UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-7534
STORAGE TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One StorageTek Drive, Louisville, Colorado 80028-4309
------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
303-673-5151
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The registrant had 106,505,944 shares of common stock outstanding as of November
4, 2002.
STORAGE TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
September 27, 2002
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Comprehensive Income 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24
Item 4 - Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 6 - Exhibits and Reports on Form 8-K 26
Signatures 30
Certifications 30
Exhibit Index 33
2
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
09/27/02 12/28/01
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 549,957 $ 453,217
Accounts receivable 506,886 505,630
Inventories 115,250 183,980
Deferred income tax assets 95,352 95,459
Other current assets 2,307 16,240
---------- ----------
Total current assets 1,269,752 1,254,526
Property, plant, and equipment 252,457 232,289
Spare parts for maintenance 37,856 35,674
Deferred income tax assets 121,359 121,826
Other assets 122,237 114,568
---------- ----------
Total assets $ 1,803,661 $ 1,758,883
========== ==========
LIABILITIES
Current liabilities:
Credit facilities $ -- $ 73,401
Current portion of long-term debt 754 812
Accounts payable 94,354 66,648
Accrued liabilities 382,457 361,113
Income taxes payable 214,503 212,566
Other current liabilities 16,425 --
---------- ----------
Total current liabilities 708,493 714,540
Long-term debt 9,923 9,523
---------- ----------
Total liabilities 718,416 724,063
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value,
300,000,000 shares authorized;
106,169,965 shares issued at
September 27, 2002, and
105,032,665 shares issued at
December 28, 2001 10,617 10,503
Capital in excess of par value 895,777 875,379
Retained earnings 199,086 150,129
Accumulated other comprehensive income
(loss) (8,456) 7,642
Treasury stock, 200,643 shares at
September 27, 2002, and December 28,
2001, at cost (3,777) (3,777)
Unearned compensation (8,002) (5,056)
---------- ----------
Total stockholders' equity 1,085,245 1,034,820
---------- ----------
Total liabilities and
stockholders' equity $ 1,803,661 $ 1,758,883
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Quarter Ended Nine Months Ended
------------------ --------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- -------- --------
Revenue
Storage products $307,335 $322,960 $ 889,379 $ 974,591
Storage services 194,370 175,039 560,167 504,361
------- ------- --------- ---------
Total revenue 501,705 497,999 1,449,546 1,478,952
------- ------- --------- ---------
Cost of revenue
Storage products 166,719 174,204 497,027 538,184
Storage services 106,801 101,768 311,096 301,702
------- ------- --------- ---------
Total cost of revenue 273,520 275,972 808,123 839,886
------- ------- --------- ---------
Gross profit 228,185 222,027 641,423 639,066
Research and product development
costs 53,354 60,563 162,385 185,770
Selling, general, administrative,
and other income and expense, net 141,958 135,055 412,952 414,138
------- ------- --------- ---------
Operating profit 32,873 26,409 66,086 39,158
Interest income 2,837 2,465 7,439 7,222
Interest expense (540) (1,759) (1,568) (5,219)
------- ------- --------- ---------
Income before income taxes 35,170 27,115 71,957 41,161
Provision for income taxes (11,300) (9,200) (23,000) (14,000)
------- ------- --------- ---------
Net income $ 23,870 $ 17,915 $ 48,957 $ 27,161
======= ======= ========= =========
EARNINGS PER COMMON SHARE
Basic earnings per share $ 0.23 $ 0.17 $ 0.47 $ 0.26
======= ======= ========= =========
Weighted-average shares 105,268 103,352 104,903 102,886
======= ======= ========= =========
Diluted earnings per share $ 0.22 $ 0.17 $ 0.46 $ 0.26
======= ======= ========= =========
Weighted-average and dilutive
potential shares 107,121 105,140 107,360 104,500
======= ======= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
4
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
-------------------------
09/27/02 09/28/01
----------- -----------
OPERATING ACTIVITIES
Cash received from customers $ 1,465,480 $ 1,548,705
Cash paid to suppliers and employees (1,202,442) (1,414,958)
Interest received 7,078 7,222
Interest paid (1,288) (4,197)
Income taxes paid (11,229) (11,252)
---------- ----------
Net cash provided by operating activities 257,599 125,520
---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (83,003) (50,029)
Proceeds from sale of property, plant, and equipment 354 82
Other assets (14,321) (6,173)
---------- ----------
Net cash used in investing activities (96,970) (56,120)
---------- ----------
FINANCING ACTIVITIES
Repayments of credit facilities, net (73,401) (3,163)
Proceeds from employee stock plans 14,280 8,437
Proceeds from other debt 1,166 1,913
Repayments of other debt (1,868) (8,607)
---------- ----------
Net cash used in financing activities (59,823) (1,420)
---------- ----------
Effect of exchange rate changes on cash (4,066) 4,712
---------- ----------
Increase in cash and cash equivalents 96,740 72,692
Cash and cash equivalents - beginning of the period 453,217 279,731
---------- ----------
Cash and cash equivalents - end of the period $ 549,957 $ 352,423
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 48,957 $ 27,161
Depreciation and amortization expense 70,501 87,418
Inventory writedowns 28,996 40,417
Translation gain (461) (19,433)
Other non-cash adjustments to income 17,433 25,116
Decrease in accounts receivable 15,934 70,120
(Increase) decrease in other current assets 531 (1,831)
(Increase) decrease in inventories 42,695 (62,364)
Increase in spare parts (17,724) (7,391)
(Increase) decrease in deferred income tax assets 993 (500)
Increase (decrease) in accounts payable 26,934 (24,231)
Increase (decrease) in accrued liabilities 8,938 (12,210)
Increase in other current liabilities 3,694 --
Increase in income taxes payable 10,178 3,248
----------- ----------
Net cash provided by operating activities $ 257,599 $ 125,520
=========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
5
STORAGE TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Quarter Ended Nine Months Ended
------------------- -------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- -------- --------
Net income $ 23,870 $ 17,915 $ 48,957 $ 27,161
------- ------- ------- -------
Other comprehensive income (loss),
net of tax (benefit):
Cumulative effect of change in
accounting principle on adoption
of Statement of Financial
Accounting Standards No. 133 and
138, net of tax (benefit) of $0,
$0, $0, and $(3,881) -- -- -- (7,535)
Net gain (loss) on foreign
currency cash flow hedges, net
of tax (benefit) of $322,
$(3,482), $(11,431), and $8,411 516 (6,759) (18,338) 16,328
Reclassification adjustment for
net (gains) losses included in
net income, net of (tax) benefit
of $3,402, $(432), $1,396, and
$(3,725) 5,457 (838) 2,240 (7,231)
------- ------- ------- -------
Other comprehensive income (loss) 5,973 (7,597) (16,098) 1,562
------- ------- ------- -------
Comprehensive income $ 29,843 $ 10,318 $ 32,859 $ 28,723
======= ======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
6
STORAGE TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The accompanying interim consolidated financial statements of Storage Technology
Corporation and its wholly owned subsidiaries (StorageTek or the Company) have
been prepared on substantially the same basis as the Company's annual
consolidated financial statements and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 28, 2001. In
the opinion of management, the interim consolidated financial statements reflect
all adjustments necessary for the fair presentation of results for the periods
presented, and such adjustments are of a normal, recurring nature.
The consolidated results for interim periods are not necessarily indicative of
expected results for the full fiscal year.
