Form 10-Q
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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Commission File Number 1-7534
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STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One StorageTek Drive, Louisville, 80028-4309
Colorado
(Address of principal executive (Zip Code)
offices)
Registrant's Telephone Number, including area code: (303) 673-5151
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ YES / / NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock ($.10 Par Value) - 101,561,011 shares outstanding at August 11,
2000.
<PAGE>
Form 10-Q, Page 2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 30, 2000
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 25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 30
Exhibit Index 31
<PAGE>
Form 10-Q, Page 3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
6/30/00 12/31/99
-----------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 248,135 $ 215,421
Accounts receivable 484,112 627,435
Inventories (Note 2) 223,238 260,642
Deferred income tax assets 123,707 124,588
--------- ---------
Total current assets 1,079,192 1,228,086
Property, plant and equipment, net 272,528 322,061
Spare parts for maintenance, net 47,361 41,995
Deferred income tax assets 41,236 40,882
Other assets 115,808 102,451
--------- ---------
Total assets $1,556,125 $1,735,475
========= =========
LIABILITIES
Current liabilities:
Credit facilities (Note 3) $ 189,557 $ 286,152
Current portion of long-term debt 6,047 13,943
Accounts payable 78,246 111,253
Accrued liabilities 305,985 303,110
Income taxes payable 70,662 72,865
--------- ---------
Total current liabilities 650,497 787,323
Long-term debt 13,107 28,953
--------- ---------
Total liabilities 663,604 816,276
--------- ---------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
101,570,297 shares issued at June 30, 2000, and
100,825,390 shares issued at December 31, 1999 10,157 10,083
Capital in excess of par value 841,112 830,780
Retained earnings 45,817 84,704
Treasury stock (2,334) (2,334)
Unearned compensation (2,231) (4,034)
--------- ---------
Total stockholders' equity 892,521 919,199
--------- ---------
$1,556,125 $1,735,475
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
Form 10-Q, Page 4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended
------------------- --------------------
06/30/00 06/25/99 06/30/00 06/25/99
------------------- --------------------
Revenue
Storage products $348,895 $484,769 $650,007 $ 841,796
Storage services 163,582 169,633 322,139 330,109
------- ------- ------- ---------
Total revenue 512,477 654,402 972,146 1,171,905
------- ------- ------- ---------
Cost of revenue
Storage products 202,494 269,493 399,248 469,216
Storage services 100,251 114,467 208,613 208,830
------- ------- ------- ---------
Total cost of revenue 302,745 383,960 607,861 678,046
------- ------- ------- ---------
Gross profit 209,732 270,442 364,285 493,859
Research and product
development costs 64,302 72,624 129,482 146,100
Selling, general, administrative
and other income
and expense, net 132,857 151,702 266,977 289,561
Litigation expense (Note 4) 82,308 82,308
Restructuring expense (Note 5) 12,358 20,246 23,800 20,246
------- ------- ------- ---------
Operating profit (loss) 215 (56,438) (55,974) (44,356)
Interest income 4,725 1,091 6,401 2,021
Interest expense (3,939) (4,733) (10,264) (8,632)
------- ------- ------- ---------
Income (loss) before income
taxes 1,001 (60,800) (59,837) (50,967)
Benefit (provision) for
income taxes (350) 21,600 20,950 18,300
------- ------- ------- ---------
Net income (loss) $ 651 $(38,480) $(38,887) $ (32,667)
======= ======= ======= =========
EARNINGS (LOSS) PER COMMON SHARE (Note 8)
Basic earnings (loss) per share $ 0.01 $ (0.38) $ (0.39) $ (0.33)
======= ======= ======= =========
Weighted-average shares 100,906 100,081 100,657 99,931
======= ======= ======= =========
Diluted earnings (loss) per share $ 0.01 $ (0.38) $ (0.39) $ (0.33)
======= ======= ======= =========
Weighted-average and dilutive
potential shares 101,281 100,081 100,657 99,931
======= ======= ======= =========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
Form 10-Q, Page 5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Six Months Ended
------------------------
06/30/00 06/25/99
------------------------
OPERATING ACTIVITIES
Cash received from customers $1,111,965 $ 1,136,902
Cash paid to suppliers and employees (928,629) (1,154,289)
Cash paid for restructuring activities (Note 5) (22,327) (1,770)
Interest received 6,401 2,021
Interest paid (9,467) (7,531)
Income tax refunded, net 20,119 6,535
--------- ----------
Net cash provided by (used in)
operating activities 178,062 (18,132)
--------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (34,000) (59,438)
Business acquisitions, net (6,400)
Other assets, net (1,787) (2,272)
--------- ----------
Net cash used in investing activities (35,787) (68,110)
--------- ----------
FINANCING ACTIVITIES
Proceeds from (repayments of) credit
facilities, net (96,595) 116,022
Repayments of other debt, net (15,871) (1,331)
Repurchases of common stock (26,080)
Proceeds from employee stock plans 8,567 14,346
--------- ----------
Net cash provided by (used in)
financing activities (103,899) 102,957
--------- ----------
Effect of exchange rate changes on cash (5,662) (15,657)
--------- ----------
Increase in cash and cash equivalents 32,714 1,058
Cash and cash equivalents
- beginning of the period 215,421 231,985
--------- ----------
Cash and cash equivalents - end of the period $ 248,135 $ 233,043
========= ==========
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (38,887) $ (32,667)
Depreciation and amortization expense 73,268 62,475
Inventory write downs 54,838 15,353
Non-cash litigation expense (Note 4) 82,308
Non-cash restructuring expense (Note 5) 4,566 18,476
Translation loss 14,144 11,499
Other non-cash adjustments to income 3,953 (12,237)
(Increase) decrease in accounts receivable 146,957 (32,148)
Increase in inventories, net (13,333) (87,027)
Increase in spare parts (19,359) (10,881)
(Increase) decrease in deferred income
tax assets, net 184 (6,660)
Decrease in accounts payable
and accrued liabilities (46,230) (20,077)
Decrease in income taxes payable (2,039) (6,546)
--------- ----------
Net cash provided by (used in)
operating activities $ 178,062 $ (18,132)
========= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
Form 10-Q, Page 6
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
-----------------------------
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 (SEC) 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
31, 1999.
NOTE 2 - INVENTORIES
--------------------
Inventories, net of the associated reserves, consist of the following (in
thousands of dollars):
06/30/00 12/31/99
---------------------------
Raw materials $ 52,246 $ 59,141
Work-in-process 38,009 45,717
Finished goods 132,983 155,784
------- -------
$223,238 $260,642
======= =======
NOTE 3 - DEBT AND FINANCING ARRANGEMENTS
----------------------------------------
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $120,000,000 at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase the Company's promissory notes denominated in a number of
foreign currencies. As of June 30, 2000, the Company had promissory notes of
$63,557,000 outstanding under this financing agreement and had committed to
borrowings between July 2000 and January 2001 in the cumulative principal amount
of approximately $194,004,000. 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 associated with the promissory notes
outstanding as of June 30, 2000, was 8.62%. 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 up to the outstanding balance of the
promissory notes.
