Back to GetFilings.com
FORM 10-K
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 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
COMMISSION FILE NUMBER 1-7534
STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2270 South 88th Street, Louisville, Colorado 80028-4309
(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), New York Stock Exchange
including related preferred
stock purchase rights
8% Convertible Subordinated New York Stock Exchange
Debentures due 2015
7% Convertible Subordinated New York Stock Exchange
Debentures due 2008
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
As of March 4, 1995, there were 53,316,255 shares of common stock of the
registrant outstanding. The aggregate market value of voting stock held by
nonaffiliates of the registrant was $1,319,682,809 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 4,
1996. 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 29, 1995. Portions of the
registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 30, 1996 are incorporated by reference into
Part III of this Form 10-K.
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. [ X ]
PAGE
Page 2
PART I
ITEM 1. BUSINESS
GENERAL
- -------
Storage Technology Corporation and its subsidiaries ("StorageTek" or the
"Company") design, manufacture, market and service high-performance
information storage and retrieval subsystems and networking products. The
Company's three principal product lines are serial access storage subsystems
(Nearline(R)), random access storage subsystems (online) and networking
products. Nearline products include magnetic tape storage devices and
automated library systems. Online products consist of rotating magnetic
disk devices, including products that utilize fault-tolerant array
technology (RAID), and solid-state direct access storage devices (DASD).
Networking products include routers, switches, channel extenders and
security encryption devices. The Company has commenced activities designed
to expand its professional services business emphasis in the future, in
part, through increased emphasis on new marketing channels (see "MARKETING,
DISTRIBUTION AND SERVICES," below). StorageTek maintains a worldwide
customer service organization 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, Australia, Japan, Mexico, New Zealand and
Brazil, as well as through distributors in Africa, Asia, Europe and other
countries in South America. In 1995, international revenue accounted for
approximately 41% of the Company's total revenue.
StorageTek's objective is to be the preferred provider of information
storage and retrieval solutions for enterprise computer systems and
networks. The Company's strategy for achieving this objective includes:
continuing to make significant investments in research and development;
expanding hardware product offerings and distribution channels to provide
solutions that address changing customer requirements; investing in new
technologies and businesses that complement its business and product
offerings; and continuing to reduce cycle time and maintain production
quality. 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.
On March 7, 1995, the Company acquired Network Systems Corporation (Network
Systems). The transaction was accounted for as a pooling of interests and,
as a result, certain financial information has been restated. For a
discussion of the acquisition, see Note 2, Business Combinations -- Network
Systems Corporation, of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, of this
Form 10-K. During the second quarter and third quarter of 1995, the Company
substantially reduced the scope of its midrange business with the sale of
its midrange lease assets and substantially all of its midrange service
business, and the closing of its StorageTek Distributed Systems Division
operations. See Note 3 of NOTES TO
PAGE
Page 3
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K for further
information. During the fourth quarter of 1995, the Company announced that
it was implementing actions designed to restructure its business operations,
and had incurred restructuring charges and other one-time charges of $180.9
million. The restructuring charges, totalling $167.2 million, cover the
cost of work force reductions, facility closings and consolidations, and
asset writedowns. For a discussion of the restructuring charges, see
"RESTRUCTURING PLAN", below, and Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, of this Form 10-K. On February 9, 1996, the Company announced
that it intends to sell its lease assets and enter into a worldwide lease
financing alliance during the first quarter of 1996. For a discussion, see
Note 19, Subsequent Events -- Sale of Lease Assets, of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS. As part of its 1995 restructuring plan, the Company
entered into a letter of intent on February 28, 1996, to sell its 500,000
square foot research and manufacturing facility in Longmont, Colorado.
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.
THE STATEMENTS IN THE FOLLOWING DESCRIPTION THAT REGARD THE COMPANY'S FUTURE
PRODUCT AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE
FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS. ACTUAL
RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THE RISKS DETAILED IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK FACTORS
THAT MAY AFFECT FUTURE RESULTS," OF THIS FORM 10-K.
PRINCIPAL PRODUCTS
- ------------------
StorageTek has three principal product lines: Nearline products (serial
access subsystems, including magnetic tape storage devices and automated
library systems); online products (random access subsystems, including
rotating and solid-state DASD) and networking products.
Product sales, including related software revenue, accounted for
approximately 70% of total revenue in 1995, while service and rental income
accounted for the balance. The following table presents revenue by product
line, which includes product sales, service and rental and software revenue.
This information has been restated to reflect the Company's acquisition of
Network Systems Corporation in March 1995, which was accounted for as a
pooling of interests:
PAGE
Page 4
REVENUE BY PRODUCT LINE
FISCAL YEAR ENDED DECEMBER
------------------------------------------------------
1995 1994 1993
---------------- --------------- ----------------
$ million % $ million % $ million %
---------------- ---------------- ----------------
Nearline Products $1,197.7 62.1 $1,033.0 55.2 $ 875.5 54.1
Online Products 375.9 19.5 254.2 13.6 126.0 7.8
Networking Products 208.9 10.8 249.8 13.3 213.3 13.2
Midrange and Other
Products 147.0 7.6 334.4 17.9 402.9 24.9
---------------- ---------------- ----------------
Total $1,929.5 100.0 $1,871.4 100.0 $1,617.7 100.0
================ ================ ================
During 1995, the Company introduced RedWood SD-3 (RedWood(TM)), a high-capacity
tape drive, and the Arctic Fox 9800 (Arctic Fox) and Kodiak 9890 Scaleable
Storage Facility (Kodiak(TM)) online products. On March 7, 1995, the Company
completed a merger with Network Systems. The acquisition of Network Systems
provided the Company with significant new networking products. Network
Systems products currently include the BorderGuard(TM), Security Router(TM), the
Enterprise Routing Switch (ERS(TM)) and Central Archive Management (CAM(TM)).
The ERS has been developed in conjunction with Northern Telecom, Inc. The
Company anticipates that an increasing portion of its future revenue will
come from these products, enhancements to these products and other new
products currently under development. There can be no assurance, however,
that these products will provide significant revenue contribution, or that
new products will be developed in a timely manner, address technological
advances, gain market acceptance or withstand 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 17 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, of this Form 10-K.
NEARLINE PRODUCTS
- -----------------
StorageTek's current line of Nearline subsystems includes its Automated
Cartridge System (ACS) library and associated magnetic tape cartridge
storage products. The Company's current library products include: the
PowderHorn 9310 (PowderHorn(R)), the Company's second-generation ACS
library, which became available in the second quarter of 1993; the Company's
first generation 4410 ACS library, which has been available since 1988; and
WolfCreek 9360 (WolfCreek(R)), a smaller, high-performance lower-cost
library, which became available in the fourth quarter of 1993. The
Company's tape cartridge products include: the Timberline 9490
(Timberline(R)), a high-performance 36-track cartridge subsystem, available
since the fourth quarter of 1994; the high capacity (up to 50 gigabytes per
cartridge) RedWood, which currently provides Small Computer System Interface
(SCSI) support, available since the first quarter of 1995; the Silverton
PAGE
Page 5
4490 (Silverton), a 36-track cartridge subsystem, which became available
in the third quarter of 1993; and the 4480 18-track cartridge subsystem,
which has been available since 1987. The Company also develops and licenses
software programs designed to expand the range of applications for its ACS
libraries.
The Company recently completed the development of the 9710 library, a
reduced cost, smaller capacity library designed for the midrange
marketplace, and the Twin Peaks 4890 36-track cartridge subsystem (Twin
Peaks), which is also designed for the midrange marketplace. Both the 9710
library and Twin Peaks are currently in limited availability production. In
addition, the Company is developing other new library and tape products, all
of which are in the preliminary engineering phase and for which no firm
availability dates have been set. 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.
ONLINE PRODUCTS
- ---------------
StorageTek's current OnlinePlus(TM) product line consists of a number of online
random access DASD products, featuring RAID rotating magnetic disk
subsystems and solid-state disk (SSD) subsystems. 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(R)) is a key part of the Company's online strategy.
Iceberg, available since the second quarter of 1994, 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 to enhance the capabilities of Iceberg, and have
been available since the second half of 1994. The Company's online products
also include Arctic Fox, a high-performance solid-state device, and Kodiak,
a high-performance, high-capacity online product. Both Arctic Fox and
Kodiak became available in 1995. These online products are expected to
serve as an increasing source of revenue for the Company in 1996. See Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," of this Form 10-K for a discussion of operating
results and certain risks that may affect future results.
NETWORKING PRODUCTS
- -------------------
The Company's network product offerings were significantly expanded through
the acquisition of Network Systems, which was completed on March 7, 1995.
Currently, the Company's network products include: unlimited distance
channel extension and CPU networking devices, which have been available
since 1976; the CAM product, a software application designed to provide
backup and recovery to a variety of network client systems, available since
the first half of 1995; interconnect controllers that connect LANs to
mainframes, available since 1991; multiprotocol bridge routers for LAN, WAN
and MAN connections, available since 1988; intelligent port switching hubs,
available since 1993; the ERS, available since the first half of 1995; and
the Security Router and BorderGuard products lines, which became available in
1995. The Company currently is developing new products designed to support
network attached storage for the client-server environment.
PAGE
Page 6
MIDRANGE AND OTHER PRODUCTS
- ---------------------------
In the second and third quarters of 1995, the Company substantially reduced
the scope of its midrange business with the sale of its midrange lease
assets and substantially all of its midrange service business and the
closing of its StorageTek Distributed Systems Division operations. The
Company continues to offer library, tape and networking products that are
designed for the midrange computer market. For a discussion of the sale of
the midrange assets and service business, see Note 3 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.
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,
Australia, Japan, Mexico, New Zealand and Brazil 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 and in other countries in South America. In 1995, international
revenue accounted for 41% of total revenue, compared to 39% in 1994, and 38%
in 1993. 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 -- Risk Factors that May Affect Future
Results -- International Sales and Operations," of this Form 10-K for a
discussion of factors associated with the Company's international business.
As of December 29, 1995, the order backlog was approximately $57 million,
compared to approximately $60 million as of December 30, 1994.
Approximately 37% in 1995 and 85% in 1994 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 $88 million of
equipment shipped awaiting revenue recognition as of December 29, 1995,
compared to approximately $94 million as of December 30, 1994. 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 or awaiting customer acceptance 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 orders in the
Company's backlog or equipment shipped awaiting revenue recognition amounts
will ultimately be recognized as revenue.
In 1996, the Company intends to expand the distribution of certain products
through original equipment manufacturers, value-added distributors and
telephone sales. The Company believes that increased use of these
distribution channels will be important to achieving cost improvements and
gaining market penetration for its lower end products. The Company also has
consolidated its professional service groups and intends to expand its
service offerings in 1996 with five major categories of service to be
provided, including: data center, educational, media management, network
management and system services. Historically, the Company has not generated
a
PAGE
Page 7
significant portion of its revenue from these sources, and there can be no
assurance that the Company's efforts to expand its distribution channels and
service offerings will be successful.
The installed service base of products and the expertise of the Company's
customer service engineers are considered to be valuable assets of the
Company. These assets are expected to continue to be important competitive
elements of the Company's business. The Company has a worldwide customer
support organization to install, maintain and service StorageTek equipment,
as well as the equipment of others. The Company generally warrants the
performance of products for a specified period of time, after which it
services those products under maintenance agreements. In response to
competitive pressures, many of the products include extended warranty
periods. Such extended warranties may adversely affect profit margins. In
1995, service and rental revenue accounted for 30% of total revenue,
compared to 31% in 1994 and 35% in 1993.
MANUFACTURING AND MATERIALS
- ---------------------------
The Company currently operates manufacturing facilities in Colorado,
Minnesota, Puerto Rico, Florida, France and England. A significant portion
of the Company's European requirements for Timberline are manufactured at
its Toulouse, France, facility. In connection with the restructuring
activities announced in the fourth quarter of 1995, the Company expects to
cease manufacturing operations in Florida in the second half of 1996, and
also has announced plans to sell its manufacturing operations in England in
July 1996, see "RESTRUCTURING PLAN", below. Currently, all the Company's
manufacturing facilities are in compliance with the ISO 9001 international
quality standard.
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 a 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. 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 - Risk 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
- -----------
The Company competes with a number of large multinational companies that
have substantially greater resources, including, IBM, Fujitsu Limited and
Hitachi Ltd., as well as similarly sized companies, including Amdahl Corp.
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,
PAGE
Page 8
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 within
and outside the U.S. In the network products arena, the Company faces
strong competition in several key product areas, including hubs, switches,
Asynchronous Transfer Mode (ATM) routers and channel extension products,
from a number of companies with significant market share and financial
resources. Further, because of the significance of IBM in mainframe
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.
The Company is adapting its product offerings for the client-server, and
intensifying its activities in this arena in response to the migration
toward shared data storage. The Company anticipates that its ability to
compete in the client-server systems market will depend on a number of
factors within and outside its control, including the timely introduction
and performance of products for the client-server market introduced by the
Company and its competitors. For further discussion of competitive
conditions, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors that May
Affect Future Results," of this Form 10-K.
NEW PRODUCT DEVELOPMENT
- -----------------------
The Company currently invests substantial resources in its product
development efforts in order to maintain and enhance the competitiveness of
its products. In 1995, 1994 and 1993, the Company devoted approximately
10%, 11%, and 12%, respectively, of its revenue to develop new products and
enhance the performance of existing products. 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 in the past has acquired
other companies and has entered into joint development and other similar
relationships with other companies. For example, the Company acquired
Amperif Corporation in 1993 and Network Systems in 1995.
The Company spent approximately $187 million on research and product
development activities in 1995, as compared to approximately $206 million in
1994 and approximately $191 million in 1993. Current research and
development projects include: the development of enhancements for Iceberg
and Kodiak; the completion of development activities related to RedWood and
other Nearline tape products; the development of networking product
enhancements. As of December 29, 1995, approximately 1,500 employees were
engaged on a full-time basis in engineering and product development
activities.
In the future, there can be no assurance that new products and product
enhancements will be successfully developed or developed in a timely manner,
or if introduced, that the products will achieve market acceptance. The
Company has experienced delays from time to time in completing development
activities and introducing new products and product enhancements and there
can be no assurance that the Company will not encounter delays in the
future. For further discussion of factors concerning product development,
see Part II, Item 7, "Management's
PAGE
Page 9
Discussion and Analysis of Financial Condition and Results of Operations --
Risk Factors that May Affect Future Results," of this Form 10-K.
INTELLECTUAL PROPERTY
- ---------------------
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 270 U.S. patents, as well as foreign counterparts to many of these
patents in relevant markets, covering various aspects of its products. Four
of these patents expire in 1996 and the remainder will expire from 1997
through 2015. The Company also has pending approximately 130 U.S. patent
applications, including approximately 22 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, license 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 has 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 or royalty
agreements are generally offered in such situations, there can be no
assurance that litigation will not be commenced in the future regarding
patents, copyrights, trademarks or trade secrets or that any license,
royalty or other rights can be obtained on acceptable terms, or at all.
StorageTek is currently engaged in certain 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 --
Risk Factors that May Affect Future Results," of this Form 10-K.
ENVIRONMENT
- -----------
Compliance by StorageTek with provisions of federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material
adverse affect on StorageTek. For 1995, StorageTek did not have any
material expenditures for environmental control facilities. To date in
1996, 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.
PAGE
Page 10
Government regulation of the environment and related compliance costs have
increased in recent years. StorageTek cannot predict the nature or scope of
future environmental laws or regulations or how they will be administered or
whether compliance will require substantial expenditures. Based upon
currently available information, StorageTek does not expect that future
compliance with environmental regulations will have a material affect on
StorageTek.
RESTRUCTURING PLAN
- ------------------
In the fourth quarter of 1995, the Company disclosed that it was evaluating
its current operations and manner of conducting business and was
implementing actions designed to restructure its business operations. On
January 25, 1996, the Company disclosed that during the fourth quarter of
1995, it incurred restructuring charges of $167.2 million, to cover the cost
of work force reductions of approximately 1,700 employees, facility closings
and consolidations affecting its facilities located in Colorado, and other
facilities located both within and outside the U.S., and asset writedowns.
