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Form 10-Q
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 2002
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 ($0.10 Par Value) - 105,966,741 shares outstanding at August 5,
2002.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 28, 2002
PAGE
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 Comprehensive Income 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 29
Exhibit Index 30
2
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
06/28/02 12/28/01
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 488,756 $ 453,217
Accounts receivable 467,832 505,630
Inventories 134,156 183,980
Deferred income tax assets 95,471 95,459
Other current assets 7,943 16,240
---------- ----------
Total current assets 1,194,158 1,254,526
Property, plant, and equipment 263,806 232,289
Spare parts for maintenance 37,975 35,674
Deferred income tax assets 121,508 121,826
Other assets 126,763 114,568
---------- ----------
Total assets $ 1,744,210 $ 1,758,883
========== ==========
LIABILITIES
Current liabilities:
Credit facilities $ -- $ 73,401
Current portion of long-term debt 699 812
Accounts payable 87,830 66,648
Accrued liabilities 356,772 361,113
Income taxes payable 206,691 212,566
Other current liabilities 27,828 --
---------- ----------
Total current liabilities 679,820 714,540
Long-term debt 10,298 9,523
---------- ----------
Total liabilities 690,118 724,063
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value,
300,000,000 shares authorized;
106,158,575 shares issued at June
28, 2002, and 105,032,665 shares
issued at December 28, 2001 10,616 10,503
Capital in excess of par value 895,490 875,379
Retained earnings 175,216 150,129
Accumulated other comprehensive
income (loss) (14,429) 7,642
Treasury stock, 200,643 shares at
June 28, 2002, and December 28,
2001, at cost (3,777) (3,777)
Unearned compensation (9,024) (5,056)
---------- ----------
Total stockholders' equity 1,054,092 1,034,820
---------- ----------
Total liabilities and
stockholders' equity $ 1,744,210 $ 1,758,883
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended
------------------- --------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Revenue
Storage products $299,879 $346,271 $582,044 $651,631
Storage services 192,050 165,863 365,797 329,322
------- ------- ------- -------
Total revenue 491,929 512,134 947,841 980,953
------- ------- ------- -------
Cost of revenue
Storage products 169,492 190,365 330,308 363,980
Storage services 104,890 102,000 204,295 199,934
------- ------- ------- -------
Total cost of revenue 274,382 292,365 534,603 563,914
------- ------- ------- -------
Gross profit 217,547 219,769 413,238 417,039
Research and product development
costs 54,526 61,013 109,031 125,207
Selling, general, administrative,
and other income and expense, net 136,998 140,840 270,994 279,083
------- ------- ------- -------
Operating profit 26,023 17,916 33,213 12,749
Interest income 2,552 2,509 4,602 4,757
Interest expense (545) (1,825) (1,028) (3,460)
------- ------- ------- -------
Income before income taxes 28,030 18,600 36,787 14,046
Provision for income taxes (8,900) (6,350) (11,700) (4,800)
------- ------- ------- -------
Net income $ 19,130 $ 12,250 $ 25,087 $ 9,246
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic earnings per share $ 0.18 $ 0.12 $ 0.24 $ 0.09
======= ======= ======= =======
Weighted-average shares 105,009 103,005 104,720 102,653
======= ======= ======= =======
Diluted earnings per share $ 0.18 $ 0.12 $ 0.23 $ 0.09
======= ======= ======= =======
Weighted-average and dilutive
potential shares 107,510 104,429 107,479 104,181
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
4
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
-----------------------
06/28/02 06/29/01
---------- ----------
OPERATING ACTIVITIES
Cash received from customers $1,006,002 $1,050,105
Cash paid to suppliers and employees (828,878) (980,763)
Interest received 4,183 4,757
Interest paid (844) (2,992)
Income taxes refunded (paid) 10,289 (6,131)
--------- ---------
Net cash provided by operating activities 190,752 64,976
--------- ---------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (75,512) (36,211)
Proceeds from sale of property, plant, and equipment 177 80
Other assets (13,138) (4,391)
--------- ---------
Net cash used in investing activities (88,473) (40,522)
--------- ---------
FINANCING ACTIVITIES
Proceeds from employee stock plans 14,047 8,102
Proceeds from other debt 1,107 711
Proceeds (repayments) of credit facilities, net (73,401) 5,375
Repayments of other debt (1,637) (8,045)
--------- ---------
Net cash provided by (used in) financing
activities (59,884) 6,143
--------- ---------
Effect of exchange rate changes on cash (6,856) (3,433)
--------- ---------
Increase in cash and cash equivalents 35,539 27,164
Cash and cash equivalents - beginning of the period 453,217 279,731
--------- ---------
Cash and cash equivalents - end of the period $ 488,756 $ 306,895
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 25,087 $ 9,246
Depreciation and amortization expense 47,439 60,519
Inventory writedowns 21,338 20,883
Translation gain (1,512) (11,600)
Other non-cash adjustments to income (1,964) 12,643
Decrease in accounts receivable 58,161 73,515
Increase in other current assets (4,109) (5,845)
(Increase) decrease in inventories 30,909 (41,101)
Increase in spare parts (11,599) (8,744)
(Increase) decrease in deferred income tax assets 993 (292)
Increase (decrease) in accounts payable 20,107 (20,729)
Decrease in accrued liabilities (19,099) (22,816)
Increase in other current liabilities 4,405 336
Increase (decrease) in income taxes payable 20,596 (1,039)
--------- ---------
Net cash provided by operating activities $ 190,752 $ 64,976
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
5
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Quarter Ended Six Months Ended
------------------- -------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Net income $ 19,130 $ 12,250 $ 25,087 $ 9,246
------- ------- ------- -------
Other comprehensive income (loss),
net of tax:
Cumulative effect of change in
accounting principle on adoption
of Statement of Financial
Accounting Standards No. 133
and 138 -- -- -- (7,535)
Net gain (loss) on foreign
currency cash flow hedges (25,614) 4,893 (25,652) 23,087
Reclassification adjustment for
net (gains) losses included in
net income 4,950 (4,429) 3,581 (6,393)
------- ------- ------- -------
Other comprehensive income (loss),
net of tax (20,664) 464 (22,071) 9,159
------- ------- ------- -------
Comprehensive income (loss) $ (1,534) $ 12,714 $ 3,016 $ 18,405
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
6
STORAGE TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The accompanying interim 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 28, 2001. 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.
