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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 1-7534
STORAGE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0593263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One StorageTek Drive, Louisville, 80028-4309
Colorado
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 673-5151
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock ($.10 par value), including
related preferred stock purchase rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $682,764,323 based on the last reported sale price of the common
stock of the registrant on the New York Stock Exchange's consolidated
transactions reporting system on February 29, 2000. For purposes of this
disclosure, shares of common stock held by persons who hold more than 5% of the
outstanding common stock and common stock held by executive officers and
directors of the registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination is
not necessarily conclusive for other purposes.
As of February 29, 2000, there were 100,729,814 shares of common stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days of its
fiscal year ended December 31, 1999. Portions of the registrant's definitive
proxy statement for its annual meeting of stockholders to be held on May 18,
2000, are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
ALL ASSUMPTIONS, ANTICIPATIONS, EXPECTATIONS AND FORECASTS CONTAINED IN THE
FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCT AND BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND UNCERTAINTIES.
SOME OF THESE RISKS ARE DETAILED IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT
MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN REPRESENT A GOOD-FAITH ASSESSMENT OF THE COMPANY'S
FUTURE PERFORMANCE FOR WHICH MANAGEMENT BELIEVES THERE IS A REASONABLE BASIS.
THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION ON FORECASTS
CONTAINED HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.
HISTORICAL STATEMENTS MADE HEREIN ARE ACCURATE ONLY AS OF THE DATE OF FILING
THIS FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION AND MAY BE RELIED
UPON ONLY AS OF THAT DATE.
GENERAL
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Storage Technology Corporation ("StorageTek" or the "Company") designs,
manufactures, markets and maintains information storage products, storage
services and storage management software. The Company provides customers with a
broad range of storage products and services, including tape, disk and network
products; storage services, including maintenance and professional services; and
storage management software.
The Company's products are used by a range of customers that include large
multinational companies, small businesses, and governmental agencies,
encompassing a wide range of industry sectors, including financial, retail,
telecommunications, transportation, manufacturing and services, as well as
educational, scientific and medical institutions located around the world. The
Company markets its products and services through its direct sales organization
and indirect sales channels, including original equipment manufacturer (OEM),
value-added distributor (VAD), value-added reseller (VAR) and other distribution
arrangements.
StorageTek's strategy is focused on providing information-centric solutions that
allow the customer to collect, move, store, share and protect digital
information. The Company's strategy of delivering solutions to customers is
founded on a virtual, intelligent storage architecture (VISTA) technology model,
which is grounded in an industry standard that permits storage management that
is compatible with a wide range of types and manufacturers of computers. The
VISTA model encompasses: (i) systems administration; (ii) applications; (iii)
storage management; (iv) storage administration; (v) storage access; and (vi)
physical storage.
The key features of the Company's VISTA model include open storage solutions
that allow the customer to mix-and-match products from a number of vendors;
intelligent storage solutions that contain embedded intelligence apart from the
server; and integrated storage solutions that provide customers with a complete,
scalable product hierarchy and storage management. StorageTek provides many of
the components in the VISTA model and has created alliances with other
manufacturers, developers, distributors and suppliers to provide customers with
total information-centric storage solutions. As a result, it is possible for
other companies to be at various times collaborators, customers and competitors
in different markets.
The Company was incorporated in Delaware in 1969. Its principal executive
offices are located at One StorageTek Drive, Louisville, Colorado 80028,
telephone (303) 673-5151.
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REVENUE AND GROSS PROFIT BY BUSINESS SEGMENT
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REVENUE AND GROSS PROFIT BY BUSINESS SEGMENT
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER
1999 1998 1997
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Revenue
Storage products $1,465,216 $1,520,647 $1,495,038
Storage services 718,844 633,821 584,016
Storage management software 184,171 103,754 65,602
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Total revenue $2,368,231 $2,258,222 $2,144,656
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Gross profit
Storage products $ 592,822 $ 688,050 $ 669,914
Storage services 221,669 273,662 265,521
Storage management software 128,493 78,698 37,691
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Total gross profit $ 942,984 $1,040,410 $ 973,126
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Additional information concerning revenue and profit attributable to each of the
Company's business segments and geographic areas is found in Part II, Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," and in Part IV, Note 14, of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS," of this Form 10-K, which information is incorporated by reference
into this Part I, Item 1.
PRINCIPAL PRODUCTS
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StorageTek is currently organized into three reportable business segments:
storage products; storage services; and storage management software. The
Company's storage product offerings include tape, disk and network products.
Storage services offerings include maintenance services for StorageTek and
third-party storage products, and storage consulting and integration services.
The storage management software segment sells and licenses software tools and
applications for improving storage product performance and simplifying
information storage management.
STORAGE PRODUCTS
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The Company's storage products, which accounted for 62% of total revenue in
1999, include a range of tape, disk and network products that serve as
components of the Company's VISTA model. The Company's storage products are
designed for the mainframe and client-server markets, including the developing
storage area network (SAN) market.
TAPE PRODUCTS
The Company's tape products historically have generated significant revenue for
the Company and are engineered to provide reliable, cost-effective storage of
digital information. The Company experienced a shift in its tape customer base
during 1999 from the mainframe to the client-server marketplace. Sales of
client-server tape automation products grew 75% during 1999 with the fourth
quarter of 1999 representing the first quarter in which sales of client-server
tape products exceeded sales of mainframe tape products. In December 1998, the
Company announced the availability of its 9840 product, a high-performance,
high-capacity tape drive. The 9840 addresses both the mainframe and
client-server markets. The TimberWolf automated tape library product family, a
low cost, reliable storage solution for the client-server market, first became
available in 1996. The
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Company also offers TimberLine, a high-performance 36-track cartridge subsystem
which first became available in the fourth quarter of 1994, and PowderHorn 9310
Automated Cartridge System (ACS), a high-performance, high-capacity cartridge
library which became available in 1993, and other earlier generation tape
products targeted for the mainframe marketplace.
The Company is currently developing new tape products and enhancements, all of
which are in the design, preliminary engineering or engineering validation
testing phase and no availability dates have been announced. See Part II, Item
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- New Products, Services
and Software; Emerging Markets," which is incorporated by reference into this
Part I, Item 1, for a discussion of certain risks associated with the
development and introduction of new products that may affect future results.
DISK PRODUCTS
The Company's disk product offerings include a family of disk systems that offer
a spectrum of capacity, performance, connectivity and price. The Company's disk
product offerings include the 9393 Shared Virtual Array (SVA), which utilizes
virtual disk technology and is currently targeted for the mainframe and
client-server markets. The 9393 is designed to provide high-performance,
scalability and continuous online data availability and first became available
in 1999. In February 2000, the Company announced the availability of the 9500
SVA, the next generation of SVA disk products, targeted for the client-server
marketplace.
In addition, the Company also offers the OPENstorage Disk product family, which
is designed for the client-server disk market. The OPENstorage products are
designed to provide high-performance, high-availability, scalable physical
storage, and first became available in the third quarter of 1996. The
OPENstorage Disk products are distributed by the Company's direct sales force
and through indirect channels. From the third quarter of 1996 through 1999, the
Company's disk products were principally sold through a worldwide, non-exclusive
OEM agreement with International Business Machines Corporation (IBM). In 1999,
the Company focused on shifting its sales activities from its OEM relationship
with IBM to the direct sales channel. The Company does not anticipate any
significant sales revenue from IBM in 2000. Under the OEM arrangement with IBM,
the Company developed new disk technology, some of which is owned by IBM, and
IBM has granted the Company both royalty-bearing and royalty-free licenses to
use this technology. There can be no assurances that the Company will be
successful in developing, introducing, or marketing new disk products and
enhancements, or establishing cost-effective, high-volume distribution channels
for its disk products.
NETWORK PRODUCTS
A key element of the Company's VISTA model is the Company's SAN strategy. A SAN
allows the sharing of information and storage devices across a network. The
Company's network products are designed to provide device interface and host
interface with the physical storage and the connectivity infrastructure
necessary to enable the integration of network-based storage management
functions. The Company's principal network products include the StorageNet
family of products, which are designed to provide high-performance, high-speed
connectivity between local and wide-area networks and serve as the foundation of
StorageTek's SAN infrastructure. The first StorageNet products became available
in 1996.
The Company is currently developing new network products and enhancements
intended to address the developing SANs marketplace. All of these products and
enhancements are in the design, preliminary engineering or engineering
validation testing phase and no availability dates have been announced. See Part
II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- New Products,
Services and Software; Emerging Markets," which is incorporated by
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reference into this Part I, Item 1, for a discussion of certain risks associated
with the development and introduction of new products that may affect future
results, as well as risks associated with the developing SANs market.
STORAGE SERVICES
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The Company's storage services include maintenance services, integration
services, storage consulting and managed storage services. The Company provides
maintenance services for both StorageTek storage products and third-party
equipment around the world, using a combination of service engineers, remote
diagnostic tools, online and telephone assistance, and contractual agreements
with third-party service providers. In 1999, the Company's storage services
revenue accounted for approximately 30% of total revenue.
In the past, the Company's maintenance services had been the principal source of
service revenue. The Company generally warrants its products for a specified
period of time, after which it services products for a fee under maintenance
agreements. As a result of competitive pressures, many of the Company's products
may include extended warranty periods. Extending warranty periods may reduce
future maintenance revenue and put downward pressure on profit margins. The
Company's maintenance revenue also may be adversely affected by the shift in the
Company's customer base from the mainframe to the client-server marketplace, as
well as the Company's increasing reliance on indirect distribution channels for
its products, as some indirect distributors provide service for the products
that they sell.
The Company invested significant resources in 1998, and the first three quarters
of 1999, in programs designed to expand its service business. These programs
included a broad range of consulting and integration service offerings,
developing pre-packaged solutions customized to specific customer application
needs, and managed storage service offerings. However, certain of these programs
did not meet the Company's expectations regarding profitability. The Company
intends to limit its consulting and integration service offerings to supporting
sales of SAN virtual products and software in the future. The Company is
currently completing its open commitments with respect to its consulting
integration services which will not be continued. While the Company anticipates
service revenue will decline in 2000 as it reduces its investments in or
eliminates these service offerings, these changes are expected to improve
profitability as these business activities have generated lower gross margins.