See the Company's 1999 Form 10-K for additional information regarding the
Company's debt and financing arrangements.
<PAGE>
Form 10-Q, Page 7
NOTE 4 - LITIGATION
-------------------
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's motion
for summary judgment and dismissed the complaint. Stuff appealed the dismissal
to the Colorado Court of Appeals (the "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
again dismissed, with prejudice, all of Stuff's material claims against the
Company. On August 30, 1999, Stuff filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently, the
parties have filed various appellate briefs. Oral arguments before the Appeals
Court occurred on August 8, 2000 with no action taken at that time. The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit against the
Company alleging infringement of various patents. During the second quarter of
1999, the Company recognized a pre-tax expense of $82,308,000 in connection with
the resolution of this litigation.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material 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.
NOTE 5 - RESTRUCTURING
----------------------
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. Key elements of the
restructuring plan include:
o an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
remaining positions eliminated by the end of the third quarter of 2000;
o a reduction in investment in certain businesses, including consulting and
integration services and managed storage services;
o a recommitment to the Company's core strengths of tape automation, virtual
storage and open storage area networks (including related maintenance and
professional services);
o modifications to the sales model in North America intended to improve
productivity and increase account coverage and growth;
<PAGE>
Form 10-Q, Page 8
o other organizational and operational changes intended to improve
efficiency and competitiveness.
The elements of the restructuring included an involuntary reduction in
headcount, the elimination of a significant number of temporary employee
positions, and managing the replacement of terminating employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.
During the second quarter and six months of 2000, the Company incurred pre-tax
expenses of $12,358,000 and $23,800,000, respectively, related to the
restructuring. The following table summarizes the activity in the Company's
restructuring reserves during the six months of 2000 (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
---------- ---------- ---------- ------
Balances, December 31, 1999 $ 3,917 $ 3,917
Restructuring expense 18,981 $ 4,430 $ 389 23,800
Cash payments (22,074) (253) (22,327)
Asset writedowns (4,430) (136) (4,566)
------- ------ ------ -------
Balances, June 30, 2000 $ 824 $ 0 $ 0 $ 824
======= ====== ====== =======
Employee severance expense of $18,981,000 was recognized during the six months
of 2000 in connection with the restructuring. This expense is comprised of
separation charges related to the fixed and determinable severance payments owed
to approximately 1,100 employees who were involuntarily terminated during the
six months of 2000 in connection with the restructuring. Substantially all of
the $824,000 of employee severance charges incurred, but not paid, as of June
30, 2000, relate to severance payments which are expected to be paid within the
next three months.
Asset writedowns of $4,430,000 were recognized during the six months of 2000 in
connection with the restructuring. The asset writedowns are comprised of
$2,957,000 related to the impairment writedown of assets at the Company's
manufacturing facility in Toulouse, France and $1,473,000 related to the
spin-off of the Company's managed storage services business. The Company has
engaged in activities to sell this facility and the impairment charge was
required to reflect the Company's estimate of the fair value of the Toulouse
facility upon its anticipated sale.
Other exit costs of $389,000 were recognized during the six months of 2000.
Other exit costs are comprised of $253,000 associated with legal expenses
incurred in connection with the spin-off of the managed storage services
business and $136,000 related to excess lease space in Canada.
The Company incurred pre-tax expenses of $20,246,000 during the second quarter
and six months of 1999, in connection with a restructuring program announced on
April 15, 1999, which provided for a reduction in headcount as well as the
elimination of certain lower priority research and development programs.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the Consolidated Balance Sheet at
their fair value. The corresponding change in fair value of the derivative
instrument will be recognized either in the Consolidated Statement of
Operations, 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 9
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. In June 2000, the FASB issued SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities" -- an amendment of SFAS No. 133. SFAS No. 138 addresses a number
of implementation issues associated with SFAS No. 133. The Company
anticipates it will adopt SFAS No. 133 and its associated interpretations
effective on January 1, 2001. The adoption of these new accounting standards
for derivatives is not currently anticipated to have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance regarding the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. In June
2000, the SEC issued SAB 101B that has the effect of delaying the required
adoption of SAB 101 for the Company until the fourth quarter of 2000. The
Company is currently evaluating the impact, if any, of adopting SAB 101.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting for
Certain Transactions involving Stock Compensation -- an Interpretation of
Accounting Principles Board Opinion No. 25 (APB 25)." FIN 44 clarifies the
application of APB 25 and is effective July 1, 2000. The Company believes that
FIN 44 will not have a material effect on the financial position or results of
operations.
NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS
----------------------------------------
In the first quarter of 2000, the Company changed its reportable segments to
reflect changes in its business operations resulting from its restructuring
activities. The Company is now organized into two reportable segments based on
the definitions of segments provided under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information": storage products and storage
services. The principal effect of this change was the reclassification of
storage management software from a separate reportable segment to its inclusion
within the storage products segment, and the reclassification of storage
integration products from the storage services segment to the storage products
segment. The 1999 quarterly segment data has been restated to conform to the
current year presentation.
The storage products segment sells tape, disk, network, and other products for
the enterprise and client-server computing environments. The storage products
segment includes products designed for storage area networks (SAN) and software
tools and applications for improving storage product performance and simplifying
information storage management. The storage services segment provides
maintenance services for the Company's and third party products, as well as
storage consulting services associated mainly with SAN, virtual storage
technologies and software solutions.
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.