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):
06/28/02 12/28/01
-------- --------
Raw materials $ 19,815 $ 41,850
Work-in-process 45,386 57,641
Finished goods 68,955 84,489
------- -------
$134,156 $183,980
======= =======
NOTE 3 - AGREEMENTS WITH EDS
On March 29, 2002, StorageTek and Electronic Data Systems Corporation (EDS)
entered into a 10-year master secondary storage services agreement. On April 1,
2002, StorageTek and EDS entered into a 10-year agreement under which StorageTek
outsourced certain internal information technology and customer call center
operations to EDS. There are no cross-default provisions between the two
agreements, and performance under each agreement by both StorageTek and EDS is
not contingent upon performance under the other agreement. These agreements have
been accounted for individually at their estimated fair values consistent with
the provisions of Accounting Principles Board (APB) Opinion No. 29, "Accounting
for Nonmonetary Transactions," based on management's estimates of fair value.
These values are subject to change pending receipt of a third-party appraisal.
Under the terms of the secondary storage services agreement, StorageTek will
provide tape storage services for certain EDS-operated data center sites within
the United States. StorageTek will receive a fee for these services calculated
using a monthly base service fee adjusted for certain increases and decreases in
the actual amount of data stored. The agreement also provides for adjustments to
the fees in the event specified service level metrics are not achieved.
The secondary storage services agreement can be renewed on an annual basis after
the expiration of the initial 10-year term. The agreement can be cancelled by
either party upon certain events, and can be cancelled by EDS for convenience
with six months notice no sooner than two-and-one-half years from the effective
date of the agreement. In the event EDS terminates the agreement for
convenience, a termination fee is payable to StorageTek with the amount of the
fee based upon a declining scale from the effective date.
7
In connection with the secondary storage services agreement, StorageTek
purchased certain secondary storage equipment for a purchase price of
$52,200,000. Substantially all of the purchase price paid to EDS relates to
equipment previously sold by StorageTek to EDS; however, none of the equipment
purchased by StorageTek was sold to EDS subsequent to the companies entering
into definitive negotiations of the secondary storage services agreement. The
purchase price was paid in April 2002. Because StorageTek is only responsible
for delivering secondary storage pursuant to the service level agreement,
StorageTek makes all decisions on secondary storage equipment additions and
retirements within the data centers. Upon the expiration or termination of the
agreement, EDS has the option to purchase any secondary storage equipment owned
by StorageTek at the data center sites at a purchase price equal to the greater
of the net book value of the equipment or the fair market value of the
equipment. In limited situations, EDS also has the right to repurchase a portion
of the equipment prior to expiration or termination of the agreement at an
assigned value declining on a straight-line basis over five years. The estimated
fair value of the equipment subject to this repurchase right was $12,271,000 as
of March 29, 2002. In the event EDS exercises this repurchase right, the
exercise will not affect any other terms of the agreement.
StorageTek has agreed to reimburse certain lease payments made by EDS on
equipment used to deliver secondary storage services under the agreement. EDS'
gross remaining lease obligation associated with this equipment, assuming no
lease terminations, was approximately $8,599,000 as of March 29, 2002.
Revenue is recognized under the secondary storage services agreement as the
services are rendered and billed to EDS. Costs to provide these services are
generally incurred in proportion with the contracted billing schedules. The
revenue and costs are included within storage services for segment reporting
purposes. The purchase price of $52,200,000 payable to EDS for the secondary
storage equipment has been recorded within Property, Plant, and Equipment on the
Consolidated Balance Sheet. The Company is depreciating the equipment on a
straight-line basis over the estimated useful lives of the assets. Useful lives
were determined based on the individual characteristics of the equipment, and
range from one to five years. Lease reimbursement payments made to EDS will be
recognized as a reduction of service revenue.
NOTE 4 - GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 requires that goodwill no
longer be amortized. Under SFAS No. 142, goodwill will be tested for impairment
on an annual basis or as necessary. The Company adopted SFAS No. 142 on the
first day of the Company's fiscal year 2002. During the quarter ended June 28,
2002, the Company completed the initial goodwill impairment test. No accounting
charge resulted from the completion of this initial impairment test.
