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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 29, 2000
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, Colorado 80028-4309
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock ($.10 par value), including New York Stock Exchange
related preferred stock purchase rights
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 $986,915,129 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 16, 2001. 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 16, 2001, there were 103,982,978 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 29, 2000. Portions of the registrant's definitive
proxy statement for its annual meeting of stockholders to be held on May 24,
2001, 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 PRODUCTS, BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND
UNCERTAINTIES. SOME OF THESE RISKS ARE DETAILED 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 THE
FORWARD-LOOKING STATEMENTS 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, develops,
manufactures and markets a broad range of information storage products, and
provides maintenance and consulting services. These storage products and
services provide customers with a broad range of solutions for the storage and
retrieval of digitized electronic data. StorageTek's solutions are designed to
be easy to manage and allow universal access to data across servers, media
types, and storage networks.
The Company's products are used by a broad range of customers that include large
multinational companies, mid-size and small businesses and governmental
agencies, encompassing a broad range of industry sectors, including financial
services, retail sales, telecommunications, transportation and a variety of
manufacturing industries, as well as educational, scientific and medical
institutions located around the world. The Company markets its products and
services through its direct sales organization to end-user customers and through
original equipment manufacturers (OEMs), value-added distributors (VADs),
value-added resellers (VARs) and other distributors (collectively, the Indirect
Channel).
The Company's products are used in both the mainframe and client-server
environments. The Company is a leading provider of automated tape storage
solutions. In addition to its own products, StorageTek 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.
BUSINESS SEGMENTS
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StorageTek is organized into two reportable business segments: storage products
and storage services.
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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
2000 1999 1998
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Revenue:
Storage products $1,411,932 $1,704,314 $1,634,328
Storage services 648,272 663,917 623,894
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Total revenue $2,060,204 $2,368,231 $2,258,222
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Gross profit:
Storage products $ 595,083 $ 729,535 $ 767,331
Storage services 236,435 213,449 273,079
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Total gross profit $ 831,518 $ 942,984 $1,040,410
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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, Item 14, of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS," of this Form 10-K, which information is incorporated by reference
into this Part I, Item 1.
STORAGE PRODUCTS
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Within storage products, the Company's principal products are divided into three
categories: tape products, disk products and network products, in each case
including related software tools and applications. The Company is one of the
leaders in virtual storage technology with its virtual tape and disk offerings.
StorageTek's virtual storage products save customers time and money, and at the
same time, provide improved performance.
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's tape products consist primarily of automated
tape libraries, principally the Powderhorn(R), TimberWolf(TM) and L-Series
libraries, tape drives that are used in automated tape libraries, principally
the 9840, 9940, DLT and the TimberLine cartridge subsystems.
The Powderhorn(R) automated tape library, the Company's largest-capacity tape
library, is a high-capacity, high-performance system for use in mainframe and
client-server environments that has been available since 1993. The
TimberWolf(TM) automated tape library is a low-cost system for use in a
client-server environment that has been available since 1996. The Company has
made a number of improvements to these libraries since their initial
introduction.
The Company's newest automated tape libraries, the L-Series, range from the L20,
StorageTek's smallest and least expensive library, to the largest L-Series
library, the L700, and are used mainly in the client-server environment. The
L-Series libraries are designed to be easily installed, scalable and easily
upgradable. The Company intends to market the L20 to a new type of customer, the
small office/home office segment. There is no assurance that the Company will be
successful in its efforts to sell its products in such a segment.
The 9840 and 9940 tape drives are used in both the mainframe and client-server
environments and can be attached by SCSI, ESCON and native fibre channel. The
9840 tape drive is designed to
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optimize fast access, while the newly-introduced 9940 tape drive is designed to
optimize capacity. For certain client-server tape drive products, the Company
purchases its DLT tape drives from a third party. TimberLine(R) is a
high-performance 36-track cartridge sub-system for use in mainframe and
client-server environments, particularly for data-intensive applications and
large batch/back-up workloads.
The Company offers the Virtual Storage Manager(R) (VSM), a software-driven data
storage management solution designed to improve performance, cartridge
utilization and overall storage management using StorageTek's 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, and is currently available for the
mainframe environment.
The Company historically has generated a significant portion of its revenue and
operating profits from the mainframe tape market; however, the Company has
experienced a shift in customer purchase patterns to the client-server
environment. Sales of client-server tape automation products increased 18% in
2000, while sales of mainframe tape products decreased 21% in 2000. Fiscal 2000
was the first year that client-server tape product revenue was greater than
mainframe tape product revenue.
The Company is currently developing new tape products, along with enhancements
to existing tape products, which are in the design, preliminary engineering or
engineering validation testing phase and which have not yet been publicly
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 and Services and 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 points. The
Company's primary disk product offerings include the 9500 Shared Virtual
Array(TM) (SVA) and the OPENstorage(TM) Disk products family.
From the third quarter of 1996 through 1999, the Company's SVA product was
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 did not receive any significant sales revenue
from IBM in 2000. The Company is still developing its disk sales channels and
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.
The Company's 9500 SVA is a disk subsystem storage product for both the
mainframe and client-server environments. The 9500 SVA uses a virtual
architecture that uses its storage disks more efficiently, saving customers time
and money.
The Company's SnapShot software, which is offered in conjunction with the
Company's SVA products, is designed to provide virtual duplication and
significantly reduce central processing unit and channel utilization costs
associated with data movement. The SnapShot product was first released in 1996.
The OPENstorage(TM) Disk products are designed to provide high-performance,
high-availability, scalable physical storage for the client-server environment,
and first became available in the third quarter of 1996. The Company's disk
products are distributed by the Company's direct sales force and through its
Indirect Channel.
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NETWORK AND OTHER PRODUCTS
The Company's storage networking products are designed to improve transfer speed
of data by pooling tape and disk storage and shifting data transfers away from
the customer's application servers. The Company's StorageNet(TM) family of
products is designed to provide high-performance, high-speed connectivity
between local and wide-area networks and include both basic hardware, such as
switches and bridges, that the Company purchases from third parties and more
complex systems including software, such as the StorageNet(TM) 6000 series of
storage domain managers. The StorageNet(TM) 6000 uses a new architecture that
enables seamless, scalable and highly efficient management of storage resources
in fast changing, heterogeneous open system storage domains.
The Company is currently developing new storage networking products and
enhancements intended to address the developing storage area networking
marketplace. Most of these products and enhancements are in the design,
preliminary engineering or engineering validation testing phase and which have
not yet been publicly 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 and Services and 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, as well as risks associated with the developing
storage networking market.
STORAGE SERVICES
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Within storage services, the Company's principal services are divided into two
categories: maintenance services and consulting services.
MAINTENANCE SERVICES
The Company provides maintenance services for both StorageTek products and
third-party products around the world, using a combination of service engineers,
remote diagnostic tools, online and telephone assistance and contractual
agreements with third-party service providers.
The Company generally warrants its products for a specified period of time,
after which it services these products for a fee under maintenance agreements.
As a result of competitive pressures, the Company may offer extended warranty
periods on its products. The Company's accounting policies require the deferral
of revenue for extended warranties based upon their estimated fair value.
Accordingly, extended warranty periods may reduce product revenue and 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 the Company continues to improve its product reliability, as well
as the Company's increasing reliance on the Indirect Channel for its products,
as they provide service for the products that they sell.
CONSULTING SERVICES
The Company's storage consulting services primarily support sales of the
Company's hardware and software products, particularly for VSM and its storage
networking products.
BACKLOG
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As of December 29, 2000, the order backlog was approximately $83 million,
compared to year-end amounts of approximately $56 million in 1999 and $46
million in 1998.
Backlog amounts are calculated on an "if sold" basis and include orders from
end-user customers and the Indirect Channel for products that StorageTek expects
to deliver during the following 12 months. Unfilled orders may, in certain
cases, be canceled by the customer. Accordingly, backlog levels are not reliable
indicators of future results. There can be no assurance that orders in backlog
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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
accounting policy for revenue recognition.
MARKETING AND DISTRIBUTION
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StorageTek markets its products and services globally through a combination of a
direct sales organization and the Indirect Channel. The Company maintains a
presence, directly or indirectly, in many 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, New Zealand and Singapore, and sells its products and services through
independent distributors, sometimes in tandem with direct sales and service
operations, located in Africa, Asia, Europe, New Zealand and South America.
Revenue from outside the United States accounted for approximately 51% of total
revenue in 2000, 41% in 1999 and 37% in 1998, which includes sales to end-user
customers, 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 remaining 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.
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. Indirect Channel sales account for a significant
portion of the Company's product sales revenue. In 2000, 1999 and 1998, the
Company's Indirect Channel accounted for approximately 44%, 43% and 49%,
respectively, of the Company's product sales revenue. 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, Silicon Graphics, Inc., Sun Microsystems, Inc.
and Unisys Corporation. The Company's accounting policies with respect to
revenue recognition for sales to its Indirect Channel differ from those 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.
The Company historically has emphasized the use of its direct sales force in the
United States and Canada, complemented by the Indirect Channel. The Company
experienced increased turnover in its sales force in the first half of 2000 as a
result of its restructuring activities. While the Company has completed the
replacement of most of these sales positions, there can be no assurance that the
Company will not continue to encounter disruptions to its sales while the new
sales representatives are trained on the Company's products and sales tools. The
Company's operating and financial results may be adversely affected by reduced
margins on sales typically experienced in the Indirect Channel market. See Part
II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MIGHT AFFECT FUTURE RESULTS -- Significant
Personnel Changes."
In 2000, the Company initiated an e-commerce strategy which enables its VADs and
VARs in the United States and Europe to order products online via a secure
website. The Company intends to expand the scope of its e-commerce initiative to
include end-user customers, initially in the United States, and in the future,
Europe. The goal of the e-commerce initiative is to decrease the costs
associated with an order and reduce the time required to process an order. There
is no assurance that the Company's end-user customers will use the Company's
e-commerce ordering system or that, if they use the system, the Company's goal
will be attained.
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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 assembly in France
and Minnesota. 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 particular,
the Company performs certain critical steps in the manufacture of its read/write
heads for the 9840 tape drive. 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 and Herald Datanetics Ltd. 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. These vendors are not obligated to supply products for an extended
period or 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 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 competes in a number of markets that include a broad spectrum of
customers primarily on the basis of technology, product availability,
performance, quality, 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, new 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 erosion in the past and
the Company expects this trend to continue.
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The Company expects that the markets for its products and services, and its
competitors within these markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Advanced Digital Information Corporation,
Compaq Computer Corporation, EMC Corporation, Hewlett-Packard Company, Hitachi
Ltd., IBM, Network Appliance Inc., Quantum Corporation, and Sun Microsystems. A
number of the Company's competitors have significantly greater financial
resources than the Company.
NEW PRODUCT DEVELOPMENT
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StorageTek invests substantial resources to develop new products, software and
enhancements. In 2000, 1999 and 1998, the Company incurred research and
development costs of approximately $258 million, $278 million and $235 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 product
development and other similar relationships. In 2000 and 1999, the Company
received approximately $5 and $10 million, respectively, of research and product
development funding from third parties. The Company anticipates future
activities will be internally funded, with less than $5 million in joint
development funding currently anticipated in 2001.
As of December 29, 2000, approximately 990 employees were engaged on a full-time
basis in engineering and product development activities, primarily at facilities
located in the United States. 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 and Services and 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 2001 through 2017. 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.
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.
ENVIRONMENTAL COMPLIANCE
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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 not have any
material expenditures for environmental control facilities in 2000. The Company
does not currently have pending and has not budgeted any material estimated
expenditures for environmental control facilities during 2001. However,
potential liability under environmental legislation is ongoing, regardless of
whether the Company has complied with existing governmental
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guidelines. 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.
