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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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)
One StorageTek Drive, Louisville, 80028-4309
Colorado
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock ($.10 par value), including
related preferred stock purchase rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $682,764,323 based on the last reported sale price of the common
stock of the registrant on the New York Stock Exchange's consolidated
transactions reporting system on February 29, 2000. 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.
As of February 29, 2000, there were 100,729,814 shares of common stock of the
registrant outstanding.
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 its
fiscal year ended December 31, 1999. Portions of the registrant's definitive
proxy statement for its annual meeting of stockholders to be held on May 18,
2000, are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
ALL ASSUMPTIONS, ANTICIPATIONS, EXPECTATIONS AND FORECASTS CONTAINED IN THE
FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCT AND BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND UNCERTAINTIES.
SOME OF THESE RISKS ARE DETAILED IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT
MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN REPRESENT A GOOD-FAITH ASSESSMENT OF THE COMPANY'S
FUTURE PERFORMANCE FOR WHICH MANAGEMENT BELIEVES THERE IS A REASONABLE BASIS.
THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION ON FORECASTS
CONTAINED HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.
HISTORICAL STATEMENTS MADE HEREIN ARE ACCURATE ONLY AS OF THE DATE OF FILING
THIS FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION AND MAY BE RELIED
UPON ONLY AS OF THAT DATE.
GENERAL
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Storage Technology Corporation ("StorageTek" or the "Company") designs,
manufactures, markets and maintains information storage products, storage
services and storage management software. The Company provides customers with a
broad range of storage products and services, including tape, disk and network
products; storage services, including maintenance and professional services; and
storage management software.
The Company's products are used by a range of customers that include large
multinational companies, small businesses, and governmental agencies,
encompassing a wide range of industry sectors, including financial, retail,
telecommunications, transportation, manufacturing and services, as well as
educational, scientific and medical institutions located around the world. The
Company markets its products and services through its direct sales organization
and indirect sales channels, including original equipment manufacturer (OEM),
value-added distributor (VAD), value-added reseller (VAR) and other distribution
arrangements.
StorageTek's strategy is focused on providing information-centric solutions that
allow the customer to collect, move, store, share and protect digital
information. The Company's strategy of delivering solutions to customers is
founded on a virtual, intelligent storage architecture (VISTA) technology model,
which is grounded in an industry standard that permits storage management that
is compatible with a wide range of types and manufacturers of computers. The
VISTA model encompasses: (i) systems administration; (ii) applications; (iii)
storage management; (iv) storage administration; (v) storage access; and (vi)
physical storage.
The key features of the Company's VISTA model include open storage solutions
that allow the customer to mix-and-match products from a number of vendors;
intelligent storage solutions that contain embedded intelligence apart from the
server; and integrated storage solutions that provide customers with a complete,
scalable product hierarchy and storage management. StorageTek provides many of
the components in the VISTA model and has created alliances with other
manufacturers, developers, distributors and suppliers to provide customers with
total information-centric storage solutions. As a result, it is possible for
other companies to be at various times collaborators, customers and competitors
in different markets.
The Company was incorporated in Delaware in 1969. Its principal executive
offices are located at One StorageTek Drive, Louisville, Colorado 80028,
telephone (303) 673-5151.
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REVENUE AND GROSS PROFIT BY BUSINESS SEGMENT
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REVENUE AND GROSS PROFIT BY BUSINESS SEGMENT
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER
1999 1998 1997
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Revenue
Storage products $1,465,216 $1,520,647 $1,495,038
Storage services 718,844 633,821 584,016
Storage management software 184,171 103,754 65,602
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Total revenue $2,368,231 $2,258,222 $2,144,656
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Gross profit
Storage products $ 592,822 $ 688,050 $ 669,914
Storage services 221,669 273,662 265,521
Storage management software 128,493 78,698 37,691
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Total gross profit $ 942,984 $1,040,410 $ 973,126
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Additional information concerning revenue and profit attributable to each of the
Company's business segments and geographic areas is found in Part II, Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," and in Part IV, Note 14, of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS," of this Form 10-K, which information is incorporated by reference
into this Part I, Item 1.
PRINCIPAL PRODUCTS
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StorageTek is currently organized into three reportable business segments:
storage products; storage services; and storage management software. The
Company's storage product offerings include tape, disk and network products.
Storage services offerings include maintenance services for StorageTek and
third-party storage products, and storage consulting and integration services.
The storage management software segment sells and licenses software tools and
applications for improving storage product performance and simplifying
information storage management.
STORAGE PRODUCTS
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The Company's storage products, which accounted for 62% of total revenue in
1999, include a range of tape, disk and network products that serve as
components of the Company's VISTA model. The Company's storage products are
designed for the mainframe and client-server markets, including the developing
storage area network (SAN) market.
TAPE PRODUCTS
The Company's tape products historically have generated significant revenue for
the Company and are engineered to provide reliable, cost-effective storage of
digital information. The Company experienced a shift in its tape customer base
during 1999 from the mainframe to the client-server marketplace. Sales of
client-server tape automation products grew 75% during 1999 with the fourth
quarter of 1999 representing the first quarter in which sales of client-server
tape products exceeded sales of mainframe tape products. In December 1998, the
Company announced the availability of its 9840 product, a high-performance,
high-capacity tape drive. The 9840 addresses both the mainframe and
client-server markets. The TimberWolf automated tape library product family, a
low cost, reliable storage solution for the client-server market, first became
available in 1996. The
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Company also offers TimberLine, a high-performance 36-track cartridge subsystem
which first became available in the fourth quarter of 1994, and PowderHorn 9310
Automated Cartridge System (ACS), a high-performance, high-capacity cartridge
library which became available in 1993, and other earlier generation tape
products targeted for the mainframe marketplace.
The Company is currently developing new tape products and enhancements, all of
which are in the design, preliminary engineering or engineering validation
testing phase and no availability dates have been announced. See Part II, Item
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- New Products, Services
and Software; Emerging Markets," which is incorporated by reference into this
Part I, Item 1, for a discussion of certain risks associated with the
development and introduction of new products that may affect future results.
DISK PRODUCTS
The Company's disk product offerings include a family of disk systems that offer
a spectrum of capacity, performance, connectivity and price. The Company's disk
product offerings include the 9393 Shared Virtual Array (SVA), which utilizes
virtual disk technology and is currently targeted for the mainframe and
client-server markets. The 9393 is designed to provide high-performance,
scalability and continuous online data availability and first became available
in 1999. In February 2000, the Company announced the availability of the 9500
SVA, the next generation of SVA disk products, targeted for the client-server
marketplace.
In addition, the Company also offers the OPENstorage Disk product family, which
is designed for the client-server disk market. The OPENstorage products are
designed to provide high-performance, high-availability, scalable physical
storage, and first became available in the third quarter of 1996. The
OPENstorage Disk products are distributed by the Company's direct sales force
and through indirect channels. From the third quarter of 1996 through 1999, the
Company's disk products were principally sold through a worldwide, non-exclusive
OEM agreement with International Business Machines Corporation (IBM). In 1999,
the Company focused on shifting its sales activities from its OEM relationship
with IBM to the direct sales channel. The Company does not anticipate any
significant sales revenue from IBM in 2000. Under the OEM arrangement with IBM,
the Company developed new disk technology, some of which is owned by IBM, and
IBM has granted the Company both royalty-bearing and royalty-free licenses to
use this technology. There can be no assurances that the Company will be
successful in developing, introducing, or marketing new disk products and
enhancements, or establishing cost-effective, high-volume distribution channels
for its disk products.
NETWORK PRODUCTS
A key element of the Company's VISTA model is the Company's SAN strategy. A SAN
allows the sharing of information and storage devices across a network. The
Company's network products are designed to provide device interface and host
interface with the physical storage and the connectivity infrastructure
necessary to enable the integration of network-based storage management
functions. The Company's principal network products include the StorageNet
family of products, which are designed to provide high-performance, high-speed
connectivity between local and wide-area networks and serve as the foundation of
StorageTek's SAN infrastructure. The first StorageNet products became available
in 1996.
The Company is currently developing new network products and enhancements
intended to address the developing SANs marketplace. All of these products and
enhancements are in the design, preliminary engineering or engineering
validation testing phase and no availability dates have been announced. See Part
II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- New Products,
Services and Software; Emerging Markets," which is incorporated by
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reference into this Part I, Item 1, for a discussion of certain risks associated
with the development and introduction of new products that may affect future
results, as well as risks associated with the developing SANs market.
STORAGE SERVICES
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The Company's storage services include maintenance services, integration
services, storage consulting and managed storage services. The Company provides
maintenance services for both StorageTek storage products and third-party
equipment around the world, using a combination of service engineers, remote
diagnostic tools, online and telephone assistance, and contractual agreements
with third-party service providers. In 1999, the Company's storage services
revenue accounted for approximately 30% of total revenue.
In the past, the Company's maintenance services had been the principal source of
service revenue. The Company generally warrants its products for a specified
period of time, after which it services products for a fee under maintenance
agreements. As a result of competitive pressures, many of the Company's products
may include extended warranty periods. Extending warranty periods may reduce
future maintenance revenue and put downward pressure on profit margins. The
Company's maintenance revenue also may be adversely affected by the shift in the
Company's customer base from the mainframe to the client-server marketplace, as
well as the Company's increasing reliance on indirect distribution channels for
its products, as some indirect distributors provide service for the products
that they sell.
The Company invested significant resources in 1998, and the first three quarters
of 1999, in programs designed to expand its service business. These programs
included a broad range of consulting and integration service offerings,
developing pre-packaged solutions customized to specific customer application
needs, and managed storage service offerings. However, certain of these programs
did not meet the Company's expectations regarding profitability. The Company
intends to limit its consulting and integration service offerings to supporting
sales of SAN virtual products and software in the future. The Company is
currently completing its open commitments with respect to its consulting
integration services which will not be continued. While the Company anticipates
service revenue will decline in 2000 as it reduces its investments in or
eliminates these service offerings, these changes are expected to improve
profitability as these business activities have generated lower gross margins.
With respect to its managed storage service business, the Company anticipates
that it will seek some type of alliance, joint-venture or other structure
through which it can gain access to capital in return for, among other
possibilities, equity participation or a contract to supply certain hardware and
software used in this business. There can be no assurances that the Company will
be successful in its initiative to enter into some type of alliance,
joint-venture or other structure through which it can gain access to the capital
necessary to provide, directly or indirectly, managed storage services.
STORAGE MANAGEMENT SOFTWARE
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The Company's storage management software segment sells and licenses software
tools and applications for improving storage product performance and simplifying
information storage management. Storage management is a fundamental layer of the
VISTA model and the Company believes that its storage management software will
be important to its competitiveness in the SAN market. The Company's approach is
based on delivering open, intelligent and integrated storage solutions, which
will require a comprehensive storage management strategy. The Company intends to
continue to develop software tools and will work with other software vendors to
enable it to deliver a total solution. In 1999, storage management software
accounted for approximately 8% of total revenue.
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The Company offers the Virtual Storage Manager (VSM), a software-driven data
storage management solution designed to improve performance, cartridge
utilization and overall storage management using StorageTek's storage products.
VSM is engineered to support the demands created by data center consolidation,
electronic commerce, data warehousing and enterprise resource planning. VSM
first became available in December 1998.
The Company also offers SnapShot, software designed to provide virtual
duplication and significantly reduce central processing unit (CPU) and channel
utilization costs associated with data movement. The Company's SnapShot software
is designed solely to operate with its SVA product family. SnapShot software
currently operates with the 9393 SVA and on February 15, 2000, the Company
announced the availability of SnapShot for its 9500 SVA. The Company anticipates
that the SnapShot software will be compatible with any SVA that the Company
develops in the future. The SnapShot product was first released in 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS THAT MIGHT AFFECT FUTURE RESULTS -- New Products, Services
and Software; Emerging Markets," for a discussion of certain risks associated
with the development and introduction of new software that may affect future
results.
BACKLOG
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As of December 31, 1999, the storage product order backlog was approximately $48
million, compared to year-end amounts of approximately $42 million in 1998, and
$27 million in 1997. In addition to the backlog amount, the Company had
approximately $61 million of storage product inventory held by customers on
evaluation as of December 31, 1999, compared to $64 million as of December 25,
1998, and $51 million on December 26, 1997. The order backlog for storage
management software products on December 31, 1999, was approximately $8.5
million, and at year-end 1998 and 1997 was $4.5 million and $0.2 million,
respectively. In addition to the backlog amount, the Company had approximately
$10.5 million of storage software inventory held by customers on evaluation as
of December 31, 1999.
Backlog amounts are calculated on an "if sold" basis and include orders from
end-users, OEMs, VADs, VARs and distributors for products that StorageTek
expects to deliver during the following 12 months. Product units held by
customers on evaluation or covered by letters of intent are not included in
backlog amounts. Unfilled orders and orders with respect to inventory held by
customers on evaluation may be canceled by the customer. Accordingly, backlog
levels and inventory held by customers on evaluation are not reliable indicators
of future results. There can be no assurance that orders in backlog and
inventory held by customers on evaluation will ultimately be recognized as
revenue. See Note 1 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" of this Form
10-K for a discussion of the Company's revenue recognition accounting policy.
MARKETING AND DISTRIBUTION
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StorageTek markets its products and services globally, through a combination of
a direct sales organization and indirect sales channels. The Company maintains a
presence, directly or indirectly, in most major cities in the world. The Company
operates sales and service offices throughout the United States and Europe, as
well as Australia, Brazil, Canada, China, Hong Kong, Japan, Korea, Malaysia,
Mexico, Singapore and New Zealand, and sells its products and services through
independent distributors, sometimes in tandem with direct sales and service
operations, located in Africa, Asia, Europe, South America and New Zealand.
The Company's direct sales organization includes sales representatives, service
engineers, system engineers, system integrators, and administrative support
staff. The Company's direct sales outside the United States are generally made
by foreign sales subsidiaries. The Company's indirect channels include OEMs,
VARs, master resellers who supply product and services to VARs, VADs, system
integrators that integrate StorageTek products with other hardware and software
and
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independently provide marketing and maintenance services to customers, and
independent distributors. Indirect channel sales account for a significant
portion of the Company's product sales revenue. In 1998 and 1999, the Company's
indirect distribution channel accounted for approximately 49% and 43%,
respectively, of the Company's total product and software revenue. Excluding the
Company's OEM relationship with IBM for both years; however, revenue from
indirect distribution channels increased from 22% in 1998 to 30% in 1999 of the
Company's total product and software revenue. As previously discussed under
"Principal Products -- Disk Products," the Company does not anticipate any
significant sales revenue from IBM in 2000. Some of the OEM alliances currently
in place for the sale of the Company's products include Bull Alliance Compagnie,
Dell Computer Corporation, Hewlett-Packard Company, NEC Corporation, NCR
Corporation, Siemens Nixdorf, SGI, Sun Microsystems, Inc. and Unisys
Corporation. The Company's accounting policies with respect to revenue
recognition for indirect distribution channels differs from that used for direct
sales. See Note 1 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" of this Form
10-K for a discussion of the Company's revenue recognition policies.
In connection with its current restructuring activities, the Company is
implementing changes to its sales model for the United States and Canada that
the Company expects will improve market penetration, increase sales
productivity, reduce marketing expense, and expand the use of the indirect sales
channel. This new sales model is intended to provide better coverage for new and
existing end-user customers as well as enhancing reseller, distributor and OEM
partnerships. The Company has recently established new field sales geographies
to better serve Fortune 500 customers with enterprise-level product and service
requirements. A newly formed Growth Markets sales unit is intended to address
the needs of small and medium-sized customers, with particular emphasis on
internet and e-commerce businesses.
There can be no assurance that the Company will be successful in its efforts to
implement its new sales model within the United States and Canada during the
year 2000 or that the new emphasis on indirect sales channels will result in
increased sales or profitability over the longer term. Further, the Company may
experience disruptions to its sales as it implements this new sales model and
compensation structure. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MIGHT
AFFECT FUTURE RESULTS -- Changes in Sales Model for the United States and
Canada," for a discussion of certain risks associated with the implementation of
the Company's new sales model.
Revenue from outside the United States accounted for approximately 41% of total
revenue in 1999, 37% in 1998, and 34% in 1997, which includes sales to
end-users, resellers and distributors. In each of these three fiscal periods,
over two-thirds of the Company's revenue originating outside the United States
was derived from Europe, with the majority of the balance coming from Japan,
Australia and Canada. The Company is subject to various risks associated with
conducting business outside the U.S. See Part II, Item 7, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- International Operations and Market Risk Management/Foreign
Currency Exchange Risk," for a discussion of risks associated with operations in
foreign countries.
MANUFACTURING AND MATERIALS
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The Company's primary manufacturing and assembly facilities are located in
Puerto Rico and Colorado. The Company also performs limited manufacturing in
Toulouse, France. All of the Company's manufacturing facilities are currently in
compliance with the ISO 9001 or 9002 international quality standards.
StorageTek manufactures certain key components for its products. In addition, a
substantial portion of the Company's production costs is related to the purchase
of subassemblies, parts and components for its products from vendors located
within and outside the United States. The balance of the Company's production
costs relates to in-house manufacturing, assembly and testing. In
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particular, the Company performs certain critical steps in the manufacture of
its read/write heads for the 9840 tape drive product. The successful manufacture
of these read/write heads gives the Company a competitive edge in that the
Company has developed key proprietary design and manufacturing technologies. The
sophisticated nature of the exacting manufacturing process steps requires tight
physical, electrical and chemical tolerances. The Company relies upon its
skilled personnel and makes significant capital investments in order to
successfully manufacture these read/write heads. Even within a cleanroom
environment, minor equipment malfunctions in any one of the many manufacturing
process steps due to factors such as extraneous chemical contaminants, ambient
particulates, power surges, optical misalignments, timing or temperature
variations could halt production for an indeterminate period of time.
Certain of the parts and components included in the Company's products are
obtained from a single source or a limited group of suppliers. In particular,
IBM, Imation, Sumitomo and Herald Datanetics have been identified as single
source suppliers of the Company. Dependence upon single or limited source
vendors involves a number of risks, including the possibility of a shortage of
key components, longer lead times, and reduced control over production and
delivery schedules.
The Company has long-term supply contracts with certain vendors and suppliers;
the remaining parts and components are obtained by delivering purchase orders to
vendors specifying the required 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 -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- Sole
Source Suppliers," of this Form 10-K for a discussion of factors that may affect
the Company's ability to obtain materials from sole source suppliers, which
information is incorporated by reference into this Part I, Item 1.
