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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to ________
Commission File Number 1-7534
STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2270 South 88th Street, Louisville, 80028-4309
Colorado
(Address of principal executive (Zip Code)
offices)
Registrant's Telephone Number, including area code: (303) 673-5151
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title on which Registered
- --------------------------------------- -------------------------
Common Stock ($.10 par value) including
related preferred stock purchase rights New York Stock Exchange
8% Convertible Subordinated Debentures
due 2015 New York Stock Exchange
$3.50 Convertible Exchangeable
Preferred Stock New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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
As of February 24, 1994, there were 43,205,432 shares of common stock of the
registrant outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant was $1,520,629,184 based on the last reported
sale price of the common stock of the registrant on the New York Stock
Exchange's consolidated transactions reporting system on February 24, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of its fiscal year ended
December 31, 1993. Portions of the registrant's definitive proxy statement
are incorporated by reference into Part III of this Form 10-K.
Page 2
PART I
ITEM 1. BUSINESS
General
- -------
Storage Technology Corporation and its subsidiaries (StorageTek or the
Company) design, manufacture, market and service information storage and
retrieval subsystems for high-performance and midrange computer systems, as
well as computer networks. The Company's three principal product lines are
serial access storage subsystems, random access storage subsystems and
midrange computer products. Serial access storage subsystems include tape
devices and automated library systems. Random access storage subsystem
products currently include rotating magnetic disk and solid-state direct
access storage devices (DASD). Midrange computer products include serial
access, random access and other products for IBM AS/400 and other midrange
systems. The Company also offers software and network communication products
that expand applications for its library and random access products for
efficient storage management and access.
StorageTek operates in one principal industry segment and sells its products
to end-user customers, value-added resellers and original equipment
manufacturers (OEMs) of computer systems. The Company markets its products
worldwide through sales and service offices located in major metropolitan
areas of the United States, Canada, Europe, Japan and Australia, as well as
through distributors in Africa, Asia, Europe, Mexico and South America. In
1993, international revenue accounted for 37% of the Company's total revenue.
The Company's strategy is to continue to: Make significant investments in
research and development; expand its product offerings permitting interface to
and between IBM and non-IBM mainframes and midrange computers; develop
software products and services, as well as distribution channels, to address
the non-IBM mainframe market; and, invest in new technologies and businesses
which complement its business and product strategy. To this end, the Company
has established alliances with other manufacturers, distributors and
suppliers. As a result of these alliances, it is possible for companies to be
at various times collaborators, competitors and customers in different
markets.
Storage Technology Corporation was incorporated in Delaware in 1969. Its
principal executive offices are located at 2270 South 88th Street, Louisville,
Colorado 80028-0001, telephone (303) 673-5151.
Page 3
Principal Products
- ------------------
StorageTek has three principal information storage and retrieval product
lines: serial access subsystems (tape devices and automated library systems);
random access subsystems (rotating and solid-state DASD); and midrange
computer products.
Product sales, including software revenue, accounted for approximately 64% of
total revenue in 1993, while service and rental income accounted for the
balance. Sales, service and rental revenue from the Company's product lines
for 1993, 1992 and 1991 were as follows:
REVENUE BY PRODUCT LINE
Fiscal Year Ended December
--------------------------
1993 1992 1991
---------------------------------------------
$ million % $ million % $ million %
--------- --- --------- --- --------- ---
Serial Access 875.5 62.3 936.6 60.4 907.4 56.0
Subsystems
Random Access 126.0 9.0 193.3 12.5 218.8 13.5
Subsystems
Midrange 306.8 21.8 324.7 20.9 393.5 24.3
Systems
Other Products 96.5 6.9 96.3 6.2 99.8 6.2
----- ---- ----- ---- ----- ----
Total 1,404.8 100.0 1,550.9 100.0 1,619.5 100.0
======= ===== ======= ===== ======= =====
Additional information concerning revenue from each of the Company's product
lines is found in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and geographic information is
found in Part III, Item 14, under Note 15, of this Form 10-K.
Serial Access Subsystems
StorageTek is a principal producer and seller of high-performance serial
access, or tape, subsystems for the end-user and OEM markets. StorageTek's
current line of serial access subsystems is based on its automated cartridge
system (ACS) library and magnetic tape products. In 1993, the Company
introduced several key products in its serial access subsystems product lines,
including the PowderHorn 9310 (PowderHorn TM), the Company's second-generation
ACS library, WolfCreek 9360 (WolfCreek TM), a smaller, high-performance
lower-cost library, and Silverton 4490 (Silverton TM), a 36-track cartridge
subsystem. Also, the Company and Mobius Management Systems, Inc. introduced
new software, View Direct TM, which is designed to expand the range of
applications for ACS
Page 4
libraries. The serial access subsystems product line has generated
substantially more revenue than any other product line of the Company and
continues to be a major element of the Company's plans for the foreseeable
future.
Currently, the Company is developing a number of new products for the serial
access subsystem market, including the TimberLine TM and Redwood TM
subsystems. TimberLine, designed as a next-generation, high-performance
cartridge subsystem that is IBM 3490E compatible, is based on a new
architecture and is expected to provide performance and capacity improvements
associated with tape subsystems. TimberLine is currently scheduled for
availability in the second half of 1994. RedWood is designed as a
high-capacity, high-performance mass storage cartridge subsystem which is
expected to employ helical-scan technology. RedWood is expected to be
compatible with StorageTek libraries and is currently scheduled for
availability in the first half of 1995.
Random Access Subsystems
StorageTek's current Online Plus product line consists of a number of online
random access DASD products, including solid-state disk subsystems (SSD) and
rotating magnetic disk subsystems. The characteristics of these products
differ principally in information storage capacity, transfer rate and access
time. The Company discontinued sales of add-on memory products in the third
quarter of 1993 but continues to service its installed base of memory
products.
The Company announced a multi-faceted Online Plus strategy in the second
quarter of 1993. The Online Plus strategy includes a number of new DASD
products which are expected to serve as the cornerstone for future DASD
product offerings and as a significant source of revenue for the Company
commencing in 1994. As part of its strategy, the Company effected a merger
with Amperif Corporation (Amperif) in October 1993. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", of this Form 10-K for a discussion of operating results and
certain risks that may affect future results.
The new DASD products being developed by the Company include: Iceberg 9200
Disk Array Subsystem (Iceberg TM), software products for Iceberg, Nordique
9100 (Nordique TM), Arctic Fox and Kodiak.
Iceberg is an advanced, fault-tolerant disk array (RAID) subsystem for the IBM
and IBM-compatible mainframe environment. Beta testing at customer sites
commenced in the fourth quarter of 1993 and revenue contribution from Iceberg
is expected to begin in the first half of 1994. Iceberg Extended Facilities
Product and Iceberg Extended Operator Facility are software products designed
for use with Iceberg subsystems and will be generally available in the first
half of 1994. The Company also plans to introduce additional features to
expand the capabilities of Iceberg's Extended Storage Architecture.
Nordique is a RAID storage subsystem for the intermediate, IBM-compatible
mainframe environment. The Company expects to begin shipment of Nordique in
the first half of 1994. Arctic Fox and Kodiak are new DASD products based on
disk technology
Page 5
developed by Amperif. Arctic Fox, a solid-state disk subsystem, and Kodiak, a
high-capacity RAID device, are expected to become available in the second half
of 1994.
Midrange Systems
StorageTek's midrange products include serial access, random access and other
products for IBM AS/400 and other midrange markets. The Company markets its
midrange products directly through its subsidiary, XL/Datacomp, Inc., and
indirectly through OEM and distributor channels. In the third quarter of
1993, the Company introduced several new products, including the Alpine 9600
Storage Manager (Alpine TM), a fault-tolerant disk array subsystem, and a
series of smaller, low-cost libraries. The Company restructured its midrange
business in the third quarter of 1993 in response to disappointing customer
acceptance for Alpine and significant price erosion within the midrange
market. The Company is changing its midrange product line, organization,
distribution network and service operations to improve operating performance.
New products being developed by the Company for the midrange market include
the Highlands, Northfield and Twin Peaks subsystems. Highlands and Northfield
are DASD products designed for the IBM AS/400 market and are each currently
scheduled for availability in the first half of 1994. The Twin Peaks
subsystem (Twin Peaks) is designed as a small form factor cartridge tape drive
and is currently scheduled for availability in the first half of 1995.
Other Products
StorageTek has increased its software development expenditures during the last
several years and plans to continue to invest in the development of new
software products. In the fourth quarter of 1993, the Company introduced
NearNet 7900 (NearNet TM), a combination of hardware and software that
automates storage management over a workstation network. StorageTek expects
NearNet to serve as the first building block in a series of network solutions.
In connection with its introduction of new hardware products, the Company also
plans to introduce new software applications which are expected to enhance
storage subsystem performance, capability, and storage allocation for better
data management and access.
In 1991, the Company and Siemens Nixdorf Information Systems, Inc. merged
their U.S. high-performance, non-impact printer operations into a joint
venture. The Company began winding-down production of its impact printer in
1993 and expects to sell its interest in the joint venture back to Siemens
Nixdorf in the first quarter of 1994. The Company currently plans to support
the installed service base of printers within the United States and in certain
areas outside the United States.
Page 6
Marketing, Distribution and Services
- ------------------------------------
StorageTek markets its products through a network of sales and service offices
located in major metropolitan areas in the United States, Canada, Europe,
Japan and Australia. The Company also sells its products through
international distributors in Africa, Mexico, South America and parts of Asia
and Europe not covered by the Company's sales and service offices or
subsidiaries. In 1993, international revenue accounted for 37% of total
revenue, compared to 41% in 1992, and 39% in 1991.
As of December 31, 1993, the order backlog was approximately $71 million,
compared to approximately $109 million as of December 25, 1992. Approximately
17% in 1993 and 26% in 1992 of the backlog amount is attributable to the
Company's library products. Backlog amounts are calculated on an "if sold"
basis and include orders from end-users, OEM customers and distributors for
products that StorageTek expects to deliver during the following 12 months.
Backlog amounts do not, however, include orders for Iceberg subsystems or
other new DASD products. Units being evaluated or covered by letters of
intent are not included in backlog amounts. Unfilled orders can generally be
canceled at will by the customer. The Company does not believe that its
backlog is necessarily indicative of future shipments, nor can it give any
assurance that customers will purchase products in accordance with orders
included in the backlog.
StorageTek has a worldwide customer support network to install, maintain and
service its own equipment as well as the equipment of others. The Company
warrants the performance of products marketed into the end-user market for a
specified period of time, after which it services those products under
maintenance agreements. The installed service base of data storage products
and the expertise of the Company's service engineers is considered to be a
valuable asset of the Company and is expected to continue to be an important
element of the Company's business.
Manufacturing and Materials
- ---------------------------
Products currently are manufactured by the Company at its facilities located
in Colorado, Puerto Rico, California, Florida and England. In 1993, the
Company announced plans to manufacture and develop products in France. In
late 1994, the Company expects to begin manufacturing and engineering
operations in Toulouse, France, in facilities currently under construction.
The Company also currently manufactures several significant subassemblies,
including thin-film heads for tape as well as printed circuit assemblies for
many products. Across the Company's product lines, a substantial majority of
its production costs are subassemblies, parts and components purchased from
outside vendors. For a discussion of factors that may affect the Company's
ability to obtain materials, see Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Other Factors that
May Affect Future Results", of this Form 10-K. The balance of the Company's
production costs relate to in-house assembly and testing.
Page 7
Competition
- -----------
The Company competes with several large multinational companies having
substantially greater resources, principally, IBM, Fujitsu Limited and Hitachi
Ltd., as well as other midsized companies.
Because of the significance of the IBM mainframe and midrange operating
environments, many of the Company's products are designed to be compatible
with certain IBM operating systems and many of its products function like IBM
equipment. As a result, the Company's business has been and in the future may
be adversely affected by modification in the design or configuration of IBM
computer systems, the announcement and introduction of new products by IBM and
other competitors, and reductions in the pricing of comparable systems,
equipment or service. For further discussion of competitive conditions, see
Part II, Item 7, - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Factors that May Affect Future
Results", of this Form 10-K.
New Product Development
- -----------------------
In 1993, the Company devoted approximately 12% of its revenue to develop new
products and improve the performance of existing ones. In an attempt to
mitigate the substantial investment required to develop its products for the
market place, and to expand the Company's access to new technologies, the
Company develops relationships with other companies.
The Company spent approximately $163 million for research and product
development activities in 1993, as compared to approximately $153 million in
1992 and approximately $123 million in 1991. Current development projects
include: New products in the Online Plus family of DASD products, data
management software, new library and tape drive products, and enhancements to
the Company's existing information storage and retrieval products. The
Company expects to continue to invest significant amounts on research and
development. As of December 31, 1993, approximately 1,500 employees were
engaged on a full-time basis in engineering and product development
activities. For further discussion of factors concerning product development,
See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Factors that May Affect Future
Results", of this Form 10-K.
Intellectual Property
- ---------------------
StorageTek's policy is to apply for patents, or other appropriate proprietary
or statutory protection, when it develops valuable new or improved technology.
It presently owns a number of U.S. and foreign patents relating to its
products which are considered valuable assets of the Company. The Company
also owns, has license rights to, and/or has applied to register, trademarks,
mask works, copyrights and proprietary information, which are also considered
to be valuable assets of the Company.
Page 8
Certain areas of the computer industry have been the subject of extensive
patent coverage, and from time to time it has been necessary to obtain rights
or licenses under existing patents held by others. Currently, StorageTek and
IBM are operating under a long-term cross-license agreement.
From time to time, the Company has commenced actions against other companies
to protect or enforce its intellectual property rights. Similarly, the
Company from time to time has been notified that it may be infringing certain
patent or other intellectual property rights of others. Although licenses are
generally offered in such situations, there can be no assurance that
litigation will not be commenced in the future regarding patents, mask works,
copyrights, trademarks or trade secrets, or that any licenses or other rights
can be obtained on acceptable terms. The Company is currently engaged in
certain proceedings relating to its intellectual property and patent
infringement. See Part I, Item 3, "Legal Proceedings", and Part III, Item 14,
Note 12 to the consolidated financial statements, of this Form 10-K.
Environment
- -----------
Compliance by StorageTek with provisions of federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material adverse
effect on the Company. However, liability under environmental legislation is
on-going, regardless of whether or not the Company has disposed of such waste
in accordance with existing governmental guidelines. Moreover, government
regulation of the environment and related compliance costs have increased in
recent years. Therefore, the Company is unable to anticipate whether future
compliance will have any material effect on the Company. For further
discussion of specific environmental proceedings involving the Company and/or
its properties, see Part I, Item 3, "Legal Proceedings", of this Form 10-K.
Other Matters
- -------------
The Company employed approximately 10,100 persons on a full-time basis
worldwide as of December 31, 1993.
The Company does not consider its business to be highly seasonal, although it
historically has experienced increased sales revenue in the fourth quarter
compared to other quarters due to customers' tendencies to make purchase
decisions near the end of the calendar year. The Company expects this trend
to continue in 1994, and to be further affected by the growing revenue
expected from new DASD products introduced in 1994.
For the year ended December 31, 1993, no single customer accounted for 10% or
more of the Company's consolidated sales revenue.
No material portion of the Company's business is subject to contract
termination at the election of the U.S. government.
Page 9
Reference is made to the following notes to the consolidated financial
statements set forth in Part III, Item 14, of this Form 10-K for certain
additional information:
Note 2 Description of the Company's business combinations with
Amperif Corporation, Edata Scandinavia AB and XL/Datacomp,
Inc.
Note 15 Information on the geographic operations of the Company's
single business segment.
Reference is made to Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", of this Form 10-K, for
information regarding liquidity, including working capital, and other factors
that may affect future results.