<PAGE>
Form 10-Q, Page 10
The revenue and gross profit by segment are as follows (in thousands of
dollars):
Quarter Ended Six Months Ended
----------------------- ---------------------
06/30/00 06/25/99 06/30/00 06/25/99
----------------------- ---------------------
Revenue:
Storage products $348,895 $484,769 $650,007 $ 841,796
Storage services 163,582 169,633 322,139 330,109
------- ------- ------- ---------
Total revenue $512,477 $654,402 $972,146 $1,171,905
======= ======= ======= =========
Gross profit:
Storage products $146,401 $215,276 $250,759 $ 372,580
Storage services 63,331 55,166 113,526 121,279
------- ------- ------- ---------
Total gross profit $209,732 $270,442 $364,285 $ 493,859
======= ======= ======= =========
The following table provides supplemental financial data regarding revenue from
the Company's storage products segment (in thousands of dollars):
Quarter Ended Six Months Ended
----------------------- -----------------------
06/30/00 06/25/99 06/30/00 06/25/99
----------------------- -----------------------
Tape products $278,483 $321,930 $512,151 $573,363
Disk products 40,338 122,080 72,166 210,266
Network and other products 30,074 40,759 65,690 58,167
------- ------- ------- -------
Total storage
products revenue $348,895 $484,769 $650,007 $841,796
======= ======= ======= =======
NOTE 8 - EARNINGS (LOSS) PER SHARE
----------------------------------
The following table presents the calculation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
Quarter Ended Six Months Ended
----------------------- -----------------------
06/30/00 06/25/99 06/30/00 06/25/99
----------------------- -----------------------
Net income (loss) $ 651 $(38,480) $(38,887) $(32,667)
======= ======= ======= =======
Denominator:
Basic weighted-average
shares 100,906 100,081 100,657 99,931
Effect of dilutive shares 375
------- ------- ------- -------
Diluted weighted-average and
dilutive potential shares 101,281 100,081 100,657 99,931
======= ======= ======= =======
Basic earnings (loss)
per share $ 0.01 $ (0.38) $ (0.39) $ (0.33)
======= ======= ======= =======
Diluted earnings (loss)
per share $ 0.01 $ (0.38) $ (0.39) $ (0.33)
======= ======= ======= =======
Stock options to purchase 12,213,611 shares of common stock were excluded from
the computation of diluted earnings per share for the quarter ended June 30,
2000, as the exercise price of the options was greater than the average market
price of the Company's common stock. Stock options to purchase 12,295,680 shares
of common stock were excluded from the computation of diluted earnings per share
for the six months ended June 30, 2000, as these options are antidilutive as a
result of the net loss incurred.
<PAGE>
Form 10-Q, Page 11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 2000
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 Litigation 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 "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 forward-looking statements
contained herein, except as may be otherwise required by law.
GENERAL
-------
The Company reported net income for the second quarter ended June 30, 2000, of
$651,000 on revenue of $512.5 million, compared to a net loss for the second
quarter in 1999 of $38.5 million on revenue of $654.4 million. A net loss of
$38.9 million was reported for the six months of 2000 on revenue of $972.1
million, compared to a net loss of $32.7 million for the six months of 1999 on
revenue of $1.17 billion. The Company's reported results for the second quarter
and six months of 2000 include one-time pre-tax expenses of $12.4 million and
$38.7 million, respectively, associated with restructuring and other related
charges. Excluding the one-time pre-tax expenses the Company would have earned a
net income of $8.7 million and a net loss of $13.8 million during the second
quarter and six months of 2000, respectively. The Company's reported results for
the second quarter and six months of 1999 include one-time pre-tax expenses of
$82.3 million and $20.2 million associated with litigation and restructuring,
respectively. Excluding the one-time pre-tax expenses during the second quarter
and six months of 1999, the Company would have earned net income of $27.2
million and $33.0 million, respectively.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products 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. The
Company's financial results may be adversely impacted in future periods by its
variable sales cycle, particularly during the remainder of 2000 as it completes
the implementation of changes to the sales model in North America. 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 and services; successfully managing
the development of new direct and indirect sales channels; the implementation
and execution of its storage area network (SAN) strategy; and the execution of
ongoing activities associated with its restructuring plan. For a discussion of
these and other risk factors, see "Factors That May Affect Future Results,"
below.
In April 1999, the Company first announced plans to restructure its business. In
October 1999, the Company announced more broad restructuring plans. These
restructuring activities were intended to return the Company to profitability.
The Company's sales revenue during the second half of 2000 may continue to be
adversely affected by disruptions to its sales and service organizations and
customers associated with its restructuring activities. The Company estimates
annual savings of approximately $40 million will be realized during 2000 in
connection with the April 1999 restructuring. The Company anticipates annual
savings of approximately $150 million will result from the restructuring
activities
<PAGE>
Form 10-Q, Page 12
initiated in October 1999. Because the restructuring activities were
implemented in stages throughout the first half of 2000, the Company anticipates
the realized savings for the year 2000 will be slightly in excess of $100
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 or that additional restructuring activities may not
be required in future periods. See "Restructuring," below for further discussion
of the restructuring activities.
The Company's operating activities provided cash of $178.1 million during the
six months of 2000 compared to cash of $18.1 million used in operations during
the same period in 1999. The increase in cash generated from operations during
the six months of 2000, compared to the same period in 1999, was primarily the
result of progress in the Company's efforts to more effectively manage working
capital. Benefits were realized during the six months of 2000 in the form of
reductions in accounts receivable days sales outstanding and inventory levels.
See "Liquidity and Capital Resources -- Working Capital" for additional
discussion of working capital. Cash used in investing activities decreased from
$68.1 million during the six months of 1999 to $35.8 million during the six
months of 2000 primarily due to efforts to control capital spending on property,
plant and equipment. Cash used in financing activities of $103.9 million during
the six months of 2000 reflects debt repayments of $112.5 million offset by
proceeds received from employee stock purchase plans.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment:
Quarter Ended Six Months Ended
----------------- -------------------
06/30/00 06/25/99 06/30/00 06/25/99
----------------- -------------------
Storage products:
Tape products 54.3% 49.2% 52.7% 48.9%
Disk products 7.9 18.7 7.4 17.9
Network and other products 5.9 6.2 6.8 5.0
----- ----- ----- -----
Total storage products 68.1 74.1 66.9 71.8
Storage services 31.9 25.9 33.1 28.2
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 59.1 58.7 62.5 57.9
----- ----- ----- -----
Gross profit 40.9 41.3 37.5 42.1
Research and product
development costs 12.6 11.1 13.3 12.5
Selling, general, administrative
and other income and expense, net 25.9 23.2 27.5 24.7
Litigation expense 12.5 7.0
Restructuring expense 2.4 3.1 2.5 1.7
----- ----- ----- -----
Operating profit (loss) 0.0 (8.6) (5.8) (3.8)
Interest income (expense), net 0.2 (0.6) (0.4) (0.6)
----- ----- ----- -----
Income (loss) before income
taxes 0.2 (9.2) (6.2) (4.4)
Benefit (provision) for income
taxes (0.1) 3.3 2.2 1.6
----- ----- ----- -----
Net income (loss) 0.1% (5.9)% (4.0)% (2.8)%
===== ===== ===== =====
<PAGE>
Form 10-Q, Page 13
REVENUE
-------
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk, and network
and other products for the enterprise and client-server markets, including SANs.
Revenue generated from storage products decreased 28% and 23% during the second
quarter and six months of 2000, respectively, compared to the same periods in
1999.
Tape Products
Tape product revenue decreased 14% and 11% during the second quarter and six
months of 2000, respectively, compared to the same periods in 1999, primarily
due to decreased revenue from TimberLine(R) 9490, a 36-track cartridge
subsystem; PowderHorn(R) 9310, an automated cartridge system library; and other
earlier generation enterprise tape products. The decrease in revenue for these
products reflects both lower selling prices and decreases in the number of units
sold. These revenue declines also reflect the continued shift in the marketplace
from enterprise to client-server tape products. These declines were partially
offset by increased sales of the 9840 high-performance tape drive (9840) and
Virtual Storage Manager(R) (VSM). VSM is a data storage software solution for
the enterprise tape market designed to improve performance, cartridge
utilization, and overall management of data storage. Sales of the Company's
recently introduced L-180 and L-700 tape libraries during the six months of 2000
offset declines in the sale of earlier generation Timberwolf automated tape
products.
