Form 10-Q
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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 29, 2001
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, Colorado 80028-4309
(Address of principal executive offices) (Zip Code)
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) - 103,997,707 shares outstanding at August 6,
2001.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 29, 2001
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
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 32
Exhibit Index 33
2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
06/29/01 12/29/00
------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 306,895 $ 279,731
Accounts receivable 471,836 553,790
Inventories (Note 2) 241,000 218,218
Deferred income tax assets 121,298 121,703
Other current assets (Note 4) 19,722 -
---------- ----------
Total current assets 1,160,751 1,173,442
Property, plant, and equipment, net 258,093 267,082
Spare parts for maintenance, net 39,047 41,614
Deferred income tax assets 74,344 73,997
Other assets 94,238 97,423
---------- ----------
Total assets $ 1,626,473 $ 1,653,558
========== ==========
LIABILITIES
Current liabilities:
Credit facilities (Note 3) $ 78,419 $ 78,381
Current portion of long-term debt 1,050 6,110
Accounts payable 77,179 99,675
Accrued liabilities 335,415 363,048
Income taxes payable 158,356 155,626
Other current liabilities (Note 4) 336 -
---------- ----------
Total current liabilities 650,755 702,840
Long-term debt 9,471 12,083
---------- ----------
Total liabilities 660,226 714,923
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares
authorized; 104,142,930 shares issued at
June 29, 2001, and 103,172,244 shares issued
at December 29, 2000 10,414 10,320
Capital in excess of par value 862,530 854,744
Retained earnings 92,168 82,922
Accumulated other comprehensive income (Note 5) 9,159 -
Treasury stock, 160,230 shares at June 29, 2001,
and 113,774 shares at December 29, 2000 (2,938) (2,334)
Unearned compensation (5,086) (7,017)
---------- ----------
Total stockholders' equity 966,247 938,635
---------- ----------
Total liabilities and stockholders' equity $ 1,626,473 $ 1,653,558
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended
--------------------------------------
06/29/01 06/30/00 06/29/01 06/30/00
--------------------------------------
Revenue
Storage products $346,271 $348,895 $651,631 $650,007
Storage services 165,863 163,582 329,322 322,139
------- ------- ------- -------
Total revenue 512,134 512,477 980,953 972,146
------- ------- ------- -------
Cost of revenue
Storage products 190,365 202,494 363,980 399,248
Storage services 102,000 100,251 199,934 208,613
------- ------- ------- -------
Total cost of revenue 292,365 302,745 563,914 607,861
------- ------- ------- -------
Gross profit 219,769 209,732 417,039 364,285
Research and product development costs 61,013 64,302 125,207 129,482
Selling, general, administrative, and
other income and expense, net 140,840 132,857 279,083 266,977
Restructuring expense (Note 7) - 12,358 - 23,800
------- ------- ------- -------
Operating profit (loss) 17,916 215 12,749 (55,974)
Interest income 2,509 4,725 4,757 6,401
Interest expense (1,825) (3,939) (3,460) (10,264)
------- ------- ------- -------
Income (loss) before income taxes 18,600 1,001 14,046 (59,837)
Benefit (provision) for income taxes (6,350) (350) (4,800) 20,950
------- ------- ------- -------
Net income (loss) $ 12,250 $ 651 $ 9,246 $(38,887)
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE (Note 9)
Basic earnings (loss) per share $ 0.12 $ 0.01 $ 0.09 $ (0.39)
======= ======= ======= =======
Weighted-average shares 103,005 100,906 102,653 100,657
======= ======= ======= =======
Diluted earnings (loss) per share $ 0.12 $ 0.01 $ 0.09 $ (0.39)
======= ======= ======= =======
Weighted-average and dilutive
potential shares 104,429 101,281 104,181 100,657
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
Six Months Ended
----------------------
06/29/01 06/30/00
----------------------
OPERATING ACTIVITIES
Cash received from customers $1,050,105 $1,111,965
Cash paid to suppliers and employees (980,763) (928,629)
Cash paid for restructuring activities (Note 7) - (22,327)
Interest received 4,757 6,401
Interest paid (2,992) (9,467)
Income taxes (paid) refunded (6,131) 20,119
--------- ---------
Net cash provided by operating activities 64,976 178,062
--------- ---------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (36,211) (36,014)
Proceeds from sale of property, plant, and equipment 80 2,014
Other assets (4,391) (1,787)
--------- ---------
Net cash used in investing activities (40,522) (35,787)
--------- ---------
FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net 5,375 (89,457)
Proceeds from other debt 711 19,469
Repayments of other debt (8,045) (42,478)
Proceeds from employee stock plans 8,102 8,567
--------- ---------
Net cash provided by (used in) financing activities 6,143 (103,899)
--------- ---------
Effect of exchange rate changes on cash (3,433) (5,662)
--------- ---------
Increase in cash and cash equivalents 27,164 32,714
Cash and cash equivalents - beginning of the period 279,731 215,421
--------- ---------
Cash and cash equivalents - end of the period $ 306,895 $ 248,135
========= =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 9,246 $ (38,887)
Depreciation and amortization expense 60,519 73,268
Inventory writedowns 20,883 54,838
Non-cash restructuring expense (Note 7) - 4,566
Translation (gain) loss (11,600) 14,144
Other non-cash adjustments to income 12,643 3,953
Decrease in accounts receivable 73,515 146,957
Increase in other current assets (5,845) -
Increase in inventories (41,101) (13,333)
Increase in spare parts (8,744) (19,359)
(Increase) decrease in deferred income tax assets (292) 184
Decrease in accounts payable and accrued liabilities (43,545) (46,230)
Increase in other current liabilities 336 -
Decrease in income taxes payable (1,039) (2,039)
-------- --------
Net cash provided by operating activities $ 64,976 $ 178,062
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
5
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands of Dollars)
Accumulated
Capital in Other
Common Excess of Retained Comprehensive Treasury Unearned
Stock Par Value Earnings Income Stock Compensation Total
-------- --------- --------- --------- -------- ---------- ---------
Balances, December 29, 2000 $ 10,320 $ 854,744 $ 82,922 $ - $ (2,334) $ (7,017) $ 938,635
-------- -------- -------- -------- ------- -------- --------
Components of comprehensive income:
Net income - - 9,246 - - - 9,246
Other comprehensive income (Note 5) - - - 9,159 - - 9,159
-------- -------- -------- -------- ------- -------- --------
Total comprehensive income - - 9,246 9,159 - - 18,405
-------- -------- -------- -------- ------- -------- --------
Common stock issued under stock
option and purchase plans 100 8,002 - - - - 8,102
Other (6) (216) - - (604) 1,931 1,105
-------- -------- -------- -------- ------- -------- --------
Balances, June 29, 2001 $ 10,414 $ 862,530 $ 92,168 $ 9,159 $ (2,938) $ (5,086) $ 966,247
-------- -------- -------- -------- ------- -------- --------
The accompanying notes are an integral part of the consolidated
financial statements.