This restructuring was adopted in an effort to establish a more competitive
cost structure in response to slower revenue growth and increasing price
competition particularly in the online marketplace. In connection with the
restructuring, the Company plans to focus on core businesses and outsource
non-strategic activities, re-architect its distribution processes within and
outside the U.S., and accelerate the integration of its Network Systems
unit. Additional information concerning the 1995 restructuring plan is
found in Part II, Item 7, "Management's Discussion and Analysis of Financial
Results and Operations, " and Part IV, Item 14, Note 16 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, of this Form 10-K.
OTHER MATTERS
- -------------
The Company employed approximately 10,000 persons on a full-time basis
worldwide as of December 29, 1995.
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 1996 and that fourth
quarter results will be higher than any other quarter.
For the year ended December 29, 1995, 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
Network Systems Corporation, Bytex Corporation, Amperif
Corporation and Bus-Tech, Inc.
PAGE
Page 11
Note 3 Description of the Company's sale of its midrange lease
assets in June 1995, and substantially all of its midrange service
business in September 1995.
Note 16 Description of the Company's restructuring and other charges
in 1995 and prior years.
Note 17 Information on the geographic operations of the Company's
single business segment, which has been restated in connection
with the Network Systems Corporation merger on March 7, 1995. See
also Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- International
Operations and Hedging Activities" and "Risk Factors that May
Affect Future Results -- International Sales and Operations" for
further discussion of the risks attendant to foreign operations.
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,
restructuring plans and risk factors that may affect future results.
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
occupied. These facilities include StorageTek's executive offices, as well
as manufacturing, research and development, and spare parts storage
facilities.
StorageTek owns approximately 199,000 square feet of manufacturing
facilities in the Palm Bay/Melbourne, Florida, area, and approximately
200,000 square feet of manufacturing, research and development, and
administrative facilities in the Minneapolis, Minnesota, area. These
facilities are approximately 50% and 100% utilized, respectively.
StorageTek occupies approximately 180,000 square feet of leased engineering,
manufacturing and marketing facilities in Toulouse, France; 128,000 square
feet of manufacturing facilities in Puerto Rico, of which approximately
78,000 square feet is owned and 50,000 square feet is leased; and
approximately 38,000 square feet of leased manufacturing facilities in
England. The facilities in France, Puerto Rico and England are
approximately 55%, 80% and 100% utilized, respectively.
StorageTek also leases facilities at approximately 348 locations throughout
the world, primarily for sales, customer services, and spare parts storage,
as well as for limited research and product development purposes.
Approximately 237 of these leased field offices are located in North
America, with combined office and warehouse facilities totaling
approximately 1,275,000 square feet in the United States and 100,000 square
feet in Canada. As part of the restructuring activities in the fourth
quarter of 1995, a number of the leased field office facilities have been
fully or partially vacated and the Company is currently in the process of
consolidating a number of facilities into other StorageTek facilities. The
Company maintains approximately 95 field offices
PAGE
Page 12
in Europe comprising approximately 540,000 square feet, and 15 offices in
the Asia/Pacific region comprising approximately 75,000 square feet.
As part of the 1995 restructuring plan, the Company is in the process of
consolidating its foreign field offices and entered into a letter of intent
on February 28, 1996, to sell its 500,000 square foot research and
manufacturing facility in Longmont, Colorado. 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.
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 certified a class consisting
(with certain exceptions) of those who purchased StorageTek's common stock
and related securities from December 23, 1991, to August 7, 1992. A
shareholder derivative action was also filed in the second quarter of 1992
based on substantially similar factual allegations was consolidated with the
class action. On July 27, 1995, the Company and the plaintiffs in the
shareholder class action and derivative litigation announced an agreement to
settle the litigation. The settlement provided that, without admitting any
wrongdoing, the Company would pay $30,680,000 for its portion of the
settlement. The Company's insurance policies paid $24,320,000 as part of
the total settlement of $55,000,000. As a result of the settlement, a
one-time charge of $30,680,000 was recognized during the third quarter of
1995. The court gave final approval to the settlement in December 1995.
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 in
the discovery phase.
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. On December 22,
1994, the Company filed a counterclaim for infringement of one of its
patents and, in November 1995, added a second patent to its counterclaim.
The case is in the discovery phase. A trial date has been set for May 1996.
PAGE
Page 13
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 alleged that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties. The suit sought injunctive relief and
damages in the amount of $2,400,000,000. On December 28, 1995, the court
dismissed the complaint. The Company is currently proceeding with a
counterclaim against Stuff for breach of its covenant not to sue, which was
part of the 1990 settlement agreement.
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 were illegal, including price increases and parts and maintenance
software availability. On January 4, 1996, the parties settled this suit.
The settlement of this litigation did not involve any admission of wrongdoing
by the Company, and had no material affect on the Company's financial
position or results of operations.
On February 15, 1994, the Company 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 either to 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. On June 10, 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 to
support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been set for
November 1996.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "passthrough" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the
"151 Patent"). The complaint asked the court to impose injunctive relief,
treble damages in an unspecified amount, and an award of attorney fees and
costs. A trial commenced on January 22, 1996, and on February 1, 1996, a
jury found that the Company's products did not infringe the 151 Patent. A
notice of appeal to the U.S. Court of Appeals for the Federal Circuit is due
March 29, 1996. A notice of appeal to the U.S. Court of Appeals for the
Federal Circuit was filed by Odetics, Inc. on March 8, 1996.
On December 8, 1995, Odetics, Inc. filed a second patent infringement suit
in the U.S. District Court for the Eastern District of Virginia against the
Company. The complaint alleges that the "cartridge access port" in certain
of the Company's tape library products infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorney fees and costs. This case has been stayed pending
the outcome of any appeal to the U.S. Court of Appeals for the Federal Circuit
with respect to the case filed by Odetics, Inc. in June 1995.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that
PAGE
Page 14
these cases could result in outcomes unfavorable to the Company. While the
Company currently believes that the amount of the ultimate potential loss
would not be material to the Company's financial position, the outcome of
litigation is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material affect on the
Company's financial position or reported results of operations in a
particular quarter. An adverse decision, particularly in patent litigation,
could require material changes in production processes and products or
result in the Company's inability to ship products or components found to
have violated third-party patent rights.
Information concerning certain of these legal proceedings is also contained
in Note 14 of NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS identified in
Part IV, Item 14, of this Form 10-K.
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 29, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company
as of March 11, 1996.
NAME POSITION WITH COMPANY AGE
- --------------------------------------------------------------------
Ryal R. Poppa Chairman of the Board, 62
President and Chief
Executive Officer
David E. Weiss Executive Vice President 51
and Chief Operating Officer
Lowell Thomas Gooch Executive Vice President 51
and General Manager of
Network Systems
John V. Williams Executive Vice President of 52
Worldwide Field Operations
David E. Lacey Corporate Vice President 49
and Interim Chief Financial
Officer
W. Russell Wayman Corporate Vice President, 51
General Counsel and
Secretary
Mr. Poppa became Chairman of the Board, Chief Executive Officer and a
director of the Company in January 1985, and President of the Company in
January 1988. He is also a director of SemiTool Inc.
Mr. Weiss was appointed Chief Operating Officer on March 10, 1995. Mr.
Weiss served as Executive Vice President of Systems Development from January
1993 to March 1995. He was a Senior Vice President of Marketing and Program
Management Process from June 1992 to January 1993 and Corporate Vice
President of Market Planning from August 1991 to June 1992.
PAGE
Page 15
From March 1991 through August 1991, he was a staff vice president reporting
to the Chief Executive Officer.
On November 20, 1995, Mr. Gooch was appointed as Executive Vice President
and General Manager of the Company's Network Systems Corporation unit. From
January 1989 to November 1995, Mr. Gooch was Executive Vice President of
Operations of the Company. Mr. Gooch has been employed by the Company in
various capacities since 1972.
Mr. Williams was appointed Executive Vice President of Worldwide Field
Operations 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.
Mr. Lacey was appointed Interim Chief Financial Officer on February 1, 1995,
in addition to his position as Corporate 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. Wayman has served as Corporate Vice President since March 1991, General
Counsel since January 1990 and Corporate Secretary of the Company since
February 1990.
PAGE
Page 16
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 1995 and 1994. On
December 29, 1995, there were 17,431 record holders of common stock of
StorageTek.
1995 High Low
----------------------------------------------------
First Quarter $32.625 $18.625
Second Quarter 26.750 17.875
Third Quarter 29.500 23.750
Fourth Quarter 27.625 22.250
1994 High Low
----------------------------------------------------
First Quarter $40.625 $31.250
Second Quarter 34.125 25.125
Third Quarter 39.000 28.750
Fourth Quarter 31.000 26.625
Dividends
- ---------
StorageTek has never paid cash dividends on its common stock. The Company
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 29, 1995, 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
Page 17
ITEM 6.SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1993
through 1995 (except for the 1993 Balance Sheet Data), has been derived from
the consolidated financial statements appearing elsewhere herein, including
the Consolidated Balance Sheet as of December 29, 1995, and December 30,
1994, and the related Consolidated Statement of Operations for each of the
three years in the period ended December 29, 1995, and notes thereto. The
data, insofar as it relates to the Balance Sheet Data as of December 31,
1993, December 25, 1992, and December 27, 1991, and the Statement of
Operations Data for the fiscal years 1992 and 1991, has been derived from
the historical financial statements of the Company for such periods,
restated as appropriate to reflect mergers accounted for as poolings of
interests.
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
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $1,929,485 $1,871,350 $1,617,691 $1,774,325 $1,807,541
Cost of revenue 1,217,622 1,186,942 1,072,784 1,179,756 1,197,798
--------- --------- --------- --------- ---------
Gross profit 711,863 684,408 544,907 594,569 609,743
Research and product development costs 187,275 206,083 191,048 177,699 144,686
Marketing, general, administrative and
other income and expense, net 445,889 425,490 393,991 388,496 363,356
Restructuring and other charges (Note 16) 212,207 8,000 90,414 60,310(a) 9,078(b)
--------- --------- --------- --------- ---------
Operating profit (loss) (133,508) 44,835 (130,546) (31,936) 92,623
Interest income 43,325 46,935 62,438 75,885 80,339
Interest expense (34,347) (40,832) (43,853) (49,991) (53,398)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and accounting change (124,530) 50,938 (111,961) (6,042) 119,564
Provision for income taxes (17,800) (18,900) (9,500) (27,200) (21,200)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of accounting change (142,330) 32,038 (121,461) (33,242) 98,364
Cumulative effect of accounting
change (Note 10) 40,000
--------- --------- --------- --------- ---------
Net income (loss) $ (142,330) $ 32,038 $ (81,461) $ (33,242) $ 98,364
========= ========= ========= ========= =========
Earnings (loss) per common share:
Income (loss) before cumulative effect
of accounting change $ (2.91) $ 0.38 $ (2.59) $ (0.66) $ 1.99
Net income (loss) (2.91) 0.38 (1.80) (0.66) 1.99
BALANCE SHEET DATA
Working capital $ 425,351 $ 501,065 $ 492,576 $ 402,876 $ 503,052
Total assets 1,888,629 2,144,458 2,064,851 2,011,007 2,055,897
Long-term debt 363,963 356,887 362,718 370,988 375,847
Stockholders' equity 962,833 1,265,285 1,215,877 1,138,927 1,157,681
(a) In 1992, the Company recognized restructuring charges of $60,310,000.
(b) In 1991, the Company recognized merger expenses of $9,078,000.
PAGE
Page 18
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in the following discussions regarding the Company's
future product and business plans, financial results, performance and events
are forward-looking statements and are based on current expectations.
Actual results may differ materially due to a number of risks and
uncertainties, including the risks detailed below in "RISK FACTORS THAT MAY
AFFECT FUTURE RESULTS."
GENERAL
- -------
The Company reported a net loss for the year ended December 29, 1995, of
$142.3 million on revenue of $1.93 billion, compared to net income for the
year ended December 30, 1994, of $32.0 million on revenue of $1.87 billion
and a net loss for the year ended December 31, 1993, of $81.5 million on
revenue of $1.62 billion. The Company's results include restructuring and
other charges of $212.2 million in 1995, $8.0 million in 1994, and $90.4
million in 1993. A $40.0 million benefit was also recognized in 1993 from
the cumulative effect of a change in the method of accounting for income
taxes.
As more fully discussed in Note 2 of NOTES TO 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 was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements were restated for all periods prior to the
merger to include the operations of Network Systems, adjusted to conform
with StorageTek's accounting policies and presentation.
Revenue increased 3% in 1995 compared to 1994, primarily due to incremental
sales revenue from the TimberLine 9490 (TimberLine(R)) 36-track cartridge
subsystem and the Iceberg 9200 Virtual Storage Facility (Iceberg(R)). These
increases were largely offset by a significant decline in revenue from
midrange products, as well as lesser declines in revenue from older
generation library and tape products and networking products. The
significant decline in revenue from midrange products was primarily due to
the sale of substantially all of the Company's midrange lease assets and
midrange service business in the second and third quarter of 1995,
respectively. As anticipated, revenue from older generation Nearline(R)
products, including the 4480 18-track tape cartridge subsystem, Silverton
4490 36-track tape cartridge subsystem (Silverton), and 4410 Automated
Cartridge System (ACS) library, decreased in 1995. The decline in revenue
from networking products reflects slower than expected market acceptance of
the Enterprise Routing Switch (ERS(TM)) and other new internetworking products,
coupled with declines in older mainframe channel extension networking
products. While revenue from Iceberg increased 73% for 1995 compared to
1994, the rate of growth fell short of the Company's expectations primarily
due to continued price competition in the online marketplace, and slower
than expected market acceptance.
Revenue increased 16% in 1994 compared to 1993, primarily due to increased
sales of Silverton, Iceberg, and the PowderHorn 9310 (PowderHorn(R)), an ACS
library. Sales of the Company's first-generation 4410 ACS library and 4480
18-track tape cartridge system declined in 1994, as did sales of midrange
products.
PAGE
Page 19
Improvements in revenue and operating results during 1996 are significantly
dependent upon successfully addressing development and distribution issues
associated with the Company's networking products, as well as the effective
implementation of significant business restructuring activities initiated
during the fourth quarter of 1995 in all parts of the Company's business.
Risk factors that may affect future results also include the continuing
success of TimberLine, Iceberg, Silverton and PowderHorn; successfully
gaining market acceptance for the RedWood SD-3 (RedWood(TM)) and the Kodiak
9890 Scalable Storage Facility (Kodiak(TM)); the successful introduction of
planned technological improvements to these products; intense competition
and pricing pressure in the online marketplace; and the introduction of new
products by competitors; among others. See "RISK FACTORS THAT MAY AFFECT
FUTURE RESULTS," below.
The Company's cash balances increased $36.4 million during 1995 as cash
generated from operations of $306.0 was partially offset by net repayments
of debt of $201.9 million, and investments in property, plant and equipment
of $58.0 million. The Company's cash balances decreased $52.9 million
during 1994 primarily as a result of significant investments associated with
new products and increased $124.9 million during 1993 primarily as a result
of proceeds from a preferred stock offering.
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
-------------------------------------
1995 1994 1993
-------------------------------------
Revenue:
Nearline Products 62.1% 55.2% 54.1%
Online Products 19.5 13.6 7.8
Networking Products 10.8 13.3 13.2
Midrange and Other Products 7.6 17.9 24.9
---- ---- ----
Total revenue 100.0 100.0 100.0
Cost of revenue 63.1 63.4 66.3
---- ---- ----
Gross profit 36.9 36.6 33.7
Research and product development costs 9.7 11.0 11.8
Marketing, general, administrative
and other income and expense, net 23.1 22.8 24.4
Restructuring and other charges 11.0 0.4 5.6
---- ---- ----
Operating profit (loss) (6.9) 2.4 (8.1)
Interest income (expense), net 0.4 0.3 1.2
---- ---- ----
Income (loss) before income
taxes and cumulative effect
of accounting change (6.5) 2.7 (6.9)
Provision for income taxes (0.9) (1.0) (0.6)
---- ---- ----
Income (loss) before cumulative
effect of accounting change (7.4) 1.7 (7.5)
Cumulative effect on prior years of
change in method of accounting for
income taxes 2.5
---- ---- ----
Net income (loss) (7.4)% 1.7% (5.0)%
==== ==== ====
PAGE
Page 20
REVENUE
- -------
NEARLINE PRODUCTS
Revenue from Nearline products increased 16% in 1995 compared to 1994,
primarily due to incremental sales of TimberLine, which became available in
the fourth quarter of 1994. Revenue from PowderHorn also increased in 1995
compared to 1994. As anticipated, revenue from the 4480 18-track tape
cartridge subsystem and Silverton, which represent earlier generation tape
subsystems, declined in 1995. Revenue from the first generation 4410 ACS
library also declined slightly in 1995. RedWood, a high-capacity tape
drive, was introduced in the first quarter of 1995; however, the Company
received no significant revenue contribution from RedWood in 1995.