NOTE 2 - INVENTORIES
Inventories, net of associated reserves, consist of the following (in thousands
of dollars):
09/27/02 12/28/01
-------- --------
Raw materials $ 8,836 $ 41,850
Work-in-process 42,365 57,641
Finished goods 64,049 84,489
------- -------
$115,250 $183,980
======= =======
NOTE 3 - AGREEMENTS WITH EDS
On March 29, 2002, StorageTek and Electronic Data Systems Corporation (EDS)
entered into a 10-year master secondary storage services agreement. On April 1,
2002, StorageTek and EDS entered into a 10-year agreement under which StorageTek
outsourced certain internal information technology and customer call center
operations to EDS. There are no cross-default provisions between the two
agreements, and performance under each agreement by both StorageTek and EDS is
not contingent upon performance under the other agreement. These agreements have
been accounted for individually at their estimated fair values consistent with
the provisions of Accounting Principles Board (APB) Opinion No. 29, "Accounting
for Nonmonetary Transactions," based on management's estimates of fair value and
a third-party appraisal.
Under the terms of the secondary storage services agreement, StorageTek will
provide tape storage services for certain EDS-operated data center sites within
the United States. StorageTek will receive a fee for these services calculated
using a monthly base service fee adjusted for certain increases and decreases in
the actual amount of data stored. The agreement also provides for adjustments to
the fees in the event specified service level metrics are not achieved.
The secondary storage services agreement can be renewed on an annual basis after
the expiration of the initial 10-year term. The agreement can be cancelled by
either party upon certain events, and can be cancelled by EDS for convenience
with six months notice no sooner than two-and-one-half years from the effective
date of the agreement. In the event EDS terminates the agreement for
convenience, a termination fee is payable to StorageTek with the amount of the
fee based upon a declining scale from the effective date.
7
In connection with the secondary storage services agreement, StorageTek
purchased certain secondary storage equipment for a purchase price of
$52,200,000. Substantially all of the purchase price paid to EDS relates to
equipment previously sold by StorageTek to EDS; however, none of the equipment
purchased by StorageTek was sold to EDS subsequent to the companies entering
into definitive negotiations of the secondary storage services agreement. The
purchase price was paid in April 2002. Because StorageTek is only responsible
for delivering secondary storage pursuant to the service level agreement,
StorageTek makes all decisions on secondary storage equipment additions and
retirements within the data centers. Upon the expiration or termination of the
agreement, EDS has the option to purchase any secondary storage equipment owned
by StorageTek at the data center sites at a purchase price equal to the greater
of the net book value of the equipment or the fair market value of the
equipment. In limited situations, EDS also has the right to repurchase a portion
of the equipment prior to expiration or termination of the agreement at an
assigned value declining on a straight-line basis over five years. The estimated
fair value of the equipment subject to this repurchase right was $12,271,000 as
of March 29, 2002. In the event EDS exercises this repurchase right, the
exercise will not affect any other terms of the agreement.
StorageTek has agreed to reimburse certain lease payments made by EDS on
equipment used to deliver secondary storage services under the agreement. EDS'
gross remaining lease obligation associated with this equipment, assuming no
lease terminations, was approximately $8,599,000 as of March 29, 2002.
Revenue is recognized under the secondary storage services agreement on a
straight-line basis over the ten-year term of the agreement, based on the
average per gigabyte price over the term of the contract. The Company had
approximately $4,535,000 of billings to EDS for which the revenue has been
deferred as of September 27, 2002. Lease reimbursement payments made to EDS are
recognized as a reduction of service revenue. Costs and expenses to provide
these services are recognized as incurred. The purchase price of $52,200,000
paid to EDS for the secondary storage equipment has been recorded within
Property, Plant, and Equipment on the Consolidated Balance Sheet. The Company is
depreciating the equipment on a straight-line basis over the estimated useful
lives of the assets. Useful lives were determined based on the individual
characteristics of the equipment, and range from one to seven years. The revenue
and costs are included within storage services for segment reporting purposes.
NOTE 4 - GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 requires that goodwill no
longer be amortized. Under SFAS No. 142, goodwill will be tested for impairment
on an annual basis or as necessary. The Company adopted SFAS No. 142 on the
first day of the Company's fiscal year 2002. In the second quarter of 2002, the
Company completed the initial goodwill impairment test. No accounting charge
resulted from the completion of this initial impairment test.
8
The following table presents the adjusted net income and earnings per share had
SFAS No. 142 been in effect for all periods presented (in thousands, except per
share amounts):
Quarter Ended Nine Months Ended
------------------- -------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- -------- --------
Reported net income $ 23,870 $ 17,915 $ 48,957 $ 27,161
Add back: Goodwill amortization -- 1,445 -- 4,362
------- ------- ------- -------
Adjusted net income $ 23,870 $ 19,360 $ 48,957 $ 31,523
======= ======= ======= =======
Basic earnings per common share:
Reported net income $ 0.23 $ 0.17 $ 0.47 $ 0.26
Goodwill amortization -- 0.01 -- 0.04
------- ------- ------- -------
Adjusted net income $ 0.23 $ 0.18 $ 0.47 $ 0.30
======= ======= ======= =======
Diluted earnings per common share:
Reported net income $ 0.22 $ 0.17 $ 0.46 $ 0.26
Goodwill amortization -- 0.01 -- 0.04
------- ------- ------- -------
Adjusted net income $ 0.22 $ 0.18 $ 0.46 $ 0.30
======= ======= ======= =======
NOTE 5 - DEBT AND FINANCING ARRANGEMENTS
The Company had a financing agreement with a bank that provided for the sale of
promissory notes in the principal amount of up to $75,000,000 at any one time.
This agreement expired in January 2002, and all outstanding promissory notes
under the agreement were repaid at that time. The Company has historically
utilized foreign currency forwards embedded in borrowing commitments under this
financing agreement to hedge forecasted cash flows associated with revenue
denominated in foreign currencies. The Company is currently using stand-alone
foreign currency options and forwards to mitigate the risk that forecasted cash
flows associated with revenue denominated in foreign currencies may be adversely
affected by changes in foreign currency exchange rates.
See the Company's Annual Report on Form 10-K for the year ended December 28,
2001, for additional information regarding the Company's debt and financing
arrangements, and derivative instruments.
NOTE 6 - LITIGATION
In 1994, Stuff Technology Partners II, a Limited Partnership (Stuff), filed suit
in Boulder County, Colorado, District Court alleging that the Company breached a
1990 settlement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages. In September 2002, a jury confirmed
the Company's interpretation of the settlement agreement that the limitations on
the Company's use of the development project technology is restricted to its use
in optical disk drives. Remaining claims to be tried include Stuff's allegation
that the Company did not transfer all of the technology to it as required under
the 1990 settlement agreement and its allegation that the Company is using the
technology in optical disk drives. The Company will vigorously defend these
claims and, at this time, the Company believes that the likelihood of a material
adverse result on the remaining claims is remote.
9
The Company also is involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
NOTE 7 - OPERATIONS OF BUSINESS SEGMENTS
The Company is organized into two reportable segments based on the definitions
provided in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information": storage products and storage services. The storage
products segment includes sales of tape and tape automation products, disk
products, and network products. The storage services segment includes
maintenance and various storage consulting activities.