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 wholly owned subsidiaries (StorageTek or the Company) have
been prepared on substantially the same basis as the Company's annual
consolidated financial statements and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 29, 2000. In
the opinion of management, the interim consolidated financial statements reflect
all adjustments necessary for the fair presentation of results for the periods
presented, and such adjustments are of a normal, recurring nature. Certain prior
period information has been reclassified to conform to the current period
presentation.
The consolidated results for interim periods are not necessarily indicative of
expected results for the full fiscal year.
NOTE 2 - INVENTORIES
Inventories, net of associated reserves, consist of the following (in thousands
of dollars):
06/29/01 12/29/00
-------------------
Raw materials $ 40,997 $ 54,773
Work-in-process 64,954 43,175
Finished goods 135,049 120,270
------- -------
$241,000 $218,218
======= =======
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.
This financing agreement was amended in July 2001 to provide for the sale of
promissory notes in the principal amount of up to $75,000,000 at any one time.
The agreement, which expires in January 2002, provides for commitments by the
bank to purchase the Company's promissory notes denominated in a number of
foreign currencies. As of June 29, 2001, the Company had promissory notes of
$78,419,000 outstanding under this financing agreement and had committed to
borrowings between July 2001 and January 2002 in the cumulative principal amount
of approximately $190,888,000. 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. 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 29, 2001, was 6.02%. 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 Note 4 for a discussion of the accounting treatment for gains and losses
under this arrangement.
See the Company's Annual Report on Form 10-K for the year ended December 29,
2000, for additional information regarding the Company's debt and financing
arrangements.
7
NOTE 4 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS
On December 30, 2000, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133." These
accounting standards require that all derivative instruments be recorded on the
balance sheet at their estimated fair value. Changes in fair value are recorded
each period either in the Consolidated Statement of Operations or, in the case
of certain hedges, as a component of Other Comprehensive Income (OCI). In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a loss of approximately $7,535,000, net of tax, in OCI to recognize the fair
value of all derivatives that were designated as cash flow hedges as of December
30, 2000. The adoption of SFAS No. 133 and SFAS No. 138 did not have a material
impact on the Consolidated Statement of Operations.
The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's financial position,
earnings, and cash flows can be materially affected by changes in foreign
currency exchange rates. The Company attempts to mitigate this exposure as part
of its foreign currency hedging program. The primary goal of the Company's
foreign currency hedging program is to reduce the risk of adverse foreign
currency movements on the reported financial results of its non-U.S. dollar
transactions. To implement this hedging program, the Company uses a combination
of foreign currency forwards embedded in a financing agreement, stand-alone
foreign currency options, and stand-alone foreign currency forwards. The Company
does not believe that these derivatives present significant credit risks,
because the counterparties to the derivatives consist of major financial
institutions and the Company manages the notional value of contracts entered
into with any one counterparty.
The Company does not hold or issue derivatives or any other financial
instruments for trading purposes.
Cash Flow Hedges
The Company attempts to mitigate the risk that forecasted cash flows associated
with revenue denominated in foreign currencies may be adversely affected by
changes in foreign currency exchange rates through a combination of foreign
currency forwards embedded in the Company's borrowing commitments under a
financing agreement, stand-alone foreign currency options, and stand-alone
foreign currency forwards. See Note 3 for further discussion of the financing
agreement. Typically, the maximum length of time over which the Company hedges
its exposure to the variability of forecasted cash flows with these derivatives
is 16 months. The Company's derivatives used for hedging forecasted cash flows
had a notional value of $294,572,000 as of June 29, 2001, and $396,502,000 as of
December 29, 2000.
The Company records these derivatives designated as cash flow hedges at their
estimated fair value within other current assets or other current liabilities in
the Consolidated Balance Sheet. The gains and losses associated with changes in
the fair value of the derivatives are deferred in OCI to the extent that the
derivatives are effective in offsetting the changes in value of the forecasted
cash flows being hedged. The gains and losses are then reclassified as an
adjustment to revenue in the same period that the related forecasted revenue is
recognized in the Consolidated Statement of Operations. If a derivative is
terminated or discontinued as a hedge, the effective portion of gains and losses
to that date are deferred in OCI and subsequently recognized in the Consolidated
Statement of Operations in the same period that the related forecasted revenue
is recognized. The ineffective portion of the derivatives is immediately
recognized as a component of selling, general, administrative, and other income
and expense (SG&A) in the Consolidated Statement of Operations.
8
In evaluating hedge effectiveness for foreign currency forwards, the Company
assesses changes in the forward rates. The forward rates are defined as the sum
of the forward points as quoted by independent quote services and the spot rates
as of the end of the fiscal period. In evaluating hedge effectiveness for
foreign currency options, the Company compares the fair value of the options to
their intrinsic value. The fair value is based on a Black-Scholes option pricing
model, and the intrinsic value is based on the difference between the forward
rates and the strike price of the options.
During the quarter ended June 29, 2001, the Company had no expense for
ineffectiveness associated with hedging instruments. During the six months ended
June 29, 2001, the Company recognized approximately $500,000 of SG&A expense for
ineffectiveness associated with hedging instruments. The net estimated gain of
$9,159,000 recorded in Accumulated OCI as of June 29, 2001, associated with cash
flow hedges is expected to be reclassified into revenue during the next six
months.
Other Derivatives
The Company also utilizes foreign currency forwards, generally with durations of
less than two months, to reduce its exposure to foreign currency exchange rate
fluctuations in connection with monetary assets and liabilities denominated in
foreign currencies. The Company accounts for these derivatives in accordance
with SFAS No. 52, "Foreign Currency Translation." The Company records these
forwards at their estimated fair value within other current assets or
liabilities in the Consolidated Balance Sheet. Changes in the fair value of
these derivatives are immediately recognized as a component of SG&A in the
Consolidated Statement of Operations. The notional value of outstanding foreign
currency forwards utilized to reduce the Company's exposure to foreign currency
rate fluctuations in connection with monetary assets and liabilities denominated
in foreign currencies was approximately $171,315,000 as of June 29, 2001, and
$230,515,000 as of December 29, 2000.
NOTE 5 - OTHER COMPREHENSIVE INCOME
The changes in the components of other comprehensive income are as follows (in
thousands of dollars):
Quarter Six Months
Ended Ended
06/29/01 06/29/01
---------------------
Other comprehensive income, before tax:
Cumulative effect of change in accounting principle $ - $(11,416)
Net gains on foreign currency cash flow hedges 7,414 34,980
Reclassification adjustment for net gains included in
net income (6,711) (9,686)
------ -------
Other comprehensive income, before tax 703 13,878
Income tax expense related to items of other
comprehensive income (239) (4,719)
------ -------
Other comprehensive income, net of tax $ 464 $ 9,159
====== =======
All of the changes in the components of other comprehensive income relate to the
accounting for derivative instruments. See Note 4 for a discussion of the
Company's accounting for derivative instruments.