With respect to its managed storage service business, the Company anticipates
that it will seek some type of alliance, joint-venture or other structure
through which it can gain access to capital in return for, among other
possibilities, equity participation or a contract to supply certain hardware and
software used in this business. There can be no assurances that the Company will
be successful in its initiative to enter into some type of alliance,
joint-venture or other structure through which it can gain access to the capital
necessary to provide, directly or indirectly, managed storage services.
STORAGE MANAGEMENT SOFTWARE
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The Company's storage management software segment sells and licenses software
tools and applications for improving storage product performance and simplifying
information storage management. Storage management is a fundamental layer of the
VISTA model and the Company believes that its storage management software will
be important to its competitiveness in the SAN market. The Company's approach is
based on delivering open, intelligent and integrated storage solutions, which
will require a comprehensive storage management strategy. The Company intends to
continue to develop software tools and will work with other software vendors to
enable it to deliver a total solution. In 1999, storage management software
accounted for approximately 8% of total revenue.
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The Company offers the Virtual Storage Manager (VSM), a software-driven data
storage management solution designed to improve performance, cartridge
utilization and overall storage management using StorageTek's storage products.
VSM is engineered to support the demands created by data center consolidation,
electronic commerce, data warehousing and enterprise resource planning. VSM
first became available in December 1998.
The Company also offers SnapShot, software designed to provide virtual
duplication and significantly reduce central processing unit (CPU) and channel
utilization costs associated with data movement. The Company's SnapShot software
is designed solely to operate with its SVA product family. SnapShot software
currently operates with the 9393 SVA and on February 15, 2000, the Company
announced the availability of SnapShot for its 9500 SVA. The Company anticipates
that the SnapShot software will be compatible with any SVA that the Company
develops in the future. The SnapShot product was first released in 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS THAT MIGHT AFFECT FUTURE RESULTS -- New Products, Services
and Software; Emerging Markets," for a discussion of certain risks associated
with the development and introduction of new software that may affect future
results.
BACKLOG
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As of December 31, 1999, the storage product order backlog was approximately $48
million, compared to year-end amounts of approximately $42 million in 1998, and
$27 million in 1997. In addition to the backlog amount, the Company had
approximately $61 million of storage product inventory held by customers on
evaluation as of December 31, 1999, compared to $64 million as of December 25,
1998, and $51 million on December 26, 1997. The order backlog for storage
management software products on December 31, 1999, was approximately $8.5
million, and at year-end 1998 and 1997 was $4.5 million and $0.2 million,
respectively. In addition to the backlog amount, the Company had approximately
$10.5 million of storage software inventory held by customers on evaluation as
of December 31, 1999.
Backlog amounts are calculated on an "if sold" basis and include orders from
end-users, OEMs, VADs, VARs and distributors for products that StorageTek
expects to deliver during the following 12 months. Product units held by
customers on evaluation or covered by letters of intent are not included in
backlog amounts. Unfilled orders and orders with respect to inventory held by
customers on evaluation may be canceled by the customer. Accordingly, backlog
levels and inventory held by customers on evaluation are not reliable indicators
of future results. There can be no assurance that orders in backlog and
inventory held by customers on evaluation will ultimately be recognized as
revenue. See Note 1 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" of this Form
10-K for a discussion of the Company's revenue recognition accounting policy.
MARKETING AND DISTRIBUTION
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StorageTek markets its products and services globally, through a combination of
a direct sales organization and indirect sales channels. The Company maintains a
presence, directly or indirectly, in most major cities in the world. The Company
operates sales and service offices throughout the United States and Europe, as
well as Australia, Brazil, Canada, China, Hong Kong, Japan, Korea, Malaysia,
Mexico, Singapore and New Zealand, and sells its products and services through
independent distributors, sometimes in tandem with direct sales and service
operations, located in Africa, Asia, Europe, South America and New Zealand.
The Company's direct sales organization includes sales representatives, service
engineers, system engineers, system integrators, and administrative support
staff. The Company's direct sales outside the United States are generally made
by foreign sales subsidiaries. The Company's indirect channels include OEMs,
VARs, master resellers who supply product and services to VARs, VADs, system
integrators that integrate StorageTek products with other hardware and software
and
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independently provide marketing and maintenance services to customers, and
independent distributors. Indirect channel sales account for a significant
portion of the Company's product sales revenue. In 1998 and 1999, the Company's
indirect distribution channel accounted for approximately 49% and 43%,
respectively, of the Company's total product and software revenue. Excluding the
Company's OEM relationship with IBM for both years; however, revenue from
indirect distribution channels increased from 22% in 1998 to 30% in 1999 of the
Company's total product and software revenue. As previously discussed under
"Principal Products -- Disk Products," the Company does not anticipate any
significant sales revenue from IBM in 2000. Some of the OEM alliances currently
in place for the sale of the Company's products include Bull Alliance Compagnie,
Dell Computer Corporation, Hewlett-Packard Company, NEC Corporation, NCR
Corporation, Siemens Nixdorf, SGI, Sun Microsystems, Inc. and Unisys
Corporation. The Company's accounting policies with respect to revenue
recognition for indirect distribution channels differs from that used for direct
sales. See Note 1 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" of this Form
10-K for a discussion of the Company's revenue recognition policies.
In connection with its current restructuring activities, the Company is
implementing changes to its sales model for the United States and Canada that
the Company expects will improve market penetration, increase sales
productivity, reduce marketing expense, and expand the use of the indirect sales
channel. This new sales model is intended to provide better coverage for new and
existing end-user customers as well as enhancing reseller, distributor and OEM
partnerships. The Company has recently established new field sales geographies
to better serve Fortune 500 customers with enterprise-level product and service
requirements. A newly formed Growth Markets sales unit is intended to address
the needs of small and medium-sized customers, with particular emphasis on
internet and e-commerce businesses.
There can be no assurance that the Company will be successful in its efforts to
implement its new sales model within the United States and Canada during the
year 2000 or that the new emphasis on indirect sales channels will result in
increased sales or profitability over the longer term. Further, the Company may
experience disruptions to its sales as it implements this new sales model and
compensation structure. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MIGHT
AFFECT FUTURE RESULTS -- Changes in Sales Model for the United States and
Canada," for a discussion of certain risks associated with the implementation of
the Company's new sales model.
Revenue from outside the United States accounted for approximately 41% of total
revenue in 1999, 37% in 1998, and 34% in 1997, which includes sales to
end-users, resellers and distributors. In each of these three fiscal periods,
over two-thirds of the Company's revenue originating outside the United States
was derived from Europe, with the majority of the balance coming from Japan,
Australia and Canada. The Company is subject to various risks associated with
conducting business outside the U.S. See Part II, Item 7, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- International Operations and Market Risk Management/Foreign
Currency Exchange Risk," for a discussion of risks associated with operations in
foreign countries.
MANUFACTURING AND MATERIALS
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The Company's primary manufacturing and assembly facilities are located in
Puerto Rico and Colorado. The Company also performs limited manufacturing in
Toulouse, France. All of the Company's manufacturing facilities are currently in
compliance with the ISO 9001 or 9002 international quality standards.
StorageTek manufactures certain key components for its products. In addition, a
substantial portion of the Company's production costs is related to the purchase
of subassemblies, parts and components for its products from vendors located
within and outside the United States. The balance of the Company's production
costs relates to in-house manufacturing, assembly and testing. In
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particular, the Company performs certain critical steps in the manufacture of
its read/write heads for the 9840 tape drive product. The successful manufacture
of these read/write heads gives the Company a competitive edge in that the
Company has developed key proprietary design and manufacturing technologies. The
sophisticated nature of the exacting manufacturing process steps requires tight
physical, electrical and chemical tolerances. The Company relies upon its
skilled personnel and makes significant capital investments in order to
successfully manufacture these read/write heads. Even within a cleanroom
environment, minor equipment malfunctions in any one of the many manufacturing
process steps due to factors such as extraneous chemical contaminants, ambient
particulates, power surges, optical misalignments, timing or temperature
variations could halt production for an indeterminate period of time.
Certain of the parts and components included in the Company's products are
obtained from a single source or a limited group of suppliers. In particular,
IBM, Imation, Sumitomo and Herald Datanetics have been identified as single
source suppliers of the Company. Dependence upon single or limited source
vendors involves a number of risks, including the possibility of a shortage of
key components, longer lead times, and reduced control over production and
delivery schedules.
The Company has long-term supply contracts with certain vendors and suppliers;
the remaining parts and components are obtained by delivering purchase orders to
vendors specifying the required components. These vendors are not obligated to
supply products for an extended period at specific quantities and prices. See
Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS -- Sole
Source Suppliers," of this Form 10-K for a discussion of factors that may affect
the Company's ability to obtain materials from sole source suppliers, which
information is incorporated by reference into this Part I, Item 1.
COMPETITION
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The markets for the Company's products, services and software are intensely
competitive and are subject to continuous, rapid technological change, frequent
product performance improvements, short product life cycles and aggressive
pricing. The Company competes in a number of markets that include a broad
spectrum of customers primarily on the basis of technology, product
availability, performance, quality, applications and industry solutions,
reliability, price, distribution and customer service. The Company believes that
its ability to compete depends on a number of factors, both within and outside
of its control. These factors include the price and cost of the Company's and
its competitors' product offerings, the timing and success of new products and
applications, product introductions by the Company's competitors, and general
economic and business conditions within and outside the United States. Strong
competition has resulted in price reductions in the past and the Company expects
this trend to continue.
The Company expects that the markets for its products, services and software,
and its competitors within such markets, will continue to change in response to
shifting customer storage requirements and technological advances. The Company's
competitors include, among others, Compaq Computer Corporation, EMC Corporation,
Hewlett-Packard Company, Hitachi Ltd., IBM, Quantum Corporation, and Sun
Microsystems, Inc. A number of the Company's competitors have significantly
greater financial resources than the Company.
