-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UcpDRLXhw6CYgQ2opBPpCS3O+U52W8ODxpns5Nm4rjSaoiZklOFOWJ0EG9OECGiy 6iYQMqZRwd/U7CgDCKteag== 0000950134-96-004113.txt : 19960813 0000950134-96-004113.hdr.sgml : 19960813 ACCESSION NUMBER: 0000950134-96-004113 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960628 FILED AS OF DATE: 19960812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STORAGE TECHNOLOGY CORP CENTRAL INDEX KEY: 0000094673 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 840593263 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07534 FILM NUMBER: 96609070 BUSINESS ADDRESS: STREET 1: 2270 S 88TH ST CITY: LOUISVILLE STATE: CO ZIP: 80028-4306 BUSINESS PHONE: 3036735151 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 28, 1996 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 28, 1996 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) 2270 South 88th Street, Louisville, Colorado 80028-4309 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (303) 673-5151 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 APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock ($.10 Par Value) - 61,222,248 shares outstanding at August 2, 1996. 2 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q JUNE 28, 1996
PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheet 3 Consolidated Statement of Operations 4 Consolidated Statement of Cash Flows 5 Consolidated Statement of Changes in Stockholders' Equity 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 26 Item 4 - Submission of Matters to a Vote of Security Holders 27 Item 6 - Exhibits and Reports on Form 8-K 28
3 Form 10-Q Page 3 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands of Dollars)
06/28/96 (Unaudited) 12/29/95 ----------- ---------- ASSETS Current assets: Cash, including cash equivalents $ 489,780 $ 264,502 Accounts receivable, net 400,273 396,499 Notes and installment receivables (Note 4) 2,643 10,766 Net investment in sales-type leases (Note 4) 6,632 88,668 Inventories (Note 2) 274,815 214,553 ----------- ---------- Total current assets 1,174,143 974,988 Notes and installment receivables (Note 4) 1,530 10,113 Net investment in sales-type leases (Note 4) 4,993 150,751 Equipment held for sale or lease, at cost (net) 133,022 139,629 Spare parts for field service, at cost (net) 34,837 29,468 Property, plant and equipment, at cost (net) 327,653 333,021 Deferred income tax assets, net 85,534 74,902 Other assets 157,476 175,757 ----------- ---------- $1,919,188 $1,888,629 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current liabilities: Nonrecourse borrowings secured by lease commitments (Note 4) $ 19,415 Current portion of other long-term debt (Note 4) $ 5,996 65,844 Accounts payable and accrued liabilities 471,826 454,415 Income taxes payable 29,141 9,963 ----------- ---------- Total current liabilities 506,963 549,637 7% Convertible subordinated debentures (Note 5) 97,149 171,205 8% Convertible subordinated debentures 145,645 145,645 Nonrecourse borrowings secured by lease commitments (Note 4) 20,980 Other long-term debt 25,932 26,133 Deferred income tax liabilities 18,023 12,196 ----------- ---------- Total liabilities 793,712 925,796 ----------- ---------- Commitments and contingencies (Note 3) STOCKHOLDERS' EQUITY Common stock, $.10 par value, 150,000,000 shares authorized; 57,014,255 shares issued at June 28, 1996, and 53,352,087 shares issued at December 29, 1995 5,701 5,335 Capital in excess of par value 1,498,714 1,414,551 Accumulated deficit (372,777) (445,761) Treasury stock of 61,738 shares at June 28, 1996, and 43,773 shares at December 29, 1995 (779) (777) Unearned compensation (4,395) (6,427) Notes receivable from stockholders (988) (4,088) ----------- ---------- Total stockholders' equity 1,125,476 962,833 ----------- ---------- $1,919,188 $1,888,629 =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 4 Form 10-Q Page 4 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Amounts)
Quarter Ended Six Months Ended ------------------ ------------------ 06/28/96 06/30/95 06/28/96 06/30/95 -------- -------- -------- -------- Sales $340,782 $330,739 $658,080 $635,831 Service and rental revenue 138,523 149,963 274,706 295,057 -------- -------- -------- -------- Total revenue 479,305 480,702 932,786 930,888 -------- -------- -------- -------- Cost of sales 198,421 210,244 385,467 401,792 Cost of service and rental revenue 74,568 96,698 147,089 193,239 -------- -------- -------- -------- Total cost of revenue 272,989 306,942 532,556 595,031 -------- -------- -------- -------- Gross profit 206,316 173,760 400,230 335,857 Research and product development costs 48,995 45,207 98,617 93,383 Marketing, general, administrative and other income and expense, net 104,516 114,444 212,630 223,501 Merger expenses 14,352 -------- -------- -------- -------- Operating profit 52,805 14,109 88,983 4,621 Interest income 6,644 11,784 14,884 24,133 Interest expense (7,589) (9,538) (17,018) (20,313) -------- -------- -------- -------- Income before income taxes and extraordinary item 51,860 16,355 86,849 8,441 Provision for income taxes (14,000) (4,500) (23,400) (5,500) -------- -------- -------- -------- Income before extraordinary item 37,860 11,855 63,449 2,941 Extraordinary gain on sale of lease assets, net of income taxes of $8,200 (Note 4) 9,535 -------- -------- -------- -------- Net income 37,860 11,855 72,984 2,941 Preferred dividend requirement (3,019) (6,038) -------- -------- -------- -------- Income (loss) applicable to common shares $ 37,860 $ 8,836 $ 72,984 $ (3,097) ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENTS (Note 6) Primary: Income (loss) before extraordinary item $ 0.70 $ 0.17 $ 1.18 $ (0.06) Extraordinary gain, net 0.17 -------- -------- -------- -------- $ 0.70 $ 0.17 $ 1.35 $ (0.06) ======== ======== ======== ======== Fully Diluted: Income before extraordinary item $ 0.65 $ 1.11 Extraordinary gain, net 0.15 -------- -------- $ 0.65 N/A $ 1.26 N/A ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 Form 10-Q Page 5 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In Thousands of Dollars)