Government regulation in the United States for environmental and related
compliance costs has 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 not have a material impact on the
consolidated financial results and operations of the Company.
EMPLOYEES
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The Company employed approximately 7,600 persons on a full-time basis worldwide
as of December 29, 2000.
In 2000, the Company completed a broad restructuring program intended to return
the Company to profitability. Key elements of the restructuring included: (i) a
reduction of approximately 1,250 positions; (ii) a reduction in investment in
certain businesses, including storage consulting services; (iii) a recommitment
to the Company's core strengths of tape automation, virtual storage and storage
area networks (including related maintenance and consulting 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 Note 9 of "NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS" of this Form 10-K, which information is
incorporated by reference into this Part I, Item 1.
SIGNIFICANT PERSONNEL CHANGES
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The Company has experienced significant changes in its executive officers. On
July 11, 2000, Patrick J. Martin was selected as the Company's new Chairman of
the Board, President and Chief Executive Officer, replacing David E. Weiss, who
resigned from the same positions immediately prior to Mr. Martin's appointment.
Since the selection of Mr. Martin, the Company has announced the departure of
two executive officers and the appointment of three current executive officers
to new positions. It may take a period of time before the new executive
management team becomes fully productive.
The Company experienced increased turnover in its sales force in the first half
of 2000 as a result of its restructuring activities. While the Company has
completed the rehiring of many of these sales positions, financial results
continue to be adversely affected as the Company is still in the process of
delivering the product training and sales tools to increase the effectiveness of
its sales force in the United States and Canada.
The Company has experienced significant changes in the remainder of its employee
base 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 could have
an adverse effect on future operating results.
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OTHER MATTERS
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The Company's financial 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.
Further, the Company's first quarter revenue has historically decreased as
compared to other quarters. There can be no assurance that these historical
trends will continue in 2001 and that revenue during the fourth quarter will be
higher than any other quarter.
No single customer accounted for 10% or more of the Company's total revenue in
2000. 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.
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 14 separate buildings in Boulder
County, Colorado, comprising approximately 1.93 million square feet, of which
1.70 million is owned and 230,000 is leased. These facilities include
StorageTek's executive offices, as well as manufacturing, research and
development, finished goods and spare parts storage facilities. Utilization of
the Company's owned and leased facilities in Boulder County is approximately
80%.
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 67,500 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 135 locations comprising
approximately 940,000 square feet.
International Properties. StorageTek leases approximately 200,000 square feet of
engineering, consulting integration and marketing facilities in Toulouse,
France, which are approximately 60% 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 107,000 square feet, leases 4 offices in Latin America
comprising approximately 20,000 square feet, leases approximately 69 offices in
Europe comprising approximately
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448,000 square feet, and leases 16 offices in the Asia/Pacific region comprising
approximately 114,000 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
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's motion
for summary judgment and dismissed the complaint. Stuff appealed the dismissal
to the Colorado Court of Appeals (the 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
again dismissed, with prejudice, all of Stuff's material claims against the
Company. On August 30, 1999, Stuff filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Oral arguments
before the Appeals Court occurred on August 8, 2000. On August 17, 2000, the
Court of Appeals remanded the case back to the District Court for a trial on the
factual issues relating to the interpretation of the language embodied in the
1990 Settlement Agreement. The Company filed a Petition for Rehearing with the
Court of Appeals. On October 12, 2000, the Court of Appeals modified its
decision, but denied the Company's Petition for Rehearing. In November 2000, the
Company filed a Petition for Certiorari with the Supreme Court of Colorado. 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 June 1995, Odetics, Inc. filed a patent infringement suit against the Company
alleging infringement of various patents. During 1999, the Company recognized a
pre-tax expense of $97.8 million in connection with the resolution of this
litigation. The Company also recognized pre-tax expenses of $5.8 million in 1999
associated with the settlement of other litigation.
In December 1999, the Company filed suit in the U.S. District Court for the
Western District of Wisconsin against Cisco Systems, Inc. (Cisco), alleging that
Cisco infringed upon a certain patent of the Company that Cisco 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 used in its
products. Cisco filed an answer in January 2000 denying the Company's claims,
alleging that the Company's patents are invalid and asserting that a microchip
used in one of the Company's network security products infringed upon one of
Cisco's patents. Cisco is seeking unspecified compensatory damages that it
asserts should be trebled, along with injunctive relief. The Company purchases
the alleged infringing microchip from Level One, a subsidiary of Intel
Corporation. In March 2000, the case was transferred to the U.S. District Court
for the Northern District of California. Level One has been added to the lawsuit
as an additional defendant to Cisco's counterclaim. A claim construction hearing
is scheduled for April 9, 2001, and a trial date is scheduled for March 4, 2002.
The parties have commenced discovery, which is anticipated to continue for
several months. The Company continues to believe 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
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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.
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 29, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company as of
December 29, 2000.
NAME POSITION WITH COMPANY AGE
- -------------------------------------------------------------------------------------------------------
Gary Anderson Corporate Vice President, World Wide Operations Technology 53
Alain Andreoli Corporate Vice President and General Manager, International
Operations, Global Services and e-Business 41
Roger D. Archibald Vice President and General Manager, Disk 48
Thomas G. Arnold Vice President and Corporate Controller 38
Susan W. Bailey Corporate Vice President, U.S./Canada Sales and Service and
Global Channels 40
Pierre Cousin Vice President, Assistant to the Chairman 40
Jeffrey M. Dumas Corporate Vice President, General Counsel and Secretary 55
Gary D. Francis Vice President and General Manager, Automated Tape Solutions 53
Robert S. Kocol Corporate Vice President and Chief Financial Officer 44
Karen Niparko Corporate Vice President and Chief Administrative Officer 45
Patrick J. Martin Chairman of the Board, President and Chief Executive Officer 59
Mr. Anderson was appointed Corporate Vice President, Worldwide Operations
Technology, in January 2000. From July 1996 to January 2000 he served as
Corporate Vice President, Worldwide 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. Andreoli was appointed Corporate Vice President and General Manager for
International Operations, Global Services and e-Business in February 2000. From
June 1997 until his appointment, he served as Vice President and General
Manager, EAME. Prior to joining StorageTek, Mr. Andreoli held various
international and global management positions with Texas Instruments
Incorporated (TI), a semiconductor company. His roles at TI included Regional
Director for Northern Europe, Southern Europe, Eastern Europe, the Middle East
and Africa as well as Director of the European and Global industrial segment and
co-chairman of the global sales/marketing re-engineering effort.
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Mr. Archibald was appointed Vice President and General Manager, Disk in November
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. From 1993 to 1998, Mr. Archibald served
as Worldwide Marketing Manager, Information Storage Group 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. Effective January 5, 2001,
Ms. Bailey ceased to be an executive officer and an employee of the Company.
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 International Business
Machines Corporation in a number of sales, marketing and management positions.
Mr. Cousin was appointed Vice President, Assistant to the Chairman in November
2000. From February 2000 until this appointment, he served as Vice President,
Client-Server Business Group. From November 1997 until February 2000, he served
as General Manager, Southern Region, EAME and President of StorageTek France.
Prior to joining StorageTek, Mr. Cousin held various management positions with
Bull Corporation, an IT solutions group based in Europe. From 1996 to 1997, he
was Vice President, Mid-End Servers at Bull and from 1994 through 1996, he was
Sales Director, Strategic Accounts, France at Bull.
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 and General Manager, Automated Tape
Solutions in November 2000. Prior to this appointment, from February 2000, Mr.
Francis was Vice President, Corporate Strategy. From February 1997 until
February 2000, Mr. Francis 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.
Ms. Niparko was appointed Corporate Vice President and Chief Administrative
Officer in July 1999. Ms. Niparko is no longer an executive officer or an
employee of the Company. 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.
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Mr. Martin was appointed Chairman of the Board, President and Chief Executive
Officer in July 2000. Prior to joining StorageTek, Mr. Martin served in various
management positions from 1977 to 2000 at Xerox Corporation, a document products
and services company. From 1999 to 2000, Mr. Martin served as Corporate Senior
Vice President/President -- North American Solutions Group. From 1998 to 1999,
Mr. Martin was Corporate Senior Vice President/President -- Developing Markets
Operations and from 1996 to 1998 he was Corporate Vice President/
President -- Canadian and Americas Operations.
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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 2000 and 1999. On December 29, 2000, there were 11,287 record holders of
common stock of StorageTek.
2000 High Low
- ------------------------------------------------------------------------------
First Quarter $18.125 $11.875
Second Quarter 15.313 10.875
Third Quarter 16.250 10.125
Fourth Quarter 13.130 9.000
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
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 1998 through
2000 (except for the 1998 Balance Sheet Data) has been derived from the
consolidated financial statements appearing elsewhere herein, including the
Consolidated Balance Sheet as of December 29, 2000, and December 31, 1999, and
the related Consolidated Statement of Operations for each of the three years in
the period ended December 29, 2000, and notes thereto. The data, insofar as it
relates to the Balance Sheet Data as of December 25, 1998, December 26, 1997,
and December 27, 1996, and the Statement of Operations Data for the fiscal years
1997 and 1996, 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
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $2,060,204 $2,368,231 $2,258,222 $2,144,656 $2,039,550
Cost of revenue 1,228,686 1,425,247 1,217,812 1,171,530 1,192,777
--------- --------- --------- --------- ---------
Gross profit 831,518 942,984 1,040,410 973,126 846,773
Research and product development
costs 257,798 277,770 234,677 209,526 176,422
Selling, general, administrative and
other income and expense, net 542,527 615,616 492,928 472,839 444,870
Litigation and restructuring expense 27,176(a) 146,834(b)
--------- --------- --------- --------- ---------
Operating profit (loss) 4,017 (97,236) 312,805 290,761 225,481
Interest income (expense), net (6,758) (19,214) 6,943 25,356 1,211
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item (2,741) (116,450) 319,748 316,117 226,692
Benefit (provision) for income taxes 959 41,900 (121,500) (84,300) (55,900)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item (1,782) (74,550) 198,248 231,817 170,792
Extraordinary gain, net of taxes 9,535
--------- --------- --------- --------- ---------
Net income (loss) $ (1,782) $ (74,550) $ 198,248 $ 231,817 $ 180,327
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings (loss) per common
share: (c)
Income (loss) before extraordinary
item (0.02) (0.75) 1.91 1.93 1.52
Net income (loss) (0.02) (0.75) 1.91 1.93 1.61
Diluted earnings (loss) per common
share: (c)
Income (loss) before extraordinary
item (0.02) (0.75) 1.86 1.89 1.43
Net income (loss) (0.02) (0.75) 1.86 1.89 1.50
BALANCE SHEET DATA
Working capital $ 470,602 $ 440,763 $ 538,331 $ 661,206 $ 724,171
Total assets 1,653,558 1,735,475 1,842,944 1,740,017 1,884,276
Total debt 96,574 329,048 295,655 22,391 155,257
Total stockholders' equity 938,635 919,199 999,576 1,112,503 1,180,983
- ---------------
(a) In 2000, the Company recognized restructuring expense of $27,176,000.
(b) In 1999, the Company recognized litigation expense of $103,582,000 and
restructuring expense of $43,252,000.
(c) Earnings per share data has been restated to reflect the effect of a
2-for-1 stock split in the form of a stock dividend on June 26, 1998.