Future revenue growth from tape products is dependent upon increasing market
acceptance of VSM, 9840, L-series tape libraries, as well as the timely
introduction of new tape products and enhancements which are in the design,
preliminary engineering or engineering validation testing phase. Because the VSM
is a complex solution it is difficult to predict the timing and extent that VSM,
9840, L-series tape libraries, or new tape products and enhancements will gain
further market acceptance. There can be no assurances that the Company will be
successful in increasing market acceptance for these products, or that new tape
products and enhancements will be introduced in a timely manner. See "Factors
That May Affect Future Results - New Products and Services; Emerging Markets,"
for a discussion of the risks associated with the introduction of new products.
Disk Products
Disk product revenue decreased 67% and 66% during the second quarter and six
months of 2000, respectively, compared to the same periods in 1999, primarily
due to a decrease in OEM sales to International Business Machines Corporation
(IBM) of disk storage products and software designed for the enterprise market.
The Company does not anticipate any significant sales revenue from IBM in 2000.
Sales of OPENstorage(TM) Disk products also decreased during the second quarter
and six months of 2000 as the Company transitioned to its new client server disk
offerings, the 9175 and 9176. These decreases were partially offset by direct
sales of the Company's 9500 Shared Virtual Array (SVA) disk products, the next
generation of SVA disk products which became available in February 2000. There
can be no assurance that the Company will not continue to experience decreased
sales of disk products as it shifts emphasis to direct sales, or that the
Company's current and future disk products will gain additional market
acceptance.
<PAGE>
Form 10-Q, Page 14
Network and Other Products
Network and other product revenue decreased 26% and increased 13% during the
second quarter and six months of 2000, respectively, compared to the same
periods in 1999. The majority of the network and other products revenue during
the second quarter of 2000 related to networking and integration products that
drive SAN solutions.
Future revenue growth in the Company's storage products segment is significantly
dependent upon the continued demand for its client-server tape automation
products and the Company's ability to successfully distribute these products,
successfully replacing OEM sales of disk products to IBM with direct sales of
disk products, and the timely development and introduction of SAN hardware
products. There can be no assurances that the Company will be successful in
these endeavors. See "Factors That May Affect Future Results -- New Products,
Markets and Distribution Channels; Emerging Markets," for a discussion of the
risks associated with the introduction and manufacture of new products and
distribution channels.
STORAGE SERVICES
The Company's storage services revenue primarily includes revenue associated
with the maintenance of the Company's and third party storage products, as well
as storage consulting and integration services revenue. Storage services revenue
decreased 4% and 2% during the second quarter and six months of 2000,
respectively, compared to the same periods in 1999, primarily due to the
Company's exit from managed storage services and certain lower margin consulting
and integration service activities in connection with the restructuring.
There can be no assurance that storage service revenue will not decline in
future periods as a result of a decline in maintenance revenue as the customer
base continues to shift to the client-server marketplace and the Company places
increased emphasis on indirect distribution channels. Maintenance revenue may
also be adversely affected in future periods to the extent older products
currently under maintenance contracts are replaced by newer products with
extended warranties.
GROSS PROFIT
------------
Gross profit margins remained unchanged at 41% for the second quarter of 2000 as
compared to the same period in 1999. Gross profit margins decreased to 37% for
the six months of 2000 compared to 42% for same period in 1999, respectively,
primarily as a result of declines in the profit margin from the product segment.
Gross profit margins for the Company's products segment decreased to 42% and 39%
during the second quarter and six months of 2000, respectively, compared to 44%
for the same periods in 1999. This decline reflects decreases in the selling
prices for disk products and earlier generation tape products; increased sales
of tape cartridges for use in the 9840; increased sales of third-party network
products which have lower profit margins; a decline in sales of disk products to
IBM; and unfavorable manufacturing variances associated with excess
manufacturing capacity. Gross profit margins for the services segment increased
to 39% for the second quarter of 2000 compared to 33% for the same period in
1999, primarily as a result of reduced headcount, the elimination of
unprofitable integration businesses, improvement in consulting margin, and a
overall reduction in maintenance costs. Gross profit margins for the services
segment decreased to 35% for the six months of 2000 compared to 37% for the same
period in 1999, primarily as a result of increased maintenance costs associated
with certain tape products and losses associated with storage consulting and
integration service activities.
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 an impact
<PAGE>
Form 10-Q, Page 15
on the Company's gross profit margins. The Company's ability to sustain or
improve gross margins is dependent upon gaining operational efficiencies
in connection with the restructuring activities, achieving cost
improvements associated with the sourcing of production materials, the
implementation of internal pricing controls and asset management disciplines,
and driving improved profitability from the Company's continuing consulting
services and integration activities. Storage product 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.
RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------
Research and product development expenses decreased 11% during the second
quarter and six months of 2000, respectively, compared to the same periods in
1999, due to the elimination of several lower priority research and product
development programs in connection with the restructuring. As part of the
restructuring, the Company is focusing research and development activities on
the core businesses of tape and automation, virtual technologies, and SAN
implementations. See "Restructuring," below, for discussion of the restructuring
activities.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
------------------------------------------
Selling, general, administrative and other income and expense (SG&A) decreased
12% and 8% during the second quarter and six months of 2000, respectively,
compared to the same periods in 1999, primarily as a result of headcount
reductions and efforts to streamline business processes. General and
administrative expenses decreased during the second quarter of 2000 primarily
due to reduced headcount and increased control and the management of
expenditures. Selling expenses decreased during the second quarter of 2000 as a
result of reduced spending on product marketing activities, as well as reduced
bonus and commission expenses. The decrease in bonus and commissions reflects
reduced U.S. sales revenue as well as benefits associated with modifications in
these plans in connection with the restructuring. The decreases were partially
offset by increased selling expenses from international operations due to a
shift from OEM sales to IBM during the first half of 1999 to direct sales during
the first half of 2000 which require associated bonus and commission payments.
LITIGATION
----------
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's motion
for summary judgment and dismissed the complaint. Stuff appealed the dismissal
to the Colorado Court of Appeals (the "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
again dismissed, with prejudice, all of Stuff's material claims against the
Company. On August 30, 1999, Stuff filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently, the
parties have filed various appellate briefs. Oral arguments before the Appeals
Court occurred on August 8, 2000 with no action taken at that time. The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.
<PAGE>
Form 10-Q, Page 16
On June 29, 1995, Odetics, Inc. (Odetics) filed a patent infringement suit
against the Company alleging infringement of various patents. During the second
quarter of 1999, the Company recognized a pre-tax expense of $82,308,000 in
connection with the resolution of this litigation.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material 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.