The Company is focusing significant resources on product offerings for the
client-server market. Competition in the client-server market is aggressive and
is based primarily upon performance, quality, system scalability, price, service
and name recognition. The client-server market includes a wide range of
customers including customers outside of the Company's traditional customer
base. Many of the Company's potential customers in the client-server market
purchase their storage requirements as part of a bundled product, which may
provide a competitive advantage to the Company's rivals. The Company expects to
address these competitive factors through its SAN strategy, as well as through
the delivery of storage solutions which provide customers with superior
function, performance and quality. The Company anticipates that the competition
in the SAN market
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will intensify in the future as its competitors aggressively seek to position
themselves to take advantage of the shift in customer demands. The SAN market is
characterized by various alliances formed to promote industry standards and
deliver tested, interoperable SAN technology. The Company is a member of several
associations, which also include the Company's competitors. In addition, a
number of the Company's competitors in the product, services and software
markets have formed alliances with the stated objective of developing
interoperable SAN solutions. For example, 3Com Corporation, Legato Systems, Inc.
and MTI Technology Corporation have formed an alliance to deliver tested SAN
solutions. In the storage management software market, the Company competes with
vendors with which it has established relationships, including Legato Systems,
Inc. and VERITAS Software Corporation.
NEW PRODUCT DEVELOPMENT
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StorageTek invests substantial resources to develop new products, software and
enhancements. In 1999, 1998 and 1997, the Company incurred research and
development costs for product and software development activities of
approximately $278 million, $235 million and $210 million, respectively. In
order to expand the Company's access to new technologies and reduce the amount
of time necessary to bring new products to market, the Company in the past has
acquired other companies and has entered into joint development and other
similar relationships. In 1999 and 1998, the Company received approximately $10
million and $50 million, respectively, of research and product development
funding from third parties.
As of December 31, 1999, approximately 1,200 employees were engaged on a
full-time basis in engineering and product development activities, primarily at
several facilities located in the United States and at facilities located in
France and Australia. For further discussion of risk factors concerning product
development, see Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE
RESULTS -- New Products, Services and Software; Emerging Markets," of this Form
10-K, which information is incorporated by reference into the Part I, Item 1.
PATENTS AND LICENSES
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StorageTek's ability to compete is affected by its ability to protect its
proprietary information. StorageTek protects its proprietary rights through a
combination of patents, trademarks, copyrights, confidentiality procedures,
trade secret laws and licensing arrangements. The Company's policy is to apply
for patents, or other appropriate proprietary or statutory protection, in both
the United States and selected foreign countries to establish its proprietary
rights in new or improved technology. StorageTek currently holds approximately
450 United States patents, as well as foreign counterparts to many of these
patents in selected countries, covering various aspects of its products. These
patents will expire from 2000 through 2015. The Company also has pending in the
United States numerous patent applications, including several that have been
allowed and are expected to be formally issued, as well as pending foreign
counterparts to many of these applications. In addition, StorageTek has licenses
to use patents held by others. Taken as a whole, these assets are material to
the Company's business. However, no individual patent, license or other item of
proprietary information is singularly material to the Company's business.
The Company has ongoing legal proceedings relating to certain of its patents.
For a discussion of certain legal proceedings relating to the Company's patents,
see Part I, Item 3, "Legal Proceedings" of this Form 10-K, which information is
incorporated by reference into this Part I, Item 1.
ENVIRONMENT
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Compliance with the provisions of federal, state and local laws regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material adverse effect on the
financial results and operations of the Company. The Company did
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not have any material expenditures for environmental control facilities in 1999.
The Company does not currently have pending and has not budgeted any material
estimated expenditures for environmental control facilities during 2000.
However, potential liability under environmental legislation is ongoing,
regardless of whether or not the Company has complied with existing governmental
guidelines. The Company has received notice from the State of Florida and the
United States Environmental Protection Agency regarding a potential matter
involving ground water contamination and remediation activities at a property
located in Palm Bay/Melbourne, Florida, a site that the Company sold in January,
2000. The Company is currently not able to predict the outcome or potential
expenditures associated with this matter but does not expect that it will have a
material adverse effect on the financial results and operations of the Company.
Governmental regulation in the United States of the environment and related
compliance costs have increased in recent years. The Company cannot predict the
nature or scope of future environmental laws or regulations, how they will be
administered, or whether compliance will require substantial expenditures. Based
upon currently available information, the Company expects future compliance with
existing environmental regulations will have no material effect on the financial
results and operations of the Company.
RISKS ASSOCIATED WITH THE YEAR 2000
- ---------------------------------------------------
The Company is not currently aware of any significant problems among its
customers as a result of the failure of the Company's products to differentiate
between years in the 1900s and years in the 2000s. In addition, the Company did
not experience any serious problems among the various computer systems used by
the Company and, to the best of the Company's knowledge, none of its significant
suppliers experienced any serious problems among the various computer systems
used by such suppliers.
EMPLOYEES
- ---------------
The Company employed approximately 8,700 persons on a full-time basis worldwide
as of December 31, 1999, including approximately 240 persons who had received
notice of their future termination in connection with the Company's
restructuring activities, but were still employees of the Company as of the end
of the year. The Company currently anticipates there will be a reduction of an
additional 500 to 600 positions during 2000 through a combination of
terminations and attrition. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Restructuring" and
"FACTORS THAT MAY AFFECT FUTURE RESULTS -- Significant Personnel Changes."
RESTRUCTURING
- ---------------------
The Company is currently engaged in a broad restructuring program intended to
return the Company to profitability. Key elements of the restructuring include:
(i) an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the majority
of the remaining reductions projected to be completed by the end of the second
quarter of 2000; (ii) a reduction in investment in certain businesses, including
consulting and integration services and managed storage services; (iii) a
recommitment to the Company's core strengths of tape automation, virtual storage
and storage area networks (including related maintenance and professional
services); (iv) modifications to the sales model for the United States and
Canada intended to improve productivity and increase account coverage and
growth; and (v) other organizational and operational changes intended to improve
efficiency and competitiveness. Additional information concerning the Company's
restructuring is found in Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Restructuring," and in Part
IV, Note 9 of "NOTES TO
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CONSOLIDATED FINANCIAL STATEMENTS," of this Form 10-K, which information is
incorporated by reference into this Part I, Item 1.
OTHER MATTERS
- ---------------------
The Company's results historically have experienced seasonality, with increased
revenue in the Company's fourth quarter compared to other quarters as customers
tend to make purchase decisions near the end of the calendar year. There can be
no assurance that this historical trend will continue in 2000 and that revenue
during the fourth quarter will be higher than any other quarter.
No single customer accounted for 10% or more if the Company's total revenue in
1999. No material portion of the Company's business is subject to contract
termination at the election of the United States government.
Reference is made to the following "NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS" set forth in Part IV, Item 14, of this Form 10-K for certain
additional information, which information is incorporated by reference herein:
Note 5 Description of the Company's credit facilities, debt and lease
obligations.
Note 13 Description of the Company's financial instruments and
off-balance-sheet risks.
Note 14 Information on the operations of business segments and geographic
areas. See also Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- International Operations and Market Risk
Management/Foreign Currency Exchange Risk," for further discussion
of the risks associated with the Company's foreign operations.
Reference is also made to Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," of this Form 10-K, for
information regarding liquidity, working capital and risk factors that may
affect future results.
SUBSEQUENT EVENTS -- MANAGEMENT CHANGES
- ----------------------------------------------------------------
On February 3, 2000, the Company announced that David E. Weiss, its Chairman of
the Board, President and Chief Executive Officer has recommended to the
Company's Board of Directors that he resign from all such positions. At the
request of the Company's Board of Directors, Mr. Weiss will continue in all such
offices until a successor has been selected and any transition is completed. The
Board has appointed a search committee and has engaged an executive search firm
to assist the committee in identifying a successor. The Board elected Richard C.
Steadman, a current independent director of the Company, as Lead Independent
Director. The Company is unable to predict when a successor for Mr. Weiss will
be elected. The Company also announced on February 3, 2000, that Victor Perez,
the Company's Chief Operating Officer, would leave the Company at the end of the
first quarter of 2000. See Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY
AFFECT FUTURE RESULTS -- Significant Personnel Changes," for a discussion of
risks associated with recent personnel changes.
ITEM 2. PROPERTIES
StorageTek conducts its operations worldwide and occupies both leased and owned
facilities. At the present time, such facilities are adequate for the Company's
purposes.
Colorado. StorageTek occupies facilities in nine separate buildings in Boulder
County, Colorado, comprising approximately 1.8 million square feet. These
facilities include StorageTek's executive offices, as well as manufacturing,
research and development, and spare parts storage facilities. A
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majority of the Company's owned facilities in Boulder County are fully utilized.
The Company anticipates that certain manufacturing functions will be shifted to
its Puerto Rico facilities. Thereafter, utilization of the Company's owned
facilities in Boulder County are expected to be reduced. The Company also leases
approximately 400,000 square feet of office and storage space in Colorado.
Other United States Properties. The Company owns 195,000 square feet of research
and development, and administrative facilities in the Minneapolis, Minnesota
area, which is approximately 80% utilized. The Company occupies manufacturing
facilities in Puerto Rico, of which approximately 83,000 square feet are owned
and 73,500 square feet are leased. The facilities in Puerto Rico are fully
utilized. The Company also leases office and customer service facilities
throughout the United States at approximately 130 locations comprising
approximately 730,000 square feet.
International Properties. StorageTek leases approximately 200,000 square feet of
engineering, consulting integration and marketing facilities in Toulouse,
France, which are approximately 87% utilized. In addition, StorageTek leases
facilities at locations throughout the world, primarily for sales and customer
service activities, spare parts storage, and limited research and product
development activities. The Company leases offices in 20 locations in Canada
comprising approximately 100,000 square feet, leases four offices in Latin
America comprising approximately 20,000 square feet, leases approximately 60
offices in Europe comprising approximately 400,000 square feet, and 16 offices
in the Asia/Pacific region comprising approximately 90,000 square feet. Many of
the Company's leases throughout the world contain renewal rights, cancellation
rights and rights of first refusal on contiguous expansion space.