ITEM 2. PROPERTIES
StorageTek occupies facilities in 15 separate buildings in Boulder County,
Colorado, comprising approximately 2.3 million square feet. Of these,
approximately 2.2 million square feet are owned by StorageTek and the
remaining space is leased. In the Palm Bay - Melbourne, Florida area,
StorageTek owns approximately 199,000 square feet. StorageTek also occupies
126,000 square feet of manufacturing facilities in Puerto Rico, of which
approximately 72,000 square feet are leased, and leases approximately 37,000
square feet of manufacturing facilities in England. The Company occupies
approximately 63,000 square feet of leased development and manufacturing
facilities in Chatsworth, California. In addition, StorageTek occupies leased
facilities at approximately 295 other locations throughout the world,
primarily for sales, customer service and parts storage, as well as for
limited research and product development purposes. At the present time, such
facilities are adequate for the Company's purposes. The Company has entered
into an agreement with the French government to begin leasing in late 1994
approximately 180,000 square feet of manufacturing and engineering facilities
currently under construction in Toulouse, France.
ITEM 3. LEGAL PROCEEDINGS
Additional information regarding other legal proceedings is incorporated by
reference from Note 12 to the consolidated financial statements identified in
Part III, Item 14, of this Form 10-K.
In October 1992, Cigna Insurance Company (Cigna), the issuer of the Company's
primary director's and officer's liability insurance policy, filed suit
against the Company and its directors and officers seeking to rescind the
policy based on a clerical error. The parties subsequently settled this
matter in the fourth quarter of 1993.
StorageTek, via its predecessor-in-interest, Documation Inc., has been
identified as a potentially responsible party with respect to real property
located in Orlando, Florida. The Environmental Protection Agency has agreed
to settle the matter for approximately
Page 10
$96,000 plus the Company's "fair share" of unrecouped response costs
(estimated at less than $25,000), all payable out of the bankruptcy reserve.
StorageTek believes this arrangement is viable and will file a claim in this
amount against the bankruptcy reserve and, consequently, this settlement will
have no material adverse effect on the Company's financial condition and
results of operations.
On June 10, 1993, the Company filed a complaint against EMC Corp. in U.S.
District Court for the District of Colorado. The complaint alleges that EMC
Corp. has infringed three patents pertaining to the Company's disk storage
technology. The complaint seeks an injunction prohibiting further
infringement, treble damages in an unspecified amount, and an award of
attorney fees and costs. EMC Corp. filed an answer and counterclaim on July
20, 1993, alleging, among other things, patent misuse and seeking the
invalidation of the Company's patents, damages in an unspecified amount and an
award of attorney fees, costs and interest. Discovery has commenced and a
trial has been scheduled for October 1994.
On January 21, 1994, Bell Atlantic Business Systems Services, Inc. (BABSS)
filed suit in federal District Court for the Northern District of California,
alleging that a number of the Company's service business policies are illegal,
including price increases and parts and maintenance software availability.
BABSS has asked the court to order the Company to stop or change these
practices. A hearing on a motion of preliminary injunction is scheduled for
March 18, 1994. The complaint appears to focus on conduct of the Company
since December 1, 1993.
On February 11, 1994, the Company and its subsidiary XL/Datacomp, Inc., filed
suit in Boulder County, Colorado, District Court against Array Technology
Corporation and Tandem Computers Incorporated. The suit asks that the court
order defendants to either support certain disk drives purchased from
defendants or provide the Company with the technical data necessary for it to
provide such customer support.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of StorageTek security holders during the
fourth quarter of the year ended on December 31, 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Position with Company Age
---- --------------------- ---
Ryal R. Poppa Chairman of the Board, President, 60
and Chief Executive Officer
Lowell Thomas Gooch Executive Vice President Operations 49
Page 11
Derek A. Thompson Executive Vice President Worldwide 63
Field Operations
David E. Weiss Executive Vice President Systems 49
Development & Program Management
Gregory A. Tymn Senior Corporate Vice President 44
and Chief Financial Officer
John V. Williams Senior Corporate Vice President 50
Americas
Joseph E. Beal Corporate Vice President 51
Customer Satisfaction
David E. Lacey Corporate Vice President and 47
Controller
Fred G. Moore Corporate Vice President 46
Strategic Planning
Sewell I. Sleek Corporate Vice President 57
Human Resources
W. Russell Wayman Corporate Vice President 49
General Counsel and Secretary
Mr. Poppa became Chairman of the Board, Chief Executive Officer and a director
of the Company in January 1985, and also became President of the Company in
January 1988.
Mr. Gooch became Executive Vice President of Operations of the Company in
January 1989. From June 1987 to January 1989, he was Corporate Vice President
of Manufacturing; from January 1987 to June 1987, he was Vice President of
Americas/Pacific Operations; from January 1986 to January 1987, he was Vice
President of Federal Systems Operations. Mr. Gooch has been employed by the
Company in various capacities since 1972.
Mr. Thompson became Executive Vice President of Worldwide Field Operations in
March 1991. From July 1984 to March 1991, he was the Vice President of
Europe, Africa and Middle East.
Page 12
Mr. Weiss became Executive Vice President Systems Development & Program
Management in January 1993. He was a Senior Vice President Marketing from
June 1992 to January 1993 and Corporate Vice President Market Planning from
August 1991 to June 1992. From March 1991 through August 1991, he was a staff
vice president reporting to the Chief Executive Officer. Prior to joining
StorageTek, Mr. Weiss was employed by IBM for 23 years. Most recently, he was
the DASD Controller Development Director for IBM.
Mr. Tymn became Senior Vice President and Chief Financial Officer in March
1991. He was Corporate Vice President of Program Management from November
1989 until June 1992. From November 1987 through October 1989, he was the
Vice President and General Manager of StorageTek Printer Operations; and, from
July 1983 to November 1987, he was Vice President and Corporate Controller of
the Company.
Mr. Williams became Senior Corporate Vice President, Americas in August 1993.
He was Corporate Vice President from February 1992 through August 1993 and
Vice President of North America from September 1990 through February 1992.
Prior to rejoining StorageTek, Mr. Williams was employed by GRiD Systems Corp,
purchased by Tandy Corp. in 1988, where he served as vice president of
marketing.
Mr. Beal became Corporate Vice President Customer Satisfaction in August 1993.
He was a Vice President from 1988 through August 1993.
Mr. Lacey became a Corporate Vice President of the Company in December 1990
and Corporate Controller of the Company in October 1989. From February 1985
to October 1989, he was the Company's Director of Tax. Prior to joining
StorageTek, Mr. Lacey was employed by Price Waterhouse in various tax and
accounting capacities.
Mr. Moore became Corporate Vice President Strategic Planning in June 1990. He
was Vice President of Strategic Planning from January 1989 to June 1990; from
January 1988 to January 1989, he was Vice President of Systems Marketing; and
from June 1986 to January 1988, he was Director of Worldwide Product
Marketing.
Mr. Sleek became Corporate Vice President of Human Resources of the Company in
January 1989. From September 1985 to January 1989, he was Corporate Vice
President of Systems Development. Mr. Sleek has been employed by the Company
in various capacities since 1978.
Mr. Wayman became Corporate Vice President in March 1991; General Counsel
since January 1990 and Corporate Secretary of the Company since February 1990.
From May 1984 through January 1990, he was the General Counsel of VLSI
Technology, Inc.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock of Storage Technology Corporation is traded on the New York
Stock Exchange under the symbol STK. The table below reflects the high and
low closing sales prices of the common stock on the New York Stock Exchange
for 1993 and 1992 as reported by the New York Stock Exchange. On December 31,
1993 there were 23,128 record holders of common stock of StorageTek.
1993 High Low
---- ---- ---
1st Quarter $27.250 $18.625
2nd Quarter 44.000 23.375
3rd Quarter 41.125 24.500
4th Quarter 33.625 25.000
1992 High Low
---- ---- ---
1st Quarter $76.625 $39.625
2nd Quarter 63.125 29.125
3rd Quarter 37.625 26.625
4th Quarter 32.000 19.625
Dividends
- ---------
StorageTek has never paid cash dividends on its common stock and currently
plans to continue to retain future earnings for use in its business. Further,
the Company's existing multicurrency credit agreement and 9.53% Senior Secured
Notes contain certain restrictions which limit the payment of cash dividends
based, primarily, upon the Company's consolidated net income. As of December
31, 1993, under the terms of both the multicurrency credit agreement and 9.53%
Senior Secured Notes the Company did not have cumulative consolidated net
income available for the payment of cash dividends on its common stock.
Page 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1991
through 1993 (except for the 1991 Balance Sheet Data), has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 31, 1993, and December 25, 1992,
and the related Consolidated Statement of Operations for each of the three
years in the period ended December 31, 1993, and notes thereto. The data,
insofar as it relates to the Balance Sheet Data as of December 27, 1991,
December 28, 1990, and December 29, 1989, and the Statement of Operations Data
for the fiscal years 1990 and 1989, has been derived from the historical
financial statements of the Company, XL/Datacomp, Inc. and Amperif
Corporation, as pooled entities for such periods (see Note 2).
The following data (in thousands of dollars, except per share amounts) should
be read in conjunction with the consolidated financial statements and notes
thereto.
Year Ended December
-----------------------------------------------------------------
1993 1992 1991 1990 1989
-----------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $1,404,752 $1,550,945 $1,619,520 $1,594,804 $1,339,982
Cost of revenue 965,913 1,074,199 1,105,077 1,123,195 950,603
--------- --------- --------- --------- ---------
Gross profit 438,839 476,746 514,443 471,609 389,379
Research and product
development costs 163,286 152,702 123,269 104,013 90,549
Marketing, general,
administrative and other
income and expense, net 324,823 315,475 300,253 252,524 213,362
Restructuring and other
charges (Note 14) 74,772 5,104
--------- --------- --------- --------- ---------
Operating profit (loss) (124,042) 8,569 85,817 115,072 85,468
Interest expense 43,670 48,706 52,157 59,210 65,221
Interest income (54,916) (67,171) (68,552) (50,622) (46,198)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes, extraordinary items
and accounting change (112,796) 27,034 102,212 106,484 66,445
Provision for income taxes 5,000 17,700 12,400 11,100 10,100
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary items and
accounting change (117,796) 9,334 89,812 95,384 56,345
Extraordinary items (1,304)(a) 11,300(b)
Cumulative effect of
accounting change (Note 8) 40,000
--------- --------- --------- --------- ---------
Net income (loss) $ (77,796) $ 9,334 $ 89,812 $ 94,080 $ 67,645
========= ========= ========= ========= =========
Earnings (loss) per
common share:
Income (loss) before
extraordinary items and
accounting change $ (2.98) $ 0.22 $ 2.17 $ 2.63 $ 1.85
Net income (loss) (2.05) 0.22 2.17 2.59 2.22
BALANCE SHEET DATA
Working capital $ 468,497 $ 357,942 $ 436,067 $ 281,471 $ 271,831
Total assets 1,793,009 1,739,043 1,735,651 1,489,407 1,259,107
Long-term debt 361,718 369,998 373,025 337,912 431,718
Long-term debt, excluding
nonrecourse borrowings 264,743 226,840 208,081 155,640 313,388
Stockholders' equity 1,017,303 927,913 899,571 658,998 437,986
(a) In 1990, the Company recognized a net charge of $1,304,000 related to
repurchases of 8% Convertible Subordinated Debentures due 2015, and the
redemption and repurchase of 13.5% Senior Debentures.
(b) In 1989, the Company recognized an extraordinary gain of $11,300,000 from
the liquidation of its wholly owned subsidiary, Storage Technology
Products, B.V.
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The Company reported a net loss for the year ended December 31, 1993, of $77.8
million on revenue of $1.40 billion, compared to net income for the year ended
December 25, 1992, of $9.3 million on revenue of $1.55 billion and net income
for the year ended December 27, 1991, of $89.8 million on revenue of $1.62
billion.
As further discussed in Note 2 to the consolidated financial statements, the
Company completed a merger with Amperif Corporation (Amperif) in October 1993
which was accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements have been restated for all periods to
include the operations of Amperif with adjustments to conform with
StorageTek's accounting policies and presentation.
The decrease in the Company's revenue in 1993 compared to 1992 was due
primarily to the continuation of a weak European economy, a strengthening U.S.
dollar, intense price competition within the midrange marketplace, the lack of
new DASD product offerings, and the lack of a 36-track tape product offering
for the first three quarters of 1993. These factors, coupled with
restructuring and other charges of $74.8 million and losses associated with
Amperif's operations, resulted in a net loss for 1993. The net loss was
partially offset by a $40.0 million benefit from the cumulative effect of a
change in the method of accounting for income taxes.
The decrease in the Company's revenue in 1992 compared to 1991 was primarily a
result of worldwide recessionary pressures, the introduction of automated tape
products by its competitors, the lack of a 36-track tape offering, and intense
price competition within the midrange marketplace. The Company's earnings in
1992 compared to 1991 were unfavorably affected by a decline in overall sales
margin due primarily to a product mix shift in customer orders to the
Company's smaller configuration (Junior) 4400 ACS library; increased
marketing, general and administrative expenses; and increased tax expense.
The Company expects to report a loss in the first quarter of 1994. This loss
will be partially attributable to a one-time charge of between $5 million and
$10 million associated with the required adoption of a new accounting standard
for postemployment benefits. The Company also expects to report a loss from
operations due to the continuation of the weak economic conditions in Europe;
the strong U.S. dollar; and the requirement for significant investments
associated with the manufacturing, marketing and servicing of new products.
The Company anticipates increasing its worldwide workforce by as much as 10% in
1994 to support its new products. The Company anticipates a return to
profitability for the remainder of 1994; however, this plan is dependent upon
the timely completion and successful market introduction of a number of new
DASD products, including Iceberg and Nordique. While the library product
family has generated substantially more revenue for the Company than its other
product lines in the last several years, the Company's profitability in 1994 is
dependent upon revenue growth from these new DASD programs. Accordingly, there
can be no assurance that the Company will be profitable in 1994.
Page 16
The following table, stated as a percentage of total revenue, presents
consolidated statement of operations information and revenue by product line
which includes product sales, service and rental, and software revenue.
Year Ended December
----------------------------------
1993 1992 1991
----------------------------------
Revenue:
Serial Access Subsystems 62.3% 60.4% 56.0%
Random Access Subsystems 9.0 12.5 13.5
Midrange Systems 21.8 20.9 24.3
Other 6.9 6.2 6.2
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 68.8 69.3 68.2
----- ----- -----
Gross profit 31.2 30.7 31.8
Research and product development costs 11.6 9.8 7.6
Marketing, general, administrative
and other income and expense, net 23.1 20.3 18.6
Restructuring and other charges 5.3 0.3
----- ----- -----
Operating profit (loss) (8.8) 0.6 5.3
Interest (income) expense, net (0.8) (1.1) (1.0)
----- ----- -----
Income (loss) before income
taxes and cumulative effect of
accounting change (8.0) 1.7 6.3
Provision for income taxes 0.4 1.1 0.8
----- ----- -----
Income (loss) before cumulative
effect of accounting change (8.4) 0.6 5.5
Cumulative effect on prior years of
change in method of accounting for
income taxes 2.9
----- ----- -----
Net income (loss) (5.5)% 0.6% 5.5%
===== ===== =====
REVENUE
- -------
Total revenue decreased 9% in 1993 compared to 1992, as a result of a decrease
in product sales of 16% which was partially offset by an increase in service
and rental revenue of 6%. Total revenue decreased 4% in 1992 compared to
1991, as a result of a decrease in product sales of 10% which was partially
offset by an increase in service and rental revenue of 13%.
Serial Access Subsystems
Revenue from serial access subsystem products decreased 7% in 1993 compared to
1992, due primarily to the weak economic conditions in Europe, a strengthening
U.S. dollar and the lack of a 36-track tape product offering for the first
three quarters of 1993. While the weak economic conditions in Europe and the
strength of the U.S. dollar continued into the fourth quarter, these pressures
were offset partially by incremental sales revenue in the fourth quarter from
PowderHorn, the next generation of the Company's 4400 ACS library, and
Silverton, the Company's new 36-track tape offering.
