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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 30, 1994
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, 80028-4309
Louisville, Colorado
(Address of principal executive offices) (Zip Code)
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 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
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. [ ]
As of March 10, 1995, there were 44,559,186 shares of common stock of the
registrant outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant was $686,373,325 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 March 10, 1995. For
purposes of this disclosure, shares of common stock held by persons who hold
more than 5% of the outstanding common stock and common stock held by
executive officers and directors of the registrant have been excluded in that
such persons may be deemed to be "affiliates" as that term is defined under
the rules and regulations promulgated under the Securities Act of 1933. This
determination is not necessarily conclusive for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days of
the end of its fiscal year ended December 30, 1994. Portions of the
registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 24, 1995 are incorporated by reference into
Part III of this Form 10-K.
Page 2
PART I
ITEM 1. BUSINESS
GENERAL
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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
magnetic tape storage devices and automated library systems. Random access
storage subsystem products currently consist of rotating magnetic disk
devices, both in fault-tolerant disk array ("RAID") and non-redundant
configurations, 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 computer 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 maintains a worldwide customer support
network to install, maintain and service its own, and third party equipment.
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 directly markets its
products worldwide through offices located in major metropolitan areas of the
United States, Canada, Europe, Brazil, Japan and Australia, as well as
through distributors in Africa, Asia, Europe, Mexico and South America. In
1994, international revenue accounted for approximately 39% of the Company's
total revenue.
StorageTek's objective is to be the preferred provider of solutions for
information, storage and retrieval needs for the high-performance and
midrange marketplaces. The Company's strategy for achieving this objective
includes continuing to make significant investments in research and
development; expanding hardware and software product offerings and
distribution channels to provide solutions that address changing customer
requirements, including networking and interconnecting technologies; and
investing in new technologies and businesses that complement its business and
product offerings. To this end, the Company has established and will
continue to establish alliances with other manufacturers, distributors and
suppliers. As a result of these alliances, it is possible for other
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
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StorageTek has three principal information storage and retrieval product
lines: serial access subsystems (magnetic tape storage devices and automated
library systems); random access subsystems (rotating and solid-state DASD);
and midrange computer products.
Product sales, including related software revenue, accounted for
approximately 69% of total revenue in 1994, while service and rental income
accounted for the balance. Sales, service and rental revenue from the
Company's product lines for 1994, 1993 and 1992 were as follows:
REVENUE BY PRODUCT LINE
FISCAL YEAR ENDED DECEMBER
1994 1993 1992
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$ million % $ million % $ million %
--------- ---- --------- ---- --------- ----
Serial Access
Subsystems 1,033.0 63.6 875.5 62.3 936.6 60.4
Random Access
Subsystems 254.2 15.6 126.0 9.0 193.3 12.5
Midrange Systems 251.8 15.5 306.8 21.8 324.7 20.9
Other Products 86.0 5.3 96.5 6.9 96.3 6.2
------- ----- ------- ----- ------- -----
Total 1,625.0 100.0 1,404.8 100.0 1,550.9 100.0
======= ===== ======= ===== ======= =====
In the second half of 1993 and during 1994, the Company expanded its serial
access subsystem offerings with the initial shipment of, among others, the
Silverton 4490 and TimberLine tape cartridge systems and the WolfCreek 9360
and PowderHorn 9310 libraries, which together accounted for over 25% of total
revenue in 1994. The Company also introduced several new random access
subsystem products in 1994, including the Iceberg 9200 Virtual Storage
Facility and Nordique 9100 Open Storage Facility; which accounted for over
10% of total revenue in 1994. It is anticipated that a significant portion
of the Company's future revenue will come from these and future new products.
There can be no assurance, however, that these products will continue to have
a significant positive effect on revenue, or that in the future, new products
will be timely developed, address technological advances, gain market
acceptance or meet aggressive pricing practices in the marketplace.
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 IV, Item 14, Note 16 of Notes to Consolidated Financial
Statements, of this Form 10-K.
Page 4
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 storage products. The Company's
tape and library strategy currently includes: the PowderHorn 9310
(PowderHorn(TM)), the Company's second-generation Automated Cartridge System
(ACS) library, which became available in the second quarter of 1993;
WolfCreek 9360 (WolfCreek(TM)), a smaller, high-performance lower-cost library,
which became available in the fourth quarter of 1993; Silverton 4490
(Silverton(TM)), a 36-track cartridge subsystem, which became available in the
third quarter of 1993; the Company's first-generation 4400 ACS library, which
has been available since 1988; and the 4480 18-track cartridge subsystem,
which has been available since 1987. In October 1994, the Company introduced
TimberLine(TM), the Company's next-generation, high-performance 36-track
cartridge subsystem, which is expected to be a key part of the serial access
product line in 1995. The 36-track technology embodied in the Silverton and
TimberLine products has significantly reduced the importance of the Company's
older 18-track technology in the mainframe marketplace. The Company also
develops and licenses software programs designed to expand the range of
applications for its ACS libraries. The serial access subsystems product
line generates more revenue than any other product line of the Company and is
expected to continue to be a major element of the Company's plans.
The Company currently is developing several new products for the serial
access subsystem market, including the RedWood Helical Cartridge Subsystem
(Redwood(TM)). RedWood is designed as an ultra-high capacity, high-performance
mass storage cartridge subsystem and employs digital helical-scan recording
technologies. RedWood is currently in the prototype testing phase.
The Company is also currently developing software programs which are designed
to provide additional features and functions to existing tape and library
products. The majority of these software products are in the prototype
testing and engineering phases of development and are scheduled for
availability commencing in the second half of 1995. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of this Form 10-K, which is incorporated by reference into Item
1 of Part I, for a discussion of operating results and certain risks
associated with the development and introduction of new products that may
affect future results.
RANDOM ACCESS SUBSYSTEMS
StorageTek's current OnlinePlus(TM) product line consists of a number of online
random access DASD products, including RAID and non-RAID rotating magnetic
disk subsystems and solid-state disk subsystems ("SSD"). The
characteristics of these products differ principally in information storage
capacity, transfer rate, access time, and cost.
The Company's Iceberg 9200 Virtual Storage Facility (Iceberg(TM)) is the
cornerstone of the Company's OnlinePlus strategy. Iceberg has been available
since the second quarter of 1994 and is an advanced RAID subsystem for the
IBM and IBM-compatible mainframe environment. Iceberg Extended Facilities
Product and Iceberg Extended Operator Facility are software products designed
for use with Iceberg subsystems. They have been available since the second
half of 1994. These and other new DASD products are expected to serve as a
significant source of revenue for the Company in 1995. See Part II, Item 7,
"Management's Discussion and Analysis of
Page 5
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.
Arctic Fox 9800 (Arctic Fox(TM)), the Company's new SSD product, became
available on a limited basis in January 1995. Arctic Fox is a high-
performance shared access facility, and is based on disk technology acquired
as part of the Company's merger with Amperif Corporation ("Amperif"). The
Company is currently developing other new DASD products, including the Kodiak
9890 Scalable Storage Facility (Kodiak(TM)). Kodiak is a high capacity RAID
device and also is based on disk technology acquired from Amperif. Kodiak is
currently in the prototype testing phase.
MIDRANGE SYSTEMS
StorageTek's midrange products include serial access, random access and other
information storage products for IBM AS/400 and other midrange markets. The
Company markets its midrange products directly through its subsidiary,
StorageTek Distributed Systems Division, Inc. ("StorageTek DSD") (formerly
known as XL/Datacomp, Inc.), and indirectly through OEM and distributor
channels. The Company's midrange product offerings currently include:
Highlands, a high-performance, cost-competitive disk drive, which became
available in the first quarter of 1994; and Northfield, a high-performance
disk drive with RAID 5 data protection, which became available in the second
quarter of 1994. Highlands and Northfield are DASD products designed for the
IBM AS/400 market. The majority of the Company's midrange DASD product
offerings are acquired from other manufacturers.
The Company restructured its midrange business in the third quarter of 1993
in response to disappointing customer acceptance for the Company's Alpine
9600 Storage Manager and significant price erosion within the midrange
market. During 1994, the Company continued to change the midrange
organization and distribution and service networks, and redirected its
midrange marketing efforts to focus on open systems and value-added AS/400
tape products. See Part II, Item 7, "Management's Discussions and Analysis
of Financial Condition and Results of Operations -- Midrange Systems," and
Part IV, Item 14, Note 15 of Notes to Consolidated Financial Statements of
this Form 10-K for additional information with respect to the Company's
restructuring of its midrange business in 1993, including quantifications of
the significant components of the restructuring charge and the operational
and competitive implications of the restructuring.
The Company is developing other new library and tape products for the
midrange market, including a direct attach reduced capacity library subsystem
and a small form factor 36-track tape drive. These products are currently in
the prototype engineering phase.
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. The Company introduced NearNet 7900 (NearNet(TM)) in the
fourth quarter of 1993. NearNet is a combination of hardware and software
that automates storage management over a workstation network. NearNet is the
first of a series of planned network storage solutions. Central Archive
Management ("CAM"), a software application designed to provide backup and
recovery to a variety of network client systems, and NetDriver 7900, which is
a combination of software and a network gateway device
Page 6
designed to allow remote attachment of the Company's NearNet system to a
StorageTek library. CAM became available in February 1995, and NetDriver is
currently in prototype testing.
On March 7, 1995, the Company merged with Network Systems Corporation. As a
result, the Company intends to expand its network product offerings in the
future. See "Recent Merger," below.
MARKETING, DISTRIBUTION AND SERVICES
- ------------------------------------
StorageTek is committed to a worldwide marketing and product maintenance
strategy. StorageTek has established a network of sales and service offices
located in major metropolitan areas in the United States, Canada, Europe,
Brazil, Japan and Australia to market its products, in addition to its
corporate headquarters in Louisville, Colorado. The Company also sells its
products through international distributors in Africa, Asia, Europe, Mexico
and South America. In 1994, international revenue accounted for 39% of total
revenue, compared to 37% in 1993, and 41% in 1992. Because of its focus on
worldwide operations, the Company is subject to the risks of conducting
business outside the United States. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Other Factors that May Affect Future Results -- International Operations" of
this Form 10-K for a discussion of factors associated with the Company's
international business.
As of December 30, 1994, the order backlog was approximately $59 million,
compared to approximately $71 million as of December 31, 1993. Approximately
87% in 1994 and 68% in 1993 of the backlog amount is attributable to the
Company's library and tape products. In addition to these backlog amounts,
the Company also had approximately $85 million of equipment shipped awaiting
revenue recognition as of December 30 1994, compared to approximately
$39 million as of December 31, 1993. The shipped awaiting revenue
recognition amounts for 1994 principally relate to the Iceberg product. No
Iceberg equipment was included within this category in 1993. 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. Units being evaluated or covered by letters
of intent are not included in backlog amounts. Unfilled orders and orders
with respect to equipment shipped awaiting revenue recognition may be
canceled by the customer. Accordingly, there can be no assurance that the
Company's backlog and equipment shipped awaiting revenue recognition amounts
will ultimately be recognized as revenue.
The installed service base of data storage products and the expertise of the
Company's service engineers are considered to be valuable assets of the
Company and are expected to continue to be an important competitive element
of the Company's business. 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. Many of the
products introduced by the Company in late 1993 and during 1994 include
extended warranty periods in response to competitive pressures in the markets
for these products. Such extended warranties may adversely affect service
margins in the future. In 1994, service and rental revenue accounted for 31%
of total revenue, compared to 36% in 1993 and 30% in 1992.
Page 7
MANUFACTURING AND MATERIALS
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Products currently are manufactured by the Company primarily at facilities
located within the United States. The Company operates manufacturing
facilities in Colorado, Puerto Rico, California, Florida and England. In
1993, the Company achieved ISO 9001 certification at all of its manufacturing
operations. ISO 9001 is an international quality standard signifying that a
manufacturer has appropriate controls, documentation and procedures in all
significant aspects of its manufacturing operations. The Company initiated
engineering and marketing operations during 1994 in Toulouse, France, in a
newly constructed leased facility. The Company plans to commence
manufacturing operations at this facility in the first half of 1995, although
no significant manufacturing is expected to occur in Toulouse before late
1995 and such operations may be adversely affected by problems associated
with start-up operations.
While the Company manufactures several significant subassemblies, the
substantial majority of its production costs are subassemblies, parts and
components purchased from outside vendors. The balance of the Company's
production costs relate to in-house assembly and testing. Certain of the
parts and components included in the Company's products are obtained from a
single source or limited group of suppliers. The Company has long-term
supply contracts with certain vendors and suppliers; the remaining parts and
components are obtained by delivering purchase orders specifying the
particular components and, therefore, these vendors are not obligated to
supply products for an extended period, at specific quantities and prices.
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 for a discussion of factors that may affect the
Company's ability to obtain materials, which information is incorporated by
reference into Part I, Item 1 of this Form 10-K.
COMPETITION
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The Company's existing and potential competitors include several large
multinational companies having substantially greater resources, principally,
IBM, Fujitsu Limited and Hitachi Ltd., as well as a number of other
companies, including Amdahl Corporation and EMC Corp.
The markets for the Company's products are highly competitive and are
characterized by rapid technological change and intense price competition.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including the
quality, performance, and price of the Company's and its competitors'
products, the timing and success of new product introductions by the Company
and its competitors, and general economic conditions. Further, because of
the significance of IBM in the 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 in the past has been, and in the future may
be, adversely affected by a number of factors outside the control of the
Company, including among others, modifications in the design or configuration
of IBM computer systems, the announcement and introduction of new products by
IBM, as well as the announcement of competing products by IBM and other
competitors and reductions in the pricing of such 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.
Page 8
NEW PRODUCT DEVELOPMENT
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The Company currently invests substantial resources in its product
development efforts. In 1994, 1993 and 1992, the Company devoted
approximately 10%, 12% and 10%, respectively, of its revenue to develop new
products and improve the performance of existing ones. In an attempt to
expand the Company's access to new technologies and reduce the amount of time
necessary to bring new products to the market, the Company also develops
relationships with other companies.