Six Months Ended ------------------------ 06/28/96 06/30/95 ---------- ---------- OPERATING ACTIVITIES Cash received from customers (Note 4) $1,194,900 $1,129,442 Cash paid to suppliers and employees (848,444) (847,435) Interest received 14,884 33,378 Interest paid (14,855) (19,640) Income taxes (paid) refunded, net (16,651) (3,583) ---------- ---------- Net cash from operating activities 329,834 292,162 ---------- ---------- INVESTING ACTIVITIES Purchase of property, plant and equipment (24,046) (44,526) Short-term investments, net 5,557 Merger expenses (9,528) Other assets, net (1,882) (21,747) ---------- ---------- Net cash used in investing activities (25,928) (70,244) ---------- ---------- FINANCING ACTIVITIES Proceeds from nonrecourse borrowings 3,060 Repayments of nonrecourse borrowings (Note 4) (33,753) (138,401) Proceeds from other debt 62 858 Repayments of other debt (Note 4) (63,190) (52,222) Proceeds from employee stock plans 14,987 6,104 Preferred stock dividend payments (6,038) ---------- ---------- Net cash used in financing activities (81,894) (186,639) ---------- ---------- Effect of exchange rate changes on cash 3,266 938 ---------- ---------- Increase in cash and cash equivalents 225,278 36,217 Cash and cash equivalents - beginning of the period 264,502 228,081 ---------- ---------- Cash and cash equivalents - end of the period $ 489,780 $ 264,298 ========== ========== RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Net income $ 72,984 $ 2,941 Depreciation and amortization expense 77,936 111,571 Translation (gain) loss 2,212 (6,922) Other adjustments to income 10,142 20,804 Decrease in accounts receivable 6,282 35,672 Decrease in notes receivable and sales-type leases (Note 4) 237,188 163,978 (Increase) decrease in inventories (60,262) 1,799 Increase in equipment held for sale or lease, net (26,799) (29,261) Increase in spare parts, net (8,701) (7,665) Increase in net deferred income tax asset (4,610) (1,518) Increase (decrease) in accounts payable and accrued liabilities 3,903 (2,672) Increase in income taxes payable 19,559 3,435 ---------- ---------- Net cash from operating activities $ 329,834 $ 292,162 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 6 Form 10-Q Page 6 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (In Thousands of Dollars)
Notes Capital in Receivable Common Excess of Accumulated Treasury Unearned From Stock Par Value Deficit Stock Compensation Stockholders ----------------------------------------------------------------------- Balances, December 29, 1995 $5,335 $1,414,551 $(445,761) $ (777) $ (6,427) $ (4,088) 7% Convertible Subordinated Debentures exchanged for stock (3,151,237 shares) (Note 5) 315 72,667 Shares issued under stock purchase plan and for exercises of options (524,653 shares) 52 11,838 Net income 72,984 Other (1) (342) (2) 2,032 3,100 ------ ---------- ---------- ------- ---------- ---------- Balances, June 28, 1996 $5,701 $1,498,714 $(372,777) $ (779) $ (4,395) $ (988) ====== ========== ========= ======= ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 7 Form 10-Q Page 7 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PREPARATION AND RECENTLY ISSUED ACCOUNTING STANDARDS The accompanying consolidated financial statements of Storage Technology Corporation and its subsidiaries (StorageTek or the Company) have been prepared in accordance with the Securities and Exchange Commission requirements for Form 10-Q. In the opinion of management, these statements reflect all adjustments necessary for the fair presentation of results for the periods presented, and such adjustments are of a normal, recurring nature. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 29, 1995. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, is effective for transactions occurring after December 31, 1996. The Company does not anticipate that the adoption of SFAS No. 125 will have a material affect on its consolidated financial position or results of operations. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands of dollars):
06/28/96 12/29/95 -------- -------- Raw Materials $97,104 $75,673 Work-In-Process 128,502 92,487 Finished Goods 49,209 46,393 -------- -------- $274,815 $214,553 ======== ========