Revenue from Nearline products increased 18% in 1994 compared to 1993,
primarily due to increased sales of PowderHorn and Silverton. The Company
also recognized incremental sales from TimberLine during the fourth quarter
of 1994. Sales of the 4410 ACS library and 4480 18-track cartridge
subsystem declined during 1994.
Incremental sales associated with TimberLine and RedWood are expected to
offset future declines in revenue from earlier generation Nearline products.
RedWood currently provides Small Computer System Interface (SCSI) support
for multiple computing platforms. Future revenue contribution from RedWood
is significantly dependent upon the Company's ability to deliver a version
of the product which allows for the use of higher capacity tape cartridges.
While the Company believes issues associated with the design and manufacture
of higher capacity tape cartridges for RedWood were resolved during the
fourth quarter of 1995, there can be no assurance that all RedWood
development issues have been successfully addressed or that the product will
gain market acceptance in the future.
ONLINE PRODUCTS
Revenue from online products increased 48% in 1995 compared to 1994,
primarily due to incremental sales of Iceberg, which became available during
the second quarter of 1994. While Iceberg sales revenue increased during
1995, the rate of revenue growth fell short of the Company's expectations,
primarily due to the rapid rate of price erosion in the online marketplace,
and slower than expected customer acceptance of Iceberg. The Company
announced the commencement of initial shipments of Kodiak in the third
quarter of 1995; however, the Company received no significant revenue
contribution from Kodiak in 1995.
Revenue from online products increased 102% in 1994 compared to 1993, due to
incremental sales of Iceberg. Iceberg sales fell short of the Company's
expectations in 1994, primarily as a result of lower than anticipated unit
sales volume, smaller configuration sizes, price competition, as well as
longer than anticipated customer evaluation and acceptance periods.
Future revenue contribution from online products is significantly dependent
upon successfully increasing production volumes of Kodiak without
significant engineering, design or manufacturing difficulties, as well as
the timely introduction of additional functions and features for both
Iceberg and Kodiak in the highly competitive online marketplace. While the
Company believes the introduction and production schedules for these
additional functions and features are achievable, there can be no assurance
that the schedules will be met, or that these
PAGE
Page 21
functions and features will result in additional market acceptance for Iceberg
and Kodiak. Future revenue contribution from online products is also
significantly dependent upon the rate of future price declines in the
marketplace. While worldwide demand for online storage capacity in the
enterprise marketplace increased significantly in 1995, this increase was
largely offset by declines in the price per megabyte for storage.
NETWORKING PRODUCTS
Revenue from networking products decreased 16% in 1995 compared to 1994.
This decrease reflects anticipated declines in older mainframe channel
extension networking products, coupled with slower than expected market
acceptance of ERS and other internetworking products which support
communication between networks. Revenue and operating results associated
with networking products were adversely affected by difficulties encountered
with the integration of Network Systems, and delays in the development of
Asynchronous Transfer Mode (ATM) support for ERS.
Revenue from networking products increased 17% in 1994 compared to 1993, due
to incremental revenue contribution from purchase acquisitions made during
1993 by Network Systems.
As part of its restructuring, the Company initiated efforts during the
fourth quarter of 1995 to accelerate the integration of Network Systems,
increase focus on core networking products for the information storage and
retrieval marketplace, discontinue the development of future network hub
products, modify the distribution structure for networking products, and
reduce operating expenses. Improvements in revenue and operating results
with respect to networking products are significantly dependent upon the
successful implementation of these restructuring actions, the introduction
of ATM support for ERS, and the introduction of enhancements for other
networking products. The development of ATM support for ERS is completely
dependent upon the success of the Company's joint development agreement with
Northern Telecom, Inc. The Company does not anticipate ATM support for ERS
will become available until 1997. There can be no assurance that the
Company's joint development agreement with Northern Telecom, Inc. will be
successful, or that the Company's networking product line will generate any
significant future profits.
MIDRANGE AND OTHER PRODUCTS
Revenue from midrange and other products decreased 56% in 1995 compared to
1994. This decline is primarily the result of the Company's sale of its net
investment in sales-type leases associated with its midrange business during
the second quarter of 1995 and the sale of substantially all of the midrange
service business during the third quarter of 1995. No material gain or loss
resulted from the sale of the midrange lease assets as the gain on the lease
asset sale was largely offset by transaction and integration costs. A one-
time gain of approximately $8.8 million was recognized in connection with
the sale of the midrange service business. As a result of the sale of the
midrange lease assets and midrange service business, revenue from the
midrange product line is expected to be significantly reduced in future
periods.
Revenue from midrange subsystems and other products decreased 17% in 1994
compared to 1993. Midrange revenue and operating results during 1994 were
adversely affected by a steep price erosion in the midrange online
marketplace. A restructuring plan adopted by the
PAGE
Page 22
Company in the third quarter of 1993 resulted in further reductions in
midrange revenue as the Company redirected its marketing efforts to a segment
of the midrange marketplace.
GROSS PROFIT
- ------------
Gross profit on product sales of 37% in 1995 was unchanged, compared to
1994. Gross profit improvements were obtained from product cost
improvements, principally from Iceberg, and cost savings associated with the
increased manufacturing volumes during 1995 for online and Nearline
products. Product sales margins also benefited from reduced sales revenue
contribution from lower margin midrange products as a result of the sale of
the midrange lease assets. These improvements were offset by the
continuation of price declines in the online marketplace, and a significant
decrease in margin contribution from networking products.
Gross profit on product sales increased to 37% in 1994, compared to 33% in
1993, primarily as a result of a favorable product mix which included
increased revenue contribution from higher margin products sold during 1994,
such as Iceberg, Silverton, and PowderHorn; and reduced revenue contribution
from lower margin midrange products.
Gross profit on service and rental revenue was unchanged at 36% in 1995, as
compared to 1994. Gross profit on service and rental revenue increased
slightly to 36% in 1994, compared to 35% in 1993.
The Company's ability to sustain or improve product sales margins during
1996 is significantly dependent upon the rate of the price declines in the
online marketplace, achieving satisfactory manufacturing volumes associated
with networking products to offset fixed costs, and achieving cost savings
associated with the manufacture of its online and networking products.
Product sales margins also may be adversely affected by inventory writedowns
as a result of more rapid than anticipated technological changes. Service
margins also may be affected in the future due to increased price
competition.
RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenditures decreased 9% in 1995 compared
to 1994, and declined as a percentage of revenue from 11.0% in 1994 to 9.7%
in 1995. While the Company continued to invest in the development of new
products and enhancements to existing products, these decreases reflect the
completion of several major product development programs in 1994 and the
implementation of cost-control measures directed at achieving targeted
expense ratios. Research and product development increased 8% in 1994
compared to 1993, primarily due to costs incurred in connection with the
continued development of TimberLine, RedWood, Iceberg and networking
products.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------
Marketing, general, administrative and other income and expense (MG&A and
Other) increased 5% in 1995 compared to 1994 and remained relatively
unchanged as a percent of revenue at 23% for both 1995 and 1994. The
increase in MG&A and Other in 1995 is due primarily to increased marketing
expenses resulting from higher sales volumes, and a charge of $13.7 million
incurred as a result of activities indirectly related to the Company's 1995
restructuring. Also included within MG&A and Other for 1995 is a one-time
gain of $8.8 million realized on the
PAGE
Page 23
sale of substantially all of the Company's midrange service business. Gains
and losses associated with foreign currency transactions and translation
adjustments, net of associated hedging results, are included in MG&A and Other
and aggregated a net loss of $4.3 million for 1995, compared to a net loss of
$1.2 million in 1994.
MG&A and Other increased 8% 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. These
increases were partially offset by lower marketing expenses related to the
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 $1.2 million for 1994, compared to a net loss of $9.0 million in
1993.
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
- -------------------------------
Restructuring and other charges consist of the following (in thousands of
dollars):
Year Ended
----------------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
----------------------------------------------------
Restructuring charges $167,175 $8,000 $77,832
Litigation settlement 30,680
Merger and consolidation
charges 14,352 5,522
Acquired research and
development 7,060
------- ----- ------
$212,207 $8,000 $90,414
======= ===== ======
See Note 14 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a discussion
of the $30.7 million charge associated with the settlement of litigation in
1995. See Note 2 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for a
discussion of the $14.4 million charge associated with the merger with
Network Systems in 1995 and the $5.5 million charge associated with the
merger with Amperif Corporation in 1993. See Note 2 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, also, for a discussion of the $7.1
million charge incurred in connection with Network Systems' acquisition of
Bytex Corporation in 1993.
PAGE
Page 24
The following table summarizes the activity in the Company's restructuring
reserves during the last three years (in thousands of dollars):
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
-------------------------------------------------------------------------
Balances, December 25, 1992 $ 2,794 $ 2,536 $ 4,866 $ 10,196
Restructuring charges 12,636 $ 59,178 3,490 2,528 77,832
Cash payments (7,955) (769) (3,598) (12,322)
Asset writedowns (59,178) (59,178)
Reclassifications to other
restructuring charges (1,236) (1,236)
------ ------- ------ ------ -------
Balances, December 31, 1993 6,239 0 5,257 3,796 15,292
Restructuring charges 3,000 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------ ------- ------ ------ -------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------ ------- ------ ------ -------
Balances, December 29, 1995 $42,688 $ 0 $18,538 $10,172 $ 71,398
====== ======= ====== ====== =======
1995 RESTRUCTURING
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the fourth quarter of 1995, the Company recorded a
restructuring charge of $167.2 million related to the adoption by the
Company of a formal action plan for restructuring its enterprise and
networking businesses. The restructuring was adopted in an effort to
establish a more competitive cost structure in response to slower revenue
growth and increasing price competition, particularly in the online
marketplace. In connection with the restructuring, the Company plans to
focus on core businesses and outsource non-strategic activities, rearchitect
its distribution processes and accelerate the integration of Network
Systems, which was acquired in March 1995.
The majority of the Company's restructuring actions were either completed in
the fourth quarter of 1995 or are expected to be completed during 1996. As
of December 29, 1995, the remaining accrual associated with this
restructuring was approximately $67.6 million. This accrual consisted of
estimated future employee severance obligations of approximately $42.5
million; estimated future rent obligations associated with excess lease
space of approximately $16.0 million; and accruals for other exit costs
associated with the restructuring of approximately $9.1 million. While the
majority of these remaining accruals are expected to result in future cash
outflows, these outflows are not expected to have a material affect on the
Company's liquidity.
PAGE
Page 25
The 1995 restructuring is expected to yield expense reductions on an annual
basis through the elimination of recurring costs as follows (in thousands of
dollars):
Employee cost savings $ 90,000
Depreciation and amortization savings 20,000
Lease abandonments and other cost savings 15,000
-------
Total estimated annual savings $125,000
=======
The Company does not expect to realize the full benefit of the expense
reductions until the second half of 1997 when all associated restructuring
activities are expected to be completed. While the Company is currently
evaluating various outsourcing and automation projects in order to gain
further improvements in operating efficiencies, the Company does not
anticipate that any material incremental costs have been or will be incurred
as part of the restructuring which would offset the anticipated expense
reductions described above.
The Company believes that its restructuring programs over the past several
years have eliminated certain non-essential functions and excess costs.
Based on current short and long-term forecasts, the Company believes that
such cost reductions will benefit future operations. While the Company does
not currently foresee any significant additional restructuring charges in
the near future, the successful implementation of the action plans
associated with the Company's 1995 restructuring during 1996 and 1997 is
critical to achieving improved operating results in future periods. There
can be no assurance that the anticipated expense reductions will be
achieved, or that the Company's restructuring activities will otherwise be
successful or sufficient to allow the Company to generate improved operating
results in future periods. It is possible that changes in the Company's
business or in its industry may necessitate future restructuring charges,
which may be significant.
1994 RESTRUCTURING
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the fourth quarter of 1994, Network Systems recorded a
restructuring charge of $8.0 million in connection with an expense reduction
plan.
As of December 29, 1995, substantially all actions associated with the 1994
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $0.5 million related principally to
future rent obligations associated with excess lease space. No material
cash outflows are anticipated to result from this restructuring in the
future.
1993 RESTRUCTURINGS
As more fully discussed in Note 16 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, during the third quarter of 1993, StorageTek recorded a
restructuring charge of $69.2 million and, during the fourth quarter of
1993, Network Systems recorded a restructuring charge of $8.6 million for an
aggregate 1993 restructuring charge of $77.8 million for the combined
companies.
As of December 29, 1995, substantially all actions associated with the 1993
restructurings have been completed and the remaining accrual associated with
these restructurings of
PAGE
Page 26
approximately $3.3 million related principally to future rent obligations
associated with excess lease space. No material cash outflows are anticipated
to result from these restructurings in the future.
INTEREST INCOME AND EXPENSE
- ---------------------------
Interest income decreased 8% in 1995 compared to 1994, primarily due to a
reduction in the Company's net investment in sales-type lease balance.
Despite an increase in market interest rates, interest income decreased 25%
during 1994 compared to 1993, due to a reduction in net investment in sales-
type leases and a decrease in the Company's cash balances available for
investment.
Interest expense decreased 16% in 1995 compared to 1994, due primarily to a
reduction of nonrecourse borrowings and other long-term debt in the second
half of 1995. 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.
The reductions in the balances of net investment in sales-type leases and
nonrecourse borrowings during 1995 reflect the sale of the Company's
midrange lease assets and the repayment of the associated lease borrowings
during 1995. As further discussed in Note 9 of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, on December 15, 1995, the Company exercised its right
to exchange 7% convertible subordinated debentures for all of its
outstanding shares of preferred stock. As a result of the exchange,
interest expense will increase and the obligation to pay preferred stock
dividends will be eliminated. As more fully discussed in Note 19 of NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, the Company announced on February 9,
1996, that it intends to sell substantially all of its net investment in
sales-type leases. In connection with this sale, the Company intends to
repay its outstanding nonrecourse borrowings and 9.53% Senior Secured Notes.
The completion of this proposed transaction would result in further
reductions in interest income and expense during 1996.
INCOME TAXES
- ------------
As further discussed in Note 10 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, effective as of the beginning of the fiscal year 1993, the
Company was required to change its method of accounting for income taxes
from Statement of Financial Accounting Standards (SFAS) No. 96 to SFAS No.
109. A one-time benefit of $40 million was recognized in the first quarter
of 1993 as a result of the adoption of the new income tax accounting
standard on a prospective basis. The adoption of SFAS No. 109 had no cash
flow impact.
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 losses and tax credits can be
carried forward, the existence of taxable temporary differences, the
Company's earnings history, and the Company's near-term earnings
expectations. Based on the currently available information, management has
determined that the Company will more likely than not realize $74.9 million
of net deferred income tax assets as of December 29, 1995.