Revenue from serial access subsystem products increased 3% in 1992 compared to
1991, due primarily to incremental revenue from the Company's acquisition of
Edata Scandinavia AB in the second quarter of 1992 and additional tape service
revenue reflecting growth in the Company's installed base of tape products.
Page 17
The Company anticipates its serial access product revenue will decrease
slightly in 1994 as a result of the strength of the U.S. dollar, and declining
revenue from the Company's first generation 4400 ACS library and 4480 18-track
cartridge subsystem. These decreases are expected to be partially offset by
incremental revenue associated with PowderHorn, Silverton and the Company's
new WolfCreek 9360 ACS, a high-performance library with a lower cartridge
capacity than the 4400 ACS library. The library product family generates
substantially more revenue than any other product line of the Company and
continues to be a major element of the Company's plans for the foreseeable
future.
Random Access Subsystems
Revenue from random access subsystem products decreased 35% in 1993 compared
to 1992, due primarily to decreased sales of the Company's rotating DASD
products and decreased sales of Amperif's disk subsystems in the Unisys
marketplace. Revenue from the Company's rotating DASD decreased 44% in 1993,
reflecting the discontinuance of production of the Company's 8380 disk
subsystem, which was completed during the second quarter in anticipation of
new DASD product offerings. DASD revenue from Amperif decreased 50% due to
competition from new products offered by Unisys. Sales of add-on memory
products also decreased 23% in 1993 as the Company discontinued sales of these
products in the third quarter due to declining business prospects. Revenue
from solid-state DASD products was largely unchanged in 1993 compared to 1992.
Revenue from random access subsystem products decreased 12% in 1992 compared
to 1991. This reflects a 44% decrease in revenue from solid-state DASD, due
to volume and pricing declines, and a 15% decrease in Amperif's DASD revenue.
These decreases were partially offset by a 27% increase in add-on memory
sales. Rotating DASD revenue was largely unchanged in 1992 compared to 1991.
The Company anticipates that its random access subsystem revenue will continue
to decline until it begins volume shipments of its new high-end random access
subsystems. The Company anticipates it will commit substantial resources to
the development, product ramp-up and support of these new products in 1994.
The Company began limited production of Iceberg in late 1993 and expects
revenue contribution from Iceberg in the first half of 1994. Nordique, an
IBM-compatible disk array product positioned below Iceberg, is expected to
begin shipment and revenue contribution during the first half of 1994. Other
new DASD products, based on technology developed by Amperif, are under
development and are targeted for availability in the second half of 1994.
The Company anticipates significant revenue growth from Iceberg, Nordique and
its other new DASD products in 1994. Delays in the timely completion and
successful marketing of these DASD products could adversely affect the
Company's financial performance.
Midrange Systems
Revenue from midrange system products decreased 6% in 1993 and 17% in 1992.
These decreases primarily reflect delays in the availability of the Company's
Alpine 9600 Storage Manager and, subsequently, disappointing customer
acceptance of this product. The decreases in revenue from midrange system
products were also a result of the significant price erosion within the
midrange DASD marketplace, and the limited acceptance of the Company's
midrange tape product offerings. In response to these factors, the Company
restructured its midrange business in the third quarter of 1993. The Company
is changing its midrange product
Page 18
line, organization, distribution network and service operations to improve
operating performance.
The Company anticipates the operating performance of its midrange product line
will improve in 1994; however, this improvement is dependent upon the
Company's ability to successfully introduce cost-competitive DASD and tape
products in this rapidly evolving marketplace. Two new DASD products for the
midrange marketplace, Highlands and Northfield, are currently scheduled for
availability in the first half of 1994.
Other
Revenue from other products was largely unchanged in 1993 and decreased 3% in
1992, due primarily to decreased printer product revenue. Revenue from
printer products is expected to continue to decline as the Company is winding
down its production of impact printers and the installed service base of
printers maintained by the Company continues to decline.
The decrease in revenue from printer products in 1994 is expected to be offset
by incremental revenue from software and network storage management products
introduced in late 1993 which expand the applications for library and random
access products. The NearNet network storage manager, which became generally
available in the fourth quarter of 1993, simplifies management of data for
networks of UNIX servers and workstations.
GROSS PROFIT
- ------------
Overall gross profit was 31% for 1993 and 1992, compared to 32% in 1991, as
decreased product sales margins were largely offset by improved service and
rental margins.
Gross profit on product sales decreased to 29% in 1993, compared to 30% in
1992 and 33% in 1991. The decrease in 1993 was due largely to lower
production volumes, start-up costs associated with new product offerings, and
price erosion within the midrange DASD market. Additionally, the Company's
profit margins from its international operations were affected by the weak
economic conditions in Europe and a strengthening U.S. dollar. These factors
were offset partially by benefits resulting from the Company's cost-cutting
measures. The decrease in 1992 was due largely to a shift in customer orders
towards 4400 ACS Junior libraries, which have lower margins; decreased sales
of full-configuration libraries; higher costs associated with longer warranty
periods offered for the 4480 18-track cartridge subsystem; underabsorbed
overhead due to lower than expected manufacturing volumes; and start-up costs
associated with new product offerings.
Gross profit on service and rental increased to 35% in 1993, compared to 33%
in 1992 and 27% in 1991, reflecting increased product reliability and
economies created by an increased installed service base, coupled with
effective operating expense controls.
Page 19
The Company expects continued pressure on its product sales margins into 1994
due to the weak economic conditions in Europe, a strong U.S. dollar, and the
heavy investment in product support for new DASD, tape and library products.
The Company's product sales margins are expected to improve in 1994 as the
Company begins volume shipments of these new products. The Company's service
and rental margins in 1994 are expected to be adversely affected by
incremental costs associated with the installation of new products, coupled
with longer warranty periods for new DASD products.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures increased 7% in 1993 and 24% in
1992 due to the continuing investment in a significant number of new products.
The increase in 1993 was offset partially by ongoing cost containment efforts.
Research and product development expenses for 1992 and 1991 were reduced by
development funding received by Amperif from third parties of $5.0 million and
$2.5 million, respectively. The Company continues to invest in the
development of new random access subsystem, tape and library products,
software and network communication products that expand applications for its
library and random access products.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A) was
largely unchanged in 1993 compared to 1992. The Company realized a $4.1
million gain on the sale of an equity investment in 1993. Foreign currency
translation adjustments, net of associated hedging results, and foreign
currency transaction losses were $8.8 million in 1993, compared to $8.4
million in 1992.
MG&A increased 5% in 1992 compared to 1991 reflecting increased advertising
and promotional expenses and incremental expenses following the acquisition of
Edata. These increases were offset partially by a decrease of $5.3 million in
losses associated with discontinued software operations and a decrease of $3.9
million in foreign exchange losses. Foreign currency translation adjustments,
net of associated hedging results, and foreign currency transaction losses
were $8.4 million in 1992, compared to $12.3 million in 1991.
See "INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES" for further discussion
of the foreign exchange risks associated with the Company's international
operations and the related foreign currency hedging activities.
RESTRUCTURING AND OTHER CHARGES
- -------------------------------
As further discussed in Note 14 to the Company's consolidated financial
statements, the Company recognized restructuring and other charges of $74.8
million during 1993. Restructuring charges of $69.3 million principally
relate to the reorganization of the Company's midrange business. Merger and
consolidation expenses of $5.5 million in 1993 and $5.1 million in 1991 were
also recognized in connection with the mergers with Amperif and Datacomp,
respectively. The restructuring is expected to yield both improved operating
performance and expense reductions. The restructuring yielded expense
reductions of more than $10 million in the fourth quarter of 1993 and is
expected to yield expense reductions of almost $40 million during 1994.
Page 20
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 18% in 1993 and 2% in 1992, due primarily to a
reduction in net investment in sales-type lease balances and lower interest
rates. The decrease in 1993, compared to 1992, was partially offset by an
increase in the invested cash balances.
Interest expense decreased 10% in 1993 primarily as a result of lower interest
rates and a reduction in the Company's nonrecourse borrowings. Interest
expense decreased 7% in 1992 primarily as a result of reduced nonrecourse
borrowings.
INCOME TAXES
- ------------
As further discussed in Note 8 to the Company's consolidated financial
statements, effective as of the beginning of the fiscal year 1993, the Company
was required to change its method of accounting for income taxes from
Statement of Financial Accounting Standards (SFAS) No. 96 to SFAS No. 109. A
one-time benefit of $40 million was recognized in the first quarter of 1993 as
a result of the adoption of the new income tax accounting standard on a
prospective basis. The adoption of SFAS No. 109 had no cash flow impact.
The most significant difference for the Company between SFAS No. 96 and SFAS
No. 109 is the criteria for recognition of deferred income tax assets
associated with net operating loss and tax credit carryforwards. While
recognition of deferred income tax assets was limited to very specific
situations under SFAS No. 96, the new standard requires that deferred income
tax assets be recognized to the extent realization of such assets is more
likely than not.
The Company evaluated a variety of factors in determining the amount of the
deferred income tax assets to be recognized pursuant to SFAS No. 109,
including the number of years the Company's operating loss and tax credits can
be carried forward, the existence of taxable temporary differences, the
Company's earnings history, the Company's near-term earnings expectations and
possible reductions in the Company's net operating loss carryforwards as a
result of proposed adjustments by the Internal Revenue Service to the
Company's previously filed federal income tax returns. Based on the currently
available information, management has determined that the Company will more
likely than not realize $52 million of its deferred income tax assets as of
December 31, 1993. Future changes in facts and circumstances which result in
changes in the assessment of realizability of the Company's deferred income
tax assets are required to be reflected within the Company's provision for
income taxes on the Consolidated Statement of Operations.
See Note 8 to the consolidated financial statements for information with
respect to the current status of the Internal Revenue Service examinations.
The Company's provision for income taxes relates primarily to taxable earnings
associated with its international operations. The Company's effective tax rate
can be subject to significant fluctuations due to dynamics associated with the
mix of its U.S. and international taxable earnings.
Page 21
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financings
In March 1993, the Company completed a public offering of 3.45 million shares
of $3.50 Convertible Exchangeable Preferred Stock, $.01 par value (the
Preferred Stock), at a price of $50.00 per share. The net proceeds of the
Preferred Stock offering, after deducting all associated costs, were
approximately $166.5 million. The net proceeds are being used by the Company
for working capital and capital expenditures associated with the development
and introduction of new products and for other general corporate purposes.
In May 1991, the Company completed an offering of 3.45 million shares of
common stock which yielded net proceeds of $135.4 million. In September 1991,
the Company completed a $55 million private placement of 9.53% Senior Secured
Notes due August 31, 1996 (the Notes), collateralized by U.S. lease and
installment purchase receivables. The proceeds from the common stock
offering, as well as the net proceeds from the Notes, were used for
acquisitions, working capital, financing customer lease commitments, capital
expenditures and other general corporate purposes. Under the terms of the
Notes, the Company is required to comply with certain financial and other
covenants, including restrictions on the payment of cash dividends on its
common and preferred stock.
Working Capital
The Company's cash balances increased $137.1 million and short-term
investments increased $16.0 million from December 25, 1992, to December 31,
1993. Net cash from operating activities was $87.5 million for 1993 compared
to $107.1 million for 1992 and $183.1 million for 1991. The increase in cash
and short-term investments in 1993 reflects the net proceeds from the
Preferred Stock offering, coupled with the net cash generated by operating
activities, partially offset by investments in property, plant and equipment,
and the partial paydown of nonrecourse borrowings.
The current ratio increased to 2.2 at December 31, 1993, from 1.8 at December
25, 1992. Accounts receivable decreased from $313.4 million at December 25,
1992, to $218.7 million at December 31, 1993, due primarily to lower
comparable revenue. Inventories increased from $156.1 million at December 25,
1992, to $203.3 million at December 31, 1993, principally as a result of a
build-up of inventories associated with new DASD products to be introduced in
1994, and an increase in midrange disk and tape inventories.
Available Financing Lines
In March 1993, the Company entered into a $150 million two-year secured
multicurrency credit agreement with a group of U.S. and international banks
(the Revolver). The interest rates available under the Revolver depend on the
type of advance selected; however, the primary advance rate is the agent
bank's prime lending rate (6% at December 31, 1993). The total amount
available under the Revolver is limited to a percentage of the Company's
eligible U.S. accounts receivable and lease assets (primarily net investments
in sales-type leases not previously utilized for secured borrowings). To
obtain funds under the Revolver, the Company is required to comply with
certain financial and other covenants, including restrictions on the payment
of cash dividends on its common stock. There were no advances under the
Revolver during 1993. Based on the amount of eligible accounts receivable and
lease assets assigned
Page 22
to the Revolver, the Company had approximately $50 million of available credit
under the Revolver as of December 31, 1993.
As of December 31, 1993, the Company had unused committed lease discounting
lines of approximately $41 million available in the United States for recourse
and nonrecourse borrowings. The Company also had unused committed lease
discounting lines of approximately $38 million available through its foreign
subsidiaries for nonrecourse borrowings. Furthermore, the Company believes it
has the ability to increase its committed lease discounting lines in the
future, if needed. The ability to use these committed lease discounting lines
is limited by the availability of lease assets which meet the credit standards
of the lenders. The Company had, subject to lender credit approval,
approximately $58 million of lease assets available for discounting under
these lines as of December 31, 1993. At the Company's option, a portion of
these lease assets can be utilized for borrowings under the Revolver.
The Company believes it has adequate working capital and financing
capabilities to meet its anticipated 1994 operating and capital requirements,
including new product offerings.
Long-Term Debt-to-Equity
The Company's long-term debt-to-equity ratio decreased to 36% as of December
31, 1993, from 40% as of December 25, 1992, principally as a result of the
completion of the Preferred Stock offering. These debt-to-equity ratios
include $97.0 million and $143.1 million, respectively, of long-term
nonrecourse borrowings secured by customer lease commitments included within
total assets (primarily net investment in sales-type leases). Excluding long-
term nonrecourse borrowings, the Company's long-term debt-to-equity ratio
increased to 26% as of December 31, 1993, from 24% as of December 25, 1992.
Repayment Obligations
Pursuant to the indenture related to the Company's 8% Convertible Subordinated
Debentures due 2015 (Convertible Debentures), the Company is required to make
semiannual interest payments on the $145.6 million principal amount of
Convertible Debentures outstanding. The Convertible Debentures became
redeemable at the option of StorageTek beginning May 31, 1993, at a premium of
5.6%, and are redeemable at decreasing premiums through May 30, 2000.
Convertible Debentures in the principal amount of $8 million per annum, plus
accrued interest, must be redeemed beginning May 31, 2000, through a sinking
fund which provides for the retirement of 75% of the Convertible Debentures
prior to their maturity on May 31, 2015. Convertible Debentures purchased by
the Company in the open market and Convertible Debentures converted to common
stock may be applied to the sinking fund requirements. As of December 31,
1993, the Company held Convertible Debentures in the principal amount of $14.3
million available for sinking fund payments.
In connection with the Company's 9.53% Senior Secured Notes due August 31,
1996 (the Notes), the Company is required to make semiannual interest payments
on the $55 million principal amount outstanding. The Notes are redeemable at
the option of the Company, in whole or in part, from time to time, at a
premium which is determined based on current interest rates and the time
remaining until maturity. Any principal amounts not previously redeemed are
due and payable on August 31, 1996.
The Company's Preferred Stock provides for cumulative dividends payable
quarterly in arrears at an annual rate of $3.50 per share, when and as
declared by the Company's board of
Page 23
directors. Based on the 3.45 million shares outstanding as of December 31,
1993, annual dividends will aggregate $12.1 million. The Notes contain
restrictions which limit the payment of dividends; however, these restrictions
are not expected to limit the ability of the Company to pay dividends on its
Preferred Stock.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's operations and financial
results can be materially affected by changes in foreign currency exchange
rates. An increase in the exchange value of the U.S. dollar reduces the U.S.
dollar value of revenue and profits generated by the Company's international
operations because the functional currency for the Company's foreign
subsidiaries is the U.S. dollar and a significant portion of the costs
associated with this revenue are incurred in the United States.