9
NOTE 6 - 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
$2,400,000,000. In December 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. In July 1999, the
District Court again dismissed, with prejudice, all of Stuff's material claims
against the Company. In August 1999, Stuff filed a notice of appeal with the
Appeals Court seeking to overturn the decision of the District Court. In August
2000, the Court of Appeals remanded the case back to the District Court for a
trial on the factual issues relating to the interpretation of the language
embodied in the 1990 Settlement Agreement. The Company filed a Petition for
Rehearing with the Court of Appeals. In October 2000, the Court of Appeals
modified its decision, but denied the Company's Petition for Rehearing. In
November 2000, the Company filed a Petition for Certiorari with the Supreme
Court of Colorado (the Supreme Court). In April 2001, the Supreme Court denied
the Company's petition. The case has been remanded to the District Court for
trial. In June 2001, the Company filed a motion with the District Court to
bifurcate the trial into a liability phase and, if Stuff were to prevail in the
liability phase, a damages phase. In July 2001, the District Court granted the
Company's request for a bifurcated trial. 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.
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 7 - RESTRUCTURING
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. The key elements of the
restructuring included a reduction in headcount, a reduction of investment in
certain businesses, a recommitment to the Company's core strengths,
modifications to the sales model for the United States and Canada, and other
organizational and operational changes.
10
The Company incurred approximately $12,358,000 of restructuring expense in the
second quarter of 2000, and approximately $23,800,000 of restructuring expense
during the six months of 2000. Of the $23,800,000 of restructuring expense
incurred during the six months of 2000, approximately $18,981,000 related to
employee severance expense, $4,430,000 related to the impairment writedown of
assets at the Company's manufacturing facility in Toulouse, France and to asset
writedowns associated with the spin-off of the Company's managed storage
services business, and $389,000 related to excess lease space in Canada and
legal expenses associated with the spin-off of the Company's managed storage
services business.
The restructuring program was completed in the third quarter of 2000.
NOTE 8 - OPERATIONS OF BUSINESS SEGMENTS
The Company is 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
storage products segment includes revenue from tape, disk, and network products
for the enterprise and open systems computing environments, including storage
area networks (SANs). The products segment also includes revenue from licensed
software tools and applications for improving storage product performance and
simplifying information storage management. The storage services segment
provides maintenance services for Company and third-party products, as well as
storage consulting services associated mainly with SANs, virtual 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. The Company does not allocate research and
product development costs; selling, general, administrative, and other income
and expense; interest expense; interest income; or provision for income taxes to
the segments. The revenue and gross profit by segment are as follows (in
thousands of dollars):
Quarter Ended Six Months Ended
-----------------------------------------------
06/29/01 06/30/00 06/29/01 06/30/00
-----------------------------------------------
Revenue:
Storage products $346,271 $348,895 $651,631 $650,007
Storage services 165,863 163,582 329,322 322,139
------- ------- ------- -------
Total revenue $512,134 $512,477 $980,953 $972,146
======= ======= ======= =======
Gross profit:
Storage products $155,906 $146,401 $287,651 $250,759
Storage services 63,863 63,331 129,388 113,526
------- ------- ------- -------
Total gross profit $219,769 $209,732 $417,039 $364,285
======= ======= ======= =======
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
-----------------------------------------------
06/29/01 06/30/00 06/30/00 06/29/01
-----------------------------------------------
Tape products $285,763 $278,483 $533,200 $512,151
Disk products 25,287 40,338 51,598 72,166
Network and other products 35,221 30,074 66,833 65,690
------- -------- ------- -------
Total storage products
revenue $346,271 $348,895 $651,631 $650,007
======= ======= ======= =======
11
NOTE 9 - 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
-----------------------------------------------
06/29/01 06/30/00 06/29/01 06/30/00
-----------------------------------------------
Net income (loss) $ 12,250 $ 651 $ 9,246 $(38,887)
======= ======= ======= =======
Weighted-average shares 103,005 100,906 102,653 100,657
Effect of dilutive shares 1,424 375 1,528 -
------- ------- ------- -------
Weighted-average and
dilutive potential shares 104,429 101,281 104,181 100,657
======= ======= ======= =======
Basic earnings (loss) per
share $ 0.12 $ 0.01 $ 0.09 $ (0.39)
======= ======= ======= =======
Diluted earnings (loss)
per share $ 0.12 $ 0.01 $ 0.09 $ (0.39)
======= ======= ======= =======
For the quarters ended June 29, 2001, and June 30, 2000, options to purchase
5,822,283 and 12,213,611 shares of common stock, respectively, were excluded
from the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price of the Company's common
stock and, therefore, the effect would have been antidilutive. For the six
months ended June 29, 2001, options to purchase 7,092,452 shares of common stock
were excluded from the computation of diluted earnings per share for the same
reason. For the six months ended June 30, 2000, options to purchase 12,295,680
shares of common stock were excluded from the computation of diluted earnings
per share because they were antidilutive as a result of the net loss incurred in
that period.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations." This statement requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 141 is effective for
the Company's financial statements for the year ending December 27, 2002. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS No. 142 requires that
goodwill and indefinite lived intangible assets no longer be amortized, that
goodwill be tested for impairment at least annually at the reporting unit level,
that intangible assets deemed to have an indefinite life be tested for
impairment at least annually, and that the amortization period of intangible
assets with finite lives no longer be limited to forty years. SFAS No. 142 is
effective for the Company's financial statements for the year ending December
27, 2002. The adoption of this statement is not currently anticipated to have a
material impact on the Company's financial position or results of operations.
12
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 29, 2001
All assumptions, anticipations, expectations, and forecasts contained in the
following discussion regarding the Company's future products, 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 29, 2001, of
$12.3 million on revenue of $512.1 million, compared to net income of $651,000
for the second quarter ended June 30, 2000, on revenue of $512.5 million. Net
income of $9.2 million was reported for the six months of 2001 on revenue of
$981.0 million, compared to a net loss of $38.9 million for the six months of
2000 on revenue of $972.1 million. 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 recognized net income of $8.7 million and a net loss of $13.8 million
during the second quarter and six months of 2000, respectively.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation, and acceptance of the Company's products.
This evaluation process results in a variable sales cycle and makes it difficult
to predict if or when revenue will be earned, which may therefore adversely
impact the Company's financial results. Further, gross margins may be adversely
impacted in an effort to complete the sales cycle. Future financial results also
depend 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; and the implementation of its storage area network (SAN)
strategy. For a discussion of these and other risk factors, see "Factors That
May Affect Future Results."
The Company's operating activities provided cash of $65.0 million during the six
months of 2001 compared to cash of $178.1 million provided by operating
activities during the same period in 2000. The decrease in cash provided by
operating activities during the six months of 2001, compared to the same period
in 2000, was primarily a result of reduced cash received from customers due to a
lower level of sales revenue in the fourth quarter of 2000, compared to the
fourth quarter of 1999, as well as increased purchases of inventory. See
"Liquidity and Capital Resources -- Working Capital" for additional discussion
of working capital. Cash provided by financing activities of $6.1 million during
the six months of 2001 primarily consists of proceeds received from employee
stock purchase plans. Cash used in financing activities of $103.9 million during
the six months of 2000 reflects net debt repayments of $112.5 million offset by
proceeds received from employee stock purchase plans.