The Company does not have any intersegment revenue, and segment operating
performance is evaluated based on gross profit. The aggregate gross profit by
segment equals the consolidated gross profit, and the Company does not allocate
research and product development costs; selling, general, administrative, and
other income and expense; interest income; interest expense; or benefit
(provision) for income taxes to the segments. The revenue and gross profit by
segment is as follows (in thousands of dollars):
Quarter Ended Nine Months Ended
--------------------- -----------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- ---------- ----------
Revenue:
Storage products $307,335 $322,960 $ 889,379 $ 974,591
Storage services 194,370 175,039 560,167 504,361
------- ------- --------- ---------
Total revenue $501,705 $497,999 $1,449,546 $1,478,952
======= ======= ========= =========
Gross profit:
Storage products $140,616 $148,756 $ 392,352 $ 436,407
Storage services 87,569 73,271 249,071 202,659
------- ------- --------- ---------
Total gross profit $228,185 $222,027 $ 641,423 $ 639,066
======= ======= ========= =========
The following table provides supplemental financial data regarding revenue from
the Company's storage products segment (in thousands of dollars):
Quarter Ended Nine Months Ended
--------------------- -----------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- ---------- ----------
Tape and tape automation
products $239,736 $258,125 $ 702,500 $ 791,325
Disk products 33,309 23,500 88,570 75,098
Network and other products 34,290 41,335 98,309 108,168
------- ------- --------- ---------
Total storage products
revenue $307,335 $322,960 $ 889,379 $ 974,591
======= ======= ========= =========
10
NOTE 8 - EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per
share (in thousands, except per share amounts):
Quarter Ended Nine Months Ended
--------------------- -----------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- ---------- ----------
Net income $ 23,870 $ 17,915 $ 48,957 $ 27,161
------- ------- --------- ---------
Weighted average common
shares outstanding:
Basic 105,268 103,352 104,903 102,886
Effect of dilutive
common stock
equivalents 1,853 1,788 2,457 1,614
------- ------- --------- ---------
Diluted 107,121 105,140 107,360 104,500
======= ======= ========= =========
Earnings per common share:
Basic $ 0.23 $ 0.17 $ 0.47 $ 0.26
Diluted $ 0.22 $ 0.17 $ 0.46 $ 0.26
For the quarters ended September 27, 2002, and September 28, 2001, options to
purchase 7,239,457 and 6,081,221 shares of common stock, respectively, were
excluded from the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the Company's
common stock, and therefore, the effect would have been antidilutive. For the
nine months ended September 27, 2002, and September 28, 2001, options to
purchase 5,352,769 and 6,755,375 shares of common stock, respectively, were
excluded from the computation of diluted earnings per share for the same reason.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." This statement addresses
the accounting for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. SFAS No. 143 is effective
for the Company's financial statements for the year ending December 26, 2003.
The adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement addresses the accounting for costs associated with an exit activity or
with a disposal of long-lived assets. SFAS No. 146 is effective for the
Company's financial statements for the year ending December 26, 2003. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
11
STORAGE TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 27, 2002
FORWARD-LOOKING STATEMENTS
All assumptions, anticipations, expectations, and forecasts contained in the
following discussion regarding the Company, its future products, business plans,
financial results, performance, and future events are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ materially because of a number of risks and
uncertainties. Some of these risks are detailed below in "Factors That May
Affect Future Results" and elsewhere in this Form 10-Q. Forward-looking
statements can be identified by the use of words such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "intends," "potential," "continue," or the negative of such terms,
or other comparable words. Forward-looking statements also include the
assumptions underlying or relating to any such statements. The forward-looking
statements contained herein represent a good-faith assessment of the Company's
future performance for which management believes there is a reasonable basis.
The Company disclaims any obligation to update the forward-looking statements
contained herein, except as may be otherwise required by law.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
The following table, stated as a percentage of total revenue, presents
Consolidated Statements of Operations information and revenue by segment:
Quarter Ended Nine Months Ended
------------------ ------------------
09/27/02 09/28/01 09/27/02 09/28/01
-------- -------- -------- --------
Storage products revenue:
Tape and tape automation products 47.8% 51.9% 48.5% 53.5%
Disk products 6.7 4.7 6.1 5.1
Network and other products 6.8 8.3 6.8 7.3
----- ----- ----- -----
Total storage products revenue 61.3 64.9 61.4 65.9
Storage services revenue 38.7 35.1 38.6 34.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 54.5 55.4 55.7 56.8
----- ----- ----- -----
Gross profit 45.5 44.6 44.3 43.2
Research and product development costs 10.6 12.2 11.2 12.5
Selling, general, administrative,
and other income and expense, net 28.3 27.1 28.5 28.0
----- ----- ----- -----
Operating profit 6.6 5.3 4.6 2.7
Interest income, net 0.4 0.1 0.4 0.1
----- ----- ----- -----
Income before income taxes 7.0 5.4 5.0 2.8
Provision for income taxes (2.2) (1.8) (1.6) (1.0)
----- ----- ----- -----
Net income 4.8% 3.6% 3.4% 1.8%
===== ===== ===== =====
12
REVENUE
STORAGE PRODUCTS
The Company's storage products revenue consists of sales of tape and tape
automation products, disk products, and network products for the enterprise and
open-systems markets. The open-systems market consists of products designed to
operate in the UNIX, NT, and other non-MVS operating environments. Storage
products revenue decreased 5% and 9% during the third quarter and nine months of
2002, respectively, compared to the same periods in 2001, primarily due to
decreased revenue from tape and tape automation products.
Tape and Tape Automation Products
Tape and tape automation product revenue decreased 7% and 11% during the third
quarter and nine months of 2002, respectively, compared to the same periods in
2001, primarily due to a reduction in the number of tape and tape automation
units sold. The Company believes this decline is primarily attributable to the
current economic conditions and the associated weakness in information
technology spending. The Company has experienced a higher ratio of tape drives
sold relative to tape libraries as customers appear to be buying only products
essential to meeting their immediate storage needs. Also contributing to the
decline in tape and tape automation product revenue during the third quarter of
2002 was the shift from storage products revenue to storage services revenue as
a result of the secondary storage services agreement signed with EDS. These
decreases were partially offset by increased revenue from LTO tape drives and
enterprise and open-systems tape media products.
During the third quarter of 2002, the Company introduced two new tape drive
offerings: the T9940B, which is a high-speed, high-capacity tape drive for the
high-end tape market, and Quantum's SDLT 320, which is a high-speed,
high-capacity tape drive for the mid-range tape market. See "New Products" under
"Factors That May Affect Future Results" for a discussion of the risks
associated with these and other new products.
Disk Products
Disk product revenue increased 42% and 18% during the third quarter and nine
months of 2002, respectively, compared to the same periods in 2001, primarily
due to increased sales of open-systems disk products. In January 2002, the
Company announced a distribution agreement with LSI Logic Storage Systems (LSI).
Under the terms of the agreement, StorageTek will sell LSI's full line of
open-systems disk products. The increased revenue from open-systems disk
products was partially offset by decreased revenue from the V-Series product
family. The Company is focusing its disk sales efforts on opportunities to sell
disk products in combination with its tape, network, and service offerings. Disk
revenue continues to be affected by pricing pressures and intense competition in
the disk market, as well as the current economic conditions and associated
weakness in information technology spending.
During the third quarter of 2002, the Company introduced its V2X Shared Virtual
Array (SVA(TM)) disk storage system, which is the latest V-Series offering for
both mainframe and open-systems environments. The V2X is designed to eliminate
the under-allocation and over-purchasing of disk storage capacity that is
required with conventional enterprise disk storage systems. See "New Products"
under "Factors That May Affect Future Results" for a discussion of the risks
associated with this and other new products.
13
Network and Other Products
Network and other product revenue decreased 17% and 9% during the third quarter
and nine months of 2002, respectively, compared to the same periods in 2001,
primarily due to decreased sales of connectivity, software, and other
miscellaneous products. The decrease was partially offset by increased sales of
storage area networking (SAN) hardware, which includes the StorageNet(TM) 6000
series of domain managers and third-party equipment such as switches and
bridges. Although sales of the Company's StorageNet(TM) 6000 increased during
the third quarter and nine months of 2002, compared to the same periods in 2001,
sales unit growth has been limited by the size of the market that this product
can address. In October 2002, the Company announced its decision to outsource
the development and manufacture of its StorageNet(TM) 6000 series of domain
managers. This initiative will help the Company meet customer service objectives
and improve time-to-market, cost, and manufacturing efficiency.