PAGE
Page 27
The Company's provision for income taxes relates primarily to U.S. state
taxes and 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. See Note 10 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS for information with respect to the
current status of the Internal Revenue Service examinations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balances increased $36.4 million and short-term
investments decreased $5.5 million from December 30, 1994, to December 29,
1995. The increase in cash during 1995 primarily resulted from cash
generated from operations of $306.0 million; offset by net repayments of
debt of $201.9 million and investments in property, plant and equipment of
$58.0 million. Net cash provided by operations was $306.0 million for 1995
compared to $75.2 million for 1994 and $84.0 million for 1993. Net cash
provided by operations for 1995 includes cash generated from the sale of
midrange lease assets and midrange service business of approximately $193.0
million and refunds from the Internal Revenue Service of $17.8 million,
offset by a one-time payment associated with the settlement of shareholder
litigation of approximately $30.7 million. The net repayment of debt for
1995 of $201.9 million was primarily due to the repayment of borrowings
associated with the sale of midrange lease assets.
The decrease of $52.9 million in cash balances during 1994 primarily
resulted from investments in equipment held for sale or lease of $93.3
million, and in property, plant and equipment of $120.1 million; offset by
income tax refunds received by Network Systems of $23.9 million. The
increase of $124.9 million in cash balances during 1993 reflects the net
proceeds of $166.5 million from the preferred stock offering, coupled with
the net cash generated by operating activities of $84.0 million, partially
offset by investments in property, plant and equipment of $83.4 million, and
net repayments of debt of $24.5 million.
The current ratio decreased to 1.8 as of December 29, 1995, from 2.0 as of
December 30, 1994. Accounts receivable increased from $353.5 million as of
December 30, 1994, to $396.5 million as of December 29, 1995, primarily due
to an increase in end-user sales in relation to sales-type leases.
Inventories decreased from $261.7 million as of December 30, 1994, to $214.6
million as of December 29, 1995, principally as a result of the sale of
substantially all of the Company's midrange business, as well as strong year-
end demand for Nearline products in 1995.
AVAILABLE FINANCING LINES
The Company has a $200 million secured multicurrency credit agreement with a
group of U.S. and international banks (the Revolver) which expires on March
29, 1996. 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 29, 1995). 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
PAGE
Page 28
required to comply with certain financial and other covenants, including
restrictions on the payment of cash dividends on its common stock. As of
December 29, 1995, the Company had no outstanding advances under the Revolver
and had approximately $116 million of available credit under the Revolver.
The Company expects to negotiate a new multicurrency credit agreement prior to
the expiration of the Revolver on March 29, 1996. There can be no
assurances, however, that the Company will be able to complete a new credit
agreement on terms acceptable to the Company.
The Company has historically provided lease financing to its customers and,
to the extent not funded with nonrecourse or other borrowings, utilized its
lease assets as a source of liquidity. As more fully discussed in Note 19
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the Company announced on
February 9, 1996, that it intends to sell its net investment in sales-type
leases and enter into a worldwide lease financing alliance. The Company
expects to close the proposed transaction by the end of the first quarter of
1996, and anticipates an extraordinary gain if the transaction is completed.
In connection with the sale of its net investment in sales-type leases, the
Company intends to repay its outstanding nonrecourse borrowings and its
9.53% Senior Secured Notes. The completion of this transaction is expected
to provide a significant one-time source of cash at the time of closing;
however, the Company would no longer have lease assets as a source of
liquidity on a going forward basis.
As more fully discussed in Note 19 of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, on January 29, 1996, the Company entered into a one-year
agreement with a bank which provides for the sale of certain U.S. and
foreign based accounts receivable on a recourse basis. This agreement
allows for receivable sales of up to $40 million at any one time and
StorageTek's obligations under the agreement will be secured by a letter of
credit for the amount of the receivables sold. The selling price of the
receivables will be partially determined based upon foreign currency
exchange rates and any gains or losses on the sales will be recognized
within MG&A and Other in the Consolidated Statement of Operations at the
time the receivables are sold. As of February 23, 1996, the Company had
committed to future cumulative sales of approximately $206 million. Gains
and losses associated with the receivable sales are not expected to have a
material affect on the Company's reported financial results after taking
into consideration other transactions associated with the Company's
international operations.
After consideration of the factors noted above which potentially affect the
Company's future liquidity, 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.
PAGE
Page 29
LONG-TERM DEBT-TO-TOTAL CAPITALIZATION
The Company's long-term debt-to-total capitalization ratio increased to 27%
as of December 29, 1995, from 22% as of December 30, 1994. This increase
resulted from the exchange of $171.2 million of 7% convertible subordinated
debentures for all of the Company's outstanding preferred stock on December
15, 1995, and reductions in stockholders' equity resulting from the
restructuring and other charges of $212.2 million incurred during 1995.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture related to the Company's 8% Convertible
Subordinated Debentures due 2015 (8% Convertible Debentures), the Company is
required to make semiannual interest payments on the $145.6 million
principal amount of the 8% Convertible Debentures outstanding. The 8%
Convertible Debentures are convertible at the option of the holder into
common stock at a price of $35.25 per share. The 8% Convertible Debentures
are currently redeemable at the option of the Company at a premium of 4.0%,
and are redeemable at decreasing premiums through May 30, 2000. The Company
is required to make annual principal payments of $8 million, plus accrued
interest, into a sinking fund beginning May 31, 2000, to provide for the
retirement of 75% of the 8% Convertible Debentures prior to their maturity
on May 31, 2015. 8% Convertible Debentures purchased by the Company in the
open market and 8% Convertible Debentures converted to common stock may be
applied to the sinking fund requirements. As of December 29, 1995, the
Company held 8% Convertible Debentures in the principal amount of $14.4
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. The Notes are redeemable at
the option of the Company, in whole or in part, at a premium which is
determined based on current interest rates and the time remaining until
maturity. As further discussed in Note 19 of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, the Company intends to prepay the Notes in March 1996
in connection with the sale of its net investment in sales-type leases.
On December 15, 1995, the Company exercised its right to exchange 7%
Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) for
all of its outstanding shares of $3.50 Convertible Exchangeable Preferred
Stock, $.01 par value (Preferred Stock). The Preferred Stock was exchanged
at a rate of $50 principal amount of 7% Convertible Debentures for each
share of Preferred Stock. The exchange resulted in the Company issuing 7%
Convertible Debentures in the aggregate principal amount of $171.2 million.
Pursuant to the indenture related to the Company's 7% Convertible
Debentures, the Company is required to make semiannual interest payments on
the $171.2 million principal amount of the 7% Convertible Debentures
outstanding. The first interest payment is due March 15, 1996, for the
three-month period from the date of the exchange. The 7% Convertible
Debentures are unsecured, subordinated obligations of the Company and are
currently convertible into common stock at a price of $23.50 per share. The
7% Convertible Debentures are pari parsu with the Company's 8% Convertible
Debentures. The 7% Convertible Debentures are 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 premium of 4.9%, and are redeemable at decreasing
premiums thereafter through
PAGE
Page 30
March 15, 2003. The Company is required to make annual payments into a
sinking fund beginning March 15, 2003, in the amount of $17.1 million to
provide for the retirement of 50% of the 7% Convertible Debentures prior to
their maturity on March 15, 2008. 7% Convertible Debentures purchased by
the Company in the open market and 7% Convertible Debentures converted to
common stock may be applied to the sinking fund requirements. As of
December 29, 1995, the Company held no 7% Convertible Debentures available
for sinking fund payments.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES
- -----------------------------------------------
In 1995, approximately 41% 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; 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 takes into account operating and
financing activities to reduce exposures and utilizes foreign currency
options and forward exchange contracts. The Company utilizes foreign
currency options, generally with maturities of less than one year, to hedge
a portion of its exposure to exchange-rate fluctuations in connection with
anticipated revenue from its international operations. Gains and losses 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 and Other as an adjustment to the
foreign exchange gains and losses on the translation of net monetary assets.
See Note 15 of NOTES TO 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 "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS - INTERNATIONAL SALES AND OPERATIONS," below, for further discussion
of other factors which may affect the Company's international operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company believes that the successful and timely development of new
products, software applications and enhancements 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 key
products including Iceberg, Kodiak, TimberLine, RedWood, and PowderHorn, and
has plans to introduce new products and enhancements that it believes will
be key to its financial strength and competitiveness. In the past, the
Company has encountered defects which have delayed the introduction of new
products and product enhancements, and the manufacture of existing products.
These delays have, from time to time, adversely affected the Company's
financial results and competitive position in the market. There can be no
assurances that the
PAGE
Page 31
Company will not encounter product delays in the future, or that despite
intensive testing by the Company, flaws in design or production will not
occur, which could result in the Company experiencing a rate of failure in
its products that delay the sale of its products, trigger substantial repair
or replacement costs, excessive warranty claims and damage to the Company's
reputation and have a material adverse affect upon 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,
significant price erosion, 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. Delays associated with
development and introduction of new products have resulted, from time to
time, in the Company incurring significant accounting charges to reflect the
impaired values of associated business acquisitions, inventory, and other
product-line specific assets. There can be no assurance that new products
developed by the Company will be accepted in the marketplace. Moreover,
certain components of the Company's products operate near the present limits
of electronic and physical performance capabilities and are designed and
manufactured with relatively small tolerances.
DEPENDENCE ON IBM SYSTEMS
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
due to the significance of the IBM computer operating environments. Future
revenue from products and services is therefore dependent on the
marketplace's continued widespread acceptance of and IBM's continued support
of these products. While the Company believes that customers will continue
to use, and IBM will continue to support, these operating systems and
products, there can be no assurances of such continued use and support. A
significant shift away from the mainframe environment or modifications in
the design or configuration of IBM computers may have a material adverse
affect on the Company's business. The Company is adapting its product
offerings to address the client-server market through the development of
network attached storage products; however, most of these products are only
in the engineering phase of development. There can be no assurances that
the Company will be successful in timely developing and marketing products
to address the rapidly expanding client-server market.
INTENSE COMPETITION; PRICING PRESSURES
The Company competes with a number of large multinational companies that
have substantially greater resources than the Company's, including IBM,
Fujitsu Ltd., and Hitachi, Ltd., as well as similarly sized companies,
including Amdahl Corporation and EMC Corporation. Industry estimates
currently show that while demand for online storage capacity in the
enterprise marketplace is expected to increase in 1996, price erosion is
expected to more than offset this growth in demand. Competition could be
affected by cooperative alliances and relationships with competitors and
prospective customers that may emerge and rapidly acquire market share,
which may have a material adverse affect on the Company's business and
financial results.
The Company competes with a number of networking companies that have a
greater presence in the networking marketplace, including 3Com, Cisco
Systems, Inc., Cabletron Systems, Inc. and Bay Networks, Inc. The
operating results of the Company's networking product line did not meet its
expectations in 1995 due to difficulties encountered with the integration of
Network Systems, and delays in the development of ATM support for ERS. The
development of ATM support for
PAGE
Page 32
ERS is completely dependent upon the success of the Company's joint
development agreement with Northern Telecom, Inc. The Company does not
anticipate ATM support for ERS will become available until 1997. There
can be no assurance that the Company's joint development agreement with
Northern Telecom, Inc. will be successful, or that the Company's networking
product line will generate any significant future profits. The Company's
inability to successfully and timely develop and introduce new network
products and product enhancements, expand its market penetration through
new distribution channels and improve the margins on its network products
through effective cost controls could have a material adverse affect on
the Company's future business and financial results.
The Company is adapting its product offerings for, and intensifying its
activities in, the client-server arena in response to the migration toward
shared data storage. The Company anticipates that its ability to compete in
the client-server systems market will depend on a number of factors within
and outside its control, including the timely introduction and performance
of products for the client-server market introduced by the Company and its
competitors.
INTELLECTUAL PROPERTY
The Company's competitive strength 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 may 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 is
unable to predict whether these license arrangements can be renewed on terms
acceptable to the Company. The Company's intellectual property rights are
material to the Company's business. The failure to successfully protect its
intellectual property rights or obtain licenses from others as needed could
have a material adverse affect on the Company's business and financial
results.
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 and 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 any determination
unfavorable to 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, enter into royalty arrangements, 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 or royalty
arrangements 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 has, from time to time,
commenced actions against other companies to protect or enforce its
intellectual property rights. Similarly, the Company has, from time to
time, been notified that it may be infringing certain patent or other
intellectual property rights of others. Currently, the Company is involved
in a number of proceedings relating to its intellectual property
PAGE
Page 33
and patent infringement. See Part III, Item 3, "Legal Proceedings" and
Note 14 of NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for additional
information with respect to the Company's legal proceedings.
INTERNATIONAL SALES AND OPERATIONS
During 1995, approximately 41% of the Company's revenue was derived from
sales in markets outside 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. During 1995,
the Company commenced manufacturing operations in Toulouse, France and plans
to expand the volume of its production at the Toulouse facility in 1996.
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 the United States, including fluctuations in foreign
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 outside 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 the laws of the United
States. To date, the Company has not experienced any material adverse
affects on its operations as a result of the foregoing factors. There can
be no assurances, however, that one or more of the foregoing factors will
not have a material adverse affect on the Company's business or financial
results in the future.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company generally uses standard parts and components for its products
and believes that, in most cases, there are a number of alternative,
competent vendors for most of those parts and components. 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 of the
Company's suppliers have experienced occasional technical, financial or
other problems that have delayed deliveries, without significant effect on
the Company. An unanticipated failure of any sole source supplier to meet
the Company's requirements for an extended period, or an interruption of the
Company's ability to secure comparable components, could have a material
adverse affect 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. 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.
RESTRUCTURING PLAN
During the fourth quarter of 1995, the Company recorded a restructuring
charge of $167.2 million to cover the costs of work force reductions of
approximately 1,700 employees, facility closings and consolidations, and
asset writedowns. This restructuring was adopted in an effort to establish
a more competitive cost structure in response to slower revenue growth and
increasing price competition in the marketplace. In connection with the
restructuring, the Company plans to focus
PAGE
Page 34
on core businesses and outsource non-strategic activities, rearchitect its
distribution processes and accelerate the integration of Network Systems,
which was acquired in March 1995. There can be no assurance that the Company
will achieve anticipated expense reductions, or that the Company's
restructuring activities will otherwise be successful or sufficient to allow
the Company to generate improved operating results in future periods. It is
possible that changes in the Company's business or in its industry may
necessitate future restructuring charges, which may be significant. See
Item 1, Part 1, "Restructuring Plan," "Restructuring and Other Charges,"
above, and Note 16 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
additional information regarding the Company's restructuring plan.
EARNINGS FLUCTUATIONS
The Company's reported earnings have fluctuated significantly and may
continue to 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.
VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock has fluctuated and in the
future may fluctuate substantially 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. In the future, the
Company's reported earnings may be below the expectations of stock market
analysts and investors, and in such events, there could be an immediate and
significant adverse affect on the trading price of the Company's common
stock.
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.
PAGE
Page 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements with the Company's independent accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
As described in the Company's current report on Form 8-K dated as of April
3, 1995, and amended by Forms 8-K/A dated April 7, 1995 and April 12, 1995,
at a meeting of the Company's Audit Committee held on March 16, 1995, the
Committee determined to engage the accounting firm of Price Waterhouse LLP
(Price Waterhouse) as independent accountants for all subsidiaries of the
Company for 1995, subject to approval of shareholders. The shareholders
ratified the appointment on May 24, 1995, at the Annual Meeting of
Shareholders. As a result, the Company's subsidiary, Network Systems,
disengaged the accounting firm of Ernst & Young LLP (Ernst & Young) and
retained the accounting firm of Price Waterhouse, who had been auditing the
Company and all subsidiaries except Network Systems. Price Waterhouse has
expressed reliance upon Ernst & Young's report in their report on the
consolidated financial statements of the Company for the years ended
December 30, 1994, and December 31, 1993. Ernst & Young's report on the
financial statements for 1994 and 1993 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty or
audit scope. Additionally, there were no report modifications for accounting
principles in the years ended December 30, 1994, and December 31, 1993.
PAGE
Page 36
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 30, 1996 (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 COMPENSATION
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 -- Security Ownership," 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
captions "Standard Arrangements for Compensation of Directors" and
"Compensation of Executive Officers," which is incorporated herein by
reference.