ITEM 3. LEGAL PROCEEDINGS
Litigation expense recognized during 1999 consists of the following (in
thousands of dollars):
Odetics, Inc. settlement $ 97,794
ADEA/ERISA settlement 5,000
Other settlements 788
--------
$103,582
--------
--------
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100.0 million to Odetics for a fully paid up license
to the 151 Patent; $80.0 million of which was paid at the time of the settlement
and the remainder to be paid in equal annual installments of $10.0 million in
September 2000 and September 2001. The Company recognized a pre-tax expense of
$97.8 million to reflect the present value of the final settlement payments.
On December 15, 1999, at a preliminary fairness hearing, the Company and
plaintiffs, representing certain former employees of the Company, presented the
United States District Court for the District of Colorado (the Court) with a
proposed settlement agreement, which would result in the Company paying $5.0
million for the settlement of litigation alleging the Company violated the Age
Discrimination in Employment Act of 1967, as amended (ADEA) and the Employee
Retirement Income Security Act of 1974 (ERISA), between the period of April 13,
1993, and December 21, 1996. Final approval of this proposed settlement
agreement was received from the Court on March 8, 2000. The settlement agreement
states that it shall not be construed as an admission by the Company that it
violated any law. The Company funded the settlement with a $5.0 million payment
into an escrow account in December 1999. A pre-tax expense of $5.0 million was
recognized in connection with the proposed settlement during 1999.
12
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In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court against the
Company and certain subsidiaries. The suit alleged that the Company breached a
1990 settlement agreement that had resolved earlier litigation between the
parties concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2.4 billion. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court dismissed with prejudice all of Stuff's material claims
against the Company. On August 30, 1999, Stuff filed a notice of appeal with the
Colorado Court of Appeals seeking to overturn the decision of the District
Court. The parties are in the process of filing various appellate briefs and the
Company anticipates that the final briefs will be filed in April 2000. No oral
argument date has been set. The Company continues to believe that Stuff's claims
are wholly without merit and intends to defend vigorously any further actions
arising from this complaint.
In August 1999, the Company filed suit in the United States District Court,
Western District against Cisco Systems, Inc. (Cisco) in Case No. 99C 782 S,
alleging that Cisco infringed upon a certain patent of the Company used in its
products. The Company filed an amended complaint on December 30, 1999, in which
the Company alleged that Cisco had infringed upon a second patent of the Company
used in its products. Cisco filed an answer denying the Company's claims and
asserting that a microchip used in one of the Company's network security product
infringed upon one of Cisco's patents. Cisco is seeking unspecified compensatory
damages which it asserts should be trebled, along with injunctive relief. The
Company purchases the alleged infringing microchip from a subsidiary of Intel
Corporation. The Company intends to add as third party defendants the subsidiary
of Intel, along with the microchip distributor and the manufacturer of the
circuit boards that utilize the microchip. The Company believes that it has
valid claims against Cisco and valid defenses against Cisco's counterclaim.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
Information concerning certain of these legal proceedings is also contained in
Note 7 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," included in Part IV,
Item 14, of this Form 10-K.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during its
fourth quarter of the fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were serving as executive officers of the Company as of
December 31, 1999.
NAME POSITION WITH COMPANY AGE
- -------------------------------------------------------------------------------------------------------
Gary Anderson Corporate Vice President, World Wide Operations Technology 52
Roger D. Archibald Vice President and General Manager, Enterprise Business
Group 47
Thomas G. Arnold Vice President and Corporate Controller 38
Susan W. Bailey Corporate Vice President, U.S./Canada Sales and Service and
Global Channels 39
Jeffrey M. Dumas Corporate Vice President, General Counsel and Secretary 54
Gary D. Francis Vice President, Corporate Strategy 52
Robert S. Kocol Corporate Vice President and Chief Financial Officer 43
Karen Niparko Corporate Vice President and Chief Administrative Officer 44
Jean Reiczyk Corporate Vice President and General Manager, Solutions
Business Group 50
David E. Weiss Chairman of the Board, President and Chief Executive Officer 55
Mr. Anderson was appointed Corporate Vice President, World Wide Operations
Technology, in January 2000. From July 1996 to January 2000 he served as
Corporate Vice President World Wide Sourcing/Logistics/Systems. Mr. Anderson
served as Corporate Vice President, Sourcing and Logistics from November 1995 to
July 1996. Mr. Anderson has been employed by StorageTek in various other
capacities since 1981.
Mr. Archibald was appointed Vice President and General Manager, Enterprise
Business Group in February 2000. From July 1998 until this appointment, he
served as Vice President and General Manager, Enterprise Disk Business Group.
Prior to joining StorageTek, Mr. Archibald served in various management
positions at Hewlett-Packard Company, a computer and imaging products company.
Most recently, from 1993 to 1998, Mr. Archibald served as Information Storage
Group, Worldwide Marketing Manager at Hewlett-Packard.
Mr. Arnold was appointed Vice President and Corporate Controller in April 1997.
From November 1995 to April 1997, he served as Director of Worldwide
Consolidation and Reporting. Mr. Arnold served as Manager of External Reporting
from April 1991 to November 1994. Mr. Arnold has been employed by StorageTek in
various other capacities since 1989.
Ms. Bailey joined StorageTek in August 1999 as Corporate Vice President,
U.S./Canada Sales and Service and Global Channels. From 1997 until August 1999,
she was President of EnPoint Technologies, a value-added reseller/systems
integrator. From 1996 until 1997, Ms. Bailey served as Senior Vice President,
Sales, Marketing and Services of Intelligent Electronics, a distributor of
computer hardware, software, peripherals and services. From 1982 until 1986, Ms.
Bailey worked at IBM in a number of sales, marketing and management positions.
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Mr. Dumas was appointed Corporate Vice President, General Counsel and Secretary
in September 1999. He joined the Company in August 1998 as Corporate Vice
President and General Counsel. From April 1995 to August 1998, Mr. Dumas served
as Vice President and General Counsel of Symbios, Inc. He served as Group
Counsel-Work Stations Division at Silicon Graphics, Inc., a computer products
company, from 1992 to 1994.
Mr. Francis was appointed Vice President, Corporate Strategy in February 2000.
From February 1997 until February 2000, he was Vice President and General
Manger, Enterprise Nearline Business Group. From September 1993 to February
1997, Mr. Francis served as Vice President of the Nearline Business. Mr. Francis
has been employed by StorageTek since 1976 in various other capacities.
Mr. Kocol was appointed Corporate Vice President and Chief Financial Officer in
December 1998. Prior to this appointment, from 1996 to 1998, he served as Vice
President of Financial Planning and Operations. In 1991, Mr. Kocol joined the
Company's financial group as Director of Financial Operations and was
subsequently promoted to Director of Worldwide Field Operations Finance and
Administration. Mr. Kocol has been employed by StorageTek in various other
capacities since 1980.
Karen Niparko was appointed Corporate Vice President and Chief Administrative
Officer in July 1999. From April, 1997 to January, 1999, she was Vice President,
Human Resources Development, Worldwide Field Operations. Since August, 1999, Ms.
Niparko has also served as President of the StorageTek Foundation, a non-profit
organization created to award the Company's charitable contributions to
community organizations. Prior to joining StorageTek, Ms. Niparko was Vice
President, Operations at Auto-Trol Technology Corporation, a high-end graphics
software and information management company located in Denver, from 1993 until
1997.
Mr. Reiczyk was elected Corporate Vice President and General Manager, Solutions
Business Group in February 1999 and served as the Company's Vice President and
General Manager, Solutions Business Group from September 1997 to January 1999.
Prior to joining StorageTek, Mr. Reiczyk served as Senior Vice President and
Corporate Quality Officer at Global One, from March 1997 to September 1997. From
1994 to February 1997, he served as Vice President, Value Added Services, at
AT&T Europe, a unit of AT&T, a telecommunications company.
Mr. Weiss has served as Chairman of the Board, President and Chief Executive
Officer since May 1996. He served as Chief Operating Officer of the Company from
March 1995 to May 1996; Executive Vice President of Systems Development from
January 1993 to March 1995; Senior Vice President of Marketing and Program
Management Process from June 1992 to January 1993; and Corporate Vice President
of Market Planning from August 1991 to June 1992. Mr. Weiss joined StorageTek in
February 1991 as Staff Vice President. In February 2000, StorageTek announced
that Mr. Weiss would relinquish his positions as Chairman, Director and Chief
Executive Officer, but would remain in office until his successor has been
elected.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Storage Technology Corporation is traded on the New York
Stock Exchange under the symbol STK. The table below reflects the high and low
closing sales prices of the common stock on the New York Stock Exchange
composite tape as reported by The Wall Street Journal during each fiscal quarter
of 1999 and 1998. The amounts shown reflect adjustments for the 2-for-1 stock
split effected in the form of a 100% stock dividend that was completed on June
26, 1998. On December 31, 1999, there were 11,332 record holders of common stock
of StorageTek.
1999 High Low
- --------------------------------------------------------------------------------
First Quarter $40.000 $25.750
Second Quarter 29.188 17.250
Third Quarter 26.000 18.875
Fourth Quarter 21.000 14.625
1998 High Low
- --------------------------------------------------------------------------------
First Quarter $37.750 $28.657
Second Quarter 43.938 37.719
Third Quarter 50.188 21.750
Fourth Quarter 39.625 21.625
Dividends
- ---------
StorageTek has never paid cash dividends on its common stock. The Company
currently plans to continue to retain future earnings for use in its business.