13
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
--------------------------------------
06/29/01 06/30/00 06/29/01 06/30/00
--------------------------------------
Storage products revenue:
Tape products 55.8% 54.3% 54.4% 52.7%
Disk products 4.9 7.9 5.2 7.4
Network and other products 6.9 5.9 6.8 6.8
----- ----- ----- -----
Total storage products revenue 67.6 68.1 66.4 66.9
Storage services revenue 32.4 31.9 33.6 33.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 57.1 59.1 57.5 62.5
----- ----- ----- -----
Gross profit 42.9 40.9 42.5 37.5
Research and product development costs 11.9 12.6 12.8 13.3
Selling, general, administrative,
and other income and expense, net 27.5 25.9 28.4 27.5
Restructuring expense - 2.4 - 2.5
----- ----- ----- -----
Operating profit (loss) 3.5 - 1.3 (5.8)
Interest income (expense), net 0.1 0.2 0.1 (0.4)
----- ----- ----- -----
Income (loss) before income taxes 3.6 0.2 1.4 (6.2)
Benefit (provision) for income taxes (1.2) (0.1) (0.5) 2.2
----- ----- ----- -----
Net income (loss) 2.4% 0.1% 0.9% (4.0)%
===== ===== ===== =====
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue consists of sales of tape, disk, and
network products for the enterprise and open systems markets, including SANs.
The open systems market consists of products designed to operate in the UNIX,
NT, and other non-MVS operating environments. Revenue from the storage products
segment was largely unchanged during the second quarter and six months of 2001,
compared to the same periods in 2000.
Tape Products
Tape product revenue increased 3% and 4% during the second quarter and six
months of 2001, respectively, compared to the same periods in 2000. The
increases in tape revenue were primarily due to increased sales of the Virtual
Storage Manager(R) (VSM), the L-series open systems tape automation products,
and incremental sales of the Company's new high-capacity 9940 tape drive. These
increases were partially offset by decreased sales of the Timberline(R) 9490,
earlier generation open systems tape automation products, and the Powderhorn(R)
automated tape library. Continuing to extend the Company's reach into the open
systems market with tape and tape automation products will be key in growing
tape product revenue. See "Factors That May Affect Future Results - Emerging
Markets" for a discussion of the risks associated with future revenue growth in
the open systems market.
Disk Products
Disk product revenue decreased 37% and 29% during the second quarter and six
months of 2001, respectively, compared to the same periods in 2000. Disk revenue
for the second quarter of 2001 was adversely affected by significant price
14
competition in the disk market. The Company is still developing its direct sales
force for disk products in the United States and Canada. The decrease in revenue
for the six months of 2001 was also attributable to lower 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 the future. See "Factors That May Affect
Future Results - New Products and Services" for a discussion of the risks
associated with new disk products currently under development.
Network and Other Products
Network and other products revenue increased 17% and 2% during the second
quarter and six months of 2001, respectively, compared to the same periods in
2000. The increase in network revenue for the second quarter of 2001, as
compared to the second quarter of 2000, was primarily due to increased sales of
SAN hardware products, including incremental sales revenue from the
StorageNet(TM) 6000 series of domain managers. Future revenue growth is
significantly dependent upon the Company's ability to successfully compete in
the SANs market. See "Factors That May Affect Future Results - New Products and
Services and Emerging Markets" for a discussion of the risks associated with the
Company's SAN strategy.
STORAGE SERVICES
The Company's storage services revenue primarily consists of revenue associated
with the maintenance of the Company's and third-party storage products, as well
as integration service revenue associated with storage consulting activities.
Storage services revenue was largely unchanged during the second quarter and six
months of 2001, compared to the same periods in 2000.
GROSS PROFIT
Gross profit margins increased to 43% for the second quarter and six months of
2001, compared to 41% for the second quarter of 2000 and 37% for the six months
of 2000. Gross profit margins for the Company's products segment increased to
45% and 44% for the second quarter and six months of 2001, respectively,
compared to 42% and 39% for the same periods of 2000. These increases reflect
favorable product mixes for the Company's tape products, a shift in revenue from
the Company's indirect sales channel to the direct sales channel, and benefits
associated with operational efficiencies and cost reduction activities. Gross
profit margins for the services segment were largely unchanged at 39% for the
second quarter of 2001 compared to the second quarter of 2000. Gross profit
margins for the services segment increased to 39% for the six months of 2001,
compared to 35% for the same period in 2000, primarily as a result of decreased
maintenance costs associated with certain tape products, as well as an increased
focus on profitable storage consulting and integration service activities during
2001.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses decreased 5% and 3% during the second
quarter and six months of 2001, respectively, compared to the same periods in
2000, primarily due to the elimination of several lower priority research and
product development programs. The Company is focusing research and development
activities on the core businesses of tape and tape automation, virtual
technologies, and SANs.
15
SELLING, GENERAL, ADMINISTRATIVE, AND OTHER
Selling, general, administrative, and other income and expense (SG&A) increased
6% and 5% during the second quarter and six months of 2001, respectively,
compared to the same periods in 2000, primarily as a result of increases in
sales headcount.
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. In December 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. In July 1999, the District Court again
dismissed, with prejudice, all of Stuff's material claims against the Company.
In August 1999, Stuff filed a notice of appeal with the Appeals Court seeking to
overturn the decision of the District Court. In August 2000, the Court of
Appeals remanded the case back to the District Court for a trial on the factual
issues relating to the interpretation of the language embodied in the 1990
Settlement Agreement. The Company filed a Petition for Rehearing with the Court
of Appeals. In October 2000, the Court of Appeals modified its decision, but
denied the Company's Petition for Rehearing. In November 2000, the Company filed
a Petition for Certiorari with the Supreme Court of Colorado (the Supreme
Court). In April 2001, the Supreme Court denied the Company's petition. The case
has been remanded to the District Court for trial. In June 2001, the Company
filed a motion with the District Court to bifurcate the trial into a liability
phase and, if Stuff were to prevail in the liability phase, a damages phase. In
July 2001, the District Court granted the Company's request for a bifurcated
trial. 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.
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. The key elements of the
restructuring included a reduction in headcount, a reduction of investment in
certain businesses, a recommitment to the Company's core strengths,
modifications to the sales model for the United States and Canada, and other
organizational and operational changes.
The Company incurred approximately $12.4 million of restructuring expense in the
second quarter of 2000, and approximately $23.8 million of restructuring expense
in the six months of 2000. Of the $23.8 million of restructuring expense
16
incurred during the six months of 2000, approximately $19.0 million related to
employee severance expense, $4.4 million related to the impairment writedown of
assets at the Company's manufacturing facility in Toulouse, France and to asset
writedowns associated with the spin-off of the Company's managed storage
services business, and $389,000 related to excess lease space in Canada and
legal expenses associated with the spin-off of the Company's managed storage
services business.