8
The following table presents the adjusted net income and earnings per share had
SFAS No. 142 been in effect for all periods presented (in thousands, except per
share amounts):
Quarter Ended Six Months Ended
------------------- -------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Reported net income $ 19,130 $ 12,250 $ 25,087 $ 9,246
Add back: Goodwill amortization -- 1,459 -- 2,917
------- ------- ------- -------
Adjusted net income $ 19,130 $ 13,709 $ 25,087 $ 12,163
======= ======= ======= =======
Basic earnings per common share:
Reported net income $ 0.18 $ 0.12 $ 0.24 $ 0.09
Goodwill amortization -- 0.01 -- 0.03
------- ------- ------- -------
Adjusted net income $ 0.18 $ 0.13 $ 0.24 $ 0.12
======= ======= ======= =======
Diluted earnings per common share:
Reported net income $ 0.18 $ 0.12 $ 0.23 $ 0.09
Goodwill amortization -- 0.01 -- 0.03
------- ------- ------- -------
Adjusted net income $ 0.18 $ 0.13 $ 0.23 $ 0.12
======= ======= ======= =======
NOTE 5 - DEBT AND FINANCING ARRANGEMENTS
The Company had a financing agreement with a bank that provided for the sale of
promissory notes in the principal amount of up to $75,000,000 at any one time.
This agreement expired in January 2002, and all outstanding promissory notes
under the agreement were repaid at that time. The Company has historically
utilized foreign currency forwards embedded in borrowing commitments under this
financing agreement to hedge forecasted cash flows associated with revenue
denominated in foreign currencies. The Company is currently using stand-alone
foreign currency options and forwards 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.
See the Company's Annual Report on Form 10-K for the year ended December 28,
2001, for additional information regarding the Company's debt and financing
arrangements, and derivative instruments.
NOTE 6 - LITIGATION
In 1994, Stuff Technology Partners II, a Colorado Limited Partnership (Stuff),
filed suit in Boulder County, Colorado, District Court (the District Court)
against the Company. The suit alleged that the Company breached a 1990
settlement agreement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages of $2,400,000,000. In 1995, the
District Court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed to the Colorado Court of Appeals (the Court of
Appeals), which reversed the District Court's judgment and remanded the case to
the District Court for further proceedings. In 1999, the District Court again
dismissed all of Stuff's claims against the Company, and Stuff again appealed
the dismissal to the Court of Appeals. In 2000, the Court of Appeals reversed
the dismissal and remanded the case to the District Court for a trial on the
factual issues. The parties stipulated to a separate trial, scheduled for
September 16, 2002, on the interpretation of language in the 1990 settlement
agreement. If the Company prevails in this separate trial, Stuff's claims will
9
be significantly reduced. Any trial to resolve the underlying liability and
damages issues would likely not be scheduled before 2004. The Company continues
to believe that Stuff's claims are without merit and intends to vigorously
defend this suit.
The Company also is 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 - OPERATIONS OF BUSINESS SEGMENTS
The Company is organized into two reportable segments based on the definitions
provided in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information": storage products and storage services. The storage
products segment includes sales of tape and tape automation products, disk
products, and network products. The storage services segment includes
maintenance and various consulting services.
The Company does not have any intersegment revenue, and segment operating
performance is evaluated based on gross profit. The aggregate gross profit by
segment equals the consolidated gross profit, and the Company does not allocate
research and product development costs; selling, general, administrative, and
other income and expense; interest income; interest expense; or benefit
(provision) for income taxes to the segments. The revenue and gross profit by
segment is as follows (in thousands of dollars):
Quarter Ended Six Months Ended
--------------------- ---------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Revenue:
Storage products $299,879 $346,271 $582,044 $651,631
Storage services 192,050 165,863 365,797 329,322
------- ------- ------- -------
Total revenue $491,929 $512,134 $947,841 $980,953
======= ======= ======= =======
Gross profit:
Storage products $130,387 $155,906 $251,736 $287,651
Storage services 87,160 63,863 161,502 129,388
------- ------- ------- -------
Total gross profit $217,547 $219,769 $413,238 $417,039
======= ======= ======= =======
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
--------------------- ---------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Tape and tape automation
products $235,597 $285,763 $462,764 $533,200
Disk products 35,227 25,287 55,262 51,598
Network and other products 29,055 35,221 64,018 66,833
------- ------- ------- -------
Total storage products
revenue $299,879 $346,271 $582,044 $651,631
======= ======= ======= =======
10
NOTE 8 - EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per
share (in thousands, except per share amounts):
Quarter Ended Six Months Ended
--------------------- ---------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Net income $ 19,130 $ 12,250 $ 25,087 $ 9,246
------- ------- ------- -------
Weighted average common
shares outstanding:
Basic 105,009 103,005 104,720 102,653
Effect of dilutive
common stock
equivalents 2,501 1,424 2,759 1,528
------- ------- ------- -------
Diluted 107,510 104,429 107,479 104,181
======= ======= ======= =======
Earnings per common share:
Basic $ 0.18 $ 0.12 $ 0.24 $ 0.09
Diluted $ 0.18 $ 0.12 $ 0.23 $ 0.09
For the quarters ended June 28, 2002, and June 29, 2001, options to purchase
4,580,480 and 5,822,283 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 28, 2002, and June 29, 2001, options to purchase 4,409,426 and 7,092,452
shares of common stock, respectively, were excluded from the computation of
diluted earnings per share for the same reason.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." This statement addresses
the accounting for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. SFAS No. 143 is effective
for the Company's financial statements for the year ending December 26, 2003.