COMPETITION
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The markets for the Company's products, services and software are intensely
competitive and are subject to continuous, rapid technological change, frequent
product performance improvements, short product life cycles and aggressive
pricing. The Company competes in a number of markets that include a broad
spectrum of customers primarily on the basis of technology, product
availability, performance, quality, applications and industry solutions,
reliability, price, distribution and customer service. The Company believes that
its ability to compete depends on a number of factors, both within and outside
of its control. These factors include the price and cost of the Company's and
its competitors' product offerings, the timing and success of new products and
applications, product introductions by the Company's competitors, and general
economic and business conditions within and outside the United States. Strong
competition has resulted in price reductions in the past and the Company expects
this trend to continue.
The Company expects that the markets for its products, services and software,
and its competitors within such markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Compaq Computer Corporation, EMC Corporation,
Hewlett-Packard Company, Hitachi Ltd., IBM, Quantum Corporation, and Sun
Microsystems, Inc. A number of the Company's competitors have significantly
greater financial resources than the Company.
The Company is focusing significant resources on product offerings for the
client-server market. Competition in the client-server market is aggressive and
is based primarily upon performance, quality, system scalability, price, service
and name recognition. The client-server market includes a wide range of
customers including customers outside of the Company's traditional customer
base. Many of the Company's potential customers in the client-server market
purchase their storage requirements as part of a bundled product, which may
provide a competitive advantage to the Company's rivals. The Company expects to
address these competitive factors through its SAN strategy, as well as through
the delivery of storage solutions which provide customers with superior
function, performance and quality. The Company anticipates that the competition
in the SAN market
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will intensify in the future as its competitors aggressively seek to position
themselves to take advantage of the shift in customer demands. The SAN market is
characterized by various alliances formed to promote industry standards and
deliver tested, interoperable SAN technology. The Company is a member of several
associations, which also include the Company's competitors. In addition, a
number of the Company's competitors in the product, services and software
markets have formed alliances with the stated objective of developing
interoperable SAN solutions. For example, 3Com Corporation, Legato Systems, Inc.
and MTI Technology Corporation have formed an alliance to deliver tested SAN
solutions. In the storage management software market, the Company competes with
vendors with which it has established relationships, including Legato Systems,
Inc. and VERITAS Software Corporation.
NEW PRODUCT DEVELOPMENT
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StorageTek invests substantial resources to develop new products, software and
enhancements. In 1999, 1998 and 1997, the Company incurred research and
development costs for product and software development activities of
approximately $278 million, $235 million and $210 million, respectively. In
order to expand the Company's access to new technologies and reduce the amount
of time necessary to bring new products to market, the Company in the past has
acquired other companies and has entered into joint development and other
similar relationships. In 1999 and 1998, the Company received approximately $10
million and $50 million, respectively, of research and product development
funding from third parties.
As of December 31, 1999, approximately 1,200 employees were engaged on a
full-time basis in engineering and product development activities, primarily at
several facilities located in the United States and at facilities located in
France and Australia. For further discussion of risk factors concerning product
development, see Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE
RESULTS -- New Products, Services and Software; Emerging Markets," of this Form
10-K, which information is incorporated by reference into the Part I, Item 1.
PATENTS AND LICENSES
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StorageTek's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its proprietary 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, in both
the United States and selected foreign countries to establish its proprietary
rights in new or improved technology. StorageTek currently holds approximately
450 United States patents, as well as foreign counterparts to many of these
patents in selected countries, covering various aspects of its products. These
patents will expire from 2000 through 2015. The Company also has pending in the
United States numerous patent applications, including several that have been
allowed and are expected to be formally issued, as well as pending foreign
counterparts to many of these applications. In addition, StorageTek has licenses
to use patents held by others. Taken as a whole, these assets are material to
the Company's business. However, no individual patent, license or other item of
proprietary information is singularly material to the Company's business.
The Company has ongoing legal proceedings relating to certain of its patents.
For a discussion of certain legal proceedings relating to the Company's patents,
see Part I, Item 3, "Legal Proceedings" of this Form 10-K, which information is
incorporated by reference into this Part I, Item 1.
ENVIRONMENT
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Compliance with the provisions of federal, state and local laws regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material adverse effect on the
financial results and operations of the Company. The Company did
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not have any material expenditures for environmental control facilities in 1999.
The Company does not currently have pending and has not budgeted any material
estimated expenditures for environmental control facilities during 2000.
However, potential liability under environmental legislation is ongoing,
regardless of whether or not the Company has complied with existing governmental
guidelines. The Company has received notice from the State of Florida and the
United States Environmental Protection Agency regarding a potential matter
involving ground water contamination and remediation activities at a property
located in Palm Bay/Melbourne, Florida, a site that the Company sold in January,
2000. The Company is currently not able to predict the outcome or potential
expenditures associated with this matter but does not expect that it will have a
material adverse effect on the financial results and operations of the Company.
Governmental regulation in the United States of the environment and related
compliance costs have increased in recent years. The Company cannot predict the
nature or scope of future environmental laws or regulations, how they will be
administered, or whether compliance will require substantial expenditures. Based
upon currently available information, the Company expects future compliance with
existing environmental regulations will have no material effect on the financial
results and operations of the Company.
RISKS ASSOCIATED WITH THE YEAR 2000
- ---------------------------------------------------
The Company is not currently aware of any significant problems among its
customers as a result of the failure of the Company's products to differentiate
between years in the 1900s and years in the 2000s. In addition, the Company did
not experience any serious problems among the various computer systems used by
the Company and, to the best of the Company's knowledge, none of its significant
suppliers experienced any serious problems among the various computer systems
used by such suppliers.
EMPLOYEES
- ---------------
The Company employed approximately 8,700 persons on a full-time basis worldwide
as of December 31, 1999, including approximately 240 persons who had received
notice of their future termination in connection with the Company's
restructuring activities, but were still employees of the Company as of the end
of the year. The Company currently anticipates there will be a reduction of an
additional 500 to 600 positions during 2000 through a combination of
terminations and attrition. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Restructuring" and
"FACTORS THAT MAY AFFECT FUTURE RESULTS -- Significant Personnel Changes."
RESTRUCTURING
- ---------------------
The Company is currently engaged in a broad restructuring program intended to
return the Company to profitability. Key elements of the restructuring include:
(i) an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the majority
of the remaining reductions projected to be completed by the end of the second
quarter of 2000; (ii) a reduction in investment in certain businesses, including
consulting and integration services and managed storage services; (iii) a
recommitment to the Company's core strengths of tape automation, virtual storage
and storage area networks (including related maintenance and professional
services); (iv) modifications to the sales model for the United States and
Canada intended to improve productivity and increase account coverage and
growth; and (v) other organizational and operational changes intended to improve
efficiency and competitiveness. Additional information concerning the Company's
restructuring is found in Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Restructuring," and in Part
IV, Note 9 of "NOTES TO
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CONSOLIDATED FINANCIAL STATEMENTS," of this Form 10-K, which information is
incorporated by reference into this Part I, Item 1.
OTHER MATTERS
- ---------------------
The Company's results historically have experienced seasonality, with increased
revenue in the Company's fourth quarter compared to other quarters as customers
tend to make purchase decisions near the end of the calendar year. There can be
no assurance that this historical trend will continue in 2000 and that revenue
during the fourth quarter will be higher than any other quarter.
No single customer accounted for 10% or more if the Company's total revenue in
1999. No material portion of the Company's business is subject to contract
termination at the election of the United States 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 5 Description of the Company's credit facilities, debt and lease
obligations.
Note 13 Description of the Company's financial instruments and
off-balance-sheet risks.
Note 14 Information on the operations of business segments and geographic
areas. See also Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- International Operations and Market Risk
Management/Foreign Currency Exchange Risk," for further discussion
of the risks associated with the Company's 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, working capital and risk factors that may
affect future results.
SUBSEQUENT EVENTS -- MANAGEMENT CHANGES
- ----------------------------------------------------------------
On February 3, 2000, the Company announced that David E. Weiss, its Chairman of
the Board, President and Chief Executive Officer has recommended to the
Company's Board of Directors that he resign from all such positions. At the
request of the Company's Board of Directors, Mr. Weiss will continue in all such
offices until a successor has been selected and any transition is completed. The
Board has appointed a search committee and has engaged an executive search firm
to assist the committee in identifying a successor. The Board elected Richard C.
Steadman, a current independent director of the Company, as Lead Independent
Director. The Company is unable to predict when a successor for Mr. Weiss will
be elected. The Company also announced on February 3, 2000, that Victor Perez,
the Company's Chief Operating Officer, would leave the Company at the end of the
first quarter of 2000. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY
AFFECT FUTURE RESULTS -- Significant Personnel Changes," for a discussion of
risks associated with recent personnel changes.
ITEM 2. PROPERTIES
StorageTek conducts its operations worldwide and occupies both leased and owned
facilities. At the present time, such facilities are adequate for the Company's
purposes.
Colorado. StorageTek occupies facilities in nine separate buildings in Boulder
County, Colorado, comprising approximately 1.8 million square feet. These
facilities include StorageTek's executive offices, as well as manufacturing,
research and development, and spare parts storage facilities. A
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majority of the Company's owned facilities in Boulder County are fully utilized.
The Company anticipates that certain manufacturing functions will be shifted to
its Puerto Rico facilities. Thereafter, utilization of the Company's owned
facilities in Boulder County are expected to be reduced. The Company also leases
approximately 400,000 square feet of office and storage space in Colorado.
Other United States Properties. The Company owns 195,000 square feet of research
and development, and administrative facilities in the Minneapolis, Minnesota
area, which is approximately 80% utilized. The Company occupies manufacturing
facilities in Puerto Rico, of which approximately 83,000 square feet are owned
and 73,500 square feet are leased. The facilities in Puerto Rico are fully
utilized. The Company also leases office and customer service facilities
throughout the United States at approximately 130 locations comprising
approximately 730,000 square feet.
International Properties. StorageTek leases approximately 200,000 square feet of
engineering, consulting integration and marketing facilities in Toulouse,
France, which are approximately 87% utilized. In addition, StorageTek leases
facilities at locations throughout the world, primarily for sales and customer
service activities, spare parts storage, and limited research and product
development activities. The Company leases offices in 20 locations in Canada
comprising approximately 100,000 square feet, leases four offices in Latin
America comprising approximately 20,000 square feet, leases approximately 60
offices in Europe comprising approximately 400,000 square feet, and 16 offices
in the Asia/Pacific region comprising approximately 90,000 square feet. Many of
the Company's leases throughout the world contain renewal rights, cancellation
rights and rights of first refusal on contiguous expansion space.
ITEM 3. LEGAL PROCEEDINGS
Litigation expense recognized during 1999 consists of the following (in
thousands of dollars):
Odetics, Inc. settlement $ 97,794
ADEA/ERISA settlement 5,000
Other settlements 788
--------
$103,582
--------
--------
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100.0 million to Odetics for a fully paid up license
to the 151 Patent; $80.0 million of which was paid at the time of the settlement
and the remainder to be paid in equal annual installments of $10.0 million in
September 2000 and September 2001. The Company recognized a pre-tax expense of
$97.8 million to reflect the present value of the final settlement payments.
On December 15, 1999, at a preliminary fairness hearing, the Company and
plaintiffs, representing certain former employees of the Company, presented the
United States District Court for the District of Colorado (the Court) with a
proposed settlement agreement, which would result in the Company paying $5.0
million for the settlement of litigation alleging the Company violated the Age
Discrimination in Employment Act of 1967, as amended (ADEA) and the Employee
Retirement Income Security Act of 1974 (ERISA), between the period of April 13,
1993, and December 21, 1996. Final approval of this proposed settlement
agreement was received from the Court on March 8, 2000. The settlement agreement
states that it shall not be construed as an admission by the Company that it
violated any law. The Company funded the settlement with a $5.0 million payment
into an escrow account in December 1999. A pre-tax expense of $5.0 million was
recognized in connection with the proposed settlement during 1999.
12
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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 concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2.4 billion. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court dismissed with prejudice all of Stuff's material claims
against the Company. On August 30, 1999, Stuff filed a notice of appeal with the
Colorado Court of Appeals seeking to overturn the decision of the District
Court. The parties are in the process of filing various appellate briefs and the
Company anticipates that the final briefs will be filed in April 2000. No oral
argument date has been set. The Company continues to believe that Stuff's claims
are wholly without merit and intends to defend vigorously any further actions
arising from this complaint.
In August 1999, the Company filed suit in the United States District Court,
Western District against Cisco Systems, Inc. (Cisco) in Case No. 99C 782 S,
alleging that Cisco infringed upon a certain patent of the Company used in its
products. The Company filed an amended complaint on December 30, 1999, in which
the Company alleged that Cisco had infringed upon a second patent of the Company
used in its products. Cisco filed an answer denying the Company's claims and
asserting that a microchip used in one of the Company's network security product
infringed upon one of Cisco's patents. Cisco is seeking unspecified compensatory
damages which it asserts should be trebled, along with injunctive relief. The
Company purchases the alleged infringing microchip from a subsidiary of Intel
Corporation. The Company intends to add as third party defendants the subsidiary
of Intel, along with the microchip distributor and the manufacturer of the
circuit boards that utilize the microchip. The Company believes that it has
valid claims against Cisco and valid defenses against Cisco's counterclaim.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
Information concerning certain of these legal proceedings is also contained in
Note 7 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," included in Part IV,
Item 14, of this Form 10-K.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during its
fourth quarter of the fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company as of
December 31, 1999.
NAME POSITION WITH COMPANY AGE
- -------------------------------------------------------------------------------------------------------
Gary Anderson Corporate Vice President, World Wide Operations Technology 52
Roger D. Archibald Vice President and General Manager, Enterprise Business
Group 47
Thomas G. Arnold Vice President and Corporate Controller 38
Susan W. Bailey Corporate Vice President, U.S./Canada Sales and Service and
Global Channels 39
Jeffrey M. Dumas Corporate Vice President, General Counsel and Secretary 54
Gary D. Francis Vice President, Corporate Strategy 52
Robert S. Kocol Corporate Vice President and Chief Financial Officer 43
Karen Niparko Corporate Vice President and Chief Administrative Officer 44
Jean Reiczyk Corporate Vice President and General Manager, Solutions
Business Group 50
David E. Weiss Chairman of the Board, President and Chief Executive Officer 55
Mr. Anderson was appointed Corporate Vice President, World Wide Operations
Technology, in January 2000. From July 1996 to January 2000 he served as
Corporate Vice President World Wide Sourcing/Logistics/Systems. Mr. Anderson
served as Corporate Vice President, Sourcing and Logistics from November 1995 to
July 1996. Mr. Anderson has been employed by StorageTek in various other
capacities since 1981.
Mr. Archibald was appointed Vice President and General Manager, Enterprise
Business Group in February 2000. From July 1998 until this appointment, he
served as Vice President and General Manager, Enterprise Disk Business Group.
Prior to joining StorageTek, Mr. Archibald served in various management
positions at Hewlett-Packard Company, a computer and imaging products company.
Most recently, from 1993 to 1998, Mr. Archibald served as Information Storage
Group, Worldwide Marketing Manager at Hewlett-Packard.
Mr. Arnold was appointed Vice President and Corporate Controller in April 1997.
From November 1995 to April 1997, he served as Director of Worldwide
Consolidation and Reporting. Mr. Arnold served as Manager of External Reporting
from April 1991 to November 1994. Mr. Arnold has been employed by StorageTek in
various other capacities since 1989.
Ms. Bailey joined StorageTek in August 1999 as Corporate Vice President,
U.S./Canada Sales and Service and Global Channels. From 1997 until August 1999,
she was President of EnPoint Technologies, a value-added reseller/systems
integrator. From 1996 until 1997, Ms. Bailey served as Senior Vice President,
Sales, Marketing and Services of Intelligent Electronics, a distributor of
computer hardware, software, peripherals and services. From 1982 until 1986, Ms.
Bailey worked at IBM in a number of sales, marketing and management positions.
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Mr. Dumas was appointed Corporate Vice President, General Counsel and Secretary
in September 1999. He joined the Company in August 1998 as Corporate Vice
President and General Counsel. From April 1995 to August 1998, Mr. Dumas served
as Vice President and General Counsel of Symbios, Inc. He served as Group
Counsel-Work Stations Division at Silicon Graphics, Inc., a computer products
company, from 1992 to 1994.
Mr. Francis was appointed Vice President, Corporate Strategy in February 2000.
From February 1997 until February 2000, he was Vice President and General
Manger, Enterprise Nearline Business Group. From September 1993 to February
1997, Mr. Francis served as Vice President of the Nearline Business. Mr. Francis
has been employed by StorageTek since 1976 in various other capacities.
Mr. Kocol was appointed Corporate Vice President and Chief Financial Officer in
December 1998. Prior to this appointment, from 1996 to 1998, he served as Vice
President of Financial Planning and Operations. In 1991, Mr. Kocol joined the
Company's financial group as Director of Financial Operations and was
subsequently promoted to Director of Worldwide Field Operations Finance and
Administration. Mr. Kocol has been employed by StorageTek in various other
capacities since 1980.
Karen Niparko was appointed Corporate Vice President and Chief Administrative
Officer in July 1999. From April, 1997 to January, 1999, she was Vice President,
Human Resources Development, Worldwide Field Operations. Since August, 1999, Ms.
Niparko has also served as President of the StorageTek Foundation, a non-profit
organization created to award the Company's charitable contributions to
community organizations. Prior to joining StorageTek, Ms. Niparko was Vice
President, Operations at Auto-Trol Technology Corporation, a high-end graphics
software and information management company located in Denver, from 1993 until
1997.
Mr. Reiczyk was elected Corporate Vice President and General Manager, Solutions
Business Group in February 1999 and served as the Company's Vice President and
General Manager, Solutions Business Group from September 1997 to January 1999.
Prior to joining StorageTek, Mr. Reiczyk served as Senior Vice President and
Corporate Quality Officer at Global One, from March 1997 to September 1997. From
1994 to February 1997, he served as Vice President, Value Added Services, at
AT&T Europe, a unit of AT&T, a telecommunications company.