The restructuring program was completed in the third quarter of 2000.
INTEREST INCOME AND EXPENSE
Interest income decreased $2.2 million and $1.6 million during the second
quarter and six months of 2001, respectively, compared to the same periods in
2000, primarily due to approximately $3.0 million of interest received in 2000
that was related to an income tax refund. Interest expense decreased $2.1
million and $6.8 million during the second quarter and six months of 2001,
respectively, compared to the same periods in 2000. The decreases are primarily
due to decreased borrowings under the Company's debt and financing arrangements.
INCOME TAXES
The Company's effective tax rate decreased from 35% for the second quarter and
six months of 2000, to 34% for the second quarter and six months of 2001.
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
$195.6 million of deferred income tax assets as of June 29, 2001. The Company's
valuation allowance of approximately $21.1 million as of June 29, 2001, relates
principally to net deductible temporary differences, tax credit carryforwards
and net operating loss carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations." This statement requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 141 is effective for
the Company's financial statements for the year ending December 27, 2002. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS No. 142 requires that
goodwill and indefinite lived intangible assets no longer be amortized, that
goodwill be tested for impairment at least annually at the reporting unit level,
that intangible assets deemed to have an indefinite life be tested for
impairment at least annually, and that the amortization period of intangible
assets with finite lives no longer be limited to forty years. SFAS No. 142 is
effective for the Company's financial statements for the year ending December
27, 2002. The adoption of this statement is not currently anticipated to have a
material impact on the Company's financial position or results of operations.
17
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's operating activities provided cash of $65.0 million during the six
months of 2001 compared to cash of $178.1 million provided by operating
activities during the same period in 2000. The decrease in cash provided by
operating activities during the six months of 2001, compared to the same period
in 2000, was primarily a result of reduced cash received from customers due to a
lower level of sales revenue in the fourth quarter of 2000, compared to the
fourth quarter of 1999, as well as increased purchases of inventory. Cash
provided by financing activities of $6.1 million during the six months of 2001
primarily consists of proceeds received from employee stock purchase plans. Cash
used in financing activities of $103.9 million during the six months of 2000
reflects net debt repayments of $112.5 million offset by proceeds received from
employee stock purchase plans.
The average collection period for Company receivables decreased from 86 days for
the second quarter of 2000, to 84 days for the second quarter of 2001. Inventory
balances increased from $218.2 million as of December 29, 2000, to $241.0
million as of June 29, 2001, as a result of the Company fulfilling a portion of
its commitment to purchase disk drives from IBM and completing end-of-life
manufacturing for a line of older tape products.
Available Financing Lines
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $120.0 million at any one
time. The financing agreement was amended in July 2001 to provide for the sale
of promissory notes in the principal amount of up to $75.0 million at any one
time. This amendment to the financing agreement was made to reflect a shift in
the derivative instruments utilized by the Company as a result of recently
issued accounting standards. The agreement, which expires in January 2002,
provides for commitments by the bank to purchase the Company's promissory notes
denominated in a number of foreign currencies. As of June 29, 2001, the Company
had promissory notes of $78.4 million outstanding under this financing agreement
and had committed to borrowings between July 2001 and January 2002 in the
cumulative principal amount of approximately $190.9 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. 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 29, 2001, was 6.02%. 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.
The Company has a revolving credit facility (the Revolver) that expires in
October 2001. The credit limit available under the Revolver ($212.5 million as
of June 29, 2001) is reduced by $12.5 million on the last day of each fiscal
quarter. The interest rates under the Revolver depend upon the repayment period
of the advance selected and the Company's Total Debt to rolling four quarter
Earnings Before Interest Expense, Taxes, Depreciation, and Amortization (EBITDA)
ratio. Depending upon the term of the outstanding borrowing, the rate ranges
from the applicable LIBOR plus 2.00% to 2.50% or the agent bank's base rate plus
0.00% to 0.50%. The Company had no borrowings outstanding as of June 29, 2001,
but had outstanding letters of credit for approximately $214,000 under the
Revolver. The remaining available credit under the Revolver as of June 29, 2001,
was approximately $212.3 million. The Revolver is secured by the Company's U.S.
accounts receivable and U.S. inventory. The Revolver contains certain financial
18
and other covenants, including restrictions on the payment of cash dividends on
the Company's common stock.
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 that are favorable to the Company.
Total Debt-to-Capitalization
The Company's total debt-to-capitalization ratio decreased from 9% as of
December 29, 2000, to 8% as of June 29, 2001, primarily due to the repayment of
a note payable. See "Working Capital," above, for a discussion of cash sources
and uses.
INTERNATIONAL OPERATIONS
During the second quarter and six months of 2001, approximately 51% of the
Company's revenue was generated by its international operations, compared to
approximately 52% for the second quarter and six months of 2000. 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. 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," 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 adverse political and economic conditions;
impositions of, or changes in, tariffs, quotas, and legislative or regulatory
requirements; 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. The Company expects these risks to
increase in the future as it plans to expand its operations in Eastern Europe
and Asia. There can be no assurances that 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 Rate Risk
The Company's primary market risk relates to changes in foreign currency
exchange rates. The functional currency for the Company's foreign subsidiaries
is the U.S. dollar. A significant portion of the Company's revenue is generated
by its international operations. As a result, the Company's financial position,
earnings, and cash flows can be materially affected by changes in foreign
currency exchange rates. The Company attempts to mitigate this exposure as part
of its foreign currency hedging program. The primary goal of the Company's
foreign currency hedging program is to reduce the risk of adverse foreign
19
currency movements on the reported financial results of its non-U.S. dollar
transactions. Factors that could have an impact on the effectiveness of the
Company's hedging program include the accuracy of forecasts and the volatility
of foreign currency markets. All foreign currency derivatives are authorized and
executed pursuant to the Company's policies. The Company does not hold or issue
derivatives or any other financial instruments for trading purposes.
To implement its foreign currency hedging program, the Company uses a
combination of foreign currency forwards embedded in a financing agreement, as
well as stand-alone foreign currency options and forwards. These derivatives are
used to hedge the risk that forecasted revenue denominated in foreign currencies
might be adversely affected by changes in foreign currency exchange rates.
Foreign currency forwards are also used to reduce the Company's exposure to
foreign currency exchange rate fluctuations in connection with monetary assets
and liabilities denominated in foreign currencies.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of June
29, 2001, and as of December 29, 2000, would result in a hypothetical loss of
approximately $40.6 million and $69.5 million, respectively. The decrease in the
hypothetical loss for the second quarter of 2001 is primarily due to a decrease
in outstanding borrowing 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.
Interest Rate Risk
Changes in interest rates affect interest income earned on the Company's cash
investments, as well as interest expense on short-term borrowings. A
hypothetical 10% adverse movement in interest rates applied to cash investments
and short-term borrowings would not have a material adverse effect on the
Company's financial position, earnings, or cash flows.