NOTE 3 - LITIGATION On June 10, 1993, the Company filed suit against EMC Corp. in U.S. District Court for the District of Colorado. The suit alleged infringement by EMC Corp. of a patent pertaining to the Company's disk storage technology. The complaint asked the court to impose injunctive relief, treble damages in an unspecified amount, and an award of attorney fees and costs. EMC Corp. filed an answer and counterclaim on July 20, 1993, alleging, among other things, patent misuse by StorageTek and seeking the invalidation of the Company's patents, damages in an unspecified amount and an award of attorney fees, costs and interest. On September 23, 1994, EMC Corp. filed suit in U.S. District Court in Wilmington, Delaware, alleging infringement of a patent pertaining to disk storage technology. The complaint asked the court to impose injunctive relief, treble damages in an unspecified amount and an award of 8 Form 10-Q Page 8 attorney fees and costs. On December 22, 1994, the Company filed a counterclaim for infringement of one of its patents and, in November 1995, added a second patent to its counterclaim. On April 16, 1996, the Company and EMC Corp. settled the above suits filed on June 10, 1993, and September 23, 1994, and each of the related counterclaims. The settlement includes a cross-licensing agreement limited to patents covering rotating and solid-state direct access storage device technologies. 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. The suit sought injunctive relief and damages in the amount of $2,400,000,000. On December 28, 1995 the court dismissed the complaint. Stuff has appealed the dismissal to the Colorado Court of Appeals. In April 1996, the trial court stayed discovery on the Company's counterclaim for breach of the covenant not to sue pending resolution of the appeal. On February 15, 1994, the Company filed suit in Boulder County, Colorado, District Court against Array Technology Corporation (Array) and Tandem Computers Incorporated (Tandem). The suit asked that the court order Array and Tandem to either support certain disk drives purchased from them or provide the Company with technical data necessary for StorageTek to provide such customer support. In March 1994, Array and Tandem filed their answer and also filed counterclaims against the Company alleging breach of contract and claiming damages. On June 10, 1994, the court ordered Array and Tandem to continue to provide support for these products and to maintain, in an independent escrow account, the materials necessary to enable the Company to support the products in the event Array and Tandem failed to provide such services. On May 30, 1995, the Company filed an amended complaint seeking damages. The case is in the discovery phase. A trial date has been set for November 1996. On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S. District Court for the Eastern District of Virginia against the Company and two of its customers alleging that the "pass-through" port in certain of the Company's tape library products infringed U.S. Patent No. 4,779,151 (the "151 Patent"). The complaint asked the court to impose injunctive relief, treble damages in an unspecified amount, and an award of attorneys fees and costs. On February 1, 1996, a jury found that the Company's products did not infringe the 151 Patent. A notice of appeal to the U.S. Court of Appeals for the Federal Circuit was filed by Odetics, Inc. on March 8, 1996. Oral argument on the appeal of this suit is expected in late 1996. On December 8, 1995, Odetics, Inc. filed a second patent infringement suit in the U.S. District Court for the Eastern District of Virginia against the Company. The complaint alleges that the "cartridge access port" in certain of the Company's tape library products also infringe the 151 Patent. The complaint seeks injunctive relief, treble damages in an unspecified amount, and an award of attorneys fees and costs. This case has been stayed pending the outcome of any appeal to the U.S. Court of Appeals for the Federal Circuit with respect to the case filed by Odetics, Inc. on June 29, 1995. In addition, the Company is involved in various other less significant legal proceedings. The Company believes it has adequate legal defenses with respect to each of the suits cited above 9 Form 10-Q Page 9 and intends to vigorously defend against these actions. However, it is reasonably possible that these cases could result in outcomes unfavorable to the Company. While the Company currently believes that the amount of the ultimate potential loss would not be material to the Company's financial position, the outcome of litigation is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material effect on the Company's financial position or reported results of operations in a particular quarter. An adverse decision, particularly in patent litigation, could require material changes in production processes and products or result in the Company's inability to ship products or components found to have violated third-party patent rights. NOTE 4 - SALE OF LEASE ASSETS In March 1996, StorageTek sold all of the issued and outstanding stock of its wholly owned lease financing subsidiary, StorageTek Financial Services Corporation (SFSC), as well as the lease assets of certain of the Company's foreign subsidiaries to Leasetec Corp. (Leasetec). These transactions resulted in the sale of substantially all of the Company's net investment in sales-type leases, installment receivables, and equipment held subject to operating leases. Leasetec assumed approximately $6,000,000 of associated nonrecourse borrowings and the Company used a portion of the cash proceeds to retire its remaining nonrecourse borrowings and 9.53% Senior Secured Notes. The transactions resulted in an extraordinary gain of $9,535,000, net of applicable taxes of $8,200,000, in the first quarter of 1996. The increase in net cash from operating activities on the Consolidated Statement of Cash Flows during the six months ending June 28, 1996, as compared to the same period