PAGE>
Form 10-Q, Page 21
Company is
currently expanding its direct sales channel to sell its SVA and SnapShot
products. The Company anticipates increased revenue contribution from SVA and
Snapshot in the second half of 1999 through its direct sales channel, but does
not expect that this increase will fully offset the decrease in OEM sales to
IBM. Failure to successfully develop new high-volume distribution channels for
the Company's disk products and SnapShot software could adversely affect the
Company's financial results. IBM's entry with a competitive disk product may
heighten the competitive pressures in the market for SVA and further accelerate
the price erosion which the Company is currently experiencing in the disk
market.
Competition
The markets for the Company's products, software and services are intensely
competitive and are subject to continuous, rapid technological change, frequent
product performance improvements, short product life cycles, and aggressive
pricing. The Company believes that its ability to remain competitive involves
factors such as price and cost of the Company's and its competitors' product
offerings, the timing and success of the Company's new products and offerings,
and new product introductions by the Company's competitors. This competitive
environment gives rise to aggressive pricing strategies and puts pressure on the
Company's gross margins for each segment. The Company's competitors include,
among others, Compaq Computer Corporation, EMC Corporation, Hewlett-Packard
Company, Hitachi Ltd., IBM, Quantum Corporation, and Sun Microsystems, Inc. A
number of the Company's competitors have significantly greater market presence
and financial resources than the Company. In the highly competitive
client-server market, a number of the Company's competitors are able to offer
customers a bundled server and storage product, which may provide them with a
competitive advantage. The Company expects to address some of these competitive
issues through its software, SAN, and services strategies.
From time-to-time, two or more of the Company's competitors may form business
alliances that compete with the Company. For example, in the first quarter of
1999, IBM and EMC announced that they have entered into a strategic business and
technology alliance. Although the impact of this alliance on the Company's
business is unclear at this time, the alliance of two of the Company's major
competitors could adversely affect the Company's ability to compete in a number
of its existing market segments. A number of the Company's competitors in the
product, services and software markets have formed alliances with the stated
objective of developing interoperable SAN solutions. In the storage management
software market, the Company competes with vendors with which it has established
partnerships, including Legato Systems, Inc. and VERITAS Software Corporation.
The Company also anticipates that it will continue to establish distribution
partnerships with other equipment manufacturers, software vendors and service
providers to address competitive factors. There can be no assurances that the
Company will be able to successfully compete against other companies in these
markets.
Volatility of Stock Price / Earnings Fluctuations
The Company's common stock is subject to significant fluctuations in trading
price. The Company's stock price may be impacted if the Company's revenue or
earnings fail to meet the expectations of the investment community. The
Company's stock price may also be affected by broad economic and market trends,
which are unrelated to the Company's performance.
The Company's financial and operating results may fluctuate from quarter to
quarter due to a number of reasons. In the past, the Company's results have
followed a seasonal pattern, which reflects the tendency of customers to make
their purchase decisions at the end of a calendar year. During any fiscal
quarter, a disproportionately large portion of the total product sales are
recognized in the last weeks and days of the quarter. These factors make the
forecasting of
<PAGE>
Form 10-Q, Page 22
revenue inherently difficult. Because the Company plans its
operating expenses on expected revenue, a shortfall in revenue may cause
earnings to be below expectations in that period. A number of factors may cause
revenue to fall below expectations, such as product and technology transitions
announced by the Company or its competitors, delays in the availability of new
products, changes in the purchasing patterns of the Company's customers and
distribution partners, the timing of customers' acceptance of solutions, rapid
price erosion, or adverse global economic conditions. The mix of sales among the
Company's business segments and sales concentration in particular geographic
regions may cause the Company's operating margins to fluctuate and impact
earnings.
Sole Source 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. Many non-standard parts are
obtained from a single source or a limited group of suppliers; however, there
are other vendors who could produce these in satisfactory quantities after a
period of pre-qualification and product ramping. Certain of the Company's key
components and products are purchased from single source 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, Imation Corporation is a single source supplier for
the 9840 tape cartridges and the Company is dependent on Imation to economically
produce large volumes of high-quality tape cartridges for the 9840 product.
There can be no assurance that Imation will be able to meet the anticipated
demands. However, the Company is also dependent on IBM to supply disk drives
used in both the Company's Iceberg product which are sold to IBM and in the SVA
product which is sold through its own direct sales channel.
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
the inability to secure comparable components in a timely manner, could result
in a shortage of key components, longer lead times, and reduced control over
production and delivery schedules. These factors could have a material adverse
effect on the Company's revenue and operating results. In the event a sole
source supplier were 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.
Information Systems Transition
The Company is in the process of replacing many of its internal information
systems with new, integrated information systems. The implementation of these
information systems is complex and has affected numerous operational,
transactional, financial, and reporting processes. The transition to these new
systems and processes is currently expected to be completed during the third
quarter of 1999, and involves a number of risks and uncertainties. The Company
must successfully manage the transfer of critical information to the new
systems, the integration of these systems, and the implementation of associated
process changes and employee training programs. There can be no assurance that
the transition to the new information systems will not cause delays or
interruptions in the Company's critical business processes. For example, during
the first half of 1999, the Company's accounts receivable, inventory, and spare
parts levels have been adversely impacted by issues associated with the
transition to new internal information systems
<PAGE>
Form 10-Q, Page 23
and business processes. Failure to successfully manage the transition could
adversely affect the Company's operating and financial results in the future.
Risks Associated with the Year 2000
The Company's product lines include information storage products and software
which collect, move, store, share, and protect data. In order to properly
process data, the Company's products must successfully manage and manipulate
data that includes both 20th and 21st century dates (Year 2000 Ready). All of
the Company's currently offered products and software have been evaluated and,
provided they have been upgraded to include all recommended engineering changes,
the Company believes that they are Year 2000 Ready. However, there can be no
assurance that the Company's current products and software will be Year 2000
Ready in all environments. In addition, the Company does not currently intend to
develop modifications to certain of its older products and software to make them
Year 2000 Ready and has notified all the affected customers of potential year
2000 problems with older products and software in order to raise their
awareness.
The Company generally believes that it is not legally responsible for costs
incurred by its customers to achieve their year 2000 readiness. Should the
Company's products and software fail to be Year 2000 Ready, however, the Company
may experience increased warranty and other customer satisfaction costs. Since
the year 2000 complications are not fully known and potential liability issues
are uncertain, the effect of the year 2000 on the Company's warranty costs,
product liability costs, potential litigation expenses, and financial results
are not known at this time, but could be material in any given quarter.
The Company is currently in the process of replacing many of its internal
information systems with new integrated information systems. See "Information
Systems Transition" above. These new systems are believed to be Year 2000 Ready.
The Company has also completed an assessment on its other critical internal
information systems which are not being replaced and has implemented remediation
programs on non-Year 2000 Ready systems. The Company has completed assessing
critical non-information systems to determine if they are Year 2000 Ready. The
remediation programs for its critical information and non-information systems
that were not Year 2000 Ready are substantially completed and tested. The
remaining remediation programs are expected to be completed and tested by the
end of the third quarter of 1999. The Company is currently formulating
contingency plans in the event of a system failure or delay.
The costs incurred to date directly related to the Company's remediation
activities are approximately $2.5 million. Future costs related to the
remediation activities are not expected to exceed approximately $1.0 million;
however, the amount may change as the year 2000 readiness activities progress
during 1999. These remediation costs do not include the costs associated with
the Company's new information systems, which are expected to be Year 2000 Ready.
The Company has invested approximately $40 million in these new information
systems as of June 25, 1999, and the investment in these systems during the
remainder of 1999 is estimated to be approximately $3 million. The Company does
not currently believe that any remaining remediation and testing activities will
have a material adverse effect on the Company's operations and financial
results. Delays in implementing new internal information systems or a failure to
fully identify all year 2000 dependencies in the Company's systems could have
material adverse consequences, including delays in the delivery or sale of the
Company's products, or cause the Company to incur unexpected additional costs.
The Company has completed an assessment of the possible effects on its
operations of the year 2000 readiness of key suppliers and vendors. The Company
identified all critical vendors and suppliers and has ensured they are Year 2000
Ready. The Company has also identified
<PAGE>
Form 10-Q, Page 24
alternative suppliers and vendors in the
event such suppliers and vendors are not Year 2000 Ready. The Company's
dependence on suppliers and vendors and, therefore, on the proper functioning of
their information systems and software, means that their failure to address year
2000 issues could have a material effect on the Company's operations and
financial results.
The effect that the year 2000 will have on customers' information technology
spending patterns is uncertain at this time. The potential adverse consequences
resulting from customers' year 2000 concerns could include, among others,
decreased spending on new information storage systems during the second half of
1999 as customers complete their year 2000 testing activities and delays in
customer purchase decisions once customers have verified the year 2000 readiness
of their information systems. The demand for the Company's products worldwide
could be adversely affected in the event these patterns were to materialize,
which could have an adverse effect on the Company's operating and financial
results.
Euro Conversion
Effective January 1, 1999, 11 member countries of the European Union adopted a
single European currency, the euro, as their common legal currency. The Company
generates a significant portion of its revenue from sales in member countries of
the European Union. Like many companies that operate in Europe, various aspects
of the Company's business and financial accounting will be affected by the euro
conversion and the transitions in the business environment resulting from the
convergence of currencies. The Company continues to evaluate the European
pricing strategies for its products, software and services and the implications
of the euro conversion on its contractual agreements, tax strategy and foreign
currency risk management strategy. The Company does not believe that the
transition in the European market resulting from the euro conversion will impact
the competitiveness of its products and services in Europe in the short-term, as
significant price transparency already exists. There can be no assurances,
however, that the conversion will not adversely affect the Company's pricing,
tax, and currency hedging strategies, or business systems and processes in the
future.
<PAGE>
Form 10-Q, Page 25
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Part I, Item 3 - Legal Proceedings, of the Company's Form 10-K for the
fiscal year ended December 25, 1998, filed with the Commission on March 5, 1999.
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 concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2.4 billion. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court dismissed with prejudice Stuff's claims relating to the
Company's alleged use of the optical disk technology, and dismissed without
prejudice all of the remaining claims. The only course of legal action available
to Stuff with respect to the claims dismissed with prejudice is to appeal to the
Court of Appeals for a second time. While it is unclear what course of action
Stuff intends to take in this case, the Company continues to believe Stuff's
claims are wholly without merit and intends to vigorously defend any further
actions arising from this complaint.
On December 8, 1995, Odetics, Inc. (Odetics) filed a 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 infringes U.S. Patent No. 4,779,151 as
further described in the Odetics litigation dated June 29, 1995, below in this
section. The complaint seeks injunctive relief, treble damages in an unspecified
amount, and an award of attorney's fees and costs. This case has been stayed
pending the outcome of the June 29, 1995 Odetics litigation.
On October 3, 1995, certain former employees of the Company filed suit in the
U.S. District Court for the District of Colorado against the Company. The
amended suit alleges violations of the Age Discrimination in Employment Act
(ADEA) and the Employee Retirement Income Security Act (ERISA) between the
period of April 13, 1993, and December 31, 1996. On November 26, 1997, the Court
granted the plaintiffs' request to proceed as a class action on the ADEA claims.
On November 9, 1998, the Court granted the plaintiffs' request to proceed as a
class on the ERISA claims. On March 1, 1999, the Court denied the Company's
appeal on the certification of the ERISA class. Approximately 1,300 persons are
eligible members of the ERISA class, which includes approximately 400 members of
the ADEA class. The plaintiffs seek, among other things, compensatory damages in
an unspecified amount, including the value of back pay and benefits;
reinstatement as employees or alternatively the value of future earnings and
benefits; and exemplary or liquidated damages. The Company has filed an answer
denying both the ADEA and ERISA claims. The case is in the discovery phase. The
Company has filed a number of motions which are pending before the court. A
trial date has been set for October 1999.
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. The
<PAGE>
Form 10-Q, Page 26
Company is also involved in various other less
significant legal actions. 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 all of these actions is inherently difficult to
predict. In the event of an adverse outcome, the ultimate potential loss could
have a material adverse effect on the Company's financial position or reported
results of operations in a particular quarter. An unfavorable 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.
On June 29, 1995, Odetics filed a patent infringement suit in the U.S. District
Court for the Eastern District of Virginia (District Court) against the Company
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's fees and costs. In February 1996, a jury
found that the Company's products did not infringe the 151 Patent. Odetics
appealed and in June 1997, the U.S. Court of Appeals for the Federal Circuit
(Court of Appeals) reversed the District Court's ruling and remanded the case
back to the District Court for further proceedings. On March 27, 1998, a second
trial was held and a jury found that a pass-through port in certain of the
Company's tape library products infringed the 151 Patent and awarded actual
damages to Odetics of $70.6 million. On July 31, 1998, the District Court
granted the Company's motion for judgment as a matter of law, overturning the
jury's verdict, and entered judgment in favor of the Company. On August 10,
1998, Odetics appealed the judgment. On July 6, 1999, the Court of Appeals
reversed the District Court's judgment as a matter of law, entered a judgment in
favor of Odetics, and remanded the case to the District Court for further
proceedings. In connection with this litigation, the Company recognized a
pre-tax expense of $82.3 million during the second quarter of 1999 for the
actual damages of $70.6 million as determined by the jury, plus $11.7 million of
estimated post-judgment interest. On July 20, 1999, the Company filed a petition
for rehearing with the Court of Appeals. A decision on the petition is pending.
Information concerning these legal proceedings is also contained in Note 4 of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included in Part I of this Form 10-Q.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this Item 3 is included in the section above
entitled "Market Risk Management / Foreign Currency Exchange Rate."
<PAGE>
Form 10-Q, Page 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 20, 1999. A
quorum of stockholders was represented at the meeting in person or by proxy.