Credit Risk
The Company is exposed to credit risk associated with cash investments, foreign
currency derivatives, and trade receivables. The Company does not believe that
its cash investments and foreign currency derivatives present significant credit
risks, because the counterparties to the instruments consist of major financial
institutions and the Company manages the notional value of contracts entered
into with any one counterparty. Substantially all trade receivable balances are
unsecured. The concentration of credit risk with respect to trade receivables is
limited due to the large number of customers in the Company's customer base and
their dispersion across various industries and geographic areas.
FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products and Services
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 technologies, products, and services is complex and
involves various uncertainties. The Company is currently in the early product
evaluation stage for a disk product that is expected to offer significant
improvements in performance and capacity. This new product is currently
20
scheduled for introduction in the second half of 2001. In addition, the Company
is still developing the necessary product modifications and professional
services knowledge to successfully implement its SAN solutions in various
customer operating environments. 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 and manufacturing
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
successfully manage the development and introduction of new products and
services in the future.
Emerging Markets
Future revenue growth is partially dependent upon successfully developing and
introducing products for two primary emerging markets: the storage area
networking (SAN) market and the open systems market.
The open systems market includes products designed to operate in the UNIX, NT,
and other non-MVS operating environments. Competition in the open systems market
is aggressive and is primarily based on technology, performance, reliability,
quality, system scalability, price, product availability, customer service, and
brand recognition. The open systems market encompasses a broad range of
customers, including customers outside of the Company's traditional customer
base. Many of the Company's potential customers in the open systems market
purchase their storage requirements as part of a bundled product, which may
provide a competitive advantage to the Company's rivals. The Company expects to
address these competitive factors through the delivery of storage solutions that
provide customers with superior functionality, performance, and quality. The
Company's customer base continues to shift to the open systems market and there
can be no assurance that the Company's strategy will be effective in expanding
its open systems market sales.
The SAN market has only recently begun to develop and is characterized by
rapidly changing technology and standards. Because this market is new and
standards are still being defined, it is difficult to predict its potential size
or future growth rate. Customers may be reluctant to adopt new data storage
standards, and competing standards may emerge that will be preferred by
customers.
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 competes in a number of markets that include a broad spectrum of
customers primarily on the basis of technology, performance, reliability,
quality, system scalability, price, product availability, customer service, and
brand recognition. The Company believes that its ability to compete depends upon
a number of factors, both within and outside of its control. These factors
include the price and cost of the Company's and its competitors' product
offerings, the timing and success of new products and applications, new product
introductions by the Company's competitors, the Company's service and
distribution capabilities, and general economic and business conditions within
and outside the United States. Strong competition has resulted in price erosion
in the past and the Company expects this trend to continue. The Company
anticipates that price competition for its products and services will continue
to have a significant impact on the Company's gross profit margins as well. The
Company's ability to sustain or improve total gross margins is significantly
dependent upon designing, developing, and manufacturing competitive products,
pricing those products, improving margins on the Company's disk and network
products, and reducing costs associated with the sourcing of production
21
materials. Storage product gross margins may also be affected in future periods
by inventory reserves and writedowns resulting from rapid technological changes
or delays in gaining market acceptance for products.
The Company expects that the markets for its products and services, and its
competitors within these markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Advanced Digital Information Corporation,
Compaq Computer Corporation, EMC Corporation, Hewlett-Packard Company, Hitachi
Ltd., IBM, Network Appliance Inc., Quantum Corporation, and Sun Microsystems. A
number of the Company's competitors have significantly greater financial
resources than the Company.
Partners/Competitors
The markets in which the Company competes are characterized by various alliances
formed to promote industry standards and deliver tested, interoperable
technology. For example, Seagate Technology, Inc., IBM, and Hewlett-Packard
Company have jointly developed the Linear Tape Open (LTO) drive, a high-capacity
tape drive technology for the open systems market. The Company has developed
versions of its tape libraries that will support LTO tape drives. However, the
Company may be at a cost disadvantage when selling tape libraries that use LTO
tape drives. The Company also competes with vendors with which it has
established relationships, including Hewlett-Packard Company and Sun
Microsystems. The Company anticipates that it will continue to establish
distribution alliances with other equipment manufacturers, software vendors, and
service providers. There can be no assurance that the Company will be able to
successfully realize the benefits from these alliances while competing against
these companies at the same time.
Indirect Channels
The Company is placing increased emphasis on its indirect distribution channels,
including original equipment manufacturers (OEMs), value-added distributors
(VADs), value-added resellers (VARs), and other distributors. The Company's
financial results may be negatively affected if the Company is unsuccessful in
its efforts to develop its indirect channels or if the financial condition of
one or more of these customers weakens. The Company's ability to forecast future
demand for its products may be adversely affected by unforeseen changes in
demand from its indirect channel customers. There can be no assurance that the
Company will be successful in expanding or maintaining its indirect channel
sales. Furthermore, there can be no assurance that profit margins on indirect
channel sales will not deteriorate due to competitive pressures. There also can
be no assurance that maintenance revenue will not decline in future periods as a
result of customers of these indirect channels electing to purchase maintenance
services from vendors other than the Company.
Significant Personnel Changes and Restructuring Activities
The Company has experienced significant changes in its executive management
team. Since December 29, 2000, five executive officers have departed and three
new executive officers have been appointed to positions in the Company. There
can be no assurance that there will not be any future changes in the executive
management team, and it may take a period of time before the new executive
management team becomes fully productive.
The Company experienced increased turnover in its United States and Canadian
direct sales force in the first six months of 2000 as a result of its
restructuring activities. Even though the Company has rehired most of the sales
headcount and United States and Canada direct sales improved in the second
22
quarter of 2001, the Company is still in the process of delivering the product
training and sales tools to increase the effectiveness of its sales force in the
United States and Canada.
The Company experienced significant changes in the remainder of its employee
base during 1999 and 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. While the Company's restructuring
activities have now been completed and attrition rates have declined to
historical rates, the future success of the Company depends in large part upon
its ability to attract, retain, and motivate highly skilled employees. The
Company faces significant competition for individuals who possess the skills
required to sell and deliver the products and services offered to its customers.
An inability to successfully sell and deliver products and services required by
Company customers could have an adverse effect on future operating results.
There can be no assurance that the Company's past restructuring activities will
be sufficient, and it is possible that additional restructuring activities may
be necessary in the future.
Ability to Develop and Protect Intellectual Property Rights
The Company relies heavily on its ability to develop new intellectual property
rights that do not infringe on the rights of others in order to remain
competitive and develop and manufacture products that are competitive in terms
of technology and cost. There can be no assurance that the Company will continue
to be able to develop such new intellectual property.
