ITEM 1. BUSINESS
GENERAL - ------- Storage Technology Corporation and its subsidiaries ("StorageTek" or the "Company") design, manufacture, market and service information storage and retrieval subsystems for high-performance and midrange computer systems, as well as computer networks. The Company's three principal product lines are serial access storage subsystems, random access storage subsystems and midrange computer products. Serial access storage subsystems include magnetic tape storage devices and automated library systems. Random access storage subsystem products currently consist of rotating magnetic disk devices, both in fault-tolerant disk array ("RAID") and non-redundant configurations, and solid-state direct access storage devices ("DASD"). Midrange computer products include serial access, random access and other products for IBM AS/400 and other midrange computer systems. The Company also offers software and network communication products that expand applications for its library and random access products for efficient storage management and access. StorageTek maintains a worldwide customer support network to install, maintain and service its own, and third party equipment.
StorageTek operates in one principal industry segment and sells its products to end-user customers, value-added resellers and original equipment manufacturers ("OEMs") of computer systems. The Company directly markets its products worldwide through offices located in major metropolitan areas of the United States, Canada, Europe, Brazil, Japan and Australia, as well as through distributors in Africa, Asia, Europe, Mexico and South America. In 1994, international revenue accounted for approximately 39% of the Company's total revenue.
StorageTek's objective is to be the preferred provider of solutions for information, storage and retrieval needs for the high-performance and midrange marketplaces. The Company's strategy for achieving this objective includes continuing to make significant investments in research and development; expanding hardware and software product offerings and distribution channels to provide solutions that address changing customer requirements, including networking and interconnecting technologies; and investing in new technologies and businesses that complement its business and product offerings. To this end, the Company has established and will continue to establish alliances with other manufacturers, distributors and suppliers. As a result of these alliances, it is possible for other companies to be at various times collaborators, competitors and customers in different markets.
Storage Technology Corporation was incorporated in Delaware in 1969. Its principal executive offices are located at 2270 South 88th Street, Louisville, Colorado 80028-0001, telephone (303) 673-5151.
PRINCIPAL PRODUCTS - ------------------ StorageTek has three principal information storage and retrieval product lines: serial access subsystems (magnetic tape storage devices and automated library systems); random access subsystems (rotating and solid-state DASD); and midrange computer products.
Product sales, including related software revenue, accounted for approximately 69% of total revenue in 1994, while service and rental income accounted for the balance. Sales, service and rental revenue from the Company's product lines for 1994, 1993 and 1992 were as follows:
REVENUE BY PRODUCT LINE
FISCAL YEAR ENDED DECEMBER
1994 1993 1992 -------------------------------------------------------- $ million % $ million % $ million % --------- ---- --------- ---- --------- ----
Serial Access Subsystems 1,033.0 63.6 875.5 62.3 936.6 60.4
Random Access Subsystems 254.2 15.6 126.0 9.0 193.3 12.5
Midrange Systems 251.8 15.5 306.8 21.8 324.7 20.9
Other Products 86.0 5.3 96.5 6.9 96.3 6.2 ------- ----- ------- ----- ------- ----- Total 1,625.0 100.0 1,404.8 100.0 1,550.9 100.0 ======= ===== ======= ===== ======= =====
In the second half of 1993 and during 1994, the Company expanded its serial access subsystem offerings with the initial shipment of, among others, the Silverton 4490 and TimberLine tape cartridge systems and the WolfCreek 9360 and PowderHorn 9310 libraries, which together accounted for over 25% of total revenue in 1994. The Company also introduced several new random access subsystem products in 1994, including the Iceberg 9200 Virtual Storage Facility and Nordique 9100 Open Storage Facility; which accounted for over 10% of total revenue in 1994. It is anticipated that a significant portion of the Company's future revenue will come from these and future new products. There can be no assurance, however, that these products will continue to have a significant positive effect on revenue, or that in the future, new products will be timely developed, address technological advances, gain market acceptance or meet aggressive pricing practices in the marketplace.
Additional information concerning revenue from each of the Company's product lines is found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and geographic information is found in Part IV, Item 14, Note 16 of Notes to Consolidated Financial Statements, of this Form 10-K.
SERIAL ACCESS SUBSYSTEMS
StorageTek is a principal producer and seller of high-performance serial access, or tape, subsystems for the end-user and OEM markets. StorageTek's current line of serial access subsystems is based on its automated cartridge system ("ACS") library and magnetic tape storage products. The Company's tape and library strategy currently includes: the PowderHorn 9310 (PowderHorn(TM)), the Company's second-generation Automated Cartridge System (ACS) library, which became available in the second quarter of 1993; WolfCreek 9360 (WolfCreek(TM)), a smaller, high-performance lower-cost library, which became available in the fourth quarter of 1993; Silverton 4490 (Silverton(TM)), a 36-track cartridge subsystem, which became available in the third quarter of 1993; the Company's first-generation 4400 ACS library, which has been available since 1988; and the 4480 18-track cartridge subsystem, which has been available since 1987. In October 1994, the Company introduced TimberLine(TM), the Company's next-generation, high-performance 36-track cartridge subsystem, which is expected to be a key part of the serial access product line in 1995. The 36-track technology embodied in the Silverton and TimberLine products has significantly reduced the importance of the Company's older 18-track technology in the mainframe marketplace. The Company also develops and licenses software programs designed to expand the range of applications for its ACS libraries. The serial access subsystems product line generates more revenue than any other product line of the Company and is expected to continue to be a major element of the Company's plans.
The Company currently is developing several new products for the serial access subsystem market, including the RedWood Helical Cartridge Subsystem (Redwood(TM)). RedWood is designed as an ultra-high capacity, high-performance mass storage cartridge subsystem and employs digital helical-scan recording technologies. RedWood is currently in the prototype testing phase.
The Company is also currently developing software programs which are designed to provide additional features and functions to existing tape and library products. The majority of these software products are in the prototype testing and engineering phases of development and are scheduled for availability commencing in the second half of 1995. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K, which is incorporated by reference into Item 1 of Part I, for a discussion of operating results and certain risks associated with the development and introduction of new products that may affect future results.
RANDOM ACCESS SUBSYSTEMS
StorageTek's current OnlinePlus(TM) product line consists of a number of online random access DASD products, including RAID and non-RAID rotating magnetic disk subsystems and solid-state disk subsystems ("SSD"). The characteristics of these products differ principally in information storage capacity, transfer rate, access time, and cost.
The Company's Iceberg 9200 Virtual Storage Facility (Iceberg(TM)) is the cornerstone of the Company's OnlinePlus strategy. Iceberg has been available since the second quarter of 1994 and is an advanced RAID subsystem for the IBM and IBM-compatible mainframe environment. Iceberg Extended Facilities Product and Iceberg Extended Operator Facility are software products designed for use with Iceberg subsystems. They have been available since the second half of 1994. These and other new DASD products are expected to serve as a significant source of revenue for the Company in 1995. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this Form 10-K for a discussion of operating results and certain risks that may affect future results.
Arctic Fox 9800 (Arctic Fox(TM)), the Company's new SSD product, became available on a limited basis in January 1995. Arctic Fox is a high- performance shared access facility, and is based on disk technology acquired as part of the Company's merger with Amperif Corporation ("Amperif"). The Company is currently developing other new DASD products, including the Kodiak 9890 Scalable Storage Facility (Kodiak(TM)). Kodiak is a high capacity RAID device and also is based on disk technology acquired from Amperif. Kodiak is currently in the prototype testing phase.
MIDRANGE SYSTEMS
StorageTek's midrange products include serial access, random access and other information storage products for IBM AS/400 and other midrange markets. The Company markets its midrange products directly through its subsidiary, StorageTek Distributed Systems Division, Inc. ("StorageTek DSD") (formerly known as XL/Datacomp, Inc.), and indirectly through OEM and distributor channels. The Company's midrange product offerings currently include: Highlands, a high-performance, cost-competitive disk drive, which became available in the first quarter of 1994; and Northfield, a high-performance disk drive with RAID 5 data protection, which became available in the second quarter of 1994. Highlands and Northfield are DASD products designed for the IBM AS/400 market. The majority of the Company's midrange DASD product offerings are acquired from other manufacturers.
The Company restructured its midrange business in the third quarter of 1993 in response to disappointing customer acceptance for the Company's Alpine 9600 Storage Manager and significant price erosion within the midrange market. During 1994, the Company continued to change the midrange organization and distribution and service networks, and redirected its midrange marketing efforts to focus on open systems and value-added AS/400 tape products. See Part II, Item 7, "Management's Discussions and Analysis of Financial Condition and Results of Operations -- Midrange Systems," and Part IV, Item 14, Note 15 of Notes to Consolidated Financial Statements of this Form 10-K for additional information with respect to the Company's restructuring of its midrange business in 1993, including quantifications of the significant components of the restructuring charge and the operational and competitive implications of the restructuring.
The Company is developing other new library and tape products for the midrange market, including a direct attach reduced capacity library subsystem and a small form factor 36-track tape drive. These products are currently in the prototype engineering phase.
OTHER PRODUCTS
StorageTek has increased its software development expenditures during the last several years and plans to continue to invest in the development of new software products. The Company introduced NearNet 7900 (NearNet(TM)) in the fourth quarter of 1993. NearNet is a combination of hardware and software that automates storage management over a workstation network. NearNet is the first of a series of planned network storage solutions. Central Archive Management ("CAM"), a software application designed to provide backup and recovery to a variety of network client systems, and NetDriver 7900, which is a combination of software and a network gateway device
designed to allow remote attachment of the Company's NearNet system to a StorageTek library. CAM became available in February 1995, and NetDriver is currently in prototype testing.
On March 7, 1995, the Company merged with Network Systems Corporation. As a result, the Company intends to expand its network product offerings in the future. See "Recent Merger," below.
MARKETING, DISTRIBUTION AND SERVICES - ------------------------------------ StorageTek is committed to a worldwide marketing and product maintenance strategy. StorageTek has established a network of sales and service offices located in major metropolitan areas in the United States, Canada, Europe, Brazil, Japan and Australia to market its products, in addition to its corporate headquarters in Louisville, Colorado. The Company also sells its products through international distributors in Africa, Asia, Europe, Mexico and South America. In 1994, international revenue accounted for 39% of total revenue, compared to 37% in 1993, and 41% in 1992. Because of its focus on worldwide operations, the Company is subject to the risks of conducting business outside the United States. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Factors that May Affect Future Results -- International Operations" of this Form 10-K for a discussion of factors associated with the Company's international business.
As of December 30, 1994, the order backlog was approximately $59 million, compared to approximately $71 million as of December 31, 1993. Approximately 87% in 1994 and 68% in 1993 of the backlog amount is attributable to the Company's library and tape products. In addition to these backlog amounts, the Company also had approximately $85 million of equipment shipped awaiting revenue recognition as of December 30 1994, compared to approximately $39 million as of December 31, 1993. The shipped awaiting revenue recognition amounts for 1994 principally relate to the Iceberg product. No Iceberg equipment was included within this category in 1993. Backlog amounts are calculated on an "if sold" basis and include orders from end-users, OEM customers and distributors for products that StorageTek expects to deliver during the following 12 months. Units being evaluated or covered by letters of intent are not included in backlog amounts. Unfilled orders and orders with respect to equipment shipped awaiting revenue recognition may be canceled by the customer. Accordingly, there can be no assurance that the Company's backlog and equipment shipped awaiting revenue recognition amounts will ultimately be recognized as revenue.
The installed service base of data storage products and the expertise of the Company's service engineers are considered to be valuable assets of the Company and are expected to continue to be an important competitive element of the Company's business. StorageTek has a worldwide customer support network to install, maintain and service its own equipment, as well as the equipment of others. The Company warrants the performance of products marketed into the end-user market for a specified period of time, after which it services those products under maintenance agreements. Many of the products introduced by the Company in late 1993 and during 1994 include extended warranty periods in response to competitive pressures in the markets for these products. Such extended warranties may adversely affect service margins in the future. In 1994, service and rental revenue accounted for 31% of total revenue, compared to 36% in 1993 and 30% in 1992.
MANUFACTURING AND MATERIALS - --------------------------- Products currently are manufactured by the Company primarily at facilities located within the United States. The Company operates manufacturing facilities in Colorado, Puerto Rico, California, Florida and England. In 1993, the Company achieved ISO 9001 certification at all of its manufacturing operations. ISO 9001 is an international quality standard signifying that a manufacturer has appropriate controls, documentation and procedures in all significant aspects of its manufacturing operations. The Company initiated engineering and marketing operations during 1994 in Toulouse, France, in a newly constructed leased facility. The Company plans to commence manufacturing operations at this facility in the first half of 1995, although no significant manufacturing is expected to occur in Toulouse before late 1995 and such operations may be adversely affected by problems associated with start-up operations.
While the Company manufactures several significant subassemblies, the substantial majority of its production costs are subassemblies, parts and components purchased from outside vendors. The balance of the Company's production costs relate to in-house assembly and testing. Certain of the parts and components included in the Company's products are obtained from a single source or limited group of suppliers. The Company has long-term supply contracts with certain vendors and suppliers; the remaining parts and components are obtained by delivering purchase orders specifying the particular components and, therefore, these vendors are not obligated to supply products for an extended period, at specific quantities and prices. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors that May Affect Future Results," of this Form 10-K for a discussion of factors that may affect the Company's ability to obtain materials, which information is incorporated by reference into Part I, Item 1 of this Form 10-K.
COMPETITION - ----------- The Company's existing and potential competitors include several large multinational companies having substantially greater resources, principally, IBM, Fujitsu Limited and Hitachi Ltd., as well as a number of other companies, including Amdahl Corporation and EMC Corp.
The markets for the Company's products are highly competitive and are characterized by rapid technological change and intense price competition. The Company believes that its ability to compete successfully depends on a number of factors, both within and outside of its control, including the quality, performance, and price of the Company's and its competitors' products, the timing and success of new product introductions by the Company and its competitors, and general economic conditions. Further, because of the significance of IBM in the mainframe and midrange operating environments, many of the Company's products are designed to be compatible with certain IBM operating systems and many of its products function like IBM equipment. As a result, the Company's business in the past has been, and in the future may be, adversely affected by a number of factors outside the control of the Company, including among others, modifications in the design or configuration of IBM computer systems, the announcement and introduction of new products by IBM, as well as the announcement of competing products by IBM and other competitors and reductions in the pricing of such comparable systems, equipment or service. For further discussion of competitive conditions, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Factors that May Affect Future Results," of this Form 10-K.
NEW PRODUCT DEVELOPMENT - ----------------------- The Company currently invests substantial resources in its product development efforts. In 1994, 1993 and 1992, the Company devoted approximately 10%, 12% and 10%, respectively, of its revenue to develop new products and improve the performance of existing ones. In an attempt to expand the Company's access to new technologies and reduce the amount of time necessary to bring new products to the market, the Company also develops relationships with other companies.
The Company spent approximately $170 million for research and product development activities in 1994, as compared to approximately $163 million in 1993 and approximately $153 million in 1992. Current development projects include: new products in the Online Plus family of DASD products, data management software, new tape subsystem products, networking systems and enhancements to the Company's existing information storage and retrieval products. As of December 30, 1994, approximately 1,500 employees were engaged on a full-time basis in engineering and product development activities.
Going forward, there can be no assurance that new products will be successfully or timely developed, or, if introduced, that they will achieve market acceptance. The Company has experienced delays from time to time in completing development and introduction of new products, and there can be no assurance that the Company will not encounter delays in the development and introduction of future products. For further discussion of factors concerning product development, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Factors that May Affect Future Results," of this Form 10-K.
INTELLECTUAL PROPERTY - --------------------- StorageTek's ability to compete is affected by its ability to protect its proprietary information. StorageTek protects its intellectual property rights through a combination of patents, trademarks, copyrights, confidentiality procedures, trade secret laws, and licensing arrangements. The Company's policy is to apply for patents, or other appropriate proprietary or statutory protection, when it develops new or improved technology that is important to its business. StorageTek currently holds over 220 U.S. patents, as well as foreign counterparts to many of these patents in relevant markets, covering various aspects of its products. Three of these patents expire in 1995 and the remainder will expire from 1996 through 2011. The Company also has pending approximately 120 U.S. patent applications, including approximately 17 that have been allowed and are expected to be formally issued soon, as well as pending foreign counterparts to many of these applications. StorageTek also has licenses to use patents held by others. StorageTek owns, has license rights to, and/or has applied to register, over 40 trademarks, as well as copyrights. Taken as a whole, these assets are material to StorageTek's business. However, no individual patent, trademark or other item of proprietary information is singularly material to StorageTek's business.
The Company operates in an industry characterized by vigorous pursuit and protection of intellectual property rights, which have resulted in significant and sometimes protracted and expensive litigation. From time to time, StorageTek has commenced actions against other companies to protect or enforce its intellectual property rights. Similarly, StorageTek from time to time has been notified that it may be infringing certain patent or other intellectual property rights of others. Although licenses are generally offered in such situations, there can be no assurance that
litigation will not be commenced in the future regarding patents, copyrights, trademarks or trade secrets or that any license or other rights can be obtained on acceptable terms. StorageTek is currently engaged in several proceedings relating to its intellectual property and alleged patent infringement. See Part I, Item 3, "Legal Proceedings" of this Form 10-K. For a discussion of factors concerning intellectual property see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Factors that May Affect Future Results," of this Form 10-K.