In an attempt to mitigate the impact of foreign currency fluctuations, the
Company employs a hedging program which utilizes foreign currency options and
forward exchange contracts. The Company utilizes foreign currency options,
generally with maturities of less than one year, to hedge its exposure to
exchange-rate fluctuations in connection with anticipated sales revenue from
its international operations. Gains and losses on the options are deferred
and subsequently recognized as an adjustment to the associated sales revenue.
The Company also utilizes forward exchange contracts, generally with
maturities of less than two months, to hedge its exposure to exchange-rate
fluctuations in connection with monetary assets and liabilities held in
foreign currencies. Gains and losses on forward contracts are recognized
currently within MG&A as adjustments to the foreign exchange gains and losses
on the translation of net monetary assets.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------------
The Company believes that successful and timely development and shipment of
its new products will play a key role in determining its competitive strength
during the next several years. During 1994, the Company plans to introduce a
number of new products. There can be no assurance that the Company will
successfully develop, manufacture or market these products.
The Company's strategic plans assume that its new Online Plus DASD product
family will serve as a significant source of revenue beginning in 1994. One
of these new DASD products, Iceberg, is expected to begin revenue contribution
in the first half of 1994. While the Company believes this schedule is
achievable, there is no assurance that it can be met. This schedule is two
years later than that originally anticipated and announced in early 1992.
Iceberg is currently in beta testing in various operating environments and the
Company is continuing to integrate additional highly sophisticated software on
the subsystem. If, as a result of the testing, significant problems arise
which result in material delays in the availability of Iceberg, expected
revenue from Iceberg would be further delayed or may be lost, and such delays
would continue to adversely affect the Company's financial results. Delays in
the introduction of the other new DASD products under development could also
adversely affect the Company's future financial performance.
Page 24
The Company competes with several large, multinational companies having
substantially greater resources than the Company's, principally, IBM, Fujitsu
Limited and Hitachi Ltd., as well as other midsized companies. Because of the
significance of the IBM mainframe and midrange operating environments, many of
the Company's products are designed to be compatible with certain IBM
operating systems and many of its products function like IBM equipment. As a
result, the Company's business has been and in the future may be adversely
affected by a number of factors including, among others, modifications in the
design or configuration of IBM computer systems; the announcement and
introduction of new products by competitors; continuing changes in customer
requirements such as migration toward networked computing and reductions in
the pricing of comparable systems, equipment or services. The Company's
ability to sustain or increase sales levels depends to a significant extent
upon acceptance of the many new and enhanced products it has introduced in
1993 and products planned for introduction in 1994. There can be no assurance
that the Company's current products, products in development, or products in
the early stages of market introduction will achieve or sustain market
acceptance.
The market for the Company's products is characterized by rapid technological
advances which can result in frequent product introductions and enhancements,
unpredictable product transitions and shortened product life cycles. To be
successful in this market, the Company must make significant investments in
research and product development and introduce competitive new products and
enhancements to existing products on a timely basis. These factors can reduce
the effective life of product-line-specific assets. There can be no assurance
that new products developed by the Company will be accepted in the
marketplace. Moreover, certain components of the Company's products operate
near the present limits of electronic and physical capabilities of performance
and are designed and manufactured with relatively small tolerances. If flaws
in design or production occur, the Company may experience a rate of failure in
its products that results in substantial costs for the repair or replacement
of defective products and potential damage to the Company's reputation.
The Company's manufacturing process has increased in complexity as it has
increased the number and diversity of products offered to customers. 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. The Company purchases certain
important components and products from single suppliers that the Company
believes are currently the only manufacturers of the particular components
that meet the Company's specification. In addition, the Company manufactures
some key components or its products include components for which alternative
sources of supply are not readily available. In the past, certain suppliers
have experienced occasional technical, financial or other problems that have
delayed deliveries to the Company, without significant effect on it. An
unanticipated failure of any sole-source supplier to meet the Company's
requirements for an extended period, or an interruption of the Company's
ability to secure comparable components, could have a material adverse effect
on its revenue and profitability. In addition, the Company markets a number
of products acquired from other manufacturers on an OEM basis. These products
are often available only from a single manufacturer. Some of these OEM
suppliers are, or may in the future be, competitors of the Company. In the
event that an OEM product is no longer available, second sourcing is not
always feasible and there could be a material adverse effect on the Company's
profitability.
Page 25
The Company's earnings can fluctuate significantly from quarter to quarter due
to the effects of (i) customers' tendencies to make purchase decisions near
the end of the calendar year, (ii) the timing of the announcement and
availability of products and product enhancements by the Company and its
competitors, and (iii) fluctuating foreign currency exchange rates.
As further discussed in Note 1 to the Company's consolidated financial
statements, the Company is required to adopt SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" not later than fiscal 1994. The
Company plans to adopt the standard in the first quarter of 1994. The Company
has not finally determined the impact of adopting SFAS No. 112; however, it
expects to recognize a one-time charge of between $5 million and $10 million
as a result of the adoption of the new standard. The adoption of SFAS No. 112
will have no cash flow impact.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements at Item 14, of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure or
any reportable events.
As described in the Company's filing on Form 8-K dated as of May 26, 1992, at
a meeting of the Company's Audit Committee held on May 26, 1992, the Committee
determined to engage the accounting firm of Price Waterhouse as independent
accountants for all subsidiaries of the Company for 1992, subject to approval
of shareholders. The shareholders ratified the appointment on May 27, 1992,
at the Annual Meeting of Shareholders. As a result, the Company's subsidiary,
XL/Datacomp, Inc. (Datacomp), disengaged the accounting firm of KPMG Peat
Marwick (KPMG) and retained the accounting firm of Price Waterhouse to perform
the annual audit of the financial statements of Datacomp. Price Waterhouse,
who had been auditing the Company and all subsidiaries except Datacomp, had
expressed reliance upon KPMG's report in their report on the consolidated
financial statements of the Company for the year ended December 31, 1991.
KPMG's report on the financial statements for 1991 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty or audit scope. Additionally, there were no report modifications
for accounting principles, with the exception of an explanatory paragraph
referencing Datacomp's change in its method of accounting for income taxes in
the year ended December 31, 1991, a change with which KPMG concurred.
Page 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the identity, background and experience of the
Company's directors is set forth in the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held May 25, 1994 (the Proxy
Statement) and is incorporated herein by reference. Also, see the information
concerning executive officers set forth under the caption "Executive Officers
of the Registrant" in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning compensation of executive officers required under
this item is contained in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information concerning certain principal holders of securities and
security ownership of executive officers required under this item is contained
in the Company's Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
required under this item is contained in the Company's Proxy Statement and is
incorporated herein by reference.
Page 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
PAGE
1. Financial Statements:
--------------------
Consolidated Balance Sheet at December 31, 1993, and
December 25, 1992 F-1
Consolidated Statement of Operations for the Years Ended
December 31, 1993, December 25, 1992, and
December 27, 1991 F-2
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1993, December 25, 1992, and
December 27, 1991 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1993, December 25, 1992,
and December 27, 1991 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants for Storage Technology
Corporation F-25
Report of Independent Accountants for XL/Datacomp, Inc. F-26
2. Financial Statement Schedules:
-----------------------------
VIII - Valuation and Qualifying Accounts and Reserves F-27
IX - Short-Term Borrowings F-28
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
3. Exhibits:
--------
(a) The exhibits listed below are filed as part of this Annual Report on
Form 10-K or are incorporated into this Annual Report on Form 10-K by
reference:
Page 28
4.1 Restated Certificate of Incorporation and Restated
By-Laws of Storage Technology Corporation dated July
28, 1987, as currently in effect (filed as Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1987, and incorporated
herein by reference).
4.2 Certificate of Amendment to the Restated Certificate
of Incorporation dated May 22, 1989 (filed as Exhibit
(c)(1) to the Registrant's Current Report on Form 8-K
dated June 2, 1989, and incorporated herein by
reference).
4.3 Certificate of Second Amendment to the Restated
Certificate of Incorporation dated June 2, 1992 (filed
as Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 26, 1992, and
incorporated herein by reference).
4.4 First Amendment to the Restated Bylaws of Storage
Technology Corporation, amending Section IV (filed as
Exhibit 3(c) to the Company's Annual Report on Form
10-K for the fiscal year ended December 25, 1987, and
incorporated herein by reference).
4.5 Specimen Certificate of Common Stock, $0.10 par value
of Registrant (filed as Exhibit (c)(2) as to the
Registrant's Current Report on Form 8-K dated June 2,
1989, and incorporated herein by reference).
4.6 Indenture dated as of May 31, 1990, between Storage
Technology Corporation and Manufacturers Hanover Trust
Company of California, Trustee, relating to the
Company's 8% Convertible Subordinated Debentures due
May 31, 2015 (filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 filed May 11, 1990,
File No. 33-34876, and incorporated herein by
reference).
4.7 Registration Statement of the Registrant on Form 8-A
dated August 13, 1981 (filed as Exhibit 4.7 to the
Registrant's Registration Statement on Form S-3 filed
January 29, 1993, File No. 33-57678, and incorporated
herein by reference).
4.8 Registration Statement of the Registrant on Form 8-A
dated August 23, 1990 (filed as Exhibit 4.8 to the
Registrants' Registration Statement on Form S-3 filed
January 29, 1993, File No. 33-57678, and incorporated
herein by reference).
4.9 Rights Agreement dated as of August 20, 1990, between
Storage Technology Corporation and First Fidelity
Bank, N.A., New Jersey, Rights Agent, (filed as
Exhibit 4.1 to the Company's Current Report on Form
8-K on August 20, 1990, and incorporated herein by
reference).
Page 29
4.10 Certificate of Designations of Series B Junior
Participating Preferred Stock (filed as Exhibit A to
Exhibit 4.1 to the Registrant's Current Report on Form
8-K filed with the Commission on August 8, 1990, and
incorporated herein by reference).
4.11 Form of certificate for $3.50 Convertible Exchangeable
Preferred Stock (filed as Exhibit 4.11 to the
Registrants Registration Statement on Form S-3 filed
January 29, 1993, File No. 33-57678, and incorporated
herein by reference).
4.12 Form of Certificate of Designations of $3.50
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.12 to the Registrants Registration Statement
on Form S-3 filed January 29, 1993, File No. 33-57678,
and incorporated herein by reference).
4.13 Form of Indenture between the Registrant and American
Stock Transfer and Trust Company, as Trustee, relating
to the Registrant's 8% Convertible Subordinated
Debentures due 2008, (filed as Exhibit 4.13 to the
Registrants Registration Statement on Form S-3 filed
January 29, 1993, File No. 33-57678, and incorporated
herein by reference).
4.14 Form of 8% Convertible Subordinated Debentures due
2008 (filed as Exhibit 4.13 to the Registrant's
Registration Statement on Form S-3 filed January 29,
1993, File No. 33-57678, and incorporated herein by
reference).
*10.1 1982 Employee Stock Purchase Plan (filed as part of
the Company's Registration Statement on Form S-8,
filed November 4, 1982, File No. 2-80183, and
incorporated herein by reference).
*10.2 1987 Employee Stock Purchase Plan, as amended (filed
as part of the Company's Registration Statement on
Form S-8, filed November 10, 1989, as Registration No.
33-32243, and incorporated herein by reference).
*10.3 1984 Stock Option Plan (filed as part of the Company's
Registration Statement on Form S-8, filed February 10,
1984, File No. 2-89417, and incorporated herein by
reference).
- ------------------------
* Contract or compensatory plan or arrangement in which directors
and/or officers participate.
Page 30
*10.4 1987 Equity Participation Plan (filed as part of the
Company's Registration Statement on Form S-8, filed
December 28, 1987, File No. 33-19426, and incorporated
herein by reference).
*10.5 Amendment to the 1987 Equity Participation Plan (filed
as Exhibit 10(h) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1990,
and incorporated herein by reference).
*10.6 Storage Technology Corporation Amended and Restated
Stock Option Plan for Non-Employee Directors (filed as
part of the Company's Registration Statement on Form
S-8, filed November 12, 1989, File No. 33-32235, and
incorporated herein by reference).
*10.7 Employment Agreement between Storage Technology
Corporation and Harris Ravine, dated February 27, 1987
(filed as Exhibit 10(t) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 25,
1987, and incorporated herein by reference).
*10.8 Amendment to the 1987 Employee Stock Purchase Plan
(filed as part of the Registrant's Registration
Statement on Form S-8 filed September 18, 1991, File
No. 33-42818, and incorporated herein by reference).
*10.9 Storage Technology Corporation Amended and Restated
Stock Option Plan for Non-Employee Directors (filed as
part of the Registrant's Registration Statement on
Form S-8, filed September 18, 1991, file No. 33-42817,
and incorporated herein by reference).
*10.10 Employment Agreement between Storage Technology
Corporation and Ryal R. Poppa, dated December 13, 1989
(filed as Exhibit 10(k) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 29,
1989, and incorporated herein by reference).
*10.11 Employment Agreement between the Company and Geoffroy
de Belloy, dated September 13, 1990 (filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K for
fiscal year ended December 27, 1991, and incorporated
herein by reference).
*10.12 Employment Agreement between the Company and Harris
Ravine dated June 6, 1991 (filed as Exhibit 10.12 to
the Company's Annual
- ------------------------
* Contract or compensatory plan or arrangement in which directors
and/or officers participate.
Page 31
Report on Form 10-K for fiscal year ended December 27,
1991, and incorporated herein by reference).
*10.13 Employment Agreement between the Company and Derek A.
Thompson dated February 26, 1991 (filed as Exhibit
10.13 to the Company's Annual Report on Form 10-K for
fiscal year ended December 25, 1992, and incorporated
herein by reference).
*10.14 Employment Agreement between the Company and John V.
Williams dated February 13, 1992 (filed as Exhibit
10(n) to the Registrant's Annual Report on Form 10-K
for the year ended December 25, 1992, and incorporated
herein by reference).
10.15 Form of Note Agreement dated as of August 30, 1991
relating to Registrant's 9.53% Senior Secured Notes
due August 31, 1996 (filed as Exhibit 4(e) to the
Registrant's Registration Statement on Form S-4 filed
October 25, 1991, File No. 33-43536, and incorporated
herein by reference).
10.16 Multicurrency Credit Agreement dated as of March 31,
1993, among the Registrant, Storage Technology De
Puerto Rico, Inc., XL/Datacomp, Inc. and StorageTek
Financial Services Corporation as Borrowers and Bank
of America National Trust and Savings Association as
Agent, Swing Line Bank and Issuing Bank, and the other
banks and financial institutions parties thereto (the
"Credit Agreement") (filed as Exhibit 10.15 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 26, 1993, and incorporated herein
by reference).
**10.17 First Amendment to the Multicurrency Credit Agreement
dated as of August 6, 1993.
**10.18 Second Amendment to the Multicurrency Credit Agreement
dated as of September 24, 1993.
*/**10.19 Agreement between the Company and Harris Ravine dated
October 8, 1993.
- ------------------------
* Contract or compensatory plan or arrangement in which directors
and/or officers participate.
** Indicates Exhibits filed with this Annual Report.
Page 32
**11.0 Computation of Earnings (Loss) per Common Share.
**21.0 Subsidiaries of Registrant.
**23.1 Consent of Price Waterhouse.
**23.2 Consent of KPMG Peat Marwick.
(b) Reports on Form 8-K. During the last quarter of the fiscal year
covered by this report the Company filed two reports on Form 8-K.
On October 15, 1993, the Company filed a Form 8-K in connection
with a publicly disseminated news release concerning third-quarter
1993 financial results. The Company filed a Form 8-K on October
20, 1993 in connection with a publicly disseminated news release
announcing the effectiveness of the merger with Amperif
Corporation.