STORAGE SERVICES
The Company's storage services revenue primarily includes revenue associated
with the maintenance of the Company's and third-party storage products, as well
as service revenue associated with various storage consulting activities.
Storage services revenue increased 11% during the third quarter and nine months
of 2002, compared to the same periods in 2001. The growth in service revenue has
been driven largely by an expanded effort to sell services that help customers
successfully manage their storage requirements, as well as increased service
revenue from the EDS agreement. See Note 3 of Notes to Consolidated Financial
Statements for further discussion of the EDS secondary storage services
agreement.
GROSS PROFIT
Gross profit margins remained flat at 45% for the third quarter of 2002,
compared to the same period in 2001. Gross profit margins increased to 44% for
the nine months of 2002, compared to 43% for the same period in 2001. The
increase in gross profit margins for the nine months of 2002 is primarily a
result of improvements in storage services profit margins. Gross profit margins
for the storage products segment remained flat at 46% for the third quarter of
2002, compared to the same period in 2001. Gross profit margins decreased to 44%
for the nine months of 2002, compared to 45% for the same period in 2001. Gross
margins for the storage services segment increased to 45% and 44% for the third
quarter and nine months of 2002, respectively, compared to 42% and 40% for the
same periods in 2001. The increase in gross margins for the storage services
segment reflects improvements in spare parts utilization and the service
delivery process. The Company is continuing to assess its service delivery
processes in an effort to improve efficiencies and eliminate unnecessary costs.
These improvements may require additional investments and costs that could
adversely impact service margins in future periods. Service margins may also
decrease in future periods to the extent professional services, which generally
carry lower margins, become a more significant source of service revenue.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses decreased 12% and 13% during the third
quarter and nine months of 2002, respectively, compared to the same periods in
2001, primarily due to engineering initiatives designed to improve research and
development productivity, increase strategic alignment, and eliminate
non-essential spending. The Company continues to evaluate and prioritize
research and product development programs and is focusing on the core businesses
of tape automation, disk, virtual storage, and SAN products.
14
SELLING, GENERAL, ADMINISTRATIVE, AND OTHER INCOME AND EXPENSE
Selling, general, administrative, and other income and expense (SG&A) increased
5% during the third quarter of 2002, compared to the same period in 2001,
primarily due to a pre-tax impairment charge of $4.5 million in connection with
an equity investment. SG&A was unchanged during the nine months of 2002, as
compared to the same period in 2001. As a percentage of revenue, SG&A was
largely unchanged from the third quarter and nine months of 2001. In light of
the prolonged economic downturn, the Company is continuing its efforts to
control discretionary spending and identify new opportunities to drive increased
profitability.
LITIGATION
In 1994, Stuff Technology Partners II, a Limited Partnership (Stuff), filed suit
in Boulder County, Colorado, District Court alleging that the Company breached a
1990 settlement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages. In September 2002, a jury confirmed
the Company's interpretation of the settlement agreement that the limitations on
the Company's use of the development project technology is restricted to its use
in optical disk drives. Remaining claims to be tried include Stuff's allegation
that the Company did not transfer all of the technology to it as required under
the 1990 settlement agreement and its allegation that the Company is using the
technology in optical disk drives. The Company will vigorously defend these
claims and, at this time, the Company believes that the likelihood of a material
adverse result on the remaining claims is remote.
The Company also is involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
INTEREST INCOME AND EXPENSE
Interest income was largely unchanged during the third quarter and nine months
of 2002, compared to the same periods in 2001. Interest expense decreased $1.2
million and $3.7 million during the third quarter and nine months of 2002,
respectively, compared to the same periods in 2001, primarily due to a decrease
in outstanding debt.
INCOME TAXES
The Company's effective tax rate was 32% for the third quarter and nine months
of 2002, compared to 34% for the same periods in 2001. The decrease in the
effective tax rate is primarily due to the Company's global tax strategies
associated with the Company's manufacturing operations in Puerto Rico.
Statement of Financial Accounting Standards (SFAS) No. 109 requires that
deferred income tax assets be recognized to the extent realization of such
assets is more likely than not. Based on the currently available information,
management has determined that the Company will more likely than not realize
$216.7 million of deferred income tax assets as of September 27, 2002. The
Company's valuation allowance of approximately $20.9 million as of September 27,
2002, relates principally to net deductible temporary differences, tax credit
carryforwards, and net operating loss carryforwards.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 requires that goodwill no
longer be amortized. Under SFAS No. 142, goodwill will be tested for impairment
on an annual basis or as necessary. The Company adopted SFAS No. 142 on the
first day of the Company's fiscal year 2002. During the second quarter of 2002,
the Company completed the initial goodwill impairment test. No accounting charge
resulted from the completion of this initial impairment test. See Note 4 of
Notes to Consolidated Financial Statements for a discussion of the financial
impact on the Company's results of operations had SFAS No. 142 been in effect
for all periods presented.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets." This statement addresses the accounting for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. SFAS No. 143 is effective for the Company's financial
statements for the year ending December 26, 2003. The adoption of this statement
is not currently anticipated to have a material impact on the Company's
financial position or results of operations.
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement addresses the accounting for costs associated with an exit activity or
with a disposal of long-lived assets. SFAS No. 146 is effective for the
Company's financial statements for the year ending December 26, 2003. The
adoption of this statement is not currently anticipated to have a material
impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's cash balance increased $96.7 million during the nine months of
2002 as a result of progress in the Company's efforts to more effectively manage
working capital. The Company's operating activities provided cash of $257.6
million during the nine months of 2002, compared to cash of $125.5 million
generated from operations during the same period in 2001. The increase in cash
generated from operations during the nine months of 2002, compared to the same
period in 2001, was primarily a result of significantly lower purchases of
inventory, as well as other efforts to more effectively manage working capital.
Cash used in investing activities increased to $97.0 million during the nine
months of 2002 from $56.1 million during the nine months of 2001, primarily due
to the repurchase of $52.2 million of secondary storage equipment from EDS in
connection with the secondary storage services agreement. Cash used in financing
activities increased to $59.8 million during the nine months of 2002, as
compared to $1.4 million during the nine months of 2001. The increase in cash
used in financing activities was primarily due to the repayment of borrowings
under the Company's credit facilities during the nine months of 2002, partially
offset by increased proceeds from employee stock plans.
Sources of Liquidity and Capitalization
The Company has a $150.0 million revolving credit facility (the Revolver) that
expires in October 2004. The interest rates for borrowing under the Revolver are
dependent on the Company's Total Debt to rolling four quarter Earnings Before
Interest Expense, Taxes, Depreciation, and Amortization (EBITDA) ratio and the
term of the outstanding borrowing. The rate ranges from the applicable LIBOR
plus 1.75% to 2.50% or the agent bank's base rate plus 0.00% to 0.50%. The
16
Company had no outstanding borrowings under the Revolver as of September 27,
2002. The Revolver is secured by the Company's domestic accounts receivable and
domestic inventory, and contains certain financial and other covenants,
including restrictions on the payment of cash dividends on the Company's common
stock.
The Company had a financing agreement with a bank that provided for the sale of
promissory notes in the principal amount of up to $75.0 million at any one time.