The Company spent approximately $170 million for research and product
development activities in 1994, as compared to approximately $163 million in
1993 and approximately $153 million in 1992. Current development projects
include: new products in the Online Plus family of DASD products, data
management software, new tape subsystem products, networking systems and
enhancements to the Company's existing information storage and retrieval
products. As of December 30, 1994, approximately 1,500 employees were
engaged on a full-time basis in engineering and product development
activities.
Going forward, there can be no assurance that new products will be
successfully or timely developed, or, if introduced, that they will achieve
market acceptance. The Company has experienced delays from time to time in
completing development and introduction of new products, and there can be no
assurance that the Company will not encounter delays in the development and
introduction of future products. 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
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StorageTek's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its intellectual property
rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws, and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection, when it develops new or improved
technology that is important to its business. StorageTek currently holds
over 220 U.S. patents, as well as foreign counterparts to many of these
patents in relevant markets, covering various aspects of its products. Three
of these patents expire in 1995 and the remainder will expire from 1996
through 2011. The Company also has pending approximately 120 U.S. patent
applications, including approximately 17 that have been allowed and are
expected to be formally issued soon, as well as pending foreign counterparts
to many of these applications. StorageTek also has licenses to use patents
held by others. StorageTek owns, has license rights to, and/or has applied
to register, over 40 trademarks, as well as copyrights. Taken as a whole,
these assets are material to StorageTek's business. However, no individual
patent, trademark or other item of proprietary information is singularly
material to StorageTek's business.
The Company operates in an industry characterized by vigorous pursuit and
protection of intellectual property rights, which have resulted in
significant and sometimes protracted and expensive litigation. From time to
time, StorageTek has commenced actions against other companies to protect or
enforce its intellectual property rights. Similarly, StorageTek 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
Page 9
litigation will not be commenced in the future regarding patents, copyrights,
trademarks or trade secrets or that any license or other rights can be
obtained on acceptable terms. StorageTek is currently engaged in several
proceedings relating to its intellectual property and alleged patent
infringement. See Part I, Item 3, "Legal Proceedings" of this Form 10-K.
For a discussion of factors concerning intellectual property 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.
ENVIRONMENT
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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 StorageTek. For 1994, StorageTek did not have any material
expenditures for environmental control facilities. To date in 1995,
StorageTek does not have pending and has not budgeted any material estimated
expenditures for environmental control facilities. However, potential
liability under environmental legislation is ongoing, regardless of whether
or not StorageTek has complied with existing governmental guidelines.
Moreover, government regulation of the environment and related compliance
costs have increased in recent years. Based upon currently available
information, StorageTek does not expect that future compliance with
environmental regulations will have a material effect on StorageTek. 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
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The Company employed approximately 10,300 persons on a full-time basis
worldwide as of December 30, 1994.
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. There can be no assurance that
this historical trend will continue in 1995 and that fourth quarter results
will be higher than any other quarter.
For the year ended December 30, 1994, no single customer accounted for 10% or
more of the Company's consolidated total revenue.
No material portion of the Company's business is subject to contract
termination at the election of the U.S. government.
Reference is made to the following Notes to the Consolidated Financial
Statements set forth in Part IV, Item 14, of this Form 10-K for certain
additional information, which information is incorporated by reference
herein:
Note 2 Description of the Company's business combinations with Amperif
Corporation and Edata Scandinavia AB.
Page 10
Note 16 Information on the geographic operations of the Company's single
business segment. See also Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- International Operations and Hedging Activities"
and "Other Factors that May Affect Future Results --
International Operations" for further discussion of the risks
attendant to foreign operations.
Note 18 Description of the Company's merger with Network Systems.
Reference is also 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.
RECENT MERGER
- -------------
See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Network Systems Merger," and Note 18
of Notes to Consolidated Financial Statements contained in Part IV, Item 14,
of this Form 10-K for a discussion concerning the Company's recent merger
with Network Systems Corporation, which designs, manufactures, markets and
services high-performance computer networking products. Such information is
incorporated by reference into Part I, Item 1, of this Form 10-K.
ITEM 2. PROPERTIES
StorageTek occupies facilities in 15 separate buildings in Boulder County,
Colorado, comprising approximately 2.5 million square feet. Of these,
approximately 2.2 million square feet are owned by StorageTek and the
remaining space is leased. Currently, substantially all of this space is
utilized. These facilities include StorageTek's executive offices, as well
as manufacturing, research and development, and parts storage facilities. In
the Palm Bay - Melbourne, Florida area, StorageTek owns approximately 199,000
square feet of manufacturing facilities, which are approximately 50%
utilized. StorageTek also occupies 128,000 square feet of manufacturing
facilities in Puerto Rico, of which approximately 50,000 square feet are
leased, and leases approximately 38,000 square feet of manufacturing
facilities in England, which facilities are approximately 70% and 100%
utilized, respectively. 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. Of the leased field offices, approximately
215 are located in North America, with combined office and warehouse
facilities totaling approximately 1,250,000 square feet in the United States
and 100,000 square feet in Canada. The Company maintains approximately 65
field offices in Europe comprising approximately 325,000 square feet, and 15
field offices in the Asia/Pacific region comprising approximately 75,000
square feet. Many of the Company's leases throughout the world contain
renewal rights, cancellation rights and rights of first refusal on contiguous
expansion space. At the present time, such facilities are adequate for the
Company's purposes. The Company entered into an agreement with the French
government in February 1993 to begin leasing in January 1995 approximately
180,000 square feet of newly constructed engineering, manufacturing and
marketing facilities in Toulouse, France.
Page 11
ITEM 3. LEGAL PROCEEDINGS
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. 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. A shareholder derivative action was also filed in the second quarter
of 1992 based on substantially similar factual allegations and has been
consolidated with the class action. Discovery and depositions of the
Company's employees and other potential witnesses commenced in August 1993,
and are substantially complete. No trial dates have been established. 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 an outcome favorable to the Company. In the event of an adverse outcome,
neither the amount nor the likelihood of any potential liability which might
result is reasonably estimable; however, the Company currently believes that
the amount of the ultimate potential loss, after considering available
insurance recoveries, would not be material to the Company's financial
position. However, an adverse outcome could have a material effect on the
Company's reported results of operations in a future period. 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.
On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District
Court for the District of Colorado. The suit currently alleges infringement
by EMC Corp. of a patent 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 by StorageTek and seeking the invalidation of the
Company's patents, damages in an unspecified amount and an award of attorney
fees, costs and interest. The case is now in the discovery phase. The
Company believes EMC's counterclaim is without merit and intends to
vigorously defend against the action.
On February 23, 1994, the Company and its subsidiary, XL/Datacomp, Inc.
("XL/Datacomp"), filed suit in Boulder County, Colorado, District Court
against Array Technology Corporation ("Array") and Tandem Computers
Incorporated ("Tandem"). The suit asked that the court order Array and
Tandem to either support certain disk drives purchased from them or provide
the Company with technical data necessary for StorageTek to provide such
customer support. On March 15, 1994, Array and Tandem filed their answer and
also filed counterclaims against the Company alleging breach of contract and
claiming damages. On June 15, 1994, the court ordered Array and Tandem to
continue to provide support for these products and to maintain, in an
independent
Page 12
escrow account, the materials necessary to enable the Company and XL/Datacomp
to support the products in the event Array and Tandem failed to provide such
services. The suit is now in the discovery phase as to the claims made by
Array and Tandem. No trial dates have been established. The Company
believes the counterclaims filed by Array and Tandem are without merit and
intends to vigorously defend against them.
On July 3, 1984, StorageTek, via its predecessor-in-interest, Documation
Inc., was identified as a potentially responsible party with respect to real
property located in Orlando, Florida. The Environmental Protection Agency
("EPA") has agreed to settle the matter for approximately $132,000 payable
out of funds from the bankruptcy reserve being held by the Company. The EPA
has indicated it intends to enter into a settlement agreement for such
amount, but final documents have not been executed. 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 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 that had resolved earlier
litigation between the parties. The suit seeks injunctive relief and damages
in the amount of $2.4 billion. The Company has filed a motion to dismiss the
complaint, as well as an alternative motion to bifurcate certain of the
claims. On July 1, 1994, the court partially granted the Company's motion to
dismiss, dismissing claims based on facts or conduct occurring before the
1990 settlement of the previous litigation. In November 1994, the defendants
filed a motion for summary judgment. Discovery has been stayed pending a
ruling on that motion. No trial date has been established. The Company
believes that the claims in the suit are barred by the 1990 settlement
between the Company and Stuff and are without merit, and the Company intends
to vigorously defend against them.
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. The case is now in the discovery phase and no trial date has
been set. The Company believes the suit is without merit and intends to
vigorously defend against the suit.
On September 23, 1994, EMC Corp. filed suit in U.S. District Court in
Wilmington, Delaware, alleging infringement of a patent pertaining to disk
storage technology. The complaint seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. The Company has
filed an answer. The Company also has filed a motion to transfer the case to
the U.S. District Court for Colorado and has filed a counterclaim for
infringement of one of its patents. Discovery has been stayed pending a
decision on the motion to transfer. The Company believes the suit is without
merit and intends to vigorously defend against the suit.
In addition, the Company is involved in various other less significant legal
proceedings. The outcomes of these legal proceedings are not expected
individually or in the aggregate 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.
Information concerning certain of these legal proceedings is also contained
in Note 13 of Notes to the Consolidated Financial Statements identified in
Part IV, Item 14, of this Form 10-K.
Page 13
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 fiscal year ended December 30, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company as of
March 17, 1995.
Name Position with Company Age
- ------------------ --------------------------------------- ---
Ryal R. Poppa Chairman of the Board, President, 61
and Chief Executive Officer
David E. Weiss Chief Operating Officer and Executive 50
Vice President of Systems Development
Lowell Thomas Gooch Executive Vice President of Operations 50
John V. Williams Executive Vice President of Worldwide 51
Field Operations
David E. Lacey Corporate Vice President and Interim 48
Chief Financial Officer
Mark D. McGregor Corporate Vice President, Treasurer 53
and Interim Controller
W. Russell Wayman Corporate Vice President, 50
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. Weiss was appointed Chief Operating Officer on March 10, 1995, in
addition to his position as Executive Vice President of Systems Development.
Mr. Weiss became Executive Vice President of Systems Development in January
1993. He was a Senior Vice President of Marketing from June 1992 to January
1993 and Corporate Vice President of 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 from December 1989 to February 1991.
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 at StorageTek. Mr. Gooch has been employed by the
Company in various capacities since 1972.
Mr. Williams became Executive Vice President of Worldwide Field Operations
effective on January 1, 1995. Prior to that time, he served as Senior
Corporate Vice President, Americas from August 1993 through December 1994.
He was Corporate Vice President from February 1992 through August 1993 and
Vice President of North America from September 1990 through February 1992.
Page 14
Prior to his return to StorageTek, Mr. Williams was employed by GRiD Systems
Corp., where he served as vice president of sales and service from March 1981
to September 1990.
Mr. Lacey was appointed Interim Chief Financial Officer on February 1, 1995,
in addition to his position as Vice President. Mr. Lacey became a Corporate
Vice President in December 1990. He served as Corporate Controller of the
Company from October 1989 to February 1995.
Mr. McGregor was appointed Interim Controller on February 13, 1995, in
addition to his position as Corporate Vice President and Treasurer, which he
assumed on November 16, 1994. He served as Assistant Treasurer from July
1993 to November 1994. Prior to that time, from July 1987 to June 1993, he
served as Assistant Corporate Controller.
Mr. Wayman has served as Corporate Vice President since 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., a manufacturer of application specific
integrated circuits.
Mr. Derek Thompson, age 65, retired on January 1, 1995, as Executive Vice
President of Worldwide Field Operations, where he served from March 1991 to
December 1994, and became Executive Vice President Emeritus. From July 1984
to March 1991, he was the Vice President of Field Operations for Europe,
Africa and the Middle East.
Mr. Gregory Tymn, age 45, served as Senior Vice President and Chief Financial
Officer from March 1991 through January 1995. From November 1989 until June
1992, Mr. Tymn was Corporate Vice President of Program Management. Effective
April 15, 1995, Mr. Tymn will be resigning from the Company.
Page 15
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
composite tape as reported by The Wall Street Journal for 1994 and 1993. On
December 30, 1994, there were 19,646 record holders of common stock of
StorageTek.
1994 High Low
----------- ------- -------
1st Quarter $40.625 $31.250
2nd Quarter 34.125 25.125
3rd Quarter 39.000 28.750
4th Quarter 31.000 26.625
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
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.
Furthermore, the Company's existing multicurrency credit agreement and 9.53%
Senior Secured Notes contain certain restrictions that limit the payment of
cash dividends based primarily upon the Company's consolidated net income.
As of December 30, 1994, under the terms of the multicurrency credit
agreement, the Company did not have sufficient cumulative consolidated net
income to permit the payment of cash dividends on its common stock.
PAGE 16
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1992
through 1994 (except for the 1992 Balance Sheet Data), has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 30, 1994, and December 31,
1993, and the related Consolidated Statement of Operations for each of the
three years in the period ended December 30, 1994, and notes thereto. The
data, insofar as it relates to the Balance Sheet Data as of December 25,
1992, December 27, 1991, and December 28, 1990, and the Statement of
Operations Data for the fiscal years 1991 and 1990, has been derived from the
historical financial statements of the Company, XL/Datacomp, Inc. and Amperif
Corporation, as pooled entities for such periods.