- ------------------------
** Indicates Exhibits filed with this Annual Report.
Page 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Storage Technology Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 11, 1994 STORAGE TECHNOLOGY CORPORATION
By: /s/RYAL R. POPPA
------------------------------------
Ryal R. Poppa
Chairman of the Board, President and
Chief Executive Officer (Principal
Executive Officer)
By: /s/GREGORY A. TYMN
------------------------------------
Gregory A. Tymn
Senior Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
By: /s/DAVID E. LACEY
------------------------------------
David E. Lacey
Corporate Vice President and Controller
(Principal Accounting Officer)
Page 34
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/JUDITH E.N. ALBINO
- ----------------------------
Judith E.N. Albino Director March 11, 1994
/s/WILLIAM L. ARMSTRONG
- ----------------------------
William L. Armstrong Director March 11, 1994
/s/ROBERT A. BURGIN
- ----------------------------
Robert A. Burgin Director March 11, 1994
/s/PAUL FRIEDMAN
- ----------------------------
Paul Friedman Director March 11, 1994
/s/STEPHEN J. KEANE
- ----------------------------
Stephen J. Keane Director March 11, 1994
/s/ROBERT E. LABLANC
- ----------------------------
Robert E. LaBlanc Director March 11, 1994
/s/ROBERT E. LEE
- ----------------------------
Robert E. Lee Director March 11, 1994
/s/HARRISON SHULL
- ----------------------------
Dr. Harrison Shull Director March 11, 1994
/s/RICHARD C. STEADMAN
- ----------------------------
Richard C. Steadman Director March 11, 1994
/s/ROBERT C. WILSON
- ----------------------------
Robert C. Wilson Director March 11, 1994
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 31, December 25,
1993 1992
---------------------------
ASSETS
Cash, including cash equivalents of
$181,583 in 1993 and $70,128 in 1992,
and restricted cash of $3,857 in
1993 and $4,187 in 1992 $ 255,062 $ 117,954
Short-term investments 16,042
Accounts receivable, net of allowance
for doubtful accounts of $12,452 in
1993 and $11,949 in 1992 218,701 313,350
Notes and installment receivables 9,973 9,625
Net investment in sales-type leases (Note 3) 171,165 193,078
Inventories, at lower of cost
(first-in, first-out) or market (Note 4) 203,257 156,136
--------- ---------
Total current assets 874,200 790,143
Notes and installment receivables 13,968 21,228
Net investment in sales-type leases (Note 3) 252,678 309,160
Computer equipment, at cost net of
accumulated depreciation of $96,454 in
1993 and $78,743 in 1992 (Note 5) 97,324 103,281
Spare parts for field service, at cost
net of accumulated amortization of $55,317
in 1993 and $48,268 in 1992 50,150 51,389
Property, plant and equipment, at cost net
of accumulated depreciation (Note 6) 306,034 305,097
Deferred income tax assets, net of valuation
allowance (Note 8) 52,260
Other assets 146,395 158,745
--------- ---------
$1,793,009 $1,739,043
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Nonrecourse borrowings secured by lease
commitments (Note 7) $ 74,191 $ 88,548
Current portion of other long-term debt
(Note 7) 32,581 18,211
Accounts payable 91,890 129,978
Accrued liabilities 192,874 183,939
Income taxes payable (Note 8) 14,167 11,525
--------- ---------
Total current liabilities 405,703 432,201
Nonrecourse borrowings secured by lease
commitments (Note 7) 96,975 143,148
Other long-term debt (Note 7) 264,743 226,840
Deferred income tax liabilities (Note 8) 8,285 8,941
--------- ---------
Total liabilities 775,706 811,130
--------- ---------
Commitments and contingencies (Notes 7 and 12)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 40,000,000
shares authorized; 3,450,000 shares of $3.50
Convertible Exchangeable Preferred Stock issued
in 1993, and none issued in 1992, $172,500,000
aggregate liquidation preference (Note 9) 35
Common stock, $.10 par value, 150,000,000
shares authorized; 43,097,788 shares issued
in 1993, and 42,613,422 shares issued in 1992 4,310 4,261
Capital in excess of par value 1,421,860 1,244,471
Accumulated deficit (401,623) (314,368)
Treasury stock of 34,349 shares in 1993
and 33,936 shares in 1992 (735) (729)
Cumulative translation adjustment 2,872
Unearned compensation (6,544) (8,594)
--------- ---------
Total stockholders' equity 1,017,303 927,913
--------- ---------
$1,793,009 $1,739,043
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
---------------------------------------
December 31, December 25, December 27,
1993 1992 1991
---------------------------------------
Sales $ 902,482 $1,079,130 $1,201,114
Service and rental revenue 502,270 471,815 418,406
--------- --------- ---------
Total revenue 1,404,752 1,550,945 1,619,520
--------- --------- ---------
Cost of sales 641,411 757,369 801,138
Cost of service and rental revenue 324,502 316,830 303,939
--------- --------- ---------
Total cost of revenue 965,913 1,074,199 1,105,077
--------- --------- ---------
Gross profit 438,839 476,746 514,443
Research and product development costs 163,286 152,702 123,269
Marketing, general, administrative
and other income and expense, net 324,823 315,475 300,253
Restructuring and other charges
(Note 14) 74,772 5,104
--------- --------- ---------
Operating profit (loss) (124,042) 8,569 85,817
Interest expense 43,670 48,706 52,157
Interest income (54,916) (67,171) (68,552)
--------- --------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change (112,796) 27,034 102,212
Provision for income taxes (Note 8) 5,000 17,700 12,400
--------- --------- ---------
Income (loss) before cumulative
effect of accounting change (117,796) 9,334 89,812
Cumulative effect on prior years of
change in method of accounting for
income taxes (Note 8) 40,000
--------- --------- ---------
Net income (loss) (77,796) 9,334 89,812
Preferred dividend requirement (Note 9) 9,805
--------- --------- ---------
Income (loss) applicable to common
shares $ (87,601) $ 9,334 $ 89 812
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative effect
of accounting change $ (2.98) $ 0.22 $ 2.17
Cumulative effect on prior years of
change in method of accounting for
income taxes 0.93
--------- --------- ---------
$ (2.05) $ 0.22 $ 2.17
========= ========= =========
Weighted average common shares and
equivalents 42,800 43,347 41,298
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Year Ended
---------------------------------------
December 31, December 25, December 27,
1993 1992 1991
---------------------------------------
OPERATING ACTIVITIES
Cash received from customers $ 1,532,183 $ 1,572,892 $ 1,589,841
Cash paid to suppliers and employees (1,446,321) (1,456,835) (1,415,976)
Interest received 54,251 67,136 66,765
Interest paid (40,519) (47,751) (52,603)
Income taxes paid (12,048) (28,327) (2,089)
Net cash adjustment to conform year
end of Datacomp (Note 2) (2,816)
---------- ---------- ----------
Net cash from operating activities 87,546 107,115 183,122
---------- ---------- ----------
INVESTING ACTIVITIES
Short-term investments, net (15,377) 40,227 (39,778)
Purchase of property, plant and
equipment (67,720) (106,119) (111,094)
Business acquisitions, net of cash
acquired (51,761)
Other assets, net (6,945) (4,136) (25,484)
---------- ---------- ----------
Net cash used in investing activities (90,042) (121,789) (176,356)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from preferred stock offering,
net (Note 9) 166,479
Proceeds from common stock offering,
net (Note 9) 135,362
Borrowings (repayments) under revolving
credit agreements, net (19,000) (72,293)
Proceeds from nonrecourse borrowings 87,508 114,935 145,985
Repayments of nonrecourse borrowings (147,647) (150,005) (200,519)
Proceeds from other debt 79,740 21,320 79,331
Repayments of other debt (44,144) (27,538) (39,099)
Proceeds from employee stock plans
and warrants 11,468 16,126 15,509
Preferred stock dividend payments
(Note 9) (9,459)
Proceeds from sale of lease receivables
(Note 13) 50,022
Purchases of treasury stock (5,098)
---------- ---------- ----------
Net cash from financing activities 143,945 762 64,276
Effect of exchange rate changes
on cash (4,341) (4,884) (6,675)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 137,108 (18,796) 64,367
Cash and cash equivalents -
beginning of the year 117,954 136,750 72,383
---------- ---------- ----------
Cash and cash equivalents - end of
the year $ 255,062 $ 117,954 $ 136,750
========== ========== ==========
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (77,796) $ 9,334 $ 89,812
Cumulative effect of accounting
change (Note 8) (40,000)
Restructuring and other charges
(Note 14) 74,772 5,104
Depreciation and amortization expense 149,891 143,605 113,899
Loss on disposal of property, plant
and equipment 5,113 4,675 1,804
(Increase) decrease in accounts
receivable 81,197 19,873 (14,680)
(Increase) decrease in notes
receivable and sales-type leases 54,605 18,524 (16,499)
(Increase) decrease in inventories (62,997) 4,354 24,416
Increase in computer equipment, net (48,730) (57,532) (43,943)
Increase in spare parts, net (19,599) (30,849) (17,239)
(Increase) decrease in net deferred
income tax asset (12,535) 578 (1,571)
Increase (decrease) in accounts
payable (37,113) 14,937 16,193
Increase (decrease) in accrued
liabilities (5,360) (24,241) 21,635
Increase (decrease) in income taxes
payable 5,487 (11,205) 11,882
Translation loss 8,069 12,062 1,025
Net cash adjustment to conform year
end of Datacomp (Note 2) (2,816)
Other 12,542 3,000 (5,900)
---------- ---------- ----------
Net cash from operating activities $ 87,546 $ 107,115 $ 183,122
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Capital in Cumulative
Preferred Common Excess of Accumulated Treasury Translation Unearned
Stock Stock Par Value Deficit Stock Adjustment
Compensation
----------------------------------------------------------------------------------
Balances, December 28, 1990,
as previously reported $3,600 $1,063,396 $(422,119) $ (630) $ (70) $(3,817)
Pooling of interests with
Amperif Corp. (Note 2) 128 11,456 7,054
----- --------- -------- ------ ------ ------
Balances, December 28, 1990,
as restated 3,728 1,074,852 (415,065) (630) (70) (3,817)
Adjustment to reflect change
in year end of XL/Datacomp
(Note 2) 1,560
Common stock issuance
(3,450,000 shares) (Note 9) 345 135,017
Shares issued under stock
purchase plan, and for
exercises of options and
warrants (1,025,240 shares) 103 15,360
Restricted stock awards
(95,338 shares) 10 3,828 (3,828)
Restricted stock amortization 316
Net income 89,812
Other 2 218 (9) (99) (2,076) 14
----- --------- -------- ------ ------ ------
Balances, December 27, 1991 4,188 1,229,275 (323,702) (729) (2,146) (7,315)
Purchases of treasury stock
(149,600 shares) (5,098)
Shares issued under stock
purchase plan, and for
exercises of options
(621,411 shares) 62 11,204 5,098
Restricted stock awards
(139,144 shares) 14 4,551 (2,372)
Restricted stock amortization 615
Net income 9,334
Other (3) (559) 5,018 478
----- --------- -------- ------ ------ ------
Balances, December 25, 1992 4,261 1,244,471 (314,368) (729) 2,872 (8,594)
Preferred stock issuance
(3,450,000 shares) (Note 9) $35 166,444
Shares issued under stock
purchase plan, and for
exercises of options and
warrants (557,601 shares) 56 12,604
Cash dividends paid on
preferred stock ($2.74 per
share) (Note 9) (9,459)
Restricted stock amortization 794
Net loss (77,796)
Other (7) (1,659) (6) (2,872) 1,256
-- ----- --------- -------- ------ ------ ------
Balances, December 31, 1993 $35 $4,310 $1,421,860 $(401,623) $ (735) $ 0 $(6,544)
== ===== ========= ======== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Storage Technology Corporation and its wholly owned subsidiaries (collectively
hereinafter referred to as StorageTek or the Company). Intercompany accounts
and transactions have been eliminated. As further discussed in Note 2, the
consolidated financial statements have been restated for all periods presented
to reflect the merger with Amperif Corporation as a pooling of interests.
REVENUE RECOGNITION
Revenue from end-user equipment sales, including sales-type leases, is
recognized at the time of acceptance by the customer, generally after
installation at a customer site. Revenue from original equipment
manufacturers and distributors is recognized at the time of shipment. Costs
associated with post-installation equipment support are estimated and accrued
at the time of the sale. Rental revenue associated with operating leases is
recorded ratably over the rental period.
End users of equipment sold or leased by StorageTek generally contract with
the Company for equipment service which includes normal maintenance and repair
or replacement of product components. Revenue from these contracts is
recognized as earned and the cost of performing these activities is expensed
as incurred.
CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND RESTRICTED CASH
Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have remaining maturities of three months or
less at the time of acquisition. Investments that do not qualify as cash
equivalents are classified as short-term investments. The carrying amount of
short-term investments is equal to cost, adjusted for premium or discount
amortization, plus accrued interest. The carrying value of short-term
investments approximates fair value. Restricted cash balances relate
primarily to funds received on behalf of third parties.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $23,092,000 in 1993, $9,148,000 in 1992, and
$7,486,000 in 1991 associated with acquiring and developing software products
to be marketed to customers. Other assets as shown on the Consolidated
Balance Sheet include unamortized software product costs of $36,068,000 as of
December 31, 1993, and $20,461,000 as of December 25, 1992. Amortization is
based on the greater of straight-line amortization over estimated useful
lives, generally four years, or the percentage of actual revenue versus total
anticipated revenue. Amortization of software costs was $7,485,000 in 1993,
$6,818,000 in 1992, and $2,877,000 in 1991.
F-5
DEPRECIATION AND AMORTIZATION
Computer equipment, and property, plant and equipment are recorded at cost and
depreciated on a straight-line basis over their estimated useful lives.
Capitalized machinery and equipment leases are amortized over the estimated
service lives or the periods of the leases, as applicable. Manufactured spare
parts are recorded at cost and amortized over their estimated useful service
lives. Goodwill, included within other assets on the Consolidated Balance
Sheet, represents the excess of purchase price over fair value of net assets
acquired and is amortized on a straight-line basis not exceeding 10 years.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." See Note 8 for additional information regarding the Company's
accounting for income taxes.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for StorageTek's foreign subsidiaries is the U.S.
dollar. Accordingly, monetary assets and liabilities are translated at year-
end exchange rates while non-monetary items are translated at historical
rates. Revenue and expenses are translated at the average rates in effect
during the year, except for cost of sales and depreciation which are
translated at historical rates. Foreign currency translation adjustments, net
of associated hedging results, and foreign currency transaction losses were
$8,802,000 in 1993, compared to losses of $8,372,000 in 1992 and $12,321,000
in 1991. See Note 13 for information with respect to the Company's accounting
policies for financial instruments utilized in its foreign currency hedging
program.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed under the treasury stock method
using the weighted average number of common shares and dilutive common stock
equivalent shares outstanding during the year. The Preferred Stock (see Note
9) and 8% Convertible Subordinated Debentures (see Note 7) are not common
stock equivalents and, therefore, have been excluded from the computation of
earnings (loss) per common share. The Preferred Stock and 8% Convertible
Subordinated Debentures presently have an anti-dilutive effect on the annual
computation of fully diluted earnings per common share.
RECENT PRONOUNCEMENTS
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits" which generally
requires the accrual of the estimated cost of postemployment benefits provided
over the related service periods of active employees. The Company provides
certain severance and disability-related benefits to its employees. SFAS No.
112 is required to be adopted no later than fiscal 1994 and the Company plans
to adopt the new standard in the first quarter of 1994. The Company has not
finally determined the impact of adopting SFAS No. 112; however, it expects to
recognize a one-time charge of between $5,000,000 and $10,000,000 as a result
of the adoption of the new standard. The adoption of SFAS No. 112 will have
no cash flow impact.