Mr. Weiss has served as Chairman of the Board, President and Chief Executive
Officer since May 1996. He served as Chief Operating Officer of the Company from
March 1995 to May 1996; Executive Vice President of Systems Development from
January 1993 to March 1995; 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. Mr. Weiss joined StorageTek in
February 1991 as Staff Vice President. In February 2000, StorageTek announced
that Mr. Weiss would relinquish his positions as Chairman, Director and Chief
Executive Officer, but would remain in office until his successor has been
elected.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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 during each fiscal quarter
of 1999 and 1998. The amounts shown reflect adjustments for the 2-for-1 stock
split effected in the form of a 100% stock dividend that was completed on June
26, 1998. On December 31, 1999, there were 11,332 record holders of common stock
of StorageTek.
1999 High Low
- --------------------------------------------------------------------------------
First Quarter $40.000 $25.750
Second Quarter 29.188 17.250
Third Quarter 26.000 18.875
Fourth Quarter 21.000 14.625
1998 High Low
- --------------------------------------------------------------------------------
First Quarter $37.750 $28.657
Second Quarter 43.938 37.719
Third Quarter 50.188 21.750
Fourth Quarter 39.625 21.625
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.
The Company's credit facilities contain provisions restricting the payment of
cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1997 through
1999 (except for the 1997 Balance Sheet Data) has been derived from the
consolidated financial statements appearing elsewhere herein, including the
Consolidated Balance Sheet as of December 31, 1999, and December 25, 1998, and
the related Consolidated Statement of Operations for each of the three years in
the period ended December 31, 1999, and notes thereto. The data, insofar as it
relates to the Balance Sheet Data as of December 26, 1997, December 27, 1996,
and December 29, 1995, and the Statement of Operations Data for the fiscal years
1996 and 1995, has been derived from the historical financial statements of the
Company for such periods.
The following table data (in thousands of dollars, except per share amounts)
should be read in conjunction with the consolidated financial statements and
notes thereto.
YEAR ENDED DECEMBER
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $2,368,231 $2,258,222 $2,144,656 $2,039,550 $1,929,485
Cost of revenue 1,425,247 1,217,812 1,171,530 1,192,777 1,217,622
---------- ---------- ---------- ---------- ----------
Gross profit 942,984 1,040,410 973,126 846,773 711,863
Research and product development
costs 277,770 234,677 209,526 176,422 187,275
Selling, general, administrative and
other income and expense, net 615,616 492,928 472,839 444,870 445,889
Litigation, restructuring and other
charges 146,834(b) 212,207(c)
---------- ---------- ---------- ---------- ----------
Operating profit (loss) (97,236) 312,805 290,761 225,481 (133,508)
Interest income (expense), net (19,214) 6,943 25,356 1,211 8,978
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item (116,450) 319,748 316,117 226,692 (124,530)
Benefit (provision) for income taxes 41,900 (121,500) (84,300) (55,900) (17,800)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item (74,550) 198,248 231,817 170,792 (142,330)
Extraordinary gain, net of taxes 9,535
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (74,550) $ 198,248 $ 231,817 $ 180,327 $ (142,330)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per common
share: (a)
Income (loss) before extraordinary
item $ (0.75) $ 1.91 $ 1.93 $ 1.52 $ (1.46)
Net income (loss) (0.75) 1.91 1.93 1.61 (1.46)
Diluted earnings (loss) per common
share: (a)
Income (loss) before extraordinary
item $ (0.75) $ 1.86 $ 1.89 $ 1.43 $ (1.46)
Net income (loss) (0.75) 1.86 1.89 1.50 (1.46)
BALANCE SHEET DATA
Working capital $ 440,763 $ 538,331 $ 661,206 $ 724,171 $ 425,351
Total assets 1,735,475 1,842,944 1,740,017 1,884,276 1,888,629
Total debt 329,048 295,655 22,391 155,257 449,222
Stockholders' equity 919,199 999,576 1,112,503 1,180,983 962,833
- ---------------
(a) Earnings per share data has been restated to reflect the effect of the
2-for-1 stock split in the form of a stock dividend on June 26, 1998.
(b) In 1999, the Company recognized litigation expense of $103,582,000 and
restructuring expense of $43,252,000.
(c) In 1995, the Company recognized restructuring expense of $167,175,000,
litigation settlement expense of $30,680,000, and merger and consolidation
expense of $14,352,000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL ASSUMPTIONS, ANTICIPATIONS, EXPECTATIONS AND FORECASTS CONTAINED IN THE
FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCT AND BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND UNCERTAINTIES.
SOME OF THESE RISKS ARE DETAILED BELOW IN "FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN REPRESENT A GOOD-FAITH ASSESSMENT OF THE COMPANY'S FUTURE
PERFORMANCE FOR WHICH MANAGEMENT BELIEVES THERE IS A REASONABLE BASIS. THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION ON FORECASTS CONTAINED
HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.
HISTORICAL STATEMENTS MADE HEREIN ARE ACCURATE ONLY AS OF THE DATE OF FILING
THIS FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION AND MAY BE RELIED
UPON ONLY AS OF THAT DATE.
GENERAL
- -----------
The Company reported a net loss for the year ended December 31, 1999, of $74.6
million on revenue of $2.37 billion, compared to net income for the year ended
December 25, 1998, of $198.2 million on revenue of $2.26 billion and net income
for the year ended December 26, 1997, of $231.8 million on revenue of $2.14
billion. The Company's reported results for 1999 include one-time pre-tax
litigation expenses of $103.6 million, restructuring expenses of $43.3 million,
and other related restructuring expenses of $12.5 million. Excluding these
one-time expenses, net of tax, the Company reported net income of $27.4 million
during 1999.
Revenue increased 5% in 1999, compared to 1998, due to increases in revenue from
storage services and storage management software. Revenue from storage products
decreased in 1999, compared to 1998. Gross profit margins decreased to 40% in
1999 compared to 46% in 1998, due to decreased profit margins in all of the
Company's business segments.
Revenue increased 5% in 1998, compared to 1997, primarily due to increases in
revenue from storage services and storage management software. Gross profit
margins increased to 46% in 1998, compared to 45% in 1997, primarily due to
increased sales of higher-margin storage management software. The increased
margins from storage management software were partially offset by decreased
margins from storage services.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products,
software and services. This evaluation process results in a variable sales
cycle, and makes it difficult to predict if or when revenue will be earned.
Further, gross margins may be adversely impacted in an effort to complete the
sales cycle. Revenue and operating profits during 1999 fell significantly short
of the Company's expectations due principally to shortfalls in revenue and gross
margins in North America and Europe. While revenue in North America and Europe
increased in 1999 compared to 1998, gross margins declined in terms of both
gross margin dollars and as a percentage of revenue. The Company believes a
portion of this shortfall was due to some customers delaying purchasing
decisions in anticipation of possible issues associated with the year 2000,
particularly with respect to tape products and Virtual Storage Manager(TM)(VSM)
targeted for the mainframe market. Delays in the introduction and market
acceptance of these new products also impacted the Company's financial results
during the first half of 1999.
The Company's financial results may continue to be adversely impacted by its
variable sales cycle, particularly in the first half of 2000, as it implements
changes to the sales model in the United States and Canada. Future financial
results are also dependent upon the Company's ability to manage its costs and
operating expenses in line with revenue; the timely development, manufacture and
introduction of new products, software and services; successfully managing the
development of
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new direct and indirect sales channels; the implementation of its storage area
network (SAN) strategy; and the execution of its ongoing restructuring
activities. For the discussion of these and other risk factors, see "Factors
That May Affect Future Results," below.
In April 1999, the Company announced plans to restructure its business. In
October 1999, the Company announced additional restructuring plans. These
restructuring activities are intended to return the Company to profitability. As
the Company's restructuring activities are on-going, the amount and timing of
restructuring expenses which will be incurred during 2000 cannot be clearly
determined at this time, however, these restructuring expenses are expected to
materially affect the Company's reported financial results during 2000. The
Company's sales revenue in the first half of 2000 may be adversely effected by
disruptions to its sales organizations and customers associated with its
restructuring activities. The Company estimates annual savings of approximately
$40 million were realized in connection with the April 1999 restructuring. The
Company expects the activities associated with the October 1999 restructuring to
be completed by the end of the second quarter of 2000 and the October 1999
restructuring is expected to yield annualized savings of approximately $150
million. There can be no assurance that the restructuring activities described
above will be successful or sufficient to allow the Company to realize the
expected annualized savings or return the Company to profitability. See
"Restructuring," below for further discussion of the restructuring activities.
On October 15, 1999, the Company announced that it had engaged an investment
banking firm to assist the Company in its on-going analysis, evaluation and
consideration of various strategic alternatives. These strategic alternatives
could have included financial restructurings, acquisitions, divestitures,
spin-offs, joint ventures, and business combinations including sales, mergers,
or partnerships. On February 3, 2000, the Company announced that the board of
directors had concluded that the Company was most likely to maximize shareholder
value by continuing to operate as an independent entity and by executing the
current restructuring activities.
The Company's cash balance decreased $16.6 million in 1999 due primarily to
litigation payments of $85.8 million and restructuring payments of $34.4
million. See Notes 7 and 9 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of litigation and restructuring, respectively. Excluding the
effects of these one-time payments, the Company's operating activities provided
cash of $245.6 million in 1999, compared to cash of $88.1 million generated from
operations in 1998. The increase in cash generated from operations in 1999,
compared to 1998, was primarily the result of progress in the Company's efforts
to more effectively manage working capital. See "Liquidity and Capital
Resources -- Working Capital" for additional discussion of operating cash flows.
Cash used in investing activities of $102.4 million was primarily due to
property, plant and equipment purchases of $100.8 million. Cash used in
financing activities of $2.1 million was mainly the result of cash payments of
$35.2 million associated with repurchases of common stock largely offset by cash
receipts of $25.4 million from employee stock plans.
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The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment.
Year Ended December
---------------------------------------
1999 1998 1997
---------------------------------------
Storage products:
Tape products 44.3% 43.1% 45.0%
Disk products 13.9 20.6 20.6
Network products 3.7 3.6 4.1
----- ----- -----
Total storage products 61.9 67.3 69.7
Storage services 30.3 28.1 27.2
Storage management software 7.8 4.6 3.1
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 60.2 53.9 54.6
----- ----- -----
Gross profit 39.8 46.1 45.4
Research and product development costs 11.7 10.4 9.8
Selling, general, administrative and other income
and expense, net 26.0 21.8 22.0
Litigation expense 4.4
Restructuring expense 1.8
----- ----- -----
Operating profit (loss) (4.1) 13.9 13.6
Interest income (expense), net (0.8) 0.3 1.1
----- ----- -----
Income (loss) before income taxes (4.9) 14.2 14.7
Benefit (provision) for income taxes 1.8 (5.4) (3.9)
----- ----- -----
Net income (loss) (3.1)% 8.8% 10.8%
----- ----- -----
----- ----- -----
REVENUE
- -----------
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk, and network
products for the mainframe and client-server marketplaces. Revenue generated
from storage products decreased 4% in 1999, compared to 1998, and increased 2%
in 1998, compared to 1997.
TAPE PRODUCTS
Tape product revenue increased 8% in 1999, compared to 1998, primarily due to
increased sales of the 9840 high-performance tape drive, increased sales of the
TimberWolf(TM) family of automated tape products designed for the client-server
market, and sale of 9840 tape media. Sales of the Company's client-server tape
automation products grew 75% during 1999 with the fourth quarter of 1999
representing the first quarter in which sales of client-server tape products
exceeded sales of mainframe tape products. Revenue from TimberLine(R) 9490, a
36-track cartridge subsystem; PowderHorn(R) 9310, an automated cartridge system
library; and other earlier generation mainframe tape products declined during
1999, compared to 1998, reflecting both lower selling prices and decreases in
the number of units sold. These revenue declines reflect the continued shift in
the marketplace from mainframe to client-server tape products. The Company
believes that the sales of tape products designed for the mainframe market have
also been adversely impacted in 1999 due to customers delaying testing and
purchasing decisions in anticipation of the year 2000.
Tape product revenue increased 1% in 1998, compared to 1997. Revenue from
TimberWolf and PowderHorn 9310 increased in 1998, compared to 1997, but was
offset by decreased revenue from TimberLine 9490 and other earlier generation
tape products. The decrease in TimberLine revenue was primarily the result of an
increase in pricing pressure and delays during the second half of 1998
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in customer purchase decisions associated with the evaluation of the Company's
9840 tape drive. The 9840 tape drive became generally available and provided
initial revenue contribution in December 1998.
DISK PRODUCTS
Disk product revenue decreased 29% in 1999, compared to 1998, due to a decrease
in OEM sales of disk storage products designed for the mainframe market to
International Business Machines Corporation (IBM). The Company does not
anticipate any significant sales revenue from IBM in 2000. The decline in sales
of disk products to IBM were partially offset by an increase in direct sales of
the 9393 Shared Virtual Array (SVA). Revenue from the OPENstorage(TM)Disk
products increased in 1999, compared to 1998. Sales of both the 9393 SVA and
OPENstorage Disk products did not meet the Company's expectations in 1999 due
primarily to issues associated with establishing an effective direct sales
channel for these products. In 1999, the Company announced plans to sell Sun
Microsystems, Inc.'s open enterprise disk products under a worldwide OEM sales
and marketing agreement; however, these new products are currently not
available. In February 2000, the Company announced the availability of the 9500
SVA, the next generation of SVA disk products. There can be no assurance that
the Company will not continue to experience decreased sales of disk products as
a result of continuing issues associated with sales channels or a lack of market
acceptance for its disk products.
Disk product revenue increased 5% in 1998, compared to 1997, primarily due to
increased revenue from the OPENstorage Disk subsystem. A significant portion of
the Company's total revenue in 1998 was derived from sales of disk products to
IBM. While unit sales of disk storage products for the mainframe market
increased in 1998 compared to 1997, revenue remained unchanged due to price
decreases provided for under the terms of an OEM agreement with IBM.
NETWORK PRODUCTS
Network product revenue increased 5% in 1999, compared to 1998, primarily due to
increased sales of network products designed for the SAN market. The increase in
sales of SAN network products during 1999 was offset by decreased revenue from
the earlier generation connectivity products. Network product revenue decreased
5% in 1998, compared to 1997, primarily due to reduced revenue from the earlier
generation connectivity products.
The Company's storage products revenue may be adversely impacted by its variable
sales cycles and by disruptions to its sales organization and customers
associated with restructuring activities currently underway, particularly in the
first half of 2000. Future revenue growth in the Company's storage products
segment is significantly dependent upon the continued demand for its
client-server tape automation products, successfully replacing OEM sales of disk
products to IBM with direct sales of disk products, and gaining greater market
acceptance of the Company's SAN network products. There can be no assurances
that the Company will be successful in these endeavors. See "Factors That May
Affect Future Results -- New Products, Markets and Distribution Channels;
Emerging Markets," for a discussion of the risks associated with the
introduction and manufacture of new products and distribution channels.
STORAGE SERVICES
Storage services includes revenue associated with the maintenance of the
Company's and third-party storage products, as well as integration service
revenue associated with new applications, storage consulting and managed storage
services. Storage services revenue increased 13% in 1999, compared to 1998, due
to growth in storage consulting and integration services. Revenue associated
with maintenance services decreased in 1999, compared to 1998, but still
represented approximately 82% of total storage services revenue in 1999. The
decrease in maintenance revenue during 1999 was partially due to the shift in
the Company's customer base from the mainframe to the
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client-server marketplace, as well as the increasing reliance on indirect
distribution channels for its products, as some indirect distributors provide
service for the products they sell. Storage services revenue increased 9% in
1998, compared to 1997, primarily due to an increase in storage products under
maintenance contracts and growth in the multi-vendor support services area.
In connection with the restructuring activities announced in October 1999, the
Company anticipates decreased revenue from its storage services segment in 2000
as it reduces its investments in, or eliminates, certain lower-margin storage
consulting, integration and managed storage service offerings. There can be no
assurance that maintenance revenue will not also continue to decline in 2000 as
the customer base continues to shift to the client-server marketplace and the
Company places increased emphasis on indirect distribution channels. Maintenance
revenue may also be adversely affected in future periods to the extent older
products currently under maintenance contracts are replaced by newer products
with extended warranties.
STORAGE MANAGEMENT SOFTWARE
Storage management software revenue increased 78% in 1999, compared to 1998,
primarily due to increased revenue from VSM. VSM is a data storage software
solution designed to improve performance, cartridge utilization, and overall
storage management. While revenue from VSM increased during 1999, sales of VSM
did not meet the Company's expectations. The Company believes sales of VSM
during 1999 were adversely impacted due to customers delaying purchase decisions
in anticipation of the year 2000. Revenues from VSM during the first half of
1999 were also adversely impacted by delays in the introduction and market
acceptance of VSM. Revenue from SnapShot, which is designed for use with the
Company's SVA disk products, decreased in 1999, compared to 1998, due to a
decrease in OEM sales to IBM.
Storage management software revenue increased 58% in 1998, compared to 1997,
primarily due to increased revenue from SnapShot and VSM. The increase in
SnapShot revenue in 1998 compared to 1997 was primarily due to increased OEM
sales to IBM.
Future revenue growth from storage management software is dependent upon
increasing market acceptance for VSM. Because VSM is a complex system, it is
difficult to predict the timing and extent that VSM will gain acceptance. There
can be no assurances that the Company will be successful in increasing market
acceptance for VSM. A significant portion of the Company's storage management
software revenue has been derived from sales of SnapShot to IBM. The Company
does not anticipate any sales of SnapShot to IBM in 2000. The Company has
recently introduced SnapShot capabilities for its 9500 SVA disk products
targeted for the client-server marketplace. Future revenue growth from Snapshot
is dependent upon market acceptance of the SnapShot software and the related SVA
disk products, and successfully addressing issues associated with direct sales
of its SVA products.
GROSS PROFIT
- ------------------
The following table sets forth the gross profit percentages for each segment
calculated as gross profit for the segment divided by revenue for the segment.