RESTRUCTURING
-------------
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. Key elements of the
restructuring plan include:
o an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
remaining positions eliminated by the end of the third quarter of 2000;
o a reduction in investment in certain businesses, including consulting and
integration services and managed storage services;
o a recommitment to the Company's core strengths of tape automation, virtual
storage and open storage area networks (including related maintenance and
professional services);
o modifications to the sales model for North America intended to improve
productivity and increase account coverage and growth;
o other organizational and operational changes intended to improve
efficiency and competitiveness.
The elements of the restructuring included an involuntary reduction in
headcount, the elimination of a significant number of temporary employee
positions, and managing the replacement of terminating employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.
During the second quarter and six months of 2000, the Company incurred pre-tax
expenses of $12.4 million and $23.8 million, respectively, related to the
restructuring. The following table summarizes the activity in the Company's
restructuring reserves during the six months of 2000 (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
---------- ---------- ---------- ------
Balances, December 31, 1999 $ 3,917 $ 3,917
Restructuring expense 18,981 $ 4,430 $ 389 23,800
Cash payments (22,074) (253) (22,327)
Asset writedowns (4,430) (136) (4,566)
------- ------ ------ -------
Balances, June 30, 2000 $ 824 $ 0 $ 0 $ 824
======= ====== ====== =======
Employee severance expense of $19.0 million was recognized during the six months
of 2000 in connection with the restructuring. This expense is comprised of
separation charges related to the fixed
<PAGE>
Form 10-Q, Page 17
and determinable severance payments owed to approximately 1,100 employees who
were involuntarily terminated during the six months of 2000 in connection
with the restructuring. Substantially all of the $824,000 of employee
severance charges incurred, but not paid, as of June 30, 2000, relate to
severance payments which are expected to be paid within the next three months.
Asset writedowns of $4.4 million were recognized during the six months of 2000
in connection with the restructuring. The asset writedowns are comprised of $3.0
million related to the impairment writedown of assets at the Company's
manufacturing facility in Toulouse, France and $1.4 million related to the
spin-off of the Company's managed storage services business. The Company has
engaged in activities to sell this facility and the impairment charge was
required to reflect the Company's estimate of the fair value of the Toulouse
facility upon its anticipated sale.
Other exit costs of $389,000 were recognized during the six months of 2000.
Other exit costs are comprised of $253,000 associated with legal expenses
incurred in connection with the spin-off of the managed storage services
business and $136,000 related to excess lease space in Canada.
The Company incurred pre-tax expenses of $20.2 million during the second quarter
and six months of 1999, in connection with a restructuring program announced on
April 15, 1999, which provided for a reduction in headcount as well as the
elimination of certain lower priority research and development programs.
The Company currently anticipates it will incur an additional $5 million in
restructuring charges during the third quarter of 2000 at which time the
Company's activities associated with its restructuring plans announced in
October 1999 are expected to be complete. The majority of these charges are
expected to relate to employee severance payments.
The Company has now reached its goal of reducing 1,200 to 1,400 positions. A net
reduction of approximately 1,250 positions was achieved through a combination of
involuntary severances, limiting the replacement of terminating employees due to
normal attrition, and eliminating certain contractors, temporary employees and
other non-permanent positions. The Company has now implemented substantially all
of its planned restructuring activities.
The Company estimates annual savings of approximately $40 million will be
realized during 2000 in connection with the April 1999 restructuring. The
Company anticipates annual savings of approximately $150 million will result
from the restructuring activities initiated in October 1999. Because the
restructuring activities were implemented in stages throughout the first half of
2000, the Company anticipates the realized savings for the year 2000 will be
slightly in excess of $100 million. The Company does not anticipate any material
incremental operating expenses will be incurred on an on-going basis.
The Company has restructured its business in the past in order to realign its
business with its product and market strategies, or establish a more cost
efficient business structure. There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved operating results in future periods. It is possible that
additional changes in the Company's business or in its industry may necessitate
additional restructuring expense in the future. The necessity for additional
restructuring activities may result in expenses that adversely affect reported
results of operations in the period the restructuring plan is adopted, and
require incremental cash payments.
<PAGE>
Form 10-Q, Page 18
INTEREST INCOME AND EXPENSE
---------------------------
Interest expense decreased $794,000 and increased $1.6 million during the second
quarter and six months of 2000, respectively, compared to the same periods in
1999. The decrease during the second quarter of 2000 is due to decreased
borrowings under the Company's debt and financing arrangements. The increase
during the six months of 2000 is due to higher interest rates and higher
outstanding debt balances compared to the same period in 1999. Interest income
increased $3.6 million and $4.4 million during the second quarter and six months
of 2000, respectively, compared to the same periods in 1999, primarily as a
result of approximately $3.0 million of interest received related to an income
tax refund.
INCOME TAXES
------------
The Company's effective tax rate decreased from 36% for the second quarter and
six months of 1999, to 35% for the second quarter and six months of 2000.
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
$164.9 million of deferred income tax assets as of June 30, 2000. The Company's
valuation allowance of approximately $14.3 million as of June 30, 2000, relates
principally to net deductible temporary differences, tax credit carryforwards
and net operating loss carryforwards associated with the Company's foreign
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Available Financing Lines
The Company has a revolving credit facility (the Primary Revolver) which expires
in October 2001. The credit limit available under the Primary Revolver ($262.5
million as of June 30, 2000) is reduced by $12.5 million on the last business
day of each calendar quarter. The interest rates under the Primary Revolver
depend upon the repayment period of the advance selected and the Company's
rolling four quarter Total Debt to Earnings before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) ratio. Depending on the term of the
outstanding borrowing, the rate ranges from the applicable LIBOR plus
2.0% to 2.5% or the agent bank's base rate plus 0% to 0.50%. The weighted
average interest rate on the advances as of June 30, 2000, was 9.3%. The
Company had borrowings of $126.0 million and issued letters of credit for
approximately $50,000 under the Primary Revolver as of June 30, 2000. The
remaining available credit under the Primary Revolver as of June 30, 2000, was
approximately $136.5 million. Borrowings under the Primary Revolver are secured
by the Company's U.S. accounts receivable and U.S. inventory. The Primary
Revolver contains certain financial and other covenants, including
restrictions on payment of cash dividends on the Company's common stock.
The Company has also entered into a $150 million revolving credit facility (the
Supplemental Revolver) which expires in January 2001. The interest rates under
the Supplemental Revolver depend upon the repayment period of the advance
selected and the Company's EBITDA ratio. Depending on the term of the
outstanding borrowing, the rate ranges from the applicable LIBOR plus 2.0% to
2.5% or the agent bank's base rate plus 0% to 0.50%. The Company had no
borrowings outstanding under the Supplemental Revolver as of June 30, 2000.