of 1995, is largely a result of cash received from the sale of lease assets. NOTE 5 - DEBT AND OTHER FINANCING ARRANGEMENTS On June 12, 1996, the Company called for redemption on July 12, 1996, all outstanding 7% Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) in the principal amount of approximately $171,000,000. During the six months of 1996, 7% Convertible Debentures in the principal amount of $74,056,000 were converted at a price of $23.50 per share into 3,151,237 shares of common stock. Substantially all of the remaining outstanding 7% Convertible Debentures were converted into 4,131,087 shares of common stock on or before July 12, 1996. The Company redeemed all remaining outstanding 7% Convertible Debentures on July 12, 1996, in the principal amount of $67,000. On March 28, 1996, the Company entered into a $150,000,000 secured credit agreement (the Revolver) which expires in May 1998. The interest rates available under the Revolver depend on the type of advance selected. The current primary advance rate is the agent bank's prime lending rate plus 0.125% (8.375% as of June 28, 1996). Under the Revolver, the Company is required to comply with certain financial and other covenants, including restrictions on the payment of cash dividends on its common stock. As of June 28, 1996, the Company had issued letters of credit for approximately $22,000,000 and had approximately $128,000,000 of available credit under the Revolver. On January 29, 1996, the Company entered into a financing agreement with a bank which provides for the sale of certain U.S. and foreign based accounts receivable on a recourse basis which currently expires on July 31, 1997. This agreement allows for receivable sales of up 10 Form 10-Q Page 10 to $40,000,000 at any one time and the Company's obligations under the agreement are secured by a letter of credit for the amount of the receivables sold. The selling price of the receivables is partially determined based upon foreign currency exchange rates and any gains or losses on the sales are recognized within marketing, general, administrative and other income and expense, net, in the Consolidated Statement of Operations at the time the receivables are sold. As of June 28, 1996, the Company had committed to future cumulative sales of approximately $204,000,000. Gains and losses associated with the receivable sales are not expected to have a material effect on the Company's reported financial results after taking into consideration other transactions associated with the Company's international operations. Based upon the Company's past credit and collection experience with respect to the receivables that it expects to sell, the Company believes that no material credit risk exists under the recourse provisions of the agreement. NOTE 6 - EARNINGS PER COMMON SHARE Fully diluted earnings per common share for the second quarter and six months ended June 28, 1996, reflects the assumed conversion of the Company's remaining outstanding 7% Convertible Debentures and the 8% Convertible Subordinated Debentures as of the end of the period, whereas these convertible securities were either not outstanding or were not dilutive in the same periods of 1995. NOTE 7 - RESTRUCTURING During the fourth quarter of 1995, the Company adopted a formal action plan for restructuring its enterprise and networking businesses. The restructuring was adopted in an effort to establish a more cost efficient business structure in response to competition. Elements of the Company's restructuring plan included focusing on its core businesses, outsourcing non-strategic activities, rearchitecting its distribution processes and accelerating the integration of Network Systems Corporation (Network Systems). The following table summarizes the activity associated with the Company's restructuring reserves during the six months of 1996 (in thousands of dollars): Employee Lease Other Severance Abandonments Exit Costs Total --------- ------------ ---------- -------- Balances, December 29, 1995 $ 42,688 $18,538 $10,172 $ 71,398 Cash payments (19,618) (1,177) (2,847) (23,642) Reclassifications 301 (154) 1,222 1,369 --------- ------- ------- -------- Balances, June 28, 1996 $ 23,371 $17,207 $ 8,547 $ 49,125 ========= ======= ======= ======== Cash payments during the six months of 1996 are primarily the result of a reduction in the number of employees of approximately 1,600 people. Reclassifications consist principally of reclassifying a restructuring accrual as other exit costs of approximately $1,400,000, which was previously recorded as a direct write-off of a fixed asset. The reclassifications had no effect on 11 Form 10-Q Page 11 the Company's reported results within the Consolidated Statement of Operations during the six months of 1996. While the majority of these remaining accruals are expected to result in future cash outflows, these outflows are not expected to have a material effect on the Company's liquidity. NOTE 8 - IBM ORIGINAL EQUIPMENT MANUFACTURER (OEM) ARRANGEMENT On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM agreement with International Business Machines Corporation (IBM). Under the terms of the agreement, StorageTek will develop and manufacture mainframe online storage products for IBM. IBM will serve as StorageTek's primary distribution channel for this technology and StorageTek does not anticipate that it will continue to sell this technology directly to end-user customers during the term