The Company's credit facilities contain provisions restricting the payment of
cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the three fiscal years 1997 through
1999 (except for the 1997 Balance Sheet Data) has been derived from the
consolidated financial statements appearing elsewhere herein, including the
Consolidated Balance Sheet as of December 31, 1999, and December 25, 1998, and
the related Consolidated Statement of Operations for each of the three years in
the period ended December 31, 1999, and notes thereto. The data, insofar as it
relates to the Balance Sheet Data as of December 26, 1997, December 27, 1996,
and December 29, 1995, and the Statement of Operations Data for the fiscal years
1996 and 1995, has been derived from the historical financial statements of the
Company for such periods.
The following table data (in thousands of dollars, except per share amounts)
should be read in conjunction with the consolidated financial statements and
notes thereto.
YEAR ENDED DECEMBER
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue $2,368,231 $2,258,222 $2,144,656 $2,039,550 $1,929,485
Cost of revenue 1,425,247 1,217,812 1,171,530 1,192,777 1,217,622
---------- ---------- ---------- ---------- ----------
Gross profit 942,984 1,040,410 973,126 846,773 711,863
Research and product development
costs 277,770 234,677 209,526 176,422 187,275
Selling, general, administrative and
other income and expense, net 615,616 492,928 472,839 444,870 445,889
Litigation, restructuring and other
charges 146,834(b) 212,207(c)
---------- ---------- ---------- ---------- ----------
Operating profit (loss) (97,236) 312,805 290,761 225,481 (133,508)
Interest income (expense), net (19,214) 6,943 25,356 1,211 8,978
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item (116,450) 319,748 316,117 226,692 (124,530)
Benefit (provision) for income taxes 41,900 (121,500) (84,300) (55,900) (17,800)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item (74,550) 198,248 231,817 170,792 (142,330)
Extraordinary gain, net of taxes 9,535
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (74,550) $ 198,248 $ 231,817 $ 180,327 $ (142,330)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per common
share: (a)
Income (loss) before extraordinary
item $ (0.75) $ 1.91 $ 1.93 $ 1.52 $ (1.46)
Net income (loss) (0.75) 1.91 1.93 1.61 (1.46)
Diluted earnings (loss) per common
share: (a)
Income (loss) before extraordinary
item $ (0.75) $ 1.86 $ 1.89 $ 1.43 $ (1.46)
Net income (loss) (0.75) 1.86 1.89 1.50 (1.46)
BALANCE SHEET DATA
Working capital $ 440,763 $ 538,331 $ 661,206 $ 724,171 $ 425,351
Total assets 1,735,475 1,842,944 1,740,017 1,884,276 1,888,629
Total debt 329,048 295,655 22,391 155,257 449,222
Stockholders' equity 919,199 999,576 1,112,503 1,180,983 962,833
- ---------------
(a) Earnings per share data has been restated to reflect the effect of the
2-for-1 stock split in the form of a stock dividend on June 26, 1998.
(b) In 1999, the Company recognized litigation expense of $103,582,000 and
restructuring expense of $43,252,000.
(c) In 1995, the Company recognized restructuring expense of $167,175,000,
litigation settlement expense of $30,680,000, and merger and consolidation
expense of $14,352,000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL ASSUMPTIONS, ANTICIPATIONS, EXPECTATIONS AND FORECASTS CONTAINED IN THE
FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCT AND BUSINESS PLANS,
FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY BECAUSE OF A NUMBER OF RISKS AND UNCERTAINTIES.
SOME OF THESE RISKS ARE DETAILED BELOW IN "FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN REPRESENT A GOOD-FAITH ASSESSMENT OF THE COMPANY'S FUTURE
PERFORMANCE FOR WHICH MANAGEMENT BELIEVES THERE IS A REASONABLE BASIS. THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION ON FORECASTS CONTAINED
HEREIN, EXCEPT AS MAY BE OTHERWISE REQUIRED BY LAW.
HISTORICAL STATEMENTS MADE HEREIN ARE ACCURATE ONLY AS OF THE DATE OF FILING
THIS FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION AND MAY BE RELIED
UPON ONLY AS OF THAT DATE.
GENERAL
- -----------
The Company reported a net loss for the year ended December 31, 1999, of $74.6
million on revenue of $2.37 billion, compared to net income for the year ended
December 25, 1998, of $198.2 million on revenue of $2.26 billion and net income
for the year ended December 26, 1997, of $231.8 million on revenue of $2.14
billion. The Company's reported results for 1999 include one-time pre-tax
litigation expenses of $103.6 million, restructuring expenses of $43.3 million,
and other related restructuring expenses of $12.5 million. Excluding these
one-time expenses, net of tax, the Company reported net income of $27.4 million
during 1999.
Revenue increased 5% in 1999, compared to 1998, due to increases in revenue from
storage services and storage management software. Revenue from storage products
decreased in 1999, compared to 1998. Gross profit margins decreased to 40% in
1999 compared to 46% in 1998, due to decreased profit margins in all of the
Company's business segments.
Revenue increased 5% in 1998, compared to 1997, primarily due to increases in
revenue from storage services and storage management software. Gross profit
margins increased to 46% in 1998, compared to 45% in 1997, primarily due to
increased sales of higher-margin storage management software. The increased
margins from storage management software were partially offset by decreased
margins from storage services.
Many of the Company's customers undertake detailed procedures relating to the
evaluation, testing, implementation and acceptance of the Company's products,
software and services. This evaluation process results in a variable sales
cycle, and makes it difficult to predict if or when revenue will be earned.
Further, gross margins may be adversely impacted in an effort to complete the
sales cycle. Revenue and operating profits during 1999 fell significantly short
of the Company's expectations due principally to shortfalls in revenue and gross
margins in North America and Europe. While revenue in North America and Europe
increased in 1999 compared to 1998, gross margins declined in terms of both
gross margin dollars and as a percentage of revenue. The Company believes a
portion of this shortfall was due to some customers delaying purchasing
decisions in anticipation of possible issues associated with the year 2000,
particularly with respect to tape products and Virtual Storage Manager(TM)(VSM)
targeted for the mainframe market. Delays in the introduction and market
acceptance of these new products also impacted the Company's financial results
during the first half of 1999.
The Company's financial results may continue to be adversely impacted by its
variable sales cycle, particularly in the first half of 2000, as it implements
changes to the sales model in the United States and Canada. Future financial
results are also dependent upon the Company's ability to manage its costs and
operating expenses in line with revenue; the timely development, manufacture and
introduction of new products, software and services; successfully managing the
development of
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new direct and indirect sales channels; the implementation of its storage area
network (SAN) strategy; and the execution of its ongoing restructuring
activities. For the discussion of these and other risk factors, see "Factors
That May Affect Future Results," below.
In April 1999, the Company announced plans to restructure its business. In
October 1999, the Company announced additional restructuring plans. These
restructuring activities are intended to return the Company to profitability. As
the Company's restructuring activities are on-going, the amount and timing of
restructuring expenses which will be incurred during 2000 cannot be clearly
determined at this time, however, these restructuring expenses are expected to
materially affect the Company's reported financial results during 2000. The
Company's sales revenue in the first half of 2000 may be adversely effected by
disruptions to its sales organizations and customers associated with its
restructuring activities. The Company estimates annual savings of approximately
$40 million were realized in connection with the April 1999 restructuring. The
Company expects the activities associated with the October 1999 restructuring to
be completed by the end of the second quarter of 2000 and the October 1999
restructuring is expected to yield annualized savings of approximately $150
million. There can be no assurance that the restructuring activities described
above will be successful or sufficient to allow the Company to realize the
expected annualized savings or return the Company to profitability. See
"Restructuring," below for further discussion of the restructuring activities.
On October 15, 1999, the Company announced that it had engaged an investment
banking firm to assist the Company in its on-going analysis, evaluation and
consideration of various strategic alternatives. These strategic alternatives
could have included financial restructurings, acquisitions, divestitures,
spin-offs, joint ventures, and business combinations including sales, mergers,
or partnerships. On February 3, 2000, the Company announced that the board of
directors had concluded that the Company was most likely to maximize shareholder
value by continuing to operate as an independent entity and by executing the
current restructuring activities.
The Company's cash balance decreased $16.6 million in 1999 due primarily to
litigation payments of $85.8 million and restructuring payments of $34.4
million. See Notes 7 and 9 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of litigation and restructuring, respectively. Excluding the
effects of these one-time payments, the Company's operating activities provided
cash of $245.6 million in 1999, compared to cash of $88.1 million generated from
operations in 1998. The increase in cash generated from operations in 1999,
compared to 1998, was primarily the result of progress in the Company's efforts
to more effectively manage working capital. See "Liquidity and Capital
Resources -- Working Capital" for additional discussion of operating cash flows.
Cash used in investing activities of $102.4 million was primarily due to
property, plant and equipment purchases of $100.8 million. Cash used in
financing activities of $2.1 million was mainly the result of cash payments of
$35.2 million associated with repurchases of common stock largely offset by cash
receipts of $25.4 million from employee stock plans.
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The following table, stated as a percentage of total revenue, presents
Consolidated Statement of Operations information and revenue by segment.
Year Ended December
---------------------------------------
1999 1998 1997
---------------------------------------
Storage products:
Tape products 44.3% 43.1% 45.0%
Disk products 13.9 20.6 20.6
Network products 3.7 3.6 4.1
----- ----- -----
Total storage products 61.9 67.3 69.7
Storage services 30.3 28.1 27.2
Storage management software 7.8 4.6 3.1
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue 60.2 53.9 54.6
----- ----- -----
Gross profit 39.8 46.1 45.4
Research and product development costs 11.7 10.4 9.8
Selling, general, administrative and other income
and expense, net 26.0 21.8 22.0
Litigation expense 4.4
Restructuring expense 1.8
----- ----- -----
Operating profit (loss) (4.1) 13.9 13.6
Interest income (expense), net (0.8) 0.3 1.1
----- ----- -----
Income (loss) before income taxes (4.9) 14.2 14.7
Benefit (provision) for income taxes 1.8 (5.4) (3.9)
----- ----- -----
Net income (loss) (3.1)% 8.8% 10.8%
----- ----- -----
----- ----- -----
REVENUE
- -----------
STORAGE PRODUCTS
The Company's storage products revenue includes sales of tape, disk, and network
products for the mainframe and client-server marketplaces. Revenue generated
from storage products decreased 4% in 1999, compared to 1998, and increased 2%
in 1998, compared to 1997.