PAGE
Page 37
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:
1. Financial Statements:
--------------------- PAGE
Consolidated Balance Sheet at December 29, 1995,
and December 30, 1994 F-1
Consolidated Statement of Operations for the
Years Ended December 29, 1995, December 30, 1994
and December 31, 1993 F-2
Consolidated Statement of Cash Flows for the
Years Ended December 29, 1995, December 30, 1994
and December 31, 1993 F-3
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended December 29, 1995,
December 30, 1994, and December 31, 1993 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants for Storage
Technology Corporation F-31
Report of Independent Accountants for
Network Systems Corporation F-32
2. Financial Statement Schedules:
------------------------------
II - Valuation and Qualifying
Accounts and Reserves F-33
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
PAGE
Page 38
3. Exhibits:
---------
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:
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 15, 1994 (filed November 16, 1994, as Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4, File No.
33-55343, 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 (filed
as Exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 25, 1987, and as Exhibit
3.1(ii) to the Company's Quarterly Report on Form 10-Q, for
the quarter ended September 29, 1995, filed on November 13,
1995, and incorporated herein by reference).
3.2 Certificate of Amendment dated May 22, 1989 to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit (c)(1) to the Registrant's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by
reference).
3.3 Certificate of Second Amendment dated June 2, 1992, to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 26, 1992, and incorporated
herein by reference).
3.4 First Amendment dated February 2, 1988, 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).
3.5 Second Amendment dated May 25, 1995, to the Restated
Bylaws of Storage Technology Corporation, amending Article II
(filed as Exhibit 3.3(ii) to the Company's Quarterly Report
on Form 10-Q, for the quarter ended September 29, 1995, filed
on November 13, 1995, File No. 1-7534, and incorporated
herein by reference).
PAGE
Page 39
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).
4.4 Registration Statement of the Registrant on Form 8-A dated
August 23, 1990 (filed as Exhibit 4.8 to the Registrant's
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 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).
4.8 Indenture between the Registrant and American Stock
Transfer and Trust Company, as Trustee, relating to the
Registrant's 7% 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).
4.9 Form of 7% 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).
PAGE
Page 40
4.10 Registration Statement on Form 8-A dated December 4, 1995
(filed on December 4, 1995, File No. 1-7534, 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).
4.14(1) Amendment No. 1 dated as of January 25, 1996, to
Amended and Restated Security Agreement dated as of April 2,
1994, relating to Registrant's 9.53% Senior Secured Notes due
August 30, 1996.
4.15(1) Amendment No. 3 dated as of January 25, 1996, to Note
Agreement dated as of April 2, 1994, relating to Registrant's
9.53% Senior Secured Notes due August 30, 1996.
10.2(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(2) 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(2) 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, File No. 1-7534,
and incorporated herein by reference).
10.5(2) 1995 Equity Participation Plan (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q, for the
quarter ended June 30, 1995, filed on August 11, 1995, File
No. 1-7534, and incorporated herein by reference).
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
Page 41
10.6(2) Storage Technology Corporation MBO Plan (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 1, 1994, filed on August 12, 1994,
and incorporated herein by reference).
10.7(2) 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).
10.8(2) Employment Agreement between the Company and David E.
Lacey, dated February 17, 1995 (filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K, filed on March 17,
1995, File No. 1-7534, and incorporated herein by reference).
10.9(2) Employment Agreement between the Company and Ryal
Poppa dated December 13, 1989, as amended on March 8, 1995
and July 27, 1995, (filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, and as Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, respectively, File
No. 1-7534, and incorporated herein by reference).
10.10(2) Employment Agreement between the Company and L.
Thomas Gooch, dated February 17, 1995 (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K, filed on
March 17, 1995, File No. 1-7534, and incorporated herein by
reference).
10.11(1/2) Amendment to Employment Agreement between the
Company and L. Thomas Gooch, dated December 1, 1995.
10.12(2) Employment Agreement between the Company and W.
Russell Wayman, dated February 17, 1995 (filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K, filed on
March 17, 1995, File No. 1-7534, and incorporated herein by
reference).
10.13(1/2) Employment Agreement between the Company and David
E. Weiss, dated December 6, 1995.
10.14(2) Employment Agreement between the Company and John V.
Williams, dated February 17, 1995 (filed as Exhibit 10.13 to
the Company's Annual Report on Form 10-K, filed on March 17,
1995, File No. 1-7534, and incorporated herein by reference).
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
Page 42
10.15 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).
10.16 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, filed on November 14, 1994 and
incorporated herein by reference).
10.17 First Amendment and Waiver dated as of April 20, 1995,
to Amended and Restated Multicurrency Credit Agreement dated
as of September 28, 1994 (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, filed on August 11, 1995, File No. 1-7534, and
incorporated herein by reference).
10.18 Second Amendment and Waiver dated as of June 27, 1995,
to Amended and Restated Multicurrency Credit Agreement (filed
as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, filed on August 11,
1995, File No. 1-7534, and incorporated herein by reference).
10.19 Third Amendment and Waiver dated September 28, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995, filed on November 13, 1995, File No.
1-7534, and incorporated herein by reference).
10.20(1) Fourth Amendment dated as of December 22, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994.
10.21(1) Multicurrency Receivables Transfer Agreement dated as
of January 29, 1996.
11.0(1) Computation of Earnings (Loss) per Common Share.
21.0(1) Subsidiaries of Registrant.
23.1(1) Consent of Price Waterhouse LLP.
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which
directors and/or officers participate.
PAGE
Page 43
23.2(1) Consent of Ernst & Young LLP.
24.1 Power-of-Attorney.
27.0(1) Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On November 21, 1995, the Company filed a Current Report on Form 8-K
dated November 24, 1995, pursuant to Item 5 concerning the Company's
announcement that the Board of Directors had approved a restructuring
plan. Subsequent to 1995 fiscal year end, the Company filed a Current
Report on Form 8-K on January 29, 1996, pursuant to Item 5 concerning
its 1995 financial results as reported in a press release dated
January 25, 1996.
(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.
(1) Indicates Exhibits filed with this Annual Report.
(2) Contract or compensatory plan or arrangement in which directors
and/or officers participate.
PAGE
Page 44
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 11, 1996 STORAGE TECHNOLOGY CORPORATION
By: /s/ Ryal R. Poppa
-------------------------------------
Ryal R. Poppa
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
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 Chairman of the Board March 11, 1996
- ---------------------- (Director), President and
Ryal Poppa Chief Executive Officer
(Principal Executive Officer)
/s/ David E. Lacey Corporate Vice President and March 11, 1996
- --------------------- Interim Chief Financial Officer
David E. Lacey (Principal Financial Officer
and Principal Accounting
Officer)
PAGE
Page 45
SIGNATURE TITLE DATE
/s/ Judith E.N. Albino Director March 11, 1996
- ---------------------------
Judith E.N. Albino
/s/ William L. Armstrong Director March 11, 1996
- ---------------------------
William L. Armstrong
/s/ Robert A. Burgin Director March 11, 1996
- ---------------------------
Robert A. Burgin
/s/ Paul Friedman Director March 11, 1996
- ---------------------------
Paul Friedman
/s/ William R. Hoover Director March 11, 1996
- ---------------------------
William R. Hoover
/s/ Stephen J. Keane Director March 11, 1996
- ---------------------------
Stephen J. Keane
/s/ Robert E. LaBlanc Director March 11, 1996
- ---------------------------
Robert E. LaBlanc
/s/ Robert E. Lee Director March 11, 1996
- ---------------------------
Robert E. Lee
/s/ Harrison Shull Director March 11, 1996
- ---------------------------
Harrison Shull
/s/ Richard C. Steadman Director March 11, 1996
- ---------------------------
Richard C. Steadman
/s/ Robert C. Wilson Director March 11, 1996
- ---------------------------
Robert C. Wilson
PAGE
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 29, December 30,
1995 1994
--------------------------
ASSETS
Current assets:
Cash, including cash equivalents of
$190,451 in 1995 and $128,257 in 1994 $ 264,502 $ 228,081
Short-term investments 5,477
Accounts receivable, net of allowance for
doubtful accounts of $14,665 in 1995 and
$13,387 in 1994 396,499 353,455
Notes and installment receivables 10,766 9,110
Net investment in sales-type leases (Note 4) 88,668 155,341
Inventories (Note 5) 214,553 261,705
--------- ---------
Total current assets 974,988 1,013,169
Notes and installment receivables 10,113 11,851
Net investment in sales-type leases (Note 4) 150,751 231,377
Equipment held for sale or lease, at cost net
of accumulated depreciation of $117,377
in 1995 and $98,649 in 1994 (Note 6) 139,629 146,320
Spare parts for field service, at cost net of
accumulated amortization of $87,980 in 1995
and $74,685 in 1994 29,468 62,421
Property, plant and equipment, at cost net of
accumulated depreciation (Note 7) 333,021 380,511
Deferred income tax assets, net of valuation
allowance (Note 10) 74,902 51,768
Other assets 175,757 247,041
--------- ---------
$1,888,629 $2,144,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Nonrecourse borrowings secured by lease
commitments (Note 9) $ 19,415 $ 79,407
Current portion of other long-term debt (Note 9) 65,844 28,396
Accounts payable 93,129 123,464
Accrued liabilities (Note 8) 361,286 271,378
Income taxes payable (Note 10) 9,963 9,459
--------- ---------
Total current liabilities 549,637 512,104
Nonrecourse borrowings secured by lease
commitments (Note 9) 20,980 112,073
Other long-term debt (Note 9) 342,983 244,814
Deferred income tax liabilities (Note 10) 12,196 10,182
--------- ---------
Total liabilities 925,796 879,173
--------- ---------
Commitments and contingencies (Notes 9 and 14)
STOCKHOLDERS' EQUITY
$3.50 Convertible Exchangeable Preferred Stock,
$.01 par value, 40,000,000 shares
authorized; none issued in 1995, and
3,450,000 shares issued in 1994 (Note 11) 35
Common stock, $.10 par value, 150,000,000 shares
authorized; 53,352,087 shares issued in
1995, and 52,517,626 shares issued in 1994 5,335 5,252
Capital in excess of par value 1,414,551 1,562,568
Accumulated deficit (445,761) (291,356)
Treasury stock of 43,773 shares in 1995 and
35,713 shares in 1994 (777) (773)
Unearned compensation (6,427) (6,150)
Notes receivable from stockholders (4,088) (4,291)
--------- ---------
Total stockholders' equity 962,833 1,265,285
--------- ---------
$1,888,629 $2,144,458
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
PAGE
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-------------------------------------------
Sales $1,345,260 $1,289,271 $1,050,143
Service and rental revenue 584,225 582,079 567,548
--------- --------- ---------
Total revenue 1,929,485 1,871,350 1,617,691
--------- --------- ---------
Cost of sales 841,583 812,228 705,962
Cost of service and rental revenue 376,039 374,714 366,822
--------- --------- ---------
Total cost of revenue 1,217,622 1,186,942 1,072,784
--------- --------- ---------
Gross profit 711,863 684,408 544,907
Research and product development costs 187,275 206,083 191,048
Marketing, general, administrative
and other income and expense, net 445,889 425,490 393,991
Restructuring and other charges
(Note 16) 212,207 8,000 90,414
--------- --------- ---------
Operating profit (loss) (133,508) 44,835 (130,546)
Interest income 43,325 46,935 62,438
Interest expense (34,347) (40,832) (43,853)
--------- --------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change (124,530) 50,938 (111,961)
Provision for income taxes (Note 10) (17,800) (18,900) (9,500)
--------- --------- ---------
Income (loss) before cumulative
effect of accounting change (142,330) 32,038 (121,461)
Cumulative effect on prior years of
change in method of accounting
for income taxes (Note 10) 40,000
--------- --------- ---------
Net income (loss) (142,330) 32,038 (81,461)
Preferred dividend requirement
(Note 11) (11,544) (12,075) (9,805)
--------- --------- ---------
Income (loss) applicable to
common shares $ (153,874) $ 19,963 $ (91,266)
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative
effect of accounting change $ (2.91) $ 0.38 $ (2.59)
Cumulative effect on prior years
of change in method of
accounting for income taxes 0.79
--------- --------- ---------
$ (2.91) $ 0.38 $ (1.80)
========= ========= =========
Weighted average common shares
and equivalents 52,798 52,410 50,652
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
PAGE
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Year Ended
-------------------------------------------
December 29, December 30, December 31,
1995 1994 1993
------------------------------------------
OPERATING ACTIVITIES
Cash received from customers (Note 3) $ 2,036,789 $ 1,820,260 $ 1,750,457
Cash paid to suppliers and employees (1,715,669) (1,760,344) (1,646,853)
Interest received 53,362 55,484 59,609
Interest paid (30,401) (38,480) (40,702)
Income taxes paid, net (38,056) (1,675) (38,468)
---------- ---------- ----------
Net cash from operating activities 306,025 75,245 84,043
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (58,003) (120,057) (83,350)
Short-term investments, net 5,508 18,804 73,480
Business acquisitions, net of cash acquired (11,165) (11,161) (64,365)
Other assets, net (8,842) (37,246) (16,179)
---------- ---------- ----------
Net cash used in investing activities (72,502) (149,660) (90,414)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from nonrecourse borrowings 2,593 167,237 87,508
Repayments of nonrecourse borrowings (150,818) (147,632) (147,647)
Proceeds from other debt 847 17,839 79,740
Repayments of other debt (54,536) (46,977) (44,144)
Proceeds from employee stock plans and
warrants 12,443 24,394 14,934
Proceeds from preferred stock offering,
net (Note 11) 166,479
Preferred stock dividend payments (Note 11) (12,075) (12,075) (9,459)
Repurchase of common stock (442) (10,976)
---------- ---------- ----------
Net cash from (used in) financing
activities (201,546) 2,344 136,435
---------- ---------- ----------
Effect of exchange rate changes on cash 4,444 19,179 (5,120)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 36,421 (52,892) 124,944
Cash and cash equivalents - beginning
of the year 228,081 280,973 156,029
---------- ---------- ----------
Cash and cash equivalents - end of the
year $ 264,502 $ 228,081 $ 280,973
========== ========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (142,330) $ 32,038 $ (81,461)
Depreciation and amortization expense 208,991 203,372 166,752
Translation (gain) loss (2,910) (10,424) 8,475
Cumulative effect of accounting change
(Note 10) (40,000)
Restructuring and other charges (Note 16) 91,609 2,200 59,178
Other non-cash adjustments to income 40,975 10,191 7,032
(Increase) decrease in accounts receivable (41,351) (92,165) 87,540
Decrease in notes receivable and
sales-type leases 149,158 49,232 57,836
(Increase) decrease in inventories 36,615 (44,210) (62,161)
Increase in equipment held for sale or
lease, net (59,773) (93,263) (48,462)
Increase in spare parts, net (7,243) (32,143) (19,161)
(Increase) decrease in net deferred
income tax asset (22,750) 7,914 (7,893)
Increase (decrease) in accounts payable (31,699) 22,872 (34,381)
Increase in accrued liabilities 85,102 10,320 11,824
Increase (decrease) in income taxes
payable 1,631 9,311 (21,075)
---------- ---------- ----------
Net cash from operating activities $ 306,025 $ 75,245 $ 84,043
========== ========== ==========
The accompanying notes are an integral part of the consolidated
Financial statements.