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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 PRODUCTS, BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND
UNCERTAINTIES. SOME OF THESE RISKS ARE DETAILED BELOW IN "FACTORS THAT MAY
AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS FORM 10-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 THE FORWARD-LOOKING STATEMENTS
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 29, 2000, of $1.8
million on revenue of $2.06 billion, compared to a net loss for the year ended
December 31, 1999, of $74.6 million on revenue of $2.37 billion and net income
for the year ended December 25, 1998, of $198.2 million on revenue of $2.26
billion. The Company's reported results for 2000 include one-time pre-tax
restructuring expenses of $27.2 million and other related restructuring expenses
of $14.8 million. Excluding these one-time expenses, net of tax, the Company
would have reported net income of $26.2 million during 2000. Excluding one-time
litigation, restructuring and other related expenses, net of tax, the Company
would have reported net income of $27.4 million during 1999.
Total revenue decreased 13% in 2000, compared to 1999, primarily due to
decreased revenue from storage products. Revenue from storage products decreased
17% in 2000, compared to 1999, and revenue from storage services decreased 2% in
2000, compared to 1999. Total gross profit margins remained largely unchanged at
40% in 2000, compared to 1999.
Revenue increased 5% in 1999, compared to 1998, primarily due to an increase in
revenue from storage services. Gross profit margins decreased to 40% in 1999,
compared to 46% in 1998, due to decreased margins from both storage products and
storage services.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products.
This evaluation process results in a variable sales cycle and makes it difficult
to predict if or when revenue will be earned. Further, gross margins may be
adversely impacted in an effort to complete the sales cycle. The Company's
financial results may be adversely impacted by its variable sales cycle. 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 and services; and the
implementation of its storage area network (SAN) strategy. For the discussion of
these and other risk factors, see "Factors That May Affect Future Results,"
below.
In April 1999, the Company first announced plans to restructure its business. In
October 1999, the Company announced additional restructuring plans. These
restructuring activities were intended to return the Company to profitability.
As of September 29, 2000, the Company had substantially completed all currently
planned restructuring activities. The Company estimates annual savings of
approximately $190.0 million will be realized in connection with these
restructurings. Because the restructuring activities were implemented in stages
throughout the first nine months of 2000, the Company estimates the realized
savings for the year 2000 were slightly in excess of $140.0 million. There can
be no assurance that the restructuring activities described above will be
sufficient to allow the Company to realize the expected annualized savings or
that additional restructuring activities
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may not be required in future periods. See Note 9 of "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS" for further discussion of the restructuring activities.
The Company's cash balance increased $64.3 million in 2000 as a result of
progress in the Company's efforts to more effectively manage working capital and
the receipt of tax refunds of $54.9 million in 2000. The Company's operating
activities provided cash of $336.8 million in 2000, compared to cash of $245.6
million and $88.1 million generated from operations in 1999 and 1998,
respectively, excluding the effects of one-time payments related to litigation
and restructuring. The increase in cash generated from operations in 2000 and
1999, 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 decreased to $78.7 million during 2000, as
compared to $102.4 million in 1999, primarily due to decreased expenditures on
property, plant and equipment. Cash used in investing activities in 1998 was
$60.6 million as capital expenditures were offset by decreases in short-term
investments. Cash used in financing activities increased to $188.4 million in
2000, primarily due to repayments of borrowings under the Company's credit
facilities.
The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment.
Year Ended December
---------------------------------------
2000 1999 1998
---------------------------------------
Storage products:
Tape products 53.8% 49.5% 44.6%
Disk products 7.1 15.6 23.3
Network and other products 7.6 6.9 4.5
----- ----- -----
Total storage products 68.5 72.0 72.4
Storage services 31.5 28.0 27.6
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 59.6 60.2 53.9
----- ----- -----
Gross profit 40.4 39.8 46.1
Research and product development costs 12.5 11.7 10.4
Selling, general, administrative and other income
and expense, net 26.4 26.0 21.8
Litigation expense 4.4
Restructuring expense 1.3 1.8
----- ----- -----
Operating profit (loss) 0.2 (4.1) 13.9
Interest income (expense), net (0.3) (0.8) 0.3
----- ----- -----
Income (loss) before income taxes (0.1) (4.9) 14.2
Benefit (provision) for income taxes 1.8 (5.4)
----- ----- -----
Net income (loss) (0.1)% (3.1)% 8.8%
----- ----- -----
----- ----- -----
REVENUE
- -------
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk and network
and other products. Revenue generated from storage products decreased 17% in
2000, compared to 1999, primarily due to a decrease in OEM sales of disk and
software products to International Business Machines Corporation (IBM). Revenue
generated from storage products increased 4% in 1999, compared to 1998, as an
increase in revenue from tape products was partially offset by a decline in disk
revenue.
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TAPE PRODUCTS
Tape product revenue decreased 5% in 2000, compared to 1999, primarily due to
decreased revenue from TimberLine(R) 9490, a 36-track cartridge subsystem;
decreased revenue from PowderHorn(R) 9310, an automated cartridge system
library; decreased sales of the TimberWolf(TM) family of automated tape products
designed for the client-server market; and decreased revenue from other earlier
generation mainframe tape products. The decrease in revenue from these products
reflects both lower selling prices and decreases in the number of units sold.
These decreases were partially offset by increased sales of the L-series
client-server market tape libraries, the 9840 tape drive (9840) and Virtual
Storage Manager(R) (VSM).
Tape product revenue increased 16% in 1999, compared to 1998, primarily due to
increased sales of the 9840 tape drive, increased sales of TimberWolf(TM) tape
products, and sales of 9840 tape media. Revenue from TimberLine(R) 9490,
PowderHorn(R) 9310 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. The Company believes that the sales of
tape products designed for the mainframe market in 1999 were adversely impacted
due to customers delaying testing and purchasing decisions in anticipation of
the year 2000.
DISK PRODUCTS
Disk product revenue decreased 61% in 2000 and 30% in 1999, due primarily to a
decrease in OEM sales to IBM of disk storage products and software. The Company
does not anticipate any significant sales revenue from IBM in the future. Sales
of OPENstorage(TM) Disk products also decreased in 2000 and 1999. These
decreases were partially offset by an increase in direct sales of the 9500
Shared Virtual Array(TM) (SVA). In October 2000, the Company announced the next
generation of SVA; however, there can be no assurance that the Company's current
and future disk products will gain additional market acceptance or that
decreases in disk product revenue will not continue in the future.
NETWORK AND OTHER PRODUCTS
Network and other products revenue decreased 3% in 2000, compared to 1999,
primarily due to decreased revenue from earlier generation connectivity products
offset by an increase in sales of third party hardware and software designed to
provide storage networking solutions. In October 2000, the Company introduced
the StorageNet(TM) 6000 series of domain managers. Network and other products
revenue increased 62% in 1999, compared to 1998, primarily due to increased
revenue from sales of third-party hardware and software.
Future revenue growth in the Company's storage products segment is significantly
dependent upon the continued demand for its tape automation products development
of a successful disk sales strategy, and market acceptance of the StorageNet(TM)
6000 and other network products designed for the emerging SANs market. There can
be no assurances that the Company will be successful in these endeavors. See
"Factors That May Affect Future Results -- New Products and Services and
Emerging Markets," for a discussion of the risks associated with new products,
new markets and distribution channels.
STORAGE SERVICES
Storage services include revenue associated with the maintenance of the
Company's and third-party storage products, as well as integration service
revenue associated with storage consulting activities. Storage services revenue
decreased 2% in 2000, compared to 1999, primarily due to the Company's exit from
managed storage services and certain lower margin consulting and integration
service activities in connection with the restructuring. Storage services
revenue increased 6% in 1999, compared to 1998, as the Company expanded its
consulting and integration service offerings.
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There can be no assurance that service revenue will not continue to decline in
the future as the customer base continues to shift to the client-server
marketplace. 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.
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
----------------------------------------
2000 1999 1998
----------------------------------------
Total gross profit 40.4% 39.8% 46.1%
Storage products 42.2% 42.8% 47.0%
Storage services 36.5% 32.2% 43.8%
While total gross margins were largely unchanged for the full year 2000, as
compared to 1999, margins from both products and services improved in the second
half of 2000 as the Company began to realize some of the benefits from its
restructuring activities.
Gross profit margins for the Company's storage products decreased slightly
during 2000. The decrease reflects decreases in the selling prices for disk
products and earlier generation tape products; increases in sales of tape
cartridges for use with the 9840 tape drive which have lower margins; increased
sales of third-party network products which have lower margins; a decline in
sales of disk products to IBM; and unfavorable manufacturing variances
associated with excess manufacturing capacity during the first half of 2000.
These decreases were largely offset by increased sales of the recently
introduced L-series tape libraries, which generally carry higher margins than
the earlier generation TimberWolf(TM) automated tape products.
Gross profit margins for the storage services segment increased to 37% in 2000
compared to 32% in 1999, primarily as a result of reduced headcount, the
elimination of unprofitable integration service activities and improvement in
consulting margins.
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 were adversely affected by
efforts to shorten sales cycles; increased 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 decreased principally as a result
of increased revenue contribution from lower-margin consulting, integration, and
managed storage service offerings. Storage service margins were also 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.
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 an impact on the Company's gross profit margins.
The Company's ability to sustain or improve gross margins is dependent upon
gaining operational efficiencies in connection with the restructuring
activities, achieving cost improvements associated with the sourcing of
production materials, the implementation of internal pricing controls and asset
management disciplines and driving improved profitability from the Company's
continuing consulting and integration services activities. Storage product 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.
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RESEARCH AND PRODUCT DEVELOPMENT
- --------------------------------
Research and product development expenses decreased 7% in 2000, compared to
1999, as the Company eliminated several lower priority research and product
development programs in connection with the restructuring. As part of the
restructuring, the Company is focusing research and development activities on
the core businesses of tape automation, virtual storage, and SAN products and
related services. Research and product development costs as a percentage of
revenue increased to 13% in 2000, compared to 12% in 1999, primarily due to
lower revenue and lower third-party funding for research and 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.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
- ------------------------------------------
Selling, general, administrative and other income and expense (SG&A) decreased
12% in 2000, compared to 1999, primarily as a result of headcount reductions and
decreased selling expenses. Selling expenses decreased in 2000 as a result of
reduced spending on product marketing activities, as well as reduced bonus and
commission expenses associated with decreases in sales revenue. General and
administrative expenses decreased in 2000 primarily due to reduced headcount.
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, increases in sales headcount, and an increase in marketing
expenditures.
LITIGATION
- ----------
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's motion
for summary judgment and dismissed the complaint. Stuff appealed the dismissal
to the Colorado Court of Appeals (the 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
again dismissed, with prejudice, all of Stuff's material claims against the
Company. On August 30, 1999, Stuff filed a notice of appeal with the Appeals
Court seeking to overturn the decision of the District Court. Oral arguments
before the Appeals Court occurred on August 8, 2000. On August 17, 2000, the
Court of Appeals remanded the case back to the District Court for a trial on the
factual issues relating to the interpretation of the language embodied in the
1990 Settlement Agreement. The Company filed a Petition for Rehearing with the
Court of Appeals. On October 12, 2000, the Court of Appeals modified its
decision, but denied the Company's Petition for Rehearing. In November 2000, the
Company filed a Petition for Certiorari with the Supreme Court of Colorado. 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 June 1995, Odetics, Inc. filed a patent infringement suit against the Company
alleging infringement of various patents. During 1999, the Company recognized a
pre-tax expense of
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$97.8 million in connection with the resolution of this litigation. The Company
also recognized pre-tax expenses of $5.8 million in 1999 associated with the
settlement of other litigation.