of the agreement. The agreement, which expires in 1999, contains certain minimum purchase commitments on behalf of IBM. The agreement also contains provisions including, among others, product quality, availability, supply, delivery, and development milestones. Failure to achieve these milestones may result in reduced purchase commitments, the imposition of penalties and, under certain circumstances, IBM may terminate the agreement. StorageTek is required to perform, and IBM will fund, certain research and development activities associated with the development of enhancements to these products. The technology which is developed will be owned by IBM, subject to licensing rights by StorageTek. Revenue on sales to IBM will be recognized at the time of shipment in accordance with the Company's revenue recognition policy for OEM sales. Costs associated with post-installation warranty obligations will be estimated and accrued at the time of revenue recognition. 12 Form 10-Q Page 12 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 28, 1996 CERTAIN STATEMENTS IN THE FOLLOWING DISCUSSION REGARDING THE COMPANY'S FUTURE PRODUCTS AND BUSINESS PLANS, FINANCIAL RESULTS, PERFORMANCE AND EVENTS ARE FORWARD-LOOKING STATEMENTS AND ARE BASED ON CURRENT EXPECTATIONS. ACTUAL RESULTS MAY DIFFER MATERIALLY DUE TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THE RISKS DISCUSSED UNDER THE HEADING "OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT. GENERAL Storage Technology Corporation (StorageTek or the Company) reported net income for the second quarter ended June 28, 1996, of $37.9 million on revenue of $479.3 million, compared to net income for the second quarter ended June 30, 1995, of $11.9 million on revenue of $480.7 million. Net income of $73.0 million was reported for the six months of 1996 on revenue of $932.8 million, compared to net income of $2.9 million for the six months of 1995 on revenue of $930.9 million. The Company's reported net income for the six months of 1996 includes an extraordinary gain of $9.5 million, net of taxes, associated with the sale of substantially all of the Company's lease assets. Revenue was largely unchanged for both the second quarter and six months of 1996 as compared to the same periods in 1995; however, revenue for the second quarter and six months of 1995 included revenue of approximately $20 million and $48 million, respectively, associated with the Company's midrange business which was sold during 1995. During the second quarter and six months of 1996, the Company received significantly increased revenue and gross profit contribution from TimberLine 9490 (TimberLine), a 36-track tape cartridge subsystem, over the same periods of 1995. PowderHorn 9310 (PowderHorn), an Automated Cartridge System (ACS) Library; and RedWood SD-3 (RedWood), a high-capacity cartridge subsystem, also contributed to increased revenue and operating profit during these periods as compared to the same periods of 1995. As anticipated, revenue from older generation Nearline products decreased during the second quarter and six months of 1996, compared to the same periods of 1995. While revenue from Iceberg 9200 Virtual Storage Facility (Iceberg) subsystems increased in the second quarter of 1996 as compared to the second quarter of 1995, gross margin contribution decreased due to intense price competition in the online marketplace. Revenue contribution from networking products decreased during the second quarter and six months of 1996, compared to the same periods of 1995, primarily due to the continued decline in revenue from older networking products and lower than expected revenue from the Enterprise Routing Switch (ERS); however, progress in the Company's restructuring activities resulted in the realization of cost savings associated with the manufacture of this product line during the second quarter and six months of 1996. The Company's revenue and operating results during the remainder of 1996 are significantly dependent upon sustaining the market growth of TimberLine and PowderHorn; gaining market acceptance for new Nearline products, including products targeted for the open-systems market; successfully managing the transition in the Company's business model for its 13 Form 10-Q Page 13 mainframe online products to serving primarily as an OEM supplier to International Machines Corporation (IBM); successfully addressing distribution issues associated with the Company's networking products; and the effective implementation of significant business restructuring activities initiated during the fourth quarter of 1995. Future results are also dependent upon the Company's ability to successfully identify, expand, and capitalize on new emerging product and service markets outside the Company's traditional marketplace. For discussion of these factors and other risk factors, see "OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS," below. The Company's cash balances increased $225.3 million during the six months of 1996 primarily as a result of net cash flows generated from the sale of substantially all of the Company's lease assets, as well as cash flows generated from operations. See "EXTRAORDINARY GAIN," below, for further discussion of the lease asset sale. The following table, stated as a percentage of total revenue, presents Consolidated Statement of Operations information and revenue by product line which includes product sales, service and rental, and software revenue.