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 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". This
statement addresses the accounting for costs associated with an exit activity or
with a disposal of long-lived assets. SFAS No. 146 is effective for the
Company's financial statements for the year ending December 26, 2003. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
11
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 28, 2002
FORWARD-LOOKING STATEMENTS
All assumptions, anticipations, expectations, and forecasts contained in the
following discussion regarding the Company, its future products, business plans,
financial results, performance, and future 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. Forward-looking
statements can be identified by the use of words such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "intends," "potential," "continue," or the negative of such terms,
or other comparable words. Forward-looking statements also include the
assumptions underlying or relating to any such statements. 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 the forward-looking statements
contained herein, except as may be otherwise required by law.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
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
------------------ ------------------
06/28/02 06/29/01 06/28/02 06/29/01
-------- -------- -------- --------
Storage products revenue:
Tape and tape automation products 47.9% 55.8% 48.8% 54.4%
Disk products 7.2 4.9 5.8 5.2
Network and other products 5.9 6.9 6.8 6.8
----- ----- ----- -----
Total storage products revenue 61.0 67.6 61.4 66.4
Storage services revenue 39.0 32.4 38.6 33.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 55.8 57.1 56.4 57.5
----- ----- ----- -----
Gross profit 44.2 42.9 43.6 42.5
Research and product development costs 11.1 11.9 11.5 12.8
Selling, general, administrative,
and other income and expense, net 27.8 27.5 28.6 28.4
----- ----- ----- -----
Operating profit 5.3 3.5 3.5 1.3
Interest income, net 0.4 0.1 0.4 0.1
----- ----- ----- -----
Income before income taxes 5.7 3.6 3.9 1.4
Provision for income taxes 1.8 1.2 1.3 0.5
----- ----- ----- -----
Net income 3.9% 2.4% 2.6% 0.9%
===== ===== ===== =====
12
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue consists of sales of tape and tape
automation products, disk products, and network products for the enterprise and
open-systems markets. The open-systems market consists of products designed to
operate in the UNIX, NT, and other non-MVS operating environments. Storage
products revenue decreased 13% and 11% during the second quarter and six months
of 2002, respectively, compared to the same periods in 2001, primarily due to
decreased revenue from tape and tape automation products.
Tape and Tape Automation Products
Tape and tape automation product revenue decreased 18% and 13% during the second
quarter and six months of 2002, respectively, compared to the same periods in
2001, primarily due to a reduction in the number of tape and tape automation
units sold. The Company believes this decline is primarily attributable to the
current economic conditions and the associated weakness in information
technology spending. The Company has also experienced a higher ratio of tape
drives sold relative to tape libraries as customers appear to be buying only
products essential to meeting their immediate storage needs. Also contributing
to the decline in tape product revenue during the second quarter of 2002 was a
shift from storage products revenue to storage services revenue as a result of
the secondary storage services agreement signed with EDS. See "Storage Services"
below for further discussion of the impact of the EDS secondary storage services
agreement. These decreases were partially offset by increased revenue from
enterprise and open-systems tape media products.
Disk Products
Disk product revenue increased 39% and 7% during the second quarter and six
months of 2002, respectively, compared to the same periods in 2001, primarily
due to increased sales of open-systems disk products. In January 2002 the
Company announced a distribution agreement with LSI Logic Storage Systems (LSI).
Under the terms of the agreement, StorageTek will sell LSI's full line of
scalable, high performance, high availability open-systems disk products. The
second quarter of 2002 was the first full quarter of activity under this
agreement. The increased revenue from open-systems disk products was partially
offset by decreased revenue from the Shared Virtual Array(TM) (SVA) family of
products targeted for the enterprise marketplace. The Company is focusing its
disk sales efforts on opportunities to sell disk products in combination with
its tape, networking, and service offerings. Disk revenue continues to be
affected by pricing pressures and intense competition in the disk market, as
well as the worldwide slowdown in customer spending for disk storage.
Network and Other Products
Network and other product revenue decreased 18% and 4% during the second quarter
and six months of 2002, respectively, compared to the same periods in 2001,
primarily due to decreased sales of connectivity, software, and other
miscellaneous products. The decrease was partially offset by increased sales of
storage area networking (SAN) hardware, which includes the StorageNet(TM) 6000
series of domain managers and third-party equipment such as switches and
bridges. Although sales of the Company's StorageNet(TM) 6000 increased during
the second quarter and six months of 2002, compared to the same periods in 2001,
sales unit growth has been limited by the size of the market that this product
can address.
13
STORAGE SERVICES
The Company's storage services revenue primarily includes revenue associated
with the maintenance of the Company's and third-party storage products, as well
as service revenue associated with storage consulting activities. Storage
services revenue increased 16% and 11% during the second quarter and six months
of 2002, respectively, compared to the same periods in 2001. The growth in
service revenue has been driven largely by an expanded effort to sell services
that help customers successfully manage their storage requirements.
A portion of the revenue growth in the Company's storage services segment was
also driven by the recently announced secondary storage services agreement with
EDS. Under the terms of the agreement, StorageTek will provide tape storage
services for certain EDS-operated data center sites within the United States.
StorageTek will receive a fee for these services calculated using a monthly base
service fee adjusted for certain increases and decreases in the actual amount of
data stored. The Company recognized service revenue in connection with the
secondary storage services agreement of approximately $9.1 million during the
second quarter of 2002. Prior to entering into this agreement, StorageTek could
have potentially sold tape and tape automation products to EDS in these data
centers in order to meet their storage requirements, and earned maintenance
revenue associated with those products. Historically, product sales into these
data centers have varied significantly from one quarter to the next. Sales of
the StorageTek products into the data centers covered within the scope of the
agreement during the second quarter of 2001 were approximately $5.1 million.
Service revenue recognized in connection with maintenance of equipment in these
data centers during the second quarter of 2001 was approximately $2.6 million.
See Note 3 of Notes to Consolidated Financial Statements for a discussion of the
accounting policies associated with the secondary storage services agreement
with EDS.