A board of ten directors was to be elected at the meeting. All of management's
nominees as listed in the Company's proxy statement were elected, including the
following:
FOR WITHHELD
---------- -----------
David E. Weiss 88,431,829 1,170,262
James R. Adams 88,440,876 1,161,215
William L. Armstrong 88,438,140 1,163,951
J. Harold Chandler 88,439,932 1,162,159
Maurice F. Holmes 88,454,208 1,147,883
William R. Hoover 88,439,076 1,163,015
William T. Kerr 88,439,792 1,162,299
Robert E. La Blanc 88,432,570 1,169,521
Robert E. Lee 88,432,380 1,169,711
Richard C. Steadman 88,446,113 1,155,978
At the annual meeting, the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 150,000,000 to 300,000,000, by a vote of 81,910,497
in favor to 7,427,626 against, with 263,968 abstentions. The stockholders also
approved an amendment to the Company's 1995 Equity Participation Plan, as
amended, to increase the number of shares reserved for issuance by 4,750,000
shares of Common Stock, by a vote of 65,247,297 in favor to 23,848,694 against,
with 506,100 abstentions. The stockholders also approved the terms of a
performance-based incentive plan, by a vote of 84,332,295 in favor to 4,838,860
against, with 430,936 abstentions. The stockholders ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
current fiscal year, by a vote of 89,179,957 in favor to 353,951 against, with
68,183 abstentions. The shareholders did not approve a shareholder proposal to
require shareholder approval of certain expenditures in excess of $500,000, by a
vote of 74,541,071 against, 1,846,001 in favor, 802,422 abstentions and
12,412,597 broker non-votes. There were no other broker non-votes for any of
these proposals.
<PAGE>
Form 10-Q, Page 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Third Amendment of Restated Certificate of
Incorporation
10.1* Executive Officer Performance-Based Incentive Plan
10.2* Employment Agreement between the Company and David E. Weiss
10.3* 1995 Equity Participation Plan, as amended March 1999
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter ended
June 25, 1999.
- ------------------------------
* Contract or compensation plan or arrangement in which directors and/or
officers participate.
<PAGE>
Form 10-Q, Page 29
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
August 9, 1999 /s/ ROBERT S. KOCOL
- ------------------------------- ----------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 9, 1999 /s/ THOMAS G. ARNOLD
- ------------------------------- -----------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
Form 10-Q, Page 30
EXHIBIT INDEX
Exhibit No. Description
- -------------- --------------------------------------------------
3.1 Certificate of Third Amendment of Restated Certificate of
Incorporation
10.1 Executive Officer Performance-Based Incentive Plan
10.2 Employment Agreement between the Company and David E. Weiss
10.3 1995 Equity Participation Plan
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
CERTIFICATE OF THIRD AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
STORAGE TECHNOLOGY CORPORATION
STORAGE TECHNOLOGY CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is STORAGE TECHNOLOGY CORPORATION
SECOND: The Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware (the "Secretary of State") on August
11, 1969; a Restated Certificate of Incorporation was filed with the Secretary
of State on July 24, 1987 (the "Restated Certificate of Incorporation"); and
Certificates of Amendment of Restated Certificate of Incorporation were filed
with the Secretary of State on May 22, 1989 and June 2, 1992 (the "Prior
Amendments").
THIRD: The Board of Directors of the Corporation, at a meeting duly called and
held on December 10, 1998, adopted resolutions (i) proposing an amendment (the
"Amendment") to the Restated Certificate of Incorporation, which Amendment
increases the authorized capital stock of the Corporation, and (ii) declaring
said Amendment to be advisable and directing that said Amendment be presented to
the stockholders of the Corporation at the next annual meeting of stockholders
for consideration and approval thereof. The resolutions setting forth the
proposed Amendment are as follows:
"RESOLVED, that the Board of Directors deems it advisable to amend
the Restated Certificate of Incorporation of the Corporation;
FURTHER RESOLVED, that the Board of Directors hereby approves the
following Amendment to Article V of the Corporation's Restated Certificate
of Incorporation to change the authorized shares of common stock of the
Corporation, and at the next annual meeting of stockholders the
Corporation shall present such Amendment to the Restated Certificate of
Incorporation to the stockholders for consideration and approval thereof,
as follows:
The first paragraph of Article V of the Restated Certificate of
Incorporation, as amended by the Prior Amendments, be and is hereby
amended and restated to read as follows:
The total number of shares of capital stock that the Company
is authorized to issue is Three Hundred Forty Million
(340,000,000) shares, divided into Three
-1-
<PAGE>
Hundred Million (300,000,000) shares of Common Stock with a
par value of ten cents ($.10) per share (hereinafter called
"Common Stock"); and Forty Million (40,000,000) shares of
Preferred Stock, with a par value of one cent ($.01) per
share."
FOURTH: At the Annual Meeting of the Stockholders held on May 20, 1999, which
was duly called and held upon notice duly given in accordance with Section 222
of the General Corporation Law of the State of Delaware, a majority of the
shares of the Corporation's Common Stock outstanding as of the record date for
said Annual Meeting of Stockholders was voted in favor of the Amendment,
representing the necessary number of shares as required by statute. The only
class and series of shares outstanding is Common Stock.
FIFTH: The Amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said STORAGE TECHNOLOGY CORPORATION has caused
this Certificate of Amendment to be signed by David E. Weiss, its
Chief Executive Officer, and Lizbeth J. Stenmark, its Secretary, this 21st day
of May, 1999.
BY: /s/ David E. Weiss
--------------------------
David E. Weiss,
Chairman, President and Chief
Executive
Officer
ATTEST: /s/ Lizbeth J. Stenmark
-------------------------
Lizbeth J. Stenmark,
Secretary
[CORPORATE SEAL]
-2-
STORAGE TECHNOLOGY CORPORATION
Performance-based Incentive Bonus Plan
(Effective as of January 1, 1999)
1. Purpose
The purpose of the Plan is to motivate and retain eligible employees for
achievement of goals relating to the performance of the Company and, or its
business units or segments. The Plan is designed to ensure that the annual bonus
paid hereunder to officers of the Company is deductible under Section 162(m) of
the Internal Revenue Code (the "Code"), and the regulations thereunder ("Section
162(m)").
2. Covered Individuals
Participation in the Plan is determined annually in the discretion of the
Committee. In selecting participants for the Plan, the Committee will select
officers of the Company and its subsidiaries who are likely to have a
significant impact on the performance of the Company.
3. Administration of the Plan
The Plan will be administered by the Human Resources and Compensation
Committee (the "Committee") of the Board of Directors of the Company. The
Committee shall have the sole discretion and authority to administer and
interpret the Plan in accordance with Section 162(m) of the Code.
4. Maximum Bonus and Performance Goals
The annual bonus will be paid in cash, or in shares of the Company's
Common Stock (including restricted stock) or Common Stock equivalents, in lieu
of cash, as the Committee, in its sole discretion, may determine from time to
time. For each fiscal year, the Committee will establish: (a) the award levels
for the participants, (b) the performance goals which must be achieved in order
for a participant to be paid an award at specified level, and (c) the formula
for determining actual awards, using the performance measures as variables.
Each participant's potential bonus award will be stated as a percentage of
his or her annual base salary. Base salary will be the participant's annual
salary rate on the last day of the fiscal year.
The Committee may use one or more of the following performance measures in
<PAGE>
establishing performance goals for any participant for any fiscal year: (i) net
after-tax income; (ii) total annual revenue; (iii) earnings per share; (iv)
stockholder value add objectives; (v) customer satisfaction objectives; (vi)
product and solution development and introduction time; (vii) return on equity;
(viii) return on assets; (ix) market penetration; (x) product and services
quality and reliability measurements; (xi) employee development and training
objectives; (xii) operating expenses; (xiii) product sales margins; (xiv)
operating profit; (xv) employee satisfaction objectives; and (xvi) individual
performance objectives. The Committee may select performance goals that differ
from participant to participant and may select performance goals that apply on a
corporate basis, or business unit or segment basis.
No bonus in excess of $3 million will be paid to any one officer pursuant
to the Plan. The Committee may reduce or entirely eliminate all bonus payments
under the Plan for any year, or any participant's bonus for any year in its sole
discretion.
5. Payment of Bonus
No bonus will be paid unless and until the Committee has certified in
writing that the performance goals have been satisfied. The payment of a bonus
for any given fiscal year requires that the participant be on the Company's
payroll as of the date that the Committee determines that the performance goals
were achieved as to all participants in the Plan. However, the Committee may
make exceptions to this requirement in the case of death, retirement, or
disability, or such other circumstances as the Committee may determine.
6. Amendment and Termination
The Committee reserves the right to amend or terminate the Plan at any
time without stockholder approval, except to the extent stockholder approval may
be required to ensure the Plan's qualification under Section 162(m) of the Code,
as in effect from time to time.
STORAGE TECHNOLOGY CORPORATION
Employment Agreement
May 19, 1999
<PAGE>
TABLE OF CONTENTS
Section 1. Position. . . . . . . . . . . . ............................ . . 1
Section 2. Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Base Compensation. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 4. Incentive Bonuses. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Termination of Employment; Severance Benefits. . . . . . . . . . 3
Section 5.a. Involuntary Termination . . . . . . . . . . . . . . . . . . . 3
Section 5.b. Voluntary Resignation; Termination for Cause. . . . . . . . . . 3
Section 5.c. Restricted Stock and Stock Options. . . . . . . . . . . . . . . 3
Section 5.d. Medical Benefits................................. . . . . . . . 4
Section 5.e. Other Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5.f. Notice of Termination . . . . . . . . . . . . . . . . . . . . . 5
Section 6 Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . . 5
Section 6.a. Cause . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . 5
Section 6.b. Change of Control . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6.c. Disability. . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 6.d. Involuntary Termination . . . . . . . . . . . . . . . . . . . . 6
Section 6.e. Termination Date . . . . . . . . . . . . . . . . .. . . . . . . 7
Section 7. Limitation on Payments. . . . . . . . . . . . . . . . . . . . . 7
Section 8. Non-Compete; Non-Solicit. . . . . . . . . . . . . . . . . . . . 8
Section 9. Employee Benefit Programs. . . . . . . . . . . . . . . . . . . . 9
Section 10. Successors. . . . . . . . . . . . . . . . . . .. . . . . . . . . 10
Section 10.a Company's Successors . . . . . . . . . . . . . . . . . . . . .. 10
Section 10.b. Employee's Successors . . . . . . . . . . . . . . . . . . . . 11
Section 11. Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . 11
Section 11.a. Withholding. . . . . . . . . . . . . ....... . . . . . . . . . 11
Section 11.b. Confidentiality Agreement. . . . . . . . . . . . . . . . . . . 11
Section 11.c. Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . 11
Section 11.d. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 11.e. Amendment or Modification. . . . . . . . . . . . . . . . . . . 12
Section 11.f. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 11.g. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 11.h. Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 11.i. Severability. . . . . . . . . . . . . . . .. . . . . . . . . . 13
Section 11.j. Entire Agreement. . . . . . . . . . . . . . . . . .. . . . . . 13
Section 11.k. Knowledge and Representation . . . . . . . . . . . . . . . . . 14
Schedule 1 Option Summary . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit A Form of Settlement and Release. . . . . . . . . . . . . . . . . 16
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of May 19, 1999
(the "Effective Date") by and between Storage Technology Corporation (the
"Company"), a Delaware corporation, and David E. Weiss (hereinafter, "you" or
"your") and sets forth the terms and conditions of your employment with the
Company. Previously, you and the Company entered into an agreement dated June
24, 1996 concerning your employment with the Company, which was for a term of
three years and terminated on May 21, 1999. This Agreement shall replace and
supersede such agreement and all prior agreements between you and the Company
concerning the subject matter hereof. In consideration of your employment by the
Company on the terms and conditions set forth below, and the mutual covenants
and agreements contained herein, you and the Company agree as follows:
1. Position. During the Term (as defined below), you will be employed
full-time by the Company in the position of Chairman of the Board of Directors,
President and Chief Executive Officer of the Company and shall report directly
to the Company's Board of Directors (the "Board"). In such capacity, you will
perform the duties and level of responsibilities as in effect on the Effective
Date, or such higher level of duties and responsibilities as may be assigned by
the Board from time to time, and such duties and responsibilities normally
inherent in such capacities in corporations of similar size and character.
During the Term, you shall devote your entire working time, attention and
energies to the business of the Company and shall be bound by the Company's
Corporate Policies and Practices from time to time in effect during the Term (as
defined in Section 2, below). You shall not engage in any other business or
personal activity or activities that require services by you that may conflict
with the proper performance of your duties hereunder.
2. Employment. The terms of this Agreement shall terminate one year after
the Effective Date ("Term"); provided, however, that until such time as notice
of non-renewal or termination of the Agreement is given by either you or the
Company to the other party, ninety days or more prior to expiration of the
existing term of your or its decision not to renew, the Term and this Agreement
shall automatically be renewed for subsequent one-year terms; provided
<PAGE>
further that in no event shall the Term and this Agreement be so extended to a
date more than five years from the Effective Date. A termination of this
Agreementpursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or
provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the Term or the terms and
conditions of any confidentiality agreement between you and the Company, as
described in Section 11.b, below.
3. Base Compensation. For your services during the Term, the Company will
pay you a base salary at the annualized rate equal to $750,000. Such salary
shall be paid periodically in accordance with the normal payroll practices of
the Company in effect from time to time during the Term, less any withholding
taxes as set forth in Section 11.a, below. The amount of your base salary may be
increased by the Board from time to time during the Term, and may be reduced if
the Board requires a decrease in base salary for all corporate officers and you
expressly consent in writing to such decrease, or as may be mutually agreed upon
by you and the Company (such annualized base salary as may be adjusted from time
to time by the Board is referred to in this Agreement as "Base Salary").