Available credit under the Supplemental Revolver as of June 30, 2000, was
$150.0 million. The Supplemental Revolver is secured by the Company's U.S.
accounts receivable and U.S. inventory. The Supplemental Revolver contains
certain financial and other covenants, including restrictions on the payment of
cash dividends on the Company's common stock.
<PAGE>
Form 10-Q, Page 19
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $120 million at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase the Company's promissory notes denominated in a number of
foreign currencies. As of June 30, 2000, the Company had promissory notes of
$63.6 million outstanding under this financing agreement and had committed to
borrowings between July 2000 and January 2001 in the cumulative principal amount
of approximately $194.0 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 associated with the promissory notes
outstanding as of June 30, 2000, was 8.62%. 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 up to the outstanding balance of the
promissory notes.
Working Capital
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company may choose to fund these activities
through the issuance of additional equity or debt financing. The issuance of
equity or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that 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 decreased from 26% as of
December 31, 1999, to 19% as of June 30, 2000, primarily due to a net decrease
in borrowings of $96.6 million under the Company's credit facilities. See
"Working Capital," above, for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
------------------------
During the second quarter and six months of 2000, approximately 52% of the
Company's revenue was generated by its international operations, compared to
approximately 39% for the second quarter and six months of 1999. The Company
also sells products 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 U.S. dollar reduces the value of revenue and profits generated by
the Company's international operations. As a result, the Company's operating and
financial results can be materially affected by fluctuations in foreign currency
exchange rates. In an attempt to mitigate the impact of foreign currency
fluctuations, the Company employs a 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
<PAGE>
Form 10-Q, Page 20
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 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 values 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 are recognized as incurred as adjustments to
revenue.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of June
30, 2000, and as of December 31, 1999, would result in a hypothetical loss of
approximately $45.4 million and $54.9 million, respectively. The decrease in the
hypothetical loss for the second quarter of 2000 is primarily due to a decrease
in outstanding commitments under the financing agreement. These hypothetical
losses do not take into consideration the Company's underlying international
operations. The Company anticipates that any hypothetical loss associated with
the Company's foreign currency exchange rate sensitive instruments would be
offset by gains associated with its underlying international operations.
<PAGE>
Form 10-Q, Page 21
The Company had outstanding borrowings under its Primary Revolver of $126.0
million as of June 30, 2000. The interest rate on these borrowings is dependent
on the LIBOR, which is sensitive to interest rate changes. A hypothetical 10%
adverse movement in the LIBOR applied to the borrowings would not have a
material adverse effect on the Company's results of operations, cash flows, or
financial position in 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------
New Products and Services; Emerging Markets
The Company's results of operations and competitive strength depend upon its
ability to successfully develop, manufacture and market innovative new products
and services. Short product life cycles are inherent in 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 and services is complex and
involves uncertainties. Delays in product development, manufacturing, or in
customer evaluation and purchasing decisions may make product transitions
difficult. 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 has experienced product development delays in the past that
adversely affected the Company's financial results and competitive position.
There can be no assurance that the Company will be able to manage successfully
the development and introduction of new products and services in the future.
The Company's future financial results are significantly dependent upon
successfully competing in the rapidly growing emerging client-server and SANs
markets and replacing its earlier generation products in the enterprise
environment with new technologies. The Company currently is making significant
investments in developing new products for these markets, particularly in the
internet and e-commerce businesses. There can be no assurance that the Company
will be successful in these activities. The SANs market is new and rapidly
evolving. The Company's operating and financial results may be adversely
impacted in the event the SANs market develops slower than expected or the
Company's products fail to gain acceptance in this market. The Company's
traditional maintenance revenue base may be adversely impacted as a result of
the shift from the enterprise to the client-server marketplace.
Competition
The markets for the Company's products 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 new products and offerings, new product introductions by
competitors, and the ability to establish more effective distribution channels.
This competitive environment gives rise to aggressive pricing strategies and
puts pressure on gross profit margins. 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 name recognition 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 these competitive issues, in part,
through its SAN strategy.
<PAGE>
Form 10-Q, Page 22
From time-to-time, two or more of the Company's competitors may form business
alliances that compete with the Company. For example, during the third quarter
of 1999, EMC Corporation acquired Data General, a supplier of the Company's
OPENstorage Disk products. The alliance of two of the Company's major
competitors could adversely affect the Company's ability to compete. A number of
the Company's competitors have formed alliances with the stated objective of
developing interoperable SAN solutions. In addition, the Company competes with
vendors with which it has established relationships, including Legato Systems,
Inc. and VERITAS Software Corporation. The Company also anticipates that it will
continue to establish distribution alliances 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 compete successfully against
other companies in these markets.
Significant Personnel Changes
The Company has experienced significant changes in its management team,
including the hiring, resignation and retirement of members of its executive
sales and marketing management. The Company announced in February 2000 that
David E. Weiss, the Company's Chairman of the Board of Directors (Board),
President and Chief Executive Officer, recommended that the Board ask him to
resign from all positions. The Board accepted Mr. Weiss' proposal and asked him
to resign from all such positions upon the election of a successor or at such
earlier date as the Board deemed appropriate. In February 2000, the Company also
announced significant changes to its operating management, including the planned
departure of Victor Perez, the Company's Chief Operating Officer.
On July 11, 2000, the Board announced that Patrick J. Martin was selected as the
new Chairman of the Board, President and Chief Executive Officer. The Board also
accepted the resignation of Mr. Weiss from the same positions immediately prior
to Mr. Martin's appointment. The Company anticipates it will incur charges of
approximately $7.5 million during the third quarter of 2000 in connection with
the resignation of Mr. Weiss and hiring of Mr. Martin. The Company may
experience a delay between the time the management team is formed and the time
the team becomes fully productive.
The Company has also experienced changes in the remainder of its employee base
during 1999 and the first half of 2000 as a result of the voluntary and
involuntary severance programs implemented in connection with its restructuring
activities, as well as increased levels of employee attrition. The future
success of the Company depends in large part on its ability to attract, retain
and motivate highly skilled employees. The Company faces significant competition
for individuals with the skills required to deliver the products and services
offered to its customers. An inability to successfully deliver products and
services required by its customers, or an inability to implement the
restructuring activities while the Company completes the significant personnel
changes currently underway, could have an adverse effect on future operating
results.
Changes in Sales Model for North America
The Company historically has emphasized the use of its direct sales force in
North America, complemented by indirect distribution channels, such as OEMs,
value-added resellers and value-added distributors. In connection with its
restructuring activities, the Company has implemented changes to its sales model
for North America that the Company expects will improve market penetration,
increase sales profitability, reduce sales expense, and expand the use of the
indirect sales channel. This new sales model is intended to provide better
coverage for new and existing end user customers, as well as enhancing reseller,
distributor and OEM alliances. The Company has also reorganized its field sales
organizations with the objective of better serving Fortune 500 customers with
enterprise-level product and service requirements. A new sales organization was
also formed to address the needs of small and medium-sized customers with
particular emphasis on internet and e-commerce businesses. There is no
<PAGE>
Form 10-Q, Page 23
assurance that the Company will not encounter short term disruptions to its
sales as it completes the implementation of this new sales model or that the
new emphasis on indirect sales channels will result in increased sales or
productivity over the long-term. The Company's operating and financial
results may be adversely affected by reduced margins on sales typically
experienced in indirect sales channels.