This agreement expired in January 2002, and all outstanding promissory notes
under the agreement were repaid at that time.
The Company's cash flows from operations are currently expected to serve as the
principal source of working capital. Cash flows from operations could be
negatively impacted by a decrease in demand for the Company's products and
services as a result of rapid technological changes and other risks described
under "Factors That May Affect Future Results."
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company may choose to fund these activities
through the issuance of additional debt or equity financing. The issuance of
equity or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that any additional long-term financing,
if required, can be completed on terms that are favorable to the Company.
The Company's debt-to-capitalization ratio decreased from 7% as of December 28,
2001, to 1% as of September 27, 2002, primarily because of the repayment of
borrowings under the Company's credit facilities. See "Working Capital" above
for a discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
International operations accounted for approximately 48% and 49% of the
Company's revenue during the third quarter and nine months of 2002,
respectively, compared to 49% and 50% during the same periods of 2001. The
Company also sells products through domestic indirect distribution channels that
have end-user customers located outside the United States. The Company expects
that it will continue to generate a significant portion of its revenue from
international operations. See "International Business" under "Factors That May
Affect Future Results" for a discussion of the risks associated with conducting
business outside the United States.
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; Australia; Canada; and
Japan. 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 operating and financial results can be materially affected
by fluctuations in foreign currency exchange rates. In an attempt to mitigate
the impact of foreign currency fluctuations, the Company employs a foreign
currency hedging program. See "Market Risk Management" below.
MARKET RISK MANAGEMENT
Foreign Currency Exchange Rate Risk
The Company's primary market risk relates to changes in foreign currency
exchange rates. The functional currency for the Company's foreign subsidiaries
is the U.S. dollar. A significant portion of the Company's revenue is generated
by its international operations. As a result, the Company's financial position,
earnings, and cash flows can be materially affected by changes in foreign
currency exchange rates. The Company attempts to mitigate this exposure as part
17
of its foreign currency hedging program. The primary goal of the Company's
foreign currency hedging program is to reduce the risk of adverse foreign
currency movements on the reported financial results of its non-U.S. dollar
transactions. Factors that could have an impact on the effectiveness of the
Company's hedging program include the accuracy of forecasts and the volatility
of foreign currency markets. All foreign currency derivatives are authorized and
executed pursuant to the Company's policies. The Company does not hold or issue
derivatives for trading purposes.
To implement its foreign currency hedging program, the Company uses foreign
currency options and forwards. These derivatives are used to hedge the risk that
forecasted revenue denominated in foreign currencies might be adversely affected
by changes in foreign currency exchange rates. Foreign currency forwards are
also used to reduce the Company's exposure to foreign currency exchange rate
fluctuations in connection with monetary assets and liabilities denominated in
foreign currencies.
A hypothetical 10% adverse movement in foreign exchange rates applied to the
Company's foreign currency exchange rate sensitive instruments held as of
September 27, 2002, and as of December 28, 2001, would result in a hypothetical
loss of approximately $65.6 million and $55.6 million, respectively. These
hypothetical losses do not take into consideration the Company's underlying
international operations. The Company anticipates that any hypothetical loss
associated with the Company's foreign currency exchange rate sensitive
instruments would be substantially offset by gains associated with its
underlying international operations.
Interest Rate Risk
Changes in interest rates affect interest income earned on the Company's cash
investments, as well as interest expense on short-term borrowings. A
hypothetical 10% adverse movement in interest rates applied to cash investments
and short-term borrowings held as of September 27, 2002, and as of December 28,
2001, would not have a material adverse effect on the Company's financial
position, earnings, or cash flows.
Credit Risk
The Company is exposed to credit risk associated with cash investments, foreign
currency derivatives, and trade receivables. The Company does not believe that
its cash investments and foreign currency derivatives present significant credit
risks, because the counterparties to the instruments consist of major financial
institutions, and the Company manages the notional amount of contracts entered
into with any one counterparty. Substantially all trade receivable balances are
unsecured. The concentration of credit risk with respect to trade receivables is
limited due to the large number of customers in the Company's customer base and
their dispersion across various industries and geographic areas. Although the
Company has a large number of customers who are dispersed across different
industries and geographic areas, a prolonged economic downturn could increase
the Company's exposure to credit risk on its trade receivables. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses.
FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products
Short product life cycles are inherent in high-technology industries. The
Company's results of operations and competitive strength depend on its ability
to successfully develop, manufacture, and market innovative new products, as
well as adapt its current products and services to new technologies.
18
The Company devotes significant resources to research and product development
projects and must effectively manage the risks associated with new products.
Developing new products is complex and involves various uncertainties, including
possible delays in product development, manufacturing, or in customer evaluation
and purchasing decisions. The manufacture of new products involves integrating
complex designs and processes, collaborating with sole source suppliers for key
components, and increasing manufacturing capacities to accommodate demand. A
design flaw, inaccurate forecasting of customer demand, failure to obtain
sufficient quantities of key components, or manufacturing constraints could
adversely affect the Company's operating and financial results. The Company has
experienced product development and manufacturing delays in the past that
adversely affected its financial results and competitive position. There can be
no assurance that the Company will be able to successfully manage the
development and introduction of new products in the future.
New Services
As the Company and its competitors introduce new products, the Company must
ensure that services related to those new products are in place, including the
appropriate resources, training, and management. Proper training is key in
delivering the Company's maintenance and professional services, and a lack of
proper training could have a material adverse effect on the Company's financial
condition and results of operations. In addition, the Company must accurately
forecast the demand for maintenance and professional services, and must manage
its employee base accordingly. Any failure by the Company to properly manage its
new and existing services business could have a material adverse effect on the
Company's financial condition and results of operations.
Emerging Markets
Future revenue growth is partially dependent on successfully developing and
introducing products and services for two primary emerging markets: the
open-systems market and the SAN market.
The open-systems market includes products designed to operate in the UNIX, NT,
and other non-MVS operating environments. Competition in the open-systems market
is aggressive and is based primarily on functionality, technology, performance,
reliability, quality, system scalability, price, product availability, customer
service, and brand recognition. The open-systems market encompasses a broad
range of customers, including customers outside of the Company's traditional
customer base. Many of the Company's potential customers in the open-systems
market purchase their storage requirements as part of a bundled product, which
may provide a competitive advantage to the Company's competitors. The Company
expects to address these competitive factors by delivering storage solutions
that utilize its expertise in tape, disk, and SANs in order to provide customers
with superior functionality, performance, and quality. The Company's customer
base continues to shift to the open-systems market, and there can be no
assurance that the Company's strategy will be effective in expanding its
open-systems market revenue.
The current and potential market for SAN solutions and technologies is
continually evolving, and is characterized by rapidly changing technology and
standards. The Company is still developing the necessary product modifications
and professional services knowledge to successfully implement its SAN solutions
in various operating environments. Customers may be reluctant to adopt new data
storage standards, and competing standards may emerge that will be preferred by
customers. Because this market is new and standards are still being defined, it
is difficult to predict the potential size of the SAN market or the future rate
of adoption of the Company's SAN solutions.
19
Competition
In the third quarter and nine months of 2002, approximately 80% of the Company's
storage products revenue was derived from sales of tape and tape automation
products. Additionally, a significant portion of the Company's service revenue
is derived from the service of tape and tape automation products. One of the key
competitive advantages that the Company's tape and tape automation products have
over the competition's disk storage products is that the Company's tape and tape
automation products store digitized data at a fraction of the cost of disk
storage. The Company must continue to develop and introduce new tape and tape
automation products that reduce the cost of storage at a rate that is similar to
the decline in disk storage costs in order to maintain this competitive
advantage.
