Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 24, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
---------------------------
Commission File Number 1-7534
--------------------------
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, 80028-4309
Louisville, 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) - 100,009,620 shares outstanding at
October 29, 1999.
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Form 10-Q
Page 2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
September 24, 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
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 30
Exhibit Index 32
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Form 10-Q
Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
09/24/99 12/25/98
------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 236,314 $ 231,985
Accounts receivable 714,825 755,931
Inventories (Note 2) 329,435 261,808
Deferred income tax assets 116,522 114,715
---------- ----------
Total current assets 1,397,096 1,364,439
Property, plant and equipment, net 333,003 320,946
Spare parts for maintenance, net 46,408 33,395
Deferred income tax assets 16,127 15,875
Other assets 111,705 108,289
---------- ----------
$1,904,339 $1,842,944
========== ==========
LIABILITIES
Current liabilities:
Credit facilities (Note 3) $ 362,914 $ 276,673
Current portion of long-term debt 5,620 1,722
Accounts payable 132,688 136,555
Accrued liabilities 395,464 332,758
Income taxes payable 52,864 78,400
---------- ----------
Total current liabilities 949,550 826,108
Long-term debt 21,146 17,260
---------- ----------
Total liabilities 970,696 843,368
---------- ----------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
100,045,905 shares issued at September 24, 1999, and
100,338,353 shares issued at December 25, 1998 10,004 10,034
Capital in excess of par value 820,470 834,778
Retained earnings 110,542 159,254
Treasury stock of 113,774 shares at September 24, 1999,
and 117,271 shares at December 25, 1998 (2,334) (2,409)
Unearned compensation (5,039) (2,081)
---------- ------------
Total stockholders' equity 933,643 999,576
---------- ----------
$1,904,339 $1,842,944
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
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Form 10-Q
Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Nine Months Ended
--------------------------------------------
09/24/99 09/25/98 09/24/99 09/25/98
--------------------------------------------
Revenue $573,730 $571,060 $1,745,635 $1,598,257
Cost of revenue 343,409 304,788 1,021,455 842,923
------- ------- --------- ---------
Gross profit 230,321 266,272 724,180 755,334
Research and product development
costs 66,225 60,880 212,325 171,800
Selling, general, administrative
and other income and
expense, net 150,732 122,955 440,293 355,818
Litigation expense (Note 4) 16,274 98,582
Restructuring expense (Note 5) 16,082 36,328
-------- -------- --------- ---------
Operating profit (loss) (18,992) 82,437 (63,348) 227,716
Interest expense (6,765) (2,689) (15,397) (5,138)
Interest income 712 1,975 2,733 12,345
------- -------- --------- ---------
Income (loss) before income
taxes (25,045) 81,723 (76,012) 234,923
Benefit (provision) for income
taxes 9,000 (31,100) 27,300 (89,300)
--------- -------- --------- ---------
Net income (loss) $ (16,045) $ 50,623 $ (48,712) $ 145,623
======== ======== ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per
share $ (0.16) $ 0.50 $ (0.49) $ 1.38
======== ======== ========= =========
Weighted-average shares 99,743 102,178 99,800 105,242
======= ======= ========= ========
Diluted earnings (loss) per
share $ (0.16) $ 0.48 $ (0.49) $ 1.35
======= ======== ========= ========
Weighted-average and dilutive
potential shares 99,743 104,723 99,800 108,030
======= ======== ========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
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Form 10-Q
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STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Nine Months Ended
--------------------------
09/24/99 09/25/98
--------------------------
OPERATING ACTIVITIES
Cash received from customers $ 1,758,507 $ 1,544,947
Cash paid to suppliers and employees (1,689,248) (1,389,800)
Interest received 2,733 12,345
Interest paid (13,738) (4,182)
Income tax refunded (paid), net 6,240 (92,907)
---------- ----------
Net cash provided by operating activities 64,494 70,403
---------- ----------
INVESTING ACTIVITIES
Short-term investments, net 77,275
Purchases of property, plant and equipment, net (90,734) (70,239)
Business acquisitions, net (6,400)
Other assets, net (4,782) (9,774)
---------- ----------
Net cash used in investing activities (101,916) (2,738)
---------- ----------
FINANCING ACTIVITIES
Proceeds from credit facilities, net 86,241 330,000
Repayments of other debt, net (1,239) (3,863)
Repurchases of common stock (35,226) (458,270)
Proceeds from employee stock plans 14,843 25,744
---------- ---------
Net cash provided by (used in)
financing activities 64,619 (106,389)
---------- ---------
Effect of exchange rate changes on cash (22,868) 197
---------- ---------
Increase (decrease) in cash and cash equivalents 4,329 (38,527)
Cash and cash equivalents - beginning
of the period 231,985 256,319
---------- ---------
Cash and cash equivalents - end of the period $ 236,314 $ 217,792
========== =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (48,712) $ 145,623
Depreciation and amortization expense 98,603 91,719
Translation loss 18,418 1,052
Litigation 98,582
Restructuring 7,977
Other non-cash adjustments to income 7,137 4,531
(Increase) decrease in accounts receivable 18,224 (53,310)
Increase in inventories (65,556) (57,273)
Increase in spare parts, net (25,502) (14,605)
(Increase) decrease in deferred income tax assets, net (6,031) 4,764
Decrease in accounts payable and accrued liabilities (21,455) (38,627)
Decrease in income taxes payable (17,191) (13,471)
---------- ---------
Net cash provided by operating activities $ 64,494 $ 70,403
========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
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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 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):
09/24/99 12/25/98
---------------------------
Raw materials $ 65,301 $ 46,672
Work-in-process 67,600 76,839
Finished goods 196,534 138,297
------- -------
$329,435 $261,808
======= =======
NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
The Company has an unsecured revolving credit facility (the Revolver) which
expires in October 2001. The credit limit available under the Revolver,
$312,500,000 as of September 24, 1999, is reduced by $12,500,000 on the last day
of each calendar quarter. The interest rates under the Revolver depend on the
repayment period of the advance selected. The weighted average interest rate on
the advances at September 24, 1999 was 6.92%. The Company had borrowings of
$290,000,000 and had issued letters of credit for approximately $50,000 under
the Revolver as of September 24, 1999. The remaining available credit under the
Revolver as of September 24, 1999, was approximately $22,450,000. The Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
<PAGE>
Form 10-Q, Page 7
In January 1999, the Company entered into a $150,000,000 unsecured revolving
credit facility (the $150,000,000 Revolver) which expires in January 2000. The
interest rates under the $150,000,000 Revolver depend on the repayment period of
the advance selected and may range from the London Interbank Offered Rate plus
1.00% to the bank's base rate. As of September 24, 1999, the Company had no
borrowings issued against the $150,000,000 Revolver. The $150,000,000 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 $140,000,000 at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of September 24, 1999, the Company had outstanding borrowings of $72,914,000
under this financing agreement and had committed to borrowings between October
1999 and December 2000 in the cumulative principal amount of approximately
$452,972,000. 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. The weighted
average interest rate of the outstanding promissory notes at September 24, 1999
was 6.87%. 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.