F-3
PAGE
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Notes
Capital in Cumulative Receivable
Preferred Common Excess of Accumulated Treasury Translation Unearned From
Stock Stock Par Value Deficit Stock Adjustment Compensation Stockholders
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 25, 1992,
as previously reported $4,261 $1,244,471 $(314,368) $(729) $ 2,872 $(8,594)
Pooling of interests with
Network Systems Corp. (Note 2) 796 116,249 93,969
----- --------- -------- ---- ------ ------
Balances, December 25, 1992,
as restated 5,057 1,360,720 (220,399) (729) 2,872 (8,594)
Preferred stock issuance
(3,450,000 shares) (Note 11) $35 166,444
Shares issued under stock
purchase plan, and for
exercises of options and
warrants (682,534 shares) 68 16,058
Shares purchased and retired
(299,761 shares) (30) (10,946)
Cash dividends paid on preferred
stock ($2.74 per share) (9,459)
Net loss (81,461)
Other (7) (2,924) (6) (2,872) 2,050
-- ----- --------- -------- ---- ------ ------
Balances, December 31, 1993 35 5,088 1,529,352 (311,319) (735) 0 (6,544)
Shares issued under stock
purchase plan, and for
exercises of options
(1,684,570 shares) 168 32,037 (33)
Shares purchased and retired
(11,574 shares) (1) (441)
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Notes receivable from
stockholders for the
purchase of shares (Note 12) $(4,291)
Net income 32,038
Other (3) 1,620 (5) 394
-- ----- --------- -------- ---- ------ ------ ------
Balances, December 30, 1994 35 5,252 1,562,568 (291,356) (773) 0 (6,150) (4,291)
Preferred stock exchanged and
retired (3,450,000) (Note 11) (35) (165,194)
Shares issued under stock
purchase plan, and for
exercises of options
(743,432 shares) 74 14,620
Cash dividends paid on preferred
stock ($3.50 per share) (12,075)
Net loss (142,330)
Other 9 2,557 (4) (277) 203
-- ----- --------- -------- ---- ------ ------ ------
Balances, December 29, 1995 $ 0 $5,335 $1,414,551 $(445,761) $(777) $ 0 $(6,427) $(4,088)
== ===== ========= ======== ==== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PAGE
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). All
intercompany accounts and transactions have been eliminated in
consolidation. As further discussed in Note 2, the consolidated financial
statements have been restated for all periods presented to reflect the
merger with Network Systems Corporation (Network Systems).
NATURE OF OPERATIONS
StorageTek designs, manufactures, markets and services high-performance
information storage and retrieval subsystems and networking products.
StorageTek 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,
Mexico, Japan, New Zealand and Australia, as well as through distributors in
Africa, Asia, Europe, and other countries in South America.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during
the periods. Significant estimates have been made by management with
respect to the realizability of the Company's deferred tax assets, the
possible outcome of outstanding litigation, and future obligations
associated with the Company's 1995 restructuring. Actual results could
differ from these estimates making it reasonably possible that a change in
these estimates could occur in the near term. See Notes 10, 14 and 16,
respectively, for additional information with respect to these estimates.
REVENUE RECOGNITION
Revenue from the majority of the Company's 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 certain customer-installable products, as well
as revenue from OEMs and distributors, is recognized at the time of
shipment. Costs associated with post-installation warranty obligations are
estimated and accrued at the time of revenue recognition. 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
F-5
PAGE
replacement of product components. Revenue from these service and support
contracts is recognized as earned and the costs associated with these
activities are expensed as incurred.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $25,463,000 in 1995, $30,607,000 in 1994,
and $25,592,000 in 1993 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 $54,034,000
as of December 29, 1995, and $55,198,000 as of December 30, 1994.
Amortization expense is calculated based on the greater of straight-line
amortization over estimated useful lives, generally three to four years, or
the percentage of actual revenue versus total anticipated revenue.
Amortization expense and write-offs associated with capitalized software
costs were $26,627,000 in 1995, $15,671,000 in 1994, and $10,741,000 in 1993.
The Company evaluates the realizability of the carrying value of the
capitalized software each quarter based upon estimates of the associated
future revenue.
DEPRECIATION AND AMORTIZATION
Equipment held for sale or lease, and property, plant and equipment are
stated at cost. Depreciation and amortization, which include the
amortization of assets recorded under capital leases, are computed using the
straight-line method over the related assets estimated useful lives or
remaining lease term. Manufactured spare parts are recorded at cost and
amortized over their estimated useful service lives. Other assets as shown
on the Consolidated Balance Sheet include unamortized goodwill of
$52,298,000 as of December 29, 1995, and $81,167,000 as of December 30,
1994. Amortization expense of goodwill is calculated 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 calculated 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 the majority 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. See Note 15 for information with respect to the Company's
accounting policies for financial instruments utilized in its foreign
currency hedging program.
F-6
PAGE
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 Company's preferred
stock (see Note 11) and convertible subordinated debentures (see Note 9) are
not common stock equivalents and, therefore, have been excluded from the
computation of earnings (loss) per common share. The preferred stock and
convertible subordinated debentures were anti-dilutive to the annual
computation of fully diluted earnings per common share for all periods
presented.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation." SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, encourages, but does not require,
companies to recognize compensation expense for the theoretical fair value
of grants to employees of equity instruments based on mathematical formulas.
Companies that choose not to adopt the new accounting rules will continue to
apply the existing accounting contained in Accounting Principles Board
Opinion (APBO) No. 25, "Accounting for Stock Issued to Employees." SFAS 123
requires companies that choose not to adopt the new fair value accounting
rules to disclose the pro forma net income and earnings per share as if the
fair value rules had been adopted.
The Company will adopt SFAS 123 in 1996 and anticipates it will elect to
continue accounting for stock-based compensation in accordance with APBO 25
and provide the disclosures required by SFAS 123. Accordingly, the adoption
of SFAS 123 will not have any affect on the Company's consolidated financial
position or results of operations.
NOTE 2 - BUSINESS COMBINATIONS
NETWORK SYSTEMS CORPORATION
On March 7, 1995, the Company issued approximately 8,000,000 shares of
StorageTek common stock in exchange for all of the outstanding common stock
of Network Systems. The Company also reserved approximately 500,000 shares
for issuance in connection with Network Systems' outstanding employee stock
purchase and option plans. The transaction, which was accounted for as a
pooling of interests, involved a merger between a wholly owned subsidiary of
StorageTek and Network Systems. StorageTek's consolidated financial
statements were restated for all periods prior to the merger to include the
operations of Network Systems, adjusted to conform with StorageTek's
accounting policies and presentation.
F-7
PAGE
Network Systems designs, manufactures, markets and services computer
networking products worldwide. Separate pre-merger revenue and net income
of StorageTek and Network Systems as if the merger was consummated on March
31, 1995, were as follows (in thousands of dollars):
Year Ended
-----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-----------------------------------------
Revenue:
Pre-merger
StorageTek $ 400,013 $1,624,959 $1,404,752
Network Systems 46,424 231,756 215,558
Merger adjustments 3,749 14,635 (2,619)
--------- --------- ---------
450,186 1,871,350 1,617,691
Post-merger 1,479,299
--------- --------- ---------
$1,929,485 $1,871,350 $1,617,691
========= ========= =========
Net income (loss):
Pre-merger
StorageTek $ 3,208 $ 41,437 $ (77,796)
Network Systems (15,686) (23,820) 2,207
Merger adjustments 3,564 14,421 (5,872)
--------- --------- ---------
(8,914) 32,038 (81,461)
Post-merger (133,416)
--------- --------- ---------
$ (142,330) $ 32,038 $ (81,461)
========= ========= =========
Pre-merger net income for the year ended December 29, 1995, includes merger
expenses of $4,143,000 and $10,209,000 recognized by StorageTek and Network
Systems, respectively. These expenses, which aggregate $14,352,000, are
included within restructuring and other charges on the Consolidated
Statement of Operations and consist principally of change in control
payments, financial advisor fees, legal fees, and accounting fees.
The merger adjustments relate to revenue recognition and income tax effects.
Adjustments were made to revenue and the associated costs and expenses to
reflect revenue recognition for certain Network Systems' product sales to
end-user customers at the time of customer acceptance, consistent with
StorageTek's policy, rather than at the time of shipment. Adjustments were
made to the combined tax position of StorageTek and Network Systems as if
the merger had occurred as of the beginning of the earliest period
presented.
BYTEX CORPORATION
In November 1993, Network Systems acquired all the outstanding shares of
Bytex Corporation (Bytex) for approximately $47,100,000. The transaction
was accounted for as a purchase acquisition. In connection with the
acquisition, Network Systems recognized a charge of $7,060,000 associated
with Bytex assets to be used in research and development activities, for
which there existed no alternative future uses. This charge is included
within restructuring and other charges on the Consolidated Statement of
Operations. The accompanying financial statements include Bytex's results
of operations since November 1993.
F-8
PAGE
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 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.
BUS-TECH, INC.
In May 1993, Network Systems acquired all the assets and assumed certain
liabilities of Bus-Tech, Inc. (BTI) for approximately $24,700,000. The
transaction was accounted for as a purchase acquisition. The accompanying
consolidated financial statements include BTI's results of operations since
May 1993.
NOTE 3 - MIDRANGE LEASE ASSETS AND MIDRANGE SERVICE BUSINESS SALE
In September 1995, the Company completed the sale of substantially all of
its midrange service business. A gain of approximately $8,800,000 was
recognized in 1995 in connection with this transaction and has been included
within marketing, general, administrative and other income and expense on
the Consolidated Statement of Operations.
In June 1995, the Company completed the sale of substantially all of its net
investment in sales-type leases associated with its midrange business.
During the second quarter of 1995, the Company also announced plans to fully
integrate StorageTek Distributed Systems Division, Inc., the Company's
wholly owned midrange subsidiary, into StorageTek. The gain associated with
the lease asset sale was largely offset by transaction and integration
costs. The sale of the midrange lease assets and midrange service business
generated cash of approximately $193,000,000 during 1995 and has been
included within operating activities on the Consolidated Statement of Cash
Flows. The majority of this cash was utilized for repayments of borrowings
associated with the assets.
NOTE 4 - 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.
F-9
PAGE
The components of net investment in sales-type leases are as follows (in
thousands of dollars):
December 29, December 30,
1995 1994
----------------------------
Total minimum lease and
maintenance payments $324,678 $482,958
Less: Executory costs
(maintenance payments) (61,860) (61,197)
------- -------
Net minimum lease payments 262,818 421,761
Estimated unguaranteed residual
values 5,070 13,870
Less: Unearned interest income (28,469) (48,913)
------- -------
239,419 386,718
Less: Current portion (88,668) (155,341)
------- -------
$150,751 $231,377
======= =======
Future minimum lease payments due from customers under sales-type leases and
noncancellable operating leases as of December 29, 1995, are as follows (in
thousands of dollars):
Sales-Type Operating
Leases Leases
-----------------------------
1996 $127,297 $ 7,214
1997 103,525 2,647
1998 62,818 1,139
1999 24,152 25
2000 6,688
Thereafter 198
------- ------
$324,678 $11,025
======= ======
Of the future minimum lease payments due from customers under sales-type
leases, the following amounts will be remitted under nonrecourse borrowing
arrangements (see Note 9): $21,606,000 in 1996; $13,269,000 in 1997;
$7,417,000 in 1998; $1,735,000 in 1999; and $51,000 in 2000. As further
discussed in Note 19, the Company announced on February 9, 1996, that it
intends to sell substantially all of its net investment in sales-type leases
and enter into a worldwide lease financing alliance.
NOTE 5 - 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 29, December 30,
1995 1994
------------------------------
Raw materials $ 75,673 $ 51,938
Work-in-process 92,487 105,605
Finished goods 46,393 104,162
------- -------
$214,553 $261,705
======= =======
F-10
PAGE
NOTE 6 - EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale or lease to customers consists of the following (in
thousands of dollars):
December 29, December 30,
1995 1994
-----------------------------
Equipment shipped awaiting
revenue recognition $ 88,337 $ 93,768
Equipment off-rent 40,143 35,632
Equipment on-rent 11,149 16,920
------- -------
$139,629 $146,320
======= =======
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 29, December 30,
1995 1994
-------------------------------
Machinery and equipment $ 667,425 $ 674,261
Buildings and building
improvements 174,742 150,067
Land and land improvements 18,701 16,464
-------- --------
860,868 840,792
Less: Accumulated depreciation (527,847) (460,281)
-------- --------
$ 333,021 $ 380,511
======= =======
Machinery and equipment includes capitalized leases of $51,039,000 as of
December 29, 1995, and $39,000,000 as of December 30, 1994. Accumulated
depreciation includes accumulated amortization on such capitalized leases of
$24,653,000 as of December 29, 1995, and $19,966,000 as of December 30,
1994.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 29, December 30,
1995 1994
------------------------------
Restructuring costs (see Note 16) $ 71,398 $ 12,430
Deferred revenue 44,549 25,833
Other 245,339 233,115
------- -------
$361,286 $271,378
======= =======
Other accrued liabilities consists of items which are individually
immaterial.
F-11
PAGE
NOTE 9 - 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 29, December 30,
1995 1994
------------------------------
7% Convertible Subordinated
Debentures due 2008 $171,205
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
Capitalized lease obligations 32,659 21,275
Other 4,318 7,418
------- -------
408,827 273,210
Less: Current portion (65,844) (28,396)
------- -------
$342,983 $244,814
======= =======
7% CONVERTIBLE DEBENTURES
On December 15, 1995, the Company exercised its right to exchange 7%
Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) for
all of its outstanding shares of $3.50 Convertible Exchangeable Preferred
Stock, $.01 par value (Preferred Stock). The Preferred Stock was exchanged
at a rate of $50 principal amount of 7% Convertible Debentures for each
share of Preferred Stock. The exchange resulted in the Company issuing 7%
Convertible Debentures in the aggregate principal amount of $171,205,000.
The 7% Convertible Debentures are unsecured, subordinated obligations of the
Company and are currently convertible into common stock at a price of $23.50
per share. The 7% Convertible Debentures are pari parsu with the Company's
8% Convertible Subordinated Debentures due 2015. Interest on the 7%
Convertible Debentures is payable semiannually in arrears on March 15 and
September 15. The first interest payment is due on March 15, 1996, for the
three-month period from the date of the exchange. The 7% Convertible
Debentures are 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 premium of
4.9%, and are redeemable at decreasing premiums thereafter through March 15,
2003. The Company is required to make annual payments of $17,121,000 into a
sinking fund beginning March 15, 2003, to provide for the retirement of 50%
of the 7% Convertible Debentures prior to their maturity on March 15, 2008.
7% Convertible Debentures purchased by the Company in the open market and 7%
Convertible Debentures converted to common stock may be applied to the
sinking fund requirements. The Company has reserved 7,285,000 shares of
common stock for issuance upon conversion of the 7% Convertible Debentures.
8% CONVERTIBLE DEBENTURES
In May 1990, the Company issued $160,000,000 of 8% Convertible Subordinated
Debentures due 2015 (8% Convertible Debentures), of which $145,645,000 were
remaining outstanding as of December 29, 1995. The 8% Convertible
Debentures are unsecured subordinated obligations of the Company and are
convertible into common stock at a price of $35.25 per share. Interest on
the 8% Convertible Debentures is payable semiannually in arrears on
F-12
PAGE
November 30 and May 31. The 8% Convertible Debentures are currently
redeemable at the option of StorageTek for cash at a premium of 4.0%, and
are redeemable at decreasing premiums through May 30, 2000. The Company is
required to make annual principal payments of $8,000,000, plus accrued
interest, into a sinking fund beginning May 31, 2000, to provide for the
retirement of 75% of the 8% Convertible Debentures prior to their maturity
on May 31, 2015. 8% Convertible Debentures purchased by the Company in the
open market and 8% Convertible Debentures converted to common stock may be
applied to the sinking fund requirements. As of December 29, 1995, the
Company held 8% Convertible Debentures in the principal amount of
$14,355,000 available for sinking fund payments. The Company has reserved
4,132,000 shares of common stock for issuance upon conversion of the 8%
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 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. As further discussed in Note 19, the Company
intends to prepay all of the Notes in the first quarter of 1996.
RECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
The Company's recourse borrowings, which were secured by customer lease
commitments and by the underlying equipment, were repaid during 1995 in
connection with the sale of the Company's midrange lease assets (see Note
3). The borrowings provided for recourse to the Company in the event of a
default by a customer with respect to the lease commitments.
BANKING AND CREDIT ARRANGEMENTS
The Company has a secured multicurrency credit agreement with a group of
U.S. and international banks (the Revolver) which has a maximum borrowing
limit of $200,000,000 and expires on March 29, 1996. 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 29, 1995). 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 29, 1995, the Company had no
outstanding advances under the Revolver and had approximately $116,000,000
of available credit under the Revolver.