The following table 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
---------------------------------------------------------------
1994 1993 1992 1991 1990
---------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $1,624,959 $1,404,752 $1,550,945 $1,619,520 $1,594,804
Cost of revenue 1,057,250 965,913 1,074,199 1,105,077 1,123,195
--------- --------- --------- --------- ---------
Gross profit 567,709 438,839 476,746 514,443 471,609
Research and product
development costs 169,811 163,286 152,702 123,269 104,013
Marketing, general,
administrative and other
income and expense, net 341,747 324,823 315,475 300,253 252,524
Restructuring and other
charges (Note 15) 74,772 5,104(a)
--------- --------- --------- --------- ---------
Operating profit (loss) 56,151 (124,042) 8,569 85,817 115,072
Interest expense 40,678 43,670 48,706 52,157 59,210
Interest income (42,964) (54,916) (67,171) (68,552) (50,622)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes, extraordinary items
and accounting change 58,437 (112,796) 27,034 102,212 106,484
Provision for income taxes 17,000 5,000 17,700 12,400 11,100
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary items
and accounting change 41,437 (117,796) 9,334 89,812 95,384
Extraordinary items (1,304)(b)
Cumulative effect of
accounting change (Note 9) 40,000
--------- --------- --------- --------- ---------
Net income (loss) $ 41,437 $ (77,796) $ 9,334 $ 89,812 $ 94,080
========= ========= ========= ========= =========
Earnings (loss) per common share:
Income (loss) before
extraordinary items
and accounting change $ 0.66 $ (2.98) $ 0.22 $ 2.17 $ 2.63
Net income (loss) 0.66 (2.05) 0.22 2.17 2.59
BALANCE SHEET DATA
Working capital $ 474,220 $ 468,497 $ 357,942 $ 436,067 $ 281,471
Total assets 1,890,007 1,793,009 1,739,043 1,735,651 1,489,407
Long-term debt 356,887 361,718 369,998 373,025 337,912
Long-term debt, excluding
nonrecourse borrowings 244,814 264,743 226,840 208,081 155,640
Stockholders' equity 1,074,547 1,017,303 927,913 899,571 658,998
(a) In 1991, the Company recognized expenses of $5,104,000 in connection
with the merger with XL/Datacomp, Inc.
(b) 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.
PAGE 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The Company reported net income for the year ended December 30, 1994, of
$41.4 million on revenue of $1.62 billion, compared to a net loss for the
year ended December 31, 1993, of $77.8 million on revenue of $1.40 billion
and net income for the year ended December 25, 1992, of $9.3 million on
revenue of $1.55 billion.
Revenue increased 16% in 1994 compared to 1993, primarily due to increased
sales of the Company's Silverton 4490 (Silverton), a 36-track tape offering;
PowderHorn 9310 (PowderHorn), an Automated Cartridge System (ACS) library;
and incremental sales revenue from the Iceberg 9200 Virtual Storage Facility
(Iceberg). Sales of the Company's first-generation 4400 ACS library and 4480
18-track tape cartridge system declined in 1994, as did sales of midrange
products. The Company's improved operating results in 1994 over 1993
resulted from increased gross profit contributions associated with sales of
its serial access and direct access storage device (DASD) products, including
Silverton, PowderHorn, and Iceberg. While both revenue and operating results
improved during 1994, these results fell short of the Company's expectations.
The Company's operating results in 1994 were adversely affected by
competitive pricing pressure in the DASD marketplace; a longer than
anticipated customer acceptance period for Iceberg; and higher than expected
marketing, general and administrative expenses. The Company's operating
results in 1994 were also pressured by the discontinuance of austerity
measures, including salary reductions, instituted in late 1992. The
Company's midrange systems business operated near the breakeven level during
1994.
Revenue decreased 9% in 1993, compared to 1992, primarily due to the 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 most of 1993. These
factors, coupled with restructuring and other charges of $74.8 million
associated with the Company's midrange business and losses associated with
the operations of Amperif Corporation (Amperif), with whom the Company merged
in the fourth quarter of 1993, resulted in a net loss for 1993. The net loss
in 1993 was partially offset by a $40.0 million benefit from the cumulative
effect of a change in the method of accounting for income taxes.
Improvements in revenue and operating results in 1995 are significantly
dependent upon the continuing success of the Company's recently introduced
products, the timely and successful introduction of new products and planned
technological improvements to existing products, and achieving cost savings
associated with the manufacture of these products to offset anticipated
intense competitive pricing pressures, particularly in the DASD marketplace.
Aggressive pricing practices in the DASD marketplace have resulted in
significant price declines in recent months. Improvements in revenue and
operating results during 1995 are significantly dependent upon the extent of
price declines during the reminder of 1995 and the Company's ability to
manage these price declines. The Company plans to continue the implementation
of cost-control measures in order to attain targeted expense ratios,
including further redeployments or reductions in headcount. Other factors
that may affect future results include the introduction of new products by
competitors, technological advances within the computer industry, and changes
in the worldwide economy, among others. See "OTHER FACTORS THAT MAY AFFECT
FUTURE RESULTS," below.
PAGE 18
On March 7, 1995, the Company completed the merger with Network Systems
Corporation. For further discussion of the merger, see Note 18 to the
Company's Consolidated Financial Statements and "NETWORK SYSTEMS MERGER,"
below.
The Company's cash and short-term investments decreased $65.2 million during
1994 primarily as a result of the significant investment associated with the
ramp-up of production for new products, and delivery of these products to
customers for evaluation and acceptance prior to cash collection of the
associated revenue.
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
-------------------------------
1994 1993 1992
----- ----- -----
Revenue:
Serial Access Subsystems 63.6% 62.3% 60.4%
Random Access Subsystems 15.6 9.0 12.5
Midrange Systems 15.5 21.8 20.9
Other 5.3 6.9 6.2
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 65.1 68.8 69.3
----- ----- -----
Gross profit 34.9 31.2 30.7
Research and product
development costs 10.4 11.6 9.8
Marketing, general, administrative
and other income and expense, net 21.0 23.1 20.3
Restructuring and other charges 5.3
----- ----- -----
Operating profit (loss) 3.5 (8.8) 0.6
Interest (income) expense, net (0.1) (0.8) (1.1)
----- ----- -----
Income (loss) before income
taxes and cumulative effect
of accounting change 3.6 (8.0) 1.7
Provision for income taxes 1.0 0.4 1.1
----- ----- -----
Income (loss) before
cumulative effect of
accounting change 2.6 (8.4) 0.6
Cumulative effect on prior years
of change in method of
accounting for income taxes 2.9
----- ----- -----
Net income (loss) 2.6% (5.5)% 0.6%
===== ===== =====
REVENUE
- -------
Total revenue increased 16% in 1994 compared to 1993, principally as a result
of an increase in product sales of 24%. Service and rental revenue was
largely unchanged in 1994 compared to 1993. 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%.
SERIAL ACCESS SUBSYSTEMS
Revenue from serial access subsystem products increased 18% in 1994 compared
to 1993, primarily due to increased sales of PowderHorn and Silverton. The
Company also recognized incremental sales from its TimberLine 36-track
cartridge subsystem, which became available in
PAGE 19
the fourth quarter of 1994. Sales of the Company's first-generation 4400 ACS
library and 4480 18-track cartridge system declined during 1994.
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 most of 1993. These pressures were offset partially by incremental sales
revenue in the fourth quarter of 1993 from PowderHorn and Silverton.
During 1995, increased sales associated with TimberLine and new serial access
products scheduled for availability in 1995 are expected to offset
anticipated further declines in revenue from the Company's first-generation
tape and library products. The serial access product family generates more
revenue than any other product line of the Company and is expected to
continue to be a major element of the Company's plan for 1995.
RANDOM ACCESS SUBSYSTEMS
Revenue from random access subsystem products increased 102% in 1994 compared
to 1993, due to incremental sales of Iceberg. Iceberg became generally
available during the second quarter of 1994. More than 245 Iceberg
subsystems had been revenue recognized through the end of the year. While
demand for Iceberg was strong in 1994, sales fell short of the Company's
expectations. Sales of Iceberg in 1994 were adversely affected by lower than
anticipated unit sales volume, smaller configuration sizes, and pricing
pressures, as well as a longer than anticipated customer evaluation and
acceptance period. No significant sales revenue was generated in 1994 by the
Company's Nordique 9100 Open Storage Facility (Nordique), which became
available in the third quarter of 1994. Nordique, a disk array product
targeted at the lower end of the large systems marketplace and the midrange
systems marketplace, has been adversely affected by rapid technological
advances that have limited its competitiveness.
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. The decrease in revenue from the Company's rotating DASD
reflects the discontinuance of production of the Company's 8380 disk
subsystem, which was completed during the second quarter of 1993. The
decrease in DASD revenue from Amperif resulted from competition from new
products offered by Unisys.
The Company is committing substantial resources to develop additional
functions and features for Iceberg. Sales of Iceberg in 1995 are dependent
upon continued customer acceptance of Iceberg in light of existing and
anticipated competitive offerings in the DASD marketplace, the timely
introduction of these additional Iceberg functions and features, achieving
cost savings associated with the manufacture of Iceberg, and managing
anticipated aggressive price competition in the DASD market. While the
Company believes the introduction schedules for new Iceberg features and
other DASD products currently being developed are achievable, there can be no
assurances that they will be met, or that they will gain market acceptance.
MIDRANGE SYSTEMS
Revenue from midrange system products decreased 18% in 1994 compared to 1993.
Midrange revenue and operating profits continued to be adversely affected by
steep price erosion in the midrange DASD marketplace. Further, the
restructuring plan adopted in the third quarter of 1993 has resulted in
reduced midrange revenue as anticipated at the time the
PAGE 20
restructuring was adopted. During 1994, the Company continued to change the
midrange organization, and distribution and service networks. The Company
also redirected its midrange marketing efforts to focus on open systems and
value-added AS/400 tape products and service to improve performance.
Revenue from midrange system products decreased 6% in 1993 compared to 1992.
This decrease primarily reflects delays in the availability of the Company's
Alpine 9600 Storage Manager, and price erosion in the midrange DASD
marketplace. The decreases in revenue from midrange system products were
also a result of the limited acceptance of the Company's midrange tape
products. In response to these factors, the Company restructured its
midrange business in the third quarter of 1993. The restructuring involved
changing the Company's midrange product line, organization, distribution
network and service operations to improve operating performance. See Note 15
to the consolidated financial statements and "RESTRUCTURING AND OTHER
CHARGES," below, for further discussion of the Company's 1993 restructuring
of its midrange business.
The Company's midrange business operated near the breakeven level during
1994. In 1995, price erosion in this intensely competitive marketplace is
expected to continue. Accordingly, there can be no assurance that the
Company's midrange business will generate any significant profits in the
future.
OTHER
Revenue from other products decreased 11% in 1994 compared to 1993, due to a
decrease in printer product revenue resulting from decreased unit sales
volume. Revenue from other products was largely unchanged in 1993 compared
to 1992. Printer product revenue will continue to decline in 1995 as the
Company continues to wind down these operations. Sales of the Company's
NearNet network storage manager (NearNet) were not significant in 1994. The
ability to successfully develop and introduce networking products in the
future is, however, expected to have a significant effect on the Company's
future operating results. See "NETWORK SYSTEMS MERGER," below.
GROSS PROFIT
- ------------
Overall gross profit increased to 35% for 1994, compared to 31% for 1993 and
1992, primarily due to increased product sales margins.
Gross profit on product sales increased to 35% in 1994, compared to 29% in
1993 and 30% in 1992, primarily as a result of a favorable product mix which
included greater contribution to revenue from higher margin products sold
during 1994, such as Iceberg, Silverton, and PowderHorn; and reduced revenue
contribution from midrange products, which generally have lower margins.
Product sales margins were, however, pressured by intense price competition
in the large systems and midrange DASD marketplaces; increased operating
expenses associated with the discontinuance of salary reductions and other
austerity measures; and inventory writedowns associated with DASD products
targeted for the midrange and lower end of the large systems marketplace.
Charges of approximately $15 million were recognized in 1994 for inventory
writedowns as a result of the continued price erosion in the midrange DASD
marketplace.
PAGE 21
Gross profit on service and rental revenue increased slightly to 36% in 1994,
compared to 35% in 1993 and 33% in 1992. Service margins were, however,
reduced in the second half of 1994, primarily due to the discontinuance of
austerity measures instituted in 1992.
The Company's ability to sustain or improve product sales margins in 1995 is
significantly dependent upon the timely introduction of planned technological
improvements to existing products and achieving cost savings associated with
the manufacture of these products. Product sales margins may also be
adversely effected by inventory writedowns during 1995 as a result of more
rapid than anticipated technological changes and continuing price erosion in
the DASD marketplace. Service margins are expected to decline slightly in
1995 as a result of longer warranty periods and increased costs associated
with the installation of new products.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures increased 4% in 1994 and 7% in
1993. The Company completed several major product development programs
during 1994 and has now shifted a portion of these resources to the
development of enhancements for these products. The increase in 1993 was
primarily due to the investment in these product development programs, which
was partially offset by ongoing cost containment efforts.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A)
increased 5% in 1994 compared to 1993, primarily due to an increase in
operating expenses as a result of higher sales volumes and costs incurred in
connection with the introduction of new products and the discontinuance of
austerity measures. These increases were partially offset by lower operating
expenses related to the Company's restructured midrange business and reduced
foreign currency losses in 1994, compared to 1993. Gains and losses
associated with foreign currency transactions and translation adjustments,
net of associated hedging results, aggregated a net loss of $1.0 million for
1994, compared to a net loss of $8.8 million in 1993.
MG&A was largely unchanged in 1993 compared to 1992. Gains and losses
associated with foreign currency transactions and translation adjustments,
net of associated hedging results, aggregated a net loss of $8.8 million in
1993, compared to a net loss of $8.4 million in 1992.
See "INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES," below, 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 15 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, recognized
during the third quarter of 1993, principally related to the reorganization
of the Company's midrange business. Merger and consolidation expenses of
$5.5 million were also recognized during 1993 in connection with the merger
with Amperif.