F-6
NOTE 2 - BUSINESS COMBINATIONS
AMPERIF CORPORATION
In October 1993, the Company issued approximately 1,300,000 shares of
StorageTek common stock in exchange for all of the outstanding common and
preferred stock of Amperif Corporation (Amperif). The Company has also
reserved approximately 600,000 shares for issuance in connection with
Amperif's outstanding warrants and employee stock options. The merger was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements have been restated for all periods prior to the merger to
include the operations of Amperif, adjusted to conform with StorageTek's
accounting policies and presentation Merger and consolidation expenses in
the amount of $5,522,000, included within restructuring and other charges on
the Consolidated Statement of Operations, were recognized in 1993 in
connection with the merger. Amperif designs, manufactures, markets and
services high-performance, information storage and retrieval subsystems for
mainframe computers.
Separate pre-merger revenue and net income of StorageTek and Amperif were as
follows (in thousands of dollars):
Year Ended
----------------------------------------
1993 1992 1991
----------------------------------------
Revenue:
Pre-merger
StorageTek $1,065,438 $1,521,487 $1,584,904
Amperif 14,311 30,165 35,879
Merger adjustments (1,917) (707) (1,263)
--------- --------- ---------
1,077,832 1,550,945 1,619,520
Post-merger 326,920
--------- --------- ---------
$1,404,752 $1,550,945 $1,619,520
========= ========= =========
Net income (loss):
Pre-merger
StorageTek $ (68,572) $ 15,494 $ 93,074
Amperif (21,266) (5,828) (2,342)
Merger adjustments (2,983) (332) (920)
--------- --------- ---------
(92,821) 9,334 89,812
Post-merger 15,025
--------- --------- ---------
$ (77,796) $ 9,334 $ 89,812
========= ========= =========
EDATA
In the second quarter of 1992, the Company acquired all of the outstanding
equity securities of Edata Scandinavia AB (Edata) for approximately
$75,000,000. The acquisition was accounted for as a purchase. Goodwill
associated with the acquisition (the excess of purchase price over the
estimated fair value of the net assets acquired) of $44,700,000 is included
within other assets on the Consolidated Balance Sheet and is being amortized
on a straight-line basis over 10 years. Edata markets and distributes
equipment and systems for storage and management of large volumes of data, and
for automation and control of computer centers and information networks in
Belgium, Denmark, Finland, Luxembourg, the Netherlands, Norway and Sweden.
F-7
XL/DATACOMP, INC.
In November 1991, the Company issued approximately 3,250,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock of
XL/Datacomp, Inc. (Datacomp). The Company also reserved approximately 450,000
shares for issuance in connection with Datacomp's outstanding employee stock
options and to satisfy Datacomp's employee stock purchase plan obligations.
The merger was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements for 1991 include the operations of Datacomp.
An adjustment to accumulated deficit of $1,560,000 was made in 1991 to conform
Datacomp's reporting periods with StorageTek's fiscal year. Merger expenses
in the amount of $5,104,000, included within restructuring and other charges
on the Consolidated Statement of Operations, were recognized in 1991 in
connection with the merger. Datacomp is a full-service distributor of
midrange computer systems.
NOTE 3 - SALES-TYPE AND OPERATING LEASES
The components of net investment in sales-type leases are as follows (in
thousands of dollars):
December 31, December 25,
1993 1992
---------------------------
Total minimum lease and maintenance payments $ 499,295 $ 550,201
Less: Executory costs (maintenance payments) (50,017) (41,464)
-------- --------
Net minimum lease payments 449,278 508,737
Estimated unguaranteed residual values 24,879 73,206
Less: Unearned interest income (50,314) (79,705)
-------- --------
423,843 502,238
Less: Current portion (171,165) (193,078)
-------- --------
$ 252,678 $ 309,160
======== ========
Future minimum lease payments due from customers under sales-type leases and
noncancellable operating leases as of December 31, 1993, are as follows (in
thousands of dollars):
Sales-Type Operating
Leases Leases
-------------------------
1994 $210,110 $17,276
1995 155,363 10,450
1996 86,354 2,775
1997 37,431 170
1998 9,654 23
Thereafter 383
------- ------
$499,295 $30,694
======= ======
Of the future minimum lease payments due from customers under sales-type
leases, the following amounts will be remitted under recourse and nonrecourse
borrowing arrangements (see Note 7): $109,007,000 in 1994; $84,487,000 in
1995; $45,330,000 in 1996; $17,361,000 in 1997; and $4,607,000 in 1998.
F-8
NOTE 4 - INVENTORIES
Inventories, including material, labor and factory overhead, consist of the
following (in thousands of dollars):
December 31, December 25,
1993 1992
---------------------------
Raw materials $ 38,991 $ 45,060
Work-in-process 66,668 54,213
Finished goods 97,598 56,863
------- -------
$203,257 $156,136
======= =======
NOTE 5 - COMPUTER EQUIPMENT
Computer equipment held for sale or lease to customers consists of the
following (in thousands of dollars):
December 31, December 25,
1993 1992
---------------------------
Equipment on-rent $40,038 $ 31,015
Equipment shipped awaiting
revenue recognition 38,612 32,412
Equipment off-rent 18,674 39,854
------ -------
$97,324 $103,281
====== =======
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 31, December 25,
1993 1992
---------------------------
Land and land improvements $ 12,160 $ 11,711
Buildings and building improvements 135,575 129,212
Machinery and equipment 525,083 495,609
-------- --------
672,818 636,532
Less: Accumulated depreciation (366,784) (331,435)
-------- --------
$ 306,034 $ 305,097
======== ========
Machinery and equipment includes capitalized leases of $45,544,000 as of
December 31, 1993, and $38,861,000 as of December 25, 1992. Accumulated
depreciation includes accumulated amortization on such capitalized leases of
$20,381,000 as of December 31, 1993 and $18,636,000 as of December 25, 1992.
Maintenance and repairs, which are expensed as incurred, totalled $19,834,000
in 1993; $18,798,000 in 1992; and $15,210,000 in 1991.
F-9
NOTE 7 - DEBT, BANKING ARRANGEMENTS AND LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations, but excluding
nonrecourse borrowings, consists of the following (in thousands of dollars):
December 31, December 25,
1993 1992
---------------------------
8% Convertible Subordinated Debentures
due 2015 $145,645 $145,645
Recourse borrowings secured by lease
commitments 60,533
9.53% Senior Secured Notes due 1996 55,000 55,000
Capitalized lease obligations 28,272 22,174
Other 7,874 22,232
------- -------
297,324 245,051
Less: Current portion (32,581) (18,211)
------- -------
$264,743 $226,840
======= =======
8% CONVERTIBLE DEBENTURES
In May 1990, the Company issued $160,000,000 of 8% Convertible Subordinated
Debentures due 2015 (Convertible Debentures), which are unsecured subordinated
obligations of the Company and are convertible into common stock at a price of
$35.25 per share. The costs incurred in connection with the offering
($4,300,000) have been included in other assets on the Consolidated Balance
Sheet and are being amortized over the 25-year term of the Convertible
Debentures. Interest on the Convertible Debentures is payable semiannually in
arrears on November 30 and May 31. The Convertible Debentures became
redeemable at the option of StorageTek beginning May 31, 1993, at a premium of
5.6%, and are redeemable at decreasing premiums thereafter through May 30,
2000. Convertible Debentures in the principal amount of $8,000,000 per annum,
plus accrued interest, must be redeemed beginning May 31, 2000, through a
sinking fund which provides for the retirement of 75% of the Convertible
Debentures prior to their maturity on May 31, 2015. Convertible Debentures
purchased by the Company in the open market and Convertible Debentures
converted to common stock may be applied to the sinking fund requirements. As
of December 31, 1993, the Company held Convertible Debentures in the principal
amount of $14,300,000 available for sinking fund payments. The Company has
reserved 4,132,000 shares of common stock for issuance upon conversion of the
Convertible Debentures. The aggregate fair value of the Convertible
Debentures, based on the quoted closing sales price on the New York Stock
Exchange, was $158,389,000 as of December 31, 1993.
RECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
The Company's recourse borrowings are secured by customer lease commitments
included within total assets (primarily net investment in sales-type leases --
see Note 3) and by the underlying equipment. The borrowings also provide for
limited recourse to the Company in the event of a default by a customer with
respect to the lease commitments. The weighted average interest rate as of
December 31, 1993, related to the borrowings was approximately 7.5%. Based on
the borrowing rates currently available to the Company for borrowings with
similar terms and maturities, the aggregate carrying value of the recourse
borrowings approximated fair value as of December 31, 1993.
F-10
9.53% SENIOR SECURED NOTES
In September 1991, the Company completed a $55,000,000 private placement of
9.53% Senior Secured Notes due August 31, 1996 (the Notes), collateralized by
U.S. lease and installment purchase receivables. Interest on the Notes is
payable semiannually in arrears on February 28 and August 31. The Notes are
redeemable at the option of the Company, in whole or in part, from time to
time, at a premium which is determined based on current interest rates and the
time remaining until maturity of the Notes. Under the terms of the Note
agreement, the Company is required to comply with certain financial and other
covenants, including restrictions on the payment of cash dividends on its
common and preferred stock. The aggregate fair value of the Notes, based on
the interest rates currently available for comparable notes with similar
maturities, was approximately $60,100,000 as of December 31, 1993.
BANKING AND CREDIT ARRANGEMENTS
In March 1993, the Company entered into a $150,000,000 two-year secured
multicurrency credit agreement with a group of U.S. and international banks
(the Revolver). The interest rates available under the Revolver depend on the
type of advance selected; however, the primary advance rate is the agent
bank's prime lending rate (6% as of December 31, 1993). The total amount
available under the Revolver is limited to a percentage of the Company's
eligible U.S. accounts receivable and lease assets (primarily net investments
in sales-type leases not previously utilized for secured borrowings). In
order to obtain funds under the Revolver, the Company is required to comply
with certain financial and other covenants, including restrictions on the
payment of cash dividends on its common stock. There were no advances under
the Revolver during 1993. Based on the amount of eligible accounts receivable
and leased assets assigned to the Revolver, the Company had approximately
$50,000,000 of available credit under the Revolver as of December 31, 1993.
As of December 31, 1993, the Company had unused committed lease discounting
lines of approximately $41,000,000 available in the United States for recourse
and nonrecourse borrowings. The Company also had unused committed lease
discounting lines of approximately $38,000,000 available through its foreign
subsidiaries for nonrecourse borrowings. The ability to use these committed
lease discounting lines is limited by the availability of lease assets which
meet the credit standards of the lenders. The Company had, subject to lender
credit approval, approximately $58,000,000 of lease assets available for
discounting under these lines as of December 31, 1993. At the Company's
option, a portion of these lease assets can be utilized for borrowings under
the Revolver.
F-11
SCHEDULED DEBT MATURITIES
Scheduled maturities of long-term debt, including future minimum lease
payments under capitalized lease obligations, but excluding nonrecourse
borrowings, as of December 31, 1993, are as follows (in thousands of dollars):
Total Long-
Capitalized Other Term Debt
Leases Debt Commitments
---------------------------------------
1994 $10,198 $ 24,206 $ 34,404
1995 9,393 23,217 32,610
1996 7,353 69,150 76,503
1997 2,773 5,675 8,448
1998 1,706 1,159 2,865
Thereafter 1,107 145,645 146,752
------ ------- -------
32,530 $269,052 $301,582
======= =======
Less: Amount representing
interest (4,258)
------
Present value of capitalized
lease obligations (including
$8,375 classified as current) $28,272
======
NONRECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
Nonrecourse borrowings incurred in connection with the financing of certain of
the Company's customer lease obligations are secured by the lease commitments
and by the underlying equipment. The related lease receivables are also
reflected in the Consolidated Balance Sheet as accounts receivable to the
extent they represent amounts due on or prior to the balance sheet date, and
as part of net investment in sales-type leases for any amounts due thereafter
(see Note 3). The weighted average interest rate as of December 31, 1993,
related to the borrowings was approximately 9%. Based on the borrowing rates
currently available to the Company for nonrecourse borrowings with similar
terms and maturities, the aggregate carrying value of the nonrecourse
borrowings approximated fair value as of December 31, 1993.
OPERATING LEASE OBLIGATIONS
StorageTek had various operating leases in effect for certain buildings, sales
offices, and machinery and equipment. Rent expense was $37,086,000 in 1993;
$37,539,000 in 1992; and $32,363,000 in 1991. Future minimum rental
commitments required under all noncancellable operating leases with terms of
one year or more are as follows: $28,243,000 in 1994; $22,428,000 in 1995;
$17,769,000 in 1996; $13,178,000 in 1997; $10,761,000 in 1998; and $37,163,000
thereafter. The Company has also entered into an agreement with the French
government to begin leasing in late 1994 manufacturing and engineering
facilities currently under construction in France.
NOTE 8 - INCOME TAXES
Effective as of the beginning of fiscal 1993, the Company changed its method
of accounting for income taxes to comply with the provisions of SFAS No. 109.
A one-time benefit of $40,000,000 was recognized in the first quarter of 1993
as a result of the adoption of the new income tax accounting standard on a
prospective basis. This benefit results largely from the requirement under
SFAS No. 109 to recognize the tax benefits associated with net operating
F-12
loss and tax credit carryforwards to the extent their future realization is
determined, based on the weight of the available evidence, to be more likely
than not. The adoption of SFAS No. 109 had no cash flow impact.
Income (loss) before income taxes and cumulative effect of accounting change
consists of the following (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 27,
1993 1992 1991
------------------------------------------
United States $(114,196) $(5,545) $ 50,180
International 1,400 32,579 52,032
-------- ------ -------
$(112,796) $27,034 $102,212
======== ====== =======
The provision for income taxes attributable to income (loss) before income
taxes and cumulative effect of accounting change consists of the following (in
thousands of dollars):
Year Ended
-------------------------------------------
December 31, December 25, December 27,
1993 1992 1991
-------------------------------------------
Current tax provision
(benefit):
U.S. federal $ 3,200 $(2,500) $ 200
International 11,100 17,100 14,600
State 3,100 300 200
-------- ------ ------
17,400 14,900 15,000
-------- ------ ------
Deferred tax provision
(benefit):
U.S. federal (4,800) 2,800 (1,600)
International (4,200) 100 (1,400)
State (3,400) (100) 400
-------- ------ ------
(12,400) 2,800 (2,600)
-------- ------ ------
$ 5,000 $17,700 $12,400
======== ====== ======
The provision for income taxes attributable to income (loss) before income
taxes and cumulative effect of accounting change includes benefits of
$1,422,000 in 1993; $4,074,000 in 1992; and $53,671,000 in 1991 from the
utilization of net operating loss carryforwards as well as benefits of
$7,432,000 in 1993; $11,284,000 in 1992; and $11,186,000 in 1991 as a result
of the Company's Grant of Industrial Tax Exemption issued by the Commonwealth
of Puerto Rico (the Tax Grant). On a per common share basis, the benefit of
the Tax Grant was $0.17 in 1993; $0.27 in 1992; and $0.27 in 1991. The
benefits from the Tax Grant, which expires in 2007, include reduced tax rates,
as well as the ability to utilize U.S. net operating losses through 1994 to
further reduce Puerto Rico tax liabilities. To the extent cumulative U.S. and
Puerto Rico taxable income exceeds the U.S. net operating loss carryforwards
in the future, the benefit from the utilization of U.S. operating losses will
be payable to Puerto Rico. The cumulative benefit of the grant provision
relating to the use of net operating losses was $14,449,000 as of December 31,
1993.