Competition has resulted in price erosion in the past, and the Company expects
this trend to continue. The cost of disk storage continues to decrease at a
rapid rate due to competition and new disk drive technologies such as Advanced
Technology Attachment (ATA). The Company recently announced that its ATA
solution, the BladeStore disk subsystem, is scheduled for general availability
in the fourth quarter of 2002. The Company believes that its ATA solution will
complement enterprise-class disk by driving down costs and will complement tape
with faster access. While the Company has unique competitive advantages with
respect to its established customer base and a broad range of storage solution
offerings, the Company's ability to compete in the disk market may be limited by
the resources available for further development of its disk products, the
effectiveness of disk product distribution, the competition, and market
dynamics, including significant annual price erosion.
Price competition for the Company's products and services may have a significant
impact on the Company's gross profit margins. The Company's ability to sustain
or improve total gross margins is significantly dependent on designing,
developing, and manufacturing competitive products, as well as reducing costs
associated with the sourcing of production materials. This pressure on product
margins is expected to increase as the Company's disk revenue shifts from its
enterprise-class products to open-systems products developed and manufactured by
a third party. Storage product gross margins also may be affected in future
periods by inventory reserves and writedowns resulting from rapid technological
changes or delays in gaining market acceptance for products.
The Company continues to purchase and use third-party products in delivering
storage solutions to customers. Some of these third-party products are
manufactured by the Company's competitors, including LTO tape drives and certain
SAN products. The Company may be at a cost disadvantage in acquiring these
products, and gross margins may be adversely affected by the use of these
products in storage solutions.
Indirect Channels
The Company continues to develop its indirect distribution channels, including
original equipment manufacturers (OEMs), value-added distributors (VADs),
value-added resellers (VARs), and other distributors. Increasing the Company's
sales through these indirect channels is critical to the Company's successful
expansion into the open-systems market. There can be no assurance that the
Company will be successful in expanding its indirect channel sales. Furthermore,
there can be no assurance that profit margins on indirect channel sales will not
deteriorate due to competitive pressures. Maintenance revenue also may be
adversely affected in future periods to the extent that customers of these
indirect channel partners elect to purchase maintenance services from vendors
other than the Company.
The Company's ability to forecast future demand for its products may be
adversely affected by unforeseen changes in demand from its indirect channel
partners. The Company's worldwide indirect channel sales were adversely impacted
20
during 2001 by the global economic downturn. Although there was slight
improvement in U.S. indirect channel sales during the nine months of 2002, the
Company has limited visibility to future indirect channel sales and the future
financial condition of its channel partners. The Company's financial results may
be negatively affected if the financial condition of one or more of these
channel partners weakens or if the current economic downturn continues.
Key Personnel
The future success of the Company depends in large part on its ability to
attract, retain, and motivate its management team and other key employees. The
Company faces significant competition for individuals who possess the skills
required to design, develop, manufacture, and market the Company's products and
services. An inability to successfully attract, retain, and motivate these
employees could have an adverse effect on future operating results.
Ability to Develop and Protect Intellectual Property Rights
The Company relies heavily on its ability to develop new intellectual property
rights that do not infringe on the rights of others in order to remain
competitive and to develop and manufacture products that are competitive in
terms of technology and cost. There can be no assurance that the Company will
continue to be able to develop such new intellectual property.
The Company relies on a combination of U.S. patent, copyright, trademark, and
trade secret laws to protect its intellectual property rights. With respect to
certain of the Company's international operations, the Company files patent and
trademark registration applications with foreign governments. However, many
foreign countries do not have intellectual property laws that are as well
developed as those of the United States. The Company enters into confidentiality
agreements relating to its intellectual property with its employees and
consultants. In addition, the Company includes confidentiality provisions in
license and non-exclusive sales agreements with its customers.
Despite all of the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy or otherwise obtain or use the
Company's intellectual property. Monitoring the unauthorized use of the
Company's intellectual property rights is difficult, particularly in foreign
countries. There can be no assurance that the Company will be able to protect
its intellectual property rights, particularly in foreign countries.
Suppliers
The Company has reduced its inventory levels by over 35% during the nine months
of 2002 in its efforts to more effectively manage working capital. The Company
generally uses standard parts and components for its products and believes that,
in most cases, there are a number of alternative, competent vendors for most of
those parts and components. Many nonstandard parts are obtained from a limited
group of suppliers. However, the Company believes there are other vendors who
could produce these parts in satisfactory quantities after a period of
prequalification and product ramping. Certain suppliers have experienced
occasional technical, financial, or other problems that have delayed deliveries
in the past. An unanticipated failure of suppliers to meet the Company's
requirements for an extended period, or the inability to secure comparable
components in a timely manner, could result in a shortage of key components or
products, longer lead times, reduced control over production and delivery
schedules, and an inability to fulfill customer orders in a timely manner. In
addition, the Company will become increasingly dependent on a limited supplier
base as it moves toward a lean manufacturing environment. An inability of a
supplier to deliver required components or products could have a material
adverse effect on revenue and operating results.
21
Sole Source Suppliers
Certain key components and products are purchased from sole source suppliers
that the Company believes are currently the only manufacturers of the particular
components that meet the Company's qualification requirements and other
specifications or for which alternative sources of supply are not readily
available. In the event a sole source supplier did not continue to supply
components, the Company would need to identify and qualify other acceptable
suppliers. This process could take an extended period, and there can be no
assurance that any additional source would become available or would be able to
satisfy production requirements on a timely basis or at a price acceptable to
the Company.
Significant sole source suppliers include Imation Corporation (Imation),
Sanmina-SCI Corporation (Sanmina), and Herald Datanetics Ltd. (HDL). There can
be no assurance that significant sole source suppliers will be able to meet the
Company's ongoing quality or delivery requirements necessary to satisfy customer
needs. Failure to meet these requirements may have a material adverse impact on
the Company's financial condition and results of operations.
Imation is a sole source supplier for the 9840 and 9940 tape media, and the
Company is dependent on Imation to economically produce large volumes of
high-quality tape media at a cost acceptable to the Company and its customers.
In the second quarter of 2002, the Company announced it had outsourced its card
manufacturing to Sanmina. The Company is dependent on Sanmina for the
manufacture of printed circuit boards and for certain other manufacturing and
repair services.
HDL is a sole subcontractor that manufactures a key component used in certain
tape products. HDL is located in the People's Republic of China (PRC). The
Company's dependence on HDL is subject to additional risks beyond those
associated with other sole source suppliers, including the lack of a
well-established court system or acceptance of the rule of law in the PRC, the
degree to which the PRC permits economic reform policies to continue, the
political relationship between the PRC and the United States, and broader
political and economic factors. To date, the Company has not experienced any
material problems with HDL; however, there can be no assurance that the Company
will not experience any material problems with HDL in the future.
Manufacturing
The Company manufactures and assembles a significant portion of its products in
Puerto Rico, and the Company's ability to perform these activities may be
significantly affected by weather-related risks beyond the control of the
Company. If the Puerto Rico facility were significantly affected by adverse
weather, the Company believes it could relocate operations within a reasonable
period of time without substantial delays or disruption. However, there can be
no assurance that the Company would be able to relocate its Puerto Rico
operations in a timely manner to avoid a material adverse impact on its
financial condition or results of operations.
International Business
The Company's international business may be affected by changes in demand
resulting from global and localized economic, business, and political
conditions. The Company is subject to the risks of conducting business outside
the United States, including adverse political and economic conditions;
impositions of, or changes in, tariffs, quotas, and legislative or regulatory
requirements; difficulty in obtaining export licenses; potentially adverse
taxes; the burdens of complying with a variety of foreign laws; and other
factors outside the Company's control. The Company expects these risks to
increase in the future as it expands its operations in eastern Europe, Asia, and
Latin America. There can be no assurance that these factors will not have a
22
material adverse effect on the Company's business or financial results in the
future.