ENVIRONMENT - ----------- Compliance by StorageTek with provisions of federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material adverse effect on StorageTek. For 1994, StorageTek did not have any material expenditures for environmental control facilities. To date in 1995, StorageTek does not have pending and has not budgeted any material estimated expenditures for environmental control facilities. However, potential liability under environmental legislation is ongoing, regardless of whether or not StorageTek has complied with existing governmental guidelines. Moreover, government regulation of the environment and related compliance costs have increased in recent years. Based upon currently available information, StorageTek does not expect that future compliance with environmental regulations will have a material effect on StorageTek. For further discussion of specific environmental proceedings involving the Company and/or its properties, see Part I, Item 3, "Legal Proceedings," of this Form 10-K.
OTHER MATTERS - ------------- The Company employed approximately 10,300 persons on a full-time basis worldwide as of December 30, 1994.
The Company does not consider its business to be highly seasonal, although it historically has experienced increased sales revenue in the fourth quarter compared to other quarters due to customers' tendencies to make purchase decisions near the end of the calendar year. There can be no assurance that this historical trend will continue in 1995 and that fourth quarter results will be higher than any other quarter.
For the year ended December 30, 1994, no single customer accounted for 10% or more of the Company's consolidated total revenue.
No material portion of the Company's business is subject to contract termination at the election of the U.S. government.
Reference is made to the following Notes to the Consolidated Financial Statements set forth in Part IV, Item 14, of this Form 10-K for certain additional information, which information is incorporated by reference herein:
Note 2 Description of the Company's business combinations with Amperif Corporation and Edata Scandinavia AB.
Note 16 Information on the geographic operations of the Company's single business segment. See also Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations and Hedging Activities" and "Other Factors that May Affect Future Results -- International Operations" for further discussion of the risks attendant to foreign operations.
Note 18 Description of the Company's merger with Network Systems.
Reference is also made to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K, for information regarding liquidity, including working capital, and other factors that may affect future results.
RECENT MERGER - ------------- See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Network Systems Merger," and Note 18 of Notes to Consolidated Financial Statements contained in Part IV, Item 14, of this Form 10-K for a discussion concerning the Company's recent merger with Network Systems Corporation, which designs, manufactures, markets and services high-performance computer networking products. Such information is incorporated by reference into Part I, Item 1, of this Form 10-K.
ITEM 2.
ITEM 2. PROPERTIES
StorageTek occupies facilities in 15 separate buildings in Boulder County, Colorado, comprising approximately 2.5 million square feet. Of these, approximately 2.2 million square feet are owned by StorageTek and the remaining space is leased. Currently, substantially all of this space is utilized. These facilities include StorageTek's executive offices, as well as manufacturing, research and development, and parts storage facilities. In the Palm Bay - Melbourne, Florida area, StorageTek owns approximately 199,000 square feet of manufacturing facilities, which are approximately 50% utilized. StorageTek also occupies 128,000 square feet of manufacturing facilities in Puerto Rico, of which approximately 50,000 square feet are leased, and leases approximately 38,000 square feet of manufacturing facilities in England, which facilities are approximately 70% and 100% utilized, respectively. In addition, StorageTek occupies leased facilities at approximately 295 other locations throughout the world, primarily for sales, customer service and parts storage, as well as for limited research and product development purposes. Of the leased field offices, approximately 215 are located in North America, with combined office and warehouse facilities totaling approximately 1,250,000 square feet in the United States and 100,000 square feet in Canada. The Company maintains approximately 65 field offices in Europe comprising approximately 325,000 square feet, and 15 field offices in the Asia/Pacific region comprising approximately 75,000 square feet. Many of the Company's leases throughout the world contain renewal rights, cancellation rights and rights of first refusal on contiguous expansion space. At the present time, such facilities are adequate for the Company's purposes. The Company entered into an agreement with the French government in February 1993 to begin leasing in January 1995 approximately 180,000 square feet of newly constructed engineering, manufacturing and marketing facilities in Toulouse, France.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the second quarter of 1992, seven purported class actions were filed in the U.S. District Court for the District of Colorado against the Company and certain of its officers and directors. These actions were subsequently consolidated into a single action, and a consolidated amended complaint was filed on July 7, 1992, seeking an unspecified amount of damages. The complaint alleged that the defendants failed to properly disclose the status of development of a new product and the Company's business prospects. The complaint further alleged that the individual defendants sold shares of the Company's common stock based on material inside information, in violation of federal securities and common law. The court has certified a class consisting (with certain exceptions) of those who purchased StorageTek's common stock and related securities from December 23, 1991, to August 8, 1992. A shareholder derivative action was also filed in the second quarter of 1992 based on substantially similar factual allegations and has been consolidated with the class action. Discovery and depositions of the Company's employees and other potential witnesses commenced in August 1993, and are substantially complete. No trial dates have been established. The Company believes the suits are without merit and intends to vigorously defend against them. There can be no guarantee, however, that the cases will result in an outcome favorable to the Company. In the event of an adverse outcome, neither the amount nor the likelihood of any potential liability which might result is reasonably estimable; however, the Company currently believes that the amount of the ultimate potential loss, after considering available insurance recoveries, would not be material to the Company's financial position. However, an adverse outcome could have a material effect on the Company's reported results of operations in a future period. In the derivative action, any recovery would be the property of the Company.
In June 1993, the Company received a subpoena from the Denver Regional Office of the Securities and Exchange Commission (the "Commission") to produce certain documents in connection with the Commission's order for an investigation of possible violations of federal disclosure, reporting and insider trading requirements. The requests by the Commission relate principally to announcements and related disclosures concerning the status of development of a new product in 1992.
On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District Court for the District of Colorado. The suit currently alleges infringement by EMC Corp. of a patent pertaining to the Company's disk storage technology. The complaint seeks an injunction prohibiting further infringement, treble damages in an unspecified amount, and an award of attorney fees and costs. EMC Corp. filed an answer and counterclaim on July 20, 1993, alleging, among other things, patent misuse by StorageTek and seeking the invalidation of the Company's patents, damages in an unspecified amount and an award of attorney fees, costs and interest. The case is now in the discovery phase. The Company believes EMC's counterclaim is without merit and intends to vigorously defend against the action.
On February 23, 1994, the Company and its subsidiary, XL/Datacomp, Inc. ("XL/Datacomp"), filed suit in Boulder County, Colorado, District Court against Array Technology Corporation ("Array") and Tandem Computers Incorporated ("Tandem"). The suit asked that the court order Array and Tandem to either support certain disk drives purchased from them or provide the Company with technical data necessary for StorageTek to provide such customer support. On March 15, 1994, Array and Tandem filed their answer and also filed counterclaims against the Company alleging breach of contract and claiming damages. On June 15, 1994, the court ordered Array and Tandem to continue to provide support for these products and to maintain, in an independent
escrow account, the materials necessary to enable the Company and XL/Datacomp to support the products in the event Array and Tandem failed to provide such services. The suit is now in the discovery phase as to the claims made by Array and Tandem. No trial dates have been established. The Company believes the counterclaims filed by Array and Tandem are without merit and intends to vigorously defend against them.
On July 3, 1984, StorageTek, via its predecessor-in-interest, Documation Inc., was identified as a potentially responsible party with respect to real property located in Orlando, Florida. The Environmental Protection Agency ("EPA") has agreed to settle the matter for approximately $132,000 payable out of funds from the bankruptcy reserve being held by the Company. The EPA has indicated it intends to enter into a settlement agreement for such amount, but final documents have not been executed. StorageTek believes this arrangement is viable and will file a claim in this amount against the bankruptcy reserve and, consequently, this settlement will have no material adverse effect on the Company's financial condition and results of operations.
On January 24, 1994, Stuff Technology Partners II, a Colorado Limited Partnership ("Stuff"), filed suit in Boulder County, Colorado, District Court against the Company and certain subsidiaries. The suit alleges that the Company breached a 1990 settlement agreement that had resolved earlier litigation between the parties. The suit seeks injunctive relief and damages in the amount of $2.4 billion. The Company has filed a motion to dismiss the complaint, as well as an alternative motion to bifurcate certain of the claims. On July 1, 1994, the court partially granted the Company's motion to dismiss, dismissing claims based on facts or conduct occurring before the 1990 settlement of the previous litigation. In November 1994, the defendants filed a motion for summary judgment. Discovery has been stayed pending a ruling on that motion. No trial date has been established. The Company believes that the claims in the suit are barred by the 1990 settlement between the Company and Stuff and are without merit, and the Company intends to vigorously defend against them.
On January 21, 1994, Bell Atlantic Business Systems Services, Inc. ("BABSS") filed suit in Federal District Court for the Northern District of California, alleging that a number of the Company's service business policies are illegal, including price increases and parts and maintenance software availability. The case is now in the discovery phase and no trial date has been set. The Company believes the suit is without merit and intends to vigorously defend against the suit.
On September 23, 1994, EMC Corp. filed suit in U.S. District Court in Wilmington, Delaware, alleging infringement of a patent pertaining to disk storage technology. The complaint seeks an injunction, treble damages in an unspecified amount and an award of attorney fees and costs. The Company has filed an answer. The Company also has filed a motion to transfer the case to the U.S. District Court for Colorado and has filed a counterclaim for infringement of one of its patents. Discovery has been stayed pending a decision on the motion to transfer. The Company believes the suit is without merit and intends to vigorously defend against the suit.
In addition, the Company is involved in various other less significant legal proceedings. The outcomes of these legal proceedings are not expected individually or in the aggregate to have a material adverse effect on the financial condition or operations of the Company based on the Company's current understanding of the relevant facts and law.
Information concerning certain of these legal proceedings is also contained in Note 13 of Notes to the Consolidated Financial Statements identified in Part IV, Item 14, of this Form 10-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of StorageTek security holders during the fourth quarter of the fiscal year ended December 30, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company as of March 17, 1995.
Name Position with Company Age - ------------------ --------------------------------------- --- Ryal R. Poppa Chairman of the Board, President, 61 and Chief Executive Officer
David E. Weiss Chief Operating Officer and Executive 50 Vice President of Systems Development
Lowell Thomas Gooch Executive Vice President of Operations 50
John V. Williams Executive Vice President of Worldwide 51 Field Operations
David E. Lacey Corporate Vice President and Interim 48 Chief Financial Officer
Mark D. McGregor Corporate Vice President, Treasurer 53 and Interim Controller
W. Russell Wayman Corporate Vice President, 50 General Counsel and Secretary
Mr. Poppa became Chairman of the Board, Chief Executive Officer and a director of the Company in January 1985, and also became President of the Company in January 1988.
Mr. Weiss was appointed Chief Operating Officer on March 10, 1995, in addition to his position as Executive Vice President of Systems Development. Mr. Weiss became Executive Vice President of Systems Development in January 1993. He was a Senior Vice President of Marketing from June 1992 to January 1993 and Corporate Vice President of Market Planning from August 1991 to June 1992. From March 1991 through August 1991, he was a staff vice president reporting to the Chief Executive Officer. Prior to joining StorageTek, Mr. Weiss was employed by IBM for 23 years. Most recently, he was the DASD Controller Development Director for IBM from December 1989 to February 1991.
Mr. Gooch became Executive Vice President of Operations of the Company in January 1989. From June 1987 to January 1989, he was Corporate Vice President of Manufacturing at StorageTek. Mr. Gooch has been employed by the Company in various capacities since 1972.
Mr. Williams became Executive Vice President of Worldwide Field Operations effective on January 1, 1995. Prior to that time, he served as Senior Corporate Vice President, Americas from August 1993 through December 1994. He was Corporate Vice President from February 1992 through August 1993 and Vice President of North America from September 1990 through February 1992.
Prior to his return to StorageTek, Mr. Williams was employed by GRiD Systems Corp., where he served as vice president of sales and service from March 1981 to September 1990.
Mr. Lacey was appointed Interim Chief Financial Officer on February 1, 1995, in addition to his position as Vice President. Mr. Lacey became a Corporate Vice President in December 1990. He served as Corporate Controller of the Company from October 1989 to February 1995.
Mr. McGregor was appointed Interim Controller on February 13, 1995, in addition to his position as Corporate Vice President and Treasurer, which he assumed on November 16, 1994. He served as Assistant Treasurer from July 1993 to November 1994. Prior to that time, from July 1987 to June 1993, he served as Assistant Corporate Controller.
Mr. Wayman has served as Corporate Vice President since March 1991; General Counsel since January 1990 and Corporate Secretary of the Company since February 1990. From May 1984 through January 1990, he was the General Counsel of VLSI Technology, Inc., a manufacturer of application specific integrated circuits.
Mr. Derek Thompson, age 65, retired on January 1, 1995, as Executive Vice President of Worldwide Field Operations, where he served from March 1991 to December 1994, and became Executive Vice President Emeritus. From July 1984 to March 1991, he was the Vice President of Field Operations for Europe, Africa and the Middle East.
Mr. Gregory Tymn, age 45, served as Senior Vice President and Chief Financial Officer from March 1991 through January 1995. From November 1989 until June 1992, Mr. Tymn was Corporate Vice President of Program Management. Effective April 15, 1995, Mr. Tymn will be resigning from the Company.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Storage Technology Corporation is traded on the New York Stock Exchange under the symbol STK. The table below reflects the high and low closing sales prices of the common stock on the New York Stock Exchange composite tape as reported by The Wall Street Journal for 1994 and 1993. On December 30, 1994, there were 19,646 record holders of common stock of StorageTek.
1994 High Low ----------- ------- ------- 1st Quarter $40.625 $31.250 2nd Quarter 34.125 25.125 3rd Quarter 39.000 28.750 4th Quarter 31.000 26.625
1993 High Low ----------- ------- ------- 1st Quarter $27.250 $18.625 2nd Quarter 44.000 23.375 3rd Quarter 41.125 24.500 4th Quarter 33.625 25.000
Dividends
StorageTek has never paid cash dividends on its common stock and currently plans to continue to retain future earnings for use in its business. Furthermore, the Company's existing multicurrency credit agreement and 9.53% Senior Secured Notes contain certain restrictions that limit the payment of cash dividends based primarily upon the Company's consolidated net income. As of December 30, 1994, under the terms of the multicurrency credit agreement, the Company did not have sufficient cumulative consolidated net income to permit the payment of cash dividends on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1992 through 1994 (except for the 1992 Balance Sheet Data), has been derived from the consolidated financial statements appearing elsewhere herein, including the Consolidated Balance Sheet as of December 30, 1994, and December 31, 1993, and the related Consolidated Statement of Operations for each of the three years in the period ended December 30, 1994, and notes thereto. The data, insofar as it relates to the Balance Sheet Data as of December 25, 1992, December 27, 1991, and December 28, 1990, and the Statement of Operations Data for the fiscal years 1991 and 1990, has been derived from the historical financial statements of the Company, XL/Datacomp, Inc. and Amperif Corporation, as pooled entities for such periods.
The following table data (in thousands of dollars, except per share amounts) should be read in conjunction with the consolidated financial statements and notes thereto.
(a) In 1991, the Company recognized expenses of $5,104,000 in connection with the merger with XL/Datacomp, Inc.
(b) In 1990, the Company recognized a net charge of $1,304,000 related to repurchases of 8% Convertible Subordinated Debentures due 2015, and the redemption and repurchase of 13.5% Senior Debentures.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - ------- The Company reported net income for the year ended December 30, 1994, of $41.4 million on revenue of $1.62 billion, compared to a net loss for the year ended December 31, 1993, of $77.8 million on revenue of $1.40 billion and net income for the year ended December 25, 1992, of $9.3 million on revenue of $1.55 billion.
Revenue increased 16% in 1994 compared to 1993, primarily due to increased sales of the Company's Silverton 4490 (Silverton), a 36-track tape offering; PowderHorn 9310 (PowderHorn), an Automated Cartridge System (ACS) library; and incremental sales revenue from the Iceberg 9200 Virtual Storage Facility (Iceberg). Sales of the Company's first-generation 4400 ACS library and 4480 18-track tape cartridge system declined in 1994, as did sales of midrange products. The Company's improved operating results in 1994 over 1993 resulted from increased gross profit contributions associated with sales of its serial access and direct access storage device (DASD) products, including Silverton, PowderHorn, and Iceberg. While both revenue and operating results improved during 1994, these results fell short of the Company's expectations. The Company's operating results in 1994 were adversely affected by competitive pricing pressure in the DASD marketplace; a longer than anticipated customer acceptance period for Iceberg; and higher than expected marketing, general and administrative expenses. The Company's operating results in 1994 were also pressured by the discontinuance of austerity measures, including salary reductions, instituted in late 1992. The Company's midrange systems business operated near the breakeven level during 1994.