4. Incentive Bonuses. The Company currently maintains a Management By
Objective Bonus Program (the "MBO Program") as may be modified from time to
time. During the Term, you shall be eligible to receive bonuses under the terms
and conditions of the MBO Program approved by the Board and, or the Human
Resources and Compensation Committee of the Board, based upon the achievement of
pre-established financial and other performance goals. During the Term, you
shall be eligible to receive a bonus under the MBO Program equal to 95% of your
Base Salary at the target level of performance. The amount of your target bonus
may be increased by the Board from time to time during the Term, and may be
reduced if the Board requires a decrease in target bonus for all corporate
officers and you expressly consent in writing to such decrease, or as may be
mutually agreed upon by you and the Company (such annualized target bonus as may
be adjusted from time to time by the Board is referred to in this Agreement as
"Target Bonus"). Any payments under the MBO Program shall be made in accordance
with the provisions of, and under the conditions contained in, the MBO Program.
<PAGE>
5. Termination of Employment; Severance Benefits.
a. Involuntary Termination. If your employment terminates as a
result of an Involuntary Termination other than for Cause (as defined in Section
6 below), you shall be entitled to receive a severance payment equal to the sum
of (i) two times your Base Salary for the fiscal year then in effect, plus (ii)
two times your Target Bonus for the fiscal year then in effect, whether or not
such bonus would otherwise be payable (or, if no Target Bonus is in effect for
such year, the highest Target Bonus in the three preceding fiscal years);
provided, that in the event of an Involuntary Termination upon a Change of
Control (as defined in Section 6.b below), you shall be entitled to receive a
severance payment equal to the sum of (i) three times your Base Salary for the
fiscal year then in effect, plus (ii) three times your Target Bonus, whether or
not such bonus would otherwise be payable (or, if no Target Bonus is in effect
for such year, the highest Target Bonus in the three preceding fiscal years).
Any severance payments to which you become entitled pursuant to this Section 5.a
shall be paid to you (or your estate or beneficiary in the event of your death)
in a lump sum within thirty calendar days of your Termination Date and shall be
paid contingent upon your execution and delivery to the Company of a Settlement
and Release Agreement substantially in the form attached hereto as Exhibit A.
b. Voluntary Resignation; Termination For Cause. If you voluntarily
resign from the Company (other than as an Involuntary Termination), or if the
Company terminates your employment for Cause, then you shall not be entitled to
receive any severance or other benefits except for those benefits, if any, as
may then be established under then existing benefits plans at the time of your
resignation or termination.
c. Restricted Stock and Stock Options. (i) In the event you are
entitled to receive severance pursuant to Section 5.a, then, in addition to such
severance, all unvested stock options granted to you under the Company's stock
option plans (or under any successor company's stock option plans) on or after
the Effective Date shall vest and become exercisable in full, and the Company's
right to repurchase any shares of restricted stock purchased under any of the
Company's stock plans on or after the Effective Date shall terminate and all
such stock shall become fully vested. In addition, any stock options granted to
you by the Company
<PAGE>
on or after the Effective Date, and the stock options granted
to you by the Company prior to the Effective Date and identified in Schedule 1
attached hereto, shall remain exercisable for a twelve-month period following
the Termination Date, subject to the original terms of such options.
(ii) In the event of an Involuntary Termination upon a Change
of Control, all unvested stock options granted to you under the Company's stock
option plans prior to the Effective Date shall vest and become exercisable in
full, subject to the original terms of such options, and the Company's right to
repurchase any shares of restricted stock purchased under any of the Company's
stock plans prior to the Effective Date shall terminate and become fully vested.
d. Medical Benefits. In the event you are entitled to receive
severance pursuant to Section 5.a, then, in addition to such severance, the
Company shall pay you a lump sum payment in an amount that the Company
reasonably determines to represent the estimated cost that you may incur to
extend for a twenty-four month period under the COBRA continuation laws the
medical coverage for you and your dependents in effect on the Termination Date.
Such payment may be used for such continuation coverage or for any other
purpose.
e. Other Benefits. In the event you are entitled to severance
pursuant to Section 5.a, then, in addition to such severance, for a period of
twenty-four months after the Termination Date, the Company shall continue to
provide you with (i) life and disability insurance benefits as in effect as of
the Termination Date, or such comparable benefits as the Company may, in its
sole discretion, determine to be sufficient to satisfy its obligations to you
under this Agreement; and (ii) the allowance for financial and tax and estate
planning services in effect on the Termination Date. Notwithstanding the
foregoing, if you become covered under any life or disability insurance plan
provided by a subsequent employer, then the amount of coverage required to be
provided by the Company hereunder shall be reduced by the amount of coverage
provided by the subsequent employer's insurance plans.
f. Notice of Termination. Any termination (of your employment with
the
<PAGE>
Company other than by reason of your Death) shall be communicated by a
notice of termination given to the other in accordance with Section 11.d of this
Agreement. Such notice shall indicate the specific termination provision in this
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination under the provision so
indicated, and shall specify the Termination Date.
6. Certain Defined Terms.
a. Cause. "Cause" means any of the following: (i) willful failure to
perform your duties and responsibilities as President and Chief Executive
Officer; (ii) your willful breach of any provision of this Agreement; (iii) your
willful breach of any other written agreement between you and the Company; (iv)
gross negligence or dishonesty in the performance of your duties hereunder; (v)
your willful violation of any of the Corporate Policies and Practices as in
effect from time to time; (vi) you engaging in conduct or activities that
materially conflict with the interests of or injure the Company, or materially
interfere with your duties owed to the Company; (vii) your refusal to comply
with or material neglect of instructions received from the Board; and (viii)
your conviction (including any plea of guilty or nolo contendered) for a felony
or a crime.
b. Change of Control. "Change of Control" means the occurrence of
any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended),
other than the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company, of the "beneficial
ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
total voting power represented by the Company's then outstanding voting
securities; or
(ii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining
<PAGE>
outstanding or by being converted
into voting securities of the surviving entity (including the parent corporation
of such surviving entity)) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
approval by the stockholders of the Company of a plan of complete liquidation of
the Company, or the sale or disposition by the Company of all or substantially
all the Company's assets.
c. Disability. "Disability" means that you have been unable to
substantially perform your duties under this Agreement as the result of your
incapacity due to physical or mental illness for a period of twenty-six weeks,
consecutive or otherwise, after its commencement.
d. Involuntary Termination. "Involuntary Termination" means any of the
following: (i) termination of your employment by the Company which is not
effected for Cause; (ii) termination of your employment with the Company by
reason of your death or Disability; (iii) during the twenty-four month period
following a Change of Control, termination of your employment for any reason
other than for Cause; (iv) the failure of the Company to obtain the assumption
of this Agreement by any successors contemplated in Section 10 below; (v)
without your express written consent, your relocation to a facility or a
location more than 50 miles from the Company's principal business offices
located in Louisville, Colorado; (vi) without your express written consent, a
reduction in your Base Salary and Target Bonus as in effect immediately prior to
such reduction; or (vii) without your express written consent, a significant
reduction of your duties, authority or responsibilities relative to your duties,
authority and responsibilities as in effect immediately prior to such reduction.
e. Termination Date. "Termination Date" means any of the following: (i)
the date on which the Company delivers to you a written notice of termination or
such later date, not to exceed ninety days, specified in the notice of
termination; (ii) in the event the Term ends by reason of your death or
Disability, the date of death or determination of Disability; and (iii) in the
event this Agreement is terminated by you, the date on which you deliver a
written notice of termination to the Company, or such later date in accordance
with Section 2, above. Any notice of termination shall specify the provision(s)
in this Agreement claimed to provide a basis for
<PAGE>
termination.
7. Limitation on Payments. In the event that the severance and other benefits
provided for in this Agreement or otherwise payable to you (i) would constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then such
severance and other benefits shall be either (i) delivered in full, or (ii)
delivered as to such lesser extent which would result in no portion of such
severance and other benefits being subject to excise tax under Section 4999 of
the Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by you on an after-tax basis, of the greatest
amount of benefits, notwithstanding that all or some portion of such benefits
may be taxable under Section 4999 of the Code. Unless you and the Company agree
otherwise in writing, any determination required under this Section shall be
made in writing by the Company's independent public accountants (the
"Accountants"). Such determination shall be conclusive and binding upon you and
the Company for all purposes. For purposes of making the calculations required
by this Section, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. You and the Company shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
8. Non-Compete; Non-Solicit.
a. Each of the parties hereto recognize that your services are special
and unique and that the level of compensation and the other provisions herein
for compensation and benefits are partly in consideration of and conditioned
upon your agreement not to compete with the Company, and that your covenant not
to compete or solicit as set forth in this Section during and after the Term is
essential to protect the business and good will of the Company.
<PAGE>
b. You agree that during the Term and for a period ending twenty-four
months following the Termination Date (the "Covenant Period"), you will not
either directly or indirectly, engage in any activity in competition with any
product, service or other activity of the Company (said competing products,
services or activities to be determined and identified at the Company's
reasonable discretion at the Termination Date, which may include businesses or
markets that the Company has expressed its intent to enter), or harmful or
contrary to the interests of the Company, including, but not limited to:
accepting employment with or serving as a consultant or advisor or director to
any employer that is in competition with the Company or acting against the
interests of the Company; or disclosing or misusing any confidential,
proprietary or material information concerning the Company (such information
includes, without limitation, information regarding the Company's operations,
its products and services, product designs, business plans, strategic plans,
marketing and distribution plans and arrangements, customers, and financial
statements, budgets and forecasts, and employee names, titles, compensation,
skills and performance); or participating in any hostile takeover attempt of the
Company.
c. You agree that during the Covenant Period, you will not, either
directly or indirectly: (i) induce or attempt to influence any employee of the
Company to leave his/her employ with the Company; (ii) solicit or encourage
then-current employees of the Company to apply for employment with any person or
entity with which you are employed or with which you intend to become employed,
or in which you have or intend to have a financial interest, as a consultant,
recruiter, independent contractor or otherwise, or in which you have a
substantial financial or equity interest; or (iii) provide to any other person
or entity the names of any employee who is employed by the Company on the
Termination Date. For purposes of this Section, the term "Company" shall mean
and include the Company, any subsidiary or affiliate of the Company, any
successor to the business of the Company (by merger, consolidation, sale of
assets or stock or otherwise) and any other corporation or entity for which you
may serve as a director, officer or employee at the request of the Company or
any successor of the Company.
d. You agree that the Company would suffer an irreparable injury if you
were to
<PAGE>
breach the covenants contained in Sections 8.b or 8.c and that the
Company would by reason of such breach or threatened breach be entitled to
injunctive relief in a court of appropriate jurisdiction and you hereby
stipulate to the entering of such injunctive relief prohibiting you from
engaging in such breach.
e. If any of the restrictions contained in this Section 8 shall be deemed
to be unenforceable by reason of the extent, duration or geographical scope or
other provisions thereof, then the parties hereto contemplate that the court
shall reduce such extent, duration, geographical scope or other provision hereof
and enforce this Section 8 in its reduced form for all purposes in the manner
contemplated hereby.
9. Employee Benefit Programs.
a. You shall be eligible to participate in the employee and executive
benefit programs maintained by the Company, including (without limitation) any
qualified or non-qualified retirement plans or programs, savings and
profit-sharing plans, stock option, restricted stock and other equity plans,
bonus plans, deferred compensation plans, life, short-term and long-term
disability, medical, accident and other insurance programs, paid vacations in
accordance with the policy for executive officers as may be in effect from time
to time, and similar plans or programs, subject in each case to the generally
applicable terms and conditions of any such plan or program and to the sole
determination of the Board, or any committee of the Board, or other committee
administering such plan or program. During the Term of this Agreement (and
thereafter pursuant to Section 5.e), the Company shall provide you with (i) life
insurance coverage in an amount equal to $5 million and a medical benefits
program with a supplemental payment coverage of $15,000 per year, which benefits
will be provided to you in addition to the programs maintained for other
employees; (ii) an annual reimbursement for financial and tax and estate
planning expenses incurred by you in an amount not to exceed 1% of your Base
Salary; and (iii) the various executive officer perquisites to the extent the
Company continues to offer them from time to time.
b. Stock option, restricted stock or other equity benefits, if any, shall
be awarded
<PAGE>
pursuant to the terms and conditions of the Company's equity plans
for employees, as may be in effect from time to time. The Company's 1995 Equity
Participation Plan, as amended, provides that stock option and stock
appreciation rights may be subject to forfeiture and any option gain may be
payable by you to the Company during a period specified in the plan in the event
you may engage in activities that are in competition with the Company following
your termination. You are encouraged to carefully review the terms of the plan
and any other equity plans that may be in effect from time to time, and any
stock option agreements in their entirety.
10. Successors.
a. Company's Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
include any successor to the Company's business and assets which executes and
delivers the assumption agreement described in this Section or which becomes
bound by the terms of this Agreement by operation of law.
b. Employee's Successors. The terms of this Agreement and all your rights
hereunder shall inure to the benefit of, and be enforceable by, your personal or
legal representatives, executors, administrators, successors, heirs, devisees
and legatees.
11. Miscellaneous Provisions.
a. Withholding. All payments to you pursuant to this Agreement shall be
subject to withholding of all amounts required to be withheld by applicable
Internal Revenue Service and State tax authorities by the Company and shall be
conditioned upon your submission of all information or execution of all
instruments necessary to enable the Company to comply with such withholding
requirements.
<PAGE>
b. Confidentiality Agreement. As a condition of your employment, you have
executed the Company's standard form of confidential inventions and trade
secrets agreement. You hereby reaffirm that during the Term and thereafter you
will comply with all provisions of such agreement and agree that you will enter
into such modifications or amendments thereof as the Company may reasonably
request from time to time.
c. Stock Ownership Guidelines. During the Term, you agree to comply with
the corporate officer stock ownership guidelines approved by the Board or any
committee of the Board, as may be amended from time to time.
d. Notice. Any notice required to be given under this Agreement shall be
given in writing, either by personal delivery or by causing such written notice
to be mailed, first class postage prepaid, in the United States mail, to the
parties at the addresses set forth below, or at such other address for a party
as shall be specified by like notice, provided that notices of change of address
shall be effective only upon receipt thereof.