Quarter Ended Six Months Ended ------------------ ------------------ 06/28/96 06/30/95 06/28/96 06/30/95 -------- -------- -------- -------- Revenue: Nearline products 67.9% 61.2% 66.7% 58.9% Online products 17.5 16.4 18.0 18.7 Networking products 8.8 11.2 9.6 11.3 Other products 5.8 11.2 5.7 11.1 -------- -------- -------- -------- Total revenue 100.0 100.0 100.0 100.0 Cost of revenue 57.0 63.9 57.1 63.9 -------- -------- -------- -------- Gross profit 43.0 36.1 42.9 36.1 Research and product development costs 10.2 9.4 10.6 10.0 Marketing, general, administrative and other income and expense, net 21.8 23.8 22.8 24.0 Merger expenses 1.6 -------- -------- -------- -------- Operating profit 11.0 2.9 9.5 0.5 Interest income (expense), net (0.2) 0.5 (0.2) 0.4 -------- -------- -------- -------- Income before income taxes and extraordinary item 10.8 3.4 9.3 0.9 Provision for income taxes (2.9) (0.9) (2.5) (0.6) -------- -------- -------- -------- Income before extraordinary item 7.9 2.5 6.8 0.3 Extraordinary gain on sale of lease assets, net of income taxes 1.0 -------- -------- -------- -------- Net income 7.9% 2.5% 7.8% 0.3% ======== ======== ======== ========
REVENUE NEARLINE PRODUCTS Revenue from Nearline products increased 11% and 13% in the second quarter and six months of 1996, respectively, compared to the same periods in 1995, primarily due to a significant increase in revenue from TimberLine. Revenue contribution from PowderHorn and RedWood, 14 Form 10-Q Page 14 which was introduced in the first quarter of 1995, also increased in the second quarter and six months of 1996, compared to the same periods in 1995; however, market acceptance for RedWood was slower than expected. As anticipated, revenue from older generation Nearline products, such as 4480 18-Track Tape Cartridge Subsystem, Silverton 4490 36-Track Tape Cartridge Subsystem (Silverton), and 4410 Automated Cartridge Subsystem (ACS) library declined in the second quarter and six months of 1996, compared to the same periods 1995. Future results of the Nearline product line are significantly dependent upon the continued success of TimberLine and PowderHorn, and gaining market acceptance for other new Nearline products, including products targeted for the open-systems market. Sales of these products are expected to offset anticipated further declines in revenue from older generation Nearline products. There can be no assurance that RedWood or other new Nearline products will gain market acceptance in the future. ONLINE PRODUCTS Revenue from online products increased 6% in the second quarter of 1996 and decreased 4% in the six months of 1996, as compared to the same periods in 1995. While revenue from Iceberg subsystems increased in the second quarter of 1996 as compared to the second quarter of 1995, the gross margin contribution from Iceberg decreased due to intense price competition in the online marketplace. The effects of price competition on Iceberg increased during June 1996 as the Company began transitioning its business model to primarily serving as an OEM supplier of mainframe online storage products to IBM. The decrease in revenue contribution from online products also reflects a decrease in service revenue contribution from older online products. On June 7, 1996, StorageTek entered into a worldwide non-exclusive OEM agreement with IBM. Under the terms of the agreement, StorageTek will develop and manufacture for IBM, mainframe online storage products that it sells under the brand names Iceberg, Kodiak 9890 Scalable Storage Facility (Kodiak) and Arctic Fox 9800 High-Performance Shared-Access Facility (Arctic Fox). IBM will serve as StorageTek's primary distribution channel for this technology and StorageTek does not anticipate that it will continue to sell this technology directly to end-user customers during the term of the agreement. IBM plans to market these products under the names to IBM RAMAC Virtual Array Storage, IBM RAMAC Scalable Array Storage and IBM RAMAC Electronic Array Storage. The agreement, which expires in 1999, contains certain minimum purchase commitments on behalf of IBM. The agreement also contains provisions including, among others, product quality, availability, supply, delivery, and development milestones. Failure to achieve these milestones may result in reduced purchase commitments, the imposition of penalties and, under certain circumstances, IBM may terminate the agreement. The Company anticipates it will experience further online price competition during the third quarter of 1996 as it transitions into primarily serving as an OEM supplier of mainframe online storage products. The Company anticipates the OEM agreement with IBM will benefit the Company in the longer term through increased revenue contribution from the mainframe online product line, due to increased market penetration. Additionally, the OEM arrangement with IBM is expected to allow the Company to redirect resources to its other product lines, as well as new, emerging products and services outside the Company's traditional marketplace. There 15 Form 10-Q Page 15 can be no assurance that the Company will achieve the milestones provided for in the OEM agreement or that the Company will realize the anticipated benefits. NETWORKING PRODUCTS Revenue from networking products decreased 21% and 14% in the second quarter and six months of 1996, respectively, compared to the same periods in 1995. These decreases are due primarily to the continued decline in revenue from older networking products and lower than expected revenue from ERS as the Company continued the implementation of restructuring actions aimed at increasing