PAGE 22
The restructuring yielded expense reductions of approximately $10 million in
the fourth quarter of 1993 and approximately $39 million during 1994. The
cost savings during 1994 resulted from the following components (in millions
of dollars):
Exit of non-profitable midrange product lines
and services $15
Consolidation of marketing and service organizations 11
Employee reductions 8
Reduced goodwill amortization 5
--
Total $39
==
Following is a rollforward by quarter of the $12 million of restructuring
accruals established at the time of the restructuring (in millions of
dollars):
Reclassifications
to Other
Beginning Cash Restructuring Ending
Balance Payments Charges Balance
-------------------------------------------------
Third quarter, 1993 $12.0 $(0.7) $11.3
Fourth quarter, 1993 11.3 (4.5) $(1.2) 5.6
First quarter, 1994 5.6 (2.4) 3.2
Second quarter, 1994 3.2 (0.9) 2.3
Third quarter, 1994 2.3 (0.4) 1.9
Fourth quarter, 1994 1.9 (1.0) 0.9
--- ---
Total $(9.9) $(1.2)
=== ===
No material cash outflows are anticipated to result from this restructuring
in the future.
INTEREST INCOME AND EXPENSE
- ---------------------------
Despite an increase in market interest rates during 1994, interest income
decreased 22% compared to 1993, due to a reduction in net investment in sales-
type lease balances and a decrease in the Company's cash balances available
for investment. Interest income decreased 18% in 1993 compared to 1992, due
primarily to a reduction in net investment in sales-type lease balances.
Interest expense decreased 7% in 1994 compared to 1993, primarily as a result
of reduced levels of nonrecourse borrowings in the first half of 1994.
Interest expense decreased 10% in 1993 compared to 1992, primarily as a
result of lower interest rates and a reduction in the Company's nonrecourse
borrowings.
INCOME TAXES
- ------------
As further discussed in Note 9 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
PAGE 23
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.
SFAS No. 109 requires that deferred income tax assets be recognized to the
extent realization of such assets is more likely than not. The Company
evaluates 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 $51.6 million of deferred income tax assets as of
December 30, 1994.
See Note 9 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 in certain foreign
countries. 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.
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 were 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.
WORKING CAPITAL
The Company's cash balances decreased $49.1 million and short-term
investments decreased $16.0 million from December 31, 1993, to December 30,
1994. Net cash provided by operations was $73.3 million for 1994 compared to
$87.5 million for 1993 and $107.1 million for 1992. The decrease in cash and
short-term investments for 1994 primarily resulted from a significant
investment in equipment held for sale or lease as the Company shipped Iceberg
and other new products to customers for evaluation and acceptance prior to
recognizing the associated revenue. While the ramp-up of production of
Iceberg was largely completed in 1994, the Company continues to carry a
significant investment in equipment held for sale or lease going into 1995.
Significant investments in property, plant and equipment were also made in
1994 in connection with test and production equipment associated with new
products. Net cash of $2.1 million from financing activities during 1994
reflects net proceeds from non-recourse borrowings offset by repayments of
other debt. 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.
PAGE 24
The current ratio decreased to 2.1 at December 30, 1994, from 2.2 at December
31, 1993. Accounts receivable increased from $218.7 million at December 31,
1993, to $313.2 million at December 30, 1994, due primarily to higher
comparable revenue. Inventories increased from $203.3 million at December
31, 1993, to $240.0 million at December 30, 1994, principally as a result of
a build-up of inventories associated with new DASD and tape products.
AVAILABLE FINANCING LINES
In September 1994, the Company amended its secured multicurrency credit
agreement with a group of U.S. and international banks (the Revolver) to
increase the maximum possible borrowings under the credit facility from $150
million to $200 million and to extend the facility through March 1996. In
addition, the Revolver was modified to increase the total amount available
under the borrowing base. 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 (8.5% at December 30, 1994). The total
amount available under the Revolver is limited to a monthly borrowing base
determined as a percentage of the Company's eligible accounts receivable,
lease assets (primarily net investments in sales-type leases not previously
utilized for other secured borrowings), and equipment awaiting revenue
recognition. 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. As of December 30, 1994,
the Company had no outstanding advances under the Revolver and had
approximately $136 million of available credit under the Revolver.
In addition to the Revolver, the Company had lease assets in excess of $80
million available for financing as of December 30, 1994. Subject to credit
approval, the Company believes it can develop lease discounting lines, if
needed, or fund its operating and capital requirements through other forms of
asset-backed financings. At the Company's option, a portion of these lease
assets can also be utilized for borrowings under the Revolver.
In order to sustain desired levels of cash balances, the Company may from
time-to-time borrow against its Revolver. The Company believes it has
adequate working capital and financing capabilities to meet its anticipated
operating and capital requirements for the next 12 months, including new
product offerings. Over the longer term, the Company intends to continue to
commit substantial amounts of its resources to research and development
projects and may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The Company may seek to fund these activities or possible
transactions through the issuance of additional equity or debt. The issuance
of equity or convertible debt securities could result in dilution to the
Company's stockholders. There can be no assurance that such additional
financing, if required, can be completed on terms acceptable to the Company.
FINANCING SUBSIDIARY
The Company established a wholly owned captive financing subsidiary,
StorageTek Financial Services Corporation (SFSC), during 1994. The Company
believes that SFSC will expand the Company's offering of leasing and other
customer finance products and services, as well as lower the Company's cost
of funding those products and services.
PAGE 25
LONG-TERM DEBT-TO-EQUITY
The Company's long-term debt-to-equity ratio decreased to 33% as of December
30, 1994, from 36% as of December 31, 1993. These debt-to-equity ratios
include $112.0 million and $97.0 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
decreased to 23% as of December 30, 1994, from 26% as of December 31, 1993.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
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 are
convertible at the option of the holder into common stock at a price of
$35.25 per share. The Convertible Debentures are currently redeemable at the
option of the Company at a premium of 4.8%, 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 30, 1994, 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. All principal
amounts are due and payable on August 31, 1996. Upon repayment of the Notes,
approximately $60 million of additional lease assets which currently secure
the Notes will become available for financing. 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.
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 directors. Annual dividends associated
with the Preferred Stock aggregate $12.1 million. The Notes contain
restrictions that limit the payment of dividends on the Company's Preferred
Stock; however, these restrictions are not expected to limit the ability of
the Company to pay dividends on its Preferred Stock.
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, if issued, would contain
conversion and optional redemption
PAGE 26
provisions substantially identical to those of the Preferred Stock, and would
be subject to a mandatory sinking fund.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
In 1994, approximately 39% of the Company's revenue was generated by its
international operations. The majority of the Company's international
operations involve transactions denominated in the local currencies of
countries within Western Europe, principally Germany, France and the United
Kingdom; Scandinavia; Japan; Canada and Australia. An increase in the
exchange value of the U.S. dollar reduces the value of revenue and profits
generated by the Company's international operations. As a result, the
Company's 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 revenue from its
international operations. Gains and losses on the options are deferred and
recognized as an adjustment to the hedged 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 net monetary assets held in foreign currencies. The forward contracts
are marked-to-market each month with any gains or losses recognized within
MG&A as an adjustment to the foreign exchange gains and losses on the
translation of net monetary assets. See Note 14 to the consolidated
financial statements for additional information with respect to the Company's
foreign currency hedging activities, including an assessment of the market
and credit risks associated with these activities. See "OTHER FACTORS THAT
MAY AFFECT FUTURE RESULTS - INTERNATIONAL OPERATIONS," below, for further
discussion of other factors which may affect the Company's international
operations.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------------
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company believes that the successful and timely development and shipment
of its new products will play a key role in determining its results of
operations and competitive strength in the future. During the past several
years, the Company has introduced many new and enhanced products and has
plans to introduce additional products in 1995. There can be no assurance
that the Company will successfully develop, manufacture or market these
products. Delays in the availability of new products could adversely affect
the Company's financial results.
The market for the Company's products is characterized by rapid technological
advances which necessitate frequent product introductions and enhancements,
and can result in 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, a problem that has been experienced in the midrange line of products
and resulted in inventory write downs. 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
PAGE 27
that results in substantial costs for the repair or replacement of defective
products and potential damage to the Company's reputation.
DEPENDENCE ON IBM SYSTEMS; COMPETITION; PRICING PRESSURES
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 companies, including Amdahl
Corporation and EMC Corp. Current industry estimates show the industry's
1995 DASD manufacturing capacity and total projected output are significantly
greater than anticipated demand. This potential over-supply could put
increasing downward pressure on pricing. 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 in the past has been and in the future may be adversely affected by
a number of factors outside the control of the Company, including, among
others, modifications in the design or configuration of IBM computer systems;
IBM's efforts to deny access to required interface information; the
announcement and introduction of new products by competitors; changes in
customer requirements such as migration toward networked computing; and price
competition for comparable systems, equipment or services. The Company's
ability to sustain or increase sales levels depends to a significant extent
upon acceptance of and continued demand for the many recently introduced
products, and products planned for introduction in the future. There can be
no assurance that the Company's current product offerings, products in
development, or products in the early stages of market introduction will
achieve or sustain market acceptance, or that they will be able to
successfully compete against other companies' products. Also, the Company's
service business may be adversely affected in the future by aggressive
pricing and litigation strategies utilized by competitors in an effort to
gain market share, as well as the current trend toward granting extended
warranties.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company's manufacturing processes have increased in complexity as the
number and diversity of products offered to customers has increased. The
manufacturing process for many of the Company's products is highly complex
and precise. Unexpected difficulties in the manufacturing process can cause
component parts, or systems to be rejected. Many of these difficulties are
hard to diagnose and expensive to remedy. The Company expects to begin
manufacturing operations in its Toulouse France facilities in 1995, which
could initially experience manufacturing irregularities or adverse output
fluctuations.
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. However, 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 qualification requirements and
other specifications. 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 results of operations. In the event a sole-source supplier
was unable or unwilling to continue to supply components, the Company would
have to identify and qualify other acceptable suppliers.
PAGE 28
This process could take an extended period and no assurance can be given that
any additional source would become available or would be able to satisfy the
Company's production requirements on a timely basis.
The Company markets a number of products acquired from other manufacturers on
an original equipment manufacturer (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 results of
operations.
EARNINGS FLUCTUATIONS
The Company's reported earnings can fluctuate significantly from quarter to
quarter due to a variety of factors, including among others, the effects of
(i) customers' historical 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, (iii)
fluctuating foreign currency exchange rates, (iv) longer than anticipated
customer acceptance periods for the Company's products, and (v) changes in
the mix of products sold. The Company's reported earnings in 1995 may also
be significantly affected by the operating results of Network Systems - with
whom the Company merged in March 1995. Network Systems' operating results,
together with associated merger and consolidation charges, are expected to be
dilutive to the Company's reported earnings at least through 1995.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has fluctuated substantially
in the past in response to reported earnings, industry conditions, new
product or product development announcements by the Company or its
competitors, announced acquisitions and joint ventures by the Company or its
competitors, general market and economic conditions, international currency
fluctuations and other events or factors. Further, the volatility of the
stock markets in recent years has caused wide fluctuations in trading prices
of stocks of high technology companies independent of their individual
operating results. The market value of the Company's Common Stock may at any
given time in the future be adversely affected by these and other factors.
See Part II, Item 5, "Market for Registrant's Common Stock and Related
Stockholder Matters " of this Form 10-K.
INTELLECTUAL PROPERTY
The Company's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its intellectual property
rights through a combination of patents, trademarks, copyrights,
confidentiality procedures, trade secret laws and licensing arrangements.
The Company's policy is to apply for patents, or other appropriate
proprietary or statutory protection when it develops new or improved
technology that is important to its business. Such protection, however, may
not preclude competitors from developing products similar to the Company's
products. In addition, competitors attempt to restrict the Company's ability
to compete by advancing various intellectual property law theories which
could, if enforced by the courts, restrict the Company's ability to develop
and manufacture interoperable products. Also, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as the laws of the United States. The Company also relies on
certain technology that is licensed from others. The Company's intellectual
property rights are material to the Company's business. The failure to
successfully protect its intellectual property rights could have a material
adverse effect on the Company's business, financial condition and operating
results.
PAGE 29
The high technology industry is characterized by vigorous pursuit and
protection of intellectual property rights or positions, which in some
instances has resulted in significant litigation, which is often protracted
and expensive. Litigation by or against the Company could result in
significant expense and divert the efforts of the Company's technical and
management personnel, whether or not such litigation results in an
unfavorable determination against the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology. There can be no assurances that the Company would be successful
in such development or that such license would be available on reasonable
terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. The
Company from time to time 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. Currently, the Company is
involved in several proceedings relating to its intellectual property and
patent infringement. See Part I, Item 3, "Legal Proceedings" and Note 13 to
the consolidated financial statements for additional information with respect
to the Company's legal proceedings.
INTERNATIONAL OPERATIONS
During fiscal 1994, 1993 and 1992, approximately 39%, 37% and 41%,
respectively, of the Company's revenue was derived from sales in markets
outside of the United States, primarily in Europe. The Company expects that
international sales will continue to account for a significant portion of its
revenue for the foreseeable future. The Company's international business may
be affected by changes in demand resulting from localized economic and market
conditions. For example, in the past the Company's business has been
adversely affected by recessions in Europe. In addition, the Company is
subject to the risks of conducting business outside of the United States,
including fluctuations in currency exchange rates, changes in or impositions
of legislative or regulatory requirements, tariffs, quotas, difficulty in
obtaining export licenses, potentially adverse taxes, the burdens of
complying with a variety of foreign laws and other factors beyond the
Company's control. In addition, the laws of certain foreign countries in
which the Company's products are or may be manufactured or sold may not
protect the Company's intellectual property rights to the same extent as do
the laws of the United States. To date, the Company has not experienced any
material adverse effects on its operations as a result of the foregoing
factors; however, there can be no assurances that in the future one or more
of the foregoing factors will not have a material adverse effect on the
Company's business, financial condition or operating results.