Company: Storage Technology Corporation
One StorageTek Drive
Louisville, Colorado 80028
Attention: General Counsel
Executive: David E. Weiss
6900 Pawnee Way
Longmont, Colorado 80503
e. Amendment or Modification. This Agreement may not be amended or
modified and no provision shall be waived unless agreed to in writing and signed
by you and the Company. No waiver by either party of any breach of this
Agreement shall be deemed a waiver of any other provision or condition at
another time.
f. Assignment. The rights of any person to payments or benefits under
this
<PAGE>
Agreement shall not be made subject to option or assignment, either by
voluntary or involuntary assignment or by operation of law, including (without
limitation) bankruptcy, garnishment, attachment or other creditor's process, and
any action in violation of this Section shall be void. The Company may assign
its rights under this Agreement to an affiliate.
g. Governing Law. This Agreement is entered into in accordance
with, and shall be interpreted pursuant to the provisions of, the laws of the
State of Colorado.
h. Arbitration. Any controversy or claim arising between you and the
Company including, without limitation, any claims, demands or causes of action
alleging wrongful discharge; unlawful discrimination based on sex, age, race,
national origin, disability, religion or other unlawful basis; breach of
contract; or any claims seeking damages under any federal, state or local law,
rule, regulation or common law theory; but excluding any claims by you for
worker's compensation or unemployment compensation, and excluding any claims by
the Company for injunctive relief (for instance, for breach of confidentiality,
breach of a covenant not to compete, violation of trade secrets, or unfair
competition), shall be resolved by final and binding arbitration. By signing
below, the Employee voluntarily waives any right to submit claims to a judge or
jury in either state or federal court. The arbitration shall be held in Denver,
Colorado, or elsewhere by mutual agreement. The selection of the arbitrator and
procedure shall be governed by the Employment Arbitration Rules of the American
Arbitration Association, as amended. The arbitrator shall be someone with a
minimum seven years of employment law background and from the AAA Commercial
Arbitration Panel or, if both parties agree, the Judicial Arbiters Group. The
arbitrator shall apply the applicable substantive law to any claim; for any
state law claim or damages issues, the law of Colorado shall govern, including
but not limited to the provisions of C.R.S. Sections 13-21-102(5). Judgment upon
an award rendered by an arbitration may be entered by any court having
jurisdiction. The Company will pay the cost normally associated with the
arbitration, including the arbitrator's fee and any fee for a hearing facility.
Following resolution of all claims between the parties in an arbitration
proceeding, if the arbitrator so determines, the Company shall reimburse you for
all reasonable legal fees and expenses that you incurred in connection with a
successful claim to enforce your rights under
<PAGE>
this Agreement.
i. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair the validity or enforceability of the remaining provisions of this
Agreement, which shall remain in full force and effect in accordance with their
terms.
j. Entire Agreement. This Agreement, together with the other agreements
referenced herein, embody the entire agreement between the parties relating to
the subject matter hereof, and supersede all previous agreements or
understandings, whether oral or written.
k. Knowledge and Representation. By signing below, you acknowledge
that the terms of this Agreement have been fully explained to you, that you
understand the nature and extent of the rights and obligations provided under
this Agreement, and the you have been encouraged to and have had an opportunity
to consult legal counsel prior to signing this Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer or representative, as of
the day and year first above written.
STORAGE TECHNOLOGY CORPORATION
By: /s/ Robert E. Lee
-----------------------------
Title: Chairman of the Human Resources
and Compensation Committee
EMPLOYEE
/s/ David E. Weiss
- ------------------
David E. Weiss
<PAGE>
STORAGE TECHNOLOGY CORPORATION
SCHEDULE 1
Grant Number Grant Date #Shares Exercise Price
_______________________________________________________________________________
910030 08/01/91 2,400 $24.500
960050 12/10/96 70,830 $24.250
960051 12/10/96 38,138 $24.250
960855 02/05/98 80,402 $30.313
PF0026 02/05/98 34,458 $30.313
961753 02/05/99 89,840 $37.063
PF0121 02/05/99 38,503 $37.063
<PAGE>
EXHIBIT A
SETTLEMENT AND RELEASE
1. In exchange for payment of salary (in the amount of ________) and bonus
(in the amount of _________) to ___________ ("Employee"), by Storage
Technology Corporation ("Company") and other good and valuable
consideration, Employee hereby irrevocably and unconditionally releases
and discharges the Company, its past and present subsidiaries,
divisions, officers, directors, agents, employees, successors, and
assigns (separately and collectively, "releasees") jointly and
individually, from any and all claims, known or unknown, which he/she,
his/her heirs, successors or assigns have or may have against releasees
and any and all liability which releasees may have to him/her whether
denominated claims, demands, causes of action, obligations, damages, or
liabilities arising from any and all bases, however denominated,
including but not limited to, any claims of discrimination under the Age
Discrimination in Employment Act ("ADEA"), the Older Workers Benefit
Protection Act, the Rehabilitation Act, the Family Medical Leave Act,
the Americans with Disabilities Act, Title VII of the Civil Rights Act
of 1964, the Civil Rights Act of 1991 or any federal or state civil
rights act, claims for wrongful discharge, breach of contract, or for
damages under any other federal, state or local law, rule or regulation,
or common law under any theory; provided, however, that this release
does not affect (1) any claims for benefits which have vested or shall
vest on or before the effective date of this Settlement and Release
("Release") under any of the Company's benefit plans; (2) any claims for
indemnification for acts of Employee which have occurred or may occur as
an officer or employee of the Company; or (3) any claims which may arise
after the execution of this Release. This release specifically excepts
any claim Employee may wish to make for unemployment compensation, and
the Company agrees not to contest any claim made by Employee for
unemployment compensation. This release is for any relief, no matter
how denominated, including, but not limited to, back pay, front pay,
compensatoy damages, punitive damages, or damages for pain and
suffering. Employee further agrees that he/she will not file or permit
to be filed on his/her behalf any such claim, will not permit
himself/herself to be a member of any class seeking relief against the
releasees and will not counsel or assist in the prosecution of claims
against the releasees, whether those claims are on behalf of
himself/herself or others, unless he/she is under a court order to do
so.
2. Employee agrees that by signing this Release, he/she is giving up the
right to sue for age discrimination, and that under this Release
Employee shall receive consideration to which he/she is not otherwise
entitled, and would not receive but for his/her release of rights under
the ADEA. Employee has up to twenty-one (21) days after delivery of
this Release to consider whether to sign this Release. Employee agrees
that, after he/she has signed and delivered this Release to the Company,
this Release will not be effective or enforceable until the end of a
seven (7) day revocation period beginning the day after the Employee
signs this Release, and that Employee will not receive the severance
payment due under the Employment Agreement until this seven-day period
has expired. During this seven-day period, Employee may revoke this
Release, without reason and in his/her sole judgment, but he/she may do
so only by delivering a written statement of revocation
<PAGE>
to the Company
to the attention of General Counsel. If the Company does not receive a
written statement of revocation from Employee by the end of the
revocation period, then this Release will become legally enforceable and
Employee may not thereafter revoke this Release.
3. Employee agrees that this Release shall be governed by federal law and the
internal laws of the State of Colorado, irrespective of the choice of law
rules of any state.
ACKNOWLEDGMENT:
Employee's signature below acknowledges that he/she has read this document
fully, that he/she understands and agrees to its contents, that he/she
understands that it is a legally binding document, and that he/she has been
advised to consult a lawyer of his/her choosing before signing this Release, and
has had the opportunity to do so.
- -------------------------- -----------------------------------
Date EMPLOYEE
This Release presented to Employee on __________________________.
STORAGE TECHNOLOGY CORPORATION
1995 EQUITY PARTICIPATION PLAN
(As amended through March 5, 1999)
SECTION 1
INTRODUCTION
1.1 Establishment. Effective as provided in Section 22, the Company hereby
establishes a plan of long-term stock-based compensation incentives for selected
employees, directors and consultants of the Company and its affiliated
corporations. The plan shall be known as the Storage Technology Corporation 1995
Equity Participation Plan (the "1995 Plan").
1.2 Purpose. The purpose of the 1995 Plan is to provide employees,
directors and consultants selected for participation in the 1995 Plan with added
incentives to continue in the service of the Company and its affiliates and to
create in such employees, directors and consultants a more direct interest in
the future success of the operations of the Company and its affiliated
corporations by relating incentive compensation to the achievement of long-term
corporate economic objectives. The 1995 Plan is also designed to attract key
employees, directors and consultants and to retain and motivate participating
employees, directors and consultants by providing an opportunity for equity
investment in the Company.
1.3 No Effect on 1987 Plan Options. Options granted pursuant to the
Storage Technology Corporation 1987 Equity Participation Plan (the "1987 Plan")
shall be governed by the terms and provisions of the option agreements covering
such grants and by the provisions of the 1987 Plan.
SECTION 2
DEFINITIONS
2.1 Definitions. The following terms shall have the meanings set forth
below:
(a) "Affiliated Corporation" means any corporation that is either a
parent corporation with respect to the Company or a subsidiary corporation with
respect to the Company (within the meaning of Sections 424(e) and (f),
respectively, of the Internal Revenue Code).
(b) "Board" means the Board of Directors of the Company.
<PAGE>
(c) "Cause" means performance or conduct problems resulting in
discharge, as determined by the Company or Affiliated Company, which
determination will be conclusive.
(d) "Committee" means a committee designated by the Board to
administer the Plan or, if no committee is so designated, the Board.
(e) "Common Stock" means the Company's $.10 par value voting common
stock.
(f) "Common Stock Equivalent" means a right to receive Common Stock
in the future that may be granted to a Participant pursuant to Sections 12, 13
or 15 in lieu of a current issuance of Common Stock, subject to certain
conditions and limitations imposed in accordance with such Sections.
(g) "Consultant" means a natural person who performs services for
the Company, or any Affiliated Corporation, or any division thereof in exchange
for consideration, but who is not an Employee.
(h) "Director" means a member of the Board.
(i) "Effective Date" means the effective date of the 1995 Plan, as
set forth in Section 22 hereof.
(j) "Eligible Employees" means those Employees upon whose judgment,
initiative and efforts the Company or the Affiliated Corporations are, or are
expected to become, largely dependent for the successful conduct of their
business.
(k) "Employee" means a natural person who is deemed an employee
(including, without limitation, an officer or director who is also an employee)
of the Company, or any Affiliated Corporation, in accordance with the rules
contained in Section 3401(c) of the Internal Revenue Code and the regulations
thereunder.
(l) "Fair Market Value" means with respect to Common Stock, as of
any date, the closing price of a share of Common Stock on the New York Stock
Exchange as reported by The Wall Street Journal for the last trading day prior
to that date. If no such prices are reported, then Fair Market Value shall mean
the average of the high and low sale prices for the Common Stock (or if no sale
prices are reported, the average of the high and low bid prices) as reported by
the principal regional stock exchange, or if not so reported, as reported by
Nasdaq or a quotation system of general circulation to brokers and dealers.
<PAGE>
(m) "Incentive Stock Option" means the right to purchase Common
Stock granted to an Employee pursuant to Sections 6 and 7, which constitutes an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code, and which may or may not be issued with related Stock Appreciation Rights.
(n) "Internal Revenue Code" means the Internal Revenue Code of 1986,
as it may be amended from time to time.
(o) "Long-Term Employee" means a person who, as of the date he or
she ceases to be an Employee of the Company or any Affiliated Corporation, has
been an Employee of the Company or any Affiliated Corporation for six years or
more, with no break in such employment of longer than one year.
(p) "MBO Payment" means a payment to a Participant pursuant to the
Company's MBO Plan, which payment may be made either in shares of Common Stock,
Common Stock Equivalents or in cash, or partly in Common Stock, partly in Common
Stock Equivalents and partly in cash, as determined in accordance with the
provisions of Section 13.
(q) "MBO Equity Plan" means the Company's Management By Objective
Plan, as established by the Board or the Committee from time to time, pursuant
to which MBO Payments are made from time to time in the manner and under the
conditions established by the Board or the Committee.
(r) "Non-Qualified Option" means a right to purchase Common Stock
granted to a Participant pursuant to Sections 6 and 8, which does not qualify as
an Incentive Stock Option or which is designated as a Non-Qualified Option, and
which may or may not be issued with related Stock Appreciation Rights.
(s) "Outside Director" means a Director who is not an Employee.
(t) "Participant" means an Eligible Employee, Director or Consultant
designated by the Committee from time to time during the term of the 1995 Plan
to receive one or more of the stock-based compensation incentives provided under
the 1995 Plan.
(u) "Reduction in Force" means any termination of employment that,
in the sole judgment of the Company, is (i) made at the request of the Company
or an Affiliated Corporation and is due to the elimination of the Employee's
position, or (ii) a reduction in the
<PAGE>
number of persons employed by the Company,
either overall or in the Employee's function, department, division or other
relevant workplace unit.
(v) "Restricted Stock Award" means an award of Common Stock granted
to a Participant pursuant to Section 10 that is subject to certain restrictions
imposed in accordance with the provisions of such Section.
(w) "Retire" means any termination of employment that is deemed to
be a "Retirement" by a resolution of the Board of Directors, or any termination
of employment made at the request of the Employee if, as of the date of such
termination, such Employee (a) is age 62 or older and (b) has, at the time of
such termination, been employed by the Company or any Affiliated Corporation for
six years or more, with no break in such employment of longer than one year.
(x) "Retired" means the status of any former Employee after he or
she Retires.
(y) "Stock Appreciation Right" means a right granted to a
Participant pursuant to Section 9 to receive a payment from the Company equal to
the difference between the Fair Market Value of one or more shares of Common
Stock subject to a Non-Qualified Option or an Incentive Stock Option and the
exercise price of such shares under the terms of such Stock Option.
(z) "Stock Option" means an Incentive Stock Option or a
Non-Qualified Option.
2.2 Gender and Number. Except when otherwise indicated by the context, the
masculine gender shall also include the feminine gender, and the definition of
any term herein in the singular shall also include the plural.