GROSS PROFIT
Gross profit margins increased to 44% for the second quarter and six months of
2002, compared to 43% for the same periods in 2001, primarily as a result of
improvements in storage services profit margins. Gross profit margins for the
storage products segment decreased to 43% for the second quarter and six months
of 2002, compared to 45% and 44%, respectively, for the same periods in 2001.
The decrease reflects shifts in both the distribution channels and products sold
during 2002. Sales through the Company's indirect channels, which typically
generate lower margins, represented 45% of the total product sales in the second
quarter of 2002, as compared to 40% in the second quarter of 2001. A decrease in
sales of StorageTek manufactured tape products coupled with an increase in sales
of third-party manufactured open-systems disk products also contributed to the
decline in product margins. Gross margins for the storage services segment
increased to 45% and 44% for the second quarter and six months of 2002,
respectively, compared to 39% for the same periods in 2001. The increase
reflects improvements in spare parts utilization and the service delivery
process. The Company is continuing to assess its service delivery processes in
an effort to improve efficiencies and eliminate unnecessary costs. These
improvements may require additional investments and costs that could adversely
impact service margins in the second half of 2002.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses decreased 11% and 13% during the
second quarter and six months of 2002, respectively, compared to the same
periods in 2001, primarily due to engineering initiatives designed to improve
research and development productivity, increase strategic alignment, and
eliminate non-essential spending. The Company continues to evaluate and
prioritize research and product development programs and is focusing on the core
businesses of tape automation, virtual storage, SAN products, and related
services.
14
SELLING, GENERAL, ADMINISTRATIVE, AND OTHER INCOME AND EXPENSE
Selling, general, administrative, and other income and expense (SG&A) decreased
3% during the second quarter and six months of 2002, compared to the same
periods in 2001. As a percentage of revenue, SG&A was largely unchanged from the
second quarter and six months of 2001. In light of the economic downturn, the
Company is intensifying its efforts to control discretionary spending and
identify new opportunities to drive increased profitability.
LITIGATION
In 1994, Stuff Technology Partners II, a Colorado Limited Partnership (Stuff),
filed suit in Boulder County, Colorado, District Court (the District Court)
against the Company. The suit alleged that the Company breached a 1990
settlement agreement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages of $2.4 billion. In 1995, the District
Court granted the Company's motion for summary judgment and dismissed the
complaint. Stuff appealed to the Colorado Court of Appeals (the Court of
Appeals), which reversed the District Court's judgment and remanded the case to
the District Court for further proceedings. In 1999, the District Court again
dismissed all of Stuff's claims against the Company, and Stuff again appealed
the dismissal to the Court of Appeals. In 2000, the Court of Appeals reversed
the dismissal and remanded the case to the District Court for a trial on the
factual issues. The parties stipulated to a separate trial, scheduled for
September 16, 2002, on the interpretation of language in the 1990 settlement
agreement. If the Company prevails in this separate trial, Stuff's claims will
be significantly reduced. Any trial to resolve the underlying liability and
damages issues would likely not be scheduled before 2004. The Company continues
to believe that Stuff's claims are without merit and intends to vigorously
defend this suit.
The Company also is 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.
INTEREST INCOME AND EXPENSE
Interest income was largely unchanged during the second quarter and six months
of 2002, compared to the same periods in 2001. Interest expense decreased $1.3
million and $2.4 million during the second quarter and six months of 2002,
respectively, compared to the same periods in 2001, primarily due to a decrease
in outstanding debt.
INCOME TAXES
The Company's effective tax rate was 32% for the second quarter and six months
of 2002, compared to 34% for the same periods in 2001. The decrease in the
effective tax rate is primarily due to the Company's global tax strategies
associated with the Company's manufacturing operations in Puerto Rico.
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,
15
management has determined that the Company will more likely than not realize
$217.0 million of deferred income tax assets as of June 28, 2002. The Company's
valuation allowance of approximately $21.4 million as of June 28, 2002, 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 Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 requires that goodwill no
longer be amortized. Under SFAS No. 142, goodwill will be tested for impairment
on an annual basis or as necessary. The Company adopted SFAS No. 142 on the
first day of the Company's fiscal year 2002. During the quarter ended June 28,
2002, the Company completed the initial goodwill impairment test. No accounting
charge resulted from the completion of this initial impairment test. See Note 4
of Notes to Consolidated Financial Statements for a discussion of the financial
impact on the Company's results of operations had SFAS No. 142 been in effect
for all periods presented.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets." This statement addresses the accounting for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. SFAS No. 143 is effective for the Company's financial
statements for the year ending December 26, 2003. 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 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". This
statement addresses the accounting for costs associated with an exit activity or
with a disposal of long-lived assets. SFAS No. 146 is effective for the
Company's financial statements for the year ending December 26, 2003. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's operating activities provided cash of $190.8 million during the
six months of 2002, compared to cash of $65.0 million generated from operations
during the same period in 2001. The increase in cash generated from operations
during the six months of 2002, compared to the same period in 2001, was
primarily a result of significantly lower purchases of inventory, as well as
other efforts to more effectively manage working capital. Cash used in investing
activities increased to $88.5 million during the six months of 2002 from $40.5
million during the six months of 2001, primarily due to the payment of $52.2
million to EDS in connection with the secondary storage services agreement. Cash
used in financing activities was $59.9 million during the six months of 2002,
compared to cash provided by financing activities of $6.1 million during the
same period in 2001. This change in net cash from financing activities was
primarily as a result of the repayment of borrowings under the Company's credit
facilities during the six months of 2002, partially offset by increased proceeds
from employee stock plans. The Company has continued to reduce its outstanding
debt balance, and its debt-to-capitalization ratio was 1% as of June 28, 2002.