Restructuring Activities
The Company's ability to generate revenue growth during 2001 and the nine months
of 2002 was adversely affected by the slowdown in the global economy as some
customers delayed purchase decisions, reevaluated their information technology
spending budgets, required higher purchase approval levels, and reduced capital
expenditures by maximizing the current capacities of their data storage
equipment. The Company does not currently foresee any significant improvement in
information technology spending during the fourth quarter of 2002 or during
2003. In light of this economic environment, the Company has implemented various
cost-saving measures, including reduced discretionary spending, delayed employee
merit increases, and the outsourcing of certain manufacturing and development
activities. There can be no assurance that a prolonged economic downturn will
not have additional adverse effects on the Company's future revenue or operating
results. Furthermore, there can be no assurance that these cost-saving measures
will be successful or sufficient to allow the Company to continue to generate
improved operating results in future periods. The Company has recognized
significant restructuring charges in the past and it is possible that changes in
the Company's business or its industry may necessitate restructuring activities
in the future. The necessity for restructuring activities may result in expenses
that adversely affect results of operations and may require incremental cash
payments.
Earnings Fluctuations
The Company's financial and operating results may fluctuate from quarter to
quarter for a number of reasons. Many of the Company's customers undertake
detailed procedures relating to the evaluation, testing, implementation, and
acceptance of the Company's products, which results in a variable sales cycle
and makes it difficult to predict if or when revenue will be earned.
Furthermore, gross margins may be adversely impacted in an effort to complete
the sales cycle.
In the past, the Company's results have followed a seasonal pattern, which
reflects the tendency of customers to make their purchase decisions at the end
of a calendar year. During any fiscal quarter, a disproportionately large
percentage of the total product sales are earned in the last weeks or days of
the quarter. It is difficult to predict the extent to which these historical
trends will continue in the future, especially in light of the recent slowdown
in the global economy.
A number of other factors also may cause revenue to fall below expectations,
such as product and technology transitions announced by the Company or its
competitors, delays in the availability of new products, inability to
manufacture to meet customer demand, changes in the purchasing patterns of the
Company's customers and distribution partners, or adverse global economic
conditions. The Company has recently experienced changes in the purchasing
patterns of its customers in the form of smaller purchases, delayed purchase
decisions, and higher level approvals. The mix of sales among the Company's
business segments and sales concentration in particular geographic regions may
carry different gross profit margins and may cause the Company's operating
margins to fluctuate. These factors make the forecasting of revenue inherently
difficult. Because the Company plans its operating expenses on expected revenue,
a shortfall in revenue may cause earnings to be below expectations in that
period.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this Item 3 is included in the section above
entitled "Market Risk Management."
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined under Rule 13a-14 promulgated under the Securities Exchange Act of
1934, within 90 days of the filing date of this report. Based on their
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced above.
24
STORAGE TECHNOLOGY CORPORATION
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In 1994, Stuff Technology Partners II, a Limited Partnership (Stuff), filed suit
in Boulder County, Colorado, District Court alleging that the Company breached a
1990 settlement that had resolved earlier litigation between the parties
involving an unsuccessful optical disk drive storage development project. The
suit seeks injunctive relief and damages. In September 2002, a jury confirmed
the Company's interpretation of the settlement agreement that the limitations on
the Company's use of the development project technology is restricted to its use
in optical disk drives. Remaining claims to be tried include Stuff's allegation
that the Company did not transfer all of the technology to it as required under
the 1990 settlement agreement and its allegation that the Company is using the
technology in optical disk drives. The Company will vigorously defend these
claims and, at this time, the Company believes that the likelihood of a material
adverse result on the remaining claims is remote.
The Company also is involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this Quarterly Report on Form
10-Q or are incorporated by reference into this Quarterly Report on Form 10-Q:
3.1 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (previously filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.3 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.4 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 25, 1999, filed on August 9, 1999, and
incorporated herein by reference)
3.5 Restated Bylaws of Storage Technology Corporation, as amended through
November 11, 1998 (previously filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference)
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
26
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1996, filed on August 12, 1996, and incorporated herein by
reference)
10.5(1) Storage Technology Corporation Flexible Option Plan, dated December
2001 (previously filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 2001, filed on
March 4, 2002, and incorporated herein by reference)
10.6(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.7(1) CEO Employment Agreement, dated July 11, 2000, between the Company
and Patrick J. Martin (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2000, filed on August 11, 2000, and incorporated herein by
reference)
10.8(1) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol (previously filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 2001, filed on November 8, 2001, and incorporated
herein by reference)
10.9(1) Restricted Stock Award Agreement, dated as of September 27, 2001, by
and between the Company and Robert S. Kocol (previously filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2001, filed on March 4, 2002, and
incorporated herein by reference)
10.10(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.11(1) Offer Letter, dated February 9, 2001, from the Company to Jill F.
Kenney (previously filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.12(1) Offer Letter, dated February 9, 2001, from the Company to Roger
Gaston (previously filed as Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.13(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.14(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
27
10.15(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.16(1) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
(previously filed as Exhibit 10.28 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.17(1) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
(previously filed as Exhibit 10.29 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.18(1) Offer Letter, dated December 10, 2001, between the Company and Thomas
Major (previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002, and incorporated herein by reference)
10.19(1) Letter Agreement, dated July 31, 2001, between the Company and Pierre
Cousin (previously filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002, and incorporated herein by reference)
10.20 Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager (previously filed as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.21 Security Agreement, dated as of October 10, 2001, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as
Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.22 Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent (previously filed as Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
28, 2001, filed on November 8, 2001, and incorporated herein by
reference)
10.23(1) Form of Executive Severance Agreement (previously filed as Exhibit
10.32 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 2002, filed on May 13, 2002, and incorporated
herein by reference)
10.24 Master Services Agreement (MSA), between each of the Company,
Electronic Data Systems Corporation, and EDS Information Services
L.L.C., dated as of April 1, 2002 (previously filed as Exhibit 10.33
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2002, filed on May 13, 2002, and incorporated herein
by reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
28
10.25 Authorization Letter #1 pursuant to the MSA, dated April 1, 2002
(previously filed as Exhibit 10.34 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 2002, filed on
May 13, 2002, and incorporated herein by reference)
10.26 Authorization Letter #2 pursuant to the MSA, dated April 1, 2002
(previously filed as Exhibit 10.35 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 2002, filed on
May 13, 2002, and incorporated herein by reference)
10.27 Master Secondary Storage Services Agreement, between the Company and
Electronic Data Systems Corporation, dated March 29, 2002 (previously
filed as Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 29, 2002, filed on May 13, 2002,
and incorporated herein by reference)
10.28(1) Offer Letter, dated June 25, 2002, between the Company and Mark
Roellig (previously filed as Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 28, 2002, filed
on August 12, 2002, and incorporated herein by reference)
10.29(1,2) Extension Agreement, dated August 28, 2002, between the Company and
Pierre Cousin
10.30(1,2) Extension Agreement, dated September 30, 2002, between the Company
and Pierre Cousin
99.1(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Current Report on Form 8-K, filed on July 24, 2002, relating to an Item 5, Other
Events and Regulation FD Disclosure, regarding an announcement by the Company of
its results of operations for the fiscal quarter ended June 28, 2002, including
a copy of the script of the prepared remarks of the Company's Chief Executive
Officer and Chief Financial Officer from a conference call regarding such
results of operation.