SECTION 3
PLAN ADMINISTRATION
3.1 Administration Generally. The 1995 Plan shall be administered by the
Board or Committee. In accordance with the provisions of the 1995 Plan, the
Committee, in its sole discretion:
<PAGE>
(i) shall select the Participants from Eligible
Employees, Directors and Consultants;
(ii) shall determine the number of shares of Common Stock to be
subject to Incentive Stock Options, Non-Qualified Options, Stock Appreciation
Rights, Restricted Stock Awards and other Common Stock or Common Stock
Equivalent awards granted pursuant to the 1995 Plan;
(iii) shall determine the number of shares of Common Stock or
Common Stock Equivalents to be issued as MBO Payments;
(iv) shall determine the time at which such options, rights,
awards and payments are to be granted;
(v) shall fix the exercise price, period and the manner in
which a Stock Option becomes exercisable;
(vi) shall establish the duration and nature of Restricted Stock
Award restrictions;
(vii) shall determine the Fair Market Value of the Common Stock,
in accordance with Section 2.1(l) of the 1995 Plan;
(viii) shall determine whether and under what circumstances, if
any, a Stock Option or Stock Appreciation Right may be settled in cash or Common
Stock Equivalents instead of Common Stock;
(ix) may reduce the exercise price of any Stock Option or Stock
Appreciation Right to the then current Fair Market Value if the Fair Market
Value of the Common Stock covered by such option or right shall have declined
since the date the Stock Option was granted;
(x) may modify or amend the terms and conditions of any Stock
Option, Stock Appreciation Right, Restricted Stock Award or other Common Stock
award, subject to Section 19 of the Plan (including, but not limited to,
accelerating vesting or waiving forfeiture restrictions);
(xi) may institute an option exchange program;
<PAGE>
(xii) may authorize any person to execute on behalf of the
Company any instrument required to effect the grant of a Stock Option, Stock
Appreciation Right, Restricted Stock Award or other Common Stock or Common Stock
Equivalent award previously granted by the Committee; and
(xiii) shall establish such other terms and requirements of the
various compensation incentives under the 1995 Plan as the Committee may deem
necessary or desirable and consistent with the terms of the 1995 Plan.
The Committee shall determine the form or forms of the agreements with
Participants, which shall evidence the particular provisions, terms, conditions,
rights and duties of the Company and the Participants with respect to Incentive
Stock Options, Non-Qualified Options, Stock Appreciation Rights, Common Stock
Equivalent and Restricted Stock Awards granted pursuant to the 1995 Plan, which
provisions need not be identical except as may be provided herein. The Committee
may from time to time adopt such rules and regulations for carrying out the
purposes of the 1995 Plan as it may deem proper and in the best interests of the
Company. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the 1995 Plan or in any agreement entered into
hereunder in the manner and to the extent it shall deem expedient to carry the
1995 Plan into effect, and it shall be the sole and final judge of such
expediency. No member of the Committee shall be liable for any action or
determination made in good faith. The determinations, interpretations and other
actions of the Committee pursuant to the provisions of the 1995 Plan shall be
binding and conclusive for all purposes and on all persons, subject only to the
review and control of the Board on all Plan matters except selection of
Participants.
3.2 Multiple Administrative Bodies. If permitted by Rule 16b-3, the 1995
Plan may be administered by different bodies with respect to Directors who are
Employees, Outside Directors, officers (within the meaning of Rule 16a-1(f)) who
are not Directors, and Employees who are neither Directors nor officers.
3.3 Administration With Respect to Directors and Officers. With respect to
grants of Stock Options, Stock Appreciation Rights, Restricted Stock Awards or
other Common Stock or Common Stock Equivalent awards under the 1995 Plan to
Employees who are also officers or Directors, the 1995 Plan shall be
administered by:
(a) the Board, if the Board may administer the 1995 Plan and still
have transactions under the 1995 Plan qualify for exemption under Rule 16b-3, or
(b) a Committee designated by the Board to administer the 1995 Plan,
which Committee shall be constituted (i) in such a manner as to permit awards
granted under
<PAGE>
the 1995 Plan to qualify for exemption under Rule 16b-3 and (ii)
in such a manner as to satisfy applicable laws.
3.4 Administration With Respect to Other Persons. With respect to grants
of Stock Options, Stock Appreciation Rights, Restricted Stock Awards or other
Common Stock or Common Stock Equivalent awards to Employees who are neither
Directors nor officers, the 1995 Plan shall be administered by:
(a) the Board or
(b) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy applicable laws.
3.5 Committee Composition. Once a Committee has been appointed pursuant to
Section 3.3 or 3.4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) or remove all members of the Committee
and thereafter directly administer the Plan, all to the extent permitted by
applicable laws and, in the case of a Committee appointed under Section 3.3, to
the extent permitted by Rule 16b-3 as it applies to transactions intended to
qualify thereunder as exempt transactions.
SECTION 4
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. Thirteen Million Five Hundred Fifty Thousand
(13,550,000) shares of Common Stock are authorized for issuance under the 1995
Plan in accordance with the provisions of the 1995 Plan and subject to such
restrictions or other provisions as the Committee may from time to time deem
necessary. This authorization may be increased from time to time by approval of
the Board and the stockholders of the Company. Shares of Common Stock that are
issued upon exercise of Incentive Stock Options, Non-Qualified Options, or Stock
Appreciation Rights or pursuant to MBO Payments, shares of Common Stock that are
issued as Restricted Stock Awards, shares of Common Stock that are issued in
connection with Common Stock Equivalents, and shares of Common Stock that are
issued pursuant to a plan adopted pursuant to Section 15, shall be applied to
reduce the number of shares of Common Stock remaining available for future
issuance under the 1995 Plan.
<PAGE>
4.2 Unused and Forfeited Stock. Any shares of Common Stock that are
subject to an Incentive Stock Option or a Non-Qualified Option that expires or
for any reason is terminated unexercised, and with respect to which no related
Stock Appreciation Right has been exercised, any shares of Common Stock that are
subject to Common Stock Equivalents or to a Restricted Stock Award and that are
forfeited (the "Forfeited Restricted Stock"), and any shares of Common Stock
that for any other reason are not issued to a Participant (not including shares
withheld pursuant to Section 20.2) or are forfeited (if forfeited, the "Other
Forfeited Stock"), shall automatically become available for use under the 1995
Plan; provided, however, that (i) no shares of Forfeited Restricted Stock or
Other Forfeited Stock may be subject to Incentive Stock Options and (ii) such
shares shall not be returned to the 1995 Plan if prohibited by Rule 16b-3.
4.3 Capital Adjustments.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Stock Option, Stock Appreciation Right and Common Stock
Equivalent ("Rights"), and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Stock Options, Stock
Appreciation Rights or Common Stock Equivalents have yet been granted or that
have been returned to the Plan upon cancellation or expiration of a Stock
Option, Stock Appreciation Right or Common Stock Equivalents (the "Shares
Available for Future Grant"), as well as the price per share of Common Stock
covered by each outstanding Stock Option or Stock Appreciation Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued and outstanding
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such proportionate adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into or exercisable for shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number of Shares Available for Future Grant or the number or
price of shares of Common Stock subject to outstanding Stock Options or Stock
Appreciation Rights.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that a Stock Option or
Stock Appreciation Right
<PAGE>
has not been previously exercised, it will terminate
immediately prior to the consummation of such proposed action. The Committee
may, in the exercise of its sole discretion in such instances, declare that any
Stock Option or Stock Appreciation Right shall terminate as of a date fixed by
the Committee and give each Participant the right to exercise his or her Stock
Option or Stock Appreciation Right in whole or in part, including with respect
to shares as to which the Stock Option or Stock Appreciation Right would not
otherwise be exercisable. Unless determined otherwise by the Committee, Common
Stock Equivalents shall convert into shares of Common Stock immediately prior to
the consummation of any such dissolution or liquidation.
(c) Merger or Asset Sale. In the event of a merger or consolidation
of the Company with or into another corporation, or the sale of all or
substantially all of the assets of the Company, each outstanding Stock Option,
Stock Appreciation Right and Common Stock Equivalent may be assumed or an
equivalent Stock Option, Stock Appreciation Right or Common Stock Equivalent may
be substituted by the successor corporation or a parent or subsidiary of the
successor corporation. The Committee may, in lieu of such assumption or
substitution of Stock Options and Stock Appreciation Rights, provide for
Optionees to have the right to exercise his or her Stock Option or Stock
Appreciation Right in whole or in part, including with respect to shares as to
which it would not otherwise be exercisable. If the Committee makes a Common
Stock Equivalent convertible into shares of Common Stock or makes a Stock Option
or Stock Appreciation Right exercisable in lieu of assumption or substitution in
the event of a merger, consolidation or sale of assets, the Committee shall
notify the Participants and, in the case of a Stock Option or Stock Appreciation
Right, shall notify the Optionee that the Stock Option or Stock Appreciation
Right shall be fully exercisable for a period of thirty (30) days from the date
of such notice, and the Stock Option or Stock Appreciation Right shall terminate
upon the expiration of such period. For the purposes of this paragraph, the
Stock Option, Stock Appreciation Right or Common Stock Equivalent shall be
considered assumed if, following the merger, consolidation or sale of assets,
the Stock Option, Stock Appreciation Right or Common Stock Equivalent confers
the right to purchase or receive, for each share of Common Stock subject to the
Stock Option, Stock Appreciation Right or Common Stock Equivalent immediately
prior to the merger, consolidation or sale of assets, the consideration (whether
stock, cash or other securities or property) received in the merger,
consolidation or sale of assets by holders of Common Stock for each share held
on the effective date of the transaction (and, if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding shares); provided, however, that if such consideration
received in the merger, consolidation or sale of assets was not solely common
stock of the successor corporation or its parent, the Committee may, with the
consent of the successor corporation, provide for the consideration to be
received upon conversion of a Common Stock Equivalent or upon the exercise of
the Stock Option or Stock Appreciation Right, for each share of Common Stock
<PAGE>
subject to the Stock Option, Stock Appreciation Right or Common Stock Equivalent
to be solely common stock of the successor corporation or its parent equal in
fair market value to the per share consideration received by holders of Common
Stock in the merger, consolidation or sale of assets.
SECTION 5
PARTICIPATION
5.1 Eligibility. Participants in the 1995 Plan shall be those Eligible
Employees, Directors and Consultants who, in the judgment of the Committee, are
performing, or during the term of their service to the Company are expected to
perform, vital services in the management, operation and development of the
Company or an Affiliated Corporation, and significantly contribute or are
expected to significantly contribute to the achievement of long-term corporate
economic objectives. Participants who are Employees may be granted from time to
time one or more Incentive Stock Options (with or without Stock Appreciation
Rights), and Participants (whether or not they are Employees) may be granted one
or more Non-Qualified Options (with or without Stock Appreciation Rights), one
or more Restricted Stock Awards, one or more MBO Payments in Common Stock
Equivalents or in shares of Common Stock, Common Stock equivalents pursuant to
Section 12, and one or more other Common Stock or Common Stock Equivalent awards
pursuant to Section 15; provided, however, that the grant of each such option,
right, award or payment shall be separately approved by the Committee, and
receipt of one such option, right, award or payment shall not result in
automatic receipt of any other option, right, award or payment. Upon
determination by the Committee that a Stock Option, Stock Appreciation Right,
Restricted Stock Award, MBO Payment or other Common Stock or Common Stock
Equivalent award is to be granted to a Participant, written notice shall be
given to such person, specifying the terms, conditions, rights and duties
related thereto. Each Participant shall, if required by the Committee, enter
into an agreement with the Company, in such form as the Committee shall
determine and as is consistent with the provisions of the 1995 Plan, specifying
such terms, conditions, rights and duties. Stock Options, Stock Appreciation
Rights, Restricted Stock Awards, MBO Payments and other Common Stock or Common
Stock Equivalent awards shall be deemed to be granted as of the date specified
in the grant resolution of the Committee, which date shall be the date of any
related agreement with the Participant. In the event of any inconsistency
between the provisions of the 1995 Plan and any such agreement entered into
hereunder, the provisions of the 1995 Plan shall govern.
5.2 Limitations. The following limitations shall apply to grants of Stock
Options and Stock Appreciation Rights to Participants:
<PAGE>
(a) No Participant shall be granted, in any fiscal year of the
Company, Stock Options and Stock Appreciation Rights to purchase more than
500,000 shares.
(b) The foregoing limitation shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 4.3.
(c) If a Stock Option or Stock Appreciation Right is canceled in the
same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 4.3), the canceled Stock
Option or Stock Appreciation Right shall be counted against the limit set forth
in Section 5.2(a). For this purpose, if the exercise price of a Stock Option or
Stock Appreciation Right is reduced, the transaction will be treated as a
cancellation of the Stock Option or Stock Appreciation Right and the grant of a
new Stock Option or Stock Appreciation Right.
(d) Incentive Stock Options may not be granted to Outside Directors
or to Consultants.
5.3 Rule 16b-3. Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, MBO Payments and other Common Stock or Common Stock Equivalent awards
granted to Participants who are subject to Section 16 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), must comply with the applicable
provisions of Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to 1995 Plan transactions.
SECTION 6
STOCK OPTIONS
6.1 Grant of Stock Options. Coincident with or following designation for
participation in the 1995 Plan, a Participant may be granted one or more Stock
Options. The Committee in its sole discretion may designate whether a Stock
Option granted to an Employee is to be considered an Incentive Stock Option or a
Non-Qualified Option. The Committee may grant both an Incentive Stock Option and
a Non-Qualified Option to the same Employee at the same time or at different
times. Incentive Stock Options and Non-Qualified Options, whether granted at the
same or different times, shall be deemed to have been awarded in separate
grants, shall be clearly identified, and in no event will the exercise of one
Stock Option affect the right to exercise any other Stock Option or affect the
number
<PAGE>
of shares of Common Stock for which any other Stock Option may be
exercised. All Stock Options granted to Participants who are not Employees shall
be Non-Qualified Options.