NETWORK SYSTEMS MERGER
- ----------------------
As more fully discussed in Note 18 to the consolidated financial statements,
the Company, through a wholly owned subsidiary, completed a merger with
Network Systems Corporation (Network Systems) on March 7, 1995. The merger
will be accounted for as a pooling of interests and, accordingly, the
consolidated financial statements will be restated in the first quarter of
1995 for all periods prior to the merger to include the operations of Network
Systems, adjusted to conform with StorageTek's accounting policies and
presentation. The conforming accounting changes principally relate to
revenue recognition and income tax accounting. Merger and consolidation
charges of between $10 and $15 million are expected to be recognized in the
first quarter of 1995 in connection with the merger. The merger and
consolidation charges, together with Network Systems' operating results, are
expected to be
PAGE 30
dilutive to StorageTek's operating results at least through 1995.
Nonetheless, StorageTek believes Network Systems' current and anticipated
future products will provide the Company with the opportunity to accelerate
its plans for introducing storage management solutions for the enterprisewide
network environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the Index to
Consolidated Financial Statements at Item 14 of this Form 10-K are
incorporated by reference into this Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
Page 31
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 under the caption "Election of Directors" in
the Company's definitive Proxy Statement concerning the Annual Meeting of
Stockholders to be held May 24, 1995 (the "Proxy Statement"), which
information is incorporated herein by reference. Also, the information
concerning executive officers set forth under the caption "Executive Officers
of the Registrant," in Part I of this Form 10-K is incorporated herein by
reference.
The information concerning Forms 3, 4, and 5 filed by Section 16 reporting
persons set forth under the caption "Compensation of Executive Officers --
Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATIONS
The information concerning compensation of executive officers and directors
required under this item is contained in the Proxy Statement under the
captions "Compensation of Executive Officers" and "Standard Arrangements for
Compensation of Directors," 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 and directors required under this
item is contained in the Proxy Statement under the captions "Voting
Securities of the Company -- Principal Holders of Securities,-- Security
Ownership of Named Executives" and "Election of Directors," which 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 Proxy Statement under the
caption "Compensation of Executive Officers," which is incorporated herein by
reference.
Page 32
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 30, 1994,
and December 31, 1993 F-1
Consolidated Statement of Operations for the
Years Ended December 30, 1994, December 31,
1993, and December 25, 1992 F-2
Consolidated Statement of Cash Flows for the
Years Ended December 30, 1994, December 31,
1993, and December 25, 1992 F-3
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended December 30, 1994,
December 31, 1993, and December 25, 1992 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants for Storage
Technology Corporation F-29
Report of Independent Accountants for
Network Systems Corporation F-30
2. Financial Statement Schedules:
VIII - Valuation and Qualifying
Accounts and Reserves F-31
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 33
Exhibit No. Description
---------- ------------------------------------------------------------
2.1 Restated Agreement and Plan of Merger by and among the
Registrant, StorageTek Eagle Corporation and Network Systems
Corporation dated as of August 8, 1994, as amended as of
August 25, 1994 and September 9, 1994 and Restated on
November 5, 1994 (filed November 16, 1994, as Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4, and
incorporated herein by reference).
2.2 Amendment to Restated Agreement and Plan of Merger among
Storage Technology Corporation, StorageTek Eagle Corporation
and Network Systems Corporation dated as of February 8, 1995
(filed February 8, 1995 on Form 8-K, and incorporated herein
by reference).
3.1 Restated Certificate of Incorporation and Restated Bylaws 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).
3.2 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).
3.3 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).
3.4 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).
4.1 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).
4.2 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).
4.3 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).
Page 34
Exhibit No. Description
---------- ------------------------------------------------------------
4.4 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).
4.5 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).
4.6 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).
4.7 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).
4.8 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).
4.9 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).
4.10 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).
4.11 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).
4.12 Amendment No. 1 and Waiver to Note Agreement dated as of
April 1, 1994 relating to the Registrant's 9.53% Senior
Secured Notes due August 31, 1996 (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 1, 1994, and incorporated herein by
reference).
4.13 Amendment No. 2 and Waiver to Note Agreement dated as of
April 2, 1994 relating to the Registrant's 9.53% Senior
Secured Notes due August 31, 1996 (filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 1, 1994, and incorporated herein by
reference).
Page 35
Exhibit No. Description
---------- ------------------------------------------------------------
10.1* 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).
10.2* 1987 Employee Stock Purchase Plan, as amended (filed as part
of the Registrant's Registration Statement on Form S-8 filed
September 8, 1994, File No. 33-42818, and incorporated
herein by reference).
10.3* 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).
10.4* 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).
10.5* Storage Technology Corporation MBO Plan (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
quarter ended July 1, 1994, 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
Registrant's Registration Statement on Form S-8, filed
September 18, 1991, File No. 33-42817, and incorporated
herein by reference).
10.7 NONE
10.8*/** Employment Agreement between the Company and David E. Lacey,
dated February 17, 1995.
10.9*/** Employment Agreement between the Company and L. Thomas
Gooch, dated February 17, 1995.
10.10*/** Employment Agreement between the Company and Mark D.
McGregor, dated February 17, 1995.
- ----------------------
* Contract or compensatory pal or arrangement in which directors and/or
officers participate.
** Indicates Exhibits filed with this Annual Report.
Page 36
Exhibit No. Description
---------- ------------------------------------------------------------
10.11*/** Employment Agreement between the Company and W. Russell
Wayman, dated February 17, 1995.
10.12*/** Employment Agreement between the Company and David E. Weiss,
dated February 17, 1995.
10.13*/** Employment Agreement between the Company and John V.
Williams, dated February 17, 1995.
10.14 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).
10.15 Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994 (filed as Exhibit 10.0 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, and incorporated herein by
reference).
10.16 Restated Agreement and Plan of Merger, dated November 15,
1994, between the Registrant, StorageTek Eagle Corporation
and Network Systems Corporation (filed as Appendix A to the
Registrant's Registration Statement on Form S-4 filed on
January 10, 1995, File No. 33-55343, and incorporated herein
by reference).
10.17** Amendment to Restated Agreement and Plan of Merger, dated
February 8, 1995, between the Registrant, StorageTek Eagle
Corporation and Network Systems Corporation.
11.0** Computation of Earnings (Loss) per Common Share.
21.0** Subsidiaries of Registrant.
- ----------------------
* Contract or compensatory pal or arrangement in which directors and/or
officers participate.
** Indicates Exhibits filed with this Annual Report.
Page 37
Exhibit No. Description
---------- ------------------------------------------------------------
23.0** Consent of Price Waterhouse LLP.
24.1 Power-of-Attorney.
27.0** Financial Data Schedule.
(b) Reports on Form 8-K. During the fourth quarter of 1994 there were no
Form 8-K's filed by the Company. Subsequent to 1994 fiscal year end,
the Company filed two reports on Form 8-K. On January 26, 1995, the
Company filed a report on Form 8-K concerning its 1994 financial
results, and on March 17, 1995, the Company filed a report on Form 8-K
concerning the Company's merger with Network Systems Corporation, which
incorporated by reference the following financial statements:
(1) The Unaudited Pro Forma Condensed Combined Financial Statements
of StorageTek and Network Systems as of and for the nine months
ended September 1994 and for each of the three years in the period
ended December 1993; and
(2) Network Systems' financial statements as of December 31, 1993,
and December 31, 1992, and for each of the three years in the period
ended December 31, 1993.
(c) Exhibits. The Exhibits listed in Item 14(a)(3) hereof are filed as part
of this Annual Report on Form 10-K.
(d) Financial Statement Schedules. See Item 14(a)(3) above.
- ----------------------
** Indicates Exhibits filed with this Annual Report.
Page 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 17, 1995 STORAGE TECHNOLOGY CORPORATION
By: /s/ Ryal R. Poppa
-----------------------------
Ryal R. Poppa
Chairman of the Board,
President
and Chief Executive Officer
(Principal Executive Officer)
Page 39
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/ Ryal R. Poppa
- ---------------------
Ryal Poppa Chairman of the Board, March 17, 1995
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ David E. Lacey
- ---------------------
David E. Lacey Interim Chief Financial March 17, 1995
Officer and Corporate
Vice President
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Judith E.N. Albino
- ---------------------
Judith E.N. Albino Director March 17, 1995
/s/ William L. Armstrong
- ------------------------
William L. Armstrong Director March 17, 1995
/s/ Robert A. Burgin
- ---------------------
Robert A. Burgin Director March 17, 1995
/s/ Paul Friedman
- ---------------------
Paul Friedman Director March 17, 1995
/s/ Stephen J. Keane
- ---------------------
Stephen J. Keane Director March 17, 1995
/s/ Robert E. LaBlanc
- ---------------------
Robert E. LaBlanc Director March 17, 1995
/s/ Robert E. Lee
- ---------------------
Robert E. Lee Director March 17, 1995
/s/ Harrison Shull
- ---------------------
Harrison Shull Director March 17, 1995
Page 40
SIGNATURE TITLE DATE
/s/ Richard C. Steadman
- -----------------------
Richard C. Steadman Director March 17, 1995
/s/ Robert C. Wilson
- ---------------------
Robert C. Wilson Director March 17, 1995
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 30, December 31,
1994 1993
---------- ----------
ASSETS
Current assets:
Cash, including cash equivalents of
$118,751 in 1994 and $181,583 in 1993,
and restricted cash of $5,353 in 1994
and $3,857 in 1993 $ 205,926 $ 255,062
Short-term investments 16,042
Accounts receivable, net of allowance
for doubtful accounts of $10,623 in
1994 and $12,452 in 1993 313,231 218,701
Notes and installment receivables 8,203 9,973
Net investment in sales-type leases (Note 3) 155,341 171,165
Inventories (Note 4) 240,019 203,257
--------- ---------
Total current assets 922,720 874,200
Notes and installment receivables 9,918 13,968
Net investment in sales-type leases (Note 3) 231,377 252,678
Equipment held for sale or lease, at cost
net of accumulated depreciation of
$98,649 in 1994 and $96,454 in 1993 (Note 5) 137,374 97,324
Spare parts for field service, at cost net
of accumulated amortization of $64,109
in 1994 and $55,317 in 1993 56,977 50,150
Property, plant and equipment, at cost net
of accumulated depreciation (Note 6) 332,651 306,034
Deferred income tax assets, net of
valuation allowance (Note 9) 51,603 52,260
Other assets 147,387 146,395
--------- ---------
$1,890,007 $1,793,009
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by
lease commitments (Note 8) $ 79,407 $ 74,191
Current portion of other long-term debt (Note 8) 27,396 32,581
Accounts payable 113,794 91,890
Accrued liabilities (Note 7) 219,139 192,874
Income taxes payable (Note 9) 8,764 14,167
--------- ---------
Total current liabilities 448,500 405,703
Nonrecourse borrowings secured by lease
commitments (Note 8) 112,073 96,975
Other long-term debt (Note 8) 244,814 264,743
Deferred income tax liabilities (Note 9) 10,073 8,285
--------- ---------
Total liabilities 815,460 775,706
--------- ---------
Commitments and contingencies (Notes 8 and 13)
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 1994 and 1993, $172,500,000
aggregate liquidation preference (Note 10) 35 35
Common stock, $.10 par value, 150,000,000
shares authorized; 44,560,822 shares issued
in 1994, and 43,097,788 shares issued in 1993 4,456 4,310
Capital in excess of par value 1,449,240 1,421,860
Accumulated deficit (372,261) (401,623)
Treasury stock of 35,713 shares in 1994
and 34,349 shares in 1993 (773) (735)
Unearned compensation (6,150) (6,544)
--------- ---------
Total stockholders' equity 1,074,547 1,017,303
--------- ---------
$1,890,007 $1,793,009
========= =========
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 30, December 31, December 25,
1994 1993 1992
---------- ---------- ----------
Sales $1,115,802 $ 902,482 $1,079,130
Service and rental revenue 509,157 502,270 471,815
--------- --------- ---------
Total revenue 1,624,959 1,404,752 1,550,945
--------- --------- ---------
Cost of sales 728,983 641,411 757,369
Cost of service and rental revenue 328,267 324,502 316,830
--------- --------- ---------
Total cost of revenue 1,057,250 965,913 1,074,199
--------- --------- ---------
Gross profit 567,709 438,839 476,746
Research and product development costs 169,811 163,286 152,702
Marketing, general, administrative
and other income and expense, net 341,747 324,823 315,475
Restructuring and other
charges (Note 15) 74,772
--------- --------- ---------
Operating profit (loss) 56,151 (124,042) 8,569
Interest expense 40,678 43,670 48,706
Interest income (42,964) (54,916) (67,171)
--------- --------- ---------
Income (loss) before income
taxes and cumulative
effect of accounting change 58,437 (112,796) 27,034
Provision for income taxes (Note 9) 17,000 5,000 17,700
--------- --------- ---------
Income (loss) before cumulative
effect of accounting change 41,437 (117,796) 9,334
Cumulative effect on prior years
of change in method of accounting
for income taxes (Note 9) 40,000
--------- --------- ---------
Net income (loss) 41,437 (77,796) 9,334
Preferred dividend
requirement (Note 10) 12,075 9,805
--------- --------- ---------
Income (loss) applicable
to common shares $ 29,362 $ (87,601) $ 9,334
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative
effect of accounting change $ 0.66 $ (2.98) $ 0.22
Cumulative effect on prior years
of change in method of
accounting for income taxes 0.93
--------- --------- ---------
$ 0.66 $ (2.05) $ 0.22
========= ========= =========
Weighted average common
shares and equivalents 44,513 42,800 43,347
========= ========= =========
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 30, December 31, December 25,
1994 1993 1992
----------- ----------- -----------
OPERATING ACTIVITIES
Cash received from customers $ 1,580,550 $ 1,532,183 $ 1,572,892
Cash paid to suppliers and employees (1,491,271) (1,446,321) (1,456,835)
Interest received 42,964 54,251 67,136
Interest paid (38,327) (40,519) (47,751)
Income taxes paid (20,651) (12,048) (28,327)
---------- ---------- ----------
Net cash from operating activities 73,265 87,546 107,115
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant
and equipment (131,464) (67,720) (106,119)
Short-term investments, net 16,042 (15,377) 40,227
Business acquisitions, net
of cash acquired (51,761)
Other assets, net (28,098) (6,945) (4,136)
---------- ---------- ----------
Net cash used in investing
activities (143,520) (90,042) (121,789)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 167,237 87,508 114,935
Repayments of nonrecourse borrowings (147,632) (147,647) (150,005)
Borrowings (repayments) under
revolving credit agreements, net (19,000)
Proceeds from other debt 17,839 79,740 21,320
Repayments of other debt (46,977) (44,144) (27,538)
Proceeds from employee stock plans
and warrants 23,725 11,468 16,126
Proceeds from preferred stock
offering, net (Note 10) 166,479
Preferred stock dividend
payments (Note 10) (12,075) (9,459)
Proceeds from sale of lease
receivables (Note 14) 50,022
Purchases of treasury stock (5,098)
---------- ---------- ----------
Net cash from financing activities 2,117 143,945 762
---------- ---------- ----------
Effect of exchange rate
changes on cash 19,002 (4,341) (4,884)
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents (49,136) 137,108 (18,796)
Cash and cash equivalents
- beginning of the year 255,062 117,954 136,750
---------- ---------- ----------
Cash and cash equivalents
- end of the year $ 205,926 $ 255,062 $ 117,954
---------- ---------- ----------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 41,437 $ (77,796) $ 9,334
Depreciation and amortization expense 206,322 147,248 149,493
Translation (gain) loss (9,898) 8,069 12,062
Cumulative effect of accounting
change (Note 9) (40,000)
Restructuring and other
charges (Note 15) 74,772
Other non-cash adjustments to income 4,092 7,032 4,101
(Increase) decrease in accounts
receivable (86,999) 85,998 22,724
Decrease in notes receivable
and sales-type leases 48,298 56,207 17,024
(Increase) decrease in inventories (41,517) (61,725) 6,968
Increase in equipment held for
sale or lease, net (97,642) (46,243) (64,984)
Increase in spare parts, net (31,601) (19,599) (30,849)
(Increase) decrease in net
deferred income tax asset 2,023 (12,535) 578
Increase (decrease) in
accounts payable 22,650 (37,113) 15,057
Increase (decrease) in
accrued liabilities 21,774 (2,256) (23,188)
Increase (decrease) in
income taxes payable (5,674) 5,487 (11,205)
---------- ---------- ----------
Net cash from operating activities $ 73,265 $ 87,546 $ 107,115
---------- ---------- ----------
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 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 (771,011 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 10) $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 10) (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)
Shares issued under stock purchase
plan, and for exercises of
options (1,497,170 shares) 150 27,275 (33)
Cash dividends paid on preferred
stock ($3.50 per share) (Note 10) (12,075)
Restricted stock amortization 658
Net income 41,437
Other (4) 105 (5) (264)
-- ----- --------- -------- ----- ----- ------
Balances, December 30, 1994 $35 $4,456 $1,449,240 $(372,261) $ (773) $ 0 $(6,150)
== ===== ========= ======== ===== ===== ======
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.