Current Report on Form 8-K, filed on August 13, 2002, relating to an Item 5,
Other Events and Regulation FD Disclosure, regarding an announcement by the
Company that the Chief Executive Officer and the Chief Financial Officer had
filed sworn statements with the Securities and Exchange Commission in compliance
with SEC Order No. 4-460.
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
29
SIGNATURES
Pursuant to the requirements 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.
STORAGE TECHNOLOGY CORPORATION
(Registrant)
November 11, 2002 /s/ ROBERT S. KOCOL
--------------------------------- ---------------------------------------
(Date) Robert S. Kocol
Corporate Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 11, 2002 /s/ THOMAS G. ARNOLD
--------------------------------- ---------------------------------------
(Date) Thomas G. Arnold
Vice President and Corporate Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Patrick J. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Storage
Technology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
30
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ PATRICK J. MARTIN
---------------------
Patrick J. Martin
Chairman, President and CEO
I, Robert S. Kocol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Storage
Technology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
31
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ ROBERT S. KOCOL
-------------------
Robert S. Kocol
Corporate Vice President, Chief Financial Officer
32
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation of Storage Technology
Corporation dated July 28, 1987 (previously filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 2000, filed on February 21, 2001, and incorporated
herein by reference)
3.2 Certificate of Amendment dated May 22, 1989, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.3 Certificate of Second Amendment dated May 28, 1992, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2000, filed on February 21, 2001, and
incorporated herein by reference)
3.4 Certificate of Third Amendment dated May 21, 1999, to the Restated
Certificate of Incorporation dated July 28, 1987 (previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 25, 1999, filed on August 9, 1999, and
incorporated herein by reference)
3.5 Restated Bylaws of Storage Technology Corporation, as amended through
November 11, 1998 (previously filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated November 19, 1998, and incorporated
herein by reference)
4.1 Specimen Certificate of Common Stock, $0.10 par value of Registrant
(previously filed as Exhibit (c)(2) to the Company's Current Report
on Form 8-K dated June 2, 1989, and incorporated herein by reference)
10.1(1) Storage Technology Corporation Amended and Restated 1987 Employee
Stock Purchase Plan, as amended (previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 2001, filed on August 9, 2001, and incorporated herein
by reference)
10.2(1) Storage Technology Corporation Amended and Restated 1995 Equity
Participation Plan (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed on March 10, 2000, and incorporated herein by reference)
10.3(1) Storage Technology Corporation Management by Objective Bonus Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 2001, filed on
May 14, 2001, and incorporated herein by reference)
10.4(1) Storage Technology Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1996, filed on August 12, 1996, and incorporated herein by
reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
33
10.5(1) Storage Technology Corporation Flexible Option Plan, dated December
2001 (previously filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 2001, filed on
March 4, 2002, and incorporated herein by reference)
10.6(1) Agreement between the Company and Gary Francis, dated August 19, 1997
(previously filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, filed on March
6, 1998, and incorporated herein by reference)
10.7(1) CEO Employment Agreement, dated July 11, 2000, between the Company
and Patrick J. Martin (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2000, filed on August 11, 2000, and incorporated herein by
reference)
10.8(1) Severance Agreement, dated as of July 1, 2001, between the Company
and Robert S. Kocol (previously filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 2001, filed on November 8, 2001, and incorporated
herein by reference)
10.9(1) Restricted Stock Award Agreement, dated as of September 27, 2001, by
and between the Company and Robert S. Kocol (previously filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2001, filed on March 4, 2002, and
incorporated herein by reference)
10.10(1) Offer Letter, dated May 10, 2001, from the Company to Michael McLay
(previously filed as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
10.11(1) Offer Letter, dated February 9, 2001, from the Company to Jill F.
Kenney (previously filed as Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.12(1) Offer Letter, dated February 9, 2001, from the Company to Roger
Gaston (previously filed as Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2001,
filed on May 14, 2001, and incorporated herein by reference)
10.13(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $390,000 (previously filed as
Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.14(1) Promissory Note, dated May 11, 2001, from Michael McLay to the
Company, in the principal amount of $160,000 (previously filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 2001, filed on August 9, 2001, and
incorporated herein by reference)
10.15(1) Form of LEAP Participation Agreement, dated April 30, 2001
(previously filed as Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 2001, filed on
August 9, 2001, and incorporated herein by reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
34
10.16(1) Offer Letter, dated July 16, 2001, from the Company to Roy Perry
(previously filed as Exhibit 10.28 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.17(1) Offer Letter, dated June 27, 2001, from the Company to Angel Garcia
(previously filed as Exhibit 10.29 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2001, filed
on November 8, 2001, and incorporated herein by reference)
10.18(1) Offer Letter, dated December 10, 2001, between the Company and Thomas
Major (previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002, and incorporated herein by reference)
10.19(1) Letter Agreement, dated July 31, 2001, between the Company and Pierre
Cousin (previously filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 2001,
filed on March 4, 2002, and incorporated herein by reference)
10.20 Credit Agreement, dated as of October 10, 2001, among the Company,
the several financial institutions thereto, Bank of America, N.A., as
letter of credit issuing bank and sole administrative agent for the
Banks, Key Corporate Capital, Inc. as Documentation Agent, Fleet
National Bank as Syndication Agent, and Banc of America Securities
LLC as sole lead arranger and sole book manager (previously filed as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.21 Security Agreement, dated as of October 10, 2001, by and among the
Company, Bank of America, N.A., as Collateral Agent for itself and
other Secured Parties referred to therein (previously filed as
Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 28, 2001, filed on November 8, 2001,
and incorporated herein by reference)
10.22 Guaranty, dated as of October 10, 2001, by StorageTek Holding
Corporation, in favor of the Banks party to a certain Credit
Agreement and Bank of America, N.A., as Agent and Issuing Bank and
Collateral Agent (previously filed as Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
28, 2001, filed on November 8, 2001, and incorporated herein by
reference)
10.23(1) Form of Executive Severance Agreement (previously filed as Exhibit
10.32 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 2002, filed on May 13, 2002, and incorporated
herein by reference)
10.24 Master Services Agreement (MSA), between each of the Company,
Electronic Data Systems Corporation, and EDS Information Services
L.L.C., dated as of April 1, 2002 (previously filed as Exhibit 10.33
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2002, filed on May 13, 2002, and incorporated herein
by reference)
10.25 Authorization Letter #1 pursuant to the MSA, dated April 1, 2002
(previously filed as Exhibit 10.34 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 2002, filed on
May 13, 2002, and incorporated herein by reference)
------------------------------
1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
35
10.26 Authorization Letter #2 pursuant to the MSA, dated April 1, 2002
(previously filed as Exhibit 10.35 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 2002, filed on
May 13, 2002, and incorporated herein by reference)
10.27 Master Secondary Storage Services Agreement, between the Company and
Electronic Data Systems Corporation, dated March 29, 2002 (previously
filed as Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 29, 2002, filed on May 13, 2002,
and incorporated herein by reference)
10.28(1) Offer Letter, dated June 25, 2002, between the Company and Mark
Roellig (previously filed as Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 28, 2002, filed
on August 12, 2002, and incorporated herein by reference)
10.29(1,2) Extension Agreement, dated August 28, 2002, between the Company and
Pierre Cousin
10.30(1,2) Extension Agreement, dated September 30, 2002, between the Company
and Pierre Cousin
99.1(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2(2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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1 Contract or compensatory plan or arrangement in which directors and/or
officers participate.
2 Indicates exhibits filed with this Quarterly Report on Form 10-Q.
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