6.2 Manner of Stock Option Exercise. A Stock Option may be exercised by a
Participant in whole or in part from time to time, subject to the conditions
contained herein, (i) by delivery of written notice of exercise to the Company
at its principal office in Louisville, Colorado (Attention: Corporate
Secretary), in person or through mail, facsimile or electronic mail, or by
delivery of notice of exercise in such other method as has been approved by the
Committee, and (ii) by paying in full, with the written notice of exercise or at
such other time as the Committee may establish, the total exercise price under
the Stock Option for the shares being purchased. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Stock Option (or
portion thereof) that is being exercised and the number of shares with respect
to which the Stock Option is being exercised. The exercise of the Stock Option
shall be deemed effective upon receipt of such notice by the Corporate Secretary
and payment to the Company. As soon as practicable after the effective exercise
of the Stock Option, and upon satisfaction of all applicable withholding
requirements pursuant to Section 20, the Participant shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased and the
Company shall deliver to the Participant one or more duly issued and executed
stock certificates evidencing such ownership.
6.3 Payment of Stock Option Exercise Price. At the time of the exercise of
a Stock Option, payment of the total Stock Option exercise price for the shares
to be purchased shall be made in the manner specified in the option agreement
relating to such Stock Option, which may include any or all of the following
methods of payment:
(i) in cash or by check;
(ii) by transfer from the Participant to the Company of shares
of Common Stock (other than shares of Common Stock that the Committee determines
by rule may not be used to exercise Stock Options) with a then current aggregate
Fair Market Value equal to the total Stock Option exercise price;
(iii) delivery to the Company of (A) a properly executed exercise
notice, (B) irrevocable instructions to a broker to sell a sufficient number of
the shares being exercised to cover the exercise price and to promptly deliver
to the Company the amount of sale proceeds required to pay the exercise price
and any required tax withholding relating to the exercise, and (C) such other
documentation as the Committee and the broker shall require to effect a same-day
exercise and sale;
<PAGE>
(iv) delivery to the Company of (A) a properly executed exercise
notice, (B) irrevocable instructions to a broker or other third party acceptable
to the Company to hold the shares being exercised as collateral for a loan to
the Optionee of an amount sufficient to cover the exercise price and to promptly
deliver to the Company the amount of loan proceeds required to pay the exercise
price and any required tax withholding relating to the exercise and (C) such
other documentation as the Committee and the broker or other third party shall
require to effect the transaction;
(v) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vi) any combination of the foregoing methods of payment;
or
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by applicable laws, rules and
regulations and by the agreement relating to the Stock Option being exercised.
In the event that the option agreement does not specify the acceptable methods
of payment of the exercise price, payment may be made by any of the methods
specified in clauses (i) through (iii), inclusive, of this Section 6.3, or any
combination of such methods of payment.
6.4 Stockholder Privileges. No Participant shall have any rights as a
stockholder with respect to any shares of Common Stock covered by a Stock Option
until the Participant becomes the holder of record of such Common Stock, and no
adjustments shall be made for dividends or other distributions or other rights
as to which there is a record date preceding the date such Participant becomes
the holder of record of such Common Stock.
SECTION 7
INCENTIVE STOCK OPTIONS
7.1 Incentive Stock Option Exercise Price. The per share price to be paid
by a Participant at the time an Incentive Stock Option is exercised shall be
determined by the Committee at the time an Incentive Stock Option is granted (or
deemed to have been granted under applicable tax rules), but in no event shall
such exercise price be less than:
<PAGE>
(a) one hundred percent of the Fair Market Value, on the date the
Incentive Stock Option is granted (or deemed to have been granted under
applicable tax rules), of one share of the stock to which such Stock Option
relates; or
(b) one hundred and ten percent of the Fair Market Value, on the
date the Incentive Stock Option is granted (or deemed to have been granted under
applicable tax rules), of one share of the stock to which such Stock Option
relates if, at the time the Incentive Stock Option is granted, the Participant
owns, directly or indirectly (as determined pursuant to Section 424(d) of the
Internal Revenue Code), ten percent or more of the total combined voting power
of all classes of stock of the Company or of any Affiliated Corporation (such a
Participant is referred to as a "10% Holder").
7.2 Number of Option Shares. The number of shares of Common Stock subject
to an Incentive Stock Option shall be designated by the Committee at the time
the Committee decides to grant an Incentive Stock Option.
7.3 Aggregate Limitation of Stock Exercisable Under Options. To the extent
the aggregate Fair Market Value, determined as of the time an Incentive Stock
Option is granted, of the shares of Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by an Option Holder in any
calendar year under the 1995 Plan or otherwise, granted by the Company and
Affiliated Corporations, exceeds $100,000, such excess shall be treated as a
Non-Qualified Option.
7.4 Duration of Incentive Stock Options. The period during which an
Incentive Stock Option may be exercised shall be fixed by the Committee, but in
no event shall such period be more than ten years from the date the Stock Option
is granted, or, in the case of Participants who are 10% Holders as described in
Section 7.1(b), five years from the date the Stock Option is granted. No
Incentive Stock Option with respect to which Stock Appreciation Rights have been
granted may be exercised during the six-month period following the date on which
such Stock Option was granted. Upon the expiration of such exercise period, the
Incentive Stock Option, to the extent not then exercised, shall terminate.
Except as otherwise provided in Section 11, all Incentive Stock Options granted
to a Participant hereunder shall terminate and may no longer be exercised if the
Participant ceases to be an Employee.
7.5 Restrictions on Exercise of Incentive Stock Options. Incentive Stock
Options may be granted subject to such restrictions as to the timing of exercise
of all or various portions thereof as the Committee may determine at the time it
grants Incentive Stock Options to Participants.
<PAGE>
7.6 Disposition of Stock Acquired Pursuant to the Exercise of Incentive
Stock Options C Withholding. In the event that a Participant makes a disposition
(as defined in Section 424(c) of the Internal Revenue Code) of any Common Stock
acquired pursuant to the exercise of an Incentive Stock Option prior to the
expiration of two years from the date on which the Incentive Stock Option was
granted or prior to the expiration of one year from the date on which the Stock
Option was exercised, the Participant shall send written notice to the Company
at its principal office in Louisville, Colorado (Attention: Corporate Secretary)
of the date of such disposition, the number of shares disposed of, the amount of
proceeds received from such disposition and any other information relating to
such disposition as the Company may reasonably request. The Participant shall,
in the event of such a disposition, make appropriate arrangements with the
Company to provide for the amount of additional withholding required by federal,
state and local income and other tax laws.
SECTION 8
NON-QUALIFIED OPTIONS
8.1 Option Exercise Price. The per share price to be paid by the
Participant at the time a Non-Qualified Option is exercised shall be determined
by the Committee at the time the Stock Option is granted or amended, but in no
event shall such exercise price per share be less than eighty-five percent of
the Fair Market Value of one share of Common Stock on the date the Stock Option
is granted or amended.
8.2 Number of Option Shares. The number of shares of Common Stock subject
to a Non-Qualified Option shall be designated by the Committee at the time the
Committee decides to grant a Non-Qualified Option.
8.3 Duration of Non-Qualified Options; Restrictions on Exercise. The
period during which a Non-Qualified Option may be exercised, and the installment
restrictions on option exercise during such period, if any, shall be fixed by
the Committee, but in no event shall such period be more than ten years from the
date the Stock Option is granted, and no Non-Qualified Option with respect to
which Stock Appreciation Rights have been granted may be exercised during the
six-month period immediately following the date on which such Stock Option was
granted. Upon the expiration of such exercise period, the Non-Qualified Option,
to the extent not then exercised, shall terminate. Except as otherwise provided
in Section 11, all Non-Qualified Options granted to a Participant hereunder
shall terminate and may no longer be exercised if the Participant ceases to be
an Employee, Director or Consultant.
<PAGE>
SECTION 9
STOCK APPRECIATION RIGHTS
9.1 Grant of Rights. A Stock Appreciation Right may be granted to a
Participant in conjunction with any Incentive Stock Option or Non-Qualified
Option granted to such Participant, as determined by the Committee, (i) at the
time of the grant of such Stock Option in the case of an Incentive Stock Option
or (ii) at the time of grant, or at any subsequent time during the term of the
Stock Option, in the case of a Non-Qualified Option. Once granted, the term of a
Stock Appreciation Right shall be equal to the term of its related Stock Option.
Upon exercise of a Stock Appreciation Right by a Participant for a share of
Common Stock, the related Stock Option shall be terminated with respect to such
share. Incentive Stock Options and Non-Qualified Options shall not be
exercisable with respect to shares of Common Stock for which Stock Appreciation
Rights have been exercised. Upon such Stock Appreciation Right exercise, the
Participant shall be entitled to receive the economic value of such Stock
Appreciation Right determined in the manner prescribed in Section 9.2.
9.2 Exercise of Stock Appreciation Rights. Stock Appreciation Rights shall
be subject to such terms and conditions consistent with other provisions of the
1995 Plan as may be determined from time to time by the Committee and shall
include the following:
(a) A Stock Appreciation Right shall be exercisable, in whole or in
part, at such time or times and only to the extent that the Stock Option to
which it relates shall be exercisable; provided, however, that, except as
otherwise provided in Section 11, no Stock Appreciation Right shall be
exercisable during the six-month period following the date of its grant. A Stock
Appreciation Right shall be exercised by the giving of notice in the same manner
as the Stock Option to which it relates may be exercised.
(b) Upon the exercise of a Stock Appreciation Right, a Participant
shall be entitled to receive the economic value thereof, which shall be equal to
(i) the excess of the then Fair Market Value of one share of Common Stock over
the exercise price per share specified in the related Stock Option, multiplied
by (ii) the number of shares in respect of which the Stock Appreciation Right is
being exercised.
(c) The Committee shall, in the agreement relating to the Stock
Appreciation Right, either (i) specify the form in which payment of the economic
value of exercised Stock Appreciation Rights will be made to the Participant
upon exercise thereof (i.e., cash, Common Stock, or a specified combination
thereof) or (ii) grant the Participant
<PAGE>
the right to elect to receive cash in
full or partial payment of such economic value, at the Participant's discretion.
If the agreement relating to the Stock Appreciation Right does not so specify,
then the Participant shall have the right to elect cash or Common Stock, Common
Stock Equivalents or any combination thereof. If the Participant is not an
"officer" or "director" of the Company, as those terms are defined in the rules
under Section 16 of the Exchange Act, at the time of grant or exercise of the
Stock Appreciation Right, then the Committee may retain the right to either
consent to or disapprove of Participant's elected method of payment.
9.3 Stockholder Privileges. No Participant shall have any rights as a
stockholder with respect to any shares of Common Stock covered by a Stock
Appreciation Right until the Participant becomes the holder of record of such
Common Stock, and no adjustments shall be made for dividends or other
distributions or other rights as to which there is a record date preceding the
date such Participant becomes the holder of record of such Common Stock.
SECTION 10
RESTRICTED STOCK AWARDS
10.1 Awards Granted by Committee. Coincident with or following designation
for participation in the 1995 Plan, a Participant may be granted one or more
Restricted Stock Awards consisting of shares of Common Stock. The number of
shares granted as a Restricted Stock Award shall be determined by the Committee.
The Committee may, in its discretion, require the payment by the Participant of
cash in an amount equal to the par value of the Common Stock subject to the
Restricted Stock Award as a condition precedent to the issuance of Common Stock
to the Participant.
10.2 Restrictions. A Participant's right to retain a Restricted Stock
Award granted to him or her under Section 10.1 shall be subject to such
restrictions, including but not limited to the Participant's continuous status
as an Employee, Director or Consultant for a restriction period specified by the
Committee, or the attainment of specified performance goals and objectives, as
may be established by the Committee with respect to such award. The Committee
may in its sole discretion require different periods of employment, director
service or consulting service or different performance goals and objectives with
respect to different Participants, to different Restricted Stock Awards or to
separate, designated portions of the Common Stock shares constituting a
Restricted Stock Award. Subject to the provisions of Sections 11 and 14, if a
Participant's continuous status as an Employee, Director or Consultant
terminates prior to the end of such restriction period or the attainment of such
goals and objectives as may be specified by the Committee, the Restricted Stock
<PAGE>
Award shall be forfeited and all shares of Common Stock related thereto shall be
immediately returned to the Company.
10.3 Privileges of a Stockholder; Transferability. A Participant shall
have all voting, dividend, liquidation and other rights with respect to Common
Stock in accordance with its terms received by him or her as a Restricted Stock
Award under this Section 10 upon becoming the holder of record of such Common
Stock; provided, however, that the Participant's right to sell, encumber, or
otherwise transfer such Common Stock (and any other securities issued in respect
of such shares of Common Stock as a stock dividend, stock split or the like)
shall be subject to the limitations of Section 16.2 hereof.
10.4 Enforcement of Restrictions. The Committee may in its sole discretion
require one or more of the following methods of enforcing the restrictions
referred to in Section 10.2 and 10.3:
(a) Placing a legend on the stock certificates referring to the
restrictions;
(b) Requiring the Participant to keep the stock certificates, duly
endorsed, in the custody of the Company while the restrictions remain in effect;
or
(c) Requiring that the stock certificates, duly endorsed, be held in
the custody of a third party while the restrictions remain in effect.