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 October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. Key elements of the
restructuring plan included:
- - an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
remaining positions eliminated by the end of the third 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 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 Company had substantially completed all currently planned restructuring
activities as of September 29, 2000. The following table summarizes the reserves
in connection with 2000 restructuring activities (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
----------------------------------------------
Balances, December 31, 1999 $ 3,917 $ 3,917
Restructuring expense 21,456 $ 5,258 $ 462 27,176
Cash payments (25,373) (25,373)
Asset writedowns (5,258) (462) (5,720)
------- ------- ------- -------
Balances, December 29, 2000 $ 0 $ 0 $ 0 $ 0
------- ------- ------- -------
------- ------- ------- -------
Employee severance expense of $21.5 million was recognized during 2000 in
connection with the restructuring. This expense is comprised of separation
charges related to the fixed and determinable severance payments owed to
approximately 1,100 employees who were involuntarily terminated during 2000 in
connection with the restructuring.
Asset writedowns of $5.3 million were recognized during 2000 in connection with
the restructuring. The asset writedowns are comprised of $2.3 million related to
the spin-off of the Company's
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managed storage services business and $3.0 million related to an impairment
writedown of assets at the Company's manufacturing facility in Toulouse, France.
At the time of the impairment, the Company was engaged in activities to sell the
Toulouse facility and the impairment charge was required to reflect the
Company's estimate of fair value of the facility upon its anticipated sale. The
Company has subsequently terminated negotiations to sell the facility and the
Company currently intends to retain the facility for the foreseeable future.
Other exit costs of $462,000 were recognized during 2000. Other exit costs are
comprised of $326,000 associated with legal and accounting expenses incurred in
connection with the spin-off of the managed storage services business and
$136,000 related to excess lease space in Canada.
The Company incurred pre-tax expenses of $43.3 million during the year ended
December 31, 1999, in connection with a restructuring announced in April 1999.
This restructuring provided for a reduction in headcount as well as the
elimination of certain lower priority research and development programs.
The Company has now reached its goal of reducing 1,200 to 1,400 positions. A net
reduction of approximately 1,250 positions was achieved through a combination of
involuntary severances, limiting the replacement of terminating employees due to
normal attrition, and eliminating certain contractors, temporary employees and
other non-permanent positions.
The Company estimates annual savings of approximately $190.0 million will be
realized in connection with the restructuring activities. Because the
restructuring activities were implemented in stages throughout 2000, the Company
estimates the realized savings for the year 2000 were slightly in excess of
$140.0 million. The Company does not anticipate any material incremental
operating expenses will be incurred on an on-going basis.
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 decreased $6.6 million in 2000, compared to 1999, due to
decreased borrowings under the Company's credit facilities. Interest income
increased $5.9 million in 2000, compared to 1999, as a result of an increase in
cash available for investment. See "Liquidity and Capital Resources -- Available
Financing Lines," for further discussion of the Company's credit facilities.
Interest expense increased $15.0 million in 1999, compared to 1998, due to
increased borrowings under the Company's credit facilities. Interest income
decreased $11.2 million in 1999, compared to 1998, primarily as a result of a
decrease in cash available for investment.
INCOME TAXES
- ------------
The Company's effective tax rate was 35%, 36% and 38% during fiscal 2000, 1999
and 1998, respectively.
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," 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 $195.7 million of deferred income tax assets as of
December 29, 2000. The Company's valuation allowance of approximately $22.8
million as of December 29, 2000, relates principally to net deductible temporary
differences, tax credit carryforwards and net operating loss carryforwards.
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
The Company's cash balance increased $64.3 million in 2000 as a result of
progress in the Company's efforts to more effectively manage working capital and
the receipt of tax refunds of $54.9 million in 2000. The Company's operating
activities provided cash of $336.8 million in 2000, compared to cash of $245.6
million in 1999, excluding the effects of one-time payments related to
litigation and restructuring. The increase in cash generated from operations in
2000 and 1999, was primarily the result of progress in the Company's efforts to
more effectively manage working capital. Cash used in investing activities
decreased to $78.7 million during 2000, as compared to $102.4 million in 1999,
primarily due to decreased expenditures on property, plant and equipment. Cash
used in investing activities in 1998 was $60.6 million as capital expenditures
were offset by decreases in short-term investments. Cash used in financing
activities was $188.4 million in 2000 primarily related to repayments of
borrowings under the Company's credit facilities.
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 in 1999 was primarily due to property, plant and equipment
purchases of $100.8 million. Cash used in financing activities of $2.1 million
in 1999 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.
AVAILABLE FINANCING LINES
Borrowings under credit facilities consist of the following (in thousands of
dollars):
December 29, December 31,
2000 1999
---------------------------
Revolver $205,000
Promissory notes denominated in foreign currencies $78,381 81,152
------ -------
$78,381 $286,152
====== =======
The Company has a revolving credit facility (the Revolver) which expires in
October 2001. The credit limit available under the Revolver ($237.5 million as
of December 29, 2000) is reduced by $12.5 million on the last business day of
each calendar quarter. The interest rates under the Revolver depend upon the
repayment period of the advance selected and the Company's Total Debt to rolling
four quarter Earnings Before Interest Expense, Taxes, Depreciation and
Amortization (EBITDA) ratio. Depending on the term of the outstanding borrowing,
the rate ranges from the applicable LIBOR plus 2.00% to 2.50% or the agent
bank's base rate plus 0.00% to 0.50%. The Company had no outstanding borrowings
as of December 29, 2000, but had outstanding letters of credit for approximately
$1.5 million under the Revolver. The remaining available credit under the
Revolver as of December 29, 2000, was approximately $236.0 million. The Revolver
is secured by the Company's U.S. accounts receivable and U.S. inventory. The
Revolver contains certain financial and other covenants, including restrictions
on payment of cash dividends on the Company's common stock.
The Company also had a $150.0 million revolving credit facility (the
Supplemental Revolver), which the Company decided not to renew and expired in
January 2001. The Company had no borrowings outstanding under the Supplemental
Revolver as of December 29, 2000.
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The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $120.0 million at any one
time. The agreement, which expires in January 2002, provides for commitments by
the bank to purchase promissory notes denominated in a number of foreign
currencies. As of December 29, 2000, the Company had promissory notes of $78.4
million outstanding under this financing agreement and had committed to
borrowings between January 2001 and January 2002 in the cumulative principal
amount of approximately $396.5 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 29, 2000, was 8.75%. 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 decreased from 26% as of
December 31, 1999, to 9% as of December 29, 2000, primarily due to a net
decrease in borrowings of $207.8 million under the Company's credit facilities.
See "Working Capital," above, for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
- ------------------------
During 2000, 1999, and 1998, approximately 51%, 41%, and 37%, respectively, of
the Company's revenue was generated by its international operations. The Company
also sells products through its domestic Indirect Channel, which has 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.
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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
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 1 and Note 13 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
for further discussion of recently issued accounting standards and 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 29, 2000, and as of December 31, 1999, would result in a hypothetical
loss of approximately $69.5 million and $54.9 million, respectively. The
increase in the hypothetical loss for 2000 is primarily due to an increase in
outstanding foreign currency forwards and commitments associated with promissory
notes denominated in foreign currencies. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
NEW PRODUCTS AND SERVICES
The Company's results of operations and competitive strength depend upon its
ability to successfully develop, manufacture and market innovative new products
and services. Short product life cycles are inherent in the high-technology
market. The Company must devote significant
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resources to research and product development projects and effectively manage
the risks inherent in new product transitions. Developing new technology,
products and services is complex and involves uncertainties. The Company
introduced a significant number of new products in October 2000 including the
StorageNet(TM) 6000, the 9940 high-capacity tape drive, and Virtual Storage
Manager(R) III, as well as enhancements to the 9500 Shared Virtual Array(TM).
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 successfully manage the development and
introduction of new products, services and software in the future.
EMERGING MARKETS
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 broad 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 the delivery of storage solutions that
provide customers with superior functionality, performance and quality.
The storage networking market has only recently begun to develop and is
characterized by rapidly changing technology and standards. Because this market
is new, it is difficult to predict its potential size or future growth rate.
Customers may be reluctant to adopt new data storage standards, and competing
standards may emerge that will be preferred by customers.
COMPETITION
The markets for the Company's products 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 competes in a number of markets that include a broad spectrum of
customers primarily on the basis of technology, product availability,
performance, quality, 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, new 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 erosion in the past and
the Company expects this trend to continue.
The Company expects that the markets for its products and services, and its
competitors within these markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Advanced Digital Information Corporation,
Compaq Computer Corporation, EMC Corporation, Hewlett-Packard Company, Hitachi
Ltd., IBM, Network Appliance Inc., Quantum Corporation, and Sun Microsystems. A
number of the Company's competitors have significantly greater financial
resources than the Company.
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PARTNERS/COMPETITORS
The markets in which the Company competes are characterized by various alliances
formed to promote industry standards and deliver tested, interoperable
technology. For example, Seagate Technology, Inc., IBM and Hewlett-Packard
Company have jointly developed the linear tape-open drive, or LTO, a
high-capacity tape drive technology for the mid-range market. The Company is
currently developing versions of its tape libraries that will support LTO tape
drives. However, the Company may be at a cost disadvantage in manufacturing tape
libraries that use LTO tape drives. The Company also competes with vendors with
which it has established relationships, including Legato Systems, Inc. and
VERITAS Software Corporation. The Company 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 successfully realize the benefits
from these alliances at the same time it competes against these same companies.
SIGNIFICANT PERSONNEL CHANGES
The Company has experienced significant changes in its executive officers. On
July 11, 2000, Patrick J. Martin was selected as the Company's new Chairman of
the Board, President and Chief Executive Officer, replacing David E. Weiss, who
resigned from the same positions immediately prior to Mr. Martin's appointment.
Since the selection of Mr. Martin, the Company has announced the departure of
two executive officers and the appointment of three current executive officers
to new positions. It may take a period of time before the new executive
management team becomes fully productive.
The Company experienced increased turnover in its sales force in the first half
of 2000 as a result of its restructuring activities. While the Company has
completed the rehiring of most of these sales positions, financial results
continue to be adversely affected as the Company is still in the process of
delivering the product training and sales tools to increase the effectiveness of
its sales force in the United States and Canada.
The Company has experienced significant changes in the remainder of its employee
base 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 could have
an adverse effect on future operating results.
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 governments. 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.
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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 parts 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 and 9940 tape cartridges and the Company
is dependent on Imation to economically produce large volumes of high-quality
tape cartridges for the 9840 and 9940 product at a cost acceptable to the
Company and its customers. IBM is currently a single source supplier for disk
drives used in the Company's SVA and VSM products. IBM has indicated these
drives will no longer be manufactured after June 2001. The Company is developing
an industry standard interface drive for its SVA and VSM products. This project
is in the engineering and development stage. The Company has entered into a
final purchase commitment with IBM and believes it will be able to accurately
forecast the required number of drives to meet future demand until the new
technology becomes available. Failure to accurately forecast future demand for
these products could result in excess inventory and related inventory
write-offs, or the inability to meet customer needs for these products.
Certain suppliers have experienced occasional technical, financial or other
problems in the past that have delayed deliveries. During the third quarter of
2000, the Company's supply of flex circuits and transducer semiconductor
components for the 9840 tape drives were delayed due to manufacturing problems
experienced by suppliers. An unanticipated failure of any sole source supplier
to meet the Company's requirements for an extended period, or the inability to
secure comparable components in a timely manner, could result in a shortage of
key components, longer lead times, and reduced control over production and
delivery schedules. These factors could have a material adverse effect on
revenue and operating results. In the event a sole source supplier was unable or
unwilling to continue to supply components, the Company would need to identify
and qualify other acceptable suppliers. This process could take an extended
period, and no assurance can be given that any additional source would become
available or would be able to satisfy production requirements on a timely basis
or at a price acceptable to the Company.