16
Sources of Liquidity and Capitalization
The Company has a $150.0 million revolving credit facility (the Revolver) that
expires in October 2004. The interest rates for borrowing under the Revolver are
dependent on the Company's Total Debt to rolling four quarter Earnings Before
Interest Expense, Taxes, Depreciation, and Amortization (EBITDA) ratio and the
term of the outstanding borrowing. The rate ranges from the applicable LIBOR
plus 1.75% to 2.50% or the agent bank's base rate plus 0.00% to 0.50%. The
Company had no outstanding borrowings under the Revolver as of June 28, 2002,
but had outstanding letters of credit of approximately $268,000. The remaining
available credit under the Revolver as of June 28, 2002, was approximately
$149.7 million. The Revolver is secured by the Company's domestic accounts
receivable and domestic inventory, and contains certain financial and other
covenants, including restrictions on the payment of cash dividends on the
Company's common stock.
The Company had a financing agreement with a bank that provided for the sale of
promissory notes in the principal amount of up to $75.0 million at any one time.
This agreement expired in January 2002, and all outstanding promissory notes
under the agreement were repaid at that time.
The Company's cash flows from operations are currently expected to serve as the
principal source of working capital. Cash flows from operations could be
negatively impacted by a decrease in demand for the Company's products and
services as a result of rapid technological changes and other risks described
under "Factors That May Affect Future Results."
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 debt or equity 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.
The Company's debt-to-capitalization ratio decreased from 7% as of December 28,
2001, to 1% as of June 28, 2002, primarily because of the repayment of
borrowings under the Company's credit facilities. See "Working Capital" above
for a discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
International operations accounted for approximately 51% and 49% of the
Company's revenue during the second quarter and six months of 2002,
respectively, compared to 51% during the same periods of 2001. 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; Australia;
Canada; Japan; and Korea. 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.
17
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 expands its operations in eastern Europe and Asia.
There can be no assurance 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
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 for trading purposes.
To implement its foreign currency hedging program, the Company uses 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
28, 2002, and as of December 28, 2001, would result in a hypothetical loss of
approximately $53.7 million and $55.6 million, respectively. 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 held as of June 28, 2002, and as of December 28, 2001,
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
18
risks, because the counterparties to the instruments consist of major financial
institutions, and the Company manages the notional amount 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. Although the
Company has a large number of customers who are dispersed across different
industries and geographic areas, a prolonged economic downturn could increase
the Company's exposure to credit risk on its trade receivables. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses.
FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products and Services
Short product life cycles are inherent in the high-technology market. The
Company's results of operations and competitive strength depend on its ability
to successfully develop, manufacture, and market innovative new products and
services, as well as adapt its current products and services to new
technologies. One example is that the Company is currently in the engineering
and development stage with respect to providing native Fibre Connection (FICON)
for certain of its enterprise tape and disk products. The Company devotes
significant resources to research and product development projects and must
effectively manage the risks inherent in product transitions. Developing new
technologies, products, and services is complex and involves various
uncertainties. 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 its 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 on successfully developing and
introducing products for two primary emerging markets: the open-systems market
and the SAN 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 based on functionality, 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.
19
The current and potential market for SAN solutions and technologies is
continually evolving, and is characterized by rapidly changing technology and
standards. Major server and storage providers are continually introducing new
SAN solutions. Customers may be reluctant to adopt new data storage standards,
and competing standards may emerge that will be preferred by customers. Because
this market is new and standards are still being defined, it is difficult to
predict the potential size of the SAN market or the future rate of adoption of
the Company's SAN solutions.
Competition
In the second quarter and six months of 2002, approximately 80% of the Company's
storage products revenue was derived from sales of tape and tape automation
products. Additionally, a significant portion of the Company's service revenue
is derived from the service of tape and tape automation products. One of the key
competitive advantages that the Company's tape and tape automation products have
over the competition's disk storage products is that the Company's tape and tape
automation products store digitized data at a fraction of the cost of disk
storage. The cost of disk storage continues to decrease at a rapid rate due to
competition and new disk drive technologies. The Company must continue to
develop and introduce new tape and tape automation products that reduce the cost
of storage at a rate that is similar to the decline in disk storage costs in
order to maintain this competitive advantage.
Strong competition has resulted in price erosion in the past, and the Company
expects this trend to continue. The disk market has been subject to particularly
intense price competition. While the Company has unique competitive advantages
with respect to its established customer base and a broad range of storage
solution offerings, the Company's ability to compete in the disk market may be
limited by the resources available for the further development of its disk
products, as well as the ability to continue dropping the prices for its disk
offerings to meet the competition.
Price competition for the Company's products and services may have a significant
impact on the Company's gross profit margins. The Company's ability to sustain
or improve total gross margins is significantly dependent on designing,
developing, and manufacturing competitive products, as well as reducing costs
associated with the sourcing of production materials. This pressure on product
margins is expected to increase as the Company's disk revenue shifts from its
enterprise-class SVA products to open-systems products developed and
manufactured by a third party. Storage product gross margins also may 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 continues to purchase and use third-party products in delivering
storage solutions to customers. Some of these third-party products are
manufactured by the Company's competitors, including LTO tape drives and certain
SAN products. The Company may be at a cost disadvantage in acquiring these
products, and gross margins may be adversely affected by the use of these
products in storage solutions.