F-13
The Company reported the following deferred income tax balances on its
Consolidated Balance Sheet as of December 31, 1993 (in thousands of dollars):
Deferred income tax assets, net of valuation allowance $52,260
Deferred income tax liabilities (8,285)
------
Net deferred income tax asset, December 31, 1993 $43,975
======
The Company's net deferred income tax asset consists of the following as of
December 31, 1993 (in thousands of dollars):
Gross deferred income tax assets:
Net operating loss carryforwards $ 123,844
Tax credit carryforwards 63,265
Accrued liabilities and reserves 55,314
Foreign currency translation losses 11,779
Deferred intercompany profit 11,290
Other 26,193
--------
291,685
Less: Valuation allowance (165,456)
--------
126,229
--------
Gross deferred income tax liabilities:
Investment in sales-type leases (45,979)
Depreciation (24,130)
Other (12,145)
--------
(82,254)
--------
Net deferred income tax asset, December 31, 1993 $ 43,975
========
The valuation allowance associated with the Company's deferred income tax
assets increased from $110,695,000 as of the beginning of fiscal 1993 to
$165,456,000 as of December 31, 1993. The valuation allowance relates
primarily to net operating loss carryforwards, tax credit carryforwards, and
net deductible temporary differences. The Company evaluated a variety of
factors in determining the amount of the deferred income tax assets to be
recognized pursuant to SFAS No. 109, including the number of years the
Company's operating loss and tax credits can be carried forward, the existence
of taxable temporary differences, the Company's earnings history, the
Company's near-term earnings expectations and possible reductions in the
Company's net operating loss carryforwards as a result of proposed adjustments
by the Internal Revenue Service to the Company's previously filed federal
income tax returns.
The deferred income tax provision for 1992 and the deferred income tax benefit
for 1991 resulted from the recognition of transactions in different periods
for financial reporting purposes than those allowed for tax purposes, and
primarily relate to deferred intercompany profit and sales-type leases.
StorageTek has not provided for income taxes on the cumulative undistributed
earnings of its foreign subsidiaries to the extent they are considered to be
reinvested indefinitely (approximately $55,264,000 as of December 31, 1993).
The amount of the unrecognized deferred tax liability for these unremitted
earnings was $3,144,000 as of December 31, 1993.
F-14
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rates of 35% in 1993, and 34% in 1992 and 1991 to
income (loss) before income taxes and cumulative effect of accounting change
for the following reasons (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 27,
1993 1992 1991
------------------------------------------
U.S. federal income tax at
statutory rate $(39,479) $ 9,192 $ 34,752
Increase (decrease) in income
taxes resulting from:
Increase (decrease) in
unrecognized net operating
losses and future deductions 36,989 (7,746) (47,642)
Nondeductible items 10,390 4,746 2,867
Effect of Puerto Rico operations (4,936) (6,541) (5,947)
State income taxes, net of
federal benefits 759 378 6,603
Foreign tax rate and translation
differentials 682 6,436 4,638
Restructuring of international
subsidiaries 9,758 15,735
Capital loss carryover (2,368)
Other, net 595 1,477 3,762
------- -------- -------
Income tax expense attributable to
income (loss) before cumulative
effect of accounting change $ 5,000 $ 17,700 $ 12,400
======= ======= =======
As of December 31, 1993, StorageTek had U.S. net operating loss carryforwards
of approximately $500,000,000 which expire in the years 2000 through 2006. As
a result of a change in ownership of the Company's capital stock, as defined
under Section 382 of the Internal Revenue Code, the Company is limited to
using approximately $106,000,000 of its operating loss carryforwards in each
taxable year, with unused amounts (approximately $310,000,000 as of December
31, 1993) being added to the annual limitations in future years.
Additionally, approximately $10,000,000 of the Company's net operating loss
carryforwards relate to acquired losses of Amperif which are subject to
substantial limitations. Approximately $31,000,000 of the Company's net
operating loss carryforwards relate to tax deductions associated with stock
option plans and, accordingly, the related benefit will be recognized as an
adjustment to additional paid-in capital when realized.
StorageTek is also subject to alternative minimum tax and, as such, has
alternative minimum tax net operating loss carryforwards of approximately
$267,000,000 and alternative minimum tax credit carryforwards of approximately
$15,000,000.
StorageTek's federal income tax returns for the years 1985 through 1987 have
been examined by the Internal Revenue Service (the IRS) and the Company's
federal income tax returns for the years 1988 through 1990 are currently under
examination. The IRS has proposed adjustments of approximately $360,000,000.
The Company agrees with approximately $70,000,000 of these adjustments. The
remaining adjustments relate principally to tax accruals for post-petition
interest, professional fees and other deductions associated with distributions
made to implement the Company's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The Company is protesting these remaining adjustments
through the IRS appeals process. Although the Company believes it has
meritorious legal defenses to these proposed
F-15
adjustments, to the extent it is unsuccessful in sustaining these items, the
Company's net operating loss carryforwards and resulting future cash savings
from utilizing such carryforwards, will be reduced accordingly.
NOTE 9 - SALE OF PREFERRED AND COMMON STOCK
In March 1993, the Company completed a public offering of 3,450,000 shares of
$3.50 Convertible Exchangeable Preferred Stock, $.01 par value (Preferred
Stock), at a price of $50.00 per share. The proceeds of the Preferred Stock
offering, after deducting all associated costs, were $166,479,000. Dividends
on the Preferred Stock are cumulative and payable quarterly in arrears at an
annual rate of $3.50 per share, when and as declared by the Company's Board of
Directors. The liquidation value of each share of Preferred Stock is $50.00,
plus unpaid dividends.
The Preferred Stock is convertible at any time at the option of the holder,
unless previously redeemed, into shares of StorageTek common stock at an
initial conversion rate of 2.128 shares of common stock for each share of
Preferred Stock (equivalent to a conversion price of $23.50 per share of
common stock). The Preferred Stock is redeemable for cash at any time on and
after March 15, 1996, in whole or in part, at the option of the Company,
initially at a redemption price of $52.45 per share, and thereafter at prices
decreasing ratably annually to $50.00 per share on and after March 15, 2003,
plus accrued and unpaid dividends. The Preferred Stock is also exchangeable,
in whole but not in part, at the option of the Company on any dividend payment
date beginning March 15, 1995, for 7% Convertible Subordinated Debentures due
2008 at the rate of $50.00 principal amount of debentures for each share of
Preferred Stock. The debentures contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock, and are
subject to a mandatory sinking fund.
In May 1991, the Company completed a public offering of 3,450,000 shares of
common stock at a price of $41.00 per share. The proceeds of the common stock
offering, after deducting all associated costs, were $135,362,000.
NOTE 10 - EMPLOYEE BENEFIT PLANS, OPTIONS AND WARRANTS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1987 Employee Stock Purchase Plan (Purchase Plan), as
amended, employees may be offered the right to collectively purchase a maximum
of 150,000 shares of StorageTek's common stock, plus any remaining shares from
earlier offering periods, in six-month consecutive offering periods through
April 30, 1995. Eligible employees may contribute up to 10% of their pay
toward purchase of StorageTek common stock at a price equal to 85% of the
lower of the market price on the first or the last day of each offering
period. Proceeds received from the issuance of shares are credited to
stockholders' equity in the fiscal year the shares are issued. The Company
issued 446,699, 320,082 and 624,845 shares of StorageTek common stock under
the Purchase Plan in 1993, 1992 and 1991, respectively.
F-16
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 31, 1993, the Company had an aggregate of 3,337,698 common
shares reserved for issuance under its employee equity plans (Employee Plans).
These plans provide for the issuance of common shares pursuant to stock option
exercises, restricted stock awards and other equity awards. There were
502,732 shares available for grant under the Employee Plans as of December 31,
1993.
Employee stock options are granted under the Employee Plans at the fair market
value of the common stock on the date of grant and generally vest over three
years. Options granted under the Employee Plans must be exercised no later
than 10 years from the date of grant.
The Company awarded a total of 139,144 and 95,338 shares of common stock under
its Employee Plans in 1992 and 1991, respectively, pursuant to restricted
stock agreements, at a price per share equal to par value. The restricted
stock generally vests upon the participants' retirement; however, the vesting
period can be accelerated if, in the Board of Directors' view, the Company
achieves certain pre-established financial goals. The restricted stock may
not be transferred in any manner until such time as it is vested. If a
participant ceases employment prior to the time of vesting, the stock must be
resold to the Company at par value. Unearned compensation, which is
determined as the difference between par value and market value on the date of
the award, is charged to stockholders' equity and amortized to expense over
the anticipated vesting period of the stock.
The Company also has a Nonemployee Director Stock Option Plan (Director Plan)
under which the Company grants stock options to nonemployee directors for the
purchase of an aggregate maximum of 350,000 shares of common stock. All
Director Plan stock options are granted at the fair market value of the common
stock on the date of grant. There were 100,000 shares available for grant
under the Director Plan as of December 31, 1993.
The following summarizes information with respect to options granted under the
Company's Employee and Director Plans:
Number of Shares Option Price Per Share
------------------------------------------
Outstanding, December 27, 1991 2,351,990 $ 0.93 - $49.00
Granted 314,370 17.28 - 75.50
Exercised (450,929) 0.93 - 36.76
Cancelled or expired (64,210) 0.93 - 49.00
--------- ----------------
Outstanding, December 25, 1992 2,151,221 0.93 - 75.50
Granted 1,065,775 17.28 - 37.63
Exercised (72,552) 0.93 - 35.51
Cancelled or expired (79,478) 0.93 - 64.25
--------- ----------------
Outstanding, December 31, 1993 3,064,966 $ 3.43 - $75.50
========= ================
Exercisable, December 31, 1993 1,652,554 $ 3.43 - $75.50
========= ================
F-17
WARRANTS AND DEFERRED PURCHASE RIGHTS
Warrants to purchase 5,013 and 64,294 shares of StorageTek common stock were
exercised in 1993 and 1991, respectively, at prices of $9.97 and $19.29 per
share. In connection with the Amperif merger, the Company assumed Amperif's
obligations with respect to warrants for the purchase of 59,778 shares of
common stock at a price of $16.73 per share which expire in 1995, and warrants
for the purchase of 324,000 shares of common stock at a price of $30.86 per
share which expire in 1996. All of these warrants were outstanding as of
December 31, 1993.
In connection with the Edata acquisition in 1992, the Company granted deferred
purchase rights for 101,000 shares of common stock with a purchase price per
share equal to par value. The deferred purchase rights vest upon the
attainment of certain financial goals or upon the passage of time. As of
December 31, 1993, deferred purchase rights for 66,663 shares of the Company's
common stock remained outstanding.
EMPLOYEE PROFIT SHARING AND THRIFT PLAN
Under StorageTek's Profit Sharing and Thrift Plan, StorageTek contributions
are contingent upon realization of profits by the Company which, at the sole
discretion of the Board of Directors, are adequate to justify a corporate
contribution. No contributions from StorageTek were authorized for 1993 and
1992. StorageTek authorized contributions of $7,000,000 for 1991.
NOTE 11 - STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a new Stockholder Rights Plan (Rights
Plan). The Rights Plan is designed to deter coercive or unfair takeover
tactics and to prevent an acquiring entity from gaining control of the Company
without offering a fair price to all of the Company's shareholders.
Each right would entitle the holder of the Company's common stock to purchase
one one-hundredth of a share of Series B Junior Participating Preferred Stock
at an exercise price of $150, subject to adjustment to prevent dilution. The
rights are evidenced by the common stock certificates and will not separate
from the common stock until the earlier of (i) 20 days following the date on
which any person or entity acquires beneficial ownership of 15% or more of the
common stock (an Acquiring Person) and the right of redemption has not been
reinstated; or (ii) 10 days after a public announcement of a tender or
exchange offer by any person or entity if upon consummation such person would
be an Acquiring Person. Further, upon the occurrence of certain events
described below, the rights generally entitle each right holder (except the
Acquiring Person) to purchase that number of shares of the Company's common
stock which equals the $150 exercise price of the right divided by one-half of
the current market price of the common stock. Those events generally include
(i) 20 days after any person or entity becomes an Acquiring Person; and (ii) if
any person or entity becomes an Acquiring Person and thereafter, (a) the
Company is merged with or into an Acquiring Person and the Company's common
stock is changed, converted or exchanged; or (b) 50% or more of the Company's
assets or earning power is sold; or (c) an Acquiring Person engages in one or
more "self-dealing" transactions as described in the Rights Agreement.
F-18
The Company is generally entitled to redeem the rights for $.01 per right at
any time prior to the earlier of the date on which any person or entity
becomes an Acquiring Person or August 31, 2000. The rights will expire on
August 31, 2000, unless redeemed or exchanged earlier by the Company pursuant
to the Rights Plan.
NOTE 12 - LITIGATION
In the second quarter of 1992, seven purported class actions were filed in the
U.S. District Court for the District of Colorado against the Company and
certain of its officers and directors. These actions were subsequently
consolidated into a single action, and a consolidated amended complaint was
filed on July 7, 1992, seeking an unspecified amount of damages. The
complaint alleged that the defendants failed to properly disclose the status
of development of a new product and the Company's business prospects. The
complaint further alleged that the individual defendants sold shares of the
Company's common stock based on material inside information, in violation of
federal securities and common law. Following the court's ruling on the
defendants' motion to dismiss, a ruling which dismissed several of the fraud
and insider trading claims against a number of the individual defendants, the
class plaintiffs filed a second, and then a third, amended complaint which
renewed many of the dismissed fraud and insider trading claims and sought to
extend the class period to November 9, 1992. In response to the defendants'
second motion to dismiss, the court refused to extend the class period, but
did not dismiss any of the claims as pleaded in the third amended complaint.
The court has certified a class consisting (with certain exceptions) of those
who purchased StorageTek's common stock and related securities from December
23, 1991, to August 8, 1992. Depositions of Company employees and other
potential witnesses commenced in August 1993 and are expected to continue into
1994. In addition to the class action, a shareholder derivative action was
filed in the second quarter of 1992 based on substantially similar factual
allegations and the derivative action has been consolidated with the class
action. The Company believes the suits are without merit and intends to
vigorously defend against them. There can be no guarantee; however, that the
cases will result in decisions favorable to the Company. In the event of an
adverse decision, neither the amount nor the likelihood of any potential
liability which might result is reasonably estimable. In the derivative
action, any recovery would be the property of the Company.
In June 1993, the Company received a subpoena from the Denver Regional Office
of the Securities and Exchange Commission (the Commission) to produce certain
documents in connection with the Commission's order for an investigation of
possible violations of federal disclosure, reporting and insider trading
requirements. The requests by the Commission relate principally to
announcements and related disclosures concerning the status of development of
a new product in 1992.
In April 1992, Unisys Corporation (Unisys) filed a suit against Amperif and in
September 1993, Unisys filed additional suits against both Amperif and the
Company. All of the suits relate to patents (seven patents in all) which
Unisys alleges are violated by certain Amperif and StorageTek disk products.
Unisys has not specified the extent of damages it claims, but has asked the
court to enjoin further infringement. On October 18, 1993, StorageTek and
Amperif filed an action for declaratory relief against Unisys with respect to
some of the same patents, seeking the court's declaration that the patents are
not infringed and are invalid. The cases are pending in U.S. District Courts
for the Districts of Pennsylvania and Colorado. On October 19, 1993, Amperif
became a wholly owned subsidiary of StorageTek (see Note 2). In November
1993, Amperif and the Company moved to consolidate and transfer the
Pennsylvania cases to California. On December 29, 1993, the Pennsylvania
court held a hearing on the consolidation
F-19
and transfer, but has not issued a decision. The Company believes that
neither the Company's nor Amperif's products infringe the Unisys patents.
Further, the Company believes that there are questions as to the validity of
many of the Unisys patents, and that the conduct of Unisys in its dealings
with Amperif may make the patents unenforceable. There can be no guarantee;
however, that the cases will result in decisions favorable to the Company. In
the event of an adverse decision, neither the amount nor the likelihood of any
potential liability which might result is reasonably estimable.