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. On August 30, 1999, Stuff filed a notice
of appeal with the Colorado Court of Appeals seeking to overturn the decision of
the District Court. The Company continues to believe that Stuff's claims are
wholly without merit and intends to vigorously defend any further actions
arising from this complaint.
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
District Court granted the plaintiffs' request to proceed as a class action on
the ADEA claims. On November 9, 1998, the District Court granted the plaintiffs'
<PAGE>
Form 10-Q, Page 8
request to proceed as a class on the ERISA claims. On March 1, 1999, the
District 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 and has filed
motions for summary judgment regarding both claims and for decertification of
the ADEA class. On September 1, 1999, at a hearing before the District Court,
the Court vacated the trial date scheduled for October 1999. The District Court
has scheduled oral arguments on the pending motions on November 19, 1999. A
trial date will not be scheduled until the District Court has ruled on the
pending motions.
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 October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100,000,000 to Odetics for a fully paid up license to
the 151 Patent; $80,000,000 of which was paid at the time of the settlement and
the remainder to be paid in equal annual installments of $10,000,000 in
September in each of 2000 and 2001. The Company recognized a pre-tax expense of
$82,308,000 for actual damages and post-judgment interest in the second quarter
of 1999 in connection with these legal actions. As a result of the settlement,
the Company recognized an additional $15,486,000 pre-tax expense in the third
quarter of 1999 to reflect the present value of the final settlement payments.
The Company also settled a number of less significant legal actions resulting in
a pre-tax expense of $788,000 during the third quarter of 1999.
NOTE 5 - RESTRUCTURING
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the restructuring plan included a voluntary
reduction in headcount as well as the elimination of certain lower priority
research and product development projects. The headcount reductions were
targeted in the areas 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
<PAGE>
Form 10-Q, Page 9
connection with EITF Issue No. 94-3 (EITF 94-3) and Statement of Financial
Accounting Standards (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 third quarter and nine months of 1999, the Company incurred a pre-tax
expense of $16,082,000 and $36,328,000, respectively, related to the
restructuring. The following table summarizes the activity in the Company's
reserves during the nine months of 1999 associated with the restructuring (in
thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
------------------------------------------------
Restructuring expense $ 24,686 $ 6,680 $4,962 $ 36,328
Cash payments (21,671) (21,671)
Asset writedowns (6,680) (6,680)
-------- ------- ------ --------
Balances, September 24, 1999 $ 3,015 $ 0 $4,962 $ 7,977
======== ======= ====== ========
The employee severance expense of $24,686,000 consists of separation expense of
$22,816,000 payable to approximately 680 employees who irrevocably elected to
participate in a voluntary separation program prior to the end of the fiscal
quarter; salary expense of $1,770,000 to employees prior to their termination
date, but subsequent to their last day of work; and estimated outplacement costs
of $100,000. The majority of the remaining employee severance reserves of
$3,015,000 as of September 24, 1999, are expected to be paid within the next
three months.
The asset writedowns of $6,680,000 relate to engineering assets that have been
or will be disposed of prior to year-end, in connection with the Company's
decision to discontinue certain lower priority research and product development
projects.
The other exit costs of $4,962,000 relate to costs associated with terminating
contractual future purchase obligations associated with the manufacture of
certain products that were discontinued in connection with the restructuring.
These costs will be paid within the next three months.
On October 28, 1999, the Company announced plans to further restructure its
business. For further discussion of this restructuring, see Note 8 "Subsequent
Events."
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued 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.
<PAGE>
Form 10-Q, Page 10
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 tape, disk and
network products for the mainframe and client-server computing environment and
for the storage area network (SAN) market. The storage services segment provides
support services for the Company's and third-party products, integration
services, storage consulting and managed storage services. The storage
management software segment sells and licenses software tools and applications
for improving storage product performance and simplifying information storage
management.
The Company does not have any intersegment revenue and evaluates segment
performance based on gross profit. The sum of the segment gross profits 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 Nine Months Ended
-----------------------------------------------------
09/24/99 09/25/98 09/24/99 09/25/98
-----------------------------------------------------
Revenue:
Storage products $355,726 $380,938 $1,097,364 $1,076,923
Storage services 171,620 163,023 520,707 459,458
Storage management
software 46,384 27,099 127,564 61,876
------- ------- --------- ----------
Total revenue $573,730 $571,060 $1,745,635 $1,598,257
======= ======= ========= ==========
Gross profit:
Storage products $148,329 $175,888 $ 453,377 $ 511,689
Storage services 50,252 68,473 178,633 196,991
Storage management
software 31,740 21,911 92,170 46,654
-------- -------- --------- ---------
Total gross profit $230,321 $266,272 $ 724,180 $ 755,334
======== ======= ========= =========
NOTE 8 - SUBSEQUENT EVENTS
On October 28, 1999, the Company announced plans to further restructure its
business. This restructuring is intended to reduce investments in or eliminate
certain of the Company's storage service offerings, increase focus on certain
core products and storage management software offerings, and re-align the
corporate infrastructure.
<PAGE>
Form 10-Q, Page 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 24, 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 within
the meaning of the Private Securities Reform Act of 1995. 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. The forward-looking statements
contained herein represent a good-faith assessment of the Company's future
performance for which management believes there is a reasonable basis. The
Company disclaims any obligation to update information on forecasts contained
herein, except as may be otherwise required by law.
Historical 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.