Revenue decreased 9% in 1993, compared to 1992, primarily due to the weak European economy, a strengthening U.S. dollar, intense price competition within the midrange marketplace, the lack of new DASD product offerings, and the lack of a 36-track tape product offering for most of 1993. These factors, coupled with restructuring and other charges of $74.8 million associated with the Company's midrange business and losses associated with the operations of Amperif Corporation (Amperif), with whom the Company merged in the fourth quarter of 1993, resulted in a net loss for 1993. The net loss in 1993 was partially offset by a $40.0 million benefit from the cumulative effect of a change in the method of accounting for income taxes.
Improvements in revenue and operating results in 1995 are significantly dependent upon the continuing success of the Company's recently introduced products, the timely and successful introduction of new products and planned technological improvements to existing products, and achieving cost savings associated with the manufacture of these products to offset anticipated intense competitive pricing pressures, particularly in the DASD marketplace. Aggressive pricing practices in the DASD marketplace have resulted in significant price declines in recent months. Improvements in revenue and operating results during 1995 are significantly dependent upon the extent of price declines during the reminder of 1995 and the Company's ability to manage these price declines. The Company plans to continue the implementation of cost-control measures in order to attain targeted expense ratios, including further redeployments or reductions in headcount. Other factors that may affect future results include the introduction of new products by competitors, technological advances within the computer industry, and changes in the worldwide economy, among others. See "OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS," below.
On March 7, 1995, the Company completed the merger with Network Systems Corporation. For further discussion of the merger, see Note 18 to the Company's Consolidated Financial Statements and "NETWORK SYSTEMS MERGER," below.
The Company's cash and short-term investments decreased $65.2 million during 1994 primarily as a result of the significant investment associated with the ramp-up of production for new products, and delivery of these products to customers for evaluation and acceptance prior to cash collection of the associated revenue.
The following table, stated as a percentage of total revenue, presents consolidated statement of operations information and revenue by product line which includes product sales, service and rental, and software revenue.
Year Ended December ------------------------------- 1994 1993 1992 ----- ----- ----- Revenue: Serial Access Subsystems 63.6% 62.3% 60.4% Random Access Subsystems 15.6 9.0 12.5 Midrange Systems 15.5 21.8 20.9 Other 5.3 6.9 6.2 ----- ----- ----- Total revenue 100.0 100.0 100.0 Cost of revenue 65.1 68.8 69.3 ----- ----- ----- Gross profit 34.9 31.2 30.7 Research and product development costs 10.4 11.6 9.8 Marketing, general, administrative and other income and expense, net 21.0 23.1 20.3 Restructuring and other charges 5.3 ----- ----- ----- Operating profit (loss) 3.5 (8.8) 0.6 Interest (income) expense, net (0.1) (0.8) (1.1) ----- ----- ----- Income (loss) before income taxes and cumulative effect of accounting change 3.6 (8.0) 1.7 Provision for income taxes 1.0 0.4 1.1 ----- ----- ----- Income (loss) before cumulative effect of accounting change 2.6 (8.4) 0.6 Cumulative effect on prior years of change in method of accounting for income taxes 2.9 ----- ----- ----- Net income (loss) 2.6% (5.5)% 0.6% ===== ===== =====
REVENUE - ------- Total revenue increased 16% in 1994 compared to 1993, principally as a result of an increase in product sales of 24%. Service and rental revenue was largely unchanged in 1994 compared to 1993. Total revenue decreased 9% in 1993 compared to 1992, as a result of a decrease in product sales of 16% which was partially offset by an increase in service and rental revenue of 6%.
SERIAL ACCESS SUBSYSTEMS
Revenue from serial access subsystem products increased 18% in 1994 compared to 1993, primarily due to increased sales of PowderHorn and Silverton. The Company also recognized incremental sales from its TimberLine 36-track cartridge subsystem, which became available in
the fourth quarter of 1994. Sales of the Company's first-generation 4400 ACS library and 4480 18-track cartridge system declined during 1994.
Revenue from serial access subsystem products decreased 7% in 1993 compared to 1992, due primarily to the weak economic conditions in Europe, a strengthening U.S. dollar and the lack of a 36-track tape product offering for most of 1993. These pressures were offset partially by incremental sales revenue in the fourth quarter of 1993 from PowderHorn and Silverton.
During 1995, increased sales associated with TimberLine and new serial access products scheduled for availability in 1995 are expected to offset anticipated further declines in revenue from the Company's first-generation tape and library products. The serial access product family generates more revenue than any other product line of the Company and is expected to continue to be a major element of the Company's plan for 1995.
RANDOM ACCESS SUBSYSTEMS
Revenue from random access subsystem products increased 102% in 1994 compared to 1993, due to incremental sales of Iceberg. Iceberg became generally available during the second quarter of 1994. More than 245 Iceberg subsystems had been revenue recognized through the end of the year. While demand for Iceberg was strong in 1994, sales fell short of the Company's expectations. Sales of Iceberg in 1994 were adversely affected by lower than anticipated unit sales volume, smaller configuration sizes, and pricing pressures, as well as a longer than anticipated customer evaluation and acceptance period. No significant sales revenue was generated in 1994 by the Company's Nordique 9100 Open Storage Facility (Nordique), which became available in the third quarter of 1994. Nordique, a disk array product targeted at the lower end of the large systems marketplace and the midrange systems marketplace, has been adversely affected by rapid technological advances that have limited its competitiveness.
Revenue from random access subsystem products decreased 35% in 1993 compared to 1992, due primarily to decreased sales of the Company's rotating DASD products and decreased sales of Amperif's disk subsystems in the Unisys marketplace. The decrease in revenue from the Company's rotating DASD reflects the discontinuance of production of the Company's 8380 disk subsystem, which was completed during the second quarter of 1993. The decrease in DASD revenue from Amperif resulted from competition from new products offered by Unisys.
The Company is committing substantial resources to develop additional functions and features for Iceberg. Sales of Iceberg in 1995 are dependent upon continued customer acceptance of Iceberg in light of existing and anticipated competitive offerings in the DASD marketplace, the timely introduction of these additional Iceberg functions and features, achieving cost savings associated with the manufacture of Iceberg, and managing anticipated aggressive price competition in the DASD market. While the Company believes the introduction schedules for new Iceberg features and other DASD products currently being developed are achievable, there can be no assurances that they will be met, or that they will gain market acceptance.
MIDRANGE SYSTEMS
Revenue from midrange system products decreased 18% in 1994 compared to 1993. Midrange revenue and operating profits continued to be adversely affected by steep price erosion in the midrange DASD marketplace. Further, the restructuring plan adopted in the third quarter of 1993 has resulted in reduced midrange revenue as anticipated at the time the
restructuring was adopted. During 1994, the Company continued to change the midrange organization, and distribution and service networks. The Company also redirected its midrange marketing efforts to focus on open systems and value-added AS/400 tape products and service to improve performance.
Revenue from midrange system products decreased 6% in 1993 compared to 1992. This decrease primarily reflects delays in the availability of the Company's Alpine 9600 Storage Manager, and price erosion in the midrange DASD marketplace. The decreases in revenue from midrange system products were also a result of the limited acceptance of the Company's midrange tape products. In response to these factors, the Company restructured its midrange business in the third quarter of 1993. The restructuring involved changing the Company's midrange product line, organization, distribution network and service operations to improve operating performance. See Note 15 to the consolidated financial statements and "RESTRUCTURING AND OTHER CHARGES," below, for further discussion of the Company's 1993 restructuring of its midrange business.
The Company's midrange business operated near the breakeven level during 1994. In 1995, price erosion in this intensely competitive marketplace is expected to continue. Accordingly, there can be no assurance that the Company's midrange business will generate any significant profits in the future.
OTHER
Revenue from other products decreased 11% in 1994 compared to 1993, due to a decrease in printer product revenue resulting from decreased unit sales volume. Revenue from other products was largely unchanged in 1993 compared to 1992. Printer product revenue will continue to decline in 1995 as the Company continues to wind down these operations. Sales of the Company's NearNet network storage manager (NearNet) were not significant in 1994. The ability to successfully develop and introduce networking products in the future is, however, expected to have a significant effect on the Company's future operating results. See "NETWORK SYSTEMS MERGER," below.
GROSS PROFIT - ------------ Overall gross profit increased to 35% for 1994, compared to 31% for 1993 and 1992, primarily due to increased product sales margins.
Gross profit on product sales increased to 35% in 1994, compared to 29% in 1993 and 30% in 1992, primarily as a result of a favorable product mix which included greater contribution to revenue from higher margin products sold during 1994, such as Iceberg, Silverton, and PowderHorn; and reduced revenue contribution from midrange products, which generally have lower margins. Product sales margins were, however, pressured by intense price competition in the large systems and midrange DASD marketplaces; increased operating expenses associated with the discontinuance of salary reductions and other austerity measures; and inventory writedowns associated with DASD products targeted for the midrange and lower end of the large systems marketplace. Charges of approximately $15 million were recognized in 1994 for inventory writedowns as a result of the continued price erosion in the midrange DASD marketplace.
Gross profit on service and rental revenue increased slightly to 36% in 1994, compared to 35% in 1993 and 33% in 1992. Service margins were, however, reduced in the second half of 1994, primarily due to the discontinuance of austerity measures instituted in 1992.
The Company's ability to sustain or improve product sales margins in 1995 is significantly dependent upon the timely introduction of planned technological improvements to existing products and achieving cost savings associated with the manufacture of these products. Product sales margins may also be adversely effected by inventory writedowns during 1995 as a result of more rapid than anticipated technological changes and continuing price erosion in the DASD marketplace. Service margins are expected to decline slightly in 1995 as a result of longer warranty periods and increased costs associated with the installation of new products.
RESEARCH AND PRODUCT DEVELOPMENT - -------------------------------- Research and product development expenditures increased 4% in 1994 and 7% in 1993. The Company completed several major product development programs during 1994 and has now shifted a portion of these resources to the development of enhancements for these products. The increase in 1993 was primarily due to the investment in these product development programs, which was partially offset by ongoing cost containment efforts.
MARKETING, GENERAL, ADMINISTRATIVE AND OTHER - -------------------------------------------- Marketing, general, administrative and other income and expense (MG&A) increased 5% in 1994 compared to 1993, primarily due to an increase in operating expenses as a result of higher sales volumes and costs incurred in connection with the introduction of new products and the discontinuance of austerity measures. These increases were partially offset by lower operating expenses related to the Company's restructured midrange business and reduced foreign currency losses in 1994, compared to 1993. Gains and losses associated with foreign currency transactions and translation adjustments, net of associated hedging results, aggregated a net loss of $1.0 million for 1994, compared to a net loss of $8.8 million in 1993.
MG&A was largely unchanged in 1993 compared to 1992. Gains and losses associated with foreign currency transactions and translation adjustments, net of associated hedging results, aggregated a net loss of $8.8 million in 1993, compared to a net loss of $8.4 million in 1992.
See "INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES," below, for further discussion of the foreign exchange risks associated with the Company's international operations and the related foreign currency hedging activities.
RESTRUCTURING AND OTHER CHARGES - ------------------------------- As further discussed in Note 15 to the Company's consolidated financial statements, the Company recognized restructuring and other charges of $74.8 million during 1993. Restructuring charges of $69.3 million, recognized during the third quarter of 1993, principally related to the reorganization of the Company's midrange business. Merger and consolidation expenses of $5.5 million were also recognized during 1993 in connection with the merger with Amperif.
The restructuring yielded expense reductions of approximately $10 million in the fourth quarter of 1993 and approximately $39 million during 1994. The cost savings during 1994 resulted from the following components (in millions of dollars):
Exit of non-profitable midrange product lines and services $15 Consolidation of marketing and service organizations 11 Employee reductions 8 Reduced goodwill amortization 5 -- Total $39 ==
Following is a rollforward by quarter of the $12 million of restructuring accruals established at the time of the restructuring (in millions of dollars):
Reclassifications to Other Beginning Cash Restructuring Ending Balance Payments Charges Balance -------------------------------------------------
Third quarter, 1993 $12.0 $(0.7) $11.3 Fourth quarter, 1993 11.3 (4.5) $(1.2) 5.6 First quarter, 1994 5.6 (2.4) 3.2 Second quarter, 1994 3.2 (0.9) 2.3 Third quarter, 1994 2.3 (0.4) 1.9 Fourth quarter, 1994 1.9 (1.0) 0.9 --- --- Total $(9.9) $(1.2) === ===
No material cash outflows are anticipated to result from this restructuring in the future.
INTEREST INCOME AND EXPENSE - --------------------------- Despite an increase in market interest rates during 1994, interest income decreased 22% compared to 1993, due to a reduction in net investment in sales- type lease balances and a decrease in the Company's cash balances available for investment. Interest income decreased 18% in 1993 compared to 1992, due primarily to a reduction in net investment in sales-type lease balances.
Interest expense decreased 7% in 1994 compared to 1993, primarily as a result of reduced levels of nonrecourse borrowings in the first half of 1994. Interest expense decreased 10% in 1993 compared to 1992, primarily as a result of lower interest rates and a reduction in the Company's nonrecourse borrowings.
INCOME TAXES - ------------ As further discussed in Note 9 to the Company's consolidated financial statements, effective as of the beginning of the fiscal year 1993, the Company was required to change its method of accounting for income taxes from Statement of Financial Accounting Standards (SFAS) No. 96 to SFAS No. 109. A one-time benefit of $40 million was recognized in the first quarter of 1993
as a result of the adoption of the new income tax accounting standard on a prospective basis. The adoption of SFAS No. 109 had no cash flow impact.
SFAS No. 109 requires that deferred income tax assets be recognized to the extent realization of such assets is more likely than not. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company's operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company's earnings history, the Company's near-term earnings expectations and possible reductions in the Company's net operating loss carryforwards as a result of proposed adjustments by the Internal Revenue Service to the Company's previously filed federal income tax returns. Based on the currently available information, management has determined that the Company will more likely than not realize $51.6 million of deferred income tax assets as of December 30, 1994.
See Note 9 to the consolidated financial statements for information with respect to the current status of the Internal Revenue Service examinations.
The Company's provision for income taxes relates primarily to taxable earnings associated with its international operations in certain foreign countries. The Company's effective tax rate can be subject to significant fluctuations due to dynamics associated with the mix of its U.S. and international taxable earnings.
LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- FINANCINGS
In March 1993, the Company completed a public offering of 3.45 million shares of $3.50 Convertible Exchangeable Preferred Stock, $.01 par value (the Preferred Stock), at a price of $50.00 per share. The net proceeds of the Preferred Stock offering, after deducting all associated costs, were approximately $166.5 million. The net proceeds were used by the Company for working capital and capital expenditures associated with the development and introduction of new products and for other general corporate purposes.
WORKING CAPITAL
The Company's cash balances decreased $49.1 million and short-term investments decreased $16.0 million from December 31, 1993, to December 30, 1994. Net cash provided by operations was $73.3 million for 1994 compared to $87.5 million for 1993 and $107.1 million for 1992. The decrease in cash and short-term investments for 1994 primarily resulted from a significant investment in equipment held for sale or lease as the Company shipped Iceberg and other new products to customers for evaluation and acceptance prior to recognizing the associated revenue. While the ramp-up of production of Iceberg was largely completed in 1994, the Company continues to carry a significant investment in equipment held for sale or lease going into 1995. Significant investments in property, plant and equipment were also made in 1994 in connection with test and production equipment associated with new products. Net cash of $2.1 million from financing activities during 1994 reflects net proceeds from non-recourse borrowings offset by repayments of other debt. The increase in cash and short-term investments in 1993 reflects the net proceeds from the Preferred Stock offering, coupled with the net cash generated by operating activities, partially offset by investments in property, plant and equipment, and the partial paydown of nonrecourse borrowings.
The current ratio decreased to 2.1 at December 30, 1994, from 2.2 at December 31, 1993. Accounts receivable increased from $218.7 million at December 31, 1993, to $313.2 million at December 30, 1994, due primarily to higher comparable revenue. Inventories increased from $203.3 million at December 31, 1993, to $240.0 million at December 30, 1994, principally as a result of a build-up of inventories associated with new DASD and tape products.
AVAILABLE FINANCING LINES
In September 1994, the Company amended its secured multicurrency credit agreement with a group of U.S. and international banks (the Revolver) to increase the maximum possible borrowings under the credit facility from $150 million to $200 million and to extend the facility through March 1996. In addition, the Revolver was modified to increase the total amount available under the borrowing base. The interest rates available under the Revolver depend on the type of advance selected; however, the primary advance rate is the agent bank's prime lending rate (8.5% at December 30, 1994). The total amount available under the Revolver is limited to a monthly borrowing base determined as a percentage of the Company's eligible accounts receivable, lease assets (primarily net investments in sales-type leases not previously utilized for other secured borrowings), and equipment awaiting revenue recognition. To obtain funds under the Revolver, the Company is required to comply with certain financial and other covenants, including restrictions on the payment of cash dividends on its common stock. As of December 30, 1994, the Company had no outstanding advances under the Revolver and had approximately $136 million of available credit under the Revolver.