The Company is dependent upon a sole subcontractor, Herald Datanetics Ltd.
(HDL), to manufacture a key component used in certain tape products. HDL is
located in the People's Republic of China (PRC). To date, the Company has not
experienced any material problems with HDL. The Company's dependence on 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 is 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
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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.
The Company, along with the computer industry as a whole, has experienced
delivery delays, increased lead times in ordering parts and components for its
products, and rapid changes in the demand by customers for certain products.
These longer lead times coupled with rapid changes in the demand for products,
could result in a shortage of parts and components and result in reduced control
over delivery schedules and an inability to fulfill customer orders in a timely
manner. The complexities of these issues are increased while the Company
transitions to newer technologies and products. These factors could have a
material adverse effect on revenue and operating results.
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. Many of the Company's customers undertake
significant procedures relating to the evaluation, testing, implementation and
acceptance of the Company's products. This evaluation process results in a
variable sales cycle, and makes it difficult to predict if or when revenue will
be earned. 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. A number of other factors may also cause revenue to fall below
expectations, such as product and technology transitions announced by the
Company or its competitors, delays in the availability of new products, changes
in the purchasing patterns of the Company's customers and distribution partners,
or adverse global economic conditions. The 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. 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.
RISKS ASSOCIATED WITH THE YEAR 2000
The Company's product lines include information storage products 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 Issue). There have not been any
significant product warranty claims, business disruptions or internal
information system failures as a result of the Year 2000 Issue.
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."
30
31
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.
31
32
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 to 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 24, 2001
(the "2001 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 2001 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 2001 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 2001 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 2001 Proxy Statement.
32
33
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 29, 2000, and
December 31, 1999 F-1
Consolidated Statement of Operations for the Years Ended
December 29, 2000, December 31, 1999, and December 25,
1998 F-2
Consolidated Statement of Cash Flows for the Years Ended
December 29, 2000, December 31, 1999, and December 25,
1998 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 29, 2000, December 31, 1999,
and December 25, 1998 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-24
2. Financial Statement Schedules:
------------------------------
All 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(2) Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987
3.2(2) Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987
3.3(2) Certificate of Second Amendment dated May 28, 1992, to the
Restated Certificate of Incorporation dated July 28, 1987
3.4 Certificate of Third Amendment dated May 21, 1999, to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 25, 1999, and
incorporated herein by reference)
3.5 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)
- ------------------------
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.
33
34
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) Storage Technology Corporation 1987 Employee Stock Purchase
Plan, as amended (previously filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 filed on August 11, 2000, and
incorporated herein by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995
Equity Participation Plan (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.3(1) Storage Technology Corporation 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) Separation Agreement between the Company and Susan Bailey,
dated December 11, 2000
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,
filed on March 6, 1998 and incorporated herein by reference)
10.8(1) Form of Executive Officer Employment Agreement between the
Company and Each Executive Officer Named in Exhibit 10.9
hereto, dated October 1999 (previously filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, filed on March 10, 2000 and
incorporated herein by reference)
10.9(1/2) Schedule of Differences in Terms and Conditions of Executive
Officer Employment Agreement
10.10(1) CEO Employment Agreement, dated July 11, 2000, between the
Company and Patrick J. Martin (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, filed on August 11, 2000, and
incorporated herein by reference)
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.
34
35
10.11(1) Release dated as of July 10, 2000, between the Company and
David E. Weiss (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 filed on August 11, 2000, and
incorporated herein by reference)
10.12(1) Extension of Retention Agreement, dated July 31, 2000,
between the Company and Robert S. Kocol (previously filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 11,
2000, and incorporated herein by reference)
10.13 Amended and Restated Credit Agreement, dated as of January
13, 2000, among the Company, Bank of America, N.A., as
Administrative Agent, Swingline Bank and Letter of Credit
Issuing Bank and the other financial institutions party
thereto (previously filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
10.14 Credit Agreement, dated as of January 13, 2000, among the
Company, Bank of America, N.A. and the other financial
institutions party thereto (previously filed as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.15 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 (previously filed as Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
10.16 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)
10.17 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)
10.18 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 (previously filed as
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.
35
36
10.19 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. (previously filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
10.20(2) Fifth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
August 15, 2000, between the Company and Bank of America,
N.A.
10.21(1/2) Separation Agreement and Release, dated February 7, 2001,
between the Company and Karen Niparko
21.1(2) Subsidiaries of Registrant
23.1(2) Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K.
--------------------
On November 7, 2000, the Company filed a Current Report on Form 8-K dated
November 7, 2000, pursuant to Item 5, disclosing the terms and conditions of
the Company's offer to certain employees to exchange certain stock options
for shares of restricted stock.
On December 7, 2000, the Company filed a Current Report on Form 8-K dated
December 7, 2000, pursuant to Item 5, announcing the selection of Michael R.
McLay as Vice President, U.S./Canada Sales and Service, replacing Susan N.
Bailey, who announced her departure to explore other business opportunities.
(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.
- ------------------------
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.
36
37
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: February 20, 2001 STORAGE TECHNOLOGY CORPORATION
By: /s/ Patrick J. Martin
----------------------------------
Chairman of the Board,
President, Chief Executive Officer
and Director(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/ Patrick J. Martin Chairman of the Board, February 20, 2001
- ----------------------------------------------------- President, Chief Executive
Patrick J. Martin Officer and Director
(Principal Executive
Officer)
/s/ Robert S. Kocol Corporate Vice President and February 20, 2001
- ----------------------------------------------------- Chief Financial Officer
Robert S. Kocol (Principal Financial
Officer)
/s/ Thomas G. Arnold Vice President and Corporate February 20, 2001
- ----------------------------------------------------- Controller (Principal
Thomas G. Arnold Accounting Officer)
/s/ James R. Adams Director February 20, 2001
- -----------------------------------------------------
James R. Adams
/s/ William L. Armstrong Director February 20, 2001
- -----------------------------------------------------
William L. Armstrong
/s/ William R. Hoover Director February 20, 2001
- -----------------------------------------------------
William R. Hoover
/s/ William T. Kerr Director February 20, 2001
- -----------------------------------------------------
William T. Kerr
37
38
SIGNATURE TITLE DATE
/s/ Robert E. La Blanc Director February 20, 2001
- -----------------------------------------------------
Robert E. La Blanc
/s/ Robert E. Lee Director February 20, 2001
- -----------------------------------------------------
Robert E. Lee
/s/ Richard C. Steadman Director February 20, 2001
- -----------------------------------------------------
Richard C. Steadman
38
39
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
December 29, December 31,
2000 1999
---------------------------
ASSETS
Current assets:
Cash, including cash equivalents of $172,853 at 2000 and
$100,825 at 1999 $ 279,731 $ 215,421
Accounts receivable, net of allowance for doubtful
accounts
of $16,893 at 2000 and $19,492 at 1999 553,790 627,435
Inventories (Note 2) 218,218 260,642
Deferred income tax assets (Note 3) 121,703 124,588
--------- ---------
Total current assets 1,173,442 1,228,086
Property, plant and equipment, at cost net of accumulated
depreciation (Note 4) 267,082 322,061
Spare parts for maintenance, at cost net of accumulated
amortization of $74,131 at 2000 and $64,086 at 1999 41,614 41,995
Deferred income tax assets (Note 3) 73,997 40,882
Other assets 97,423 102,451
--------- ---------
$1,653,558 $1,735,475
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Credit facilities (Note 5) $ 78,381 $ 286,152
Current portion of long-term debt (Note 5) 6,110 13,943
Accounts payable 99,675 111,253
Accrued liabilities (Note 6) 363,048 303,110
Income taxes payable (Note 3) 155,626 72,865
--------- ---------
Total current liabilities 702,840 787,323
Long-term debt (Note 5) 12,083 28,953
--------- ---------
Total liabilities 714,923 816,276
--------- ---------
Commitments and contingencies (Notes 5 and 7)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 300,000,000 shares authorized;
103,172,244 shares issued at 2000 and 100,825,390 shares
issued at 1999 (Note 8) 10,320 10,083
Capital in excess of par value 854,744 830,780
Retained earnings 82,922 84,704
Treasury stock of 113,774 shares at 2000 and 1999, at cost (2,334) (2,334)
Unearned compensation (7,017) (4,034)
--------- ---------
Total stockholders' equity 938,635 919,199
--------- ---------
$1,653,558 $1,735,475
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
40
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Revenue:
Storage products $1,411,932 $1,704,314 $1,634,328
Storage services 648,272 663,917 623,894
--------- --------- ---------
Total revenue 2,060,204 2,368,231 2,258,222
--------- --------- ---------
Cost of revenue:
Storage products 816,849 974,780 866,997
Storage services 411,837 450,467 350,815
--------- --------- ---------
Total cost of revenue 1,228,686 1,425,247 1,217,812
--------- --------- ---------
Gross profit 831,518 942,984 1,040,410
Research and product development costs 257,798 277,770 234,677
Selling, general, administrative and other
income and expense, net 542,527 615,616 492,928
Litigation expense (Note 7) 103,582
Restructuring expense (Note 9) 27,176 43,252
--------- --------- ---------
Operating profit (loss) 4,017 (97,236) 312,805
Interest expense (16,723) (23,316) (8,331)
Interest income 9,965 4,102 15,274
--------- --------- ---------
Income (loss) before income taxes (2,741) (116,450) 319,748
Benefit (provision) for income taxes (Note 3) 959 41,900 (121,500)
--------- --------- ---------
Net income (loss) $ (1,782) $ (74,550) $ 198,248
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE (Note 10)
Basic earnings (loss) per common share $ (0.02) $ (0.75) $ 1.91
--------- --------- ---------
--------- --------- ---------
Weighted-average shares 100,859 99,900 103,868
--------- --------- ---------
--------- --------- ---------
Diluted earnings (loss) per common share $ (0.02) $ (0.75) $ 1.86
--------- --------- ---------
--------- --------- ---------
Weighted-average and dilutive potential
shares 100,859 99,900 106,497
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
41
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
OPERATING ACTIVITIES
Cash received from customers $ 2,085,470 $ 2,456,222 $ 2,124,070
Cash paid to suppliers and employees (1,773,014) (2,199,744) (1,926,451)
Cash paid for settlement of litigation (Note 7) (85,788)
Cash paid for restructuring activities (Note 9) (25,373) (34,394)
Interest paid (15,126) (21,395) (6,657)
Interest received 9,965 4,102 15,274
Income tax refunded (paid), net 54,858 6,407 (118,131)
---------- ---------- ----------
Net cash provided by operating activities 336,780 125,410 88,105
---------- ---------- ----------
INVESTING ACTIVITIES
Short-term investments, net (10,155) 77,275
Purchase of property, plant and equipment, net (69,762) (100,751) (116,903)
Other assets, net 1,234 (1,633) (21,008)
---------- ---------- ----------
Net cash used in investing activities (78,683) (102,384) (60,636)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds (repayments) from credit facilities,
net (188,472) 9,479 273,211
Repayments of other debt, net (15,755) (1,754) (4,936)
Repurchases of common stock (Note 8) (35,226) (359,395)
Proceeds from employee stock plans 15,825 25,383 36,924
---------- ---------- ----------
Net cash used in financing activities (188,402) (2,118) (54,196)
---------- ---------- ----------
Effect of exchange rate changes on cash (5,385) (37,472) 2,393
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 64,310 (16,564) (24,334)
Cash and cash equivalents -- beginning of
the year 215,421 231,985 256,319
---------- ---------- ----------
Cash and cash equivalents -- end of the year $ 279,731 $ 215,421 $ 231,985
---------- ---------- ----------
---------- ---------- ----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (1,782) $ (74,550) $ 198,248
Depreciation and amortization expense 139,664 143,010 122,864
Inventory write downs 78,689 57,300 32,167
Non-cash litigation and restructuring expense 5,720 26,652
Translation (gain) loss 13,381 38,841 (7,773)
Other non-cash adjustments to income (4,107) (61,599) (13,043)
(Increase) decrease in accounts receivable 52,379 96,091 (137,940)
(Increase) decrease in inventories, net (28,597) 3,738 (49,961)
Increase in spare parts, net (27,414) (33,113) (22,737)
(Increase) decrease in net deferred income tax
assets, net (30,936) (38,866) 9,679
Increase (decrease) in accounts payable (9,816) (22,541) 31,792
Increase (decrease) in accrued liabilities 65,259 (10,567) (58,305)
Increase (decrease) in income taxes payable 84,340 1,014 (16,886)
---------- ---------- ----------
Net cash provided by operating activities $ 336,780 $ 125,410 $ 88,105
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
42
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 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
Shares issued under stock purchase plan, and
for exercises of options (1,650,638
shares) 165 17,188 17,353
Net loss (1,782) (1,782)
Option exchange program (555,943 shares)
(Note 11) 56 5,576 (5,632)
Other 16 1,200 2,649 3,865
------ --------- -------- ------- ------ ---------
Balances, December 29, 2000 $10,320 $ 854,744 $ 82,922 $ (2,334) $(7,017) $ 938,635
------ --------- -------- ------- ------ ---------
------ --------- -------- ------- ------ ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
43
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 on consolidation.