REVENUE RECOGNITION
Revenue from end-user equipment sales, including sales-type leases, and
associated software licenses 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 warranty obligations
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 and software support which includes normal
maintenance and repair or replacement of product components. Revenue from
these service and support contracts is recognized as earned and the costs
associated with 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. The carrying value of the Company's cash
equivalents approximates fair value. Investments that do not qualify as cash
equivalents are classified as short-term investments. Restricted cash
balances relate primarily to funds received on behalf of third parties.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $27,080,000 in 1994, $23,092,000 in 1993,
and $9,148,000 in 1992 associated with acquiring and developing software
products to be marketed to customers. Other assets as shown on the
Consolidated Balance Sheet include unamortized software costs of $50,508,000
as of December 30, 1994, and $36,068,000 as of December 31, 1993.
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 expense associated
with capitalized software costs was $12,640,000 in 1994, $7,485,000 in 1993,
and $6,818,000 in 1992.
DEPRECIATION AND AMORTIZATION
Equipment held for sale or lease, 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 their estimated useful lives or the remaining lease
F-5
term, whichever is shorter. 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 over a period not exceeding 10 years. The Company
evaluates the realizability of the carrying value of goodwill each quarter
based upon estimated future cash flows on an undiscounted basis.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for StorageTek's foreign subsidiaries is the U.S.
dollar, reflecting the significant volume of intercompany transactions and
associated cash flows which result from the fact that nearly all of the
Company's products sold worldwide are manufactured in the United States.
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. Losses associated with foreign currency translation
adjustments and foreign currency transactions, net of associated hedging
results, aggregated $951,000 in 1994 compared to losses of $8,802,000 in 1993
and $8,372,000 in 1992. See Note 14 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
10) and 8% Convertible Subordinated Debentures (see Note 8) 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 were anti-dilutive to the annual computation of fully
diluted earnings per common share for all periods presented.
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 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 for 1993 and 1992 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 designed,
manufactured, marketed and serviced high-performance, information storage and
retrieval subsystems for mainframe computers.
F-6
EDATA SCANDINAVIA AB
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) is included within other
assets on the Consolidated Balance Sheet ($32,698,000 as of December 30,
1994, and $37,178,000 as of December 31, 1993, net of accumulated
amortization) and is being amortized on a straight-line basis over 10 years.
Edata marketed and distributed 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.
NOTE 3 - SALES-TYPE AND OPERATING LEASES
The Company offers lease financing to its customers to support the
acquisition of StorageTek products. Lease financings are made under both
sales-type leases and, to a lesser extent, operating leases. These leases
typically provide for a lease term of up to five years and the retention of
title to the equipment by StorageTek. The majority of StorageTek's lease
financings are currently made within the United States. The components of
net investment in sales-type leases are as follows (in thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Total minimum lease and
maintenance payments $ 482,958 $ 499,295
Less: Executory costs
(maintenance payments) (61,197) (50,017)
-------- --------
Net minimum lease payments 421,761 449,278
Estimated unguaranteed residual values 13,870 24,879
Less: Unearned interest income (48,913) (50,314)
-------- --------
386,718 423,843
Less: Current portion (155,341) (171,165)
-------- --------
$ 231,377 $ 252,678
======== ========
Future minimum lease payments due from customers under sales-type leases and
noncancellable operating leases as of December 30, 1994, are as follows (in
thousands of dollars):
Sales-Type Operating
Leases Leases
-------- -------
1995 $197,061 $10,834
1996 150,990 3,995
1997 87,962 1,705
1998 37,394 485
1999 9,546
Thereafter 5
------- ------
$482,958 $17,019
======= ======
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
F-7
(see Note 8): $118,221,000 in 1995; $88,896,000 in 1996; $47,682,000 in 1997;
$20,615,000 in 1998; and $4,605,000 in 1999.
NOTE 4 - INVENTORIES
Inventories include material, labor and factory overhead and are accounted
for at the lower of cost (first-in, first-out method) or market. The Company
evaluates the need for reserves associated with obsolete, slow-moving, and
nonsalable inventory by reviewing net realizable values on a quarterly basis.
The components of inventories are as follows (in thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Raw materials $ 41,356 $ 38,991
Work-in-process 101,797 66,668
Finished goods 96,866 97,598
------- -------
$240,019 $203,257
======= =======
NOTE 5 - EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale or lease to customers consists of the following (in
thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Equipment shipped awaiting
revenue recognition $ 84,822 $ 38,612
Equipment off-rent 35,632 18,674
Equipment on-rent 16,920 40,038
-------- --------
$ 137,374 $ 97,324
======== ========
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 30, December 31,
1994 1993
--------- ---------
Machinery and equipment $ 582,294 $ 525,083
Buildings and building
improvements 141,188 135,575
Land and land improvements 15,400 12,160
-------- --------
738,882 672,818
Less: Accumulated depreciation (406,231) (366,784)
-------- --------
$ 332,651 $ 306,034
======== ========
Machinery and equipment includes capitalized leases of $39,000,000 as of
December 30, 1994, and $45,544,000 as of December 31, 1993. Accumulated
depreciation includes accumulated amortization on such capitalized leases of
$19,966,000 as of December 30, 1994, and $20,381,000 as of December 31, 1993.
F-8
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Warranty obligations $ 23,935 $ 15,804
Other 195,204 177,070
------- -------
$219,139 $192,874
======= =======
NOTE 8 - 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 30, December 31,
1994 1993
--------- ---------
8% Convertible Subordinated
Debentures due 2015 $145,645 $145,645
9.53% Senior Secured
Notes due 1996 55,000 55,000
Recourse borrowings secured
by lease commitments 43,872 60,533
Capitalized lease obligations 21,275 28,272
Other 6,418 7,874
------- -------
272,210 297,324
Less: Current portion (27,396) (32,581)
------- -------
$244,814 $264,743
======= =======
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. Interest on the Convertible Debentures is
payable semiannually in arrears on November 30 and May 31. The Convertible
Debentures are currently redeemable at the option of StorageTek at a premium
of 4.8%, and are redeemable at decreasing premiums 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 30,
1994, 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.
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
F-9
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.
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 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 30, 1994, related to the borrowings was approximately 8.25%.
BANKING AND CREDIT ARRANGEMENTS
In September 1994, the Company amended its secured multicurrency credit
agreement with a group of U.S. and international banks (the Revolver) to
increase the maximum possible borrowings under the credit facility from
$150,000,000 to $200,000,000 and to extend the facility through March 1996.
In addition, the Revolver was modified to increase the total amount available
under the borrowing base. 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 (8.5% at December 30, 1994). The total
amount available under the Revolver is limited to a monthly borrowing base
determined as a percentage of the Company's eligible accounts receivable,
lease assets (primarily net investments in sales-type leases not previously
utilized for other secured borrowings), and equipment awaiting revenue
recognition. 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. As of December 30, 1994,
the Company had no outstanding advances under the Revolver and had
approximately $136,000,000 of available credit under the Revolver.
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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 30, 1994, are as follows (in thousands of
dollars):
Total Long-
Capitalized Other Term Debt
Leases Debt Commitments
----------- --------- ---------
1995 $ 8,037 $ 20,695 $ 28,732
1996 7,049 71,625 78,674
1997 5,119 9,122 14,241
1998 2,481 3,243 5,724
1999 1,148 302 1,450
Thereafter 130 145,948 146,078
------ ------- -------
23,964 $250,935 $274,899
------- -------
Less: Amount representing
interest (2,689)
------
Present value of capitalized
lease obligations
(including $6,701
classified as current) $21,275
======
In addition to the amounts reported above, the Company entered into an 18-
year lease of engineering, manufacturing and marketing facilities located in
Toulouse, France in January 1995. The lease will be accounted for as a
capital lease. The future minimum lease payments and present value of the
lease obligation are approximately $33,000,000 and $16,800,000, respectively.
NONRECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
Nonrecourse borrowings incurred in connection with the financing of certain
of the Company's customer lease obligations are generally secured by lease
commitments and equipment. The related lease receivables are reflected on
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). Additional security has been pledged with respect to a portion of the
nonrecourse borrowings in the form of additional lease commitments and
equipment with a carrying value of $6,468,000, and outstanding letters of
credit aggregating $1,148,000 as of December 30, 1994. The weighted average
interest rate related to the Company's nonrecourse borrowings was
approximately 8.5% as of December 30, 1994.
OPERATING LEASE OBLIGATIONS
StorageTek has various operating leases in effect for certain buildings,
sales offices, and machinery and equipment. Rent expense was $41,926,000 in
1994; $37,086,000 in 1993; and $37,539,000 in 1992. Future minimum rental
commitments required under all noncancellable operating leases with terms of
one year or more are as follows: $33,536,000 in 1995; $26,425,000 in 1996;
$17,711,000 in 1997; $13,291,000 in 1998; $10,504,000 in 1999; and
$41,532,000 thereafter.
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NOTE 9 - 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 resulted largely from the requirement under
SFAS No. 109 to recognize the tax benefits associated with net operating 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 30, December 31, December 25,
1994 1993 1992
----------- ----------- -----------
United States $ 81,335 $(114,196) $(5,545)
International (22,898) 1,400 32,579
-------- -------- ------
$ 58,437 $(112,796) $27,034
======== ======== ======
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 30, December 31, December 25,
1994 1993 1992
----------- ----------- -----------
Current tax
provision (benefit):
U.S. federal $ 3,000 $ 3,200 $(2,500)
International 10,700 11,100 17,100
State 3,000 3,100 300
------- ------- -------
16,700 17,400 14,900
------- ------- -------
Deferred tax
provision (benefit):
U.S. federal 1,300 (4,800) 2,800
International (200) (4,200) 100
State (800) (3,400) (100)
------- ------- -------
300 (12,400) 2,800
------- ------- -------
$17,000 $ 5,000 $17,700
======= ======= =======
The provision for income taxes attributable to income (loss) before income
taxes and cumulative effect of accounting change includes benefits of
$34,325,000 in 1994; $1,422,000 in 1993; and $4,074,000 in 1992 from the
utilization of net operating loss carryforwards as well as net benefits of
$9,754,000 in 1994; $7,432,000 in 1993; and $11,284,000 in 1992 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 net benefit
of the Tax Grant was $0.22 in 1994; $0.17 in 1993; and $0.27 in 1992. The
benefits from the Tax Grant include reduced tax rates and, through 1994,
included the ability to utilize U.S. net operating losses to further reduce
Puerto Rico tax liabilities. To the extent U.S. net operating losses used to
reduce Puerto Rico taxable income are subsequently used to also reduce U.S.
taxable income, the Puerto Rico benefit from the utilization of these
operating losses must be repaid to Puerto
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Rico. The cumulative net benefit of the grant provision relating to the use
of net operating losses and subject to potential repayment in the future was
$13,578,000 as of December 30, 1994. The Tax Grant provision allowing reduced
tax rates expires in 2007.