On January 24, 1994, Stuff Technology Partners II, a Colorado Limited
Partnership (Stuff), filed suit in Boulder County, Colorado, District Court
against the Company and certain subsidiaries. The suit alleges that the
Company breached a 1990 settlement agreement which had resolved earlier
litigation between the parties. The suit seeks injunctive relief and damages
in the amount of $2,400,000,000. The Company believes that the claims in the
suit are bound by the 1990 settlement between the Company and Stuff, the
claims are without merit, and the Company intends to vigorously defend against
them. The Company has not yet answered the complaint and no other proceedings
have taken place.
In addition, the Company is involved in various other less significant legal
proceedings. The outcomes of these legal proceedings are not expected to have
a material adverse effect on the financial condition or operations of the
Company based on the Company's current understanding of the relevant facts and
law.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
A significant portion of the Company's revenue is generated by its
international operations. As a result, the Company's operations and financial
results can be materially affected by changes in foreign currency exchange
rates. In an attempt to mitigate the impact of foreign currency fluctuations,
the Company employs a hedging program which utilizes foreign currency options
and forward exchange contracts.
The Company utilizes foreign currency options, generally with maturities of
less than one year, to hedge its exposure to exchange-rate fluctuations in
connection with anticipated sales revenue from its international operations.
Realized and unrealized gains and losses on the options are deferred and
subsequently recognized as an adjustment to the associated sales revenue on
the Consolidated Statement of Operations. The Company held foreign currency
options with a face value of approximately $117,100,000 as of December 31,
1993, and $100,600,000 as of December 25, 1992. Unrealized gains, net of
hedging costs, of approximately $1,400,000 as of December 31, 1993, and
$5,400,000 as of December 25, 1992, existed in connection with option
contracts.
The Company also utilizes forward exchange contracts, generally with
maturities of less than two months, to hedge its exposure to exchange-rate
fluctuations in connection with monetary assets and liabilities held in
foreign currencies. The carrying amounts of these forward foreign exchange
contracts equal their fair value as the contracts are adjusted at each balance
sheet date for changes in exchange rates. Realized and unrealized gains and
losses on the forward contracts are recognized currently within marketing,
general, administrative and other income and expense, net, on the Consolidated
Statement of Operations as adjustments to the foreign exchange gains and
losses on the translation of net monetary assets. The Company held forward
foreign exchange contracts with a face value of approximately $94,200,000 as
of December 31, 1993, and $110,200,000 as of December 25, 1992.
F-20
The forward exchange contracts and foreign currency options do not subject the
Company to risk due to exchange rate movements as gains and losses on the
contracts offset gains and losses on the transactions being hedged. Further,
the Company does not believe there is significant credit risk associated with
these contracts as the counterparties to these contracts consist of major
international financial institutions, and the Company limits the amount of the
contracts it enters into with any one party.
In December 1992, the Company received proceeds of $50,022,000 as a result of
an agreement with a financial institution to sell, on a limited recourse
basis, lease receivables. A gain of $1,678,000 was recognized in 1992 related
to the sale of these receivables. As a result of the agreement, net
investment in sales-type leases, as shown on the Consolidated Balance Sheet,
is reported net of lease receivables remaining to be collected of $30,917,000
as of December 31, 1993, and $48,442,000 as of December 25, 1992. The Company
remains contingently liable for up to $10,369,000 of the outstanding balance
pursuant to the recourse provisions as of December 31, 1993. Based upon the
Company's experience, no material credit risk exists under the recourse
provisions of the agreement.
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company has a cash investment policy
which generally restricts investments to ensure preservation of principal and
maintenance of liquidity. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies. As of December 31, 1993, the Company had no significant
concentrations of credit risk.
NOTE 14 - RESTRUCTURING AND OTHER CHARGES
In 1993, the Company recognized restructuring and other charges totaling
$74,772,000. Restructuring charges, which totaled $69,250,000, principally
relate to the reorganization of the Company's midrange business. The
restructuring charges included the writedown of residual interests associated
with net investments in sales-type leases of approximately $19,400,000;
inventory writedowns of approximately $13,500,000; the writedown of goodwill
associated with midrange products which are being de-emphasized or
discontinued of approximately $12,800,000; and estimated severance costs of
approximately $8,500,000. Merger and consolidation expenses of $5,522,000 in
1993 and $5,104,000 in 1991 were also recognized in connection with the
mergers with Amperif and Datacomp, respectively.
NOTE 15 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
BUSINESS SEGMENTS
StorageTek operates in one principal business segment - the design,
manufacturing, marketing, and servicing of information storage and retrieval
subsystems for high-performance and midrange computer systems, as well as
computer networks.
F-21
GEOGRAPHIC AREAS
StorageTek operates principally in the United States, Europe, Canada,
Australia and Japan. Operations in Canada, Australia and Japan individually
account for less than 10% of the consolidated revenue and identifiable assets,
and have been combined and shown in the table below as "Other." U.S.
operating profit includes profit recognized in the United States on transfers
to other geographic areas. Information regarding each geographic area on an
unconsolidated basis for each of the last three years is shown below (in
thousands of dollars):
Consolidated
1993 United States Europe Other Eliminations Total
- ----------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $ 938,613(1) $357,208 $108,931 $1,404,752
Transfers between areas 192,355 623 $(192,978)
--------- ------- ------- -------- ---------
Total revenue $1,130,968 $357,831 $108,931 $(192,978) $1,404,752
========= ======= ======= ======== =========
Operating profit (loss) $ (64,290) $(39,363) $ 3,869 $ (3,076) $ (102,860)
========= ======= ======= ========
Interest income (expense), net 11,246
General corporate expenses (21,182)(2)
---------
Loss before income taxes $ (112,796)
=========
Identifiable assets $1,557,720 $363,291 $ 71,875 $(408,746) $1,584,140
========= ======= ======= ========
General corporate assets 208,869
---------
Total assets $1,793,009
=========
Consolidated
1992 United States Europe Other Eliminations Total
- ----------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $ 977,574(1) $457,511 $115,860 $1,550,945
Transfers between areas 211,506 167 $(211,673)
--------- ------- ------- -------- ---------
Total revenue $1,189,080 $457,678 $115,860 $(211,673) $1,550,945
========= ======= ======= ======== =========
Operating profit $ 6,439 $ 327 $ 10,970 $ 9,197 $ 26,933
========= ======= ======= ========
Interest income (expense), net 18,465
General corporate expenses (18,364)
---------
Income before income taxes $ 27,034
=========
Identifiable assets $1,608,044 $431,427 $ 61,876 $(441,239) $1,660,108
========= ======= ======= ========
General corporate assets 78,935
---------
Total assets $1,739,043
=========
F-22
Consolidated
1991 United States Europe Other Eliminations Total
- ----------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,071,601(1) $415,839 $132,080 $1,619,520
Transfers between areas 282,738 $(282,738)
--------- ------- ------- -------- ---------
Total revenue $1,354,339 $415,839 $132,080 $(282,738) $1,619,520
========= ======= ======= ======== =========
Operating profit $ 84,285 $ 36,776 $ 7,915 $ (21,262) $ 107,714
========= ======= ======= ========
Interest income (expense), net 16,395
General corporate expenses (21,897)(2)
---------
Income before income taxes $ 102,212
=========
Identifiable assets $1,563,239 $331,524 $ 73,310 $(356,204) $1,611,869
========= ======= ======= ========
General corporate assets 123,782
---------
Total assets $1,735,651
=========
(1) U.S. revenue from unaffiliated customers includes international
export sales to customers (principally in Europe) of $52,797,000 in
1993; $63,458,000 in 1992; and $82,363,000 in 1991.
(2) General corporate expenses include merger and consolidation
expenses of $5,522,000 in 1993 and $5,104,000 in 1991.
Sales between geographic areas are generally priced to reflect market value
and to provide an appropriate gross margin to the affiliate. Operating
profit, for the purpose of this footnote, consists of total revenue less
operating expenses, and excludes interest income, interest expense and general
corporate expenses for all years presented, and the cumulative effect of the
accounting change in 1993. Identifiable assets are those assets that are
associated with the operations in each geographic area. General corporate
assets are primarily cash and short-term investments not used in the
operations of the individual geographic regions.
F-23
NOTE 16 - QUARTERLY INFORMATION (UNAUDITED)
The following quarterly results of operations for the years ended December 31,
1993, and December 25, 1992, have been restated to account for the merger with
Amperif (see Note 2) as a pooling of interests (in thousands of dollars,
except per share amounts):
Quarter Ended 1993
------------------------------------------------
March 26 June 25 September 24 December 31
------------------------------------------------
Revenue $338,992 $358,503 $ 307,058 $400,199
Cost of revenue 224,505 249,935 228,407 263,066
------- ------- -------- -------
Gross profit 114,487 108,568 78,651 137,133
Operating expenses 109,837 115,670 132,582 130,020
Restructuring and other
charges 363 69,537 4,872
------- ------- -------- -------
Operating profit (loss) 4,650 (7,465) (123,468) 2,241
Interest (income) expense,
net (2,367) (2,784) (2,491) (3,604)
------- ------- -------- -------
Income (loss) before
income taxes and
accounting change 7,017 (4,681) (120,977) 5,845
Provision for income
taxes 3,000 600 1,900 (500)
------- ------- -------- -------
Income (loss) before
accounting change 4,017 (5,281) (122,877) 6,345
Cumulative effect of
accounting change 40,000
------- ------- -------- -------
Net income (loss) $ 44,017 $ (5,281) $(122,877) $ 6,345
======= ======= ======== =======
Earnings (loss) per
common share:
Primary:
Income (loss) before
accounting change $ 0.08 $ (0.19) $ (2.94) $ 0.08
Cumulative effect of
accounting change 0.92
------- ------- -------- -------
$ 1.00 $ (0.19) $ (2.94) $ 0.08
======= ======= ======== =======
Fully diluted:
Income before accounting
change $ 0.13
Cumulative effect of
accounting change 0.81
-------
$ 0.94 N/A N/A N/A
======= ======= ======== =======
Quarter Ended 1992
------------------------------------------------
March 27 June 26 September 25 December 25
------------------------------------------------
Revenue $339,369 $395,826 $394,479 $421,271
Cost of revenue 225,241 278,815 270,755 299,388
------- ------- -------- -------
Gross profit 114,128 117,011 123,724 121,883
Operating expenses 108,151 113,520 122,237 124,269
------- ------- -------- -------
Operating profit (loss) 5,977 3,491 1,487 (2,386)
Interest (income) expense,
net (5,877) (5,016) (4,474) (3,098)
------- ------- -------- -------
Income before income taxes 11,854 8,507 5,961 712
Provision for income taxes 2,000 3,600 1,400 10,700(a)
------- ------- -------- -------
Net income (loss) $ 9,854 $ 4,907 $ 4,561 $ (9,988)
======= ======= ======== =======
Earnings (loss) per
common share:
Net income (loss) $ 0.23 $ 0.11 $ 0.11 $ (0.24)
======= ======= ======== =======
(a) Provision for income taxes for the quarter ended December 25, 1992,
includes a charge of $9,200,000 related to taxable income earned in
the first nine months of 1992. This adjustment in the fourth quarter
of 1992 was necessitated by differences between the Company's
forecasted and actual effective tax rate for 1992.
F-24
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
FOR STORAGE TECHNOLOGY CORPORATION
----------------------------------
To the Stockholders and
Board of Directors of
Storage Technology Corporation
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14.(a) 1. and 2. on page 27 present fairly, in all material respects, the
financial position of Storage Technology Corporation and its subsidiaries at
December 31, 1993 and December 25, 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated statements of operations, of
cash flows and of changes in stockholders' equity of XL/Datacomp, Inc. for the
year ended December 31, 1991. These statements reflect total revenue of
$333,808,000 for the year ended December 31, 1991. Those statements were
audited by other auditors whose report thereon has been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included
for XL/Datacomp, Inc., is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of the other auditors provide a
reasonable basis for the opinion expressed above.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes to adopt Statement of
Financial Accounting Standards No. 109 in 1993. We concur with this change in
accounting.
PRICE WATERHOUSE
Denver, Colorado
February 17, 1994
F-25
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
FOR XL/DATACOMP, INC.
---------------------
To the Board of Directors
of Storage Technology Corporation
We have audited the consolidated statements of operations and cash flows of
XL/Datacomp, Inc. and subsidiaries for the year ended December 31, 1991, and
the consolidated statement of stockholder's equity for the fifteen month
period ended December 31, 1991 (not presented separately herein). In
connection with our audit of the consolidated financial statements, we also
have audited the financial statement schedules (not presented separately
herein). These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of XL/Datacomp, Inc. and subsidiaries for the periods specified above,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 4 to the Company's consolidated financial statements, the
Company changed its method of accounting for income taxes in the year ended
December 31, 1991.
Chicago, Illinois KPMG PEAT MARWICK
January 31, 1992
F-26
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
-----------------------------------------------
SCHEDULE VIII
-------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
(In Thousands of Dollars)
Additions -
Charged to
Balance Cost of Deductions - Balance
Beginning Service Spare Parts End
of Year and Rental Written Off of Year
---------------------------------------------------
Amortization of spare
parts for customer
services:
For the year ended:
December 31, 1993 $48,268 $20,208 $13,159 $55,317
====== ====== ====== ======
December 25, 1992 $41,896 $20,746 $14,374 $48,268
====== ====== ====== ======
December 27, 1991 $49,189 $14,216 $21,509 $41,896
====== ====== ====== ======
Deductions -
Accounts
Additions - Receivable
Balance Charged to Written Off Balance
Beginning Cost and Net of End
of Year Expenses Recoveries of Year
---------------------------------------------------
Allowance for doubtful
accounts on accounts
receivable:
For the year ended:
December 31, 1993 $11,949 $ 7,228 $ 6,725 $12,452
====== ====== ====== ======
December 25, 1992 $10,733 $10,987 $ 9,771 $11,949
====== ====== ====== ======
December 27, 1991 $ 8,259 $ 4,494 $ 2,020 $10,733
====== ====== ====== ======
F-27
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
-----------------------------------------------
SCHEDULE IX
-----------
SHORT-TERM BORROWINGS
---------------------
(In Thousands of Dollars)
Weighted Weighted Weighted
Average Maximum Average Average
Interest Amount Amount Interest
Balance Rate at Outstanding Outstanding Rate
End of End of During the During the During the
Category Year Year Year Year Year (a)
- -----------------------------------------------------------------------------
December 31, 1993:
Amounts payable to
banks under
credit agreements $ 0 N/A $ 4,500 $ 1,794(b) 8.5%
Amounts payable to
financial services
company under a
working capital
financing
arrangement $ 0 N/A $ 5,248 $ 1,921(c) 12.3%
December 25, 1992:
Amounts payable to
banks under credit
agreements $ 2,300 8.8% $49,824 $10,560(b) 7.5%
Amounts payable to
financial services
company under a
working capital
financing
arrangement $ 5,220 11.5% $ 5,325 $ 1,627(c) 15.9%
December 27, 1991:
Amounts payable to
banks under credit
agreements $28,814 7.3% $93,637 $34,196(b) 9.7%
(a) The weighted average interest rate during the period was calculated by
dividing actual interest expense for the year by the weighted average
amount outstanding during the period.
(b) The weighted average amount outstanding during the period was calculated
based on the total of the daily balance outstanding divided by the number
of days in the year.
(c) The weighted average amount outstanding during the period was calculated
based on the total of the month-end balances divided by 12.
F-28
FORM 10-K
For The Fiscal Year Ended December 31, 1993
EXHIBIT INDEX
-------------
The exhibits listed below are filed as part of this Annual Report on Form 10-K:
Exhibit Number
- --------------
10.17 First Amendment to the Multicurrency Credit Agreement dated
as of August 6, 1993.
10.18 Second Amendment to the Multicurrency Credit Agreement dated
as of September 24, 1993.
10.19 Agreement between the Company and Harris Ravine dated
October 8, 1993.
11.0 Computation of Earnings (Loss) per Common Share.
21.0 Subsidiaries of Registrant.
23.1 Consent of Price Waterhouse.
23.2 Consent of KPMG Peat Marwick.