F-13
PAGE
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 29, 1995, are as follows (in thousands of
dollars):
Total Long-
Capitalized Other Term Debt
Leases Debt Commitments
-------------------------------------
1996 $ 8,937 $ 57,682 $ 66,619
1997 5,622 1,260 6,882
1998 5,233 107 5,340
1999 3,769 116 3,885
2000 2,868 153 3,021
Thereafter 23,933 316,850 340,783
------- ------- -------
50,362 $376,168 $426,530
======= =======
Less: Amount representing
interest (17,703)
-------
Present value of capitalized
lease obligations
(including $8,162
classified as current) $ 32,659
=======
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
4). The weighted average interest rate related to the Company's nonrecourse
borrowings was approximately 8% as of December 29, 1995. The Company
announced on February 9, 1996, that it intends to sell its net investment in
sales-type leases. In connection with this sale, the Company intends to
repay all of its outstanding nonrecourse borrowings.
OPERATING LEASE OBLIGATIONS
StorageTek has various operating leases in effect for certain buildings,
sales offices, and machinery and equipment. Rent expense was $50,643,000 in
1995; $50,095,000 in 1994; and $43,752,000 in 1993. Future minimum rental
commitments required under all noncancellable operating leases with terms of
one year or more are as follows: $43,676,000 in 1996; $30,595,000 in 1997;
$22,878,000 in 1998; $15,268,000 in 1999; $11,606,000 in 2000; and
$19,211,000 thereafter.
NOTE 10 - 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 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
F-14
PAGE
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 29, December 30, December 31,
1995 1994 1993
--------------------------------------------
United States $ (98,450) $ 69,949 $(113,414)
International (26,080) (19,011) 1,453
-------- ------- --------
$(124,530) $ 50,938 $(111,961)
======== ======= ========
The provision for income taxes attributable to the amounts shown above
consists of the following (in thousands of dollars):
December 29, December 30, December 31,
1995 1994 1993
--------------------------------------------
Current tax provision
(benefit):
U.S. federal $ 11,900 $ 3,300 $(1,200)
International 14,200 11,600 12,000
State 11,900 3,100 2,200
------- ------ ------
38,000 18,000 13,000
------- ------ ------
Deferred tax provision
(benefit):
U.S. federal (12,100) 2,300 2,600
International (7,300) (100) (4,700)
State (800) (1,300) (1,400)
------- ------ ------
(20,200) 900 (3,500)
------- ------ ------
$ 17,800 $18,900 $ 9,500
======= ====== ======
The provision for income taxes attributable to income (loss) before income
taxes and cumulative effect of accounting change includes benefits of
$4,098,000 in 1995; $34,325,000 in 1994; and $1,422,000 in 1993 from the
utilization of net operating loss carryforwards as well as net benefits of
$8,558,000 in 1995; $7,236,000 in 1994; and $7,432,000 in 1993 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 $0.16 in 1995; $0.14 in 1994; and $0.15
in 1993. The benefits from the Tax Grant include reduced tax rates and,
through 1995, 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 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
$14,256,000 as of December 29, 1995. The Tax Grant provision allowing
reduced tax rates expires in 2007.
F-15
PAGE
The Company reported the following deferred income tax balances on its
Consolidated Balance Sheet (in thousands of dollars)
December 29, December 30,
1995 1994
-----------------------------
Deferred income tax assets, net
of valuation allowance $ 74,902 $ 51,768
Deferred income tax liabilities (12,196) (10,182)
------- -------
Net deferred income tax asset $ 62,706 $ 41,586
======= =======
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 29, December 30,
1995 1994
-----------------------------
Gross deferred income tax assets:
Capitalized rental equipment $ 86,886 $ 120,747
Net operating loss carryforwards 57,617 89,026
Tax credit carryforwards 86,231 84,695
Restructuring accruals 36,226 3,820
Other accrued liabilities and reserves 63,410 64,518
Capitalized inventory costs 9,383 14,228
Deferred intercompany profit 18,099 14,895
Other 32,895 33,324
-------- --------
390,747 425,253
Less: Valuation allowance (189,483) (156,778)
-------- --------
201,264 268,475
-------- --------
Gross deferred income tax liabilities:
Deferred income from sales-type leases (80,518) (164,531)
Depreciation (34,609) (33,154)
Other (23,431) (29,204)
-------- --------
(138,558) (226,889)
-------- --------
Net deferred income tax asset $ 62,706 $ 41,586
======== ========
The net change in the valuation allowance for deferred income tax assets was
an increase of $32,705,000 in 1995 and a decrease of $24,819,000 in 1994.
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 and the Company's near-term
earnings expectations. Although realization is not assured, management
believes it is more likely than not that all of the net deferred income tax
asset will be realized.
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 $58,000,000 as of December 29, 1995).
The amount of the unrecognized deferred tax liability for these unremitted
earnings was $13,100,000 as of December 29, 1995.
F-16
PAGE
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 35% to income (loss) before income taxes
and cumulative effect of accounting change for the following reasons (in
thousands of dollars):
Year Ended
----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
-----------------------------------------
U.S. federal income tax at
statutory rate $(43,586) $ 17,828 $(39,186)
Increase (decrease) in income
taxes resulting from:
Increase (decrease) in
unrecognized net operating
losses and future deductions 39,209 (22,254) 42,437
Foreign tax rate and exchange
rate differentials 9,989 14,605 739
Nondeductible items 13,362 7,567 10,021
State income taxes, net of
federal benefits 2,467 6,158 673
Effect of Puerto Rico
operations (4,075) (3,634) (4,936)
Other, net 434 (1,370) (248)
------- ------- -------
Income tax expense attributable
to income (loss) before
cumulative effect of
accounting change $ 17,800 $ 18,900 $ 9,500
======= ======= =======
As of December 29, 1995, StorageTek had U.S. net operating loss
carryforwards of approximately $150,000,000 which expire in the years 2001
through 2009. Approximately $20,000,000 of the Company's net operating loss
carryforwards relate to losses associated with acquired companies which are
subject to substantial limitations. Approximately $46,000,000 of the
Company's net operating loss carryforwards relate to tax deductions
associated with stock option plans and, accordingly, the related benefit
will be credited to stockholders' equity when realized. StorageTek is also
subject to alternative minimum tax and had approximately $30,000,000 of
alternative minimum tax credit carryforwards available as of December 29,
1995.
In May 1995, the Company reached a settlement agreement with the Internal
Revenue Service with respect to proposed adjustments of approximately
$400,000,000 to the Company's federal income tax returns for the years 1985
through 1990. As a result of the settlements, all proposed adjustments were
resolved and the Company's U.S. net operating loss carryforwards have been
reduced by approximately $200,000,000. The settlement did not have a
material affect on the Company's financial position or results of operations
for 1995.
The Internal Revenue Service proposed the imposition of an accumulated
earnings tax on Network Systems as a result of its examination of Network
Systems' consolidated tax returns for the years 1983 through 1988. In 1991
and 1993, Network Systems paid the imposed tax plus interest on the tax and
filed suit in Federal District Court against the Internal Revenue Service
for the refund of the imposed tax plus interest. These suits were settled
in favor of Network Systems. In 1994, Network Systems received refunds of
$23,904,000 for the imposed tax plus interest for the tax years 1983 through
1986. In 1995, Network Systems received a refund of $17,835,000 for the
imposed tax plus interest for the tax years 1987 and 1988. The
F-17
PAGE
receipt of these tax refunds had no affect on the Company's Consolidated
Statement of Operations for 1994 and 1995, as Network Systems had previously
recognized these amounts within other assets on the Consolidated Balance
Sheet in anticipation of a full refund.
The Internal Revenue Service is currently auditing the Company's federal
income tax returns for 1991 and 1992. In addition, the Internal Revenue
Service is currently auditing Network Systems' federal income tax returns
for 1992 and 1993.
NOTE 11 - 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 were 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 was $50.00, plus unpaid dividends. As further discussed in
Note 9, on December 15, 1995, the Company exercised its right to exchange 7%
Convertible Debentures for all of its outstanding shares of the Preferred
Stock.
NOTE 12 - 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 April 30, 1996. Offering periods after April 30, 1996, are
subject to stockholder approval. 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 662,810, 503,179 and 454,736 shares of StorageTek common
stock under the Purchase Plan in 1995, 1994 and 1993, respectively.
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 29, 1995, the Company had an aggregate of 4,482,533 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 1,504,442 shares available for grant under the Employee Plans as
of December 29, 1995.
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.
F-18
PAGE
The Company has made restricted stock awards of its common stock pursuant to
its Employee Plans, at a purchase 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 vesting period of the stock. A
total of 339,990 shares of restricted stock were outstanding as of December
29, 1995.
On July 26, 1995, the Board of Directors approved the tender of certain
outstanding employee stock options with exercise prices in excess of $28.99
per share, excluding all options held by officers of the Company, in
exchange for an equal number of stock options with an exercise price equal
to the then-current market price of $24.875 per share. Options to purchase
a total of 578,453 shares of common stock were tendered pursuant to this
offer. The terms of the options dated July 26, 1995, are the same as the
options which were exchanged, but are subject to a one-year restriction on
exercise from the grant date.
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 530,000 shares of common stock
(including 180,000 shares which are subject to approval by the
shareholders). All Director Plan stock options are granted at the fair
market value of the common stock on the date of grant. There were 75,000
shares available for grant under the Director Plan as of December 29, 1995.
The following summarizes information with respect to options granted under
the Company's Employee and Director Plans:
Exercise Price
Number of Shares Per Share
----------------------------------------
Outstanding, December 31, 1993 3,984,671 $ 3.43 - $75.50
Granted 570,873 24.15 - 36.25
Exercised (1,146,888) 3.43 - 34.75
Canceled or expired (496,637) 12.50 - 64.25
---------- --------------
Outstanding, December 30, 1994 2,912,019 3.63 - 75.50
Granted 1,665,591 20.25 - 30.00
Exercised (162,363) 3.63 - 29.88
Canceled or expired (1,004,204) 15.88 - 75.50
---------- --------------
Outstanding, December 29, 1995 3,411,043 $ 6.67 - $75.50
========== ==============
Exercisable, December 29, 1995 1,406,838 $ 6.67 - $75.50
========== ==============
NOTES RECEIVABLE FROM STOCKHOLDERS
In connection with the Network Systems merger (see Note 2), the Company
assumed Network Systems' notes receivable from stockholders ($4,088,000 as
of December 29, 1995). These notes relate to loans made by Network Systems
to its officers prior to the merger to fund the exercise price of employee
stock options pursuant to a restricted stock purchase program and are
secured by the shares purchased and any other collateral required to
maintain 100% collateralization at the time of each loan.
F-19
PAGE
WARRANTS
In connection with the Amperif merger (see Note 2), the Company assumed
Amperif's obligations with respect to 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 remained outstanding as of December 29, 1995.
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. Contributions from StorageTek of $3,000,000 were authorized
for 1995. No contributions from StorageTek were authorized for 1994 and
1993.
NOTE 13 - 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 14 - 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
F-20
PAGE
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 certified a class consisting (with certain exceptions) of
those who purchased StorageTek's common stock and related securities from
December 23, 1991, to August 7, 1992. A shareholder derivative action was
also filed in the second quarter of 1992 based on substantially similar
factual allegations and was consolidated with the class action. On July 27,
1995, the Company and the plaintiffs in the shareholder class action and
derivative litigation announced an agreement to settle the litigation.
The settlement provided that, without admitting any wrongdoing, the company
would pay $30,680,000 for its portion of the settlement. The Company's
insurance policies paid $24,320,000 as part of the total settlement of
$55,000,000. As a result of the settlement, a one-time charge of $30,680,000
was recognized during the third quarter of 1995. The court gave final
approval to the settlement in December 1995.
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 in
the discovery phase.
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. On December 22,
1994, the Company filed a counterclaim for infringement of one of its
patents and, in November 1995, added a second patent to its counterclaim.
The case is in the discovery phase. A trial date has been set for May 1996.
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 alleged that the
Company breached a 1990 settlement agreement that had resolved earlier
litigation between the parties. The suit sought injunctive relief and
damages in the amount of $2,400,000,000. On December 28, 1995 the court
dismissed the complaint. The Company is currently proceeding with a
counterclaim against Stuff for breach of its covenant not to sue, which was
part of the 1990 settlement agreement.
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 were illegal, including price increases and parts and maintenance
software availability. On January 4, 1996, the parties settled this suit.
The settlement of this litigation did not involve any admission of wrongdoing
by the Company, and had no material affect on the Company's financial position
or results of operations.
On February 15, 1994, the Company 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
F-21
PAGE
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 filedcounterclaims against the Company alleging breach of
contract and claiming damages. On June 10, 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
to support the products in the event Array and Tandem failed to provide such
services. On May 30, 1995, the Company filed an amended complaint seeking
damages. The case is in the discovery phase. A trial date has been set for
November 1996.
On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S.
District Court for the Eastern District of Virginia against the Company and
two of its customers alleging that the "pass-through" port in certain of the
Company's tape library products infringed U.S. Patent No. 4,779,151 (the
"151 Patent"). The complaint asked the court to impose injunctive relief,
treble damages in an unspecified amount, and an award of attorneys fees and
costs. A trial commenced on January 22, 1996, and on February 1, 1996, a
jury found that the Company's products did not infringe the 151 Patent. A
notice of appeal to the U.S. Court of Appeals for the Federal Circuit was
filed by Odetics, Inc. on March 8, 1996.
On December 8, 1995, Odetics, Inc. filed a second patent infringement suit
in the U.S. District Court for the Eastern District of Virginia against the
Company. The complaint alleges that the "cartridge access port" in certain
of the Company's tape library products also infringe the 151 Patent. The
complaint seeks injunctive relief, treble damages in an unspecified amount,
and an award of attorneys fees and costs. This case has been stayed pending
the outcome of any appeal to the U.S. Court of Appeals for the Federal Circuit
with respect to the case filed by Odetics, Inc. in June 1995.
In addition, the Company is involved in various other less significant legal
proceedings. The Company believes it has adequate legal defenses with
respect to each of the suits cited above and intends to vigorously defend
against these actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of litigation
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material affect on the Company's
financial position or reported results of operations in a particular
quarter. An adverse decision, particularly in patent litigation, could
require material changes in production processes and products or result in
the Company's inability to ship products or components found to have
violated third-party patent rights.
NOTE 15 - 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 forward exchange contracts for trading
purposes.
F-22
PAGE
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
$168,997,000 as of December 29, 1995, and $334,100,000 as of December 30,
1994. Deferred realized and unrealized losses associated with the Company's
foreign currency options, including costs associated with option premiums
paid, aggregated approximately $2,498,000 as of December 29, 1995, compared to
deferred realized and unrealized losses of approximately $3,920,000 as of
December 30, 1994. The deferred losses on the options as of December 29,
1995, will be recognized as an adjustment to the associated revenue during
1996 in 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
$114,644,000 as of December 29, 1995, and $99,200,000 as of December 30,
1994.
The forward exchange contracts and foreign currency options do not subject
the Company to risk due to exchange rate movements as gains and losses on
the contracts offset gains and losses on the transactions being hedged. 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 monitors 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
($3,202,000 as of December 29, 1995). There was no credit exposure with
respect to the Company's foreign currency forward contracts as of December
29, 1995, as the fair value of these contracts was approximately zero.
Losses associated with foreign currency translation adjustments and foreign
currency transactions, net of associated hedging results, aggregated
$4,303,000 in 1995, $1,178,000 in 1994, and $9,042,000 in 1993.
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 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 geographic areas. As of
December 29, 1995, the Company had no significant concentrations of credit
risk.
F-23
PAGE
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments as of December 29, 1995, are as follows (in thousands of
dollars):
Carrying Estimated
Amount Fair Value
-------------------------
Assets:
Notes and installment receivables $ 20,879 $ 20,937
Foreign currency option contracts 5,700 3,202
Liabilities:
Nonrecourse borrowings secured by
lease commitments 40,395 41,198
7% Convertible Subordinated
Debentures due 2008 171,205 191,750
8% Convertible Subordinated
Debentures due 2015 145,645 142,004
9.53% Senior Secured Notes due 1996 55,000 55,815
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 7% and 8% Convertible Subordinated Debentures were
based upon the closing sales prices on the New York Stock Exchange as of
December 29, 1995. The fair value of the Company's 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 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 29, 1995, and
accordingly, had a carrying value and fair value approximating zero.