TAPE PRODUCTS
Tape product revenue increased 8% in 1999, compared to 1998, primarily due to
increased sales of the 9840 high-performance tape drive, increased sales of the
TimberWolf(TM) family of automated tape products designed for the client-server
market, and sale of 9840 tape media. Sales of the Company's client-server tape
automation products grew 75% during 1999 with the fourth quarter of 1999
representing the first quarter in which sales of client-server tape products
exceeded sales of mainframe tape products. Revenue from TimberLine(R) 9490, a
36-track cartridge subsystem; PowderHorn(R) 9310, an automated cartridge system
library; and other earlier generation mainframe tape products declined during
1999, compared to 1998, reflecting both lower selling prices and decreases in
the number of units sold. These revenue declines reflect the continued shift in
the marketplace from mainframe to client-server tape products. The Company
believes that the sales of tape products designed for the mainframe market have
also been adversely impacted in 1999 due to customers delaying testing and
purchasing decisions in anticipation of the year 2000.
Tape product revenue increased 1% in 1998, compared to 1997. Revenue from
TimberWolf and PowderHorn 9310 increased in 1998, compared to 1997, but was
offset by decreased revenue from TimberLine 9490 and other earlier generation
tape products. The decrease in TimberLine revenue was primarily the result of an
increase in pricing pressure and delays during the second half of 1998
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in customer purchase decisions associated with the evaluation of the Company's
9840 tape drive. The 9840 tape drive became generally available and provided
initial revenue contribution in December 1998.
DISK PRODUCTS
Disk product revenue decreased 29% in 1999, compared to 1998, due to a decrease
in OEM sales of disk storage products designed for the mainframe market to
International Business Machines Corporation (IBM). The Company does not
anticipate any significant sales revenue from IBM in 2000. The decline in sales
of disk products to IBM were partially offset by an increase in direct sales of
the 9393 Shared Virtual Array (SVA). Revenue from the OPENstorage(TM)Disk
products increased in 1999, compared to 1998. Sales of both the 9393 SVA and
OPENstorage Disk products did not meet the Company's expectations in 1999 due
primarily to issues associated with establishing an effective direct sales
channel for these products. In 1999, the Company announced plans to sell Sun
Microsystems, Inc.'s open enterprise disk products under a worldwide OEM sales
and marketing agreement; however, these new products are currently not
available. In February 2000, the Company announced the availability of the 9500
SVA, the next generation of SVA disk products. There can be no assurance that
the Company will not continue to experience decreased sales of disk products as
a result of continuing issues associated with sales channels or a lack of market
acceptance for its disk products.
Disk product revenue increased 5% in 1998, compared to 1997, primarily due to
increased revenue from the OPENstorage Disk subsystem. A significant portion of
the Company's total revenue in 1998 was derived from sales of disk products to
IBM. While unit sales of disk storage products for the mainframe market
increased in 1998 compared to 1997, revenue remained unchanged due to price
decreases provided for under the terms of an OEM agreement with IBM.
NETWORK PRODUCTS
Network product revenue increased 5% in 1999, compared to 1998, primarily due to
increased sales of network products designed for the SAN market. The increase in
sales of SAN network products during 1999 was offset by decreased revenue from
the earlier generation connectivity products. Network product revenue decreased
5% in 1998, compared to 1997, primarily due to reduced revenue from the earlier
generation connectivity products.
The Company's storage products revenue may be adversely impacted by its variable
sales cycles and by disruptions to its sales organization and customers
associated with restructuring activities currently underway, particularly in the
first half of 2000. Future revenue growth in the Company's storage products
segment is significantly dependent upon the continued demand for its
client-server tape automation products, successfully replacing OEM sales of disk
products to IBM with direct sales of disk products, and gaining greater market
acceptance of the Company's SAN network products. There can be no assurances
that the Company will be successful in these endeavors. See "Factors That May
Affect Future Results -- New Products, Markets and Distribution Channels;
Emerging Markets," for a discussion of the risks associated with the
introduction and manufacture of new products and distribution channels.
STORAGE SERVICES
Storage services includes revenue associated with the maintenance of the
Company's and third-party storage products, as well as integration service
revenue associated with new applications, storage consulting and managed storage
services. Storage services revenue increased 13% in 1999, compared to 1998, due
to growth in storage consulting and integration services. Revenue associated
with maintenance services decreased in 1999, compared to 1998, but still
represented approximately 82% of total storage services revenue in 1999. The
decrease in maintenance revenue during 1999 was partially due to the shift in
the Company's customer base from the mainframe to the
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client-server marketplace, as well as the increasing reliance on indirect
distribution channels for its products, as some indirect distributors provide
service for the products they sell. Storage services revenue increased 9% in
1998, compared to 1997, primarily due to an increase in storage products under
maintenance contracts and growth in the multi-vendor support services area.
In connection with the restructuring activities announced in October 1999, the
Company anticipates decreased revenue from its storage services segment in 2000
as it reduces its investments in, or eliminates, certain lower-margin storage
consulting, integration and managed storage service offerings. There can be no
assurance that maintenance revenue will not also continue to decline in 2000 as
the customer base continues to shift to the client-server marketplace and the
Company places increased emphasis on indirect distribution channels. Maintenance
revenue may also be adversely affected in future periods to the extent older
products currently under maintenance contracts are replaced by newer products
with extended warranties.
STORAGE MANAGEMENT SOFTWARE
Storage management software revenue increased 78% in 1999, compared to 1998,
primarily due to increased revenue from VSM. VSM is a data storage software
solution designed to improve performance, cartridge utilization, and overall
storage management. While revenue from VSM increased during 1999, sales of VSM
did not meet the Company's expectations. The Company believes sales of VSM
during 1999 were adversely impacted due to customers delaying purchase decisions
in anticipation of the year 2000. Revenues from VSM during the first half of
1999 were also adversely impacted by delays in the introduction and market
acceptance of VSM. Revenue from SnapShot, which is designed for use with the
Company's SVA disk products, decreased in 1999, compared to 1998, due to a
decrease in OEM sales to IBM.
Storage management software revenue increased 58% in 1998, compared to 1997,
primarily due to increased revenue from SnapShot and VSM. The increase in
SnapShot revenue in 1998 compared to 1997 was primarily due to increased OEM
sales to IBM.
Future revenue growth from storage management software is dependent upon
increasing market acceptance for VSM. Because VSM is a complex system, it is
difficult to predict the timing and extent that VSM will gain acceptance. There
can be no assurances that the Company will be successful in increasing market
acceptance for VSM. A significant portion of the Company's storage management
software revenue has been derived from sales of SnapShot to IBM. The Company
does not anticipate any sales of SnapShot to IBM in 2000. The Company has
recently introduced SnapShot capabilities for its 9500 SVA disk products
targeted for the client-server marketplace. Future revenue growth from Snapshot
is dependent upon market acceptance of the SnapShot software and the related SVA
disk products, and successfully addressing issues associated with direct sales
of its SVA products.
GROSS PROFIT
- ------------------
The following table sets forth the gross profit percentages for each segment
calculated as gross profit for the segment divided by revenue for the segment.
Year Ended December
----------------------------------------
1999 1998 1997
----------------------------------------
Total gross profit 39.8% 46.1% 45.4%
Storage products 40.5% 45.2% 44.8%
Storage services 30.8% 43.2% 45.5%
Storage management software 69.8% 75.9% 57.5%
Gross profit margins decreased to 40% in 1999, compared to 46% in 1998. The
gross profit margins decreased in all of the Company's business segments during
1999. Gross margins for the Company's products have been adversely affected by
efforts to shorten sales cycles; increased
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sales of 9840 tape cartridges and third-party products which have lower profit
margins; a decline in the selling prices for disk products and earlier
generation tape products; and unfavorable manufacturing variances associated
with excess manufacturing capacity. Gross margins associated with the services
segment have decreased principally as a result of increased revenue contribution
from lower-margin consulting, integration, and managed storage service
offerings. Storage service margins have also been adversely impacted by
increased pricing pressures associated with the maintenance of storage products
in the client-server market and increased maintenance costs associated with
certain tape products. Gross margins associated with software declined in 1999
as the mix of revenue contribution shifted from higher-margin SnapShot sales to
lower-margin VSM sales.
Gross profit margins increased to 46% in 1998, compared to 45% in 1997,
primarily due to the increased sales of higher-margin storage management
software and improved efficiencies associated with the manufacture of storage
products. This increase in gross profit was partially offset by reduced margins
associated with storage services. The decrease in storage service margins was
due primarily to increased pricing pressures associated with maintenance of
storage products in the client-server market and reduced margins associated with
the Company's consulting services.
The markets for the Company's products and services are subject to intense price
competition. The Company anticipates that price competition for its products and
services will continue to have a significant impact on the Company's gross
profit margins. The Company's ability to sustain or improve gross margins is
significantly dependent upon the timing of discontinuing the storage consulting
and integration service offerings, which have generated lower gross margins, the
timing of implementing pricing controls and gaining other operational
efficiencies in connection with the restructuring activities, and achieving cost
improvements associated with the sourcing of production materials. Storage
product and storage management software gross margins may be affected in future
periods by inventory reserves and writedowns resulting from rapid technological
changes or delays in gaining market acceptance for products.
RESEARCH AND PRODUCT DEVELOPMENT
- ----------------------------------------------------
Research and product development expenses increased 18% in 1999, compared to
1998. The Company received approximately $40 million less research and product
development funding from third-parties in 1999, compared to 1998. Excluding the
effects of the reduced third-party funding, research and product development
expense decreased as a percentage of revenue in 1999 as compared to 1998, due to
the elimination of several lower priority research and product development
programs in connection with the restructuring activities. See "Restructuring,"
below, for discussion of the restructuring activities.