In addition to the Revolver, the Company had lease assets in excess of $80 million available for financing as of December 30, 1994. Subject to credit approval, the Company believes it can develop lease discounting lines, if needed, or fund its operating and capital requirements through other forms of asset-backed financings. At the Company's option, a portion of these lease assets can also be utilized for borrowings under the Revolver.
In order to sustain desired levels of cash balances, the Company may from time-to-time borrow against its Revolver. The Company believes it has adequate working capital and financing capabilities to meet its anticipated operating and capital requirements for the next 12 months, including new product offerings. Over the longer term, the Company intends to continue to commit substantial amounts of its resources to research and development projects and may, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies. The Company may seek to fund these activities or possible transactions through the issuance of additional equity or debt. The issuance of equity or convertible debt securities could result in dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, can be completed on terms acceptable to the Company.
FINANCING SUBSIDIARY
The Company established a wholly owned captive financing subsidiary, StorageTek Financial Services Corporation (SFSC), during 1994. The Company believes that SFSC will expand the Company's offering of leasing and other customer finance products and services, as well as lower the Company's cost of funding those products and services.
LONG-TERM DEBT-TO-EQUITY
The Company's long-term debt-to-equity ratio decreased to 33% as of December 30, 1994, from 36% as of December 31, 1993. These debt-to-equity ratios include $112.0 million and $97.0 million, respectively, of long-term nonrecourse borrowings secured by customer lease commitments included within total assets (primarily net investment in sales-type leases). Excluding long- term nonrecourse borrowings, the Company's long-term debt-to-equity ratio decreased to 23% as of December 30, 1994, from 26% as of December 31, 1993.
REPAYMENT OBLIGATIONS AND CONVERSION FEATURES
Pursuant to the indenture related to the Company's 8% Convertible Subordinated Debentures due 2015 (Convertible Debentures), the Company is required to make semiannual interest payments on the $145.6 million principal amount of Convertible Debentures outstanding. The Convertible Debentures are convertible at the option of the holder into common stock at a price of $35.25 per share. The Convertible Debentures are currently redeemable at the option of the Company at a premium of 4.8%, and are redeemable at decreasing premiums through May 30, 2000. Convertible Debentures in the principal amount of $8 million per annum, plus accrued interest, must be redeemed beginning May 31, 2000, through a sinking fund which provides for the retirement of 75% of the Convertible Debentures prior to their maturity on May 31, 2015. Convertible Debentures purchased by the Company in the open market and Convertible Debentures converted to common stock may be applied to the sinking fund requirements. As of December 30, 1994, the Company held Convertible Debentures in the principal amount of $14.3 million available for sinking fund payments.
In connection with the Company's 9.53% Senior Secured Notes due August 31, 1996 (the Notes), the Company is required to make semiannual interest payments on the $55 million principal amount outstanding. All principal amounts are due and payable on August 31, 1996. Upon repayment of the Notes, approximately $60 million of additional lease assets which currently secure the Notes will become available for financing. The Notes are redeemable at the option of the Company, in whole or in part, from time to time, at a premium which is determined based on current interest rates and the time remaining until maturity.
The Company's Preferred Stock provides for cumulative dividends payable quarterly in arrears at an annual rate of $3.50 per share, when and as declared by the Company's board of directors. Annual dividends associated with the Preferred Stock aggregate $12.1 million. The Notes contain restrictions that limit the payment of dividends on the Company's Preferred Stock; however, these restrictions are not expected to limit the ability of the Company to pay dividends on its Preferred Stock.
The Preferred Stock is convertible at any time at the option of the holder, unless previously redeemed, into shares of StorageTek common stock at an initial conversion rate of 2.128 shares of common stock for each share of Preferred Stock (equivalent to a conversion price of $23.50 per share of common stock). The Preferred Stock is redeemable for cash at any time on and after March 15, 1996, in whole or in part, at the option of the Company, initially at a redemption price of $52.45 per share, and thereafter at prices decreasing ratably annually to $50.00 per share on and after March 15, 2003, plus accrued and unpaid dividends. The Preferred Stock is also exchangeable, in whole but not in part, at the option of the Company on any dividend payment date beginning March 15, 1995, for 7% Convertible Subordinated Debentures due 2008 at the rate of $50.00 principal amount of debentures for each share of Preferred Stock. The debentures, if issued, would contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock, and would be subject to a mandatory sinking fund.
INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES - ----------------------------------------------- In 1994, approximately 39% of the Company's revenue was generated by its international operations. The majority of the Company's international operations involve transactions denominated in the local currencies of countries within Western Europe, principally Germany, France and the United Kingdom; Scandinavia; Japan; Canada and Australia. An increase in the exchange value of the U.S. dollar reduces the value of revenue and profits generated by the Company's international operations. As a result, the Company's operations and financial results can be materially affected by changes in foreign currency exchange rates.
In an attempt to mitigate the impact of foreign currency fluctuations, the Company employs a hedging program which utilizes foreign currency options and forward exchange contracts. The Company utilizes foreign currency options, generally with maturities of less than one year, to hedge its exposure to exchange-rate fluctuations in connection with anticipated revenue from its international operations. Gains and losses on the options are deferred and recognized as an adjustment to the hedged revenue. The Company also utilizes forward exchange contracts, generally with maturities of less than two months, to hedge its exposure to exchange-rate fluctuations in connection with net monetary assets held in foreign currencies. The forward contracts are marked-to-market each month with any gains or losses recognized within MG&A as an adjustment to the foreign exchange gains and losses on the translation of net monetary assets. See Note 14 to the consolidated financial statements for additional information with respect to the Company's foreign currency hedging activities, including an assessment of the market and credit risks associated with these activities. See "OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS - INTERNATIONAL OPERATIONS," below, for further discussion of other factors which may affect the Company's international operations.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------------- NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The Company believes that the successful and timely development and shipment of its new products will play a key role in determining its results of operations and competitive strength in the future. During the past several years, the Company has introduced many new and enhanced products and has plans to introduce additional products in 1995. There can be no assurance that the Company will successfully develop, manufacture or market these products. Delays in the availability of new products could adversely affect the Company's financial results.
The market for the Company's products is characterized by rapid technological advances which necessitate frequent product introductions and enhancements, and can result in unpredictable product transitions and shortened product life cycles. To be successful in this market, the Company must make significant investments in research and product development and introduce competitive new products and enhancements to existing products on a timely basis. These factors can reduce the effective life of product-line-specific assets, a problem that has been experienced in the midrange line of products and resulted in inventory write downs. There can be no assurance that new products developed by the Company will be accepted in the marketplace. Moreover, certain components of the Company's products operate near the present limits of electronic and physical capabilities of performance and are designed and manufactured with relatively small tolerances. If flaws in design or production occur, the Company may experience a rate of failure in its products
that results in substantial costs for the repair or replacement of defective products and potential damage to the Company's reputation.
DEPENDENCE ON IBM SYSTEMS; COMPETITION; PRICING PRESSURES
The Company competes with several large, multinational companies having substantially greater resources than the Company's, principally IBM, Fujitsu Limited and Hitachi Ltd., as well as other companies, including Amdahl Corporation and EMC Corp. Current industry estimates show the industry's 1995 DASD manufacturing capacity and total projected output are significantly greater than anticipated demand. This potential over-supply could put increasing downward pressure on pricing. Because of the significance of the IBM mainframe and midrange operating environments, many of the Company's products are designed to be compatible with certain IBM operating systems and many of its products function like IBM equipment. As a result, the Company's business in the past has been and in the future may be adversely affected by a number of factors outside the control of the Company, including, among others, modifications in the design or configuration of IBM computer systems; IBM's efforts to deny access to required interface information; the announcement and introduction of new products by competitors; changes in customer requirements such as migration toward networked computing; and price competition for comparable systems, equipment or services. The Company's ability to sustain or increase sales levels depends to a significant extent upon acceptance of and continued demand for the many recently introduced products, and products planned for introduction in the future. There can be no assurance that the Company's current product offerings, products in development, or products in the early stages of market introduction will achieve or sustain market acceptance, or that they will be able to successfully compete against other companies' products. Also, the Company's service business may be adversely affected in the future by aggressive pricing and litigation strategies utilized by competitors in an effort to gain market share, as well as the current trend toward granting extended warranties.
MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS
The Company's manufacturing processes have increased in complexity as the number and diversity of products offered to customers has increased. The manufacturing process for many of the Company's products is highly complex and precise. Unexpected difficulties in the manufacturing process can cause component parts, or systems to be rejected. Many of these difficulties are hard to diagnose and expensive to remedy. The Company expects to begin manufacturing operations in its Toulouse France facilities in 1995, which could initially experience manufacturing irregularities or adverse output fluctuations.
The Company generally uses standard parts and components for its products and believes that, in most cases, there are a number of alternative, competent vendors for most of those parts and components. However, the Company purchases certain important components and products from single suppliers that the Company believes are currently the only manufacturers of the particular components that meet the Company's qualification requirements and other specifications. In addition, the Company manufactures some key components, or its products include components, for which alternative sources of supply are not readily available. In the past, certain suppliers have experienced occasional technical, financial or other problems that have delayed deliveries to the Company, without significant effect on it. An unanticipated failure of any sole-source supplier to meet the Company's requirements for an extended period, or an interruption of the Company's ability to secure comparable components, could have a material adverse effect on its revenue and results of operations. In the event a sole-source supplier was unable or unwilling to continue to supply components, the Company would have to identify and qualify other acceptable suppliers.
This process could take an extended period and no assurance can be given that any additional source would become available or would be able to satisfy the Company's production requirements on a timely basis.
The Company markets a number of products acquired from other manufacturers on an original equipment manufacturer (OEM) basis. These products are often available only from a single manufacturer. Some of these OEM suppliers are, or may in the future be, competitors of the Company. In the event that an OEM product is no longer available, second sourcing is not always feasible and there could be a material adverse effect on the Company's results of operations.
EARNINGS FLUCTUATIONS
The Company's reported earnings can fluctuate significantly from quarter to quarter due to a variety of factors, including among others, the effects of (i) customers' historical tendencies to make purchase decisions near the end of the calendar year, (ii) the timing of the announcement and availability of products and product enhancements by the Company and its competitors, (iii) fluctuating foreign currency exchange rates, (iv) longer than anticipated customer acceptance periods for the Company's products, and (v) changes in the mix of products sold. The Company's reported earnings in 1995 may also be significantly affected by the operating results of Network Systems - with whom the Company merged in March 1995. Network Systems' operating results, together with associated merger and consolidation charges, are expected to be dilutive to the Company's reported earnings at least through 1995.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has fluctuated substantially in the past in response to reported earnings, industry conditions, new product or product development announcements by the Company or its competitors, announced acquisitions and joint ventures by the Company or its competitors, general market and economic conditions, international currency fluctuations and other events or factors. Further, the volatility of the stock markets in recent years has caused wide fluctuations in trading prices of stocks of high technology companies independent of their individual operating results. The market value of the Company's Common Stock may at any given time in the future be adversely affected by these and other factors. See Part II, Item 5, "Market for Registrant's Common Stock and Related Stockholder Matters " of this Form 10-K.
INTELLECTUAL PROPERTY
The Company's ability to compete is affected by its ability to protect its proprietary information. StorageTek protects its intellectual property rights through a combination of patents, trademarks, copyrights, confidentiality procedures, trade secret laws and licensing arrangements. The Company's policy is to apply for patents, or other appropriate proprietary or statutory protection when it develops new or improved technology that is important to its business. Such protection, however, may not preclude competitors from developing products similar to the Company's products. In addition, competitors attempt to restrict the Company's ability to compete by advancing various intellectual property law theories which could, if enforced by the courts, restrict the Company's ability to develop and manufacture interoperable products. Also, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company also relies on certain technology that is licensed from others. The Company's intellectual property rights are material to the Company's business. The failure to successfully protect its intellectual property rights could have a material adverse effect on the Company's business, financial condition and operating results.
The high technology industry is characterized by vigorous pursuit and protection of intellectual property rights or positions, which in some instances has resulted in significant litigation, which is often protracted and expensive. Litigation by or against the Company could result in significant expense and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in an unfavorable determination against the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. There can be no assurances that the Company would be successful in such development or that such license would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. The Company from time to time has commenced actions against other companies to protect or enforce its intellectual property rights. Similarly, the Company from time to time has been notified that it may be infringing certain patent or other intellectual property rights of others. Currently, the Company is involved in several proceedings relating to its intellectual property and patent infringement. See Part I, Item 3, "Legal Proceedings" and Note 13 to the consolidated financial statements for additional information with respect to the Company's legal proceedings.
INTERNATIONAL OPERATIONS
During fiscal 1994, 1993 and 1992, approximately 39%, 37% and 41%, respectively, of the Company's revenue was derived from sales in markets outside of the United States, primarily in Europe. The Company expects that international sales will continue to account for a significant portion of its revenue for the foreseeable future. The Company's international business may be affected by changes in demand resulting from localized economic and market conditions. For example, in the past the Company's business has been adversely affected by recessions in Europe. In addition, the Company is subject to the risks of conducting business outside of the United States, including fluctuations in currency exchange rates, changes in or impositions of legislative or regulatory requirements, tariffs, quotas, difficulty in obtaining export licenses, potentially adverse taxes, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. In addition, the laws of certain foreign countries in which the Company's products are or may be manufactured or sold may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. To date, the Company has not experienced any material adverse effects on its operations as a result of the foregoing factors; however, there can be no assurances that in the future one or more of the foregoing factors will not have a material adverse effect on the Company's business, financial condition or operating results.
NETWORK SYSTEMS MERGER - ---------------------- As more fully discussed in Note 18 to the consolidated financial statements, the Company, through a wholly owned subsidiary, completed a merger with Network Systems Corporation (Network Systems) on March 7, 1995. The merger will be accounted for as a pooling of interests and, accordingly, the consolidated financial statements will be restated in the first quarter of 1995 for all periods prior to the merger to include the operations of Network Systems, adjusted to conform with StorageTek's accounting policies and presentation. The conforming accounting changes principally relate to revenue recognition and income tax accounting. Merger and consolidation charges of between $10 and $15 million are expected to be recognized in the first quarter of 1995 in connection with the merger. The merger and consolidation charges, together with Network Systems' operating results, are expected to be
dilutive to StorageTek's operating results at least through 1995. Nonetheless, StorageTek believes Network Systems' current and anticipated future products will provide the Company with the opportunity to accelerate its plans for introducing storage management solutions for the enterprisewide network environment.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the identity, background and experience of the Company's directors is set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement concerning the Annual Meeting of Stockholders to be held May 24, 1995 (the "Proxy Statement"), which information is incorporated herein by reference. Also, the information concerning executive officers set forth under the caption "Executive Officers of the Registrant," in Part I of this Form 10-K is incorporated herein by reference.
The information concerning Forms 3, 4, and 5 filed by Section 16 reporting persons set forth under the caption "Compensation of Executive Officers -- Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATIONS
The information concerning compensation of executive officers and directors required under this item is contained in the Proxy Statement under the captions "Compensation of Executive Officers" and "Standard Arrangements for Compensation of Directors," and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning certain principal holders of securities and security ownership of executive officers and directors required under this item is contained in the Proxy Statement under the captions "Voting Securities of the Company -- Principal Holders of Securities,-- Security Ownership of Named Executives" and "Election of Directors," which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions required under this item is contained in the Proxy Statement under the caption "Compensation of Executive Officers," which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
PAGE 1. Financial Statements: ---------------------
Consolidated Balance Sheet at December 30, 1994, and December 31, 1993
Consolidated Statement of Operations for the Years Ended December 30, 1994, December 31, 1993, and December 25, 1992
Consolidated Statement of Cash Flows for the Years Ended December 30, 1994, December 31, 1993, and December 25, 1992
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 30, 1994, December 31, 1993, and December 25, 1992
Notes to Consolidated Financial Statements
Report of Independent Accountants for Storage Technology Corporation
Report of Independent Accountants for Network Systems Corporation
2. Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits: ---------
(a)The exhibits listed below are filed as part of this Annual Report on Form 10-K or are incorporated into this Annual Report on Form 10-K by reference:
Exhibit No. Description ---------- ------------------------------------------------------------
2.1 Restated Agreement and Plan of Merger by and among the Registrant, StorageTek Eagle Corporation and Network Systems Corporation dated as of August 8, 1994, as amended as of August 25, 1994 and September 9, 1994 and Restated on November 5, 1994 (filed November 16, 1994, as Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, and incorporated herein by reference).
2.2 Amendment to Restated Agreement and Plan of Merger among Storage Technology Corporation, StorageTek Eagle Corporation and Network Systems Corporation dated as of February 8, 1995 (filed February 8, 1995 on Form 8-K, and incorporated herein by reference).
3.1 Restated Certificate of Incorporation and Restated Bylaws of Storage Technology Corporation dated July 28, 1987, as currently in effect (filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 25, 1987, and incorporated herein by reference).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation dated May 22, 1989 (filed as Exhibit (c)(1) to the Registrant's Current Report on Form 8-K dated June 2, 1989, and incorporated herein by reference).
3.3 Certificate of Second Amendment to the Restated Certificate of Incorporation dated June 2, 1992 (filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1992, and incorporated herein by reference).