GENERAL
The Company reported a net loss for the third quarter ended September 24, 1999,
of $16.0 million on revenue of $573.7 million, compared to net income for the
third quarter in 1998 of $50.6 million on revenue of $571.1 million. A net loss
of $48.7 million was reported for the nine months of 1999 on revenue of $1.75
billion, compared to net income of $145.6 million for the nine months of 1998 on
revenue of $1.60 billion. The Company's reported results for the third quarter
and nine months of 1999 include one-time pre-tax expenses associated with
litigation of $16.3 million and $98.6 million, and restructuring of $16.1
million and $36.3 million, respectively. Excluding the one-time expenses, net of
tax, the Company would have earned net income of $4.7 million and $37.7 million
during the third quarter and nine months of 1999, respectively.
Revenue during the third quarter of 1999 was unchanged, compared to the third
quarter of 1998, as revenue growth in the storage management software and
storage services segments was offset by a decrease in revenue from the storage
products segment. Revenue during the nine months of 1999 increased 9%, compared
to the same period in 1998, with revenue growth in all of the Company's business
segments. Gross profit margins decreased to 40% and 41% during the third quarter
and nine months of 1999, respectively, compared to 47% for the same periods in
1998, due to decreased profit margins in all of the Company's business segments.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products,
software and services. This evaluation process results in a variable sales
cycle, and makes it difficult to predict if or when revenue will be earned.
Further, gross margins may be adversely impacted in an effort to complete the
sales cycle. Revenue and operating profits during the third quarter fell
significantly short of the Company's expectations due principally to shortfalls
in revenue and
<PAGE>
Form 10-Q, Page 12
gross margins in North America. While revenue in North America
increased in the third quarter of 1999 as compared to the same period in 1998,
gross margins declined in terms of both gross margin dollars and as a percentage
of revenue. The Company believes a portion of this shortfall was due to some
customers delaying purchasing decisions in anticipation of possible issues
associated with the year 2000, particularly with respect to tape products and
Virtual Storage Manager(TM) (VSM) targeted for the mainframe market. For further
discussion of issues with the year 2000, see "Risk Factors That May Affect
Future Results - Risks Associated with the Year 2000" below.
The Company's financial results may continue to be adversely impacted by its
variable sales cycle, particularly in advance of and into the first quarter of
2000. Future financial results are also dependent upon the Company's ability to
manage its costs and operating expenses in line with revenue; the timely
development, manufacture and introduction of new products, software and
services; successfully managing the development of new direct and indirect sales
channels; the implementation of its storage area network (SAN); and the
implementation of its restructuring programs. For the discussion of these and
other risk factors, see "Restructuring" and "Risk Factors That May Affect Future
Results," below.
On October 15, 1999, the Company announced that it has engaged Goldman, Sachs &
Co. and McKinsey & Company to assist the Company in its on-going strategic
analysis, evaluation, and consideration of various strategic alternatives. These
strategic alternatives may include financial restructuring, acquisitions,
divestitures, spin-offs, joint ventures, and business combinations that could
include sales, mergers, or partnerships. The implementation of any strategic
alternatives may have a significant impact on the Company's future reported
financial results. The implementation of various strategic alternatives may
result in significant one-time charges associated with the disposition of assets
or recognition of liabilities. The implementation of various strategic
alternatives may also require significant financing activities. There can be no
assurances that the Company's analysis and implementation of strategic
alternatives will be successful or that if additional financing is required to
implement a strategy, that this financing can be completed on terms acceptable
to the Company. The Company's operating results may be adversely affected while
it completes the analysis and implementation of various strategic alternatives
due to potential disruptions of customers, employees, suppliers and strategic
partners.
On October 28, 1999, the Company announced plans to further restructure its
business. This restructuring is intended to reduce investments in or eliminate
certain of the Company's storage service and product offerings, increase focus
on certain core product and storage management software offerings, and re-align
the corporate infrastructure. These restructuring activities are expected to
begin in the fourth quarter of 1999. As the restructuring plan is in the early
stages of its development, the amount of the restructuring expense to be
recognized in the fourth quarter of 1999 or in the year 2000 cannot be
determined at this time. However, this restructuring charge may be material to
the operating results in the fourth quarter of 1999 and into the year 2000. The
amount of the restructuring expense is dependent upon a number of factors
including whether the Company is successful in its efforts to divest certain
businesses. The targeted reductions in positions associated with the initial
phase of the restructuring are estimated to be approximately 1,500 to 1,750
people. The Company expects the restructuring activities to be completed by the
end of the second quarter of 2000 and is expected to yield annualized savings of
approximately $150 million. There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to realize the expected annualized savings. See "Liquidity and Capital Resources
- - - Available
<PAGE>
Form 10-Q, Page 13
Financing Lines," below for a discussion of the potential effect these
activities may have on the Company's available financing lines.
The Company's cash balance increased $4.3 million during the nine months of 1999
as cash proceeds from operating and financing activities more than offset cash
used in investing activities. Cash generated from financing activities of $64.6
million was mainly the result of increased borrowings of $86.2 million under
credit facilities, and was partially offset by cash payments of $35.2 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 provided cash of $64.5 million during the nine months of 1999, as
compared to cash of $70.4 million generated from operations during the nine
months of 1998. The decrease in cash generated from operations during 1999, as
compared to 1998, was primarily the result of decreased gross margins; increased
operating expenses; increased levels of inventory and spare parts; and cash
payments associated with restructuring activities. This decrease was partially
offset by income taxes refunded in 1999 of $6.2 million, compared to income
taxes paid in 1998 of $92.9 million. See "Liquidity and Capital Resources -
Working Capital" for additional discussion of operating cash flows. Cash used in
investing activities of $101.9 million was primarily due to property, plant and
equipment purchases of $90.7 million. On October 8, 1999, the Company paid $80
million to Odetics in connection with the settlement of litigation. See Note 4
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for further discussion of the
Odetics settlement.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment.