Indirect Channels
The Company continues to develop its indirect distribution channels, including
original equipment manufacturers (OEMs), value-added distributors (VADs),
value-added resellers (VARs), and other distributors. Increasing the Company's
sales through these indirect channels is critical to the Company's successful
expansion into the open-systems market. There can be no assurance that the
Company will be successful in expanding its indirect channel sales. Furthermore,
there can be no assurance that profit margins on indirect channel sales will not
deteriorate due to competitive pressures. Maintenance revenue also may be
20
adversely affected in future periods to the extent that customers of these
indirect channel partners elect to purchase maintenance services from vendors
other than the Company.
The Company's ability to forecast future demand for its products may be
adversely affected by unforeseen changes in demand from its indirect channel
partners. The Company's worldwide indirect channel sales were adversely impacted
during 2001 by the downturn in the economy. Although there was slight
improvement in U.S. indirect channel sales during the six months of 2002, the
Company has limited visibility to future indirect channel sales and the future
financial condition of its channel partners. The Company's financial results may
be negatively affected if the financial condition of one or more of these
channel partners weakens or if the current slowdown in customer spending
continues.
Significant Personnel Changes
The Company has experienced significant changes in its executive management team
during the last two years. There can be no assurance that additional changes in
the executive management team will not occur, and it may take a period of time
before the new executive management team becomes fully effective.
The future success of the Company depends in large part on its ability to
attract, retain, and motivate highly skilled employees. The Company faces
significant competition for individuals who possess the skills required to
design, develop, manufacture, and market the Company's products and services. An
inability to successfully attract, retain, and motive these employees could have
an adverse effect on future operating results.
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 to 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 U.S. patent, copyright, trademark, and
trade secret laws to protect its intellectual property rights. With respect to
certain of the Company's international operations, the Company files patent and
trademark registration 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 nonstandard 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
21
a period of prequalification 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 media, and the Company is
dependent on Imation to economically produce large volumes of high-quality tape
media at a cost acceptable to the Company and its customers. IBM was a sole
source supplier for disk drives used in the Company's V960 and VSM products. As
a result of IBM discontinuing the manufacture of these drives, the Company
entered into a final purchase commitment with IBM based on forecasted
requirements. The Company recognized inventory writedowns during 2001 related to
the projected excess inventory levels of IBM disk drives obtained as part of the
final purchase commitment. Future generation V960 and VSM products will utilize
industry standard drives, for which there are a number of available suppliers.
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 on 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). The Company's dependence on HDL is subject
to additional risks beyond those associated with other sole source 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. To date, the Company has not
experienced any material problems with HDL; however, there can be no assurance
that the Company will not experience any material problems with HDL in the
future.
Manufacturing
The Company manufactures a significant portion of its products in facilities
located in Puerto Rico. The Company's ability to manufacture products may be
affected by weather-related risks beyond the control of the Company. If the
Puerto Rico manufacturing facility were affected by weather, 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 this 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
customer demand for certain products. These longer lead times, coupled with
rapid changes in product demand, 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.
22
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
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 are earned in the last weeks or days of
the quarter. This effect has been compounded by the recent slowdown in the
global economy.
A number of other factors also may cause revenue to fall below expectations,
such as product and technology transitions announced by the Company or its
competitors, delays in the availability of new products, changes in the
purchasing patterns of the Company's customers and distribution partners, or
adverse global economic conditions. The Company has recently experienced changes
in the purchasing patterns of its customers, both in the form of smaller
purchases and delayed purchase decisions. 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's ability to generate revenue growth during 2001 and the six months
of 2002 was adversely affected by the slowdown in the global economy as some
customers delayed purchase decisions, reevaluated their information technology
spending budgets, required higher purchase approval levels, and reduced capital
expenditures by maximizing the current capacities of their data storage
equipment. In light of this economic environment, the Company has implemented
various cost-saving measures, including reduced discretionary spending and
delayed employee merit increases. There can be no assurance that a prolonged
economic downturn will not have additional adverse effects on the Company's
future revenue or operating results. Furthermore, there can be no assurance that
these measures will be successful or sufficient to allow the Company to continue
to generate improved operating results in future periods. The Company has
recognized significant restructuring charges in the past. It is possible that
changes in the Company's business or its industry may necessitate restructuring
activities in the future. The necessity for restructuring activities may result
in expenses that adversely affect reported results of operations in the period
the restructuring plan is adopted and may require incremental cash payments.
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."
23
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In 1994, Stuff Technology Partners II, a Colorado Limited Partnership (Stuff),
filed suit in Boulder County, Colorado, District Court (the District Court)
against the Company. The suit alleged that the Company breached a 1990
settlement agreement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages of $2.4 billion. In 1995, the District
Court granted the Company's motion for summary judgment and dismissed the
complaint. Stuff appealed to the Colorado Court of Appeals (the Court of
Appeals), which reversed the District Court's judgment and remanded the case to
the District Court for further proceedings. In 1999, the District Court again
dismissed all of Stuff's claims against the Company, and Stuff again appealed
the dismissal to the Court of Appeals. In 2000, the Court of Appeals reversed
the dismissal and remanded the case to the District Court for a trial on the
factual issues. The parties stipulated to a separate trial, scheduled for
September 16, 2002, on the interpretation of language in the 1990 settlement
agreement. If the Company prevails in this separate trial, Stuff's claims will
be significantly reduced. Any trial to resolve the underlying liability and
damages issues would likely not be scheduled before 2004. The Company continues
to believe that Stuff's claims are without merit and intends to vigorously
defend this suit.
The Company also is 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.
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 23, 2002. A total of 98,179,580 shares of common stock, par value $0.10 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 four proposals set forth in the Company's
definitive Proxy Statement, dated April 16, 2002.