3.4 First Amendment to the Restated Bylaws of Storage Technology Corporation, amending Section IV (filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 1987, and incorporated herein by reference).
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant (filed as Exhibit (c)(2) as to the Registrant's Current Report on Form 8-K dated June 2, 1989, and incorporated herein by reference).
4.2 Indenture dated as of May 31, 1990, between Storage Technology Corporation and Manufacturers Hanover Trust Company of California, Trustee, relating to the Company's 8% Convertible Subordinated Debentures due May 31, 2015 (filed as Exhibit 4.6 to the Company's Registration Statement on Form S-3 filed May 11, 1990, File No. 33-34876, and incorporated herein by reference).
4.3 Registration Statement of the Registrant on Form 8-A dated August 13, 1981 (filed as Exhibit 4.7 to the Registrant's Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
Exhibit No. Description ---------- ------------------------------------------------------------
4.4 Registration Statement of the Registrant on Form 8-A dated August 23, 1990 (filed as Exhibit 4.8 to the Registrants' Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
4.5 Rights Agreement dated as of August 20, 1990, between Storage Technology Corporation and First Fidelity Bank, N.A., New Jersey, Rights Agent, (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K on August 20, 1990, and incorporated herein by reference).
4.6 Certificate of Designations of Series B Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 8, 1990, and incorporated herein by reference).
4.7 Certificate for $3.50 Convertible Exchangeable Preferred Stock (filed as Exhibit 4.11 to the Registrants Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
4.8 Certificate of Designations of $3.50 Convertible Exchangeable Preferred Stock (filed as Exhibit 4.12 to the Registrants Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
4.9 Indenture between the Registrant and American Stock Transfer and Trust Company, as Trustee, relating to the Registrant's 8% Convertible Subordinated Debentures due 2008, (filed as Exhibit 4.13 to the Registrants Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
4.10 Form of 8% Convertible Subordinated Debentures due 2008 (filed as Exhibit 4.13 to the Registrant's Registration Statement on Form S-3 filed January 29, 1993, File No. 33-57678, and incorporated herein by reference).
4.11 Form of Note Agreement dated as of August 30, 1991 relating to Registrant's 9.53% Senior Secured Notes due August 31, 1996 (filed as Exhibit 4(e) to the Registrant's Registration Statement on Form S-4 filed October 25, 1991, File No. 33-43536, and incorporated herein by reference).
4.12 Amendment No. 1 and Waiver to Note Agreement dated as of April 1, 1994 relating to the Registrant's 9.53% Senior Secured Notes due August 31, 1996 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1994, and incorporated herein by reference).
4.13 Amendment No. 2 and Waiver to Note Agreement dated as of April 2, 1994 relating to the Registrant's 9.53% Senior Secured Notes due August 31, 1996 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 1994, and incorporated herein by reference).
Exhibit No. Description ---------- ------------------------------------------------------------
10.1* 1984 Stock Option Plan (filed as part of the Company's Registration Statement on Form S-8, filed February 10, 1984, File No. 2-89417, and incorporated herein by reference).
10.2* 1987 Employee Stock Purchase Plan, as amended (filed as part of the Registrant's Registration Statement on Form S-8 filed September 8, 1994, File No. 33-42818, and incorporated herein by reference).
10.3* 1987 Equity Participation Plan (filed as part of the Company's Registration Statement on Form S-8, filed December 28, 1987, File No. 33-19426, and incorporated herein by reference).
10.4* Amendment to the 1987 Equity Participation Plan (filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1990, and incorporated herein by reference).
10.5* Storage Technology Corporation MBO Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for quarter ended July 1, 1994, and incorporated herein by reference).
10.6* Storage Technology Corporation Amended and Restated Stock Option Plan for Non-Employee Directors (filed as part of the Registrant's Registration Statement on Form S-8, filed September 18, 1991, File No. 33-42817, and incorporated herein by reference).
10.7 NONE
10.8*/** Employment Agreement between the Company and David E. Lacey, dated February 17, 1995.
10.9*/** Employment Agreement between the Company and L. Thomas Gooch, dated February 17, 1995.
10.10*/** Employment Agreement between the Company and Mark D. McGregor, dated February 17, 1995.
- ---------------------- * Contract or compensatory pal or arrangement in which directors and/or officers participate.
** Indicates Exhibits filed with this Annual Report.
Exhibit No. Description ---------- ------------------------------------------------------------
10.11*/** Employment Agreement between the Company and W. Russell Wayman, dated February 17, 1995.
10.12*/** Employment Agreement between the Company and David E. Weiss, dated February 17, 1995.
10.13*/** Employment Agreement between the Company and John V. Williams, dated February 17, 1995.
10.14 Multicurrency Credit Agreement dated as of March 31, 1993, among the Registrant, Storage Technology De Puerto Rico, Inc., XL/Datacomp, Inc. and StorageTek Financial Services Corporation as Borrowers and Bank of America National Trust and Savings Association as Agent, Swing Line Bank and Issuing Bank, and the other banks and financial institutions parties thereto (the "Credit Agreement") (filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 26, 1993, and incorporated herein by reference).
10.15 Amended and Restated Multicurrency Credit Agreement dated as of September 28, 1994 (filed as Exhibit 10.0 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference).
10.16 Restated Agreement and Plan of Merger, dated November 15, 1994, between the Registrant, StorageTek Eagle Corporation and Network Systems Corporation (filed as Appendix A to the Registrant's Registration Statement on Form S-4 filed on January 10, 1995, File No. 33-55343, and incorporated herein by reference).
10.17** Amendment to Restated Agreement and Plan of Merger, dated February 8, 1995, between the Registrant, StorageTek Eagle Corporation and Network Systems Corporation.
11.0** Computation of Earnings (Loss) per Common Share.
21.0** Subsidiaries of Registrant.
- ---------------------- * Contract or compensatory pal or arrangement in which directors and/or officers participate.
** Indicates Exhibits filed with this Annual Report.
Exhibit No. Description ---------- ------------------------------------------------------------
23.0** Consent of Price Waterhouse LLP.
24.1 Power-of-Attorney.
27.0** Financial Data Schedule.
(b) Reports on Form 8-K. During the fourth quarter of 1994 there were no Form 8-K's filed by the Company. Subsequent to 1994 fiscal year end, the Company filed two reports on Form 8-K. On January 26, 1995, the Company filed a report on Form 8-K concerning its 1994 financial results, and on March 17, 1995, the Company filed a report on Form 8-K concerning the Company's merger with Network Systems Corporation, which incorporated by reference the following financial statements:
(1) The Unaudited Pro Forma Condensed Combined Financial Statements of StorageTek and Network Systems as of and for the nine months ended September 1994 and for each of the three years in the period ended December 1993; and
(2) Network Systems' financial statements as of December 31, 1993, and December 31, 1992, and for each of the three years in the period ended December 31, 1993.
(c) Exhibits. The Exhibits listed in Item 14(a)(3) hereof are filed as part of this Annual Report on Form 10-K.
(d) Financial Statement Schedules. See Item 14(a)(3) above.
- ---------------------- ** Indicates Exhibits filed with this Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 17, 1995 STORAGE TECHNOLOGY CORPORATION
By: /s/ Ryal R. Poppa ----------------------------- Ryal R. Poppa Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Ryal R. Poppa - --------------------- Ryal Poppa Chairman of the Board, March 17, 1995 President and Chief Executive Officer (Principal Executive Officer)
/s/ David E. Lacey - --------------------- David E. Lacey Interim Chief Financial March 17, 1995 Officer and Corporate Vice President (Principal Financial Officer) (Principal Accounting Officer)
/s/ Judith E.N. Albino - --------------------- Judith E.N. Albino Director March 17, 1995
/s/ William L. Armstrong - ------------------------ William L. Armstrong Director March 17, 1995
/s/ Robert A. Burgin - --------------------- Robert A. Burgin Director March 17, 1995
/s/ Paul Friedman - --------------------- Paul Friedman Director March 17, 1995
/s/ Stephen J. Keane - --------------------- Stephen J. Keane Director March 17, 1995
/s/ Robert E. LaBlanc - --------------------- Robert E. LaBlanc Director March 17, 1995
/s/ Robert E. Lee - --------------------- Robert E. Lee Director March 17, 1995
/s/ Harrison Shull - --------------------- Harrison Shull Director March 17, 1995
SIGNATURE TITLE DATE
/s/ Richard C. Steadman - ----------------------- Richard C. Steadman Director March 17, 1995
/s/ Robert C. Wilson - --------------------- Robert C. Wilson Director March 17, 1995
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands of Dollars) December 30, December 31, 1994 1993 ---------- ---------- ASSETS Current assets: Cash, including cash equivalents of $118,751 in 1994 and $181,583 in 1993, and restricted cash of $5,353 in 1994 and $3,857 in 1993 $ 205,926 $ 255,062 Short-term investments 16,042 Accounts receivable, net of allowance for doubtful accounts of $10,623 in 1994 and $12,452 in 1993 313,231 218,701 Notes and installment receivables 8,203 9,973 Net investment in sales-type leases (Note 3) 155,341 171,165 Inventories (Note 4) 240,019 203,257 --------- --------- Total current assets 922,720 874,200 Notes and installment receivables 9,918 13,968 Net investment in sales-type leases (Note 3) 231,377 252,678 Equipment held for sale or lease, at cost net of accumulated depreciation of $98,649 in 1994 and $96,454 in 1993 (Note 5) 137,374 97,324 Spare parts for field service, at cost net of accumulated amortization of $64,109 in 1994 and $55,317 in 1993 56,977 50,150 Property, plant and equipment, at cost net of accumulated depreciation (Note 6) 332,651 306,034 Deferred income tax assets, net of valuation allowance (Note 9) 51,603 52,260 Other assets 147,387 146,395 --------- --------- $1,890,007 $1,793,009 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current liabilities: Nonrecourse borrowings secured by lease commitments (Note 8) $ 79,407 $ 74,191 Current portion of other long-term debt (Note 8) 27,396 32,581 Accounts payable 113,794 91,890 Accrued liabilities (Note 7) 219,139 192,874 Income taxes payable (Note 9) 8,764 14,167 --------- --------- Total current liabilities 448,500 405,703 Nonrecourse borrowings secured by lease commitments (Note 8) 112,073 96,975 Other long-term debt (Note 8) 244,814 264,743 Deferred income tax liabilities (Note 9) 10,073 8,285 --------- --------- Total liabilities 815,460 775,706 --------- --------- Commitments and contingencies (Notes 8 and 13) STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 40,000,000 shares authorized; 3,450,000 shares of $3.50 Convertible Exchangeable Preferred Stock issued in 1994 and 1993, $172,500,000 aggregate liquidation preference (Note 10) 35 35 Common stock, $.10 par value, 150,000,000 shares authorized; 44,560,822 shares issued in 1994, and 43,097,788 shares issued in 1993 4,456 4,310 Capital in excess of par value 1,449,240 1,421,860 Accumulated deficit (372,261) (401,623) Treasury stock of 35,713 shares in 1994 and 34,349 shares in 1993 (773) (735) Unearned compensation (6,150) (6,544) --------- --------- Total stockholders' equity 1,074,547 1,017,303 --------- --------- $1,890,007 $1,793,009 ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands, Except Per Share Amounts)
Year Ended ----------------------------------------- December 30, December 31, December 25, 1994 1993 1992 ---------- ---------- ----------
Sales $1,115,802 $ 902,482 $1,079,130 Service and rental revenue 509,157 502,270 471,815 --------- --------- --------- Total revenue 1,624,959 1,404,752 1,550,945 --------- --------- ---------
Cost of sales 728,983 641,411 757,369 Cost of service and rental revenue 328,267 324,502 316,830 --------- --------- --------- Total cost of revenue 1,057,250 965,913 1,074,199 --------- --------- ---------
Gross profit 567,709 438,839 476,746 Research and product development costs 169,811 163,286 152,702 Marketing, general, administrative and other income and expense, net 341,747 324,823 315,475 Restructuring and other charges (Note 15) 74,772 --------- --------- ---------
Operating profit (loss) 56,151 (124,042) 8,569 Interest expense 40,678 43,670 48,706 Interest income (42,964) (54,916) (67,171) --------- --------- ---------
Income (loss) before income taxes and cumulative effect of accounting change 58,437 (112,796) 27,034 Provision for income taxes (Note 9) 17,000 5,000 17,700 --------- --------- ---------
Income (loss) before cumulative effect of accounting change 41,437 (117,796) 9,334 Cumulative effect on prior years of change in method of accounting for income taxes (Note 9) 40,000 --------- --------- ---------
Net income (loss) 41,437 (77,796) 9,334
Preferred dividend requirement (Note 10) 12,075 9,805 --------- --------- ---------
Income (loss) applicable to common shares $ 29,362 $ (87,601) $ 9,334 ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE Income (loss) before cumulative effect of accounting change $ 0.66 $ (2.98) $ 0.22 Cumulative effect on prior years of change in method of accounting for income taxes 0.93 --------- --------- --------- $ 0.66 $ (2.05) $ 0.22 ========= ========= =========
Weighted average common shares and equivalents 44,513 42,800 43,347 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands of Dollars)
Year Ended --------------------------------------- December 30, December 31, December 25, 1994 1993 1992 ----------- ----------- ----------- OPERATING ACTIVITIES Cash received from customers $ 1,580,550 $ 1,532,183 $ 1,572,892 Cash paid to suppliers and employees (1,491,271) (1,446,321) (1,456,835) Interest received 42,964 54,251 67,136 Interest paid (38,327) (40,519) (47,751) Income taxes paid (20,651) (12,048) (28,327) ---------- ---------- ---------- Net cash from operating activities 73,265 87,546 107,115 ---------- ---------- ---------- INVESTING ACTIVITIES Purchase of property, plant and equipment (131,464) (67,720) (106,119) Short-term investments, net 16,042 (15,377) 40,227 Business acquisitions, net of cash acquired (51,761) Other assets, net (28,098) (6,945) (4,136) ---------- ---------- ---------- Net cash used in investing activities (143,520) (90,042) (121,789) ---------- ---------- ---------- FINANCING ACTIVITIES Proceeds from nonrecourse borrowings 167,237 87,508 114,935 Repayments of nonrecourse borrowings (147,632) (147,647) (150,005) Borrowings (repayments) under revolving credit agreements, net (19,000) Proceeds from other debt 17,839 79,740 21,320 Repayments of other debt (46,977) (44,144) (27,538) Proceeds from employee stock plans and warrants 23,725 11,468 16,126 Proceeds from preferred stock offering, net (Note 10) 166,479 Preferred stock dividend payments (Note 10) (12,075) (9,459) Proceeds from sale of lease receivables (Note 14) 50,022 Purchases of treasury stock (5,098) ---------- ---------- ---------- Net cash from financing activities 2,117 143,945 762 ---------- ---------- ---------- Effect of exchange rate changes on cash 19,002 (4,341) (4,884) ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents (49,136) 137,108 (18,796) Cash and cash equivalents - beginning of the year 255,062 117,954 136,750 ---------- ---------- ---------- Cash and cash equivalents - end of the year $ 205,926 $ 255,062 $ 117,954 ---------- ---------- ----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH FROM OPERATING ACTIVITIES Net income (loss) $ 41,437 $ (77,796) $ 9,334 Depreciation and amortization expense 206,322 147,248 149,493 Translation (gain) loss (9,898) 8,069 12,062 Cumulative effect of accounting change (Note 9) (40,000) Restructuring and other charges (Note 15) 74,772 Other non-cash adjustments to income 4,092 7,032 4,101 (Increase) decrease in accounts receivable (86,999) 85,998 22,724 Decrease in notes receivable and sales-type leases 48,298 56,207 17,024 (Increase) decrease in inventories (41,517) (61,725) 6,968 Increase in equipment held for sale or lease, net (97,642) (46,243) (64,984) Increase in spare parts, net (31,601) (19,599) (30,849) (Increase) decrease in net deferred income tax asset 2,023 (12,535) 578 Increase (decrease) in accounts payable 22,650 (37,113) 15,057 Increase (decrease) in accrued liabilities 21,774 (2,256) (23,188) Increase (decrease) in income taxes payable (5,674) 5,487 (11,205) ---------- ---------- ---------- Net cash from operating activities $ 73,265 $ 87,546 $ 107,115 ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Storage Technology Corporation and its wholly owned subsidiaries (collectively hereinafter referred to as StorageTek or the Company). Intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from end-user equipment sales, including sales-type leases, and associated software licenses is recognized at the time of acceptance by the customer, generally after installation at a customer site. Revenue from original equipment manufacturers and distributors is recognized at the time of shipment. Costs associated with post-installation warranty obligations are estimated and accrued at the time of the sale. Rental revenue associated with operating leases is recorded ratably over the rental period.
End users of equipment sold or leased by StorageTek generally contract with the Company for equipment service and software support which includes normal maintenance and repair or replacement of product components. Revenue from these service and support contracts is recognized as earned and the costs associated with these activities is expensed as incurred.
CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND RESTRICTED CASH
Cash equivalents are short-term, highly liquid investments that are both readily convertible to cash and have remaining maturities of three months or less at the time of acquisition. The carrying value of the Company's cash equivalents approximates fair value. Investments that do not qualify as cash equivalents are classified as short-term investments. Restricted cash balances relate primarily to funds received on behalf of third parties.
CAPITALIZED SOFTWARE COSTS
The Company capitalized costs of $27,080,000 in 1994, $23,092,000 in 1993, and $9,148,000 in 1992 associated with acquiring and developing software products to be marketed to customers. Other assets as shown on the Consolidated Balance Sheet include unamortized software costs of $50,508,000 as of December 30, 1994, and $36,068,000 as of December 31, 1993. Amortization is based on the greater of straight-line amortization over estimated useful lives, generally four years, or the percentage of actual revenue versus total anticipated revenue. Amortization expense associated with capitalized software costs was $12,640,000 in 1994, $7,485,000 in 1993, and $6,818,000 in 1992.
DEPRECIATION AND AMORTIZATION
Equipment held for sale or lease, and property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Capitalized machinery and equipment leases are amortized over their estimated useful lives or the remaining lease
term, whichever is shorter. Manufactured spare parts are recorded at cost and amortized over their estimated useful service lives. Goodwill, included within other assets on the Consolidated Balance Sheet, represents the excess of purchase price over fair value of net assets acquired and is amortized on a straight-line basis over a period not exceeding 10 years. The Company evaluates the realizability of the carrying value of goodwill each quarter based upon estimated future cash flows on an undiscounted basis.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for StorageTek's foreign subsidiaries is the U.S. dollar, reflecting the significant volume of intercompany transactions and associated cash flows which result from the fact that nearly all of the Company's products sold worldwide are manufactured in the United States. Accordingly, monetary assets and liabilities are translated at year-end exchange rates while non-monetary items are translated at historical rates. Revenue and expenses are translated at the average rates in effect during the year, except for cost of sales and depreciation which are translated at historical rates. Losses associated with foreign currency translation adjustments and foreign currency transactions, net of associated hedging results, aggregated $951,000 in 1994 compared to losses of $8,802,000 in 1993 and $8,372,000 in 1992. See Note 14 for information with respect to the Company's accounting policies for financial instruments utilized in its foreign currency hedging program.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed under the treasury stock method using the weighted average number of common shares and dilutive common stock equivalent shares outstanding during the year. The Preferred Stock (see Note 10) and 8% Convertible Subordinated Debentures (see Note 8) are not common stock equivalents and, therefore, have been excluded from the computation of earnings (loss) per common share. The Preferred Stock and 8% Convertible Subordinated Debentures were anti-dilutive to the annual computation of fully diluted earnings per common share for all periods presented.
NOTE 2 - BUSINESS COMBINATIONS
AMPERIF CORPORATION
In October 1993, the Company issued approximately 1,300,000 shares of StorageTek common stock in exchange for all of the outstanding common and preferred stock of Amperif Corporation (Amperif). The Company also reserved approximately 600,000 shares for issuance in connection with Amperif's outstanding warrants and employee stock options. The merger was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for 1993 and 1992 include the operations of Amperif, adjusted to conform with StorageTek's accounting policies and presentation. Merger and consolidation expenses in the amount of $5,522,000, included within restructuring and other charges on the Consolidated Statement of Operations, were recognized in 1993 in connection with the merger. Amperif designed, manufactured, marketed and serviced high-performance, information storage and retrieval subsystems for mainframe computers.
EDATA SCANDINAVIA AB
In the second quarter of 1992, the Company acquired all of the outstanding equity securities of Edata Scandinavia AB (Edata) for approximately $75,000,000. The acquisition was accounted for as a purchase. Goodwill associated with the acquisition (the excess of purchase price over the estimated fair value of the net assets acquired) is included within other assets on the Consolidated Balance Sheet ($32,698,000 as of December 30, 1994, and $37,178,000 as of December 31, 1993, net of accumulated amortization) and is being amortized on a straight-line basis over 10 years. Edata marketed and distributed equipment and systems for storage and management of large volumes of data, and for automation and control of computer centers and information networks in Belgium, Denmark, Finland, Luxembourg, the Netherlands, Norway and Sweden.
NOTE 3 - SALES-TYPE AND OPERATING LEASES
The Company offers lease financing to its customers to support the acquisition of StorageTek products. Lease financings are made under both sales-type leases and, to a lesser extent, operating leases. These leases typically provide for a lease term of up to five years and the retention of title to the equipment by StorageTek. The majority of StorageTek's lease financings are currently made within the United States. The components of net investment in sales-type leases are as follows (in thousands of dollars):
December 30, December 31, 1994 1993 --------- ---------
Total minimum lease and maintenance payments $ 482,958 $ 499,295 Less: Executory costs (maintenance payments) (61,197) (50,017) -------- -------- Net minimum lease payments 421,761 449,278 Estimated unguaranteed residual values 13,870 24,879 Less: Unearned interest income (48,913) (50,314) -------- -------- 386,718 423,843 Less: Current portion (155,341) (171,165) -------- -------- $ 231,377 $ 252,678 ======== ========
Future minimum lease payments due from customers under sales-type leases and noncancellable operating leases as of December 30, 1994, are as follows (in thousands of dollars):
Sales-Type Operating Leases Leases -------- -------
1995 $197,061 $10,834 1996 150,990 3,995 1997 87,962 1,705 1998 37,394 485 1999 9,546 Thereafter 5 ------- ------ $482,958 $17,019 ======= ======
Of the future minimum lease payments due from customers under sales-type leases, the following amounts will be remitted under recourse and nonrecourse borrowing arrangements
(see Note 8): $118,221,000 in 1995; $88,896,000 in 1996; $47,682,000 in 1997; $20,615,000 in 1998; and $4,605,000 in 1999.
NOTE 4 - INVENTORIES
Inventories include material, labor and factory overhead and are accounted for at the lower of cost (first-in, first-out method) or market. The Company evaluates the need for reserves associated with obsolete, slow-moving, and nonsalable inventory by reviewing net realizable values on a quarterly basis. The components of inventories are as follows (in thousands of dollars):
December 30, December 31, 1994 1993 --------- --------- Raw materials $ 41,356 $ 38,991 Work-in-process 101,797 66,668 Finished goods 96,866 97,598 ------- ------- $240,019 $203,257 ======= =======
NOTE 5 - EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale or lease to customers consists of the following (in thousands of dollars):
December 30, December 31, 1994 1993 --------- --------- Equipment shipped awaiting revenue recognition $ 84,822 $ 38,612 Equipment off-rent 35,632 18,674 Equipment on-rent 16,920 40,038 -------- -------- $ 137,374 $ 97,324 ======== ========
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands of dollars):
December 30, December 31, 1994 1993 --------- --------- Machinery and equipment $ 582,294 $ 525,083 Buildings and building improvements 141,188 135,575 Land and land improvements 15,400 12,160 -------- -------- 738,882 672,818 Less: Accumulated depreciation (406,231) (366,784) -------- -------- $ 332,651 $ 306,034 ======== ========
Machinery and equipment includes capitalized leases of $39,000,000 as of December 30, 1994, and $45,544,000 as of December 31, 1993. Accumulated depreciation includes accumulated amortization on such capitalized leases of $19,966,000 as of December 30, 1994, and $20,381,000 as of December 31, 1993.
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
December 30, December 31, 1994 1993 --------- ---------
Warranty obligations $ 23,935 $ 15,804 Other 195,204 177,070 ------- ------- $219,139 $192,874 ======= =======
NOTE 8 - DEBT, BANKING ARRANGEMENTS AND LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations, but excluding nonrecourse borrowings, consists of the following (in thousands of dollars):
December 30, December 31, 1994 1993 --------- --------- 8% Convertible Subordinated Debentures due 2015 $145,645 $145,645 9.53% Senior Secured Notes due 1996 55,000 55,000 Recourse borrowings secured by lease commitments 43,872 60,533 Capitalized lease obligations 21,275 28,272 Other 6,418 7,874 ------- ------- 272,210 297,324 Less: Current portion (27,396) (32,581) ------- ------- $244,814 $264,743 ======= =======
8% CONVERTIBLE DEBENTURES
In May 1990, the Company issued $160,000,000 of 8% Convertible Subordinated Debentures due 2015 (Convertible Debentures), which are unsecured subordinated obligations of the Company and are convertible into common stock at a price of $35.25 per share. Interest on the Convertible Debentures is payable semiannually in arrears on November 30 and May 31. The Convertible Debentures are currently redeemable at the option of StorageTek at a premium of 4.8%, and are redeemable at decreasing premiums through May 30, 2000. Convertible Debentures in the principal amount of $8,000,000 per annum, plus accrued interest, must be redeemed beginning May 31, 2000, through a sinking fund which provides for the retirement of 75% of the Convertible Debentures prior to their maturity on May 31, 2015. Convertible Debentures purchased by the Company in the open market and Convertible Debentures converted to common stock may be applied to the sinking fund requirements. As of December 30, 1994, the Company held Convertible Debentures in the principal amount of $14,300,000 available for sinking fund payments. The Company has reserved 4,132,000 shares of common stock for issuance upon conversion of the Convertible Debentures.
9.53% SENIOR SECURED NOTES
In September 1991, the Company completed a $55,000,000 private placement of 9.53% Senior Secured Notes due August 31, 1996 (the Notes), collateralized by U.S. lease and installment purchase receivables. Interest on the Notes is payable semiannually in arrears on
February 28 and August 31. The Notes are redeemable at the option of the Company, in whole or in part, from time to time, at a premium which is determined based on current interest rates and the time remaining until maturity of the Notes. Under the terms of the Note agreement, the Company is required to comply with certain financial and other covenants, including restrictions on the payment of cash dividends on its common and preferred stock.
RECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
The Company's recourse borrowings are secured by customer lease commitments included within total assets (primarily net investment in sales-type leases - - - see Note 3) and by the underlying equipment. The borrowings also provide for recourse to the Company in the event of a default by a customer with respect to the lease commitments. The weighted average interest rate as of December 30, 1994, related to the borrowings was approximately 8.25%.
BANKING AND CREDIT ARRANGEMENTS
In September 1994, the Company amended its secured multicurrency credit agreement with a group of U.S. and international banks (the Revolver) to increase the maximum possible borrowings under the credit facility from $150,000,000 to $200,000,000 and to extend the facility through March 1996. In addition, the Revolver was modified to increase the total amount available under the borrowing base. The interest rates available under the Revolver depend on the type of advance selected; however, the primary advance rate is the agent bank's prime lending rate (8.5% at December 30, 1994). The total amount available under the Revolver is limited to a monthly borrowing base determined as a percentage of the Company's eligible accounts receivable, lease assets (primarily net investments in sales-type leases not previously utilized for other secured borrowings), and equipment awaiting revenue recognition. To obtain funds under the Revolver, the Company is required to comply with certain financial and other covenants, including restrictions on the payment of cash dividends on its common stock. As of December 30, 1994, the Company had no outstanding advances under the Revolver and had approximately $136,000,000 of available credit under the Revolver.
SCHEDULED DEBT MATURITIES
Scheduled maturities of long-term debt, including future minimum lease payments under capitalized lease obligations, but excluding nonrecourse borrowings, as of December 30, 1994, are as follows (in thousands of dollars): Total Long- Capitalized Other Term Debt Leases Debt Commitments ----------- --------- --------- 1995 $ 8,037 $ 20,695 $ 28,732 1996 7,049 71,625 78,674 1997 5,119 9,122 14,241 1998 2,481 3,243 5,724 1999 1,148 302 1,450 Thereafter 130 145,948 146,078 ------ ------- ------- 23,964 $250,935 $274,899 ------- ------- Less: Amount representing interest (2,689) ------ Present value of capitalized lease obligations (including $6,701 classified as current) $21,275 ======
In addition to the amounts reported above, the Company entered into an 18- year lease of engineering, manufacturing and marketing facilities located in Toulouse, France in January 1995. The lease will be accounted for as a capital lease. The future minimum lease payments and present value of the lease obligation are approximately $33,000,000 and $16,800,000, respectively.
NONRECOURSE BORROWINGS SECURED BY LEASE COMMITMENTS
Nonrecourse borrowings incurred in connection with the financing of certain of the Company's customer lease obligations are generally secured by lease commitments and equipment. The related lease receivables are reflected on the Consolidated Balance Sheet as accounts receivable to the extent they represent amounts due on or prior to the balance sheet date, and as part of net investment in sales-type leases for any amounts due thereafter (see Note 3). Additional security has been pledged with respect to a portion of the nonrecourse borrowings in the form of additional lease commitments and equipment with a carrying value of $6,468,000, and outstanding letters of credit aggregating $1,148,000 as of December 30, 1994. The weighted average interest rate related to the Company's nonrecourse borrowings was approximately 8.5% as of December 30, 1994.
OPERATING LEASE OBLIGATIONS
StorageTek has various operating leases in effect for certain buildings, sales offices, and machinery and equipment. Rent expense was $41,926,000 in 1994; $37,086,000 in 1993; and $37,539,000 in 1992. Future minimum rental commitments required under all noncancellable operating leases with terms of one year or more are as follows: $33,536,000 in 1995; $26,425,000 in 1996; $17,711,000 in 1997; $13,291,000 in 1998; $10,504,000 in 1999; and $41,532,000 thereafter.
NOTE 9 - INCOME TAXES
Effective as of the beginning of fiscal 1993, the Company changed its method of accounting for income taxes to comply with the provisions of SFAS No. 109. A one-time benefit of $40,000,000 was recognized in the first quarter of 1993 as a result of the adoption of the new income tax accounting standard on a prospective basis. This benefit resulted largely from the requirement under SFAS No. 109 to recognize the tax benefits associated with net operating loss and tax credit carryforwards to the extent their future realization is determined, based on the weight of the available evidence, to be more likely than not. The adoption of SFAS No. 109 had no cash flow impact.
Income (loss) before income taxes and cumulative effect of accounting change consists of the following (in thousands of dollars):
Year Ended -------------------------------------- December 30, December 31, December 25, 1994 1993 1992 ----------- ----------- ----------- United States $ 81,335 $(114,196) $(5,545) International (22,898) 1,400 32,579 -------- -------- ------ $ 58,437 $(112,796) $27,034 ======== ======== ======
The provision for income taxes attributable to income (loss) before income taxes and cumulative effect of accounting change consists of the following (in thousands of dollars):
Year Ended -------------------------------------- December 30, December 31, December 25, 1994 1993 1992 ----------- ----------- ----------- Current tax provision (benefit): U.S. federal $ 3,000 $ 3,200 $(2,500) International 10,700 11,100 17,100 State 3,000 3,100 300 ------- ------- ------- 16,700 17,400 14,900 ------- ------- ------- Deferred tax provision (benefit): U.S. federal 1,300 (4,800) 2,800 International (200) (4,200) 100 State (800) (3,400) (100) ------- ------- ------- 300 (12,400) 2,800 ------- ------- ------- $17,000 $ 5,000 $17,700 ======= ======= =======
The provision for income taxes attributable to income (loss) before income taxes and cumulative effect of accounting change includes benefits of $34,325,000 in 1994; $1,422,000 in 1993; and $4,074,000 in 1992 from the utilization of net operating loss carryforwards as well as net benefits of $9,754,000 in 1994; $7,432,000 in 1993; and $11,284,000 in 1992 as a result of the Company's Grant of Industrial Tax Exemption issued by the Commonwealth of Puerto Rico (the Tax Grant). On a per common share basis, the net benefit of the Tax Grant was $0.22 in 1994; $0.17 in 1993; and $0.27 in 1992. The benefits from the Tax Grant include reduced tax rates and, through 1994, included the ability to utilize U.S. net operating losses to further reduce Puerto Rico tax liabilities. To the extent U.S. net operating losses used to reduce Puerto Rico taxable income are subsequently used to also reduce U.S. taxable income, the Puerto Rico benefit from the utilization of these operating losses must be repaid to Puerto
Rico. The cumulative net benefit of the grant provision relating to the use of net operating losses and subject to potential repayment in the future was $13,578,000 as of December 30, 1994. The Tax Grant provision allowing reduced tax rates expires in 2007.
The Company reported the following deferred income tax balances on its Consolidated Balance Sheet (in thousands of dollars):
December 30, December 31, 1994 1993 --------- --------- Deferred income tax assets, net of valuation allowance $51,603 $52,260 Deferred income tax liabilities (10,073) (8,285) ------ ------ Net deferred income tax asset $41,530 $43,975 ====== ======
The Company's net deferred income tax asset consists of the following (in thousands of dollars):
December 30, December 31, 1994 1993 --------- ---------
Gross deferred income tax assets: Capitalized rental equipment $ 120,747 $ 163,239 Net operating loss carryforwards 76,767 123,844 Tax credit carryforwards 78,917 63,265 Accrued liabilities and reserves 63,144 55,314 Capitalized inventory costs 14,228 7,680 Foreign currency translation losses 11,779 Deferred intercompany profit 14,139 11,290 Other 22,047 18,358 -------- -------- 389,989 454,769 Less: Valuation allowance (129,884) (165,456) -------- -------- 260,105 289,313 -------- -------- Gross deferred income tax liabilities: Deferred income from sales-type leases (164,531) (209,063) Depreciation (28,599) (24,130) Other (25,445) (12,145) -------- -------- (218,575) (245,338) -------- -------- Net deferred income tax asset $ 41,530 $ 43,975 ======== ========
The net change in the valuation allowance for deferred income tax assets was a decrease of $20,717,000 in 1994 and an increase of $54,761,000 in 1993. The valuation allowance relates primarily to net operating loss carryforwards, tax credit carryforwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company's operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company's earnings history, the Company's near-term earnings expectations and possible reductions in the Company's net operating loss carryforwards as a result of proposed adjustments by the Internal Revenue Service to the Company's previously filed federal income tax returns.