Year Ended December
----------------------------------------
1999 1998 1997
----------------------------------------
Total gross profit 39.8% 46.1% 45.4%
Storage products 40.5% 45.2% 44.8%
Storage services 30.8% 43.2% 45.5%
Storage management software 69.8% 75.9% 57.5%
Gross profit margins decreased to 40% in 1999, compared to 46% in 1998. The
gross profit margins decreased in all of the Company's business segments during
1999. Gross margins for the Company's products have been adversely affected by
efforts to shorten sales cycles; increased
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sales of 9840 tape cartridges and third-party products which have lower profit
margins; a decline in the selling prices for disk products and earlier
generation tape products; and unfavorable manufacturing variances associated
with excess manufacturing capacity. Gross margins associated with the services
segment have decreased principally as a result of increased revenue contribution
from lower-margin consulting, integration, and managed storage service
offerings. Storage service margins have also been adversely impacted by
increased pricing pressures associated with the maintenance of storage products
in the client-server market and increased maintenance costs associated with
certain tape products. Gross margins associated with software declined in 1999
as the mix of revenue contribution shifted from higher-margin SnapShot sales to
lower-margin VSM sales.
Gross profit margins increased to 46% in 1998, compared to 45% in 1997,
primarily due to the increased sales of higher-margin storage management
software and improved efficiencies associated with the manufacture of storage
products. This increase in gross profit was partially offset by reduced margins
associated with storage services. The decrease in storage service margins was
due primarily to increased pricing pressures associated with maintenance of
storage products in the client-server market and reduced margins associated with
the Company's consulting services.
The markets for the Company's products and services are subject to intense price
competition. The Company anticipates that price competition for its products and
services will continue to have a significant impact on the Company's gross
profit margins. The Company's ability to sustain or improve gross margins is
significantly dependent upon the timing of discontinuing the storage consulting
and integration service offerings, which have generated lower gross margins, the
timing of implementing pricing controls and gaining other operational
efficiencies in connection with the restructuring activities, and achieving cost
improvements associated with the sourcing of production materials. Storage
product and storage management software gross margins may be affected in future
periods by inventory reserves and writedowns resulting from rapid technological
changes or delays in gaining market acceptance for products.
RESEARCH AND PRODUCT DEVELOPMENT
- ----------------------------------------------------
Research and product development expenses increased 18% in 1999, compared to
1998. The Company received approximately $40 million less research and product
development funding from third-parties in 1999, compared to 1998. Excluding the
effects of the reduced third-party funding, research and product development
expense decreased as a percentage of revenue in 1999 as compared to 1998, due to
the elimination of several lower priority research and product development
programs in connection with the restructuring activities. See "Restructuring,"
below, for discussion of the restructuring activities.
Research and product development expenditures increased 12% in 1998, compared to
1997. The increased investment in new development activities during 1998 was
partially offset by the receipt of approximately $50 million of research and
product development funding from third-parties.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------------------------
Selling, general, administrative and other income and expense (SG&A) increased
25% in 1999, compared to 1998, primarily due to increased selling expenses. The
increase in selling expense reflects an increase in commission and bonus rates,
the addition of application sales specialists associated with storage services,
an increase in the Company's worldwide sales force, and an increase in marketing
expenditures. The Company has implemented significant changes to its field
organization and the bonus and commission plans for its United States field
organization in connection with the restructuring. These changes are intended to
improve sales productivity and reduce selling expenses as a percentage of
revenue. There can be no assurance that these changes
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will be effective or that the Company will not encounter disruptions which
adversely affect sales during the implementation of these changes.
SG&A increased 4% in 1998, compared to 1997, primarily as a result of spending
on internal business and financial information systems, selling expenses
associated with the Company's storage product sales, and spending on branding
initiatives. The increase was partially offset by reduced accruals for employee
bonus and profit-sharing payments in 1998, compared to 1997, as the Company did
not attain financial goals in 1998.
Gains and losses associated with foreign currency transactions and translation
adjustments, net of associated hedging results, are included in SG&A and
aggregated a net gain of $1.3 million for 1999, compared to a net loss of $0.4
million for 1998 and a net gain of $0.5 million in 1997. See "International
Operations" and "Market Risk Management/Foreign Currency Exchange Risk" for
further discussion of the foreign exchange risks associated with the Company's
international operations and the related foreign currency hedging activities.
LITIGATION
- --------------
Litigation expense recognized during 1999 consists of the following (in
thousands of dollars):
Odetics, Inc. settlement $ 97,794
ADEA/ERISA settlement 5,000
Other settlements 788
--------
$103,582
--------
--------
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100.0 million to Odetics for a fully paid up license
to the 151 Patent; $80.0 million of which was paid at the time of the settlement
and the remainder to be paid in equal annual installments of $10.0 million in
September 2000 and September 2001. The Company recognized a pre-tax expense of
$97.8 million to reflect the present value of the final settlement payments.
On December 15, 1999, at a preliminary fairness hearing, the Company and
plaintiffs, representing certain former employees of the Company, presented the
United States District Court for the District of Colorado (the Court) with a
proposed settlement agreement, which would result in the Company paying $5.0
million for the settlement of litigation alleging the Company violated the Age
Discrimination in Employment Act of 1967, as amended (ADEA) and the Employee
Retirement Income Security Act of 1974 (ERISA), between the period of April 13,
1993, and December 21, 1996. Final approval of this proposed settlement
agreement was received from the Court on March 8, 2000. The settlement agreement
states that it shall not be construed as an admission by the Company that it
violated any law. The Company funded the settlement with a $5.0 million payment
into an escrow account in December 1999. A pre-tax expense of $5.0 million was
recognized in connection with the proposed settlement during 1999.
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 concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2.4 billion. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court
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dismissed with prejudice all of Stuff's material claims against the Company. On
August 30, 1999, Stuff filed a notice of appeal with the Colorado Court of
Appeals seeking to overturn the decision of the District Court. The parties are
in the process of filing various appellate briefs and the Company anticipates
that the final briefs will be filed in April 2000. No oral argument date has
been set. The Company continues to believe that Stuff's claims are wholly
without merit and intends to defend vigorously any further actions arising from
this complaint.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
RESTRUCTURING
- -------------
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the April restructuring included a voluntary
reduction in headcount as well as the elimination of certain lower priority
research and product development projects. The headcount reductions were
targeted in the areas of research and product development, administration and
manufacturing.
On October 28, 1999, the Company's board of directors approved a broad
restructuring program intended to return the Company to profitability. Key
elements of the restructuring plan include:
- - an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
majority of the remaining reductions projected to be completed by the end of
the second quarter of 2000;
- - a reduction in investment in certain businesses, including consulting and
integration services and managed storage services;
- - a recommitment to the Company's core strengths of tape automation, virtual
storage and storage area networks (including related maintenance and
professional services);
- - modifications to the sales model for the United States and Canada intended to
improve productivity and increase account coverage and growth;
- - other organizational and operational changes intended to improve efficiency
and competitiveness.
The elements of the October restructuring included an involuntary reduction in
headcount, the elimination of a significant number of temporary employee
positions, and managing the replacement of terminating employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.
The following table summarizes the reserves in connection with 1999
restructuring activities (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
----------------------------------------------
Restructuring expense $ 32,719 $ 4,941 $ 5,592 $ 43,252
Cash payments (28,802) (5,592) (34,394)
Asset writedowns (4,941) (4,941)
-------- --------- --------- --------
Balances, December 31, 1999 $ 3,917 $ 0 $ 0 $ 3,917
-------- --------- --------- --------
-------- --------- --------- --------
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Employee severance expense of $32.7 million was recognized during 1999 in
connection with the April and October restructurings. This expense includes
$25.9 of separation charges related to approximately 680 employees who elected
voluntary severance in connection with the April restructuring; $6.2 million of
separation charges related to the fixed and determinable severance payments owed
to approximately 280 employees who were involuntarily terminated in connection
with the October restructuring; and $564,000 of employee outplacement costs. The
Company also eliminated approximately 270 temporary and contractor positions in
connection with the October restructuring for which there was no associated
restructuring charge. Substantially all of the $3.9 million of severance charges
incurred, but not paid, as of December 31, 1999, relate to severance payments
associated with the October restructuring and are expected to be paid within the
next three months.
Asset writedowns of $4.9 million, net of adjustments, were recognized during
1999 in connection with the April restructuring. Asset writedowns of $6.7
million were recognized during the second and third quarters of 1999 related to
engineering assets that were to be disposed of in connection with discontinued
research and development projects. An adjustment of $1.7 million was recognized
during the fourth quarter of 1999 as a reduction of restructuring expense to
reflect the redeployment of engineering assets to other research and development
projects and the salvage value of other engineering assets which was greater
than originally estimated.
Other exit costs of $5.6 million were recognized during 1999 principally related
to the termination of contractual future purchase obligations associated with
discontinuing certain product lines as part of the April restructuring.
The Company currently anticipates it will incur restructuring charges of
approximately $25 million to $30 million during the first half of 2000
associated with the elimination of between 500 and 600 positions. The majority
of these charges are expected to relate to cash payments to employees. Depending
on the outcome of the disposition of the Company's managed storage services
business, additional cash and non-cash restructuring charges may be incurred
during 2000.
The Company estimates annual savings of approximately $40 million were realized
in connection with the April 1999 restructuring. The Company anticipates annual
savings of approximately $150 million will result from the restructuring
activities initiated in October 1999. The majority of the restructuring
activities are not expected to be complete until the end of the second quarter
of 2000. Because the majority of the restructuring activities are not expected
to be completed until the second quarter, the Company anticipates it will incur
an operating loss during the first quarter of 2000 and that the anticipated
savings realized for the year 2000 will be slightly in excess of $100 million.
Based on the restructuring activities completed to date and the currently
planned restructuring activities, the Company does not anticipate any material
incremental operating expenses will be incurred on an on-going basis as a result
of the restructuring.
Restructuring activities which must be successfully completed in order to
achieve the anticipated savings include achieving targeted headcount reductions
associated with exiting certain consulting and service business activities and
the consolidation of internal business units and various engineering,
manufacturing, sourcing and logistics activities; restructuring the United
States and Canada sales and service organization in order to obtain operational
efficiencies; modifying the Company's bonus and commission plans to better align
the sales organization with driving operating profits and implementing operating
improvements which emphasize the efficient management of working capital.
In addition to targeted headcount reductions associated with the elimination of
permanent positions, the Company is also limiting the replacement of terminating
employees due to normal attrition and eliminating certain contractors, temporary
employees and other non-permanent positions. The number of future involuntary
terminations associated with the Company's managed storage services business and
the timing of these terminations is dependent upon efforts to find strategic
alternatives for this business.
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The complexity of the Company's restructuring activities, the uncertainties
associated with the targeted headcount reductions, and the rapidly changing
business environment in which the Company operates make it difficult to predict
the amount and timing of restructuring charges which will be incurred, and the
amount and timing of anticipated benefits which will be realized. The Company's
sales revenue in the first half of 2000 may be adversely effected by disruptions
to its sales organization and customers associated with its restructuring
activities.
The Company has restructured its business in the past in order to re-align its
business with its products and market strategies, or establish a more cost
efficient business structure. There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved operating results in future periods. It is possible that
additional changes in the Company's business or in its industry may necessitate
additional restructuring expense in the future. The necessity for additional
restructuring activities may result in expenses that adversely affect reported
results of operations in the period the restructuring plan is adopted, and
require incremental cash payments.
INTEREST INCOME AND EXPENSE
- -----------------------------------------
Interest expense increased $15.0 million in 1999, compared to 1998, due to
increased borrowings under the Company's credit facilities, as well as an
increase in the interest rates the Company borrowed under during 1999. Interest
income decreased $11.2 million in 1999, compared to 1998, primarily as a result
of a decrease in cash available for investment.
Interest expense increased $3.6 million in 1998, compared to 1997, due to
borrowings under the Company's unsecured credit facilities. Interest income
decreased $14.8 million in 1998, compared to 1997, primarily as a result of a
decrease in cash available for investment. See "Liquidity and Capital
Resources -- Available Financing Lines," for further discussion of the Company's
credit facilities.
INCOME TAXES
- -------------------
The Company's effective tax rate decreased from 38% in 1998 to 36% in 1999.
Statement of Financial Accounting Standards (SFAS) No. 109 requires that
deferred income tax assets be recognized to the extent realization of such
assets is more likely than not. Based on the currently available information,
management has determined that the Company will more likely than not realize
$165.5 million of deferred income tax assets as of December 31, 1999. The
Company's valuation allowance of approximately $14.9 million as of December 31,
1999, relates principally to net deductible temporary differences, tax credit
carryforwards and net operating loss carryforwards associated with the Company's
foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------
WORKING CAPITAL
The Company's cash balance decreased $16.6 million in 1999 due primarily to
litigation payments of $85.8 million and restructuring payments of $34.4
million. See Notes 7 and 9 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of litigation and restructuring, respectively. Excluding the
effects of these one-time payments, the Company's operating activities provided
cash of $245.6 million in 1999, compared to cash of $88.1 million generated from
operations in 1998. The increase in cash generated from operations in 1999,
compared to 1998, was primarily the result of progress in the Company's efforts
to more effectively manage working capital. Cash used in investing activities of
$102.4 million was primarily due to property, plant and equipment purchases of
$100.8 million. Cash used in financing activities of $2.1 million was mainly the
result of cash payments of $35.2 million associated with repurchases of common
stock largely offset by cash receipts of $25.4 million from employee stock
plans.
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28
The Company's cash and short-term investments balances decreased $101.6 million
in 1998 due primarily to cash payments of $359.4 million associated with the
Company's common stock repurchase programs and net investments in property,
plant and equipment of $116.9 million. These payments were partially funded by
net borrowings under the Company's credit facilities of $273.2 million, cash
generated from operating activities of $88.1 million, and a reduction in short-
term investments of $77.3 million. Cash generated from operating activities
decreased to $88.1 million in 1998, compared to $446.7 million in 1997,
primarily as a result of increased cash paid to suppliers and employees. The
increased cash paid to suppliers and employees was primarily a result of cash
paid for additional inventory on hand as of December 25, 1998, for new product
ramp-up, and cash payments in 1998 to reduce accrued liabilities outstanding as
of December 26, 1997. The accrued liabilities as of December 26, 1997, were
higher than as of December 25, 1998, primarily as a result of employee bonus and
profit sharing, and restructuring accruals.
AVAILABLE FINANCING LINES
Borrowings under credit facilities consists of the following (in thousands of
dollars):
December 31, December 25,
1999 1998
---------------------------
Primary Revolver $205,000 $195,000
Promissory notes denominated in foreign currencies 81,152 81,673
----------- -----------
$286,152 $276,673
----------- -----------
----------- -----------
The Company has a revolving credit facility (the Primary Revolver) which expires
in October 2001. The credit limit available under the Primary Revolver ($287.5
million as of December 31, 1999) is reduced by $12.5 million on the last day of
each calendar quarter. The terms of the Primary Revolver were amended in January
2000 to be secured by the Company's U.S. accounts receivable and U.S. inventory.
The interest rates under the Primary Revolver depend upon the repayment period
of the advance selected and the Company's Total Debt to Earnings before
Interest, Taxes, Depreciation and Amortization (EBITDA) ratio. The rate may
range from LIBOR plus 2.00% to 2.50% or the agent bank's base rate plus 0.00% to
0.50%. The weighted average interest rate on the advances as of December 31,
1999, was 7.88%. The Company had borrowings of $205 million and issued letters
of credit for approximately $50,000 under the Primary Revolver as of December
31, 1999. The remaining available credit under the Primary Revolver as of
December 31, 1999, was approximately $82.5 million. The Primary Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
In January 2000, the Company entered into a new $150 million revolving credit
facility (the Supplemental Revolver) which expires in January 2001. The
Supplemental Revolver is secured by the Company's U.S. accounts receivable and
U.S. inventory. The Supplemental Revolver replaced a $150 million revolving
credit facility which expired in January 2000 and for which no borrowings were
outstanding as of December 31, 1999. The interest rates under the Supplemental
Revolver depend upon the repayment period of the advance selected and the
Company's EBITDA ratio. The rate may range from LIBOR plus 2.00% to 2.50% or the
agent bank's base rate plus 0.00% to 0.50%. The Supplemental Revolver contains
certain financial and other covenants, including restrictions on the payment of
cash dividends on the Company's common stock.
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $140 million at any one time.
This financing agreement was amended in January 2000 to provide for the sale of
promissory notes in the principal amount of up to $120 million at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of December 31, 1999, the Company had promissory notes of $81.2 million
outstanding under this financing agreement and had committed to borrowings
between January
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2000 and January 2001 in the cumulative principal amount of approximately $339.5
million. The notes must be repaid only to the extent of future revenue.
Obligations under the agreement are not cancelable by the Company or the bank.
Gains and losses associated with changes in the underlying foreign currencies
are deferred during the commitment period and recognized as an adjustment to the
revenue supporting the note repayment at the time the bank purchases the
promissory notes. The promissory notes, together with accrued interest, are
payable in U.S. dollars within 40 days from the date of issuance. The weighted
average interest rate associated with the promissory notes outstanding as of
December 31, 1999, was 7.65%. Under the terms of the agreement, the Company is
required to comply with certain covenants and, under certain circumstances, may
be required to maintain a collateral account, including cash and qualifying
investments, in an amount up to the outstanding balance of the promissory notes.
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company may choose to fund these activities
through the issuance of additional equity or debt financing. The issuance of
equity or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that any additional long-term financing,
if required, can be completed on terms acceptable to the Company.
TOTAL DEBT-TO-TOTAL CAPITALIZATION
The Company's total debt-to-capitalization ratio increased from 23% as of
December 25, 1998, to 26% as of December 31, 1999, primarily due to a net
increase in borrowings of $9.5 million under the Company's credit facilities.
See "Working Capital," above, for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
- -------------------------------------
During 1999, 1998, and 1997, approximately 41%, 37%, and 34%, respectively, of
the Company's revenue was generated by its international operations. The Company
also sells products and software through domestic indirect distribution channels
that have end-user customers located outside the United States. The Company
expects that it will continue to generate a significant portion of its revenue
from international operations in the future. 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 United States dollar reduces the value of revenue and profits
generated by the Company's international operations. As a result, the Company's
operating and financial results can be materially affected by fluctuations in
foreign currency exchange rates. In an attempt to mitigate the impact of foreign
currency fluctuations, the Company employs a foreign currency hedging program.
See "Market Risk Management/Foreign Currency Exchange Risk," below.
The Company's international business may be affected by changes in demand
resulting from global and localized economic, business and political conditions.
The Company is subject to the risks of conducting business outside the United
States, including 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. There can be no
assurances these factors will not have a material adverse effect on the
Company's business or financial results in the future.