The Company relies on a combination of United States 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
files patent applications with foreign governments. However, many foreign
countries do not have intellectual property laws that are as well developed as
those of the United States. The Company enters into confidentiality agreements
relating to its intellectual property with its employees and consultants. In
addition, the Company includes confidentiality provisions in license and
non-exclusive sales agreements with 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 can be 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 sole 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 sole source supplier for the 9840 and 9940 tape cartridges and the Company is
dependent upon Imation to economically produce large volumes of high-quality
tape cartridges at a cost acceptable to the Company and its customers. IBM is
currently a sole source supplier for disk drives used in the Company's 9500
Shared Virtual Array(TM) (SVA) and VSM products. IBM has indicated these drives
will no longer be manufactured after June 2001. The Company has entered into a
23
final purchase commitment with IBM based on forecasted requirements. The Company
is currently developing an industry standard drive interface for its SVA and VSM
products. This project is in the engineering and development stage. Failure to
accurately forecast drive requirements or changes in the development schedule
for the drive interface could result in excess inventory and related inventory
write-offs, or the inability to meet customer needs for these products.
Certain suppliers have experienced occasional technical, financial, or other
problems that have delayed deliveries in the past. 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.
The Company is dependent upon a sole subcontractor, 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 upon 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
A significant portion of the Company's products is manufactured in facilities
located in Puerto Rico. The Company's ability to manufacture product may be
affected by weather-related risks beyond the control of the Company. If the
Puerto Rico manufacturing facility were affected by such an event, the Company
may not have an alternative source to meet the demand for its products without
substantial delays and disruption to its operations. The Company carries
interruption insurance to mitigate some of the risk. There is no assurance that
the Company could obtain sufficient alternate manufacturing sources or repair
the facilities in a timely manner to satisfy the demand for its products.
Failure to fulfill manufacturing demands could adversely affect the Company's
operating and financial results in the future.
From time to time, the Company has experienced delivery delays, increased lead
times in ordering parts and components for its products, and rapid changes in
the demand by customers for certain products. These longer lead times, coupled
with rapid changes in the demand for products, could result in a shortage of
parts and components, reduced control over delivery schedules, and an inability
to fulfill customer orders in a timely manner. The complexities of these issues
increase when the Company transitions to newer technologies and products. These
factors could have a material adverse effect on revenue and operating results.
Earnings Fluctuations
The Company's financial and operating results may fluctuate from quarter to
quarter for a number of reasons. Many of the Company's customers undertake
detailed procedures relating to the evaluation, testing, implementation, and
acceptance of the Company's products. This evaluation process results in a
variable sales cycle and makes it difficult to predict if or when revenue will
24
be earned. Furthermore, gross margins may be adversely impacted in an effort to
complete the sales cycle. 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 percentage of the total product sales is earned in the
last weeks or days of the quarter. A number of other factors may also 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, 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. These factors make the forecasting of
revenue inherently difficult. Because the Company plans its operating expenses
on expected revenue, a shortfall in revenue may cause earnings to be below
expectations in that period.
The Company has experienced adverse effects from the recent slowdown in the
global economy as some customers have delayed purchase decisions and are
reevaluating their information technology spending budgets. In an attempt to
protect itself from this economic downturn, the Company has implemented various
cost saving measures, including delayed merit increases and reduced
discretionary spending. There can be no assurance that a prolonged economic
downturn will not have an adverse effect on the Company's future revenue or
operating results. Although the Company has a large number of customers who are
dispersed across different industries and geographic areas, a prolonged economic
downturn would also increase the Company's exposure to credit risk on its trade
receivables.
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."
25
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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. In December 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. In July 1999, the District Court again
dismissed, with prejudice, all of Stuff's material claims against the Company.
In August 1999, Stuff filed a notice of appeal with the Appeals Court seeking to
overturn the decision of the District Court. In August 2000, the Court of
Appeals remanded the case back to the District Court for a trial on the factual
issues relating to the interpretation of the language embodied in the 1990
Settlement Agreement. The Company filed a Petition for Rehearing with the Court
of Appeals. In October 2000, the Court of Appeals modified its decision, but
denied the Company's Petition for Rehearing. In November 2000, the Company filed
a Petition for Certiorari with the Supreme Court of Colorado (the Supreme
Court). In April 2001, the Supreme Court denied the Company's petition. The case
has been remanded to the District Court for trial. In June 2001, the Company
filed a motion with the District Court to bifurcate the trial into a liability
phase and, if Stuff were to prevail in the liability phase, a damages phase. In
July 2001, the District Court granted the Company's request for a bifurcated
trial. 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. Subsequently, Cisco amended its answer to drop its infringement
counterclaim and to drop certain equitable defenses to the Company's claims. In
March 2000, the case was transferred to the U.S. District Court for the Northern
District of California. A trial date is set for March 11, 2002.
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.
26
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 24, 2001. A total of 95,690,821 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 three proposals specifically set forth in
the Company's definitive Proxy Statement, dated April 16, 2001 (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 94,076,681 1,614,140
William L. Armstrong 94,073,156 1,617,665
William R. Hoover 94,074,566 1,616,255
William T. Kerr 94,076,409 1,614,412
Robert E. La Blanc 94,066,286 1,624,535
Robert E. Lee 94,074,427 1,616,394
Patrick J. Martin 94,070,809 1,620,012
Richard C. Steadman 94,063,060 1,626,961
The second proposal related to an amendment to the Company's 1987 Amended and
Restated Employee Stock Purchase Plan, as amended, to increase the number of
shares of Common Stock authorized to be granted by 3,000,000 shares. The second
proposal was adopted by a vote of 92,827,002 in favor to 2,547,810 against, with
316,009 abstentions.
The third proposal related to a stockholders' proposal to permit cumulative
voting in the election of directors. The third proposal was rejected by a vote
of 35,039,487 in favor to 40,010,267 against, with 476,810 abstentions and
20,164,257 broker non-votes.
A stockholder made a proposal from the floor of the Annual Meeting to require
the Company to disclose in its proxy statement the name of all persons nominated
by stockholders to serve as a director of the Company. This proposal was
rejected by a vote of 55,024 in favor to 95,635,797 against, with no abstentions
and no broker non-votes.
27
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 (previously filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 29, 2000, filed
on February 21, 2001, and incorporated herein by reference)
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.3 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.4 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 25, 1999, filed on August 9, 1999, and incorporated herein by
reference)
3.5 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)
10.1(1,2) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, filed
on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1996,
filed on August 12, 1996, and incorporated herein by reference)
----------
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.