SECTION 11
EFFECT OF TERMINATION OF SERVICE ON STOCK OPTIONS,
STOCK APPRECIATION RIGHTS AND RESTRICTED STOCK AWARDS
11.1 Effect of Termination of Service on Stock Options and Stock
Appreciation Rights. No Stock Option or Stock Appreciation Right may be
exercised unless, at the time of such exercise, the Participant is an Employee,
Director or Consultant, except as follows:
(a) The Stock Option or Stock Appreciation Right may be exercised
within such period of time after termination of service as is specified in the
Stock Option or Stock Appreciation Right agreement or instrument, but (i) in no
event may such post-termination period extend beyond the original expiration
date of the Stock Option or Stock Appreciation Right and (ii) only to the extent
that the Participant was entitled to exercise it at the date of termination of
service. In the absence of a specified time in the Stock Option or Stock
Appreciation Right agreement or instrument, the Stock Option or Stock
Appreciation Right
<PAGE>
shall remain exercisable for the applicable period and to the
extent specified in Section 11.5 below following the Participant's termination
of service as an Employee, Director or Consultant. In the case of an Incentive
Stock Option, such period of time shall not exceed 90 days from the date of
termination of status as an Employee; provided, however, that the agreement may
specify a longer period, in which case Stock Option shall convert to a
Non-Qualified Option on the 91st day following termination of employment.
(b) If the Participant dies while serving as an Employee, Director
or Consultant, or within three months after the Participant ceases such service,
the Stock Option or Stock Appreciation Right may be exercised by the person to
whom it is transferred by will or the laws of descent and distribution within
such period of time after death as is specified in the Stock Option or Stock
Appreciation Right agreement or instrument, but in no event may such post-death
period extend beyond the original expiration date of the Stock Option or Stock
Appreciation Right. In the absence of a specified time in the Stock Option or
Stock Appreciation Right agreement or instrument, the Stock Option or Stock
Appreciation Right shall remain exercisable for the applicable period and to the
extent specified in Section 11.5 below.
(c) If the Participant becomes disabled (within the meaning of
Section 22(e)(3) of the Internal Revenue Code) while serving as an Employee,
Director or Consultant, the Stock Option or Stock Appreciation Right may be
exercised within such period of time after termination of service as is
specified in the Stock Option or Stock Appreciation Right agreement or
instrument, but in no event may such post-termination period extend beyond the
original expiration date of the Stock Option or Stock Appreciation Right. In the
absence of a specified time in the Stock Option or Stock Appreciation Right
agreement or instrument, the Stock Option or Stock Appreciation Right shall
remain exercisable for the applicable period and to the extent specified in
Section 11.5 below.
11.2 Effect of Termination of Service on Restricted Stock Awards. In the
event of the death or disability (as defined in Section 11.1(c)) of a
Participant, all period of service and other restrictions applicable to
Restricted Stock Awards then held by such Participant shall lapse, and such
awards shall become fully vested and nonforfeitable. In the event of a
Participant's termination of service for any other reason, any Restricted Stock
Awards as to which the employment period or other restrictions have not been
satisfied shall be forfeited.
11.3 Meaning of Employment. For all purposes of the 1995 Plan and any
Stock Option or Stock Appreciation Right granted hereunder, "employment" shall
be defined in accordance with the provisions of Section 3401(c) of the Internal
Revenue Code and the regulations thereunder.
<PAGE>
11.4 Meaning of Continuous Status. Unless otherwise specified in the Stock
Option or Stock Appreciation Right agreement or instrument, so long as a
Participant is either an Employee or a Director or a Consultant, he or she shall
be considered to be in continuous status as an Employee, Director or Consultant,
even if the person is serving in one capacity when the award is granted and
subsequently changes to service in a different capacity, such as terminating
employment but continuing to serve as a Consultant.
11.5 Default Provisions for Termination of Service. In the event that the
Stock Option or Stock Appreciation Right agreement or instrument do not specify
the post-termination period of exercisability, the following provisions shall
apply:
(a) Subject to 11.5(f), if such termination is due to the death of
the Participant, or the Participant dies within three months after such
termination, or if such termination occurs after the Participant becomes
disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code),
the Stock Option or Stock Appreciation Right may be exercised by the Participant
(or, in the case of death, by the person to whom it is transferred by will of
the laws of descent and distribution): (i) for all Incentive Stock Option
grants, or for Non-Qualified Stock Option grants or Stock Appreciation Right
grants made before May 22, 1997, or for Non-Qualified Stock Option grants or
Stock Appreciation Right grants made on or after May 22, 1997, if, at the time
of the Participant's termination, such Participant was not a Long-Term Employee,
then within a period of one year after the date of death (but in no event longer
than the term of the Stock Option or Stock Appreciation Right); and (ii) for
grants made on or after May 22, 1997, if the Participant was a Long-Term
Employee at the time of the Participant's termination, the Non-Qualified Stock
Option or Stock Appreciation Right may be exercised, to the extent it is vested
as of the date of the Participant's termination, for the entire remaining term
of such Stock Option or Stock Appreciation Right.
(b) Subject to 11.5(f), if such termination occurs after the
Participant becomes disabled (within the meaning of Section 22(e)(3) of the
Internal Revenue Code), the Stock Option or Stock Appreciation Right may be
exercised: (i) for all Incentive Stock Option grants, or for Non-Qualified Stock
Option or Stock Appreciation Right grants made before May 22, 1997, or for
Non-Qualified Stock Option grants or Stock Appreciation Right grants made on or
after May 22, 1997, if, at the time of the Participant's termination, such
Participant was not a Long-Term Employee, then within a period of one year after
the date of such termination (but in no event longer than the term of the Stock
Option or Stock Appreciation Right); and (ii) for grants made on or after May
22, 1997, if the Participant is a Long-Term Employee, a Non-Qualified Stock
Option or Stock Appreciation Right may be
<PAGE>
exercised to the extent it is vested
as of the date of the Participant's termination for the entire remaining term of
such Stock Option or Stock Appreciation Right.
(c) Subject to 11.5(f), if such termination is due to a Reduction in
Force, then, for grants on or after May 22, 1997, the Stock Option or Stock
Appreciation Right shall be exercisable, to the extent vested at the time of
such termination, for a period of six months from the date of such termination.
(d) Subject to 11.5(f), if the Participant Retires, then, for grants
on or after May 22, 1997, the Stock Option or Stock Appreciation Right shall be
exercisable, to the extent vested at the time the Participant Retires, for the
entire remaining term of such Stock Option or Stock Appreciation Right.
(e) Subject to 11.5(f), if the Participant's employment is
terminated for any reason other than those reasons covered by subsections (a)
through (d) of this Section 11.5, then the Stock Option or Stock Appreciation
Right shall be exercisable, to the extent vested at the time of such
termination, for a period of ninety (90) days after the date of such
termination.
(f) Notwithstanding the provisions of Section 11.5(a) through (e)
above:
(i) With respect to all grants of Stock Options or Stock
Appreciation Rights occurring on or after May 22, 1997, no such grants shall be
exercisable after the date of termination of employment if either the
termination was for Cause, or if the former Employee, Consultant or Director is
then, in the sole judgement of the Company, in material breach of any
contractual, statutory, fiduciary or other legal obligation to the Company.
(ii) In addition to the provisions of paragraph (i) above,
unless otherwise provided in the Option or Stock Appreciation Right agreement,
with respect to all grants of Stock Options or Stock Appreciation Rights
occurring on or after March 4, 1998 (or earlier date if agreed to by the Company
and the participant): (x) if at any time within six months after termination of
the optionee=s employment or service, the former Employee, Consultant or
Director is, in the sole judgement of the Company, engaging or has engaged in
any activity in competition with any activity of the Company, or harmful or
contrary to the interests of the Company, including, but not limited to:
accepting employment with or serving as a consultant or advisor to any employer
that is in competition with the Company or acting against the interests of the
Company, including employing or recruiting any Employee of the Company; or
disclosing or misusing any confidential, proprietary or material information
concerning the Company (such information includes, without limitation,
<PAGE>
information regarding the Company's operations, its products, product designs,
business plans, strategic plans, marketing and distribution plans and
arrangements, customers, and financial statements, budgets and forecasts); or
participating in any hostile takeover attempt of the Company, then (I) any
Options or Stock Appreciation Rights still held by the optionee shall
immediately cease to be exercisable and shall be canceled, and (II) any shares
issued upon exercise of Options or Stock Appreciation Rights after the date of
termination of employment or service shall be sold back to the Company at the
exercise price paid for such shares, and any cash received upon exercise of a
Stock Appreciation Right after termination of employment or service shall be
returned to the Company; (y) if the Employee, Consultant or Director leaves the
employment of the Company within six months of exercising Stock Options or Stock
Appreciation Rights for any reason except death, disability or retirement, then
any gain represented by the fair market value on the date of exercise over the
exercise price multiplied by the number of shares such individual purchased
("option gain"), without regard to any subsequent market price decrease or
increase, shall be paid by such individual to the Company; and (z) shares issued
upon exercise of Options or Stock Appreciation Rights after termination of
employment or service shall be non-transferable until six months after such
termination and shall be held in escrow by the Company until such time. The
Compensation Committee, in its sole discretion, may, with respect to a
particular Option or Stock Appreciation Right, omit the provisions of this
paragraph (ii) or release the optionee from the operation of such provisions if
the Compensation Committee determines that such action is in the best interests
of the Company.
SECTION 12
DIRECTOR STOCK AND STOCK EQUIVALENTS
12.1 Director Stock and Stock Equivalents. Effective with the beginning of
the Company's fiscal year beginning December 28, 1996, each Outside Director may
receive all or a portion of his or her annual retainer and any meeting fees
(which shall include any additional annual retainer or fees paid to a committee
chair) in shares of Common Stock or, if elected by the Director, in Common Stock
Equivalents. An election pursuant to this Section 12 must be made in writing on
or before the first day of the beginning of the Outside Director's annual
retainer period and shall entitle the Outside Director to a number of shares of
Common Stock or Common Stock Equivalents determined by dividing (i) the dollar
amount of the portion of the retainer for the fiscal period that is to be paid
in shares of Common Stock or Common Stock Equivalents by (ii) the Fair Market
Value of one share of Common Stock as of the last day of each such fiscal
period, rounded up to the next full number of shares. In the event any person
becomes an Outside Director other than at the beginning of an annual retainer
period, such person may elect, within thirty (30) days of the
<PAGE>
date on which such
person becomes an Outside Director, to receive his or her retainer and any
meeting fees in shares of Common Stock or Common Stock Equivalents as described
above for the balance of such annual retainer period in accordance with the
formula set forth in the preceding sentence.
For purposes of this Section 12, an annual retainer period shall begin on
the date of an Annual Meeting of the Stockholders of the Company and shall end
on the day immediately preceding the next following Annual Meeting.
12.2 Stock Equivalents. The number of Common Stock Equivalents determined
under Section 12.1 for each Outside Director shall be credited to a bookkeeping
account established in the name of that Director subject to the following terms
and conditions:
(i) If the Company pays a cash dividend with respect to the Common
Stock at any time while Common Stock Equivalents are credited to an Outside
Director's account, there shall be credited to the Outside Director's account
additional Common Stock Equivalents equal to (a) the dollar amount of the cash
dividend the Director would have received had he or she been the actual owner of
the Common Stock to which the Common Stock Equivalents then credited to the
Director's account relate, divided by (b) the Fair Market Value of one share of
the Company's Common Stock on the dividend payment date. The Company will pay
the Director a cash payment in lieu of fractional stock equivalents on the date
of such dividend payment.
(ii) Upon the death or other termination of the Outside Director's
service on the Board, or, if authorized by the Committee, such other time or
times as specified by the Outside Director at the time of his or her annual
election(s), the Company shall deliver to the Outside Director (or his or her
designated beneficiary or estate) a number of shares of Common Stock equal to
the whole number of Common Stock Equivalents then credited to the Director's
account, together with a cash payment equal to the Fair Market Value of any
fractional Common Stock Equivalent.
(iii) The Company's obligation with respect to Common Stock
Equivalents shall not be funded or secured in any manner, nor shall an Outside
Director's right to receive Common Stock equivalents be assigned or
transferable, voluntarily or involuntarily, except as expressly provided herein.
(iv) An Outside Director shall not be entitled to any voting or
other stockholder rights as a result of the credit of Common Stock Equivalents
to the Director's account until certificates representing shares of Common Stock
are delivered to the Director (or his or her designated beneficiary or estate)
hereunder.
<PAGE>
12.3 Elections. The Committee shall determine the form of Outside
Director's elections pursuant to this Section 12, which form shall evidence the
particular provisions, terms, conditions, rights and duties of the Company and
the Outside Directors with respect to Common Stock and Common Stock Equivalents
paid with respect to the Director's annual retainer and any meeting fees.
SECTION 13
MBO PAYMENTS
13.1 Participant Election As to MBO Payment. At such time as the Committee
determines that a Participant has or may become eligible for an MBO Payment
pursuant to the MBO Plan, the Committee may notify the Participant as to whether
or not the Participant will be required by the Committee to, or will be given
the right to elect to, accept all or a part of such MBO Payment in the form of
shares of Common Stock or Common Stock Equivalents. If the Committee grants the
Participant the right to elect whether to accept the MBO Payment in Common Stock
or Common Stock Equivalents, then the Participant shall have ten (10) business
days after the receipt of such notice from the Committee to make such election.
The Participant shall notify the Committee with respect to his or her election
on such form as may be provided for this purpose by the Committee, setting forth
thereon the dollar value of the portion of the MBO Payment which he or she
desires to receive in shares of Common Stock or Common Stock Equivalents. If a
Participant fails to make an election pursuant to this Section with respect to
the mode of payment of an MBO Payment, the entire MBO Payment shall be made in
cash.
13.2 Determination of Number of Shares. The number of shares of Common
Stock or Common Stock Equivalents that shall be issued or credited as an MBO
Payment shall be determined by dividing the dollar value of the portion of the
MBO Payment that is to be paid in shares of Common Stock or Common Stock
Equivalents (whether as elected above or as adjusted by the Committee pursuant
to Section 13.3) by the Fair Market Value of the Common Stock on the date the
shares are issued or credited with respect to such Payment. No fractional shares
of Common Stock or Common Stock Equivalent shall be issued or credited as a part
of an MBO Payment and the value of any such fractional share that would
otherwise be issued pursuant to the Participant's election shall be paid in
cash.