Ability to Develop and Protect Intellectual Property Rights
The Company relies heavily upon its ability to develop new intellectual property
rights that do not infringe upon the rights of others in order to remain
competitive and develop and manufacture products that are competitive in terms
of technology and cost. There is no assurance that the Company will continue to
be able to develop such new intellectual property.
The Company relies upon a combination of U.S. patent, copyright, trademark and
trade secret laws to protect its intellectual property rights. With respect to
certain of the Company's international operations, the Company does file patent
applications with foreign governments. However, many foreign countries do not
have as well-developed laws as the United States in protecting intellectual
property. The Company enters into confidentiality agreements relating to its
intellectual property with its employees and consultants. In addition, the
Company includes confidentiality provisions in most license and non-exclusive
sales agreements with its indirect distributors and its customers.
Despite all of the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy or otherwise obtain or use the
Company's intellectual property. Monitoring the unauthorized use of the
Company's intellectual property rights is difficult, particularly in foreign
countries. There is no assurance that the Company will be able to protect its
intellectual property rights, particularly in foreign countries.
Sole Source Suppliers
The Company generally uses standard parts and components for its products and
believes that, in most cases, there are a number of alternative, competent
vendors for most of those parts and components. Many non-standard parts are
obtained from a single source or a limited group of suppliers. However, there
are other vendors who could produce these parts in satisfactory quantities after
a period of pre-qualification and product ramping. Certain 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. 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 cost acceptable to the Company and its
customers. IBM is a single source supplier for the disk drives used in the
Company's SVA disk product.
Certain 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
revenue and operating results. In the event a sole source supplier was unable or
unwilling to continue to supply components, the Company would need to identify
and qualify other acceptable suppliers. This process could take an extended
period, and no assurance can be given that any additional source would become
available or would be able to satisfy production requirements on a timely basis
or at a price acceptable to the Company.
<PAGE>
Form 10-Q, Page 24
The Company is dependent upon a sole sub contractor, Herald Datanetics LTD.
(HDL), to manufacture a key component used in certain tape products. HDL is
located in the People's Republic of China (PRC). To date, the Company has not
experienced any material problems with HDL. The Company's dependence on HDL is
subject to additional risks beyond those associated with other sole suppliers,
including the lack of a well-established court system or acceptance of the rule
of law in the PRC, the degree to which the PRC permits economic reform policies
to continue, the political relationship between the PRC and the United States
and broader political and economic factors, such as whether the PRC is admitted
to the World Trade Organization.
Manufacturing
Significant portions 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 was 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
business 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, along with the computer industry as a whole, has experienced
delivery delays and increased lead times in ordering both standard and
non-standard parts and components for its products. These longer lead times
could result in a shortage of parts and key components and result in reduced
control over production and delivery schedules. These factors could have a
material adverse effect on revenue and operating results.
Information Systems and Business Process Transitions
The Company replaced many of its internal information systems outside the United
States during 1999 with new information systems. The Company also introduced
significant new business processes in conjunction with these new systems,
particularly within its European operations. The implementation of these
information systems and business processes has been complex and has affected
numerous operational, transactional, financial, and reporting processes. The
establishment of processes and training associated with these information
systems are continuing and involve a number of risks and uncertainties. The
Company must successfully manage the business process changes and employee
training programs. There can be no assurance that the transition to the new
information systems and business processes will not cause delays or
interruptions in the Company's business. Failure to successfully manage the
transition could adversely affect the Company's operating and financial results
in the future.
Volatility of Stock Price/Earnings Fluctuations
The Company's common stock is subject to significant fluctuations in trading
price. The Company's stock price may be impacted if the Company's revenue or
earnings fail to meet the expectations of the investment community. The
Company's stock price may also be affected by broad economic and market trends,
which are unrelated to the Company's performance.
The Company's financial and operating results may fluctuate from quarter to
quarter due to a number of reasons. In the past, the Company's results have
followed a seasonal pattern, which reflects the tendency of customers to make
their purchase decisions at the end of a calendar year. During any fiscal
quarter, a disproportionately large portion of the total product sales is
recognized in the last weeks and days of the quarter. These factors make the
forecasting of revenue inherently difficult. Because the Company plans
<PAGE>
Form 10-Q, Page 25
its operating expenses based on expected revenue, a shortfall in revenue may
cause earnings to be below expectations in that period. A number of factors
may cause revenue to fall below expectations, such as product and technology
transitions announced by the Company or its competitors; delays in the
availability of new products; changes in the purchasing patterns of the
Company's customers and distribution partners; the timing of customers'
acceptance of products; 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.
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 26
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
See Part I, Item 3 - Legal Proceedings, of the Company's Form 10-K for the
fiscal year ended December 31, 1999, filed with the Commission on March 10,
2000.
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's motion
for summary judgment and dismissed the complaint. Stuff appealed the dismissal
to the Colorado Court of Appeals (the "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
again dismissed, with prejudice, all of Stuff's material claims against the
Company. On August 30, 1999, Stuff filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Subsequently, the
parties have filed various appellate briefs. Oral arguments before the Appeals
Court occurred on August 8, 2000 with no action taken at that time. The Company
continues to believe that Stuff's claims are wholly without merit and intends to
defend vigorously any further actions arising from this complaint.
In December 1999, the Company filed suit in the U.S. District Court for the
Western District of Wisconsin against Cisco Systems, Inc. ("Cisco"), alleging
that Cisco infringed upon a certain patent of the Company that Cisco used in its
products. The Company filed an amended complaint on December 30, 1999, in which
the Company alleged that Cisco had infringed upon a second patent used in its
products. Cisco filed an answer in January 2000 denying the Company's claims,
alleging that the Company's patents are invalid and asserting that a microchip
used in one of the Company's network security products infringed upon one of
Cisco's patents. Cisco is seeking unspecified compensatory damages that it
asserts should be trebled, along with injunctive relief. The Company purchases
the alleged infringing microchip from Level One ("Level One"), a subsidiary of
Intel Corporation. In March 2000, the case was transferred to the U.S. District
Court for the Northern District of California. Level One has been added to the
lawsuit as an additional defendant to Cisco's counterclaim. A case management
conference was held on August 4, 2000, at which the date for a claim
construction hearing was set for April 9, 2001 and a trial date was set for
March 4, 2002. The Company continues to believe that it has valid claims against
Cisco and valid defenses against Cisco's counterclaim.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material 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.