NATURE OF OPERATIONS
StorageTek designs, develops, manufactures and markets a broad range of
information storage products, and provides maintenance and consulting services.
These storage products and services provide customers with a broad range of
solutions for the storage and retrieval of digitized electronic data.
StorageTek's solutions are designed to be easy to manage and allow universal
access to data across servers, media types, and storage networks. 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). 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
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance regarding the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. In June
2000, the SEC issued SAB 101B that had the effect of delaying the required
adoption of SAB 101 for the Company until the fourth quarter of 2000. The
adoption of SAB 101 in the fourth quarter of 2000 did not have a material impact
on the Company's financial position or results of operations for any period.
The revenue recognition policy for product sales depends on the sales channel
utilized by the Company. Revenue for product 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 reasonably assured. Product is deemed to be accepted by the customer either
at the time of installation at the customer site or upon receipt of written
acceptance, depending on the terms of the contract and applicable commercial
law. Sales to original equipment manufacturers (OEMs), value-added distributors
(VADs), value-added resellers (VARs) and other distributors (collectively, the
Indirect Channel) are generally subject to agreements allowing certain rights of
return with respect to unsold products and price protection. Revenue for product
sales to the Indirect Channel is either recognized at the time of shipment or
upon sell-through to the Indirect Channel partner's customer. The revenue
recognition policy utilized for each of the Company's Indirect Channel partners
is made based upon the Company's historical experience with respect to returns
and price protection claims. For sales to the Indirect Channel, which are
recognized at the
F-5
44
time of shipment, the Company maintains a sales return and allowance for
estimated returns and price protection claims.
Revenue from maintenance and consulting services is recognized as earned and the
associated costs and expenses are recognized as incurred. In cases in which
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 product sales revenue is recognized based upon the estimated fair
value of the service element.
RESTRUCTURING
Restructuring activities are accounted for in accordance with the guidance
provided by the Emerging Issues Task Force (EITF) in connection with EITF Issue
No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" and by the SEC in connection with Staff Accounting Bulletin
No. 100 (SAB 100), "Restructuring and Impairment Charges." EITF 94-3 and SAB 100
generally require, with respect to the recognition of severance 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.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company recognized bad debt expense of $3,536,000, $7,344,000 and $6,664,000
during 2000, 1999 and 1998, respectively. Accounts receivable write-offs, net of
recoveries, were $6,135,000, $8,276,000 and $4,164,000 during 2000, 1999 and
1998, respectively.
CAPITALIZED SOFTWARE COSTS
The Company capitalized no costs associated with acquiring and developing
software products to be licensed to customers in 2000. The Company capitalized
software costs of $3,256,000 in 1999, and $12,764,000 in 1998. Other assets as
shown on the Consolidated Balance Sheet include unamortized software costs of
$2,394,000 as of December 29, 2000, and $11,264,000 as of December 31, 1999.
Amortization expense is recognized over the estimated useful lives of the
related products, generally four years. Amortization expense associated with
capitalized software costs was $8,870,000 in 2000, $6,490,000 in 1999, and
$12,173,000 in 1998. 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. The
estimated useful life is generally 3 to 5 years for machinery and equipment, and
7 to 35 years for buildings and building improvements. Depreciation expense was
$89,147,000 in 2000, $101,003,000 in 1999, and $85,974,000 in 1998. Other assets
as shown on the Consolidated Balance Sheet include unamortized goodwill of
$16,200,000 as of December 29, 2000, and $25,618,000 as of December 31, 1999.
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 $13,854,000 in 2000, $10,504,000 in 1999, and
F-6
45
$5,310,000 in 1998. 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 evaluates the recoverability of its long-lived assets whenever
significant events or changes in circumstances occur that indicate the carrying
amounts may not be recoverable. Recoverability of long-lived assets is evaluated
based upon estimated fair values or undiscounted future cash flows, whichever is
more readily determinable. 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
or its territories. Accordingly, monetary assets and liabilities are translated
at year-end exchange rates, while non-monetary items are translated at actual
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 during the year.
See Note 13 for information with respect to the Company's accounting policies
for financial instruments utilized in its foreign currency hedging program.
STOCK-BASED COMPENSATION PLANS
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees."
ADVERTISING COSTS
Advertising costs are recognized as incurred. Advertising costs were $5,476,000
in 2000, $9,099,000 in 1999, and $9,343,000 in 1998.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure and financial
statement display for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources. The Company's comprehensive income
approximates net income for all periods presented.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the current
year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 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 of the instrument.
F-7
46
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 had
the effect of delaying the required adoption date of SFAS No. 133 for the
Company until the first day of the Company's fiscal year 2001. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an amendment of SFAS No. 133." SFAS No. 138
addresses a number of implementation issues associated with SFAS No. 133. The
Company adopted SFAS No. 133 and its associated interpretations on the first day
of its fiscal year 2001. While the adoption of these new accounting standards
for derivatives will change the presentation on the Consolidated Balance Sheet,
Consolidated Statement of Operations and Consolidated Statement of Changes in
Stockholders' Equity for certain foreign currency exchange rate sensitive
financial instruments held by the Company, the adoption of these new accounting
standards will not have a material impact on the Company's financial position or
results of operations.
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 forecasted product demand and market values on
a quarterly basis. Inventory reserves of $63,766,000 and $52,701,000,
respectively, were held as of December 29, 2000, and December 31, 1999. The
components of inventories, net of the associated reserves, are as follows (in
thousands of dollars):
December 29, December 31,
2000 1999
---------------------------
Raw materials $ 54,773 $ 59,141
Work-in-process 43,175 45,717
Finished goods 120,270 155,784
------- -------
$218,218 $260,642
------- -------
------- -------
NOTE 3 -- INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands of
dollars):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
United States $(29,420) $(160,610) $345,314
International 26,679 44,160 (25,566)
------- -------- -------
$ (2,741) $(116,450) $319,748
------- -------- -------
------- -------- -------
F-8
47
The benefit (provision) for income taxes attributable to the amounts shown above
consists of the following (in thousands of dollars):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Current tax benefit (provision):
U.S. federal $(17,541) $ 21,700 $ (84,700)
International (13,200) (15,300) (8,200)
State 1,000 3,000 (13,600)
------- ------- --------
(29,741) 9,400 (106,500)
------- ------- --------
Deferred tax benefit (provision):
U.S. federal 27,100 26,400 (9,600)
International 1,000 (600) (4,000)
State 2,600 6,700 (1,400)
------- ------- --------
30,700 32,500 (15,000)
------- ------- --------
$ 959 $ 41,900 $(121,500)
------- ------- --------
------- ------- --------
The benefit (provision) for income taxes attributable to income before income
taxes includes benefits of $23,783,000 in 2000, $7,114,000 in 1999, and $860,000
in 1998 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 29, December 31,
2000 1999
---------------------------
Deferred income tax assets, net of valuation
allowance:
Current $121,703 $124,588
Non-current 73,997 40,882
------- -------
Net deferred income tax asset $195,700 $165,470
------- -------
------- -------
The Company's net deferred income tax asset consists of the following (in
thousands of dollars):
December 29, December 31,
2000 1999
---------------------------
Gross deferred income tax assets:
Net operating loss carryforwards $ 41,027 $ 18,321
Tax credits 48,873 25,277
Restructuring accruals 1,436
Other accrued liabilities and reserves 73,477 63,948
Capitalized inventory costs 14,651 28,343
Deferred intercompany profit 10,335 11,260
Other 33,608 35,756
------- -------
221,971 184,341
Less: Valuation allowance (22,810) (14,868)
------- -------
199,161 169,473
Gross deferred income tax liabilities (3,461) (4,003)
------- -------
Net deferred income tax asset $195,700 $165,470
------- -------
------- -------
F-9
48
The net change in the valuation allowance for deferred income tax assets was an
increase of $7,942,000 in 2000 and a decrease of $11,048,000 in 1999. The
valuation allowance relates primarily to net deductible temporary differences,
tax credit carryforwards and net operating loss carryforwards. 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.
For tax return purposes, the Company has available domestic and foreign net
operating loss carryforwards of approximately $77,900,000, of which $59,400,000
will expire in years after 2020 and the remainder have an indefinite
carryforward period. The Company also has foreign tax credit carryforwards of
approximately $9,400,000, which expire in years after 2005.
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 $48,079,000 as of December 29, 2000). 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 29, December 31, December 25,
2000 1999 1998
------------------------------------------
U.S. federal income tax benefit
(provision) at statutory rate $ 959 $ 40,758 $(111,912)
(Increase) decrease in income taxes
resulting from:
Recognized (unrecognized) net
operating losses, future deductions
and credits (8,624) 5,739 1,781
Utilization of tax credits 4,217 5,359 7,000
Foreign tax rate and exchange rate
differentials (1,655) (10,906) (5,308)
Nondeductible and other items (4,814) (12,572) (10,901)
State income taxes, net of federal
benefits 3,176 6,522 (11,789)
Effect of Puerto Rico operations 7,700 7,000 9,629
------ ------- --------
Benefit (provision) for income taxes $ 959 $ 41,900 $(121,500)
------ ------- --------
------ ------- --------
F-10
49
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of
dollars):
December 29, December 31,
2000 1999
---------------------------
Machinery and equipment $ 620,372 $ 687,679
Buildings and building improvements 159,995 167,689
Land and land improvements 19,550 20,882
-------- --------
799,917 876,250
Less: Accumulated depreciation (532,835) (554,189)
-------- --------
$ 267,082 $ 322,061
-------- --------
-------- --------
Machinery and equipment includes capitalized leases of $2,626,000 as of December
29, 2000, and $6,457,000 as of December 31, 1999. Buildings and building
improvements include capitalized leases of $12,935,000 as of December 29, 2000
and $12,729,000 as of December 31, 1999. Accumulated depreciation includes
accumulated amortization on capitalized leases of $4,830,000 as of December 29,
2000, and $5,144,000 as of December 31, 1999.