MARKET RISK MANAGEMENT/FOREIGN CURRENCY EXCHANGE RISK
- --------------------------------------------------------------------------------
The market risk inherent in the Company's financial instruments relates
primarily to changes in foreign currency exchange rates. To mitigate the impact
of foreign currency fluctuations, the Company seeks opportunities to reduce
exposures through financing activities. Foreign currency options and forward
exchange contracts are also used to reduce foreign currency exposures. All
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foreign currency options and forward exchange contracts are authorized and
executed pursuant to the Company's policies. Foreign currency options and
forward exchange contracts that are designated as and qualify as hedging
transactions are subject to hedge accounting treatment. The Company does not
hold or issue derivatives or any other financial instruments for trading
purposes. See Note 13 to the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of the Company's financial instruments and off-balance-sheet
risks.
The Company has a financing agreement with a bank that provides for commitments
by the bank to purchase promissory notes denominated in a number of foreign
currencies. Gains and losses associated with changes in the underlying foreign
currencies are deferred during the commitment period and recognized as an
adjustment to the revenue supporting the note repayment at the time the bank
purchases the promissory notes. See "Liquidity and Capital
Resources -- Available Financing Lines" for a description of the financing
agreement.
The Company periodically 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 associated with the options are
deferred and recognized as an adjustment to the underlying revenue transactions.
To the extent an option is terminated or ceases to be effective as a hedge, any
gains and losses as of that date are deferred and recognized as an adjustment to
the underlying revenue transaction.
The Company also utilizes forward exchange contracts, generally with maturities
of less than two months, to hedge its exposure to exchange-rate fluctuations
associated with monetary assets and liabilities held in foreign currencies and
anticipated revenue from its international operations. The carrying amounts of
these forward exchange contracts equal their fair values as the contracts are
adjusted at each balance sheet date for changes in exchange rates. Gains and
losses on the forward exchange contracts used to hedge monetary assets and
liabilities are recognized as incurred within SG&A on the Consolidated Statement
of Operations as adjustments to the foreign exchange gains and losses on the
translation of net monetary assets. Gains and losses on the forward contracts
used to hedge anticipated revenue are recognized as incurred as adjustments to
revenue.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of
December 31, 1999, and as of December 25, 1998, would result in a hypothetical
loss of approximately $54.9 million and $59.2 million, respectively. The
decrease in the hypothetical loss for 1999 is primarily due to a decrease in
outstanding foreign currency options. These hypothetical losses do not take into
consideration the Company's underlying international operations. The Company
anticipates that any hypothetical loss associated with the Company's foreign
currency exchange rate sensitive instruments would be offset by gains associated
with its underlying international operations.
The Company had outstanding borrowings under its Primary Revolver as of December
31, 1999. The interest rate on these borrowings is dependent on the LIBOR which
is sensitive to interest rate changes. A hypothetical 10% adverse movement in
the LIBOR applied to the borrowings would not have a material adverse effect on
the Company's results of operations, cash flows, or financial position in 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
- -----------------------------------------------------------
NEW PRODUCTS, SERVICES AND SOFTWARE; EMERGING MARKETS
The Company's results of operations and competitive strength depend upon its
ability to successfully develop, manufacture and market innovative new products,
services, and software. Short product life cycles are inherent in the
high-technology market. The Company must devote significant resources to
research and product development projects and effectively manage the risks
inherent in new product transitions. Developing new technology, products,
services and
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software is complex and involves uncertainties. Delays in product development,
manufacturing, or in customer evaluation and purchasing decisions may make
product transitions difficult. The manufacture of new products involves
integrating complex designs and processes, collaborating with sole source
suppliers for key components, and increasing manufacturing capacities to
accommodate demand. A design flaw, the failure to obtain sufficient quantities
of key components, or manufacturing constraints could adversely affect the
Company's operating and financial results. The Company has experienced product
development delays in the past that adversely affected the Company's financial
results and competitive position. There can be no assurances that the Company
will be able to manage successfully the development and introduction of new
products, services, and software in the future.
The Company's future financial results are significantly dependent upon
successfully competing in the rapidly growing emerging client-server and SANs
markets and replacing its earlier generation products in the mainframe
environment with new technology. The Company currently is making significant
investments in developing new products and software for these markets,
particularly in products directed towards the internet and e-commerce
businesses. There can be no assurances that the Company will be successful in
these activities. The SANs market is a new market and is rapidly evolving. The
Company's operating and financial results may be adversely impacted in the event
the SANs market develops slower than expected or the Company's products fail to
gain acceptance in this market. The Company's traditional maintenance revenue
base may be adversely impacted as a result of the shift from mainframe to the
client-server marketplace.
COMPETITION
The markets for the Company's products, software and services are intensely
competitive and are subject to continuous, rapid technological change, frequent
product performance improvements, short product life cycles, and aggressive
pricing. The Company believes that its ability to remain competitive involves
factors such as price and cost of the Company's and its competitors' product
offerings, the timing and success of new products and offerings, new product
introductions by competitors, and the ability to establish more effective
distribution channels. This competitive environment gives rise to aggressive
pricing strategies and puts pressure on gross profit margins. The Company's
competitors include, among others, Compaq Computer Corporation, EMC Corporation,
Hewlett-Packard Company, Hitachi Ltd., IBM, Quantum Corporation, and Sun
Microsystems, Inc. A number of the Company's competitors have significantly
greater name recognition and financial resources than the Company. In the highly
competitive client-server market, a number of the Company's competitors are able
to offer customers a bundled server and storage product, which may provide them
with a competitive advantage. The Company expects to address these competitive
issues, in part, through its SAN strategy.
From time-to-time, two or more of the Company's competitors may form business
alliances that compete with the Company. For example, in the first quarter of
1999, IBM and EMC Corporation announced that they have entered into a strategic
business and technology alliance. In addition, during the third quarter of 1999,
EMC Corporation acquired Data General, the supplier of the Company's OPENstorage
Disk products. The alliance of two of the Company's major competitors could
adversely affect the Company's ability to compete. A number of the Company's
competitors have formed alliances with the stated objective of developing
interoperable SAN solutions. In the storage management software market, the
Company competes with vendors with which it has established relationships,
including Legato Systems, Inc. and VERITAS Software Corporation. The Company
also anticipates that it will continue to establish distribution alliances with
other equipment manufacturers, software vendors and service providers to address
competitive factors. There can be no assurances that the Company will be able to
compete successfully against other companies in these markets.
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SIGNIFICANT PERSONNEL CHANGES
During 1999, the Company has experienced significant changes in its management
team, including the hiring, resignation and retirement of members of its
executive sales and marketing management. The Company announced in February 2000
that David E. Weiss, the Company's Chairman of the Board of Directors, President
and Chief Executive Officer, would resign from the Company once the Board of
Directors located a successor. The search for a successor to Mr. Weiss is
currently underway and the Company is unable to predict when a successor will be
elected. In February 2000, the Company also announced significant changes to its
operating management, including the planned departure of Victor Perez, the
Company's Chief Operating Officer, at the end of the first quarter of 2000.
Further, the Company may experience a delay between the time the management team
is formed and the time the team becomes fully productive.
The Company has also experienced changes in the remainder of its employee base
during 1999 and early 2000 as a result of the voluntary and involuntary
severance programs implemented in connection with its restructuring activities,
as well as increased levels of employee attrition. The future success of the
Company depends in large part on its ability to attract, retain and motivate
highly skilled employees. The Company faces significant competition for
individuals with the skills required to deliver the products and services
offered to its customers. An inability to successfully deliver products and
services required by its customers, or an inability to implement the
restructuring activities while the Company completes the significant personnel
changes currently underway, would have an adverse effect on future operating
results.
CHANGES IN SALES MODEL FOR THE UNITED STATES AND CANADA
The Company historically has emphasized the use of its direct sales force in the
United States and Canada, complemented by indirect distribution channels, such
as OEMs, value-added resellers and value-added distributors. In connection with
its current restructuring activities, the Company is implementing changes to its
sales model for the United States and Canada that the Company expects will
improve market penetration, increase sales profitability, reduce marketing
expense, and expand the use of the indirect sales channel. This new sales model
is intended to provide better coverage for new and existing end user customers,
as well as enhancing reseller, distributor and OEM partnerships. The Company is
currently reorganizing its field sales organization with the objective of better
serving Fortune 500 customers with enterprise-level product and service
requirements. A new sales organization is also being formed to address the needs
of small and medium-sized customers with particular emphasis on internet and
e-commerce businesses. There is no assurance that the Company will not encounter
short term disruptions to its sales as it implements this new sales model or
that the new emphasis on indirect sales channels will result in increased sales
or profitability over the long-term. The Company's operating and financial
results may be adversely affected by reduced margins on sales typically
experienced in indirect sales channels.
DECLINE IN MAINFRAME REVENUE; VARIABLE SALES CYCLE
The Company historically has generated a significant portion of its revenue and
operating profits from the mainframe market. The Company's revenue from the
mainframe market declined during 1999, primarily due to the transition of
customers' purchase patterns to the client-server environment, the decline in
disk product and software sales to IBM, and significant price competition. In
addition, the Company believes its revenue has been adversely impacted in 1999
as some customers have delayed testing and purchasing decisions in anticipation
of the year 2000, particularly with respect to tape products and software
targeted for the mainframe market. Because of the multiple dynamics within the
mainframe marketplace, it is difficult to predict future demand for the
Company's mainframe products. The demand for the Company's products,
particularly in the mainframe market, will be adversely affected to the extent
these patterns continue.
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Many of the Company's customers undertake significant procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products,
software and services. This evaluation process results in a variable sales
cycle, and makes it difficult to predict if or when revenue will be earned.
ABILITY TO DEVELOP AND PROTECT INTELLECTUAL PROPERTY RIGHTS
The Company relies heavily upon its ability to develop new intellectual property
rights that do not infringe upon the rights of others in order to remain
competitive and develop and manufacture products that are competitive in terms
of technology and cost. There is no assurance that the Company will continue to
be able to develop such new intellectual property.
The Company relies upon a combination of United States patent, copyright,
trademark and trade secret laws to protect its intellectual property rights.
With respect to certain of the Company's international operations, the Company
does file patent applications with foreign government. However, many foreign
countries do not have as well-developed laws as the United States in protecting
intellectual property. The Company enters into confidentiality agreements
relating to its intellectual property with its employees and consultants. In
addition, the Company includes confidentiality provisions in license and
non-exclusive sales agreements with its indirect distributors and its customers.
Despite all of the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy or otherwise obtain or use the
Company's intellectual property. Monitoring the unauthorized use of the
Company's intellectual property rights is difficult, particularly in foreign
countries. There is no assurance that the Company will be able to protect its
intellectual property rights, particularly in foreign countries.
SOLE SOURCE SUPPLIERS
The Company generally uses standard parts and components for its products and
believes that, in most cases, there are a number of alternative, competent
vendors for most of those parts and components. Many non-standard parts are
obtained from a single source or a limited group of suppliers; however, there
are other vendors who could produce these in satisfactory quantities after a
period of pre-qualification and product ramping. Certain key components and
products are purchased from single source suppliers that the Company believes
are currently the only manufacturers of the particular components that meet the
Company's qualification requirements and other specifications or for which
alternative sources of supply are not readily available. Imation Corporation is
a single source supplier for the 9840 tape cartridges and the Company is
dependent on Imation to economically produce large volumes of high-quality tape
cartridges for the 9840 product at a price acceptable to the Company and its
customers. Sumitomo is a single source supplier for a key component used in
certain tape products. IBM is a single source supplier for the disk drives used
in the Company's SVA disk product.
Certain suppliers have experienced occasional technical, financial or other
problems in the past that have delayed deliveries, but 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 the inability to
secure comparable components in a timely manner, could result in a shortage of
key components, longer lead times, and reduced control over production and
delivery schedules. These factors could have a material adverse effect on
revenue and operating results. In the event a sole source supplier was unable or
unwilling to continue to supply components, the Company would 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 production requirements on a timely basis
or at a price acceptable to the Company.
The Company is dependent upon a sole sub contractor, Herald Datanetics LTD.
(HDL), to manufacture a key component used in certain tape products. HDL is
located in the People's
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Republic of China (PRC). To date, the Company has not experienced any material
problems with HDL, however, HDL is subject to additional risks beyond those
associated with other sole suppliers, including the lack of a well-established
court system or acceptance of the rule of law in the PRC, the degree to which
the PRC permits economic reform policies to continue, the political relationship
between the PRC and the United States and broader political and economic
factors, such as whether the PRC is admitted to the World Trade Organization.
MANUFACTURING
A significant portion of the Company's products are manufactured in facilities
located in Puerto Rico. The Company's ability to manufacture product may be
impacted by weather related risks beyond the control of the Company. If the
Puerto Rico manufacturing facility were impacted by such an event, the Company
may not have an alternative source to meet the demand for its products without
substantial delays and disruption to its operations. The Company carries
interruption insurance to mitigate some of the risk. There is no assurance that
the Company could obtain sufficient alternate manufacturing sources or repair
the facilities in a timely manner to satisfy the demand for its products.
Failure to fulfill manufacture demands could adversely affect the Company's
operating and financial results in the future.
INFORMATION SYSTEMS AND BUSINESS PROCESS TRANSITIONS
The Company replaced many of its internal information systems outside the United
States during 1999 with new, integrated information systems. The Company also
introduced significant new business processes in conjunction with these new
systems, particularly within its European operations. The implementation of
these information systems and business processes has been complex and has
affected numerous operational, transactional, financial, and reporting
processes. The establishment of processes and training associated with these
information systems are continuing and involve a number of risks and
uncertainties. The Company must successfully manage the business process changes
and employee training programs. There can be no assurance that the transition to
the new information systems and business processes will not cause delays or
interruptions in the Company's business. Failure to successfully manage the
transition could adversely affect the Company's operating and financial results
in the future.
VOLATILITY OF STOCK PRICE/EARNINGS FLUCTUATIONS
The Company's common stock is subject to significant fluctuations in trading
price. The Company's stock price may be impacted if the Company's revenue or
earnings fail to meet the expectations of the investment community. The
Company's stock price may also be affected by broad economic and market trends,
which are unrelated to the Company's performance.
The Company's financial and operating results may fluctuate from quarter to
quarter due to a number of reasons. In the past, the Company's results have
followed a seasonal pattern, which reflects the tendency of customers to make
their purchase decisions at the end of a calendar year. During any fiscal
quarter, a disproportionately large portion of the total product sales is
recognized in the last weeks and days of the quarter. These factors make the
forecasting of revenue inherently difficult. Because the Company plans its
operating expenses on expected revenue, a shortfall in revenue may cause
earnings to be below expectations in that period. A number of factors may cause
revenue to fall below expectations, such as product and technology transitions
announced by the Company or its competitors; delays in the availability of new
products; changes in the purchasing patterns of the Company's customers and
distribution partners; the timing of customers' acceptance of products; rapid
price erosion; or adverse global economic conditions. The mix of sales among the
Company's business segments and sales concentration in particular geographic
regions may carry different gross profit margins and may cause the Company's
operating margins to fluctuate and impact earnings.
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RISKS ASSOCIATED WITH THE YEAR 2000
The Company's product lines include information storage products and software
which collect, move, store, share, and protect data. In order to process data
properly, the Company's products must successfully manage and manipulate data
that includes both 20th and 21st century dates (Year 2000 Ready).
The Company is not currently aware of any significant problems among its
customers as a result of any failure of the Company's products to be Year 2000
Ready. In addition, the Company did not experience any serious problems among
the various computer systems used by the Company and, to the best of the
Company's knowledge, none of its significant suppliers experienced any serious
problems among the various computer systems used by such suppliers. The Company
generally believes that it is not legally responsible for costs incurred by its
customers to achieve their year 2000 readiness. Since the year 2000
complications are not fully known and potential liability issues are uncertain,
the effect of the year 2000 on the Company's warranty costs, product liability
costs, potential litigation expenses, and financial results are not known at
this time, but could be material in any given quarter.
The costs incurred through December 31, 1999, directly related to the Company's
remediation activities were approximately $3 million and no future costs related
to the remediation activities are expected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this Item 7A is included in the section above
entitled "Market Risk Management/Foreign Currency Exchange Rate."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the Index to
Consolidated Financial Statements at Item 14 of this Form 10-K are incorporated
by reference into this Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference from the information set forth under the caption
"Proposal 1 -- Election of Directors" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Stockholders to be held May 18, 2000
(the "2000 Proxy Statement"). The information concerning the Company's executive
officers required by this Item is incorporated by reference to the information
set forth under the caption "Executive Officers of the Registrant," in Part I of
this Annual Report on Form 10-K.
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, required by this Item is incorporated by
reference to the information set forth under the caption "Compensation of
Executive Officers -- Section 16(a) Beneficial Ownership Reporting Compliance"
in the 2000 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the captions "Compensation of Executive Officers" and
"Director Compensation" in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information under the caption "Voting Securities of the Company -- Security
Ownership" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the captions "Director Compensation" and "Compensation of
Executive Officers" in the 2000 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
PAGE
1. Financial Statements:
---------------------
Consolidated Balance Sheet at December 31, 1999, and
December 25, 1998 F-1
Consolidated Statement of Operations for the Years Ended
December 31, 1999, December 25, 1998, and December 26,
1997 F-2
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, December 25, 1998, and December 26,
1997 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, December 25, 1998,
and December 26, 1997 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-23
2. Financial Statement Schedules:
------------------------------
Schedule II -- Valuation and Qualifying Accounts and
Reserves F-24
All other schedules are omitted because they are not applicable, or the
required information is included in the consolidated financial statements or
notes thereto.
3. Exhibits:
---------
The exhibits listed below are filed as part of this Annual Report on Form
10-K or are incorporated by reference into this Annual Report on Form 10-K:
3.1 Restated Certificate of Incorporation 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 Company'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 Restated Bylaws of Storage Technology Corporation, as
amended through November 11, 1998 (filed as Exhibit 3.1 to
the Company's Current Report on Form 8-K dated November 19,
1998, and incorporated herein by reference)
4.1 Specimen Certificate of Common Stock, $0.10 par value of
Registrant (filed as Exhibit (c)(2) as to the Company's
Current Report on Form 8-K dated June 2, 1989, and
incorporated herein by reference)
4.2 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 dated August 20, 1990,
and incorporated herein by reference)
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4.3 Certificate of Designations of Series B Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 8, 1990,
and incorporated herein by reference)
10.1(1) 1987 Employee Stock Purchase Plan, as amended (filed as part
of the Company's Registration Statement on Form S-8 filed
September 8, 1994, File No. 33-42818, and incorporated
herein by reference)
10.2(1) 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, and
incorporated herein by reference)
10.3(1) 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)
10.4(1) Storage Technology Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1996, filed on August 12, 1996, and
incorporated herein by reference)
10.5(1) Employment Agreement between the Company and David E. Weiss
(filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 25, 1999, filed on
August 9, 1999 and incorporate herein by reference)
10.6(1/2) Storage Technology Corporation Amended and Restated 1987
Employee Stock Purchase Plan, dated September 16, 1999.