StorageTek has not provided for income taxes on the cumulative undistributed earnings of its foreign subsidiaries to the extent they are considered to be reinvested indefinitely (approximately $46,000,000 as of December 30, 1994). The amount of the unrecognized deferred tax liability for these unremitted earnings was $9,050,000 as of December 30, 1994.
The provision for income taxes differs from the amount computed by applying the U.S. federal income tax rates of 35% in 1994 and 1993, and 34% in 1992 to income (loss) before income taxes and cumulative effect of accounting change for the following reasons (in thousands of dollars):
Year Ended -------------------------------------- December 30, December 31, December 25, 1994 1993 1992 ----------- ----------- -----------
U.S. federal income tax at statutory rate $ 20,453 $(39,479) $ 9,192
Increase (decrease) in income taxes resulting from: Increase (decrease) in unrecognized net operating losses and future deductions (24,201) 36,989 (7,746) Foreign tax rate and translation differentials 11,859 682 6,436 Nondeductible items 7,048 10,390 4,746 State income taxes, net of federal benefits 6,555 759 378 Effect of Puerto Rico operations (3,634) (4,936) (6,541) Restructuring of international subsidiaries 9,758 Other, net (1,080) 595 1,477 ------- ------- -------
Income tax expense attributable to income (loss) before cumulative effect of accounting change $ 17,000 $ 5,000 $17,700 ======= ======= =======
As of December 30, 1994, StorageTek had U.S. net operating loss carryforwards of approximately $400,000,000 which expire in the years 2000 through 2006. Approximately $16,000,000 of the Company's net operating loss carryforwards relate to losses associated with acquired companies which are subject to substantial limitations. Approximately $45,000,000 of the Company's net operating loss carryforwards relate to tax deductions associated with stock option plans and, accordingly, the related benefit will be recognized as an adjustment to additional paid-in capital when realized.
StorageTek is also subject to alternative minimum tax and, as such, has alternative minimum tax net operating loss carryforwards of approximately $270,000,000 and alternative minimum tax credit carryforwards of approximately $16,000,000.
StorageTek's federal income tax returns for the years 1985 through 1987 have been examined by the Internal Revenue Service (the IRS) and the Company's federal income tax returns for the years 1988 through 1992 are currently under examination. The IRS has proposed adjustments of approximately $400,000,000 to the Company's federal income tax returns for the years 1985 through 1990. The Company agrees with approximately $70,000,000 of these adjustments. The remaining adjustments relate principally to tax accruals for post-petition interest, professional fees and other deductions associated with distributions made to implement the Company's reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
Company is protesting these remaining adjustments through the IRS appeals process. Although the Company believes it has meritorious legal defenses to these proposed adjustments, to the extent it is unsuccessful in sustaining these items, the Company's net operating loss carryforwards and resulting future cash savings from utilizing such carryforwards will be reduced accordingly.
NOTE 10 - PREFERRED STOCK
In March 1993, the Company completed a public offering of 3,450,000 shares of $3.50 Convertible Exchangeable Preferred Stock, $.01 par value (Preferred Stock), at a price of $50.00 per share. The proceeds of the Preferred Stock offering, after deducting all associated costs, were $166,479,000. Dividends on the Preferred Stock are cumulative and payable quarterly in arrears at an annual rate of $3.50 per share, when and as declared by the Company's Board of Directors. The liquidation value of each share of Preferred Stock is $50.00, plus unpaid dividends.
The Preferred Stock is convertible at any time at the option of the holder, unless previously redeemed, into shares of StorageTek common stock at an initial conversion rate of 2.128 shares of common stock for each share of Preferred Stock (equivalent to a conversion price of $23.50 per share of common stock). The Preferred Stock is redeemable for cash at any time on and after March 15, 1996, in whole or in part, at the option of the Company, initially at a redemption price of $52.45 per share, and thereafter at prices decreasing ratably annually to $50.00 per share on and after March 15, 2003, plus accrued and unpaid dividends. The Preferred Stock is also exchangeable, in whole but not in part, at the option of the Company on any dividend payment date beginning March 15, 1995, for 7% Convertible Subordinated Debentures due 2008 at the rate of $50.00 principal amount of debentures for each share of Preferred Stock. The debentures, if issued, would contain conversion and optional redemption provisions substantially identical to those of the Preferred Stock, and would be subject to a mandatory sinking fund.
NOTE 11 - EMPLOYEE BENEFIT PLANS, OPTIONS AND WARRANTS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1987 Employee Stock Purchase Plan (Purchase Plan), as amended, employees may be offered the right to collectively purchase a maximum of 300,000 shares of StorageTek's common stock, plus any remaining shares from earlier offering periods, in six-month consecutive offering periods through October 31, 1996. Eligible employees may contribute up to 10% of their pay toward purchase of StorageTek common stock at a price equal to 85% of the lower of the market price on the first or the last day of each offering period. Proceeds received from the issuance of shares are credited to stockholders' equity in the fiscal year the shares are issued. The Company issued 486,423, 446,699 and 320,082 shares of StorageTek common stock under the Purchase Plan in 1994, 1993 and 1992, respectively.
STOCK OPTION AND RESTRICTED STOCK PLANS
As of December 30, 1994, the Company had an aggregate of 2,343,167 common shares reserved for issuance under its employee equity plans (Employee Plans). These plans provide for the issuance of common shares pursuant to stock option exercises, restricted stock awards and other equity awards. There were 178,475 shares available for grant under the Employee
Plans as of December 30, 1994. In March 1995, the Board of Directors approved, subject to shareholder approval, the reservation for issuance of 2,200,000 shares of common stock under a newly adopted employee equity plan, the 1995 Equity Participant Plan.
Employee stock options are granted under the Employee Plans at the fair market value of the common stock on the date of grant and generally vest over a period of between three and six years. Options granted under the Employee Plans must be exercised no later than 10 years from the date of grant.
The Company has awarded shares of common stock in the past under its Employee Plans pursuant to restricted stock agreements, at a price per share equal to par value. Unearned compensation, which is determined as the difference between par value and market value on the date of the award, is charged to stockholders' equity and amortized to expense over the anticipated vesting period of the stock. A total of 309,343 shares of restricted stock were outstanding as of December 30, 1994.
The Company also has a Nonemployee Director Stock Option Plan (Director Plan) under which the Company grants stock options to nonemployee directors for the purchase of an aggregate maximum of 350,000 shares of common stock. All Director Plan stock options are granted at the fair market value of the common stock on the date of grant. There were 100,000 shares available for grant under the Director Plan as of December 30, 1994.
The following summarizes information with respect to options granted under the Company's Employee and Director Plans:
Number Option Price of Shares Per Share --------- -------------- Outstanding, December 25, 1992 2,151,221 $ 0.93 - $75.50 Granted 1,065,775 17.28 - 37.63 Exercised (72,552) 0.93 - 35.51 Cancelled or expired (79,478) 0.93 - 64.25 --------- --------------
Outstanding, December 31, 1993 3,064,966 3.43 - 75.50 Granted 467,374 28.00 - 36.25 Exercised (976,244) 3.43 - 34.75 Cancelled or expired (163,452) 12.50 - 64.25 --------- -------------- Outstanding, December 30, 1994 2,392,644 $ 3.63 - $75.50 ========= ==============
Exercisable, December 30, 1994 1,364,600 $ 3.63 - $75.50 ========= ==============
WARRANTS AND DEFERRED PURCHASE RIGHTS
In connection with the Amperif merger, the Company assumed Amperif's obligations with respect to warrants for the purchase of 59,778 shares of common stock at a price of $16.73 per share which expire in 1995, and warrants for the purchase of 324,000 shares of common stock at a price of $30.86 per share which expire in 1996. All of these warrants were outstanding as of December 30, 1994.
In connection with the Edata acquisition in 1992, the Company granted deferred purchase rights for shares of common stock with a purchase price per share equal to par value. The
deferred purchase rights vest upon the attainment of certain financial goals or upon the passage of time. The Company issued 34,503 and 33,337 shares of StorageTek common stock under deferred purchase rights in 1994 and 1993, respectively. As of December 30, 1994, deferred purchase rights for 31,662 shares of the Company's common stock remained outstanding.
EMPLOYEE PROFIT SHARING AND THRIFT PLAN
Under StorageTek's Profit Sharing and Thrift Plan, StorageTek contributions are contingent upon realization of profits by the Company which, at the sole discretion of the Board of Directors, are adequate to justify a corporate contribution. No contributions from StorageTek were authorized for 1994, 1993 and 1992.
NOTE 12 - STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors adopted a new Stockholder Rights Plan (Rights Plan). The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent an acquiring entity from gaining control of the Company without offering a fair price to all of the Company's shareholders.
Each right would entitle the holder of the Company's common stock to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock at an exercise price of $150, subject to adjustment to prevent dilution. The rights are evidenced by the common stock certificates and will not separate from the common stock until the earlier of (i) 20 days following the date on which any person or entity acquires beneficial ownership of 15% or more of the common stock (an Acquiring Person) and the right of redemption has not been reinstated; or (ii) 10 days after a public announcement of a tender or exchange offer by any person or entity if upon consummation such person would be an Acquiring Person. Further, upon the occurrence of certain events described below, the rights generally entitle each right holder (except the Acquiring Person) to purchase that number of shares of the Company's common stock which equals the $150 exercise price of the right divided by one-half of the current market price of the common stock. Those events generally include (i) 20 days after any person or entity becomes an Acquiring Person; and (ii) if any person or entity becomes an Acquiring Person and thereafter, (a) the Company is merged with or into an Acquiring Person and the Company's common stock is changed, converted or exchanged; or (b) 50% or more of the Company's assets or earning power is sold; or (c) an Acquiring Person engages in one or more "self-dealing" transactions as described in the Rights Agreement.
The Company is generally entitled to redeem the rights for $.01 per right at any time prior to the earlier of the date on which any person or entity becomes an Acquiring Person or August 31, 2000. The rights will expire on August 31, 2000, unless redeemed or exchanged earlier by the Company pursuant to the Rights Plan.
NOTE 13 - LITIGATION
In the second quarter of 1992, seven purported class actions were filed in the U.S. District Court for the District of Colorado against the Company and certain of its officers and directors. These actions were subsequently consolidated into a single action, and a consolidated amended complaint was filed on July 7, 1992, seeking an unspecified amount of damages. The complaint alleged that the defendants failed to properly disclose the status of development
of a new product and the Company's business prospects. The complaint further alleged that the individual defendants sold shares of the Company's common stock based on material inside information, in violation of federal securities and common law. The court has certified a class consisting (with certain exceptions) of those who purchased StorageTek's common stock and related securities from December 23, 1991, to August 8, 1992. A shareholder derivative action was also filed in the second quarter of 1992 based on substantially similar factual allegations and has been consolidated with the class action. Discovery and depositions of the Company's employees and other potential witnesses commenced in August 1993, and are substantially complete. No trial dates have been established. The Company believes the suits are without merit and intends to vigorously defend against them. There can be no guarantee, however, that the cases will result in an outcome favorable to the Company. In the event of an adverse outcome, neither the amount nor the likelihood of any potential liability which might result is reasonably estimable; however, the Company currently believes that the amount of the ultimate potential loss, after considering available insurance recoveries, would not be material to the Company's financial position. However, an adverse outcome could have a material effect on the Company's reported results of operations in a future period. In the derivative action, any recovery would be the property of the Company.
In June 1993, the Company received a subpoena from the Denver Regional Office of the Securities and Exchange Commission (the "Commission") to produce certain documents in connection with the Commission's order for an investigation of possible violations of federal disclosure, reporting and insider trading requirements. The requests by the Commission relate principally to announcements and related disclosures concerning the status of development of a new product in 1992.
In February 1994, the Company and its subsidiary, XL/Datacomp, Inc. (XL/Datacomp), filed suit in Boulder County, Colorado, District Court against Array Technology Corporation (Array) and Tandem Computers Incorporated (Tandem). The suit asked that the court order Array and Tandem to either support certain disk drives purchased from them or provide the Company with technical data necessary for StorageTek to provide such customer support. In March 1994, Array and Tandem filed their answer and also filed counterclaims against the Company alleging breach of contract and claiming damages. In June 1994, the court ordered Array and Tandem to continue to provide support for these products and to maintain, in an independent escrow account, the materials necessary to enable the Company and XL/Datacomp to support the products in the event Array and Tandem failed to provide such services. The suit is now in the discovery phase as to the claims made by Array and Tandem. No trial dates have been established. The Company believes the counterclaims filed by Array and Tandem are without merit and intends to vigorously defend against them.
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership (Stuff), filed suit in Boulder County, Colorado, District Court against the Company and certain subsidiaries. The suit alleges that the Company breached a 1990 settlement agreement that had resolved earlier litigation between the parties. The suit seeks injunctive relief and damages in the amount of $2,400,000,000. The Company has filed a motion to dismiss the complaint, as well as an alternative motion to bifurcate certain of the claims. In July 1994, the court partially granted the Company's motion to dismiss, dismissing claims based on facts or conduct occurring before the 1990 settlement of the previous litigation. In November 1994, the defendants filed a motion for summary judgment. Discovery has been stayed pending a ruling on that motion. No trial date has been established. The Company believes that the claims in the suit are barred by the 1990 settlement between the Company and Stuff and are without merit, and the Company intends to vigorously defend against them.
In September 1994, EMC Corp. filed suit in U.S. District Court in Wilmington, Delaware, alleging infringement of a patent pertaining to disk storage technology. The complaint seeks an injunction, treble damages in an unspecified amount and an award of attorney fees and costs. The Company has filed an answer. The Company also has filed a motion to transfer the case to the U.S. District Court for Colorado and has filed a counterclaim for infringement of one of its patents. Discovery has been stayed pending a decision on the motion to transfer. The Company believes the suit is without merit and intends to vigorously defend against the suit.
In addition, the Company is involved in various other less significant legal proceedings. The outcomes of these legal proceedings are not expected individually or in the aggregate to have a material adverse effect on the financial condition or operations of the Company based on the Company's current understanding of the relevant facts and law.
NOTE 14 - FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
FOREIGN CURRENCY OPTIONS AND FORWARD EXCHANGE CONTRACTS
A significant portion of the Company's revenue is generated by its international operations. As a result, the Company's operations and financial results can be materially affected by changes in foreign currency exchange rates. In an attempt to mitigate the impact of foreign currency fluctuations, the Company employs a hedging program which utilizes foreign currency options and forward exchange contracts. The Company does not hold or issue foreign currency options or forwards exchange contracts for trading purposes.
The Company utilizes foreign currency options, generally with maturities of less than one year, to hedge its exposure to exchange-rate fluctuations in connection with anticipated revenue from its international operations. The Company held foreign currency options with a face value of approximately $334,100,000 as of December 30, 1994, and $117,100,000 as of December 31, 1993. Deferred realized and unrealized losses associated with the Company's foreign currency options, including costs associated with option premiums paid, aggregated approximately $3,920,000 as of December 30, 1994, compared to gains of approximately $1,400,000 as of December 31, 1993. Deferred gains and losses on the options will be recognized as an adjustment to the associated revenue during 1995 on the Consolidated Statement of Operations.
The Company also utilizes forward exchange contracts, generally with maturities of less than two months, to hedge its exposure to exchange-rate fluctuations in connection with monetary assets and liabilities held in foreign currencies. The carrying amounts of these forward foreign exchange contracts equal their fair value as the contracts are adjusted at each balance sheet date for changes in exchange rates. Realized and unrealized gains and losses on the forward contracts are recognized currently within marketing, general, administrative and other income and expense, net, on the Consolidated Statement of Operations as adjustments to the foreign exchange gains and losses on the translation of net monetary assets. The Company held forward foreign exchange contracts with a face value of approximately $93,400,000 as of December 30, 1994, and $94,200,000 as of December 31, 1993.
The forward exchange contracts and foreign currency options do not subject the Company to risk due to exchange rate movements as gains and losses on the contracts offset gains
and losses on the transactions being hedged. The foreign currency hedging instruments utilized by StorageTek are generally traded over the counter. The Company does not believe there is significant credit risk associated with these contracts as the counterparties consist of major international financial institutions, and the Company limits the amount of the contracts it enters into with any one party. The credit exposure associated with the Company's foreign currency option contracts is represented by the fair value of the contracts as disclosed below ($10,526,000 as of December 30, 1994). There was no credit exposure with respect to the Company's foreign currency forward contracts as of December 30, 1994, as the fair value of these contracts was approximately zero.