NOTE 5 -- CREDIT FACILITIES, DEBT AND LEASE OBLIGATIONS
Borrowings under credit facilities consist of the following (in thousands of
dollars):
December 29, December 31,
2000 1999
---------------------------
Revolver $205,000
Promissory notes denominated in foreign currencies $78,381 81,152
------ -------
$78,381 $286,152
------ -------
------ -------
The Company has a revolving credit facility (the Revolver) which expires in
October 2001. The credit limit available under the Revolver ($237,500,000 as of
December 29, 2000) is reduced by $12,500,000 on the last business day of each
calendar quarter. The interest rates under the Revolver depend upon the
repayment period of the advance selected and the Company's Total Debt to rolling
four quarter Earnings Before Interest Expense, Taxes, Depreciation and
Amortization (EBITDA) ratio. Depending on the term of the outstanding borrowing,
the rate ranges from the applicable LIBOR plus 2.00% to 2.50% or the agent
bank's base rate plus 0.00% to 0.50%. The Company had no outstanding borrowings
as of December 29, 2000, but had outstanding letters of credit for approximately
$1,500,000 under the Revolver. The remaining available credit under the Revolver
as of December 29, 2000, was approximately $236,000,000. The Revolver is secured
by the Company's U.S. accounts receivable and U.S. inventory. The Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
The Company also had a $150,000,000 revolving credit facility (the Supplemental
Revolver), which the Company decided not to renew and expired in January 2001.
The Company had no borrowings outstanding under the Supplemental Revolver as of
December 29, 2000.
The Company has a financing agreement with a bank that provides 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 2002, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of December 29, 2000, the Company had promissory notes of $78,381,000
outstanding under this financing agreement and had committed to borrowings
between January 2001 and January 2002 in the cumulative principal amount of
approximately $396,502,000.
F-11
50
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 29, 2000, was
8.75%. 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.
Long-term debt, including capitalized lease obligations, consists of the
following (in thousands of dollars):
December 29, December 31,
2000 1999
---------------------------
Capitalized lease obligations $12,275 $15,157
Promissory notes 5,882 27,494
Other 36 245
------ ------
18,193 42,896
Less: Current portion (6,110) (13,943)
------ ------
$12,083 $28,953
------ ------
------ ------
SCHEDULED DEBT MATURITIES AND OPERATING LEASE OBLIGATIONS
Scheduled maturities of debt and operating lease obligations as of December 29,
2000, are as follows (in thousands of dollars):
Capitalized Noncancellable
Credit lease Promissory Other Total debt operating lease
facilities obligations notes debt commitments commitments
-----------------------------------------------------------------------------
2001 $78,381 $ 1,996 $5,882 $11 $ 86,270 $36,600
2002 2,020 25 2,045 22,970
2003 1,442 1,442 14,862
2004 1,434 1,434 8,994
2005 1,434 1,434 6,237
Thereafter 10,036 10,036 10,158
------ ------ ----- -- ------- ------
$78,381 $18,362 $5,882 $36 $102,661 $99,821
------ ------ ----- -- ------- ------
------ ------ ----- -- ------- ------
Less: Amount
representing
interest (6,087)
------
Present value of
capitalized lease
obligations
(including $217
classified as
current) $12,275
------
------
Rent expense associated with operating leases was $52,038,000 in 2000,
$57,710,000 in 1999, and $53,332,000 in 1998.
F-12
51
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 29, December 31,
2000 1999
---------------------------
Deferred revenue $ 69,062 $ 68,837
Accrued commissions 32,813 36,292
Accrued payroll 34,375 33,564
Accrued warranty reserve 30,907 23,926
Other 195,891 140,491
------- -------
$363,048 $303,110
------- -------
------- -------
Other accrued liabilities consist of items that are individually less than 5% of
accrued liabilities.
NOTE 7 -- LITIGATION
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court (the 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 District Court granted the Company's
motion for summary judgment and dismissed the complaint. Stuff appealed the
dismissal to the Colorado Court of Appeals (the 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 again dismissed, with prejudice, all of Stuff's material claims
against the Company. On August 30, 1999, Stuff filed a notice of appeal with the
Appeals Court seeking to overturn the decision of the District Court. Oral
arguments before the Appeals Court occurred on August 8, 2000. On August 17,
2000, the Court of Appeals remanded the case back to the District Court for a
trial on the factual issues relating to the interpretation of the language
embodied in the 1990 Settlement Agreement. The Company filed a Petition for
Rehearing with the Court of Appeals. On October 12, 2000, the Court of Appeals
modified its decision, but denied the Company's Petition for Rehearing. In
November 2000, the Company filed a Petition for Certiorari with the Supreme
Court of Colorado. 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 June 1995, Odetics, Inc. filed a patent infringement suit against the Company
alleging infringement of various patents. During 1999, the Company recognized a
pre-tax expense of $97,800,000 in connection with the resolution of this
litigation. The Company also recognized pre-tax expenses of $5,800,000 in 1999
associated with the settlement of other litigation.
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.
F-13
52
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 that repurchase program
was 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 and 8,822,500 shares of common stock during 1999 and
1998, respectively, through a combination of privately negotiated and open
market repurchase transactions. The aggregate purchase price of these shares was
$35,226,000 and $272,365,000 during 1999 and 1998, respectively, after
considering the effects of all purchase price adjustments. No repurchases
occurred in 2000.
NOTE 9 -- RESTRUCTURING
On October 28, 1999, the Company announced a broad restructuring program
intended to return the Company to profitability. Key elements of the
restructuring plan included:
- - an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
remaining positions eliminated by the end of the third 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 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 Company had substantially completed all currently planned restructuring
activities as of September 29, 2000. The following table summarizes the reserves
in connection with 2000 restructuring activities (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
----------------------------------------------
Balances, December 31, 1999 $ 3,917 $ 3,917
Restructuring expense 21,456 $ 5,258 $ 462 27,176
Cash payments (25,373) (25,373)
Asset writedowns (5,258) (462) (5,720)
------- ------ ---- -------
Balances, December 29, 2000 $ 0 $ 0 $ 0 $ 0
------- ------ ---- -------
------- ------ ---- -------
F-14
53
Employee severance expense of $21,456,000 was recognized during 2000 in
connection with the restructuring. This expense is comprised of separation
charges related to the fixed and determinable severance payments owed to
approximately 1,100 employees who were involuntarily terminated during 2000 in
connection with the restructuring.
Asset writedowns of $5,258,000 were recognized during 2000 in connection with
the restructuring. The asset writedowns are comprised of $2,301,000 related to
the spin-off of the Company's managed storage services business and $2,957,000
related to the impairment writedown of assets at the Company's manufacturing
facility in Toulouse, France. At the time of the impairment, the Company was
engaged in activities to sell the Toulouse facility and the impairment charge
was required to reflect the Company's estimate of fair value of the facility
upon its anticipated sale. The Company has subsequently terminated negotiations
to sell the facility and the Company currently intends to retain the facility.
Other exit costs of $462,000 were recognized during 2000. Other exit costs are
comprised of $326,000 associated with legal and accounting expenses incurred in
connection with the spin-off of the managed storage services business and
$136,000 related to excess lease space in Canada.
The Company incurred pre-tax expenses of $43,252,000 during the year ended
December 31, 1999, in connection with a restructuring announced in April 1999.
This restructuring provided for a reduction in headcount as well as the
elimination of certain lower priority research and development programs.
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.
The following is a reconciliation between basic and diluted EPS (in thousands,
except per share amounts):
Year Ended
------------------------------------------------------------------------------------
December 29, 2000 December 31, 1999 December 25,1998
-------------------------- -------------------------- --------------------------
Net Net Net
Income EPS Shares Income EPS Shares Income EPS Shares
------------------------------------------------------------------------------------
Basic EPS $(1,782) $(0.02) 100,859 $(74,550) $(0.75) 99,900 $198,248 $1.91 103,868
Effects of dilutive common
stock equivalents 2,629
------ ------- ------- ------ ------- -------
Diluted EPS $(1,782) $(0.02) 100,859 $(74,550) $(0.75) 99,900 $198,248 $1.86 106,497
------ ------- ------- ------ ------- -------
------ ------- ------- ------ ------- -------
Options to purchase 10,403,412 and 12,354,593 shares of common stock were
outstanding as of December 29, 2000 and December 31, 1999, respectively, but
were 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
2000 and 1999.
NOTE 11 -- EMPLOYEE BENEFIT AND OPTION PLANS
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 29, 2000, the
Company had an aggregate of 1,579,275 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
F-15
54
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 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Shares issued 1,522,028 1,320,097 631,728
Weighted average fair value per
share $ 9.65 $ 8.24 $ 10.90
Fair value assumptions:
Dividend yield 0.00% 0.00% 0.00%
Volatility 74.22% 59.54% 49.59%
Risk-free interest rate 6.20% 4.89% 5.00%
Expected life (in months) 6 6 6
EXCHANGE OFFERING
On November 6, 2000, the Company made an exchange offer (the Exchange) to
employees of the Company to exchange stock options held by these employees for
StorageTek restricted common stock. Employee stock options eligible for the
Exchange had a per share exercise price of $17.50 or greater, whether or not
vested (Eligible Options). The offer provided for an exchange ratio of four
option shares surrendered for each share of restricted stock received.
In order to be eligible to participate in the Exchange (Eligible Participant),
the employee must not have received any stock option or other equity awards in
the six months preceding November 20, 2000 (the Exchange Date) and cannot
receive stock options or other equity awards in the six months following the
Exchange Date. The Exchange specifically precluded the Chairman of the Board,
President and Chief Executive Officer of the Company, executive officers of the
Company and the CEO's direct reports from participating in the Exchange. In
order to participate in the Exchange, an Eligible Participant had to exchange
all Eligible Options held. The shares of restricted stock will vest in one-third
increments on each of the first, second and third annual anniversary dates of
the Exchange Date. If the employment of an employee who participated in the
Exchange terminates prior to the vesting of the restricted stock received in the
Exchange, the employee will forfeit the unvested shares of restricted stock. If
the employment of such employee is terminated as a result of death, disability
or a reduction in force following a change of control, all shares of restricted
stock received by that employee in the Exchange will vest immediately. As a
result of the Exchange, the Company issued 555,943 shares of restricted stock in
return for the cancellation of 2,223,772 stock options.
An annualized non-cash deferred compensation charge associated with the
restricted stock of $1,877,000 will be recognized ratably over the three-year
vesting schedule of the restricted stock. The deferred compensation charge will
be recognized on an accelerated basis to the extent that shares of the
restricted stock vest on an accelerated basis in the situations described above
and will be reduced to the extent that a participant forfeits his or her shares
of restricted stock received in the Exchange prior to vesting. The deferred
compensation charge is unaffected by future changes in the price of the common
stock.
STOCK OPTION PLANS
As of December 29, 2000, the Company had an aggregate of 9,945,412 common shares
reserved for issuance under its equity plans (Equity Plans). The Equity Plans
provide for the issuance of common shares pursuant to stock option exercises,
restricted stock awards and other equity based
F-16
55
awards. There were 12,916,619 shares available for grant under the Equity Plans
as of December 29, 2000.
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 458,000 shares reserved for
issuance and 536,668 shares available for grant under the Director Plan as of
December 29, 2000.
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 three to 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 Plans provide for
accelerated vesting upon certain events, including a change in control of the
Company or the involuntary termination of a corporate officer.