Quarter Ended Nine Months Ended
----------------------------------------
09/24/99 09/25/98 09/24/99 09/25/98
----------------------------------------
Storage products:
Tape products 45.1% 42.4% 44.8% 42.8%
Disk products 13.1 21.3 14.9 21.1
Network products 3.8 3.0 3.2 3.5
----- ----- ----- -----
Total storage products 62.0 66.7 62.9 67.4
Storage services 29.9 28.6 29.8 28.7
Storage management software 8.1 4.7 7.3 3.9
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 59.9 53.4 58.5 52.7
----- ----- ----- -----
Gross profit 40.1 46.6 41.5 47.3
Research and product development
costs 11.5 10.7 12.2 10.8
Selling, general, administrative
and other income and expense, net 26.3 21.5 25.2 22.3
Litigation expense 2.8 5.6
Restructuring expense 2.8 2.1
----- ----- ----- -----
Operating profit (loss) (3.3) 14.4 (3.6) 14.2
Interest income (expense), net (1.1) (0.1) (0.8) 0.5
----- ----- ----- -----
Income (loss) before income
taxes (4.4) 14.3 (4.4) 14.7
Benefit (provision) for income
taxes 1.6 (5.4) 1.6 (5.6)
----- ----- ----- -----
Net income (loss) (2.8)% 8.9% (2.8)% 9.1%
===== ===== ===== =====
<PAGE>
Form 10-Q, Page 14
The following table sets forth the gross profit percentages for each segment
calculated as gross profit for the segment divided by revenue for the segment.
Quarter Ended Nine Months Ended
-----------------------------------------
09/24/99 09/25/98 09/24/99 09/25/98
-----------------------------------------
Storage products 41.7% 46.2% 41.3% 47.5%
Storage services 29.3% 42.0% 34.3% 42.9%
Storage management software 68.4% 80.9% 72.3% 75.4%
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk, and network
products for the mainframe and client-server computing environments and for the
SAN market. Revenue from storage products decreased 7% during the third quarter
of 1999, compared to the third quarter of 1998, and increased 2% during the nine
months of 1999, compared to the same period in 1998. Revenue from tape products
increased in both the third quarter and nine months of 1999, compared to the
same periods of 1998, but was offset by decreased revenue from disk products in
both periods.
Tape Products
Tape product revenue increased 7% and 14% during the third quarter and nine
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. Increased revenue from the TimberWolf(TM) family of automated tape
products designed for the client-server market also contributed to the revenue
increase. Revenue from 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 third quarter and nine months of
1999, compared to the same periods in 1998, reflecting both lower selling prices
and decreases in the number of units sold as the Company's current generation
tape products gain market acceptance. The Company believes that the sales of
tape products designed for the mainframe market have been adversely impacted in
the third quarter of 1999 due to some customers delaying testing and purchasing
decisions in anticipation of the year 2000.
Disk Products
Disk product revenue decreased 39% and 23% during the third quarter and nine
months of 1999, respectively, compared to the same periods in 1998, primarily
due to a decrease in revenue from OEM sales to International Business Machines
Corporation (IBM) of Iceberg(R), a disk storage product designed for the
mainframe market. The Company anticipates that Iceberg sales to IBM will
continue to decrease in the fourth quarter of 1999 and the Company does not
anticipate any significant revenue from sales of Iceberg to IBM in 2000. See
"Risk Factors That May Affect Future Results - Dependence on IBM," for a
discussion of the risks associated with IBM. While revenue from direct sales of
the 9393 Shared Virtual Array (SVA) increased in both the third quarter and nine
months of 1999, as compared to the same periods in 1998, the amount of direct
sales of SVA did not meet the Company's expectations due to issues associated
with the development of this new direct sales channel. Revenue from the
OPENstorage(TM) Disk products was unchanged and increased in the third quarter
and nine
<PAGE>
Form 10-Q, Page 15
months of 1999, respectively, as compared to 1998. The Company's
OPENstorage Disk products are currently supplied through an OEM agreement with
Data General which expires during the second quarter of 2000. In the third
quarter of 1999, Data General merged with EMC Corporation, a significant
competitor of the Company. While the Company has plans to sell Sun Microsystems,
Inc.'s (Sun) open enterprise disk products in the future under a recently
announced worldwide OEM sales and marketing agreement, these new products are
currently not available. There can be no assurance that the Company will not
experience decreased sales of disk products for the client-server market during
the transition from the Data General to the Sun product line.
Network Products
Network product revenue during the third quarter increased 29% and was unchanged
during the nine months of 1999, compared to the same periods in 1998. Revenue
from network products designed for the SAN market increased in the third quarter
and nine 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 during 1999.
The Company's financial results may continue to be adversely impacted by its
variable sales cycles, particularly in advance of and into the first quarter of
2000. Future revenue growth in the Company's storage products segment is
significantly dependent upon the continued demand for the 9840 and TimberWolf
tape products, successfully replacing the anticipated decline in OEM sales of
Iceberg to IBM with direct sales of the SVA disk product, successfully
transitioning open disk sales from Data General to Sun, the timely introduction
and acceptance of new disk products and enhancements, and gaining greater market
acceptance for SAN solutions. 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 and
distribution channels.
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 5% and 13% during the third quarter and nine 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 was largely unchanged during the third quarter and nine months of 1999,
compared to the same periods in 1998.
As a result of the restructuring activities announced on October 28, 1999, and
further discussed under "General," above, the Company anticipates decreased
revenue from its storage services segment as it reduces its investments in, or
eliminates, certain service offerings.
STORAGE MANAGEMENT SOFTWARE
Storage management software revenue increased 71% and 106% during the third
quarter and nine months of 1999, respectively, compared to the same periods in
1998, primarily due to increased revenue from VSM. VSM is a data storage
software solution designed to improve performance, cartridge utilization, and
overall storage management. While revenue from VSM increased during the third
quarter and nine months of 1999, sales of VSM did not meet the
<PAGE>
Form 10-Q, Page 16
Company's expectations. The Company believes sales of VSM during the third
quarter of 1999 were adversely impacted due to customers delaying
purchase decisions in anticipation of the year 2000. The increase in revenue
during the third quarter of 1999 was also partially due to an increase of
third-party software license revenue of approximately $5.3 million. Revenue
from SnapShot, which is designed for use with the Company's SVA disk products,
decreased in the third quarter and nine months of 1999, compared to the same
period of 1998, due to a decrease in units from OEM sales to IBM.