13.3 Decision of Committee. The Committee shall have the sole discretion
to either accept the Participant's election with respect to the payment of an
MBO Payment, in whole or in part, in shares of Common Stock or Common Stock
Equivalents or to determine
<PAGE>
that a lesser portion, or none, of the MBO Payment
will be made in shares of Common Stock or Common Stock Equivalents, and the
Committee's determination in this regard shall be final and binding on the
Participant.
SECTION 14
TENDER OFFERS AND ACQUISITIONS
If any person or entity (other than the Company or any person or entity
that is controlled by the Company) shall make a tender offer or exchange offer
for all or any part of the Common Stock or other capital shares of the Company
and shall purchase any part of the Common Stock or other capital shares tendered
to it, and the Board opposes or does not affirmatively recommend acceptance of
such tender offer or exchange offer, then:
(a) all Stock Options with respect to which no Stock Appreciation
Rights have been granted, and all Stock Options with respect to which Stock
Appreciation Rights have been issued (and all such related Stock Appreciation
Rights) that have been outstanding for at least six months, shall become
immediately exercisable in full during the remaining term thereof, whether or
not the Participants to whom such options and rights have been granted remain
Employees, Directors or Consultants of the Company; provided, however, that
Stock Appreciation Rights shall remain subject to the requirements of Section
9.2(a) with respect to the exercise thereof only within prescribed periods after
public release of Company financial information;
(b) all restrictions with respect to outstanding Restricted Stock
Awards shall immediately lapse; and
(c) all Common Stock Equivalents shall convert into shares of Common
Stock as of the date determined by the Committee.
SECTION 15
OTHER COMMON STOCK PROGRAMS
From time to time during the duration of the 1995 Plan, the Board may, in
its sole discretion, adopt one or more incentive compensation arrangements for
Eligible Employees, Directors or Consultants pursuant to which such Eligible
Employees, Directors or Consultants may acquire shares of Common Stock or Common
Stock Equivalents, whether
<PAGE>
by purchase, outright grant or otherwise. Any such
arrangements shall be subject to the general provisions of the 1995 Plan and all
shares of Common Stock or Common Stock Equivalents issued or credited pursuant
to such arrangements shall be issued under the 1995 Plan if so designated by the
Committee.
SECTION 16
RIGHTS OF PARTICIPANTS
16.1 Employment, Directorship or Consulting Relationship. Nothing
contained in the 1995 Plan or in any Stock Option, Stock Appreciation Right,
Restricted Stock Award or other Common Stock or Common Stock Equivalent award
granted under the 1995 Plan shall confer upon any Participant any right with
respect to the continuation of his or her employment, service as a director or
consulting relationship with the Company or any Affiliated Corporation, or
interfere in any way with the right of the Company or any Affiliated
Corporation, subject to the terms of any separate agreement to the contrary, at
any time to terminate such service or to increase or decrease the compensation
of the Participant from the rate in existence at the time of the grant of a
Stock Option, Stock Appreciation Right, Restricted Stock Award or other Common
Stock or Common Stock Equivalent award. Whether an authorized leave of absence,
or absence in military or government service, shall constitute termination of
service shall be determined by the Committee at the time.
16.2 Nontransferability. Except as otherwise approved by the Committee and
set forth in the agreement between the Company and the Participant, no right or
interest of any Participant in a Stock Option, a Stock Appreciation Right, a
Restricted Stock Award prior to the completion of the restriction period
applicable thereto, or other Common Stock or Common Stock Equivalent award
granted pursuant to the 1995 Plan shall be assignable or transferable during the
lifetime of the Participant, either voluntarily or involuntarily, or subjected
to any lien, directly or indirectly, by operation of law, or otherwise,
including execution, levy, garnishment, attachment, pledge or bankruptcy. If
permitted by applicable law (including Rule 16b-3, as amended from time to
time), the Committee may (but need not) permit the transfer of Stock Options,
Stock Appreciation Rights, Restricted Stock Awards and/or other Common Stock or
Common Stock Equivalent awards either generally, to a limited class of persons
or on a case-by-case basis. In the event of a Participant's death, a
Participant's rights and interest in Stock Options, Stock Appreciation Rights,
Restricted Stock Awards and other Common Stock or Common Stock Equivalent awards
shall be transferable by testamentary will or the laws of descent and
distribution, and payment of any amounts due under the 1995 Plan shall be made
to, and exercise of any Stock Options or Stock Appreciation Rights may be made
by, the Participant's legal representatives, heirs or legatees.
<PAGE>
If in the
opinion of the Committee a person entitled to payments or to exercise rights
with respect to the 1995 Plan is disabled from caring for his or her affairs
because of mental condition, physical condition, or age, payment due such person
may be made to, and such rights shall be exercised by, such person's guardian,
conservator or other legal personal representative upon furnishing the Committee
with evidence satisfactory to the Committee of such status.
SECTION 17
GENERAL RESTRICTIONS
17.1 Investment Representations. The Company may require any person to
whom a Stock Option, Stock Appreciation Right, Restricted Stock Award, MBO
Payment or other Common Stock or Common Stock Equivalent award is granted, as a
condition of exercising such Stock Option or Stock Appreciation Right, or
receiving such Restricted Stock Award, MBO Payment or other Common Stock award
or Common Stock Equivalent award, to give written assurances in substance and
form satisfactory to the Company and its counsel to the effect that such person
is acquiring the Common Stock subject to the Stock Option, Stock Appreciation
Right, Restricted Stock Award, MBO Payment or Common Stock or Common Stock
Equivalent award for his or her own account for investment and not with any
present intention of selling or otherwise distributing the same, and to such
other effects as the Company deems necessary or appropriate in order to comply
with federal and applicable state securities laws.
17.2 Compliance with Securities Laws. Each Stock Option, Stock
Appreciation Right and Common Stock Equivalent shall be subject to the
requirement that, if at any time counsel to the Company shall determine that the
listing, registration or qualification of the shares subject to such Stock
Option, Stock Appreciation Right or Common Stock Equivalent upon any securities
exchange or under any state or federal law, or the consent or approval of any
governmental or regulatory body, is necessary as a condition of, or in
connection with, the issuance or purchase of shares thereunder, such Stock
Option, Stock Appreciation Right or Common Stock Equivalent may not be accepted
or exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained on
conditions acceptable to the Committee. Nothing herein shall be deemed to
require the Company to apply for or to obtain such listing, registration or
qualification.
17.3 Changes in Accounting Rules. Notwithstanding any other provision of
the 1995 Plan to the contrary, if, during the term of the 1995 Plan, any changes
in the financial or tax accounting rules applicable to Stock Options, Stock
Appreciation Rights, Restricted
<PAGE>
Stock Awards, MBO Payments or other Common Stock
or Common Stock Equivalent awards shall occur that, in the sole judgment of the
Committee, may have a material adverse effect on the reported earnings, assets
or liabilities of the Company, the Committee shall have the right and power to
modify as necessary, or cancel, any then outstanding and unexercised Stock
Options or Stock Appreciation Rights, any then outstanding Restricted Stock
Awards as to which the applicable restriction has not been satisfied and any
other Common Stock awards or Common Stock Equivalent.
SECTION 18
OTHER BENEFITS
The amount of any compensation deemed to be received by an Employee,
Director or Consultant as a result of the exercise of a Stock Option, a Stock
Appreciation Right or the sale of shares received upon such exercise or the
vesting of any Restricted Stock Awards or the receipt of any other Common Stock
or Common Stock Equivalent award will not constitute "earnings" with respect to
which any other benefits provided by the Company or an Affiliated Corporation to
such person are determined, including without limitation benefits under any
pension, profit sharing, life insurance or salary continuation plan.
SECTION 19
PLAN AMENDMENT, MODIFICATION AND TERMINATION
19.1 Amendment or Termination. The Board, upon recommendation of the
Committee or at its own initiative, at any time may terminate and at any time
and from time to time and in any respect, may amend or modify the 1995 Plan. The
Company shall obtain stockholder approval of any amendment to the extent
necessary and desirable to comply with Applicable Laws. "Applicable Laws" means
the requirements relating to the administration of stock option plans under U.S.
state corporate laws, U.S. federal and state securities laws, the Code, any
stock exchange or quotation system on which the Common Stock is listed or quoted
and the applicable laws of any foreign country or jurisdiction where Stock
Options, Stock Appreciation Rights, Restricted Stock Awards or other Common
Stock or Common Stock Equivalent awards are, or will be, granted under the 1995
Plan.
19.2 Effect of Amendment. Any Stock Option, Stock Appreciation Right,
Restricted Stock Award or other Common Stock or Common Stock Equivalent award
granted to a Participant prior to the date the 1995 Plan is amended, modified or
terminated will
<PAGE>
remain in effect according to its terms unless otherwise agreed
upon by the Participant; provided, however, that this sentence shall not impair
the right of the Committee to take whatever action it deems appropriate under
Section 4.3, Section 14 or Section 17.3. The termination or any modification or
amendment of the 1995 Plan shall not, without the consent of a Participant,
affect his or her rights under a Stock Option, Stock Appreciation Right,
Restricted Stock Award or other Common Stock or Common Stock Equivalent award
previously granted to him or her. With the consent of the Participant affected,
the Committee may amend outstanding option agreements in a manner not
inconsistent with the 1995 Plan.
19.3 Preservation of Incentive Stock Options. The Board shall have the
right to amend or modify the terms and provisions of the 1995 Plan and of any
outstanding Incentive Stock Options granted under the 1995 Plan to the extent
necessary to qualify any or all such Stock Options for such favorable treatment
as may be afforded Incentive Stock Options under Section 422 of the Internal
Revenue Code.
SECTION 20
WITHHOLDING
20.1 Withholding Requirement. The Company's obligations to deliver shares
of Common Stock upon the exercise of any Stock Option or Stock Appreciation
Right granted under the 1995 Plan or upon any MBO Payment under the 1995 Plan or
pursuant to any other Common Stock or Common Stock Equivalent award, shall be
subject to the Participant's satisfaction of all applicable federal, state and
local income and other tax withholding requirements.
20.2 Withholding With Common Stock. The Committee may, in its sole
discretion, allow Participants to pay all or any portion of any tax withholding
obligation that results from Stock Options, Stock Appreciation Rights, MBO
Payments, or any other Common Stock or Common Stock Equivalent award, by
electing to transfer to the Company, or to have the Company withhold from shares
otherwise issuable to the Participant, shares of Common Stock having a value
equal to the amount required to be withheld or such lesser amount as may be
elected by the Participant. Any such withholding election shall be subject to
such terms and conditions as the Committee may, from time to time, establish;
provided, that, in the case of a Participant who is an officer or director of
the Company within the meaning of Section 16 of the Exchange Act, then the
approval by the Committee of the grant of the award shall be deemed to include
approval by the Committee of the election by such Participant to utilize this
withholding provision, unless otherwise specified in the agreement relating to
the award.
<PAGE>
SECTION 21
REQUIREMENTS OF LAW
21.1 Requirements of Law. The issuance of stock and the payment of cash
pursuant to the 1995 Plan shall be subject to all applicable laws, rules and
regulations.
21.2 Governing Law. The 1995 Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
SECTION 22
EFFECTIVE DATE OF THE 1995 PLAN
22.1 Effective Date. The 1995 Plan is effective as of March 8, 1995, the
date it was adopted by the Board of Directors of the Company, subject to the
approval of the stockholders of the Company prior to the one-year anniversary of
such date. Stock Options, Stock Appreciation Rights, Restricted Stock Awards and
other Common Stock awards may be granted prior to stockholder approval if made
subject to stockholder approval.
22.2 Duration of the 1995 Plan. The 1995 Plan shall terminate at midnight
on March 7, 2005, which is the day before the tenth anniversary of the Effective
Date, and may be terminated prior thereto by Board action; and no Stock Option,
Stock Appreciation Right, Restricted Stock Award or other Common Stock or Common
Stock Equivalent award shall be granted after such termination. Stock Options,
Stock Appreciation Rights, Restricted Stock Awards and other Common Stock and
Common Stock Equivalent awards outstanding at the time of the 1995 Plan
termination may continue to be exercised, or become free of restrictions, in
accordance with their terms.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Earnings (Loss):
Net income (loss) $(38,480) $ 54,430 $(32,667) $ 95,000
========= ========= ========= =========
Shares:
Weighted average shares outstanding 100,081 106,945 99,931 106,777
========= ========= ========= =========
Earnings (Loss) per share:
Basic earnings (loss) per share $ (0.38) $ 0.51 $ (0.33) $ 0.89
========= ========= ========= =========
DILUTED
Earnings (Loss):
Net income (loss) $(38,480) $ 54,430 $(32,667) $ 95,000
========= ========= ========= =========
Shares:
Weighted average shares outstanding 100,081 106,945 99,931 106,777
Dilutive effect of outstanding options (as
determined under the treasury stock method) 2,994 2,873
--------- --------- --------- ---------
Weighted-average and dilutive potential shares 100,081 109,939 99,931 109,650
========= ========= ========= =========
Earnings (Loss) per share:
Diluted earnings (loss) per share $ (0.38) $ 0.50 $ (0.33) $ 0.87
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED
JUNE 25, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-25-1999
<CASH> 233,043
<SECURITIES> 0
<RECEIVABLES> 766,749 <F1>
<ALLOWANCES> 0
<INVENTORY> 348,166
<CURRENT-ASSETS> 1,465,019
<PP&E> 336,318 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,975,848
<CURRENT-LIABILITIES> 998,228
<BONDS> 0
0
0
<COMMON> 10,027
<OTHER-SE> 947,102
<TOTAL-LIABILITY-AND-EQUITY> 1,975,848
<SALES> 822,818
<TOTAL-REVENUES> 1,171,905
<CGS> 457,340
<TOTAL-COSTS> 678,046
<OTHER-EXPENSES> 146,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,632
<INCOME-PRETAX> (50,967)
<INCOME-TAX> (18,300)
<INCOME-CONTINUING> (32,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,667)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
<FN>
<F1> Asset values for the interim period represent net amounts.
</FN>
</TABLE>