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 weighted average fair value of restricted stock granted
was $12.28 in 2000, $21.52 in 1999, and $35.40 in 1998. Total compensation
expense related to restricted stock was $2,233,000 in 2000, $834,000 in 1999,
and $330,000 in 1998.
The following summarizes information with respect to options and restricted
stock granted under the Company's Equity and Director Plans:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE
-----------------------------
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
Granted 3,421,694 9.50
Exercised (264,244) 3.42
Cancelled, forfeited or expired (5,108,631) 22.52
---------- -----
Outstanding, December 29, 2000 10,403,412 $17.85
---------- -----
---------- -----
F-17
56
The following table summarizes information concerning outstanding and
exercisable options and restricted stock as of December 29, 2000:
Outstanding Exercisable/Unrestricted
-------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Number Average
Exercise Number Contractual Exercise Exercisable/ Exercise
Prices Outstanding Life in Years Price Unrestricted Price
- -----------------------------------------------------------------------------
$ 0 - $10 1,048,616 9.6 $ 1.42 18,556 $ 4.96
10 - 20 4,954,415 6.6 14.40 2,498,371 15.54
20 - 30 3,685,434 6.6 23.07 1,941,282 23.65
30 - 40 514,811 4.2 37.04 326,448 37.04
40 - 50 200,136 7.1 42.98 103,493 42.74
---------- ---------
10,403,412 6.8 $17.85 4,888,150 $20.80
---------- ---------
---------- ---------
PROFORMA DISCLOSURE
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, "Accounting for Stock-Based
Compensation," to reflect the fair value method of accounting for stock-based
compensation plans are as follows (in thousands, except per share amounts):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Net income (loss):
As reported $ (1,782) $(74,550) $198,248
Proforma (15,306) (95,649) 186,957
Basic EPS:
As reported $ (0.02) $ (0.75) $ 1.91
Proforma (0.15) (0.96) 1.80
Diluted EPS:
As reported $ (0.02) $ (0.75) $ 1.86
Proforma (0.15) (0.96) 1.78
Compensation expense for the options and restricted stock granted is computed
based on the actual option forfeitures during the year.
The following table summarizes the weighted average fair value of options and
restricted stock granted using the Black-Scholes option pricing model:
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Weighted average fair value of
options granted $ 7.54 $10.68 $12.61
Fair value assumptions:
Dividend yield 0% 0% 0%
Volatility 72.42% 51.44% 44.41%
Risk-free interest rate 5.94% 5.83% 5.12%
Expected life (in years) 4.4 4.2 4.0
F-18
57
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 100% of the first 3% of salary contributed by each participant
and a 50% match of the next 4% of salary contributed by each participant, up to
a maximum match of 5% of the participant's salary each pay period.
Contributions made by the Company to the Profit Sharing and Thrift Plan were
$14,878,000, $9,374,000 and $8,987,000 during 2000, 1999 and 1998, respectively.
NOTE 12 -- STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a Stockholder Rights Plan (Rights Plan).
The Rights Plan was 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 stockholders. The Rights Plan expired on
August 31, 2000.
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 promissory notes denominated in foreign currencies, 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 promissory
notes denominated in foreign currencies held by the Company as of December 29,
2000, were as follows (in thousands of dollars):
Carrying/
Commitment Fair Unrealized
Value Value Loss
----------------------------------------
Outstanding commitments associated with
promissory notes denominated in
foreign currencies $396,502 $400,876 $(4,374)
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 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 29, 2000, or December 31, 1999.
To the extent an option is terminated or
F-19
58
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.
The Company also utilizes foreign currency 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 contracts with a face value of approximately
$230,515,000 as of December 29, 2000, and $188,501,000 as of December 31, 1999.
The carrying amounts of these forward 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 exchange 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 foreign currency options and forward contracts 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.
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
No single customer accounted for more than 10% of total revenue in 2000 and
1999. Revenue from sales of storage products to IBM accounted for 20% of total
revenue in 1998.
BUSINESS SEGMENTS
In the first quarter of 2000, the Company changed its reportable segments to
reflect changes in its business operations resulting from its restructuring
activities. The Company is currently organized into two reportable segments
based on the definitions of segments provided under SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information": storage products and
storage services. The storage products segment includes sales of tape, disk,
network and other products. The storage services segment includes maintenance
and consulting services. The principal effect of this change was the
reclassification of storage management software from a separate reportable
segment to its inclusion within the storage products segment, and the
reclassification of storage integration products from the storage services
segment to the storage products segment. The 1999 quarterly segment data has
been restated to conform to the current year presentation.
F-20
59
The Company does not have any intersegment revenue, and segment operating
performance is evaluated based on gross profit. The aggregate gross profit by
segment equals the consolidated gross profit and the Company does not allocate
research and product development costs; selling, general, administrative and
other income and expense; interest income; interest expense; or benefit
(provision) for income taxes to the segments. The revenue and gross profit by
segment is as follows (in thousands of dollars):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Revenue:
Storage products $1,411,932 $1,704,314 $1,634,328
Storage services 648,272 663,917 623,894
--------- --------- ---------
Total revenue $2,060,204 $2,368,231 $2,258,222
--------- --------- ---------
--------- --------- ---------
Gross profit:
Storage products $ 595,083 $ 729,535 $ 767,331
Storage services 236,435 213,449 273,079
--------- --------- ---------
Total gross profit $ 831,518 $ 942,984 $1,040,410
--------- --------- ---------
--------- --------- ---------
The following table provides supplemental financial data regarding revenue from
the Company's storage products segment (in thousands of dollars):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Tape products $1,109,303 $1,171,281 $1,007,220
Disk products 145,215 370,529 526,598
Network and other products 157,414 162,504 100,510
--------- --------- ---------
Total storage product revenue $1,411,932 $1,704,314 $1,634,328
--------- --------- ---------
--------- --------- ---------
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 $27,795,000, $25,013,000, and
$19,407,000, for 2000, 1999, and 1998, respectively. Depreciation on fixed
assets, and amortization of goodwill and other amortization, which aggregated
$103,001,000, $111,507,000, and $91,284,000 in 2000, 1999, and 1998,
respectively, is associated with corporate assets and is not separately
identifiable within the reportable segments.
F-21
60
GEOGRAPHIC AREAS
Revenue and long-lived assets by geographic area are based on the country in
which the Company is legally transacting business. Revenue and long-lived assets
for Europe are reported in aggregate, as there are no individual countries with
revenue or long-lived assets that 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 long-lived assets, and are combined and
shown in the table below as "Other." Revenue and long-lived assets for each
geographic area are shown below (in thousands of dollars):
Year Ended
------------------------------------------
December 29, December 31, December 25,
2000 1999 1998
------------------------------------------
Revenue:
United States(1) $1,133,945 $1,493,870 $1,502,992
Europe 632,660 644,641 577,635
Other 293,599 229,720 177,595
--------- --------- ---------
Total revenue $2,060,204 $2,368,231 $2,258,222
--------- --------- ---------
--------- --------- ---------
Long-lived assets:
United States $ 238,881 $ 301,474 $ 302,692
Europe 32,328 38,843 45,438
Other 14,410 18,569 4,844
--------- --------- ---------
Total long-lived assets $ 285,619 $ 358,886 $ 352,974
--------- --------- ---------
--------- --------- ---------
- ---------------
(1) U.S. revenue from unaffiliated customers includes international export sales
to customers of $116,549,000 in 2000, $99,533,000 in 1999, and $88,654,000
in 1998.
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 2000
---------------------------------------------------
March 31 June 30 September 29 December 29
---------------------------------------------------
Revenue $459,669 $512,477 $486,617 $601,441
Cost of revenue 305,116 302,745 279,195 341,630
------- ------- ------- -------
Gross profit 154,553 209,732 207,422 259,811
Operating expenses 199,300 197,159 192,515 211,351
Restructuring expense 11,442 12,358 3,376
------- ------- ------- -------
Operating profit (loss) (56,189) 215 11,531 48,460
Interest expense, net (4,649) 786 (1,911) (984)
------- ------- ------- -------
Income (loss) before
income taxes (60,838) 1,001 9,620 47,476
Benefit (provision) for
income taxes 21,300 (350) (3,350) (16,641)
------- ------- ------- -------
Net income (loss) $(39,538) $ 651 $ 6,270 $ 30,835
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per common
share:
Basic $ (0.39) $ 0.01 $ 0.06 $ 0.30
------- ------- ------- -------
------- ------- ------- -------
Diluted $ (0.39) $ 0.01 $ 0.06 $ 0.30
------- ------- ------- -------
------- ------- ------- -------
F-22
61
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)
------- ------- ------- -------
------- ------- ------- -------
F-23
62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Storage Technology Corporation:
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index appearing under Item 14(a) 1. on page 33 present fairly, in
all material respects, the financial position of Storage Technology Corporation
and its subsidiaries at December 29, 2000 and December 31, 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 29, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
January 25, 2001
F-24
63
EXHIBIT INDEX
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:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(2) Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987
3.2(2) Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987
3.3(2) Certificate of Second Amendment dated May 28, 1992, to the
Restated Certificate of Incorporation dated July 28, 1987
3.4 Certificate of Third Amendment dated May 21, 1999, to the
Restated Certificate of Incorporation dated July 28, 1987
(filed as Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 25, 1999, and
incorporated herein by reference)
3.5 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) Storage Technology Corporation 1987 Employee Stock Purchase
Plan, as amended (previously filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 filed on August 11, 2000, and
incorporated herein by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995
Equity Participation Plan (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.3(1) Storage Technology Corporation 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)
- ------------------------
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.
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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) Separation Agreement between the Company and Susan Bailey,
dated December 11, 2000
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,
filed on March 6, 1998 and incorporated herein by reference)
10.8(1) Form of Executive Officer Employment Agreement between the
Company and Each Executive Officer Named in Exhibit 10.9
hereto, dated October 1999 (previously filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, filed on March 10, 2000 and
incorporated herein by reference)
10.9(1/2) Schedule of Differences in Terms and Conditions of Executive
Officer Employment Agreement
10.10(1) CEO Employment Agreement, dated July 11, 2000, between the
Company and Patrick J. Martin (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, filed on August 11, 2000, and
incorporated herein by reference)
10.11(1) Release dated as of July 10, 2000, between the Company and
David E. Weiss (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 filed on August 11, 2000, and
incorporated herein by reference)
10.12(1) Extension of Retention Agreement, dated July 31, 2000,
between the Company and Robert S. Kocol (previously filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 11,
2000, and incorporated herein by reference)
10.13 Amended and Restated Credit Agreement, dated as of January
13, 2000, among the Company, Bank of America, N.A., as
Administrative Agent, Swingline Bank and Letter of Credit
Issuing Bank and the other financial institutions party
thereto (previously filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
10.14 Credit Agreement, dated as of January 13, 2000, among the
Company, Bank of America, N.A. and the other financial
institutions party thereto (previously filed as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, filed on March 10, 2000, and
incorporated herein by reference)
10.15 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 (previously filed as Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
- ------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Annual Report on Form 10-K.
65
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 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)
10.17 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)
10.18 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 (previously filed as
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed on March 10,
2000, and incorporated herein by reference)
10.19 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. (previously filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by
reference)
10.20(2) Fifth Amendment to Second Amended and Restated Contingent
Multicurrency Note Purchase Commitment Agreement dated
August 15, 2000, between the Company and Bank of America,
N.A.
10.21(1/2) Separation Agreement and Release, dated February 7, 2001,
between the Company and Karen Niparko
21.1(2) Subsidiaries of Registrant
23.1(2) Consent of PricewaterhouseCoopers LLP
- ------------------------
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.