OTHER FINANCIAL INSTRUMENTS
Other financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, trade receivables, and net investment in sales-type leases. The Company has a cash investment policy which generally restricts investments to ensure preservation of principal and maintenance of liquidity. Concentrations of credit risk with respect to the Company's trade receivables and net investment in sales-type leases are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographies. As of December 30, 1994, the Company had no significant concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial instruments as of December 30, 1994, are as follows (in thousands of dollars):
Carrying Estimated Amount Fair Value --------- ---------- Assets: Notes and installment receivables $ 18,121 $ 17,513 Foreign currency option contracts 14,446 10,526 Liabilities: Nonrecourse borrowings secured by lease commitments 191,480 188,018 8% Convertible Subordinated Debentures due 2015 145,645 144,189 Recourse borrowings secured by lease commitments 43,872 42,083 9.53% Senior Secured Notes due 1996 55,000 54,853 Other: Foreign currency forward contracts 0 0
The fair value of notes and installment receivables was estimated based on expected discounted future cash flows. The carrying value of the Company's foreign currency options reflects premiums paid to purchase the contracts. The fair value of the foreign currency options was estimated based upon quotes obtained from the respective banks. The fair value of nonrecourse borrowings secured by lease commitments was estimated based upon interest rates currently available for borrowings of similar terms and maturities. The fair value of the Convertible Debentures was based upon the closing sales price on the New York Stock Exchange as of December 30, 1994. The fair value of the Company's recourse borrowings and 9.53% Senior Secured Notes were estimated based upon interest rates currently available for borrowings of similar terms and maturities. The carrying amounts of the Company's cash
and cash equivalents, accounts receivable, accounts payable and accrued liabilities are either equal to or approximate their fair value. The Company's foreign currency forward contracts, which are an off-balance-sheet financial instrument, were entered into on December 30, 1994, and accordingly, had a carrying value and fair value approximating zero.
SALES OF RECEIVABLES WITH RECOURSE
In December 1992, the Company received proceeds of $50,022,000 as a result of an agreement with a financial institution to sell, on a limited recourse basis, lease receivables. A gain of $1,678,000 was recognized in 1992 related to the sale of these receivables. As a result of the agreement, net investment in sales-type leases, as shown on the Consolidated Balance Sheet, is reported net of lease receivables remaining to be collected of $10,046,000 as of December 30, 1994, and $30,917,000 as of December 31, 1993. The Company remains contingently liable for up to $2,028,000 of the outstanding balance pursuant to the recourse provisions as of December 30, 1994. Based upon the Company's experience, no material credit risk exists under the recourse provisions of the agreement.
NOTE 15 - RESTRUCTURING AND OTHER CHARGES
In 1993, the Company recognized restructuring and other charges totaling $74,772,000. Restructuring charges, which totaled $69,250,000, principally related to the reorganization of the Company's midrange business. Merger and consolidation expenses of $5,522,000 were also recognized during 1993 in connection with the merger with Amperif.
The restructuring charge, recognized in the third quarter of 1993, was a direct result of the adoption by the Company of a formal action plan for restructuring its midrange business. This action plan was developed by the Company's management and approved by the Company's Board of Directors in September 1993. The restructuring charges recognized were specific, incremental and direct costs resulting from the restructuring plan and were based upon the facts available as of the time of the restructuring. Most of the actions called for in the plan were implemented in the fourth quarter of 1993.
BACKGROUND AND ACTION PLAN FOR RESTRUCTURING
In November 1991, StorageTek merged with XL/Datacomp, a full-service distributor of midrange computer systems and hardware support services. XL/Datacomp specialized in bundling IBM AS/400 computers with various third- party manufactured data storage products to provide its customers with systems solutions. StorageTek viewed the merger as an opportunity to expand into the midrange marketplace by combining anticipated StorageTek midrange data storage products with XL/Datacomp's customer base and channels of distribution.
During 1992 and the first half of 1993, XL/Datacomp's revenue and profitability declined as a result of delays in the availability of StorageTek manufactured products and steep price declines for midrange direct access storage device (DASD) products. In addition to XL/Datacomp's past financial results not meeting StorageTek's expectations, preliminary forecast information also became available during the third quarter of 1993 in conjunction with the preparation of StorageTek's 1994 operating plan. This information indicated that a significant improvement in the Company's midrange business prospects was unlikely given the existing midrange business structure.
In July 1993, StorageTek formed a team to review XL/Datacomp's operations with the stated charter of returning XL/Datacomp to profitability. Between July and September 1993, this team held interviews and performed site visits in order to identify opportunities to improve profitability. The team developed a restructuring plan (the "Action Plan") which identified the key elements of the restructuring plan, specific steps to be taken in order to achieve these key elements and the proposed timetable for completing each step. The Action Plan was reviewed and approved by StorageTek's Board of Directors in September 1993 and included the following key elements:
o Improve profit margins by refocusing XL/Datacomp's midrange product line and downsizing its service operations. This included: (1) refocusing efforts and remaining resources in the marketing and leasing of StorageTek manufactured products which were expected to yield higher profit margins, (2) de-emphasizing or eliminating the marketing and leasing of non- StorageTek manufactured products and existing StorageTek manufactured products which were not providing a satisfactory profit margin, and (3) downsizing the midrange customer service operations and increasing the midrange customer service billing rates.
o Reduce operating expenses through headcount reductions and other cost- control measures. The headcount reductions could be achieved by: (1) consolidating various marketing and customer service operations, (2) downsizing the midrange organization to reflect the intensely competitive marketplace and expected near-term business prospects, and (3) discontinuing non-strategic business operations.
COMPONENTS OF RESTRUCTURING CHARGE
Following is an itemization of the components included within the Company's 1993 restructuring charge (in thousands of dollars):
Non-cash Asset Writedowns Accruals Total ---------- -------- ------ Residual interests associated with lease receivables $19,389 $19,389 Inventory 13,494 13,494 Goodwill 12,780 12,780 Severance $ 8,509 8,509 Lease terminations and fixed assets 976 3,490 4,466 Lease receivables 3,000 3,000 Spare parts for field service 2,662 2,662 Advance to supplier 2,000 2,000 Consolidation of United Kingdom subsidiaries 1,449 1,449 Other 1,501 1,501 ------ ------ ------ $57,251 $11,999 69,250 Merger and consolidation charges associated with merger with Amperif Corp. 5,522 ------ Total restructuring and other charges $74,772 ======
Of the restructuring accruals of $11,999,000 established at the time of the restructuring, approximately $947,000 remained to be paid as of December 30, 1994, consisting solely of anticipated future lease payments.
The writedown of $19,389,000 associated with lease residual interests resulted from StorageTek's Action Plan which included a decision to shift XL/Datacomp's efforts away from leasing activities associated with other manufacturers' equipment in favor of marketing new StorageTek equipment, and as a result of the reduction in headcount. This decision led the Company to conclude that it would be unable to realize the recorded lease residual values in the future as a result of the reduced emphasis on these leasing activities.
The inventory writedowns of $13,494,000 primarily related to a reduction in the market value of existing product inventory resulting from the Action Plan which included a decision to place greater emphasis on the marketing and leasing of new StorageTek products which were anticipated to carry higher profit margins and the decision to discontinue the manufacture of certain marginally profitable midrange products. A portion of the writedowns also related to the immediate liquidation of inventory associated with a small retail computer marketing subsidiary which the Company discontinued.
The goodwill writedowns of $12,780,000 resulted from forecast information received in connection with the preparation of the Company's 1994 operating plan which indicated that two midrange tape products, which had associated capitalized goodwill, would fall short of previous plans and not provide the originally anticipated profit margins. As a result of the decision to reduce the sales force and focus the remaining midrange sales force away from these products pursuant to the Action Plan, it was concluded that permanent impairments of the associated goodwill had resulted from the restructuring.
The severance accrual of $8,509,000 resulted from headcount reductions associated with midrange executive management, midrange marketing personnel, and midrange customer service personnel. The accrual consisted principally of estimated future severance payments, but also included $825,000 of relocation costs for continuing employees as part of the consolidation of the customer service organizations.
The Company recognized a charge of $4,466,000 associated with the cost of lease terminations; the write-off of carrying values for associated leasehold improvements; and for losses on the disposal of fixed assets. These actions were taken as part of the Action Plan to reduce operating expenses by consolidating, downsizing or eliminating operations associated with StorageTek's midrange business.
The Action Plan concluded that in order to improve service profit margins, a significant increase in midrange customer service billing rates was necessary. A charge of $3,000,000 was established for lease receivables expected to become uncollectible as a result of the decision to downsize the midrange customer service base. A charge of $2,662,000 was recognized in connection with the writedown of the carrying value of midrange spare parts for field service. The writedown of spare parts for field service reflected anticipated excess parts expected to result from the decrease in the customer service base.
An advance of $2,000,000 was written-off as a result of the decision to terminate the relationship with a supplier of midrange products. Various costs aggregating $1,449,000 were also incurred in connection with the consolidation of separate midrange and large systems operations in the United Kingdom.
NOTE 16 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS
BUSINESS SEGMENTS
StorageTek operates in one principal business segment - the design, manufacturing, marketing, and servicing of information storage and retrieval subsystems for high-performance and midrange computer systems, as well as computer networks.
GEOGRAPHIC AREAS
StorageTek operates principally in the United States, Europe, Canada, Australia and Japan. Operations in Canada, Australia and Japan individually account for less than 10% of the consolidated revenue and identifiable assets, and have been combined and shown in the table below as "Other." Information regarding each geographic area on an unconsolidated basis for each of the last three years is shown below (in thousands of dollars):
(1) U.S. revenue from unaffiliated customers includes international export sales to customers (principally in Europe) of $61,219,000 in 1994; $52,797,000 in 1993; and $63,458,000 in 1992. (2) General corporate expenses include merger and consolidation expenses of $5,522,000 in 1993.
Sales between geographic areas are generally priced to reflect market value and to provide an appropriate gross margin to the affiliate. Operating profit, for the purpose of this footnote, consists of total revenue less operating expenses, and excludes interest income, interest expense and general corporate expenses for all years presented, and the cumulative effect of the accounting change in 1993. U.S. operating profit includes profit recognized in the United States on transfers to other geographic areas. Identifiable assets are those assets that are associated with the operations in each geographic area. General corporate assets are primarily cash and short-term investments not used in the operations of the individual geographic regions.
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
The following interim financial information presents the 1994 and 1993 consolidated results of operations on a quarterly basis (in thousands of dollars, except per share amounts):
NOTE 18 - SUBSEQUENT EVENT - NETWORK SYSTEMS MERGER
On March 7, 1995, the Company issued approximately 7,900,000 shares of StorageTek common stock in exchange for all of the outstanding common stock of Network Systems Corporation (Network Systems). The Company also reserved approximately 500,000 shares for issuance in connection with Network Systems' outstanding employee stock options. The transaction, which will be accounted for as a pooling of interests, involved a merger between the Company's wholly- owned subsidiary and Network Systems. StorageTek's consolidated financial statements will be restated in the first quarter of 1995 for all periods prior to the merger to include the operations of Network Systems, adjusted to conform with StorageTek's accounting policies and presentation. Merger and consolidation charges of between $10,000,000 and $15,000,000 are expected to be recognized in the first quarter of 1995 in connection with the merger.
Network Systems designs, manufactures, markets and services, worldwide, computer networking products. The following pro forma combined financial information assumes that the merger had occurred on the first day of the earliest period presented (in thousands of dollars, except per share amounts). Network Pro Forma Pro Forma 1994 StorageTek Systems Adjustments Combined - ------------------------------------------------------------------------- Revenue $1,624,959 $231,756 $14,635 $1,871,350 Net income (loss) 41,437 (23,820) 14,421 32,038 Earnings (loss) per common share 0.66 (0.79) 0.38
Total assets 1,890,007 265,147 (10,696) 2,144,458 Total debt 463,690 1,000 464,690 Stockholders' equity 1,074,547 201,124 (10,386) 1,265,285
Network Pro Forma Pro Forma 1993 StorageTek Systems Adjustments Combined - ------------------------------------------------------------------------- Revenue $1,404,752 $215,558 $(2,619) $1,617,691 Net income (loss) (77,796) 2,207 (5,872) (81,461) Earnings (loss) per common share (2.05) 0.07 (1.80)
Network Pro Forma Pro Forma 1992 StorageTek Systems Adjustments Combined - ------------------------------------------------------------------------- Revenue $1,550,945 $219,118 $4,262 $1,774,325 Net income (loss) 9,334 (39,674) (2,902) (33,242) Earnings (loss) per common share 0.22 (1.31) (0.66)
The pro forma adjustments to revenue and net income (loss) for all years presented include adjustments related to revenue recognition and income tax accounting. Adjustments have been made to revenue and the associated costs and expenses to reflect revenue recognition for certain Network Systems' high- end product sales to end-user customers at the time of customer acceptance, consistent with StorageTek's policy, rather than at the time of shipment.
Adjustments have also been made to the combined tax position of StorageTek and Network Systems as if the merger had occurred at the beginning of the earliest period presented. The pro forma adjustments to total assets and stockholders' equity as of December 30, 1994, reflect these same adjustments.
This pro forma combined financial information is provided for comparative purposes only and does not purport to be indicative of the results which actually would have been obtained if the merger had been effected for the periods indicated, or of the results which may be obtained in the future.
REPORT OF INDEPENDENT ACCOUNTANTS FOR STORAGE TECHNOLOGY CORPORATION
To the Stockholders and Board of Directors of Storage Technology Corporation
In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14.(a) 1. and 2. on page 32 present fairly, in all material respects, the financial position of Storage Technology Corporation and its subsidiaries at December 30, 1994 and December 31, 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Network Systems Corporation, which statements reflect total assets of $265,147,000 and $305,481,000 at December 31, 1994 and 1993, respectively, and total revenue of $231,756,000, $215,558,000 and $219,118,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Network Systems Corporation in Note 18, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for the opinion expressed above.
As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for income taxes to adopt Statement of Financial Accounting Standards No. 109 in 1993. We concur with this change in accounting.
PRICE WATERHOUSE LLP
Denver, Colorado March 10, 1995
REPORT OF INDEPENDENT ACCOUNTANTS FOR NETWORK SYSTEMS CORPORATION
Board of Directors and Stockholders Network Systems Corporation
We have audited the accompanying consolidated balance sheets of Network Systems Corporation as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Network Systems Corporation at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota March 10, 1995
STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In Thousands of Dollars)
Additions - Charged to Balance Cost of Deductions - Balance Beginning Service Spare Parts End of of Year and Rental Written Off Year --------------------------------------------------- Amortization of spare parts for customer services:
For the year ended:
December 30, 1994 $55,317 $23,789 $14,997 $64,109 ====== ====== ====== ====== December 31, 1993 $48,268 $20,208 $13,159 $55,317 ====== ====== ====== ====== December 25, 1992 $41,896 $20,746 $14,374 $48,268 ====== ====== ====== ======
Additions Balance - Charges Balance Beginning to Cost Reductions - End of of Year of Sales Write-offs Year --------------------------------------------------- Inventory reserves:
For the year ended:
December 30, 1994 $35,905 $43,672 $29,098 $50,479 ====== ====== ====== ====== December 31, 1993 $24,147 $33,554 $21,796 $35,905 ====== ====== ====== ====== December 25, 1992 $17,723 $18,703 $12,279 $24,147 ====== ====== ====== ======
Deductions - Accounts Additions Receivable Balance - Charged Written Off Balance Beginning to Cost and Net of End of of Year Expenses Recoveries of Year ---------------------------------------------------
Allowance for doubtful accounts on accounts receivable:
For the year ended:
December 30, 1994 $12,452 $ 3,670 $ 5,499 $10,623 ====== ====== ====== ====== December 31, 1993 $11,949 $ 7,228 $ 6,725 $12,452 ====== ====== ====== ====== December 25, 1992 $10,733 $10,987 $ 9,771 $11,949 ====== ====== ====== ======
EXHIBIT INDEX -------------
Exhibit No. Description ---------- ------------------------------------------------------------
10.8 Employment Agreement between the Company and David E. Lacey, dated February 17, 1995.
10.9 Employment Agreement between the Company and L. Thomas Gooch, dated February 17, 1995.
10.10 Employment Agreement between the Company and Mark D. McGregor, dated February 17, 1995.
10.11 Employment Agreement between the Company and W. Russell Wayman, dated February 17, 1995.
10.12 Employment Agreement between the Company and David E. Weiss, dated February 17, 1995.
10.13 Employment Agreement between the Company and John V. Williams, dated February 17, 1995.
10.17 Amendment to Restated Agreement and Plan of Merger, dated February 8, 1995, between the Registrant, StorageTek Eagle Corporation and Network Systems Corporation.
11.0 Computation of Earnings (Loss) per Common Share.
21.0 Subsidiaries of Registrant.
23.0 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.