10.7(1) Agreement between the Company and Gary Francis, dated August
19, 1997 (filed as Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 26, 1997,
and incorporated herein by reference)
10.8(1/2) Form of Executive Officer Employment Agreement between the
Company and Each Executive Officer Named in Exhibit 10.10
hereto, dated October 1999.
10.9(1/2) Schedule of Differences in Terms and Conditions of Executive
Officer Employment Agreement
10.10(1/2) Offer Letter, dated May 3, 1999, from the Company to James
Bartlett
10.11(1/2) Offer Letter, dated August 11, 1999, from the Company to
Susan Bailey
10.12(1/2) Termination Agreement, dated December 31, 1999, between the
Company and James Bartlett
10.13() Credit Agreement dated as of October 23, 1997, among the
Company and Bank of America National Trust and Savings
Association, as Agent, Swingline Bank, and Letter of Credit
Issuing Bank, and the other financial institutions party
thereto (filed as Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended December 26, 1997,
and incorporated herein by reference)
10.14(2) Amended and Restated Credit Agreement, dated as of January
13, 2000, among the Company, Bank of American, N.A., as
Administrative Agent, Swingline Bank and Letter of Credit
Issuing Bank and the other financial institutions party
thereto
10.15(2) Credit Agreement, dated as of January 13, 2000, among the
Company, Bank of America, N.A. and the other financial
institutions party thereto
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.
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10.16(2) Security Agreement, dated as of January 13, 2000, by and
among the Company, Bank of America, N.A., as Collateral
Agent for itself and other Secured Parties referred to
therein
10.17 Contingent Multicurrency Note Purchase Commitment Agreement
dated as of December 12, 1996, between the Company and Bank
of America National Trust and Savings Association (filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended December 27, 1996, and incorporated
herein by reference)
10.18 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
November 20, 1998, between Bank of America National Trust
and Savings Association and the Company. (filed as Exhibit
10.19 to the Company's Annual Report on Form 10-K for the
year ended December 25,1998 and incorporated herein by
reference)
10.19(2) Third Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
August 13, 1999, between Bank of America National Trust and
Savings Association and the Company
10.20(2) Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
January 5, 2000, between the Company and Bank of America,
N.A
21.0(2) Subsidiaries of Registrant
23.1(2) Consent of PricewaterhouseCoopers LLP
24.0(2) Powers of Attorney
27.0(2) Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
Current Report on Form 8-K, filed on December 23, 1999, relating to an Item
5, Other Matter, Proposed Settlement of Certain Legal Proceedings involving,
among other things, a class action suit alleging ERISA violations.
Current Report on Form 8-K, filed on February 3, 2000, relating to an Item
5, Other Matter, consisting of two press releases, one relating to the Board
of Directors of the Company commencing the search process for a new
Chairman, President and CEO, and the other relating to an update of the
Company's restructuring and a pre-announcement of earnings for the Company's
fourth Fiscal Quarter ending December 31, 1999.
(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)(2) above.
- ------------------------
2 Indicates exhibits filed with this Annual Report on Form 10-K.
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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 10, 2000 STORAGE TECHNOLOGY CORPORATION
By: /s/ Thomas G. Arnold,
Attorney-in-Fact
----------------------------------
David E. Weiss*
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/ Thomas G. Arnold, Attorney-in-Fact Chairman of the Board, March 10, 2000
- ----------------------------------------------------- President and Chief Executive
David E. Weiss* Officer (Principal Executive
Officer)
/s/ Thomas G. Arnold, Attorney-in-Fact Corporate Vice President and March 10, 2000
- ----------------------------------------------------- Chief Financial Officer
Robert S. Kocol* (Principal
Financial Officer)
/s/ Thomas G. Arnold Vice President and Corporate March 10, 2000
- ----------------------------------------------------- Controller (Principal
Thomas G. Arnold Accounting
Officer)
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
James R. Adams*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
William L. Armstrong*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
J. Harold Chandler*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
Maurice F. Holmes*
40
41
SIGNATURE TITLE DATE
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
William R. Hoover*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
William T. Kerr*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
Robert E. La Blanc*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
Robert E. Lee*
/s/ Thomas G. Arnold, Attorney-in-Fact Director March 10, 2000
- -----------------------------------------------------
Richard C. Steadman*
*Thomas G. Arnold, by signing his name hereto, does hereby sign this document
for himself and on behalf of the persons named above after whose printed name an
asterisk appears, pursuant to the Powers of Attorney duly executed by each such
person and filed herewith as Exhibit 24.0.
41
42
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 31, December 25,
1999 1998
---------------------------
ASSETS
Current assets:
Cash, including cash equivalents of $100,825 at 1999 and
$190,925 at 1998 $ 215,421 $ 231,985
Accounts receivable, net of allowance for doubtful
accounts of $19,492 at 1999 and $20,424 at 1998 627,435 755,931
Inventories (Note 2) 260,642 261,808
Deferred income tax assets (Note 3) 124,588 114,715
------------ ------------
Total current assets 1,228,086 1,364,439
Property, plant and equipment, at cost net of accumulated
depreciation (Note 4) 322,061 320,946
Spare parts for maintenance, at cost net of accumulated
amortization of $64,086 at 1999 and $57,387 at 1998 41,995 33,395
Deferred income tax assets (Note 3) 40,882 15,875
Other assets 102,451 108,289
------------ ------------
$1,735,475 $1,842,944
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Credit facilities (Note 5) $ 286,152 $ 276,673
Current portion of long-term debt (Note 5) 13,943 1,722
Accounts payable 111,253 136,555
Accrued liabilities (Note 6) 303,110 332,758
Income taxes payable (Note 3) 72,865 78,400
------------ ------------
Total current liabilities 787,323 826,108
Long-term debt (Note 5) 28,953 17,260
------------ ------------
Total liabilities 816,276 843,368
------------ ------------
Commitments and contingencies (Notes 5 and 7)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
100,825,390 shares issued at 1999, and 100,338,353 shares
issued at 1998 (Note 8) 10,083 10,034
Capital in excess of par value 830,780 834,778
Retained earnings 84,704 159,254
Treasury stock of 113,774 shares at 1999 and 117,271 shares
at 1998, at cost (2,334) (2,409)
Unearned compensation (4,034) (2,081)
------------ ------------
Total stockholders' equity 919,199 999,576
------------ ------------
$1,735,475 $1,842,944
------------ ------------
------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
43
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Revenue $2,368,231 $2,258,222 $2,144,656
Cost of revenue 1,425,247 1,217,812 1,171,530
------------ ------------ ------------
Gross profit 942,984 1,040,410 973,126
Research and product development costs 277,770 234,677 209,526
Selling, general, administrative and other
income and expense, net 615,616 492,928 472,839
Litigation expense (Note 7) 103,582
Restructuring expense (Note 9) 43,252
------------ ------------ ------------
Operating profit (loss) (97,236) 312,805 290,761
Interest expense (23,316) (8,331) (4,709)
Interest income 4,102 15,274 30,065
------------ ------------ ------------
Income (loss) before income taxes (116,450) 319,748 316,117
Benefit (provision) for income taxes (Note 3) 41,900 (121,500) (84,300)
------------ ------------ ------------
Net income (loss) $ (74,550) $ 198,248 $ 231,817
------------ ------------ ------------
------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE (Note 10)
Basic earnings (loss) per common share $ (0.75) $ 1.91 $ 1.93
------------ ------------ ------------
------------ ------------ ------------
Weighted-average shares 99,900 103,868 120,265
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings (loss) per common share $ (0.75) $ 1.86 $ 1.89
------------ ------------ ------------
------------ ------------ ------------
Weighted-average and dilutive potential
shares 99,900 106,497 122,513
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
44
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
OPERATING ACTIVITIES
Cash received from customers $ 2,456,222 $ 2,124,070 $ 2,110,587
Cash paid to suppliers and employees (2,199,744) (1,926,451) (1,606,791)
Cash paid for settlement of litigation (Note 7) (85,788)
Cash paid for restructuring activities (Note 9) (34,394) (8,845)
Interest paid (21,395) (6,657) (3,640)
Interest received 4,102 15,274 29,103
Income tax refunded (paid), net 6,407 (118,131) (73,754)
----------- ----------- -----------
Net cash provided by operating activities 125,410 88,105 446,660
----------- ----------- -----------
INVESTING ACTIVITIES
Short-term investments, net 77,275 (48,099)
Purchase of property, plant and equipment, net (100,751) (116,903) (65,893)
Other assets, net (1,633) (21,008) 8,366
----------- ----------- -----------
Net cash used in investing activities (102,384) (60,636) (105,626)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from credit facilities, net 9,479 273,211
Repayments of other debt, net (1,754) (4,936) (5,245)
Repurchases of common stock (Note 8) (35,226) (359,395) (484,996)
Proceeds from employee stock plans 25,383 36,924 29,790
----------- ----------- -----------
Net cash used in financing activities (2,118) (54,196) (460,451)
----------- ----------- -----------
Effect of exchange rate changes on cash (37,472) 2,393 (12,665)
----------- ----------- -----------
Decrease in cash and cash equivalents (16,564) (24,334) (132,082)
Cash and cash equivalents -- beginning of
the year 231,985 256,319 388,401
----------- ----------- -----------
Cash and cash equivalents -- end of the year $ 215,421 $ 231,985 $ 256,319
----------- ----------- -----------
----------- ----------- -----------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income (loss) $ (74,550) $ 198,248 $ 231,817
Depreciation and amortization expense 143,010 122,864 112,317
Non-cash litigation and restructuring expense 26,652
Translation (gain) loss 38,841 (7,773) 17,793
Other non-cash adjustments to income (4,299) 19,124 32,862
(Increase) decrease in accounts receivable 96,091 (137,940) (67,955)
(Increase) decrease in inventories, net 3,738 (49,961) 83,499
(Increase) decrease in spare parts (33,113) (22,737) (9,300)
(Increase) decrease in net deferred income tax
assets, net (38,866) 9,679 (13,635)
Increase (decrease) in accounts payable (22,541) 31,792 22,889
Increase (decrease) in accrued liabilities (10,567) (58,305) 20,219
Increase (decrease) in income taxes payable 1,014 (16,886) 16,154
----------- ----------- -----------
Net cash provided by operating activities $ 125,410 $ 88,105 $ 446,660
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
45
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Retained
Capital in Earnings
Common Excess of (Accumulated Treasury Unearned
Stock Par Value Deficit) Stock Compensation Total
--------------------------------------------------------------------------
Balances, December 27, 1996 $11,636 $1,444,939 $(271,252) $ (790) $(3,550) $1,180,983
8% Convertible Subordinated Debentures
exchanged for stock (7,106,408 shares) 710 123,560 124,270
Shares issued under stock purchase plan, and
for exercises of options (2,146,788
shares, including 1,106,540 shares issued
from treasury) 104 37,409 22,681 60,194
Repurchases of common stock (18,349,000
shares) (Note 8) (1,646) (443,447) (40,726) (485,819)
Net income 231,817 231,817
Other (4) (464) 418 (39) 1,147 1,058
------- ---------- ----------- -------- --------- ----------
Balances, December 26, 1997 10,800 1,161,997 (39,017) (18,874) (2,403) 1,112,503
Shares issued under stock purchase plan, and
for exercises of options (1,997,451
shares, including 808,254 shares issued
from treasury) 119 31,459 16,601 48,179
Repurchases of common stock (8,822,500
shares) (Note 8) (882) (271,528) (272,410)
Final price adjustment for common stock
repurchased in October 1997 (Note 8) (87,030) (87,030)
Net income 198,248 198,248
Other (3) (120) 23 (136) 322 86
------- ---------- ----------- -------- --------- ----------
Balances, December 25, 1998 10,034 834,778 159,254 (2,409) (2,081) 999,576
Shares issued under stock purchase plan, and
for exercises of options (1,718,419
shares) 172 27,672 27,844
Repurchases of common stock (1,350,000
shares) (Note 8) (135) (35,091) (35,226)
Net loss (74,550) (74,550)
Other 12 3,421 75 (1,953) 1,555
------- ---------- ----------- -------- --------- ----------
Balances, December 31, 1999 $10,083 $ 830,780 $ 84,704 $ (2,334) $(4,034) $ 919,199
------- ---------- ----------- -------- --------- ----------
------- ---------- ----------- -------- --------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
46
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.
NATURE OF OPERATIONS
StorageTek designs, manufactures, markets and maintains information storage
products, storage services and storage management software for end-user
customers, original equipment manufacturers (OEMs), value-added resellers (VARs)
and value-added distributors (VADs). The principal markets for the Company's
products and services are located in the United States and Europe.
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, the 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 in several areas including the
realizability of deferred tax assets (see Note 3), and the future obligations
associated with the Company's litigation (see note 7) and restructuring
activities (see Note 9). Actual results could differ materially from these
estimates making it reasonably possible that a change in these estimates could
occur in the near term.
REVENUE RECOGNITION
The revenue recognition policy for product and software sales depends on the
sales channel utilized by the Company. Revenue for product and software sales to
end-user customers is recognized when all of the following criteria have been
met: (a) evidence of an agreement exists, (b) delivery to and acceptance by the
customer has occurred, (c) the price to the customer is fixed and determinable,
and (d) collectibility is assured. Product and software is deemed to be accepted
by the customer at the time of installation at the customer site or upon receipt
of written acceptance. Revenue for product and software sales to OEMs, VARs and
VADs is recognized at the time of shipment, together with a reserve for
estimated product returns. Estimated product warranty costs are accrued at the
time of revenue recognition.
Revenue from maintenance, storage consulting and integration services is
recognized as earned and the associated costs are expensed as incurred. Where
extended warranty or maintenance services are bundled with the sale of product,
the Company unbundles and defers the recognition of revenue for the services at
the time the sales revenue is recognized based upon the fair value of the
service element.
RESTRUCTURING
Restructuring activities are accounted for in accordance with the guidance
provided in the consensus opinion of the Emerging Issues Task Force (EITF) in
connection with EITF Issue No. 94-3 (EITF 94-3). EITF 94-3 generally requires,
with respect to the recognition of severance
F-5
47
expenses, management approval of the restructuring plan, the determination of
the employees to be terminated, and communication of benefit arrangements to
employees.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are both readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. The carrying value of the Company's cash equivalents
approximates fair value.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs associated with acquiring and developing software
products to be licensed to customers of $3,256,000 in 1999, $12,764,000 in 1998,
and $616,000 in 1997. Other assets as shown on the Consolidated Balance Sheet
include unamortized software costs of $11,264,000 as of December 31, 1999, and
$14,498,000 as of December 25, 1998. Amortization expense is recognized over the
estimated useful lives of the related products, generally four years.
Amortization expense associated with capitalized software costs was $6,490,000
in 1999, $12,173,000 in 1998, and $20,697,000 in 1997. The Company evaluates the
realizability of the carrying value of the capitalized software based upon
estimates of the associated future revenue.
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets.
Depreciation expense was $101,003,000 in 1999, $85,974,000 in 1998, and
$66,902,000 in 1997. Other assets as shown on the Consolidated Balance Sheet
include unamortized goodwill of $25,618,000 as of December 31, 1999, and
$17,530,000 as of December 25, 1998. Amortization of goodwill is calculated on a
straight-line basis over a period not exceeding 10 years. Amortization expense
associated with goodwill and other amortization was $10,504,000 in 1999,
$5,310,000 in 1998, and $12,150,000 in 1997. The Company evaluates the
realizability of the carrying value of goodwill based upon estimated future cash
flows calculated on an undiscounted basis.
LONG-LIVED ASSETS
The Company continually evaluates the recoverability of its long-lived assets
based on estimated fair values or undiscounted future cash flows, whichever is
more readily determinable. The Company records an impairment charge whenever
significant events or changes in circumstances occur which indicate the carrying
amounts may not be recoverable. Impairment charges are recorded based on an
estimate of discounted future cash flows.
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 that result from the fact that the majority of the
Company's storage 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 exchange rates.
Revenue and expenses are translated at the average exchange rates in effect
during the year, except for cost of revenue, depreciation, and amortization
which are translated at historical exchange rates. See Note 13 for information
with respect to the Company's accounting policies for financial instruments
utilized in its foreign currency hedging program.
F-6
48
STOCK-BASED COMPENSATION PLANS
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees."
ADVERTISING COSTS
Advertising costs are recognized as incurred. Advertising costs were $9,099,000
in 1999, $9,343,000 in 1998, and $7,881,000 in 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the Consolidated Balance Sheet at
their fair value. The corresponding change in fair value of the derivative
instrument will be recognized either in the Consolidated Statement of
Operations, net of any change in fair value of the related hedged item, or as a
component of comprehensive income depending upon the intended use and
designation.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement No. 133." SFAS No. 137 has
the effect of delaying the required adoption date of SFAS No. 133 for the
Company until January 2001. The Company continues to evaluate the impact of SFAS
No. 133 and its associated interpretations on its financial statements and its
plans for adopting the new accounting standard.
NOTE 2 -- INVENTORIES
Inventories include material, labor and factory overhead and are accounted for
at the lower of cost (first-in, first-out method) or market value. The Company
evaluates the need for reserves associated with obsolete, slow-moving and
nonsalable inventory by reviewing market values on a quarterly basis. The
components of inventories, net of the associated reserves, are as follows (in
thousands of dollars):
December 31, December 25,
1999 1998
---------------------------
Raw materials $ 59,141 $ 46,672
Work-in-process 45,717 76,839
Finished goods 155,784 138,297
----------- -----------
$260,642 $261,808
----------- -----------
----------- -----------
NOTE 3 -- INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands of
dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
United States $(160,610) $345,314 $339,346
International 44,160 (25,566) (23,229)
------------ ----------- -----------
$(116,450) $319,748 $316,117
------------ ----------- -----------
------------ ----------- -----------
F-7
49
The benefit (provision) for income taxes attributable to the amounts shown above
consists of the following (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Current tax benefit (provision):
U.S. federal $ 21,700 $ (84,700) $(102,900)
International (15,300) (8,200) (5,700)
State 3,000 (13,600) (10,600)
----------- ------------ ------------
9,400 (106,500) (119,200)
----------- ------------ ------------
Deferred tax benefit (provision):
U.S. federal 26,400 (9,600) 32,400
International (600) (4,000) (7,500)
State 6,700 (1,400) 10,000
----------- ------------ ------------
32,500 (15,000) 34,900
----------- ------------ ------------
$ 41,900 $(121,500) $ (84,300)
----------- ------------ ------------
----------- ------------ ------------
The benefit (provision) for income taxes attributable to income before income
taxes includes benefits of $7,114,000 in 1999, $860,000 in 1998, and $5,590,000
in 1997 from the utilization of net operating loss carryforwards.