Future revenue growth from storage management software is dependent upon
increasing market acceptance for VSM. Because VSM is a complex system, it is
difficult to predict the timing and extent that VSM will gain acceptance,
particularly in advance of and into the first quarter of 2000. 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 the fourth quarter of 1999
as the sales of Iceberg to IBM decreases, and the Company does not anticipate
any significant revenue from sales of SnapShot to IBM in 2000. The Company has
recently introduced SnapShot capabilities for SVA for certain client-server
platforms and has plans to introduce SnapShot for additional platforms. Future
revenue growth from Snapshot is dependent upon the timely introduction and
market acceptance of future releases of the SnapShot software for the
client-server marketplace as well as the success of the Company's efforts to
sell SnapShot through its direct sales channel. 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 40% and 41% during the third quarter and nine
months of 1999, respectively, compared to 47% for the same periods in 1998. The
gross profit margins decreased in all of the Company's business segments. Gross
margins for the Company's products and software have been adversely affected
during 1999 by pricing pressures associated with competitive tape, disk, and
software offerings in North America and Europe; efforts to shorten the sales
cycles for its products and software in North America; increased sales of tape
cartridges which have lower profit margins; a decline in the selling prices for
earlier generation tape products; and unfavorable manufacturing variances
associated with excess manufacturing capacity. Gross margins associated with the
services segment have decreased principally as a result of increased revenue
contribution from lower-margin consulting, integration, and managed storage
service offerings. Storage service margins have also been adversely impacted by
significant investments in the development of the consulting and integration
services business and increased warranty costs 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 gross
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.
While the Company anticipates a decrease in revenue from its lower-margin
consulting, integration, and managed storage
<PAGE>
Form 10-Q, Page 17
services due to the restructuring announced on October 28, 1999, the storage
services gross profit margins may continue to be adversely affected in the
fourth quarter of 1999 and into 2000 as these offerings are reduced or
eliminated.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses increased 9% and 24% during the third
quarter and nine months of 1999 respectively, compared to the same periods in
1998. The Company received approximately $10 million and $30 million less
research and product development funding from third-parties in the third quarter
and nine months of 1999, respectively, as compared to the same periods in 1998.
Excluding the additional funding from third-parties, research and product
development expense decreased 6% and increased 5% in the third quarter and nine
months of 1999, respectively, as compared to the same periods in 1998. The
decrease in the third quarter of 1999 is primarily due to the elimination of
several lower priority research and product development programs associated with
the restructuring activities. See "Restructuring" below for discussion of the
restructuring activities.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
Selling, general, administrative and other income and expense (SG&A) increased
23% and 24% during the third quarter and nine months of 1999, respectively,
compared to the same periods in 1998. The increase for both the third quarter
and nine months of 1999, as compared to 1998, was primarily due to increased
selling expenses. The increase in selling expense reflects an increase in
commission and bonus rates, the addition of application specialists associated
with storage services, an increase in the Company's worldwide sales force, and
an increase in marketing efforts. The increase in selling expense during the
nine months of 1999 also reflects increased bonuses and commissions associated
with increased sales revenue.
LITIGATION
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100 million to Odetics for a fully paid up license to
the 151 Patent; $80 million of which was paid at the time of the settlement and
the remainder to be paid in equal annual installments of $10 million in
September in each of 2000 and 2001. The Company recognized a pre-tax expense of
$82.3 million for actual damages and post-judgment interest in the second
quarter of 1999 in connection with these legal actions. As a result of the
settlement, the Company recognized an additional $15.5 million pre-tax expense
in the third quarter of 1999 to reflect the present value of the final
settlement payments.
The Company also settled a number of less significant legal actions resulting in
a pre-tax expense of $788,000 during the third quarter of 1999.
RESTRUCTURING
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the restructuring plan included a voluntary
reduction in headcount as well as
<PAGE>
Form 10-Q, Page 18
the elimination of certain lower priority research and product
development projects. The headcount reductions were targeted in the areas
of research and product development, administrative and manufacturing.
During the third quarter and nine months of 1999, the Company incurred a pre-tax
expense of $16.1 million and $36.3 million, respectively, related to the
restructuring. The following table summarizes the activity in the Company's
reserves during the nine months of 1999 associated with the restructuring (in
thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
------------------------------------------------
Restructuring expense $ 24,686 $ 6,680 $4,962 $ 36,328
Cash payments (21,671) (21,671)
Asset writedowns (6,680) (6,680)
-------- ------- ------ --------
Balances, September 24, 1999 $ 3,015 $ 0 $4,962 $ 7,977
======== ======= ====== ========
The employee severance expense of $24.7 million consists of separation expense
of $22.8 million payable to approximately 680 employees who irrevocably elected
to participate in a voluntary separation program prior to the end of the fiscal
quarter; salary expense of $1.8 million to employees prior to their termination
date, but subsequent to their last day of work; and estimated outplacement costs
of $100,000. The majority of the remaining employee severance reserves of $3.0
million as of September 24, 1999, are expected to be paid within the next three
months.
The asset writedowns of $6.7 million relate to engineering assets that have been
or will be disposed of prior to year-end, in connection with the Company's
decision to discontinue certain lower priority research and product development
projects.
The other exit costs of $5.0 million relate to costs associated with terminating
contractual future purchase obligations associated with the manufacture of
certain products that were discontinued in connection with the restructuring.
These costs will be paid within the next three months.
The Company does not expect it will incur any incremental operating expenses on
an on-going basis as a result of the restructuring announced on April 15, 1999.
The Company expects annualized savings of approximately $40 million for these
restructuring activities. The majority of these savings are expected to be
realized in the form of reduced research and product development and
manufacturing expenses. There can be no assurance that the targeted savings will
be achieved. See Note 1 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
discussion of significant estimates.
On October 28, 1999, the Company announced plans to further restructure its
business. For further discussions of this restructuring, see "General" of this
Form 10-Q.
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
<PAGE>
Form 10-Q, Page 19
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 $4.1 million and $10.3 million during the third
quarter and nine months of 1999, respectively, compared to the same periods in
1998, due to increased borrowings under the Company's credit facilities.