<PAGE>
Form 10-Q, Page 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
May 18, 2000. A total of 91,177,606 shares of common stock, par value $.10 per
share (the "Common Stock") were present at the Annual Meeting, either in person
or by proxy, constituting a quorum. The matters voted upon at the Annual Meeting
by the stockholders consisted of the five proposals specifically set forth in
the Company's definitive Proxy Statement, dated April 11, 2000 (the "Proxy
Statement"), along with one proposal brought from the floor of the Annual
Meeting.
The first proposal related to the election of eight persons to serve on the
Company's Board of Directors. The Board's nominees were each elected and
received, respectively, the following votes:
Nominee For Withheld
------- ---------------- --------
James R. Adams 89,660,739 1,516,867
William L. Armstrong 89,656,387 1,521,219
William R. Hoover 89,658,300 1,519,306
William T. Kerr 89,658,744 1,518,862
Robert E. La Blanc 89,656,434 1,521,172
Robert E. Lee 89,653,536 1,524,070
Richard C. Steadman 89,655,668 1,521,938
David E. Weiss 89,636,097 1,541,509
The second proposal related to an amendment to the Company's 1995 Equity
Participation Plan, as amended (Plan), to increase in the number of shares of
Common Stock authorized to be granted thereunder by 10,000,000 shares and was
adopted by a vote of 48,151,009 in favor to 25,502,160 against, with 302,427
abstentions and 17,222,010 broker non-votes. The third proposal related to an
amendment to the Plan to increase the number of stock options and restricted
stock that may be granted in any one year and to provide a greater amount to be
granted to a participant in the Plan in the first year such person became
eligible to participate. The third proposal was adopted by a vote of 72,124,340
in favor to 18,698,225 against, with 355,041 abstentions and no broker
non-votes. The fourth proposal related to the ratification of
PricewaterhouseCoopers LLP as the Company's independent auditors and was adopted
by a vote of 90,740,048 in favor to 324,681 against, with 112,877 abstentions
and no broker non-votes. The fifth proposal was made by several stockholders of
the Company and would have required that directors and officers of the Company
hold Common Stock received under the Plan for a certain period after the
exercise thereof, subject to certain exceptions and was rejected by a vote of
4,710,386 in favor to 68,189,175 against, with 1,053,863 abstentions and
17,224,182 broker non-votes. A stockholder made a proposal from the floor of the
Annual Meeting, prior to the voting upon the five proposals set forth in the
Proxy Statement and described above, to have the Annual Meeting adjourned as
having been improperly called, which was rejected by a vote of 56,571 in favor
to 91,121,035 against, with no abstentions and no broker non-votes.
<PAGE>
Form 10-Q, Page 28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits:
--------
The exhibits listed below are filed as part of this Quarterly Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:
3.1 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (filed as Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 25,
1987, and as Exhibit 3.1(ii) to the Company's Quarterly Report on
Form 10-Q, for the quarter ended September 29, 1995, filed on
November 13, 1995, and incorporated herein by reference).
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit
(c)(1) to the Company's Current Report on Form 8-K dated June 2,
1989, and incorporated herein by reference).
3.3 Certificate of Second Amendment dated June 2, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 26, 1992, and incorporated herein by reference).
3.4 Restated Bylaws of Storage Technology Corporation, as amended
through November 11, 1998 (filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference).
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(filed as Exhibit (c)(2) as to the Company's Current Report on Form
8-K dated June 2, 1989, and incorporated herein by reference).
4.2 Rights Agreement dated as of August 20, 1990, between Storage
Technology Corporation and First Fidelity Bank, N.A., New Jersey,
Rights Agent (filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K dated August 20, 1990, and incorporated herein by
reference).
4.3 Certificate of Designations of Series B Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated August 8, 1990, and incorporated
herein by reference).
10.1 (1)(2) CEO Employment Agreement, dated July 11, 2000, between the
Company and Patrick J. Martin.
10.2 (1)(2) Release dated as of July 10, 2000, between the Company and David
E. Weiss.
10.3 (1)(2) Amended and Restated 1995 Equity Participation Plan.
10.4 (1)(2) Extension of Retention Agreement, dated July 31, 2000, between
the Company and Robert S. Kocol.
<PAGE>
Form 10-Q, Page 29
27.1 (2) Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On July 19, 2000, the Company filed a current report on Form 8-K dated July 18,
2000, pursuant to Item 5, disclosing the appointment of Patrick J. Martin as the
new Chairman of the Board, President and Chief Executive Officer to succeed
David E. Weiss whom the Board of Directors asked to resign from such positions.
-----------------------------------------------------------------------------
(1) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
(2) Indicates exhibits filed with this Quarterly Report on Form 10-Q.
<PAGE>
Form 10-Q, Page 30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
August 11, 2000 /s/ ROBERT S. KOCOL
------------------------------- ------------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 11, 2000 /s/ THOMAS G. ARNOLD
------------------------------- ------------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
Form 10-Q, Page 31
EXHIBIT INDEX
-------------
(a) Exhibits:
---------
The exhibits listed below are filed as part of this Quarterly Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:
3.1 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (filed as Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 25,
1987, and as Exhibit 3.1(ii) to the Company's Quarterly Report on
Form 10-Q, for the quarter ended September 29, 1995, filed on
November 13, 1995, and incorporated herein by reference).
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit
(c)(1) to the Company's Current Report on Form 8-K dated June 2,
1989, and incorporated herein by reference).
3.3 Certificate of Second Amendment dated June 2, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 26, 1992, and incorporated herein by reference).
3.4 Restated Bylaws of Storage Technology Corporation, as amended
through November 11, 1998 (filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference).
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(filed as Exhibit (c)(2) as to the Company's Current Report on Form
8-K dated June 2, 1989, and incorporated herein by reference).
4.2 Rights Agreement dated as of August 20, 1990, between Storage
Technology Corporation and First Fidelity Bank, N.A., New Jersey,
Rights Agent (filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K dated August 20, 1990, and incorporated herein by
reference).
4.3 Certificate of Designations of Series B Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated August 8, 1990, and incorporated
herein by reference).
10.1 (1)(2) CEO Employment Agreement, dated July 11, 2000, between the
Company and Patrick J. Martin
10.2 (1)(2) Release dated as of July 10, 2000, between the Company and David
E. Weiss.
10.3 (1)(2) Amended and Restated 1995 Equity Participation Plan.
10.4 (1)(2) Extension of Retention Agreement, dated July 31, 2000, between
the Company and Robert S. Kocol.
<PAGE>
Form 10-Q, Page 32
27.1 (2) Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
Current Report on Form 8-K, filed on July 18, 2000, relating to an Item 5, Other
Matter, consisting of a press release relating to the election of Patrick J.
Martin as Chairman of the Board, President and Chief Executive Officer of the
Company and the resignation of David E. Weiss from those positions.
------------------------------------------------------------------------------
(1) Contract or compensatory plan or arrangement in which directors and/or
Officers participate.
(2) Indicates exhibits filed with this Quarterly Report on Form 10-Q.