Research and product development expenditures increased 12% in 1998, compared to
1997. The increased investment in new development activities during 1998 was
partially offset by the receipt of approximately $50 million of research and
product development funding from third-parties.
SELLING, GENERAL, ADMINISTRATIVE AND OTHER
- --------------------------------------------------------------
Selling, general, administrative and other income and expense (SG&A) increased
25% in 1999, compared to 1998, primarily due to increased selling expenses. The
increase in selling expense reflects an increase in commission and bonus rates,
the addition of application sales specialists associated with storage services,
an increase in the Company's worldwide sales force, and an increase in marketing
expenditures. The Company has implemented significant changes to its field
organization and the bonus and commission plans for its United States field
organization in connection with the restructuring. These changes are intended to
improve sales productivity and reduce selling expenses as a percentage of
revenue. There can be no assurance that these changes
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will be effective or that the Company will not encounter disruptions which
adversely affect sales during the implementation of these changes.
SG&A increased 4% in 1998, compared to 1997, primarily as a result of spending
on internal business and financial information systems, selling expenses
associated with the Company's storage product sales, and spending on branding
initiatives. The increase was partially offset by reduced accruals for employee
bonus and profit-sharing payments in 1998, compared to 1997, as the Company did
not attain financial goals in 1998.
Gains and losses associated with foreign currency transactions and translation
adjustments, net of associated hedging results, are included in SG&A and
aggregated a net gain of $1.3 million for 1999, compared to a net loss of $0.4
million for 1998 and a net gain of $0.5 million in 1997. See "International
Operations" and "Market Risk Management/Foreign Currency Exchange Risk" for
further discussion of the foreign exchange risks associated with the Company's
international operations and the related foreign currency hedging activities.
LITIGATION
- --------------
Litigation expense recognized during 1999 consists of the following (in
thousands of dollars):
Odetics, Inc. settlement $ 97,794
ADEA/ERISA settlement 5,000
Other settlements 788
--------
$103,582
--------
--------
On October 8, 1999, the Company and Odetics, Inc. (Odetics) entered into a
settlement agreement regarding two patent infringement suits originally filed
against the Company by Odetics on June 29, 1995, and December 8, 1995, alleging
infringement of various claims in U.S. Patent No. 4,779,151 (the "151 Patent").
The Company agreed to pay $100.0 million to Odetics for a fully paid up license
to the 151 Patent; $80.0 million of which was paid at the time of the settlement
and the remainder to be paid in equal annual installments of $10.0 million in
September 2000 and September 2001. The Company recognized a pre-tax expense of
$97.8 million to reflect the present value of the final settlement payments.
On December 15, 1999, at a preliminary fairness hearing, the Company and
plaintiffs, representing certain former employees of the Company, presented the
United States District Court for the District of Colorado (the Court) with a
proposed settlement agreement, which would result in the Company paying $5.0
million for the settlement of litigation alleging the Company violated the Age
Discrimination in Employment Act of 1967, as amended (ADEA) and the Employee
Retirement Income Security Act of 1974 (ERISA), between the period of April 13,
1993, and December 21, 1996. Final approval of this proposed settlement
agreement was received from the Court on March 8, 2000. The settlement agreement
states that it shall not be construed as an admission by the Company that it
violated any law. The Company funded the settlement with a $5.0 million payment
into an escrow account in December 1999. A pre-tax expense of $5.0 million was
recognized in connection with the proposed settlement during 1999.
In January 1994, Stuff Technology Partners II, a Colorado Limited Partnership
(Stuff), filed suit in Boulder County, Colorado, District Court against the
Company and certain subsidiaries. The suit alleged that the Company breached a
1990 settlement agreement that had resolved earlier litigation between the
parties concerning an optical disk drive storage development project entered
into in 1981 which was unsuccessful and terminated in 1985. The suit sought
injunctive relief and damages in the amount of $2.4 billion. On December 28,
1995, the court granted the Company's motion for summary judgment and dismissed
the complaint. Stuff appealed the dismissal to the Colorado Court of Appeals. In
March 1997, the Court of Appeals reversed the District Court's judgment and
remanded the case to the District Court for further proceedings. On July 15,
1999, the District Court
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dismissed with prejudice all of Stuff's material claims against the Company. On
August 30, 1999, Stuff filed a notice of appeal with the Colorado Court of
Appeals seeking to overturn the decision of the District Court. The parties are
in the process of filing various appellate briefs and the Company anticipates
that the final briefs will be filed in April 2000. No oral argument date has
been set. The Company continues to believe that Stuff's claims are wholly
without merit and intends to defend vigorously any further actions arising from
this complaint.
The Company is also involved in various other less significant legal actions.
While the Company currently believes that the amount of any ultimate potential
loss would not be material to the Company's financial position, the outcome of
these actions is inherently difficult to predict. In the event of an adverse
outcome, the ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could
require material changes in production processes and products or result in the
Company's inability to ship products or components found to have violated
third-party patent rights.
RESTRUCTURING
- -------------
On April 15, 1999, the Company announced plans to restructure certain aspects of
its business. The elements of the April restructuring included a voluntary
reduction in headcount as well as the elimination of certain lower priority
research and product development projects. The headcount reductions were
targeted in the areas of research and product development, administration and
manufacturing.
On October 28, 1999, the Company's board of directors approved a broad
restructuring program intended to return the Company to profitability. Key
elements of the restructuring plan include:
- - an anticipated reduction of approximately 1,200 to 1,400 positions, with
approximately 550 positions eliminated during fiscal year 1999 and the
majority of the remaining reductions projected to be completed by the end of
the second quarter of 2000;
- - a reduction in investment in certain businesses, including consulting and
integration services and managed storage services;
- - a recommitment to the Company's core strengths of tape automation, virtual
storage and storage area networks (including related maintenance and
professional services);
- - modifications to the sales model for the United States and Canada intended to
improve productivity and increase account coverage and growth;
- - other organizational and operational changes intended to improve efficiency
and competitiveness.
The elements of the October restructuring included an involuntary reduction in
headcount, the elimination of a significant number of temporary employee
positions, and managing the replacement of terminating employees due to normal
attrition. The headcount reductions were targeted in all areas of the Company.
The following table summarizes the reserves in connection with 1999
restructuring activities (in thousands of dollars):
Employee Asset Other Exit
Severance Writedowns Costs Total
----------------------------------------------
Restructuring expense $ 32,719 $ 4,941 $ 5,592 $ 43,252
Cash payments (28,802) (5,592) (34,394)
Asset writedowns (4,941) (4,941)
-------- --------- --------- --------
Balances, December 31, 1999 $ 3,917 $ 0 $ 0 $ 3,917
-------- --------- --------- --------
-------- --------- --------- --------
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Employee severance expense of $32.7 million was recognized during 1999 in
connection with the April and October restructurings. This expense includes
$25.9 of separation charges related to approximately 680 employees who elected
voluntary severance in connection with the April restructuring; $6.2 million of
separation charges related to the fixed and determinable severance payments owed
to approximately 280 employees who were involuntarily terminated in connection
with the October restructuring; and $564,000 of employee outplacement costs. The
Company also eliminated approximately 270 temporary and contractor positions in
connection with the October restructuring for which there was no associated
restructuring charge. Substantially all of the $3.9 million of severance charges
incurred, but not paid, as of December 31, 1999, relate to severance payments
associated with the October restructuring and are expected to be paid within the
next three months.
Asset writedowns of $4.9 million, net of adjustments, were recognized during
1999 in connection with the April restructuring. Asset writedowns of $6.7
million were recognized during the second and third quarters of 1999 related to
engineering assets that were to be disposed of in connection with discontinued
research and development projects. An adjustment of $1.7 million was recognized
during the fourth quarter of 1999 as a reduction of restructuring expense to
reflect the redeployment of engineering assets to other research and development
projects and the salvage value of other engineering assets which was greater
than originally estimated.
Other exit costs of $5.6 million were recognized during 1999 principally related
to the termination of contractual future purchase obligations associated with
discontinuing certain product lines as part of the April restructuring.
The Company currently anticipates it will incur restructuring charges of
approximately $25 million to $30 million during the first half of 2000
associated with the elimination of between 500 and 600 positions. The majority
of these charges are expected to relate to cash payments to employees. Depending
on the outcome of the disposition of the Company's managed storage services
business, additional cash and non-cash restructuring charges may be incurred
during 2000.
The Company estimates annual savings of approximately $40 million were realized
in connection with the April 1999 restructuring. The Company anticipates annual
savings of approximately $150 million will result from the restructuring
activities initiated in October 1999. The majority of the restructuring
activities are not expected to be complete until the end of the second quarter
of 2000. Because the majority of the restructuring activities are not expected
to be completed until the second quarter, the Company anticipates it will incur
an operating loss during the first quarter of 2000 and that the anticipated
savings realized for the year 2000 will be slightly in excess of $100 million.
Based on the restructuring activities completed to date and the currently
planned restructuring activities, the Company does not anticipate any material
incremental operating expenses will be incurred on an on-going basis as a result
of the restructuring.
Restructuring activities which must be successfully completed in order to
achieve the anticipated savings include achieving targeted headcount reductions
associated with exiting certain consulting and service business activities and
the consolidation of internal business units and various engineering,
manufacturing, sourcing and logistics activities; restructuring the United
States and Canada sales and service organization in order to obtain operational
efficiencies; modifying the Company's bonus and commission plans to better align
the sales organization with driving operating profits and implementing operating
improvements which emphasize the efficient management of working capital.
In addition to targeted headcount reductions associated with the elimination of
permanent positions, the Company is also limiting the replacement of terminating
employees due to normal attrition and eliminating certain contractors, temporary
employees and other non-permanent positions. The number of future involuntary
terminations associated with the Company's managed storage services business and
the timing of these terminations is dependent upon efforts to find strategic
alternatives for this business.