Interest income decreased $1.3 million and $9.6 million during the third quarter
and nine 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 third quarter of
1998, to 36% for the third 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 determined that the Company will more likely than not realize
$132.6 million of deferred income tax assets as of September 24, 1999. The
Company's valuation allowance of approximately $24.1 million as of September 24,
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 $4.3 million during the nine months of 1999
as cash proceeds from operating and financing activities more than offset cash
used in investing activities. Cash generated from financing activities of $64.6
million was mainly the result of increased borrowings of $86.2 million under
credit facilities, and was partially offset by cash payments of $35.2 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 provided cash of $64.5 million during the nine months of 1999, as
compared to cash of $70.4 million generated from operations during the nine
months of 1998. The decrease in cash generated from operations during 1999, as
compared to 1998, was primarily the result of decreased gross margins; increased
operating expenses; increased levels of inventory and spare parts; and cash
payments associated with restructuring activities. This decrease was partially
offset by income taxes refunded in 1999 of $6.2 million, compared to income
taxes paid in 1998 of $92.9 million. Cash used in investing activities of $101.9
million was primarily due to property, plant and equipment purchases of $90.7
million. On October 8, 1999, the Company paid $80 million to Odetics in
connection with the settlement of litigation. This payment was funded with
available working capital and advances on the Company's unsecured revolving
credit facilities. See Note 4 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
further discussion of the Odetics settlement.
<PAGE>
Form 10-Q, Page 20
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, $312.5
million as of September 24, 1999, is reduced by $12.5 million on the last day of
each calendar quarter. The interest rates under the Revolver depend on the
repayment period of the advance selected. The weighted average interest rate on
the advances at September 24, 1999 was 6.92%. The Company had borrowings of
$290.0 million and had issued letters of credit for approximately $50,000 under
the Revolver as of September 24, 1999. The remaining available credit under the
Revolver as of September 24, 1999, was approximately $22.5 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 repayment period of
the advance selected and may range from the London Interbank Offered Rate plus
1.00% to the bank's base rate. As of September 24, 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 2001, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of September 24, 1999, the Company had outstanding borrowings of $72.9
million under this financing agreement and had committed to borrowings between
October 1999 and December 2000 in the cumulative principal amount of
approximately $453.0 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.
The weighted average interest rate of the outstanding promissory notes at
September 24, 1999 was 6.87%. 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 believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. As a result of one-time expenses associated with litigation and
restructuring, the Company anticipates it may be required to obtain waivers or
amendments to certain financial covenants of its credit facilities or obtain
other sources of financing. There can be no assurance that any waivers,
amendments, or other sources of financing, if required, can be completed on
terms similar to those currently available to the Company. 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
<PAGE>
Form 10-Q, Page 21
no assurance that any additional long-term 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 29% as of September 24, 1999, primarily due to a net
increase in borrowings of $86.2 million under short-term credit facilities. See
"Working Capital" above for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
During the third quarter and nine months of 1999, approximately 42% and 40%
respectively, of the Company's revenue was generated by its international
operations, compared to approximately 36% for the third quarter and nine 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, business and political 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 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 that 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
<PAGE>
Form 10-Q, Page 22
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
September 24, 1999, and as of December 25, 1998, would result in a hypothetical
loss of approximately $72.9 million and $59.2 million, respectively. The
increase in the hypothetical loss for the nine months of 1999 is primarily due
to an increase in forward exchange contracts outstanding. 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.
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
<PAGE>
Form 10-Q, Page 23
be able to successfully manage the development and introduction of new
products, services, and software in the future.
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.
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 and
replacing the earlier generation products in the mainframe environment with new
technology. The Company currently is making significant investments in
developing new products and software for these markets. There can be no
assurances that the Company will be successful in these activities. The SAN
market is a new market and is rapidly evolving. The Company's operating and
financial results may be adversely impacted in the event the SAN market develops
slower than expected or the Company's products fail to gain acceptance in this
market.
Many of the Company's customers undertake significant procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products,
software and services. This evaluation process results in a variable sales
cycle, and makes it difficult to predict if or when revenue will be earned,
particularly in advance of and into the year 2000, as customers may delay
testing and purchase decisions in anticipation of the year 2000. Further, gross
margins may be adversely impacted in an effort to complete the sales cycle.
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 third quarter and nine months of 1999, OEM sales of products and
software to IBM declined to 8% and 10%, respectively, of the Company's total
revenue compared to 20% in the same periods of 1998. The Company anticipates
that IBM will continue to reduce its purchases from the Company in the fourth
quarter of 1999 and does not anticipate any significant sales to IBM in 2000
under the OEM agreement. The Company does not expect IBM to 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 Company has expanded its direct sales channel to sell its SVA and
SnapShot products. 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
<PAGE>
Form 10-Q, Page 24
further accelerate the price erosion that 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,
new product introductions by the Company's competitors, and the ability to
establish new effective distribution channels. 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
and SAN 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 Corporation announced that they have entered into a strategic
business and technology alliance. In addition, during the third quarter of 1999,
EMC Corporation acquired Data General. The Company's OPENstorage Disk products
are currently supplied through an OEM agreement with Data General which expires
during the second quarter of 2000. While the Company has plans to sell Sun
Microsystems, Inc.'s open enterprise disk product in the future under a recently
announced multi-year, worldwide OEM sales and marketing agreement, these new
products are currently not available. Although the impact of these alliances on
the Company's business is unclear at this time, the alliance of two of the
Company's major competitors or partners 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
<PAGE>
Form 10-Q, Page 25
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 is recognized in the last weeks
and days of the quarter. These factors make the forecasting of 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, particularly in advance of and into the year 2000; 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 carry
different gross profit margins and may cause the Company's operating margins to
fluctuate and impact earnings.
Manufacturing / Sole Source Suppliers
A significant portion of the Company's products are manufactured in facilities
located in Puerto Rico. The Company's ability to manufacture product may be
impacted by weather related risks beyond the control of the Company. If the
Puerto Rico manufacturing facility were impacted by such an event, the Company
may not have an alternative source to meet the demand for its products without
substantial delays and disruption to its operations. The Company carries
interruption insurance to mitigate some of the risk. There is no assurance that
the Company could obtain sufficient alternate manufacturing sources or repair
the facilities in a timely manner to satisfy the demand for its products.
Failure to fulfill manufacture demands could adversely affect the Company's
operating and financial results in the future.
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 at a
price acceptable to the Company and its customers. There can be no assurance
that Imation will be able to meet the anticipated demands. The Company is also
dependent on IBM to supply disk drives used in both the Company's Iceberg
product which is 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 was unable or unwilling to continue to supply components, the
Company would have to identify
<PAGE>
Form 10-Q, Page 26
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 or at a price acceptable to the Company.