the focus on core networking products for the information storage and retrieval marketplace. Progress in the Company's restructuring activities resulted in the realization of cost savings associated with the manufacture of this product line during the second quarter and six months of 1996. In June 1996, StorageTek and Northern Telecom, Inc. (NORTEL) entered into a reseller agreement whereby StorageTek will distribute Magellan Passport, NORTEL's network switching product, which supports both Wide Area Networks (WAN) and Local Area Networks (LAN). In connection with this agreement, StorageTek and NORTEL terminated their pre-existing joint development agreement for the LAN-based ERS. StorageTek does not anticipate that the termination of this agreement or discontinuance of ERS product sales will have a material adverse impact on the Company. Future revenue and operating results from the Company's networking products are significantly dependent upon increasing the market penetration for network security, channel extension, backup, retrieval, and migration products; successfully expanding the networking product line; developing new market distribution channels; and reducing operating expenses. There can be no assurance the Company's networking products will generate any significant profits in the future or that new products will be successfully and timely developed or gain market acceptance. OTHER PRODUCTS Revenue from other products decreased 49% and 48% in the second quarter and six months of 1996, respectively, compared to the same periods in 1995. This decline is primarily the result of the Company's sale of its net investment in sales-type leases associated with its midrange business during the second quarter of 1995 and the sale of substantially all of the midrange service business during the third quarter of 1995. GROSS PROFIT Overall gross profit increased to 43% in both the second quarter and six months of 1996, compared to 36% in same periods of 1995, due to an increase in both product sales margins and service margins. Gross profit on product sales increased to 42% and 41% in the second quarter and six months of 1996, respectively, compared to 36% and 37% in the second quarter and six months of 1995, respectively. These increases are principally a result of cost savings achieved in connection with the Company's 1995 restructuring, increased manufacturing volumes, and lower purchase costs associated with components for online and Nearline products during 16 Form 10-Q Page 16 1996. Product sales margins in 1996 have also benefited from reduced revenue contribution from lower-margin midrange products as a result of the sale of the midrange lease assets in the second quarter of 1995. Product sales margins from Iceberg declined during the second quarter of 1996 as a result of competitive pricing pressures as the Company transitions to a new business model of primarily serving as an OEM supplier of mainframe online storage products to IBM; however, this decline was more than offset by higher product sales margins associated with Nearline products. Gross profit on service and rental revenue increased to 46% in both the second quarter and six months of 1996, compared to 36% and 35% for the second quarter and six months of 1995. These increases are primarily due to cost savings associated with the 1995 restructuring and reduced service revenue contribution from lower-margin midrange service as a result of the sale of the midrange service business in the third quarter of 1995. In addition to costs savings associated with the restructuring, certain organizational functions were realigned within the Company as a result of the restructuring. This realignment resulted in costs and expenses in the second quarter and six months of 1996 of approximately $2.0 million and $4.0 million, respectively, being reported as research and product development costs which were previously associated with customer services activities. Other costs and expenses previously associated with customer services activities, aggregated approximately $1.4 million and $2.8 million during the second quarter and six months of 1996, respectively, were reported as marketing, general, administrative and other income and expense. The Company's ability to sustain or improve product sales margins during the remainder of 1996 is significantly dependent upon the Company's ability to successfully manage the transition under the OEM agreement with IBM for its mainframe online storage products. The Company anticipates that sales margins will be pressured due to lower OEM pricing and scheduled price reductions over the term of the OEM agreement, which will be partially offset by lower manufacturing costs resulting from increased volumes and operating expense savings; however, the Company must further reduce costs and expenses associated with manufacturing these products in order to achieve expected benefits. Product sales margins during the remainder of 1996 are also significantly dependent upon achieving further cost savings associated with the manufacture of its Nearline and networking products. Product sales margins also may be adversely affected by inventory writedowns resulting from rapid technological changes and delays in gaining market acceptance for new products. Service margins also may be affected in the future due to increased price competition. RESEARCH AND PRODUCT DEVELOPMENT Research and product development expenditures increased 8% and 6% in the second quarter and six months of 1996, respectively, compared to the same periods of 1995, and increased as a percentage of revenue from 9.4% and 10.0% for the second quarter and six months of 1995, respectively, to 10.2% and 10.6% for the second quarter and six months of 1996, respectively. These increases are due primarily to increases of approximately $2.0 million and $4.0 million in the second quarter and six months of 1996, respectively, resulting from the realignment of certain organizational functions under the research and development organization which were previously associated with customer service activities, as well as a lower level of capitalized software development costs as products and enhancements progress through the development cycle. These increases more than offset cost savings resulting from the 1995 restructuring. 