24
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:
Director For Withheld
- ----------------------- ---------- ---------
James R. Adams 96,444,408 1,735,172
William L. Armstrong 96,445,615 1,733,965
Charles E. Foster 96,444,386 1,735,194
William T. Kerr 96,443,239 1,736,341
Robert E. La Blanc 96,442,367 1,737,213
Robert E. Lee 96,442,611 1,736,969
Patrick J. Martin 96,442,186 1,737,394
Richard C. Steadman 96,442,028 1,737,552
Each of the stockholder proposals was rejected as detailed below.
Proposal For Against Abstentions Broker Non-Votes
- ----------------------- ---------- ---------- ----------- ----------------
Proposal 2, Stockholder
proposal regarding
cumulative voting 26,585,952 52,027,397 6,673,318 12,892,913
Proposal 3, Stockholder
proposal regarding prior
notice of stockholder
nominees 2,817,915 81,510,931 957,821 12,892,913
Proposal 4, Stockholder
proposal regarding two
nominees for each
directorship position to
be filled 4,050,770 80,345,836 890,060 12,892,914
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 fiscal 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
fiscal year ended December 29, 2000, filed on February 21, 2001, 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.
25
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
fiscal 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 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal 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 (previously 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
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously 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 fiscal quarter 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 (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1996, filed on August 12, 1996, and incorporated herein by
reference)
10.5(1) Storage Technology Corporation Flexible Option Plan, dated December
2001 (previously filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 2001, filed on
March 4, 2002 and incorporated herein by reference)
10.6(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.7(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 fiscal quarter ended
June 30, 2000, filed on August 11, 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.
26
10.8(1) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol (previously filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 2001, filed on November 8, 2001, and incorporated
herein by reference)
10.9(1) Restricted Stock Award Agreement, dated as of September 27, 2001, by
and between the Company and Robert S. Kocol (previously filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2001, filed on March 4, 2002 and
incorporated herein by reference)
10.10(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporate herein by reference)
10.11(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 fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.12(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 fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.13(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.14(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.15(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.16(1) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
(previously filed as Exhibit 10.28 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.17(1) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
(previously filed as Exhibit 10.29 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.18(1) Offer Letter, dated December 10, 2001, between the Company and Thomas
Major (previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002 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.
27
10.19(1) Letter Agreement, dated July 31, 2001, between the Company and Pierre
Cousin (previously filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002 and incorporated herein by reference)
10.20 Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager (previously filed as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.21 Security Agreement, dated as of October 10, 2001, 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 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.22 Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent (previously filed as Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
28, 2001, filed on November 8, 2001, and incorporated herein by
reference)
10.23(1) Form of Executive Severance Agreement
10.24 Master Services Agreement (MSA), between each of the Company,
Electronic Data Systems Corporation, and EDS Information Services
L.L.C., dated as of April 1, 2002
10.25 Authorization Letter #1 pursuant to the MSA, dated April 1, 2002
10.26 Authorization Letter #2 pursuant to the MSA, dated April 1, 2002
10.27 Master Secondary Storage Services Agreement, between the Company and
Electronic Data Systems Corporation, dated March 29, 2002
10.28(1,2) Offer Letter, dated June 25, 2002, between the Company and Mark
Roellig
99.1(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None.
- ------------------------------
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
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 12, 2002 /s/ ROBERT S. KOCOL
- --------------------------------- ---------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 12, 2002 /s/ THOMAS G. ARNOLD
- --------------------------------- ---------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
29
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 fiscal 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
fiscal 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
fiscal 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 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal 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 (previously 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
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously 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 fiscal quarter 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 (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal 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.
30
10.5(1) Storage Technology Corporation Flexible Option Plan, dated December
2001 (previously filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 2001, filed on
March 4, 2002 and incorporated herein by reference)
10.6(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.7(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 fiscal quarter ended
June 30, 2000, filed on August 11, 2000, and incorporated herein by
reference)
10.8(1) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol (previously filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 2001, filed on November 8, 2001, and incorporated
herein by reference)
10.9(1) Restricted Stock Award Agreement, dated as of September 27, 2001, by
and between the Company and Robert S. Kocol (previously filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2001, filed on March 4, 2002 and
incorporated herein by reference)
10.10(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporate herein by reference)
10.11(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 fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.12(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 fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.13(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.14(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.15(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, 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.
31
10.16(1) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
(previously filed as Exhibit 10.28 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.17(1) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
(previously filed as Exhibit 10.29 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.18(1) Offer Letter, dated December 10, 2001, between the Company and Thomas
Major (previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002 and incorporated herein by reference)
10.19(1) Letter Agreement, dated July 31, 2001, between the Company and Pierre
Cousin (previously filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002 and incorporated herein by reference)
10.20 Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager (previously filed as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.21 Security Agreement, dated as of October 10, 2001, 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 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.22 Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent (previously filed as Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
28, 2001, filed on November 8, 2001, and incorporated herein by
reference)
10.23 Form of Executive Severance Agreement
10.24 Master Services Agreement (MSA), between each of the Company,
Electronic Data Systems Corporation, and EDS Information Services
L.L.C., dated as of April 1, 2002
10.25 Authorization Letter #1 pursuant to the MSA, dated April 1, 2002
10.26 Authorization Letter #2 pursuant to the MSA, dated April 1, 2002
10.27 Master Secondary Storage Services Agreement, between the Company and
Electronic Data Systems Corporation, dated March 29, 2002
- ------------------------------
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.
32
10.28(1,2) Offer Letter, dated June 25, 2002, between the Company and Mark
Roellig
99.1(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------------------
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