The Company reported the following deferred income tax balances on its
Consolidated Balance Sheet (in thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Deferred income tax assets,
net of valuation allowance $51,603 $52,260
Deferred income tax liabilities (10,073) (8,285)
------ ------
Net deferred income tax asset $41,530 $43,975
====== ======
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 30, December 31,
1994 1993
--------- ---------
Gross deferred income tax assets:
Capitalized rental equipment $ 120,747 $ 163,239
Net operating loss carryforwards 76,767 123,844
Tax credit carryforwards 78,917 63,265
Accrued liabilities and reserves 63,144 55,314
Capitalized inventory costs 14,228 7,680
Foreign currency translation losses 11,779
Deferred intercompany profit 14,139 11,290
Other 22,047 18,358
-------- --------
389,989 454,769
Less: Valuation allowance (129,884) (165,456)
-------- --------
260,105 289,313
-------- --------
Gross deferred income tax liabilities:
Deferred income from sales-type leases (164,531) (209,063)
Depreciation (28,599) (24,130)
Other (25,445) (12,145)
-------- --------
(218,575) (245,338)
-------- --------
Net deferred income tax asset $ 41,530 $ 43,975
======== ========
The net change in the valuation allowance for deferred income tax assets was
a decrease of $20,717,000 in 1994 and an increase of $54,761,000 in 1993.
The valuation allowance relates primarily to net operating loss
carryforwards, tax credit carryforwards, and net deductible temporary
differences. The Company evaluates 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.
F-13
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 $46,000,000 as of December 30, 1994).
The amount of the unrecognized deferred tax liability for these unremitted
earnings was $9,050,000 as of December 30, 1994.
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rates of 35% in 1994 and 1993, and 34% in 1992 to
income (loss) before income taxes and cumulative effect of accounting change
for the following reasons (in thousands of dollars):
Year Ended
--------------------------------------
December 30, December 31, December 25,
1994 1993 1992
----------- ----------- -----------
U.S. federal income tax
at statutory rate $ 20,453 $(39,479) $ 9,192
Increase (decrease) in income
taxes resulting from:
Increase (decrease) in
unrecognized net
operating losses and
future deductions (24,201) 36,989 (7,746)
Foreign tax rate and
translation differentials 11,859 682 6,436
Nondeductible items 7,048 10,390 4,746
State income taxes, net
of federal benefits 6,555 759 378
Effect of Puerto Rico
operations (3,634) (4,936) (6,541)
Restructuring of
international subsidiaries 9,758
Other, net (1,080) 595 1,477
------- ------- -------
Income tax expense
attributable to
income (loss) before
cumulative effect of
accounting change $ 17,000 $ 5,000 $17,700
======= ======= =======
As of December 30, 1994, StorageTek had U.S. net operating loss carryforwards
of approximately $400,000,000 which expire in the years 2000 through 2006.
Approximately $16,000,000 of the Company's net operating loss carryforwards
relate to losses associated with acquired companies which are subject to
substantial limitations. Approximately $45,000,000 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
$270,000,000 and alternative minimum tax credit carryforwards of
approximately $16,000,000.
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 1992 are currently
under examination. The IRS has proposed adjustments of approximately
$400,000,000 to the Company's federal income tax returns for the years 1985
through 1990. 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
F-14
Company is protesting these remaining adjustments through the IRS appeals
process. Although the Company believes it has meritorious legal defenses to
these proposed 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 10 - PREFERRED 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, if issued, would contain
conversion and optional redemption provisions substantially identical to
those of the Preferred Stock, and would be subject to a mandatory sinking
fund.
NOTE 11 - 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 300,000 shares of StorageTek's common stock, plus any remaining
shares from earlier offering periods, in six-month consecutive offering
periods through October 31, 1996. 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 486,423, 446,699 and 320,082 shares of StorageTek common stock
under the Purchase Plan in 1994, 1993 and 1992, respectively.
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 30, 1994, the Company had an aggregate of 2,343,167 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 178,475 shares available for grant under the Employee
F-15
Plans as of December 30, 1994. In March 1995, the Board of Directors
approved, subject to shareholder approval, the reservation for issuance
of 2,200,000 shares of common stock under a newly adopted employee equity
plan, the 1995 Equity Participant Plan.
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
a period of between three and six years. Options granted under the Employee
Plans must be exercised no later than 10 years from the date of grant.
The Company has awarded shares of common stock in the past under its Employee
Plans pursuant to restricted stock agreements, at a price per share equal to
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. A total of 309,343 shares of restricted stock were
outstanding as of December 30, 1994.
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 30, 1994.
The following summarizes information with respect to options granted under
the Company's Employee and Director Plans:
Number Option Price
of Shares Per Share
--------- --------------
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
Granted 467,374 28.00 - 36.25
Exercised (976,244) 3.43 - 34.75
Cancelled or expired (163,452) 12.50 - 64.25
--------- --------------
Outstanding, December 30, 1994 2,392,644 $ 3.63 - $75.50
========= ==============
Exercisable, December 30, 1994 1,364,600 $ 3.63 - $75.50
========= ==============
WARRANTS AND DEFERRED PURCHASE RIGHTS
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 30, 1994.
In connection with the Edata acquisition in 1992, the Company granted
deferred purchase rights for shares of common stock with a purchase price per
share equal to par value. The
F-16
deferred purchase rights vest upon the attainment of certain financial goals
or upon the passage of time. The Company issued 34,503 and 33,337 shares of
StorageTek common stock under deferred purchase rights in 1994 and 1993,
respectively. As of December 30, 1994, deferred purchase rights for 31,662
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 1994,
1993 and 1992.
NOTE 12 - 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.
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 13 - 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
F-17
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. 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. A shareholder derivative action was also filed in the second quarter
of 1992 based on substantially similar factual allegations and has been
consolidated with the class action. Discovery and depositions of the
Company's employees and other potential witnesses commenced in August 1993,
and are substantially complete. No trial dates have been established. 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 an outcome favorable to the Company. In the event of an adverse outcome,
neither the amount nor the likelihood of any potential liability which might
result is reasonably estimable; however, the Company currently believes that
the amount of the ultimate potential loss, after considering available
insurance recoveries, would not be material to the Company's financial
position. However, an adverse outcome could have a material effect on the
Company's reported results of operations in a future period. 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 February 1994, the Company and its subsidiary, XL/Datacomp, Inc.
(XL/Datacomp), filed suit in Boulder County, Colorado, District Court against
Array Technology Corporation (Array) and Tandem Computers Incorporated
(Tandem). The suit asked that the court order Array and Tandem to either
support certain disk drives purchased from them or provide the Company with
technical data necessary for StorageTek to provide such customer support. In
March 1994, Array and Tandem filed their answer and also filed counterclaims
against the Company alleging breach of contract and claiming damages. In
June 1994, the court ordered Array and Tandem to continue to provide support
for these products and to maintain, in an independent escrow account, the
materials necessary to enable the Company and XL/Datacomp to support the
products in the event Array and Tandem failed to provide such services. The
suit is now in the discovery phase as to the claims made by Array and Tandem.
No trial dates have been established. The Company believes the counterclaims
filed by Array and Tandem are without merit and intends to vigorously defend
against them.
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court against the
Company and certain subsidiaries. The suit alleges that the Company breached
a 1990 settlement agreement that had resolved earlier litigation between the
parties. The suit seeks injunctive relief and damages in the amount of
$2,400,000,000. The Company has filed a motion to dismiss the complaint, as
well as an alternative motion to bifurcate certain of the claims. In July
1994, the court partially granted the Company's motion to dismiss, dismissing
claims based on facts or conduct occurring before the 1990 settlement of the
previous litigation. In November 1994, the defendants filed a motion for
summary judgment. Discovery has been stayed pending a ruling on that motion.
No trial date has been established. The Company believes that the claims in
the suit are barred by the 1990 settlement between the Company and Stuff and
are without merit, and the Company intends to vigorously defend against them.
F-18
In September 1994, EMC Corp. filed suit in U.S. District Court in Wilmington,
Delaware, alleging infringement of a patent pertaining to disk storage
technology. The complaint seeks an injunction, treble damages in an
unspecified amount and an award of attorney fees and costs. The Company has
filed an answer. The Company also has filed a motion to transfer the case to
the U.S. District Court for Colorado and has filed a counterclaim for
infringement of one of its patents. Discovery has been stayed pending a
decision on the motion to transfer. The Company believes the suit is without
merit and intends to vigorously defend against the suit.
In addition, the Company is involved in various other less significant legal
proceedings. The outcomes of these legal proceedings are not expected
individually or in the aggregate 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 14 - FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
FOREIGN CURRENCY OPTIONS AND FORWARD EXCHANGE CONTRACTS
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 does not hold
or issue foreign currency options or forwards exchange contracts for trading
purposes.
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 revenue from its international operations. The
Company held foreign currency options with a face value of approximately
$334,100,000 as of December 30, 1994, and $117,100,000 as of December 31,
1993. Deferred realized and unrealized losses associated with the Company's
foreign currency options, including costs associated with option premiums
paid, aggregated approximately $3,920,000 as of December 30, 1994, compared
to gains of approximately $1,400,000 as of December 31, 1993. Deferred gains
and losses on the options will be recognized as an adjustment to the
associated revenue during 1995 on the Consolidated Statement of Operations.
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
$93,400,000 as of December 30, 1994, and $94,200,000 as of December 31, 1993.
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
F-19
and losses on the transactions being hedged. The foreign currency hedging
instruments utilized by StorageTek are generally traded over the counter. The
Company does not believe there is significant credit risk associated with
these contracts as the counterparties consist of major international financial
institutions, and the Company limits the amount of the contracts it enters into
with any one party. The credit exposure associated with the Company's foreign
currency option contracts is represented by the fair value of the contracts as
disclosed below ($10,526,000 as of December 30, 1994). There was no credit
exposure with respect to the Company's foreign currency forward contracts as
of December 30, 1994, as the fair value of these contracts was approximately
zero.
OTHER FINANCIAL INSTRUMENTS
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, trade receivables, and net investment in sales-type leases. 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 the Company's trade receivables
and net investment in sales-type leases 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 30, 1994,
the Company had no significant concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments as of December 30, 1994, are as follows (in thousands of
dollars):
Carrying Estimated
Amount Fair Value
--------- ----------
Assets:
Notes and installment receivables $ 18,121 $ 17,513
Foreign currency option contracts 14,446 10,526
Liabilities:
Nonrecourse borrowings secured
by lease commitments 191,480 188,018
8% Convertible Subordinated
Debentures due 2015 145,645 144,189
Recourse borrowings secured
by lease commitments 43,872 42,083
9.53% Senior Secured Notes due 1996 55,000 54,853
Other:
Foreign currency forward contracts 0 0
The fair value of notes and installment receivables was estimated based on
expected discounted future cash flows. The carrying value of the Company's
foreign currency options reflects premiums paid to purchase the contracts.
The fair value of the foreign currency options was estimated based upon
quotes obtained from the respective banks. The fair value of nonrecourse
borrowings secured by lease commitments was estimated based upon interest
rates currently available for borrowings of similar terms and maturities.
The fair value of the Convertible Debentures was based upon the closing sales
price on the New York Stock Exchange as of December 30, 1994. The fair value
of the Company's recourse borrowings and 9.53% Senior Secured Notes were
estimated based upon interest rates currently available for borrowings of
similar terms and maturities. The carrying amounts of the Company's cash
F-20
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities are either equal to or approximate their fair value. The
Company's foreign currency forward contracts, which are an off-balance-sheet
financial instrument, were entered into on December 30, 1994, and
accordingly, had a carrying value and fair value approximating zero.
SALES OF RECEIVABLES WITH RECOURSE
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 $10,046,000
as of December 30, 1994, and $30,917,000 as of December 31, 1993. The
Company remains contingently liable for up to $2,028,000 of the outstanding
balance pursuant to the recourse provisions as of December 30, 1994. Based
upon the Company's experience, no material credit risk exists under the
recourse provisions of the agreement.
NOTE 15 - 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
related to the reorganization of the Company's midrange business. Merger and
consolidation expenses of $5,522,000 were also recognized during 1993 in
connection with the merger with Amperif.
The restructuring charge, recognized in the third quarter of 1993, was a
direct result of the adoption by the Company of a formal action plan for
restructuring its midrange business. This action plan was developed by the
Company's management and approved by the Company's Board of Directors in
September 1993. The restructuring charges recognized were specific,
incremental and direct costs resulting from the restructuring plan and were
based upon the facts available as of the time of the restructuring. Most of
the actions called for in the plan were implemented in the fourth quarter of
1993.
BACKGROUND AND ACTION PLAN FOR RESTRUCTURING
In November 1991, StorageTek merged with XL/Datacomp, a full-service
distributor of midrange computer systems and hardware support services.
XL/Datacomp specialized in bundling IBM AS/400 computers with various third-
party manufactured data storage products to provide its customers with
systems solutions. StorageTek viewed the merger as an opportunity to expand
into the midrange marketplace by combining anticipated StorageTek midrange
data storage products with XL/Datacomp's customer base and channels of
distribution.
During 1992 and the first half of 1993, XL/Datacomp's revenue and
profitability declined as a result of delays in the availability of
StorageTek manufactured products and steep price declines for midrange direct
access storage device (DASD) products. In addition to XL/Datacomp's past
financial results not meeting StorageTek's expectations, preliminary forecast
information also became available during the third quarter of 1993 in
conjunction with the preparation of StorageTek's 1994 operating plan. This
information indicated that a significant improvement in the Company's
midrange business prospects was unlikely given the existing midrange business
structure.