The deferred income tax balances on the Consolidated Balance Sheet consist of
the following (in thousands of dollars):
December 31, December 25,
1999 1998
---------------------------
Deferred income tax assets, net of valuation
allowance:
Current $124,588 $114,715
Non-current 40,882 15,875
----------- -----------
Net deferred income tax asset $165,470 $130,590
----------- -----------
----------- -----------
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 31, December 25,
1999 1998
---------------------------
Gross deferred income tax assets:
Net operating loss carryforwards $ 18,321 $ 19,074
Tax credit carryforwards 25,277 204
Restructuring accruals 1,436 1,778
Other accrued liabilities and reserves 63,948 61,935
Capitalized inventory costs 28,343 30,010
Deferred intercompany profit 11,260 18,402
Other 35,756 31,318
----------- -----------
184,341 162,721
Less: Valuation allowance (14,868) (25,916)
----------- -----------
169,473 136,805
----------- -----------
Gross deferred income tax liabilities (4,003) (6,215)
----------- -----------
Net deferred income tax asset $165,470 $130,590
----------- -----------
----------- -----------
F-8
50
The net change in the valuation allowance for deferred income tax assets was a
decrease of $11,048,000 in 1999 and an increase of $3,404,000 in 1998. The
valuation allowance relates primarily to net deductible temporary differences,
tax credit carryforwards and net operating loss carryforwards associated with
the Company's foreign subsidiaries. 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, "Accounting for Income Taxes," including the Company's
earnings history, the number of years the Company's operating loss and tax
credits can be carried forward, the existence of taxable temporary differences,
near-term earnings expectations and the highly competitive nature of the
high-technology market.
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 $40,117,000 as of December 31, 1999). It
is not currently practicable to estimate the tax liability that might be payable
on the repatriation of these foreign earnings.
The benefit (provision) for income taxes differs from the amount computed by
applying the U.S. federal income tax rate of 35% to income before income taxes
for the following reasons (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
U.S. federal income tax benefit
(provision) at statutory rate $ 40,758 $(111,912) $(110,641)
(Increase) decrease in income taxes
resulting from:
Recognized net operating losses,
future deductions and credits 5,739 1,781 54,198
Utilization of tax credits 5,359 7,000 2,555
Foreign tax rate and exchange rate
differentials (10,906) (5,308) (17,340)
Nondeductible items (12,572) (10,901) (7,095)
State income taxes, net of federal
benefits 6,522 (11,789) (9,867)
Effect of Puerto Rico operations 7,000 9,629 4,530
Other, net (640)
----------- ------------ ------------
Benefit (provision) for income taxes $ 41,900 $(121,500) $ (84,300)
----------- ------------ ------------
----------- ------------ ------------
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 31, December 25,
1999 1998
------------ ------------
Machinery and equipment $ 687,679 $ 644,902
Buildings and building improvements 167,689 168,322
Land and land improvements 20,882 17,837
------------ ------------
876,250 831,061
Less: Accumulated depreciation (554,189) (510,115)
------------ ------------
$ 322,061 $ 320,946
------------ ------------
------------ ------------
F-9
51
Machinery and equipment includes capitalized leases of $19,186,000 as of
December 31, 1999, and $24,644,000 as of December 25, 1998. Accumulated
depreciation includes accumulated amortization on capitalized leases of
$5,144,000 as of December 31, 1999, and $7,758,000 as of December 25, 1998.
NOTE 5 -- CREDIT FACILITIES, DEBT AND LEASE OBLIGATIONS
Borrowings under credit facilities consists of the following (in thousands of
dollars):
December 31, December 25,
1999 1998
---------------------------
Primary Revolver $205,000 $195,000
Promissory notes denominated in foreign currencies 81,152 81,673
----------- -----------
$286,152 $276,673
----------- -----------
----------- -----------
The Company has a revolving credit facility (the Primary Revolver) which expires
in October 2001. The credit limit available under the Primary Revolver
($287,500,000 as of December 31, 1999) is reduced by $12,500,000 on the last day
of each calendar quarter. The terms of the Primary Revolver were amended in
January 2000 to be secured by the Company's U.S. accounts receivable and U.S.
inventory. The interest rates under the Primary Revolver depend upon the
repayment period of the advance selected and the Company's Total Debt to
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio.
The rate may range from LIBOR plus 2.00% to 2.50% or the agent bank's base rate
plus 0.00% to 0.50%. The weighted average interest rate on the advances as of
December 31, 1999, was 7.88%. The Company had borrowings of $205,000,000 and
issued letters of credit for approximately $50,000 under the Primary Revolver as
of December 31, 1999. The remaining available credit under the Primary Revolver
as of December 31, 1999, was approximately $82,450,000. The Primary Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
In January 2000, the Company entered into a new $150,000,000 revolving credit
facility (the Supplemental Revolver) which expires in January 2001. The
Supplemental Revolver is secured by the Company's U.S. accounts receivable and
U.S. inventory. The Supplemental Revolver replaced a $150,000,000 revolving
credit facility which expired in January 2000 and for which no borrowings were
outstanding as of December 31, 1999. The interest rates under the Supplemental
Revolver depend upon the repayment period of the advance selected and the
Company's EBITDA ratio. The rate may range from LIBOR plus 2.00% to 2.50% or the
agent bank's base rate plus 0.00% to 0.50%. The Supplemental Revolver contains
certain financial and other covenants, including restrictions on the payment of
cash dividends on the Company's common stock.
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $140,000,000 at any one time.
This financing agreement was amended in January 2000 to provide for the sale of
promissory notes in the principal amount of up to $120,000,000 at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of December 31, 1999, the Company had promissory notes of $81,152,000
outstanding under this financing agreement and had committed to borrowings
between January 2000 and January 2001 in the cumulative principal amount of
approximately $339,471,000. The notes must be repaid only to the extent of
future revenue. Obligations under the agreement are not cancelable by the
Company or the bank. Gains and losses associated with changes in the underlying
foreign currencies are deferred during the commitment period and recognized as
an adjustment to the revenue supporting the note repayment at the time the bank
purchases the promissory notes. The promissory notes, together with accrued
interest, are payable in U.S. dollars within 40 days from the date of issuance.
The weighted average interest rate associated with the promissory notes
outstanding as of December 31, 1999, was 7.65%. Under the terms of the
agreement, the Company
F-10
52
is required to comply with certain covenants and, under certain circumstances,
may be required to maintain a collateral account, including cash and qualifying
investments, in an amount up to the outstanding balance of the promissory notes.
Long-term debt, including capitalized lease obligations, consists of the
following (in thousands of dollars):
December 31, December 25,
1999 1998
---------------------------
Capitalized lease obligations $15,157 $18,135
Promissory notes 27,494
Other 245 847
---------- ----------
42,896 18,982
Less: Current portion (13,943) (1,722)
---------- ----------
$28,953 $17,260
---------- ----------
---------- ----------
SCHEDULED DEBT MATURITIES AND OPERATING LEASE OBLIGATIONS
Scheduled maturities of debt and operating lease obligations as of December 31,
1999, are as follows (in thousands of dollars):
Capitalized Noncancellable
Credit lease Promissory Other Total debt operating lease
facilities obligations notes debt commitments commitments
-----------------------------------------------------------------------------
2000 $286,152 $ 2,677 $13,259 $302,088 $ 41,214
2001 2,931 14,235 $245 17,411 30,125
2002 1,621 1,621 17,916
2003 1,568 1,568 11,539
2004 1,560 1,560 7,638
Thereafter 12,480 12,480 14,893
--------- -------- -------- ---- ---------- ------------
$286,152 22,837 $27,494 $245 $336,728 $123,325
--------- -------- -------- ---- ---------- ------------
--------- -------- -------- ---- ---------- ------------
Less: Amount
representing
interest (7,680)
--------
Present value of
capitalized lease
obligations
(including $684
classified as
current) $15,157
--------
--------
Rent expense associated with operating leases was $57,710,000 in 1999,
$53,332,000 in 1998, and $41,200,000 in 1997.
F-11
53
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 31, December 25,
1999 1998
---------------------------
Deferred revenue $ 55,168 $ 79,097
Accrued commissions 36,292 15,652
Accrued payroll 33,564 38,531
Accrued warranty reserve 23,926 18,073
Other 154,160 181,405
----------- -----------
$303,110 $332,758
----------- -----------
----------- -----------
Other accrued liabilities consist of items that are individually less than 5% of
accrued liabilities.
NOTE 7 -- LITIGATION
Litigation expense recognized during 1999 consists of the following (in
thousands of dollars):
Odetics, Inc. settlement $ 97,794
ADEA/ERISA settlement 5,000
Other settlements 788
--------
$103,582
--------
--------
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100,000,000 to Odetics for a fully paid up license to
the 151 Patent; $80,000,000 of which was paid at the time of the settlement and
the remainder to be paid in equal annual installments of $10,000,000 in
September 2000 and September 2001. The Company recognized a pre-tax expense of
$97,794,000 to reflect the present value of the final settlement payments.
On December 15, 1999, at a preliminary fairness hearing, the Company and
plaintiffs, representing certain former employees of the Company, presented the
United States District Court for the District of Colorado (the Court) with a
proposed settlement agreement, which would result in the Company paying
$5,000,000 for the settlement of litigation alleging the Company violated the
Age Discrimination in Employment Act of 1967, as amended (ADEA) and the Employee
Retirement Income Security Act of 1974 (ERISA), between the period of April 13,
1993, and December 21, 1996. Final approval of this proposed settlement was
received from the Court on March 8, 2000. The settlement agreement states that
it shall not be construed as an admission by the Company that it violated any
law. The Company funded the settlement with a $5,000,000 payment into an escrow
account in December 1999. A pre-tax expense of $5,000,000 was recognized in
connection with the proposed settlement during 1999.
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 concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2,400,000,000. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
F-12
54
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court dismissed with prejudice all of Stuff's material claims
against the Company. On August 30, 1999, Stuff filed a notice of appeal with the
Colorado Court of Appeals seeking to overturn the decision of the District
Court. The parties are in the process of filing various appellate briefs and the
Company anticipates that the final briefs will be filed in April 2000. No oral
argument date has been set. The Company continues to believe that Stuff's claims
are wholly without merit and intends to defend vigorously any further actions
arising from this complaint.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
NOTE 8 -- COMMON STOCK
In May 1998, the Company declared a two-for-one stock split effected in the form
of a 100% stock dividend paid at the close of business June 26, 1998, to
shareholders of record as of June 5, 1998. All earnings per common share
amounts, references to common stock, and stockholders' equity amounts have been
restated as if the stock dividend had occurred as of the earliest period
presented.
In February 1997, the Company announced a program to repurchase up to 3,000,000
shares of common stock on an annual basis. The intent of this repurchase program
is to offset dilution associated with the Company's employee stock purchase and
stock option plans. In October 1997, the Company announced a program to
repurchase an additional number of shares of its common stock up to
$800,000,000. Under these programs, the Company repurchased and retired an
aggregate of 1,350,000, 8,822,500 and 18,349,000 shares of common stock during
1999, 1998 and 1997, respectively, through a combination of privately negotiated
and open market repurchase transactions. The aggregate purchase price of these
shares was $35,226,000, $272,365,000 and $572,026,000 during 1999, 1998, and
1997, respectively, after considering the effects of all purchase price
adjustments.
NOTE 9 -- RESTRUCTURING
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the April restructuring included a voluntary
reduction in headcount as well as the elimination of certain lower priority
research and product development projects. The headcount reductions were
targeted in the areas of research and product development, administration and
manufacturing.
On October 28, 1999, the Company's board of directors approved a broad
restructuring program intended to return the Company to profitability. Key
elements of the restructuring plan include:
- - an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
majority of the remaining reductions projected to be completed by the end of
the second quarter of 2000;
- - a reduction in investment in certain businesses, including consulting and
integration services and managed storage services;
- - a recommitment to the Company's core strengths of tape automation, virtual
storage and storage area networks (including related maintenance and
professional services);
F-13
55
- - modifications to the sales model for the United States and Canada intended to
improve productivity and increase account coverage and growth;
- - other organizational and operational changes intended to improve efficiency
and competitiveness.
The elements of the October restructuring included an involuntary reduction in
headcount, the elimination of a significant number of temporary employee
positions, and managing the replacement of terminating employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.
The following table summarizes the reserves in connection with 1999
restructuring activities (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
--------- ---------- ----------- --------
Restructuring expense $ 32,719 $ 4,941 $ 5,592 $ 43,252
Cash payments (28,802) (5,592) (34,394)
Asset writedowns (4,941) (4,941)
-------- --------- --------- --------
Balances, December 31, 1999 $ 3,917 $ 0 $ 0 $ 3,917
-------- --------- --------- --------
-------- --------- --------- --------
Employee severance expense of $32,719,000 was recognized during 1999 in
connection with the April and October restructurings. This expense includes
$25,919,000 of separation charges related to approximately 680 employees who
elected voluntary severance in connection with the April restructuring;
$6,236,000 of separation charges related to the fixed and determinable severance
payments owed to approximately 280 employees who were involuntarily terminated
in connection with the October restructuring; and $564,000 of employee
outplacement costs. The Company also eliminated approximately 270 temporary and
contractor positions in connection with the October restructuring for which
there was no associated restructuring charge. Substantially all of the
$3,917,000 of severance charges incurred, but not paid, as of December 31, 1999,
relate to severance payments associated with the October restructuring and are
expected to be paid within the next three months.
Asset writedowns of $4,941,000, net of adjustments, were recognized during 1999
in connection with the April restructuring. Asset writedowns of $6,680,000 were
recognized during the second and third quarters of 1999 related to engineering
assets that were to be disposed of in connection with discontinued research and
development projects. An adjustment of $1,739,000 was recognized during the
fourth quarter of 1999 as a reduction of restructuring expense to reflect the
redeployment of engineering assets to other research and development projects
and the salvage value of other engineering assets which was greater than
originally estimated.
Other exit costs of $5,592,000 were recognized during 1999 principally related
to the termination of contractual future purchase obligations associated with
discontinuing certain product lines as part of the April restructuring.
NOTE 10 -- EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share (EPS) is computed using SFAS No. 128, "Earnings
Per Share." Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common shares.
F-14
56
The following is a reconciliation between basic and diluted EPS (in thousands,
except per share amounts):
Year Ended
----------------------------------------------------------------------------------------
December 31, 1999 December 25, 1998 December 26,1997
-------------------------- ---------------------------- ----------------------------
Net Net Net
Loss EPS Shares Income EPS Shares Income EPS Shares
----------------------------------------------------------------------------------------
Basic EPS $(74,550) $(0.75) 99,900 $198,248 $1.91 103,868 $231,817 $1.93 120,265
Effects of dilutive securities:
Common stock equivalents 2,629 1,959
Convertible debentures 255 289
------- ------ -------- ------- -------- -------
Diluted EPS $(74,550) $(0.75) 99,900 $198,248 $1.86 106,497 $232,072 $1.89 122,513
------- ------ -------- ------- -------- -------
------- ------ -------- ------- -------- -------
Options to purchase 12,354,593 shares of common stock were outstanding as of
December 31, 1999, but not included as common stock equivalents in the
computation of diluted EPS, as these options are antidilutive as a result of the
net loss incurred during 1999.
NOTE 11 -- EMPLOYEE BENEFIT PLANS AND OPTIONS
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 shares of
StorageTek common stock, plus any remaining shares from earlier offering
periods, in consecutive six-month offering periods. As of December 31, 1999, the
Company had an aggregate of 3,101,303 common shares reserved for issuance under
the Purchase Plan. Eligible employees may contribute up to 10% of their pay
toward the purchase of StorageTek common stock at a price equal to 85% of the
lower of the fair 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.
Under the Purchase Plan, the Company issued the following shares of common stock
with the weighted average fair value of the shares calculated using the
Black-Scholes option pricing model:
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Shares issued 1,320,097 631,728 937,994
Weighted average fair value per
share $ 8.24 $ 10.90 $ 5.32
Fair value assumptions:
Dividend yield 0.00% 0.00% 0.00%
Volatility 59.54% 49.59% 36.40%
Risk-free interest rate 4.89% 5.00% 5.65%
Expected life (in months) 6 6 6
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 31, 1999, the Company had an aggregate of 12,827,411 common
shares reserved for issuance under its equity plans (Equity Plans). These plans
provide for the issuance of common shares pursuant to stock option exercises,
restricted stock awards and other equity based awards. There were 1,078,818
shares available for grant under the Equity Plans as of December 31, 1999.
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 1,560,000 shares of common stock. Stock
options are granted with an exercise price equal to the fair market value of the
common stock on the date of grant. There were
F-15
57
1,074,668 shares reserved for issuance and 468,668 shares available for grant
under the Director Plan as of December 31, 1999.
Stock options are granted under the Equity and Director Plans with an exercise
price equal to 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 Equity and Director Plans have a maximum term of 10 years from the
date of grant. Options granted to corporate officers under the Equity Plan and
to directors under the Director Plan provide for accelerated vesting upon
certain events, including a change in control of the Company or the involuntary
termination of a corporate officer.