Information Systems Transition
The Company has replaced 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 establishment of processes and training associated with
these new systems are continuing and involve a number of risks and
uncertainties. The Company must successfully manage the 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. 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 provided notification or otherwise made available to all
affected customers the potential year 2000 problems with older products and
software in order to raise their awareness. The Company currently has an
established worldwide 24 hour per day call center to assist customers. This call
center is staffed with full support service employees who are trained to assist
customers with year 2000 issues that have been identified.
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 has replaced 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 that
are not being replaced to determine if they are Year 2000 Ready. The Company has
also 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.
<PAGE>
Form 10-Q, Page 27
The costs incurred to date directly related to the Company's remediation
activities are approximately $3 million and no future costs related to the
remediation activities are expected. 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 $41 million in
these new information systems as of September 24, 1999. No further investment is
expected in 1999 to make the systems Year 2000 Ready. Although all critical
internal information and non-information systems have been remediated and
tested, manual back-up processes are being prepared for critical areas. All
information contained in the systems will be backed-up to tape media on December
31, 1999, and all data systems will be monitored during this period for
potential issues and as a precaution against unauthorized access. 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 alternative suppliers and vendors and has
stocked certain critical components 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 Company's revenue has been adversely impacted in the third quarter of 1999
as some customers have delayed testing and purchasing decisions in anticipation
of the year 2000, particularly with respect to tape products and software
targeted for the mainframe market. The adverse consequences resulting from
customers' year 2000 concerns include, decreased spending on new information
storage systems as customers complete their year 2000 testing activities and
delays in customer purchase decisions once customers have verified the year 2000
readiness of their existing information systems. The Company believes the demand
for its products, particularly in the mainframe market, will be adversely
affected during the fourth quarter of 1999 and the first quarter of 2000, as
these patterns continue.
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 28
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. On August 30, 1999, Stuff filed a notice
of appeal with the Colorado Court of Appeals seeking to overturn the decision of
the District Court. The Company continues to believe that Stuff's claims are
wholly without merit and intends to vigorously defend any further actions
arising from this complaint.
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
District Court granted the plaintiffs' request to proceed as a class action on
the ADEA claims. On November 9, 1998, the District Court granted the plaintiffs'
request to proceed as a class on the ERISA claims. On March 1, 1999, the
District 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 and has filed
motions for summary judgment regarding both claims and for decertification of
the ADEA class. On September 1, 1999, at a hearing before the District Court,
the Court vacated the trial date scheduled for October 1999. The District Court
has scheduled oral arguments on the pending motions on November 19, 1999. A
trial date will not be scheduled until the District Court has ruled on the
pending motions.
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.
<PAGE>
Form 10-Q, Page 29
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 October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100 million to Odetics for a fully paid up license to
the 151 Patent; $80 million of which was paid at the time of the settlement and
the remainder to be paid in equal annual installments of $10 million in
September in each of 2000 and 2001. The Company recognized a pre-tax expense of
$82.3 million for actual damages and post-judgment interest in the second
quarter of 1999 in connection with these legal actions. As a result of the
settlement, the Company recognized an additional $15.5 million pre-tax expense
in the third quarter of 1999 to reflect the present value of the final
settlement payments.
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.
<PAGE>
Form 10-Q, Page 30
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Third Amendment, dated as of August 13, 1999,
between the Company and Bank of America, N.A., to
the Second Amended and Restated Contingent
Multi-Currency Note Purchase Commitment Agreement
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
Reports on Form 8-K
On September 2, 1999, the Company filed a Current Report on Form
8-K, under Item 5, regarding the Company's announcement on August
27, 1999 updating the Company's litigation proceedings in respect to
the Odetics, Stuff and ADEA claims.
<PAGE>
Form 10-Q, Page 31
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
November 5, 1999 /s/ ROBERT S. KOCOL
- - ------------------------------- ------------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 5, 1999 /s/ THOMAS G. ARNOLD
- - ------------------------------- ------------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate
Controller
(Principal Accounting Officer)
<PAGE>
Form 10-Q, Page 32
EXHIBIT INDEX
Exhibit No. Description
10.1 Third Amendment, dated as of August 13, 1999,
between the Company and Bank of America, N.A., to
the Second Amended and Restated Contingent
Multi-Currency Note Purchase Commitment Agreement
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
THIRD AMENDMENT TO THE SECOND AMENDED AND
RESTATED CONTINGENT MULTICURRENCY
NOTE PURCHASE COMMITMENT AGREEMENT
THIS AMENDMENT (this "Amendment"), dated as of August 13, 1999, is made to
the Second Amended and Restated Contingent Multicurrency Note Purchase
Commitment Agreement, dated as of January 15, 1998 (as heretofore or hereafter
amended, modified or supplemented from time to time and in effect, the
"Agreement"), between Storage Technology Corporation ("Borrower") and Bank of
America, N.A. (formerly Bank of America National Trust and Savings Association)
("BofA"). Capitalized terms used but not otherwise defined herein shall have the
meanings assigned to such terms by the Agreement.
WHEREAS, Borrower and BofA desire to amend and supplement the Agreement
as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO AGREEMENT
Section 1.1 Amendment to Definition of "Scheduled Termination Date".
Section 1.08(a) of the Agreement is hereby amended to change the Scheduled
Termination Date set forth therein to January 10, 2001.
Section 1.2 Amendment to Section 6.01(h)(i)(D). Section 6.01(h)(i)(D) of
the Agreement is hereby amended and restated to read in its entirety as follows:
"(D) deliver to BofA such consents as may be required under the Bank
Credit Agreement and Bank Revolver (and all other agreements or
instruments affecting the Borrower) to the delivery of such Collateral
Account Agreement and collateral; and"
Section 1.3 Amendment to Section 6.01(h)(ii)(A). Section 6.01(h)(ii)(A) of
the Agreement is hereby amended and restated to read in its entirety as follows:
"(A) on such Purchase Date, after giving effect to any payment of
Purchase Price and any payment of principal and interest on any
outstanding Notes on such Purchase Date, the Aggregate Purchase Price does
not exceed
$90,000,000;"
Section 1.4 Amendment to Section 6.01(h)(iii)(B). Section 6.01(h)(iii)(B)
of the Agreement is hereby amended and restated to read in its entirety as
follows:
1
<PAGE>
"(B) the term "Available Revolver Amount" means, with respect to the
last day of any Fiscal Quarter, the sum, as set forth in the most recent
Compliance Certificate as of such last day which was delivered pursuant to
Section 6.01(g)(vii), of (I) the excess of (x) the net of all lender
commitments under the Bank Credit Agreement as of the last day of such
Fiscal Quarter, over (y) the sum of (1) the outstanding principal amount
of all loans, advances and outstanding letter of credit reimbursement
obligations under the Bank Credit Agreement as of the last day of such
Fiscal Quarter, plus (2) the aggregate outstanding face amount of all
letters of credit under the Bank Credit Agreement as of the last day of
such Fiscal Quarter, and (II) the excess of (x) the net of all lender
commitments under the Bank Revolver as of the last day of such Fiscal
Quarter, over (y) the outstanding principal amount of all loans, advances
and other extensions of credit to the Borrower under the Bank Revolver as
of the last day of such Fiscal Quarter."