F-21
In July 1993, StorageTek formed a team to review XL/Datacomp's operations
with the stated charter of returning XL/Datacomp to profitability. Between
July and September 1993, this team held interviews and performed site visits
in order to identify opportunities to improve profitability. The team
developed a restructuring plan (the "Action Plan") which identified the key
elements of the restructuring plan, specific steps to be taken in order to
achieve these key elements and the proposed timetable for completing each
step. The Action Plan was reviewed and approved by StorageTek's Board of
Directors in September 1993 and included the following key elements:
o Improve profit margins by refocusing XL/Datacomp's midrange product line
and downsizing its service operations. This included: (1) refocusing
efforts and remaining resources in the marketing and leasing of StorageTek
manufactured products which were expected to yield higher profit margins,
(2) de-emphasizing or eliminating the marketing and leasing of non-
StorageTek manufactured products and existing StorageTek manufactured
products which were not providing a satisfactory profit margin, and (3)
downsizing the midrange customer service operations and increasing the
midrange customer service billing rates.
o Reduce operating expenses through headcount reductions and other cost-
control measures. The headcount reductions could be achieved by: (1)
consolidating various marketing and customer service operations, (2)
downsizing the midrange organization to reflect the intensely competitive
marketplace and expected near-term business prospects, and (3)
discontinuing non-strategic business operations.
COMPONENTS OF RESTRUCTURING CHARGE
Following is an itemization of the components included within the Company's
1993 restructuring charge (in thousands of dollars):
Non-cash
Asset
Writedowns Accruals Total
---------- -------- ------
Residual interests associated
with lease receivables $19,389 $19,389
Inventory 13,494 13,494
Goodwill 12,780 12,780
Severance $ 8,509 8,509
Lease terminations and fixed assets 976 3,490 4,466
Lease receivables 3,000 3,000
Spare parts for field service 2,662 2,662
Advance to supplier 2,000 2,000
Consolidation of United Kingdom
subsidiaries 1,449 1,449
Other 1,501 1,501
------ ------ ------
$57,251 $11,999 69,250
Merger and consolidation
charges associated with
merger with Amperif Corp. 5,522
------
Total restructuring and other charges $74,772
======
F-22
Of the restructuring accruals of $11,999,000 established at the time of the
restructuring, approximately $947,000 remained to be paid as of December 30,
1994, consisting solely of anticipated future lease payments.
The writedown of $19,389,000 associated with lease residual interests
resulted from StorageTek's Action Plan which included a decision to shift
XL/Datacomp's efforts away from leasing activities associated with other
manufacturers' equipment in favor of marketing new StorageTek equipment, and
as a result of the reduction in headcount. This decision led the Company to
conclude that it would be unable to realize the recorded lease residual
values in the future as a result of the reduced emphasis on these leasing
activities.
The inventory writedowns of $13,494,000 primarily related to a reduction in
the market value of existing product inventory resulting from the Action Plan
which included a decision to place greater emphasis on the marketing and
leasing of new StorageTek products which were anticipated to carry higher
profit margins and the decision to discontinue the manufacture of certain
marginally profitable midrange products. A portion of the writedowns also
related to the immediate liquidation of inventory associated with a small
retail computer marketing subsidiary which the Company discontinued.
The goodwill writedowns of $12,780,000 resulted from forecast information
received in connection with the preparation of the Company's 1994 operating
plan which indicated that two midrange tape products, which had associated
capitalized goodwill, would fall short of previous plans and not provide the
originally anticipated profit margins. As a result of the decision to reduce
the sales force and focus the remaining midrange sales force away from these
products pursuant to the Action Plan, it was concluded that permanent
impairments of the associated goodwill had resulted from the restructuring.
The severance accrual of $8,509,000 resulted from headcount reductions
associated with midrange executive management, midrange marketing personnel,
and midrange customer service personnel. The accrual consisted principally
of estimated future severance payments, but also included $825,000 of
relocation costs for continuing employees as part of the consolidation of the
customer service organizations.
The Company recognized a charge of $4,466,000 associated with the cost of
lease terminations; the write-off of carrying values for associated leasehold
improvements; and for losses on the disposal of fixed assets. These actions
were taken as part of the Action Plan to reduce operating expenses by
consolidating, downsizing or eliminating operations associated with
StorageTek's midrange business.
The Action Plan concluded that in order to improve service profit margins, a
significant increase in midrange customer service billing rates was
necessary. A charge of $3,000,000 was established for lease receivables
expected to become uncollectible as a result of the decision to downsize the
midrange customer service base. A charge of $2,662,000 was recognized in
connection with the writedown of the carrying value of midrange spare parts
for field service. The writedown of spare parts for field service reflected
anticipated excess parts expected to result from the decrease in the customer
service base.
An advance of $2,000,000 was written-off as a result of the decision to
terminate the relationship with a supplier of midrange products. Various
costs aggregating $1,449,000 were also incurred in connection with the
consolidation of separate midrange and large systems operations in the United
Kingdom.
F-23
NOTE 16 - 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.
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."
Information regarding each geographic area on an unconsolidated basis for
each of the last three years is shown below (in thousands of dollars):
Consolidated
1994 United States Europe Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,055,283(1) $445,777 $123,899 $1,624,959
Transfers between areas 287,640 $(287,640)
--------- ------- ------- -------- ---------
Total revenue $1,342,923 $445,777 $123,899 $(287,640) $1,624,959
========= ======= ======= ======== =========
Operating profit (loss) $ 99,903 $(16,098) $ 4,321 $ (11,204) $ 76,922
========= ======= ======= ========
Interest income (expense), net 2,286
General corporate expenses (20,771)
---------
Income before income taxes $ 58,437
=========
Identifiable assets $1,523,532 $364,809 $ 76,232 $(210,063) $1,754,510
========= ======= ======= ========
General corporate assets 135,497
---------
Total assets $1,890,007
=========
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 $1,348,626 $314,847 $ 71,875 $(151,208) $1,584,140
========= ======= ======= ========
General corporate assets 208,869
---------
Total assets $1,793,009
=========
F-24
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 $1,376,597 $348,504 $ 61,876 $(126,869) $1,660,108
========= ======= ======= ========
General corporate assets 78,935
---------
Total assets $1,739,043
=========
(1) U.S. revenue from unaffiliated customers includes international
export sales to customers (principally in Europe) of $61,219,000 in
1994; $52,797,000 in 1993; and $63,458,000 in 1992.
(2) General corporate expenses include merger and consolidation
expenses of $5,522,000 in 1993.
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. U.S. operating profit includes profit
recognized in the United States on transfers to other geographic areas.
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-25
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
The following interim financial information presents the 1994 and 1993
consolidated results of operations on a quarterly basis (in thousands of
dollars, except per share amounts):
Quarter Ended 1994
------------------------------------------------
April 1 July 1 September 30 December 30
-------- -------- ------------ -----------
Revenue $335,623 $360,916 $412,274 $516,146
Cost of revenue 234,315 229,495 263,372 330,068
------- ------- ------- -------
Gross profit 101,308 131,421 148,902 186,078
Operating expenses 124,832 113,660 126,477 146,589
------- ------- ------- -------
Operating profit (loss) (23,524) 17,761 22,425 39,489
Interest (income) expense, net (2,336) (202) (825) 1,077
------- ------- ------- -------
Income before income taxes (21,188) 17,963 23,250 38,412
Provision (benefit) for income taxes (1,600) 3,600 4,700 10,300
------- ------- ------- -------
Net income (loss) $(19,588) $ 14,363 $ 18,550 $ 28,112
======= ======= ======= =======
Earnings (loss) per common share:
Primary:
Net income (loss) $ (0.52) $ 0.26 $ 0.35 $ 0.56
======= ======= ======= =======
Fully diluted:
Net income N/A N/A N/A $ 0.54
======= ======= ======= =======
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 (benefit) 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
======= ======= ======= =======
F-26
NOTE 18 - SUBSEQUENT EVENT - NETWORK SYSTEMS MERGER
On March 7, 1995, the Company issued approximately 7,900,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock
of Network Systems Corporation (Network Systems). The Company also reserved
approximately 500,000 shares for issuance in connection with Network Systems'
outstanding employee stock options. The transaction, which will be accounted
for as a pooling of interests, involved a merger between the Company's wholly-
owned subsidiary and Network Systems. StorageTek's consolidated financial
statements will be restated in the first quarter of 1995 for all periods
prior to the merger to include the operations of Network Systems, adjusted to
conform with StorageTek's accounting policies and presentation. Merger and
consolidation charges of between $10,000,000 and $15,000,000 are expected to
be recognized in the first quarter of 1995 in connection with the merger.
Network Systems designs, manufactures, markets and services, worldwide,
computer networking products. The following pro forma combined financial
information assumes that the merger had occurred on the first day of the
earliest period presented (in thousands of dollars, except per share
amounts).
Network Pro Forma Pro Forma
1994 StorageTek Systems Adjustments Combined
- -------------------------------------------------------------------------
Revenue $1,624,959 $231,756 $14,635 $1,871,350
Net income (loss) 41,437 (23,820) 14,421 32,038
Earnings (loss) per
common share 0.66 (0.79) 0.38
Total assets 1,890,007 265,147 (10,696) 2,144,458
Total debt 463,690 1,000 464,690
Stockholders' equity 1,074,547 201,124 (10,386) 1,265,285
Network Pro Forma Pro Forma
1993 StorageTek Systems Adjustments Combined
- -------------------------------------------------------------------------
Revenue $1,404,752 $215,558 $(2,619) $1,617,691
Net income (loss) (77,796) 2,207 (5,872) (81,461)
Earnings (loss) per
common share (2.05) 0.07 (1.80)
Network Pro Forma Pro Forma
1992 StorageTek Systems Adjustments Combined
- -------------------------------------------------------------------------
Revenue $1,550,945 $219,118 $4,262 $1,774,325
Net income (loss) 9,334 (39,674) (2,902) (33,242)
Earnings (loss) per
common share 0.22 (1.31) (0.66)
The pro forma adjustments to revenue and net income (loss) for all years
presented include adjustments related to revenue recognition and income tax
accounting. Adjustments have been made to revenue and the associated costs
and expenses to reflect revenue recognition for certain Network Systems' high-
end product sales to end-user customers at the time of customer acceptance,
consistent with StorageTek's policy, rather than at the time of shipment.
F-27
Adjustments have also been made to the combined tax position of StorageTek
and Network Systems as if the merger had occurred at the beginning of the
earliest period presented. The pro forma adjustments to total assets and
stockholders' equity as of December 30, 1994, reflect these same adjustments.
This pro forma combined financial information is provided for comparative
purposes only and does not purport to be indicative of the results which
actually would have been obtained if the merger had been effected for the
periods indicated, or of the results which may be obtained in the future.
F-28
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 32 present fairly, in all material respects, the
financial position of Storage Technology Corporation and its subsidiaries at
December 30, 1994 and December 31, 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
30, 1994, 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 financial statements of
Network Systems Corporation, which statements reflect total assets of
$265,147,000 and $305,481,000 at December 31, 1994 and 1993, respectively,
and total revenue of $231,756,000, $215,558,000 and $219,118,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. 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 Network Systems Corporation in Note 18, 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 9 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 LLP
Denver, Colorado
March 10, 1995
F-29
REPORT OF INDEPENDENT ACCOUNTANTS
FOR NETWORK SYSTEMS CORPORATION
Board of Directors and Stockholders
Network Systems Corporation
We have audited the accompanying consolidated balance sheets of Network
Systems Corporation as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1994 (not
presented separately herein). 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 conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Network Systems
Corporation at December 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 10, 1995
F-30
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
of Year and Rental Written Off Year
---------------------------------------------------
Amortization of spare parts for
customer services:
For the year ended:
December 30, 1994 $55,317 $23,789 $14,997 $64,109
====== ====== ====== ======
December 31, 1993 $48,268 $20,208 $13,159 $55,317
====== ====== ====== ======
December 25, 1992 $41,896 $20,746 $14,374 $48,268
====== ====== ====== ======
Additions
Balance - Charges Balance
Beginning to Cost Reductions - End of
of Year of Sales Write-offs Year
---------------------------------------------------
Inventory reserves:
For the year ended:
December 30, 1994 $35,905 $43,672 $29,098 $50,479
====== ====== ====== ======
December 31, 1993 $24,147 $33,554 $21,796 $35,905
====== ====== ====== ======
December 25, 1992 $17,723 $18,703 $12,279 $24,147
====== ====== ====== ======
Deductions
- Accounts
Additions Receivable
Balance - Charged Written Off Balance
Beginning to Cost and Net of End of
of Year Expenses Recoveries of Year
---------------------------------------------------
Allowance for doubtful accounts on
accounts receivable:
For the year ended:
December 30, 1994 $12,452 $ 3,670 $ 5,499 $10,623
====== ====== ====== ======
December 31, 1993 $11,949 $ 7,228 $ 6,725 $12,452
====== ====== ====== ======
December 25, 1992 $10,733 $10,987 $ 9,771 $11,949
====== ====== ====== ======
F-31
EXHIBIT INDEX
-------------
Exhibit No. Description
---------- ------------------------------------------------------------
10.8 Employment Agreement between the Company and David E. Lacey,
dated February 17, 1995.
10.9 Employment Agreement between the Company and L. Thomas
Gooch, dated February 17, 1995.
10.10 Employment Agreement between the Company and Mark D.
McGregor, dated February 17, 1995.
10.11 Employment Agreement between the Company and W. Russell
Wayman, dated February 17, 1995.
10.12 Employment Agreement between the Company and David E. Weiss,
dated February 17, 1995.
10.13 Employment Agreement between the Company and John V.
Williams, dated February 17, 1995.
10.17 Amendment to Restated Agreement and Plan of Merger, dated
February 8, 1995, between the Registrant, StorageTek Eagle
Corporation and Network Systems Corporation.
11.0 Computation of Earnings (Loss) per Common Share.
21.0 Subsidiaries of Registrant.
23.0 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.