The following summarizes information with respect to options granted under the
Company's Equity and Director Plans:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------------------------
Outstanding, December 27, 1996 5,581,656 $14.91
Granted 1,378,994 23.34
Exercised (1,208,794) 13.63
Forfeited or expired (264,276) 14.82
--------------- ------------
Outstanding, December 26, 1997 5,487,580 17.31
Granted 1,851,117 30.37
Exercised (1,365,723) 15.19
Forfeited or expired (437,765) 21.51
--------------- ------------
Outstanding, December 25, 1998 5,535,209 21.87
Granted 8,093,911 22.61
Exercised (398,322) 15.47
Forfeited or expired (876,205) 25.03
--------------- ------------
Outstanding, December 31, 1999 12,354,593 $22.33
--------------- ------------
--------------- ------------
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
Outstanding Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life in Years Price Exercisable Price
- ---------------------------------------------------------------------------
$ 0 - $15 1,298,484 4.54 $12.52 1,193,477 $12.44
15 - 25 9,405,657 9.13 21.36 1,461,648 21.61
25 - 35 631,078 8.09 30.39 195,077 30.16
35 - 45 1,019,374 8.90 38.79 104,415 42.54
---------- ----------
12,354,593 8.58 $22.33 2,954,617 $19.21
---------- ----------
---------- ----------
Restricted stock grants of the Company's common stock are made pursuant to its
Equity Plans. These restricted stock grants are generally issued at no cost to
the employee and vest over a period of one to six years. Unearned compensation,
which is determined based on the fair market value of the Company's common stock
on the date of the award, is charged to stockholders' equity and amortized to
expense over the vesting period of the stock. Restricted stock granted to
corporate officers provides for accelerated vesting upon certain events,
including a change in control of the Company and the involuntary termination of
a corporate officer. The following summarizes
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58
information with respect to restricted stock granted under the Company's Equity
Plans. The weighted average fair value of awards is calculated using the
Black-Scholes option pricing model:
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Outstanding, beginning of year 260,921 320,762 451,620
Awarded 206,362 13,355 3,038
Vested (43,114) (24,358) (94,918)
Forfeited (84,489) (48,838) (38,978)
----------- ----------- -----------
Outstanding, end of year 339,680 260,921 320,762
----------- ----------- -----------
----------- ----------- -----------
Weighted average fair value of
awards $ 21.52 $ 35.40 $ 24.65
Compensation expense, net (in
thousands) 834 330 592
EMPLOYEE PROFIT SHARING AND THRIFT PLAN
StorageTek has a Profit Sharing and Thrift Plan whereby employee participants
may contribute a portion of their compensation, subject to limits under the
Internal Revenue Code. The plan provides for a matching contribution by the
Company equal to 50% of the first 6% of the participant's contributions.
Effective January 1, 2000, the Company will make a matching contribution equal
to 100% of the first 3% of each participant's contributions and a 50% match of
the next 4% of each participant's contributions. Company contributions in excess
of the matching contribution 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.
The following contributions were made or authorized by the Company to the Profit
Sharing and Thrift Plan (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Matching contributions $9,374 $8,987 $ 7,772
Additional contributions 11,100
--------- --------- ----------
$9,374 $8,987 $18,872
--------- --------- ----------
--------- --------- ----------
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59
SFAS NO. 123
The Company applies the intrinsic value method set forth in APB No. 25 in
accounting for its stock-based compensation plans. Net income (loss) and EPS as
reported and as calculated pursuant to SFAS No. 123 to reflect the fair value
method of accounting for stock-based compensation plans were as follows (in
thousands, except per share amounts):
Year Ended
-----------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
-----------------------------------------------
Net income (loss):
As reported $(74,550) $198,248 $231,817
SFAS No. 123 (95,649) 186,957 221,976
Basic EPS:
As reported $ (0.75) $ 1.91 $ 1.93
SFAS No. 123 (0.96) 1.80 1.85
Diluted EPS:
As reported $ (0.75) $ 1.86 $ 1.89
SFAS No. 123 (0.96) 1.78 1.83
Compensation expense for the options granted is computed based on the actual
option forfeitures during the year.
The following summarizes the weighted average fair value of options granted
using the Black-Scholes option pricing model:
Year Ended
-----------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
-----------------------------------------------
Weighted average fair value
options granted $10.68 $12.61 $ 9.89
Fair value assumptions:
Dividend yield 0% 0% 0%
Volatility 51.44% 44.41% 42.15%
Risk-free interest rate 5.83% 5.12% 6.25%
Expected life (in years) 4.2 4.0 4.3
NOTE 12 -- STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a 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
F-18
60
becomes an Acquiring Person and thereafter, (a) the Company is merged with or
into an Acquiring Person and the Company's common stock is changed, converted or
exchanged; or (b) 50% or more of the Company's assets or earning power is sold;
or (c) an Acquiring Person engages in one or more "self-dealing" transactions as
described in the Rights Agreement.
The Company is generally entitled to redeem the rights for $.01 per right at any
time prior to the earlier of the date on which any person or entity becomes an
Acquiring Person or August 31, 2000. The rights will expire on August 31, 2000,
unless redeemed or exchanged earlier by the Company pursuant to the Rights Plan.
NOTE 13 -- FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, accounts
payable, accrued liabilities, credit facilities and long-term debt. Except for
the long-term debt, the carrying amounts of these financial instruments
approximate fair value due to their short maturities and variable rates of
interest. The carrying amounts of long-term debt approximate their fair values
based upon current rates available for similar types of instruments. The
carrying/commitment value and fair value of other financial instruments held by
the Company as of December 31, 1999, were as follows (in thousands of dollars):
Carrying/
Commitment Fair Unrealized
Value Value Gain
----------------------------------------
Foreign currency options $ -- $ -- $ --
Foreign currency forward contracts -- -- --
Outstanding commitments associated with
promissory notes denominated in
foreign currencies 339,471 333,928 5,543
See below for further discussion of foreign currency options and forward
contracts. See Note 5 for further discussion of promissory notes denominated in
foreign currencies.
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.
The Company periodically 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. The Company utilizes hedge accounting for its foreign
currency options with gains and losses associated with the options deferred and
recognized as an adjustment to the underlying revenue transactions. The Company
held no foreign currency options as of December 31, 1999. Purchased foreign
currency options with a face value of approximately $220,954,000 were held as of
December 25, 1998. The fair value of any options held is estimated based on
quotes received from the respective counterparty. To the extent an option is
terminated or ceases to be effective as a hedge, any gains or losses as of that
date are deferred and recognized as an adjustment to the underlying revenue
transaction. Deferred realized and unrealized gains and losses associated with
any options held are subsequently recognized as an adjustment to the associated
revenue in the Consolidated Statement of Operations.
F-19
61
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 anticipated monetary assets and liabilities held in foreign
currencies and anticipated revenue from its international operations. The
Company held forward foreign exchange contracts with a face value of
approximately $188,501,000 as of December 31, 1999, and $140,732,000 as of
December 25, 1998. 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. Gains and losses on the forward
contracts used to hedge monetary assets and liabilities are recognized as
incurred within selling, general, administrative and other income and expense on
the Consolidated Statement of Operations as adjustments to the foreign exchange
gains and losses on the translation of net monetary assets. Gains and losses on
the forward contracts used to hedge anticipated revenue are recognized as
incurred as adjustments to revenue.
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.
Gains associated with foreign currency translation adjustments and foreign
currency transactions, net of associated hedging results, aggregated $1,298,000
in 1999, compared to a loss of $391,000 in 1998, and a gain of $482,000 in 1997.
CONCENTRATIONS OF CREDIT RISK
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments, trade
receivables, and outstanding letters of credit under the Company's credit
facilities. The Company has a cash investment policy which restricts investments
to ensure preservation of principal and maintenance of liquidity. Substantially
all trade receivable balances are unsecured. The concentration of credit risk
with respect to trade receivables is limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
different industries and geographic areas.
NOTE 14 -- OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
SIGNIFICANT CUSTOMERS
Revenue from sales of storage products and software to IBM accounted for less
than 10% of total revenue in 1999, as compared to 20% in 1998, and 19% in 1997,
respectively.
BUSINESS SEGMENTS
The Company was organized into three reportable segments during 1999 based on
the definitions of segments provided under SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information:" storage products, storage
services and storage management software. The storage products segment includes
sales of tape, disk and network products for the mainframe and client-server
computing environments. The storage services segment provides support services
for the Company's and third-party products, integration services, storage
consulting and managed storage services. The storage management software segment
sells and licenses software tools and applications for improving storage product
performance and simplifying information storage management.
The accounting policies utilized in reporting these segments are the same as
those described in Note 1, "Summary of Significant Accounting Policies." The
Company does not have any intersegment revenue and segment operating performance
is evaluated based on gross profit. The
F-20
62
segment gross profit equals the consolidated gross profit and the Company does
not allocate research and product development costs; selling, general,
administrative and other income and expense; interest income; interest expense;
or benefit (provision) for income taxes to the segments. The revenue and gross
profit by segment is as follows (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Revenue:
Storage products $1,465,216 $1,520,647 $1,495,038
Storage services 718,844 633,821 584,016
Storage management software 184,171 103,754 65,602
------------ ------------ ------------
Total revenue $2,368,231 $2,258,222 $2,144,656
------------ ------------ ------------
------------ ------------ ------------
Gross profit:
Storage products $ 592,822 $ 688,050 $ 669,914
Storage services 221,669 273,662 265,521
Storage management software 128,493 78,698 37,691
------------ ------------ ------------
Total gross profit $ 942,984 $1,040,410 $ 973,126
------------ ------------ ------------
------------ ------------ ------------
All of the Company's assets are retained and analyzed at the corporate level and
are not allocated to the individual segments. Amortization of spare parts
associated with the storage services segment was $25,013,000, $19,407,000, and
$12,568,000 for 1999, 1998, and 1997, respectively. See Note 1 for information
regarding the amortization of capitalized software associated with the storage
management software segment. Depreciation on fixed assets, and amortization of
goodwill and other amortization, which aggregated $111,507,000, $91,284,000, and
$79,052,000 in 1999, 1998, and 1997, respectively, is associated with corporate
assets and is not separately identifiable within the reportable segments.
GEOGRAPHIC AREAS
Revenue and long-lived assets by geographic area are based on the country in
which the subsidiary is legally domiciled. Revenue and long-lived assets for
Europe are reported in aggregate as there are no individual subsidiaries with
revenue or long-lived assets which exceed 10% of the consolidated amounts.
Geographic areas other than the United States and Europe account for less than
10% of the consolidated revenue and identifiable assets, and are combined and
shown in the table below as "Other." Unconsolidated revenue and long-lived
assets for each geographic area are shown below (in thousands of dollars):
Year Ended
------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------------------------------------
Revenue:
United States(1) $1,493,870 $1,502,992 $1,478,796
Europe 644,641 577,635 499,297
Other 229,720 177,595 166,563
------------ ------------ ------------
Total revenue $2,368,231 $2,258,222 $2,144,656
------------ ------------ ------------
------------ ------------ ------------
Long-lived assets:
United States $ 301,474 $ 302,692 $ 285,890
Europe 38,843 45,438 51,991
Other 18,569 4,844 4,348
------------ ------------ ------------
Total long-lived assets $ 358,886 $ 352,974 $ 342,229
------------ ------------ ------------
------------ ------------ ------------
- ---------------
(1) U.S. revenue from unaffiliated customers includes international export sales
to customers of $99,533,000 in 1999, $88,654,000 in 1998, and $59,359,000 in
1997.
F-21
63
NOTE 15 -- QUARTERLY INFORMATION (UNAUDITED)
The consolidated results of operations on a quarterly basis were as follows (in
thousands of dollars, except per share amounts):
Quarter Ended 1999
----------------------------------------------------
March 26 June 25 September 24 December 31
----------------------------------------------------
Revenue $517,503 $654,402 $573,730 $622,596
Cost of revenue 294,086 383,960 343,409 403,792
-------- -------- ----------- -----------
Gross profit 223,417 270,442 230,321 218,804
Operating expenses 211,335 224,326 216,957 240,768
Litigation expense 82,308 16,274 5,000
Restructuring expense 20,246 16,082 6,924
-------- -------- ----------- -----------
Operating profit (loss) 12,082 (56,438) (18,992) (33,888)
Interest expense, net (2,969) (3,642) (6,053) (6,550)
-------- -------- ----------- -----------
Income (loss) before
income taxes 9,113 (60,080) (25,045) (40,438)
Benefit (provision) for
income taxes (3,300) 21,600 9,000 14,600
-------- -------- ----------- -----------
Net income (loss) $ 5,813 $(38,480) $(16,045) $(25,838)
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Earnings (loss) per common
share:
Basic $ 0.06 $ (0.38) $ (0.16) $ (0.26)
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Diluted $ 0.06 $ (0.38) $ (0.16) $ (0.26)
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Quarter Ended 1998
----------------------------------------------------
March 27 June 26 September 25 December 25
----------------------------------------------------
Revenue $484,891 $542,306 $571,060 $659,965
Cost of revenue 253,389 284,746 304,788 374,889
-------- -------- ----------- -----------
Gross profit 231,502 257,560 266,272 285,076
Operating expenses 170,795 172,988 183,835 199,987
-------- -------- ----------- -----------
Operating profit 60,707 84,572 82,437 85,089
Interest income (expense),
net 4,663 3,258 (714) (264)
-------- -------- ----------- -----------
Income before income
taxes 65,370 87,830 81,723 84,825
Provision for income taxes (24,800) (33,400) (31,100) (32,200)
-------- -------- ----------- -----------
Net income $ 40,570 $ 54,430 $ 50,623 $ 52,625
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Earnings per common share:
Basic $ 0.38 $ 0.51 $ 0.50 $ 0.53
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Diluted $ 0.37 $ 0.50 $ 0.48 $ 0.52
-------- -------- ----------- -----------
-------- -------- ----------- -----------
F-22
64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Storage Technology Corporation
In our opinion, the consolidated financial statements listed in the accompanying
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 31, 1999 and December 25, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States 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 provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 8, 2000
F-23
65
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands of Dollars)
Deductions
Accounts
Additions Receivable
Balance Charged to Written Off
Beginning Other Net of Balance
of Year Expenses Recoveries End of Year
--------------------------------------------------
Accounts for doubtful accounts on
accounts receivable:
December 31, 1999 $20,424 $7,344 $8,276 $19,492
-------- -------- --------- ---------
-------- -------- --------- ---------
December 25, 1998 $17,924 $6,664 $4,164 $20,424
-------- -------- --------- ---------
-------- -------- --------- ---------
December 26, 1997 $12,907 $7,625 $2,608 $17,924
-------- -------- --------- ---------
-------- -------- --------- ---------
Additions
Balance Charged to
Beginning Cost of Reductions Balance
of Year Revenue Write-offs End of Year
--------------------------------------------------
Inventory reserves:
December 31, 1999 $39,904 $47,545 $31,576 $55,873
-------- --------- --------- ---------
-------- --------- --------- ---------
December 25, 1998 $45,862 $26,209 $32,167 $39,904
-------- --------- --------- ---------
-------- --------- --------- ---------
December 26, 1997 $51,338 $40,915 $46,391 $45,862
-------- --------- --------- ---------
-------- --------- --------- ---------
F-24
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation 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 Company'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 Restated Bylaws of Storage Technology Corporation, as
amended through November 11, 1998 (filed as Exhibit 3.1 to
the Company's Current Report on Form 8-K dated November 19,
1998, and incorporated herein by reference)
4.1 Specimen Certificate of Common Stock, $0.10 par value of
Registrant (filed as Exhibit (c)(2) as to the Company's
Current Report on Form 8-K dated June 2, 1989, and
incorporated herein by reference)
4.2 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 dated August 20, 1990,
and incorporated herein by reference)
4.3 Certificate of Designations of Series B Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 8, 1990,
and incorporated herein by reference)
10.1(1) 1987 Employee Stock Purchase Plan, as amended (filed as part
of the Company's Registration Statement on Form S-8 filed
September 8, 1994, File No. 33-42818, and incorporated
herein by reference)
10.2(1) 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, and
incorporated herein by reference)
10.3(1) 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)
10.4(1) Storage Technology Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1996, filed on August 12, 1996, and
incorporated herein by reference)
10.5(1) Employment Agreement between the Company and David E. Weiss
(filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 25, 1999, filed on
August 9, 1999 and incorporate herein by reference)
10.6(1/2) Storage Technology Corporation Amended and Restated 1987
Employee Stock Purchase Plan, dated September 16, 1999.
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.
67
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7(1) Agreement between the Company and Gary Francis, dated August
19, 1997 (filed as Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 26, 1997,
and incorporated herein by reference)
10.8(1/2) Form of Executive Officer Employment Agreement between the
Company and Each Executive Officer Named in Exhibit 10.10
hereto, dated October 1999.
10.9(1/2) Schedule of Differences in Terms and Conditions of Executive
Officer Employment Agreement
10.10(1/2) Offer Letter, dated May 3, 1999, from the Company to James
Bartlett
10.11(1/2) Offer Letter, dated August 11, 1999, from the Company to
Susan Bailey
10.12(1/2) Termination Agreement, dated December 31, 1999, between the
Company and James Bartlett
10.13() Credit Agreement dated as of October 23, 1997, among the
Company and Bank of America National Trust and Savings
Association, as Agent, Swingline Bank, and Letter of Credit
Issuing Bank, and the other financial institutions party
thereto (filed as Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended December 26, 1997,
and incorporated herein by reference)
10.14(2) Amended and Restated Credit Agreement, dated as of January
13, 2000, among the Company, Bank of American, N.A., as
Administrative Agent, Swingline Bank and Letter of Credit
Issuing Bank and the other financial institutions party
thereto
10.15(2) Credit Agreement, dated as of January 13, 2000, among the
Company, Bank of America, N.A. and the other financial
institutions party thereto
10.16(2) Security Agreement, dated as of January 13, 2000, by and
among the Company, Bank of America, N.A., as Collateral
Agent for itself and other Secured Parties referred to
therein
10.17 Contingent Multicurrency Note Purchase Commitment Agreement
dated as of December 12, 1996, between the Company and Bank
of America National Trust and Savings Association (filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended December 27, 1996, and incorporated
herein by reference)
10.18 Second Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
November 20, 1998, between Bank of America National Trust
and Savings Association and the Company. (filed as Exhibit
10.19 to the Company's Annual Report on Form 10-K for the
year ended December 25,1998 and incorporated herein by
reference)
10.19(2) Third Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
August 13, 1999, between Bank of America National Trust and
Savings Association and the Company
10.20(2) Fourth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
January 5, 2000, between the Company and Bank of America,
N.A
21.0(2) Subsidiaries of Registrant
23.1(2) Consent of PricewaterhouseCoopers LLP
24.0(2) Powers of Attorney
27.0(2) Financial Data Schedule
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.