Section 1.5 Amendment to Schedule I. Schedule I to the Agreement is hereby
amended by inserting the following definition in its alphabetically determined
place:
"'Bank Revolver' means the Credit Agreement, dated as of January 14, 1999,
among the Borrower, Bank of America National Trust and Savings Association, as
Agent, and the other financial institutions party thereto, as amended and
supplemented or otherwise modified from time to time, and any restatement,
renewal or replacement thereof."
Section 1.6 Amendment to Schedule II. Schedule II to the Agreement is
hereby amended and restated in its entirety to read as set forth on Exhibit A
attached hereto.
Section 1.7 Amendment to Exhibit 5.01(d). Exhibit 5.01(d) to the
Agreement is hereby amended and restated in its entirety as follows:
"(d) Litigation. There is no action, suit or proceeding pending or, to the
best of Borrower's knowledge, threatened in any court or a governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (i) except as set forth in the most recent report delivered by Borrower
to BofA pursuant to Section 6.01(g)(vi) relating to Borrower or any of its
Subsidiaries or any of the properties of Borrower or any of its Subsidiaries and
that, if adversely determined, could create a Material Adverse Effect, or (ii)
that relates to any aspect of the transactions contemplated by this Agreement"."
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties. Borrower hereby represents and
warrants to BofA that:
(a) Representations and Warranties. The representations and
warranties of Borrower contained in the Agreement are true and correct on
and as of the date of this Amendment as though made on and as of such
date, and
2
<PAGE>
(b) No Termination Event. Both before and after giving effect to
this Amendment, no event shall exist that constitutes a Termination Event
or an Unmatured Termination Event.
ARTICLE III
MISCELLANEOUS
Section 3.1 Agreement Document Pursuant to Agreement. This Amendment
is an Agreement Document executed pursuant to the Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Agreement.
Section 3.2 Successors, Transferees and Assigns. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, transferees and assigns.
Section 3.3 Execution in Counterparts. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be deemed to be
an original and all of which shall be taken together as one agreement.
Section 3.4 Governing Law. THIS AMENDMENT SHALL BE A CONTRACT
MADE UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO ITS
PRINCIPLES OF CONFLICTS OF LAWS.
Section 3.5 Reaffirmation of Agreement. As amended and supplemented by
this Amendment, the Agreement remains in full force and effect and is hereby
reaffirmed, ratified and confirmed in all respects. From and after the date
hereof, all references to the Agreement in any agreement, instrument or document
shall be references to the Agreement as amended and supplemented hereby.
Section 3.6 Headings. The various captions in this Amendment are provided
solely for convenience of reference and shall not affect the meaning or
interpretation of any provision of this Amendment.
Section 3.7 Complete Agreement. The Agreement (including this Amendment
and the Exhibits and Schedules to the Agreement and this Amendment) and the
other Agreement Documents contain the entire understanding of the parties with
respect to the transactions contemplated hereby and thereby and supersedes all
prior arrangements or understandings with respect thereto.
Section 3.8 Severability. Whenever possible, each provision of this
Amendment will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Amendment is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
3
<PAGE>
invalidating the remainder of this Amendment, except to the extent that such
prohibition or invalidity would constitute a material change in the terms of
this Amendment taken as a whole.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
STORAGE TECHNOLOGY CORPORATION
By: /s/ Mark D. McGregor
Name: Mark D. McGregor
Title: Vice President and Treasurer
BANK OF AMERICA, N.A. (formerly Bank of
America National Trust and Savings
Association)
By: /s/ Kevin McMahon
Name: Kevin McMahon
Title: Managing Director
5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
September 24, September 25, September 24, September 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Earnings (Loss):
Net income (loss) $(16,045) $ 50,623 $(48,712) $145,623
========= ========= ========= =========
Shares:
Weighted average shares outstanding 99,743 102,178 99,800 105,242
========= ========= ========= =========
Earnings (Loss) per share:
Basic earnings (loss) per share $ (0.16) $ 0.50 $ (0.49) $ 1.38
========= ========= ========= =========
DILUTED
Earnings (Loss):
Net income (loss) $(16,045) $ 50,623 $(48,712) $145,623
========= ========= ========= =========
Shares:
Weighted average shares outstanding 99,743 102,178 99,800 105,242
Dilutive effect of outstanding options (as
determined under the treasury stock method) 2,545 2,788
--------- --------- --------- ---------
Weighted-average and dilutive potential shares 99,743 104,723 99,800 108,030
========= ========= ========= =========
Earnings (Loss) per share:
Diluted earnings (loss) per share $ (0.16) $ 0.48 $ (0.49) $ 1.35
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED
SEPTEMBER 24, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-24-1999
<CASH> 236,314
<SECURITIES> 0
<RECEIVABLES> 714,825 <F1>
<ALLOWANCES> 0
<INVENTORY> 329,435
<CURRENT-ASSETS> 1,397,096
<PP&E> 333,003 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,904,339
<CURRENT-LIABILITIES> 949,550
<BONDS> 0
0
0
<COMMON> 10,004
<OTHER-SE> 923,639
<TOTAL-LIABILITY-AND-EQUITY> 1,904,339
<SALES> 1,224,928
<TOTAL-REVENUES> 1,745,635
<CGS> 679,381
<TOTAL-COSTS> 1,021,455
<OTHER-EXPENSES> 212,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,397
<INCOME-PRETAX> (76,012)
<INCOME-TAX> (27,300)
<INCOME-CONTINUING> (48,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,712)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
<FN>
<F1> Asset values for the interim period represent net amounts.
</FN>
</TABLE>