28
10.5(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 26, 1997, filed on March 6, 1998, and
incorporated herein by reference)
10.6(1) Form of Executive Officer Employment Agreement between the Company and
Each Executive Officer Named in Exhibit 10.7 hereto, dated October 1999
(previously filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
10.7(1) Schedule of Differences in Terms and Conditions of Executive Officer
Employment Agreement (previously filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 29, 2000, filed
on February 21, 2001, and incorporated herein by reference)
10.8(1) CEO Employment Agreement, dated July 11, 2000, between the Company and
Patrick J. Martin (previously filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
filed on August 11, 2000, and incorporated herein by reference)
10.9(1) Extension of Retention Agreement, dated July 31, 2000, between the
Company and Robert S. Kocol (previously filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, filed on August 11, 2000, and incorporated herein by reference)
10.10 Amended and Restated Credit Agreement, dated as of January 13, 2000,
among the Company, Bank of America, N.A., as Administrative Agent,
Swingline Bank and Letter of Credit Issuing Bank and the other
financial institutions party thereto (previously filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the year ended December
31, 1999, filed on March 10, 2000, and incorporated herein by
reference)
10.11 Security Agreement, dated as of January 13, 2000, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as Exhibit
10.16 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, filed on March 10, 2000, and incorporated herein by
reference)
10.12 Contingent Multicurrency Note Purchase Commitment Agreement dated as of
December 12, 1996, between the Company and Bank of America National
Trust and Savings Association (filed as Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the year ended December 27, 1996, filed
on March 7, 1997, and incorporated herein by reference)
10.13 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated November 20,
1998, between Bank of America National Trust and Savings Association
and the Company (filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended December 25, 1998, filed on March 5,
1999, and incorporated herein by reference)
10.14 Third Amendment to Second Amended and Restated Contingent Multicurrency
Note Purchase Commitment Agreement dated August 13, 1999, between Bank
of America National Trust and Savings Association and the Company
(previously filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
----------
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.
29
10.15 Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated January 5, 2000,
between the Company and Bank of America, N.A. (previously filed as
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, filed on March 10, 2000, and incorporated
herein by reference)
10.16 Fifth Amendment to Second Amended and Restated Contingent Multicurrency
Note Purchase Commitment Agreement dated August 15, 2000, between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.20 to
the Company's Annual Report on Form 10-K for the year ended December
29, 2000, filed on February 21, 2001, and incorporated herein by
reference)
10.17(1,2) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
10.18(1) Offer Letter, dated February 9, 2001 from the Company to Jill F. Kenney
(previously filed as Exhibit 10.19 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.19(1) Offer Letter, dated February 9, 2001 from the Company to Roger Gaston
(previously filed as Exhibit 10.20 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.21 Waiver Agreement, dated as of April 25, 2001, among the Company, the
several financial institutions from time to time party to the Credit
Agreement, and Bank of America, N.A., as swingline bank, letter of
credit issuing bank and sole administrative agent for the Banks
(previously filed as Exhibit 10.21 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.22 Waiver to Second Amended and Restated Multicurrency Note Purchase
Commitment Agreement, dated as of April 25, 2001, by and between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 30, 2001, filed on May 14, 2001, and incorporated herein by
reference)
10.23(1,2) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000
10.24(1,2) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000
10.25(1,2) Form of LEAP Participation Agreement, dated April 30, 2001
----------
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.
30
(b) Reports on Form 8-K.
Current Report on Form 8-K, filed on June 11, 2001, relating to an Item 5, Other
Matter, regarding the anticipated purchases of common stock by certain
executives of the Company
Current Report on Form 8-K, filed on June 22, 2001, relating to an Item 5, Other
Matter, regarding a change in executive officers of the Company
31
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 9, 2001 /s/ ROBERT S. KOCOL
------------------------ ------------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 9, 2001 /s/ THOMAS G. ARNOLD
------------------------ ------------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
32
EXHIBIT INDEX
Exhibit
No. Description
--------------------
3.1 Restated Certificate of Incorporation of Storage Technology Corporation
dated July 28, 1987 (previously filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 29, 2000, filed
on February 21, 2001, and incorporated herein by reference)
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.3 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.4 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 25, 1999, filed on August 9, 1999, and incorporated herein by
reference)
3.5 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)
10.1(1,2) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, filed
on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1996,
filed on August 12, 1996, and incorporated herein by reference)
10.5(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 26, 1997, filed on March 6, 1998, and
incorporated herein by reference)
----------
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.
33
10.6(1) Form of Executive Officer Employment Agreement between the Company and
Each Executive Officer Named in Exhibit 10.7 hereto, dated October 1999
(previously filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
10.7(1) Schedule of Differences in Terms and Conditions of Executive Officer
Employment Agreement (previously filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 29, 2000, filed
on February 21, 2001, and incorporated herein by reference)
10.8(1) CEO Employment Agreement, dated July 11, 2000, between the Company and
Patrick J. Martin (previously filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
filed on August 11, 2000, and incorporated herein by reference)
10.9(1) Extension of Retention Agreement, dated July 31, 2000, between the
Company and Robert S. Kocol (previously filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, filed on August 11, 2000, and incorporated herein by reference)
10.10 Amended and Restated Credit Agreement, dated as of January 13, 2000,
among the Company, Bank of America, N.A., as Administrative Agent,
Swingline Bank and Letter of Credit Issuing Bank and the other
financial institutions party thereto (previously filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the year ended December
31, 1999, filed on March 10, 2000, and incorporated herein by
reference)
10.11 Security Agreement, dated as of January 13, 2000, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as Exhibit
10.16 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, filed on March 10, 2000, and incorporated herein by
reference)
10.12 Contingent Multicurrency Note Purchase Commitment Agreement dated as of
December 12, 1996, between the Company and Bank of America National
Trust and Savings Association (filed as Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the year ended December 27, 1996, filed
on March 7, 1997, and incorporated herein by reference)
10.13 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated November 20,
1998, between Bank of America National Trust and Savings Association
and the Company (filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended December 25, 1998, filed on March 5,
1999, and incorporated herein by reference)
10.14 Third Amendment to Second Amended and Restated Contingent Multicurrency
Note Purchase Commitment Agreement dated August 13, 1999, between Bank
of America National Trust and Savings Association and the Company
(previously filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
10.15 Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated January 5, 2000,
between the Company and Bank of America, N.A. (previously filed as
----------
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.
34
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, filed on March 10, 2000, and incorporated
herein by reference)
10.16 Fifth Amendment to Second Amended and Restated Contingent Multicurrency
Note Purchase Commitment Agreement dated August 15, 2000, between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.20 to
the Company's Annual Report on Form 10-K for the year ended December
29, 2000, filed on February 21, 2001, and incorporated herein by
reference)
10.17(1,2) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
10.18(1) Offer Letter, dated February 9, 2001 from the Company to Jill F. Kenney
(previously filed as Exhibit 10.19 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.19(1) Offer Letter, dated February 9, 2001 from the Company to Roger Gaston
(previously filed as Exhibit 10.20 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.21 Waiver Agreement, dated as of April 25, 2001, among the Company, the
several financial institutions from time to time party to the Credit
Agreement, and Bank of America, N.A., as swingline bank, letter of
credit issuing bank and sole administrative agent for the Banks
(previously filed as Exhibit 10.21 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2001, filed on May
14, 2001, and incorporated herein by reference)
10.22 Waiver to Second Amended and Restated Multicurrency Note Purchase
Commitment Agreement, dated as of April 25, 2001, by and between the
Company and Bank of America, N.A. (previously filed as Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 30, 2001, filed on May 14, 2001, and incorporated herein by
reference)
10.23(1,2) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000
10.24(1,2) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000
10.25(1,2) Form of LEAP Participation Agreement, dated April 30, 2001
----------
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.
35