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The complexity of the Company's restructuring activities, the uncertainties
associated with the targeted headcount reductions, and the rapidly changing
business environment in which the Company operates make it difficult to predict
the amount and timing of restructuring charges which will be incurred, and the
amount and timing of anticipated benefits which will be realized. The Company's
sales revenue in the first half of 2000 may be adversely effected by disruptions
to its sales organization and customers associated with its restructuring
activities.
The Company has restructured its business in the past in order to re-align its
business with its products and market strategies, or establish a more cost
efficient business structure. There can be no assurance that the restructuring
activities described above will be successful or sufficient to allow the Company
to generate improved operating results in future periods. It is possible that
additional changes in the Company's business or in its industry may necessitate
additional restructuring expense in the future. The necessity for additional
restructuring activities may result in expenses that adversely affect reported
results of operations in the period the restructuring plan is adopted, and
require incremental cash payments.
INTEREST INCOME AND EXPENSE
- -----------------------------------------
Interest expense increased $15.0 million in 1999, compared to 1998, due to
increased borrowings under the Company's credit facilities, as well as an
increase in the interest rates the Company borrowed under during 1999. Interest
income decreased $11.2 million in 1999, compared to 1998, primarily as a result
of a decrease in cash available for investment.
Interest expense increased $3.6 million in 1998, compared to 1997, due to
borrowings under the Company's unsecured credit facilities. Interest income
decreased $14.8 million in 1998, compared to 1997, primarily as a result of a
decrease in cash available for investment. See "Liquidity and Capital
Resources -- Available Financing Lines," for further discussion of the Company's
credit facilities.
INCOME TAXES
- -------------------
The Company's effective tax rate decreased from 38% in 1998 to 36% in 1999.
Statement of Financial Accounting Standards (SFAS) No. 109 requires that
deferred income tax assets be recognized to the extent realization of such
assets is more likely than not. Based on the currently available information,
management has determined that the Company will more likely than not realize
$165.5 million of deferred income tax assets as of December 31, 1999. The
Company's valuation allowance of approximately $14.9 million as of December 31,
1999, relates principally to net deductible temporary differences, tax credit
carryforwards and net operating loss carryforwards associated with the Company's
foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------
WORKING CAPITAL
The Company's cash balance decreased $16.6 million in 1999 due primarily to
litigation payments of $85.8 million and restructuring payments of $34.4
million. See Notes 7 and 9 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of litigation and restructuring, respectively. Excluding the
effects of these one-time payments, the Company's operating activities provided
cash of $245.6 million in 1999, compared to cash of $88.1 million generated from
operations in 1998. The increase in cash generated from operations in 1999,
compared to 1998, was primarily the result of progress in the Company's efforts
to more effectively manage working capital. Cash used in investing activities of
$102.4 million was primarily due to property, plant and equipment purchases of
$100.8 million. Cash used in financing activities of $2.1 million was mainly the
result of cash payments of $35.2 million associated with repurchases of common
stock largely offset by cash receipts of $25.4 million from employee stock
plans.
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28
The Company's cash and short-term investments balances decreased $101.6 million
in 1998 due primarily to cash payments of $359.4 million associated with the
Company's common stock repurchase programs and net investments in property,
plant and equipment of $116.9 million. These payments were partially funded by
net borrowings under the Company's credit facilities of $273.2 million, cash
generated from operating activities of $88.1 million, and a reduction in short-
term investments of $77.3 million. Cash generated from operating activities
decreased to $88.1 million in 1998, compared to $446.7 million in 1997,
primarily as a result of increased cash paid to suppliers and employees. The
increased cash paid to suppliers and employees was primarily a result of cash
paid for additional inventory on hand as of December 25, 1998, for new product
ramp-up, and cash payments in 1998 to reduce accrued liabilities outstanding as
of December 26, 1997. The accrued liabilities as of December 26, 1997, were
higher than as of December 25, 1998, primarily as a result of employee bonus and
profit sharing, and restructuring accruals.
AVAILABLE FINANCING LINES
Borrowings under credit facilities consists of the following (in thousands of
dollars):
December 31, December 25,
1999 1998
---------------------------
Primary Revolver $205,000 $195,000
Promissory notes denominated in foreign currencies 81,152 81,673
----------- -----------
$286,152 $276,673
----------- -----------
----------- -----------
The Company has a revolving credit facility (the Primary Revolver) which expires
in October 2001. The credit limit available under the Primary Revolver ($287.5
million as of December 31, 1999) is reduced by $12.5 million on the last day of
each calendar quarter. The terms of the Primary Revolver were amended in January
2000 to be secured by the Company's U.S. accounts receivable and U.S. inventory.
The interest rates under the Primary Revolver depend upon the repayment period
of the advance selected and the Company's Total Debt to Earnings before
Interest, Taxes, Depreciation and Amortization (EBITDA) ratio. The rate may
range from LIBOR plus 2.00% to 2.50% or the agent bank's base rate plus 0.00% to
0.50%. The weighted average interest rate on the advances as of December 31,
1999, was 7.88%. The Company had borrowings of $205 million and issued letters
of credit for approximately $50,000 under the Primary Revolver as of December
31, 1999. The remaining available credit under the Primary Revolver as of
December 31, 1999, was approximately $82.5 million. The Primary Revolver
contains certain financial and other covenants, including restrictions on
payment of cash dividends on the Company's common stock.
In January 2000, the Company entered into a new $150 million revolving credit
facility (the Supplemental Revolver) which expires in January 2001. The
Supplemental Revolver is secured by the Company's U.S. accounts receivable and
U.S. inventory. The Supplemental Revolver replaced a $150 million revolving
credit facility which expired in January 2000 and for which no borrowings were
outstanding as of December 31, 1999. The interest rates under the Supplemental
Revolver depend upon the repayment period of the advance selected and the
Company's EBITDA ratio. The rate may range from LIBOR plus 2.00% to 2.50% or the
agent bank's base rate plus 0.00% to 0.50%. The Supplemental Revolver contains
certain financial and other covenants, including restrictions on the payment of
cash dividends on the Company's common stock.
The Company has a financing agreement with a bank that provides for the sale of
promissory notes in the principal amount of up to $140 million at any one time.
This financing agreement was amended in January 2000 to provide for the sale of
promissory notes in the principal amount of up to $120 million at any one time.
The agreement, which expires in January 2001, provides for commitments by the
bank to purchase promissory notes denominated in a number of foreign currencies.
As of December 31, 1999, the Company had promissory notes of $81.2 million
outstanding under this financing agreement and had committed to borrowings
between January
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2000 and January 2001 in the cumulative principal amount of approximately $339.5
million. The notes must be repaid only to the extent of future revenue.
Obligations under the agreement are not cancelable by the Company or the bank.
Gains and losses associated with changes in the underlying foreign currencies
are deferred during the commitment period and recognized as an adjustment to the
revenue supporting the note repayment at the time the bank purchases the
promissory notes. The promissory notes, together with accrued interest, are
payable in U.S. dollars within 40 days from the date of issuance. The weighted
average interest rate associated with the promissory notes outstanding as of
December 31, 1999, was 7.65%. Under the terms of the agreement, the Company is
required to comply with certain covenants and, under certain circumstances, may
be required to maintain a collateral account, including cash and qualifying
investments, in an amount up to the outstanding balance of the promissory notes.
The Company believes it has adequate working capital and financing capabilities
to meet its anticipated operating and capital requirements for the next 12
months. Over the longer term, the Company may choose to fund these activities
through the issuance of additional equity or debt financing. The issuance of
equity or convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that any additional long-term financing,
if required, can be completed on terms acceptable to the Company.
TOTAL DEBT-TO-TOTAL CAPITALIZATION
The Company's total debt-to-capitalization ratio increased from 23% as of
December 25, 1998, to 26% as of December 31, 1999, primarily due to a net
increase in borrowings of $9.5 million under the Company's credit facilities.
See "Working Capital," above, for discussion of cash sources and uses.
INTERNATIONAL OPERATIONS
- -------------------------------------
During 1999, 1998, and 1997, approximately 41%, 37%, and 34%, respectively, of
the Company's revenue was generated by its international operations. The Company
also sells products and software through domestic indirect distribution channels
that have end-user customers located outside the United States. The Company
expects that it will continue to generate a significant portion of its revenue
from international operations in the future. The majority of the Company's
international operations involve transactions denominated in the local
currencies of countries within Western Europe, principally Germany, France and
the United Kingdom; Japan; Canada and Australia. An increase in the exchange
value of the United States dollar reduces the value of revenue and profits
generated by the Company's international operations. As a result, the Company's
operating and financial results can be materially affected by fluctuations in
foreign currency exchange rates. In an attempt to mitigate the impact of foreign
currency fluctuations, the Company employs a foreign currency hedging program.
See "Market Risk Management/Foreign Currency Exchange Risk," below.
The Company's international business may be affected by changes in demand
resulting from global and localized economic, business and political conditions.
The Company is subject to the risks of conducting business outside the United
States, including changes in, or impositions of, legislative or regulatory
requirements, tariffs, quotas, difficulty in obtaining export licenses,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws, and other factors outside the Company's control. There can be no
assurances these factors will not have a material adverse effect on the
Company's business or financial results in the future.
MARKET RISK MANAGEMENT/FOREIGN CURRENCY EXCHANGE RISK
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The market risk inherent in the Company's financial instruments relates
primarily to changes in foreign currency exchange rates. To mitigate the impact
of foreign currency fluctuations, the Company seeks opportunities to reduce
exposures through financing activities. Foreign currency options and forward
exchange contracts are also used to reduce foreign currency exposures. All
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foreign currency options and forward exchange contracts are authorized and
executed pursuant to the Company's policies. Foreign currency options and
forward exchange contracts that are designated as and qualify as hedging
transactions are subject to hedge accounting treatment. The Company does not
hold or issue derivatives or any other financial instruments for trading
purposes. See Note 13 to the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
further discussion of the Company's financial instruments and off-balance-sheet
risks.
The Company has a financing agreement with a bank that provides for commitments
by the bank to purchase promissory notes denominated in a number of foreign
currencies. Gains and losses associated with changes in the underlying foreign
currencies are deferred during the commitment period and re