NOTE 16 - RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges consists of the following (in thousands of
dollars):
Year Ended
----------------------------------------
December 29, December 30, December 31,
1995 1994 1993
----------------------------------------
Restructuring charges $167,175 $8,000 $77,832
Litigation settlement 30,680
Merger and consolidation charges 14,352 5,522
Acquired research and development 7,060
------- ----- ------
$212,207 $8,000 $90,414
======= ===== ======
F-24
PAGE
See Note 14 for a discussion of the $30,680,000 charge associated with the
settlement of litigation in 1995. See Note 2 for a discussion of the
$14,352,000 charge associated with the merger with Network Systems in 1995
and the $5,522,000 charge associated with the merger with Amperif
Corporation in 1993. See Note 2, also, for a discussion of the $7,060,000
charge incurred in connection with Network Systems' acquisition of Bytex
Corporation in 1993.
The following table summarizes the activity in the Company's restructuring
reserves during the last three years (in thousands of dollars):
Employee Asset Lease Other
Severance Writedowns Abandonments Exit Costs Total
-------------------------------------------------------------------
Balances, December 25, 1992 $ 2,794 $ 2,536 $ 4,866 $ 10,196
Restructuring charges 12,636 $ 59,178 3,490 2,528 77,832
Cash payments (7,955) (769) (3,598) (12,322)
Asset writedowns (59,178) (59,178)
Reclassifications to other
restructuring charges (1,236) (1,236)
------ ------- ------ ------ --------
Balances, December 31, 1993 6,239 0 5,257 3,796 15,292
Restructuring charges 3,000 2,200 2,300 500 8,000
Cash payments (6,203) (1,775) (684) (8,662)
Asset writedowns (2,200) (2,200)
------ ------- ------ ------ --------
Balances, December 30, 1994 3,036 0 5,782 3,612 12,430
Restructuring charges 49,265 91,609 16,660 9,641 167,175
Cash payments (9,613) (3,904) (3,081) (16,598)
Asset writedowns (91,609) (91,609)
------ ------- ------ ------ --------
Balances, December 29, 1995 $42,688 $ 0 $18,538 $10,172 $ 71,398
====== ======= ====== ====== ========
1995 RESTRUCTURING
During the fourth quarter of 1995, the Company recorded a restructuring
charge of $167,175,000 related to the adoption by the Company of a formal
action plan for restructuring its enterprise and networking businesses.
This restructuring was adopted in an effort to establish a more
competitive cost structure in response to slower revenue growth and
increasing price competition, particularly in the online marketplace. In
connection with the restructuring, the Company plans to focus on core
businesses and outsource non-strategic activities, rearchitect its
distribution processes and accelerate the integration of Network Systems,
which was acquired in March 1995.
In connection with the plan, the Company incurred employee severance costs
of approximately $49,265,000. The Company anticipates its worldwide work
force will be reduced by approximately 1,700 employees with the majority of
the terminations expected to occur during 1996.
F-25
PAGE
Asset writedowns incurred in connection with the restructuring included a
charge of approximately $21,310,000 associated with the planned disposal of
excess spare parts in connection with the consolidation of field service
depots; a charge of approximately $19,600,000 primarily associated with the
writedown of manufacturing equipment which will be scrapped or sold; a
charge of approximately $18,484,000 associated with goodwill and other
investment writedowns on business activities which are being discontinued; a
charge of approximately $16,361,000 associated with the shutdown of
manufacturing and research facilities; a charge of approximately $10,758,000
associated with excess and obsolete inventories resulting from the decision
to discontinue various product lines; and a charge of approximately
$5,096,000 associated with other asset writedowns resulting from
discontinued business activities.
Charges of approximately $16,660,000 were incurred in connection with the
abandonment of real estate leases. Other exit costs of approximately
$9,641,000 were incurred principally related to equipment lease terminations
and the discontinuation of engineering support agreements.
As of December 29, 1995, the remaining accrual associated with this
restructuring was approximately $67,607,000. This accrual consisted of
estimated future employee severance obligations of approximately
$42,485,000; estimated future rent obligations associated with excess lease
space of approximately $16,028,000; and accruals for other exit costs
associated with the restructuring of approximately $9,094,000.
1994 RESTRUCTURING
During the fourth quarter of 1994, Network Systems recorded a restructuring
charge of $8,000,000 in connection with an expense reduction plan. The plan
included a charge for employee severances of approximately $3,000,000; a
charge associated with lease abandonments of approximately $2,300,000;
charges associated with the write-off of abandoned and non-productive
equipment of approximately $2,200,000; and a charge of approximately
$500,000 associated with other exit costs.
As of December 29, 1995, substantially all actions associated with the 1994
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $471,000 related principally to future
rent obligations associated with excess lease space.
1993 RESTRUCTURINGS
During the third quarter of 1993, StorageTek recorded a restructuring charge
of $69,250,000 and, during the fourth quarter of 1993, Network Systems
recorded a restructuring charge of $8,582,000 for an aggregate 1993
restructuring charge of $77,832,000 for the combined companies on a pooled
basis.
The StorageTek restructuring principally related to the adoption of a formal
plan that provided for the reorganization of the Company's midrange business
and included asset writedowns of approximately $57,251,000; employee
severance accruals of approximately $8,509,000; and lease termination costs
of approximately $3,490,000. Most of the actions covered by the
restructuring were implemented during the fourth quarter of 1993.
F-26
PAGE
The significant components of the Network Systems restructuring included
employee severance and other employee-related costs of approximately
$4,127,000; a charge of approximately $2,528,000 associated with other exit
costs; and a charge of $1,927,000 associated with the write-off of abandoned
facilities, manufacturing assets, and inventory.
As of December 29, 1995, substantially all actions associated with the 1993
restructuring have been completed and the remaining accrual associated with
this restructuring of approximately $3,320,000 related principally to future
rent obligations associated with excess lease space.
NOTE 17 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
BUSINESS SEGMENTS
StorageTek operates in one principal business segment - the design,
manufacturing, marketing, and servicing of high-performance information
storage and retrieval subsystems and networking products.
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
1995 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,227,509(1) $553,064 $148,912 $1,929,485
Transfers between areas 380,194 $(380,194)
--------- ------- ------- -------- ---------
Total revenue $1,607,703 $553,064 $148,912 $(380,194) $1,929,485
========= ======= ======= ======== =========
Operating loss $ (22,769) $(27,296) $ (7,047) $ (7,631) $ (64,743)
========= ======= ======= ========
Interest income (expense), net 8,978
General corporate expenses (68,765)(2)
---------
Loss before income taxes $ (124,530)
=========
Identifiable assets $1,304,606 $494,499 $122,149 $(233,300) $1,687,954
========= ======= ======= ========
General corporate assets 200,675
---------
Total assets $1,888,629
=========
F-27
PAGE
Consolidated
1994 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,242,166(1) $499,939 $129,245 $1,871,350
Transfers between areas 308,978 $(308,978)
--------- ------- ------- -------- ---------
Total revenue $1,551,144 $499,939 $129,245 $(308,978) $1,871,350
========= ======= ======= ======== =========
Operating profit (loss) $ 90,529 $(17,640) $ 4,321 $ (11,604) $ 65,606
========= ======= ======= ========
Interest income (expense), net 6,103
General corporate expenses (20,771)
---------
Income before income taxes $ 50,938
=========
Identifiable assets $1,764,903 $380,999 $ 79,917 $(216,858) $2,008,961
========= ======= ======= ========
General corporate assets 135,497
---------
Total assets $2,144,458
=========
Consolidated
1993 United States Europe Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,097,644(1) $406,054 $113,993 $1,617,691
Transfers between areas 211,342 623 $(211,965)
--------- ------- ------- -------- ---------
Total revenue $1,308,986 $406,677 $113,993 $(211,965) $1,617,691
========= ======= ======= ======== =========
Operating profit (loss) $ (70,371) $(39,894) $ 3,780 $ (2,879) $ (109,364)
========= ======= ======= ========
Interest income (expense), net 18,585
General corporate expenses (21,182)(2)
---------
Loss before income taxes $ (111,961)
=========
Identifiable assets $1,600,964 $337,541 $ 74,695 $(157,218) $1,855,982
========= ======= ======= ========
General corporate assets 208,869
---------
Total assets $2,064,851
=========
(1) U.S. revenue from unaffiliated customers includes international
export sales to customers (principally in Europe) of $79,714,000 in
1995; $94,959,000 in 1994; and $88,795,000 in 1993.
(2) General corporate expenses include a charge of $30,680,000
associated with the settlement of litigation in 1995, as well as
merger and consolidation expenses of $14,352,000 in 1995 and
$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-28
PAGE
NOTE 18 - QUARTERLY INFORMATION (UNAUDITED)
The following consolidated quarterly results of operations for 1995 and
1994, have been restated to account for the merger with Network Systems (see
Note 2) as a pooling of interest (in thousands of dollars, except per share
amounts):
Quarter Ended 1995
---------------------------------------------------------------
March 31 June 30 September 29 December 29
---------------------------------------------------------------
Revenue $450,186 $480,702 $439,596 $ 559,001
Cost of revenue 288,089 306,942 276,228 346,363
------- ------- ------- --------
Gross profit 162,097 173,760 163,368 212,638
Operating expenses 157,233 159,651 135,207 181,073
Restructuring and other charges 14,352 30,680 167,175
------- ------- ------- --------
Operating profit (loss) (9,488) 14,109 (2,519) (135,610)
Interest income (expense), net 1,574 2,246 3,038 2,120
------- ------- ------- --------
Income (loss) before income taxes (7,914) 16,355 519 (133,490)
Provision for income taxes (1,000) (4,500) (7,500) (4,800)
------- ------- ------- --------
Net income (loss) $ (8,914) $ 11,855 $ (6,981) $(138,290)
======= ======= ======= ========
Income (loss) per common share $ (0.23) $ 0.17 $ (0.19) $ (2.65)
======= ======= ======= ========
Quarter Ended 1994
---------------------------------------------------------------
April 1 July 1 September 30 December 30
---------------------------------------------------------------
Revenue $398,188 $421,104 $469,562 $582,496
Cost of revenue 265,504 259,559 292,330 369,549
------- ------- ------- --------
Gross profit 132,684 161,545 177,232 212,947
Operating expenses 153,388 142,496 155,460 180,229
Restructuring charges 8,000
------- ------- ------- --------
Operating profit (loss) (20,704) 19,049 21,772 24,718
Interest income (expense), net 3,576 1,071 1,672 (216)
------- ------- ------- --------
Income (loss) before income taxes (17,128) 20,120 23,444 24,502
(Provision) benefit for income taxes 100 (4,400) (4,800) (9,800)
------- ------- ------- --------
Net income (loss) $(17,028) $ 15,720 $ 18,644 $ 14,702
======= ======= ======= ========
Income (loss) per common share $ (0.39) $ 0.24 $ 0.30 $ 0.22
======= ======= ======= ========
NOTE 19 - SUBSEQUENT EVENTS
SALE OF LEASE ASSETS
The Company announced on February 9, 1996, that it intends to sell its net
investment in sales-type leases and enter into a worldwide lease financing
alliance. The Company expects to close the proposed transaction by the end
of the first quarter of 1996, and anticipates an extraordinary gain if the
transaction is completed. In connection with the sale of its net investment
in sales-type leases, the Company intends to repay its outstanding
nonrecourse borrowings and 9.53% Senior Secured Notes in the first quarter
of 1996.
F-29
PAGE
SALE OF RECEIVABLES
On January 29, 1996, the Company entered into a one-year financing agreement
with a bank which provides for the sale of certain U.S. and foreign based
accounts receivable on a recourse basis. This agreement allows for
receivable sales of up to $40 million at any one time and StorageTek's
obligations under the agreement will be secured by a letter of credit for
the amount of the receivables sold. The selling price of the receivables
will be partially determined based upon foreign currency exchange rates and
any gains or losses on the sales will be recognized within marketing,
general, administrative and other income and expense, net, in the
Consolidated Statement of Operations at the time the receivables are sold.
As of February 23, 1996, the Company had committed to future cumulative
sales of approximately $206 million. Gains and losses associated with the
receivable sales are not expected to have a material affect on the Company's
reported financial results after taking into consideration other
transactions associated with the Company's international operations. Based
upon the Company's past credit and collection experience with respect to the
receivables that it expects to sell, the Company believes that no material
credit risk exists under the recourse provisions of the agreement.
LITIGATION
As further discussed in Note 14, on February 1, 1996, a jury found that the
Company's "passthrough" port in certain of its tape library products did not
infringe the 151 Patent held by Odetics, Inc. On March 8, 1996, Odetics, Inc.
filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit.
F-30
PAGE
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 37 present fairly, in all material respects, the
financial position of Storage Technology Corporation and its subsidiaries at
December 29, 1995 and December 30, 1994, and the results of their operations
and their cash flows for each of the three years in the period ended
December 29, 1995, 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, a wholly-owned
subsidiary, which statements reflect total assets of $265,147,000 at
December 31, 1994, and total revenue of $231,756,000 and $215,558,000 for
the years ended December 31, 1994 and 1993, 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, 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 10 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
February 23, 1996, except for Note 19,
as to which the date is March 8, 1996
F-31
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS
FOR NETWORK SYSTEMS CORPORATION
Board of Directors and Stockholders
Network Systems Corporation
We have audited the consolidated balance sheet of Network Systems Corporation
as of December 31, 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two 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 the consolidated results of
its operations and its cash flows for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 10, 1995
F-32
PAGE
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands of Dollars)
Additions -
Balance Charged to Deductions -
Beginning of Cost of Service Spare Parts Balance End
Year and Rental Written Off of Year
---------------------------------------------------------------------
Amortization of spare parts for
customer services:
For the year ended:
December 29, 1995 $74,685 $43,378 $30,083 $87,980
====== ====== ====== ======
December 30, 1994 $65,350 $27,526 $18,191 $74,685
====== ====== ====== ======
December 31, 1993 $58,356 $23,829 $16,835 $65,350
====== ====== ====== ======
Balance Additions -
Beginning Charged to Reductions - Balance End
of Year Cost of Sales Write-offs of Year
---------------------------------------------------------------------
Inventory reserves:
For the year ended:
December 29, 1995 $51,803 $37,353 $43,866 $45,290
====== ====== ====== ======
December 30, 1994 $40,208 $44,852 $33,257 $51,803
====== ====== ====== ======
December 31, 1993 $27,521 $38,659 $25,972 $40,208
====== ====== ====== ======
Deductions -
Accounts
Balance Additions - Receivable
Beginning of Charged to Written Off Balance End
Year Cost and Expenses Net of Recoveries of Year
---------------------------------------------------------------------
Allowance for doubtful accounts on
accounts receivable:
For the year ended:
December 29, 1995 $13,387 $ 8,198 $ 6,920 $14,665
====== ====== ====== ======
December 30, 1994 $13,196 $ 6,678 $ 6,487 $13,387
====== ====== ====== ======
December 31, 1993 $12,224 $ 7,723 $ 6,751 $13,196
====== ====== ====== ======
F-33
PAGE
Exhibits Index:
---------------------
4.14 Amendment No. 1 dated as of January 25, 1996, to Amended
and Restated Security Agreement dated as of April 2, 1994,
relating to Registrant's 9.53% Senior Secured Notes due
August 30, 1996.
4.15 Amendment No. 3 dated as of January 25, 1996, to Note
Agreement dated as of April 2, 1994, relating to Registrant's
9.53% Senior Secured Notes due August 30, 1996.
10.11 Amendment to Employment Agreement between the Company and
L. Thomas Gooch, dated December 1, 1995.
10.13 Employment Agreement between the Company and David E.
Weiss, dated December 6, 1995.
10.20 Fourth Amendment dated as of December 22, 1995, to
Amended and Restated Multicurrency Credit Agreement dated as
of September 28, 1994.
10.21 Multicurrency Receivables Transfer Agreement dated as of
January 29, 1996.
11.0 Computation of Earnings (Loss) per Common Share.
21.0 Subsidiaries of Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Ernst & Young LLP.
27.0 Financial Data Schedule.