17 Form 10-Q Page 17 Effective July 1, 1996, certain research and development activities associated with the development of enhancements to the Company's mainframe online storage products will be financed by IBM pursuant to the OEM agreement. Accordingly, the Company anticipates a reduction in research and development expenses associated with these products during the second half of 1996. The Company anticipates that this decrease will be partially offset by increased investment in research and development activities associated with new products outside its traditional markets. MARKETING, GENERAL, ADMINISTRATIVE AND OTHER Marketing, general, administrative and other income and expense (MG&A and Other) decreased 9% and 5% in the second quarter and six months of 1996, respectively, compared to the same periods of 1995. The cost savings associated with the 1995 restructuring were partially offset by an increase of approximately $1.4 million and $2.8 million in the second quarter and six months of 1996, respectively, as a result of the realignment of certain organizational functions under the marketing organization which were previously associated with customer service activities. INTEREST INCOME AND EXPENSE Interest income decreased 44% and 38% in the second quarter and six months of 1996, respectively, compared to the same periods of 1995, due primarily to a reduction in the Company's net investment in sales-type lease balances. Interest expense decreased 20% and 16% in the second quarter and six months of 1996, respectively, as compared to the same periods of 1995, due primarily to a reduction in nonrecourse borrowings and other long-term debt. These decreases were partially offset by incremental interest expense associated with the exchange of the Company's 7% Convertible Subordinated Debentures for its $3.50 Convertible Exchangeable Preferred Stock in the fourth quarter of 1995. As further discussed in Note 5 to the Notes to Consolidated Financial Statements, the 7% Convertible Subordinated Debentures were called for redemption on June 12, 1996. It is anticipated that interest expense during the second half of 1996 will decline as a result of the conversion or redemption of these debentures. INCOME TAXES 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 $85.5 million of deferred income tax assets as of June 28, 1996. The Company's valuation allowance of approximately $165.7 million on a gross deferred tax asset of approximately $251.2 million as of June 28, 1996, was established based upon the consideration of a variety of factors, including the fact that the Company has a cumulative net loss in recent years, as well as uncertainties associated with the successful completion of its recent restructuring activities and the possible impact of adjustments by the Internal Revenue Service to the Company's previously filed federal income tax returns. The Company's effective tax rate can be subject to significant fluctuations due to dynamics associated with the mix of its U.S. and international taxable earnings. 18 Form 10-Q Page 18 EXTRAORDINARY GAIN As more fully discussed in Note 4 of Notes to Consolidated Financial Statements, in March 1996, StorageTek sold substantially all of the Company's net investment in sales-type leases, installment receivables, and equipment held subject to operating leases to Leasetec Corporation (Leasetec). The sale was a result of the Company's efforts to focus on the core businesses and outsource its capital intensive lease financing business. Leasetec assumed approximately $6.0 million of associated nonrecourse borrowings and the Company used a portion of the cash proceeds to retire its remaining nonrecourse borrowings and 9.53% Senior Secured Notes. The transactions resulted in an extraordinary gain of $9.5 million, net of applicable taxes of $8.2 million, in the first quarter of 1996. RESTRUCTURINGS During the fourth quarter of 1995, the Company adopted a formal action plan for restructuring its enterprise and networking businesses. The restructuring was adopted in an effort to establish a more cost efficient business structure in response to competition. Elements of the Company's restructuring plan included focusing on core businesses, outsourcing non-strategic activities, rearchitecting its distribution processes and accelerating the integration of Network Systems. The following table summarizes the activity associated with the Company's restructuring reserves during the six months of 1996 (in thousands of dollars):
Employee Lease Other Severance Abandonments Exit Costs Total --------- ------------ ---------- -------- Balances, December 29, 1995 $42,688 $18,538 $10,172 $71,398 Cash payments (19,618) (1,177) (2,847) (23,642) Reclassifications 301 (154) 1,222 1,369 --------- ------------ ---------- -------- Balances, June 28, 1996 $23,371 $17,207 $8,547 $49,125 ========= ============ ========== ========
Cash payments during the six months of 1996 are primarily the result of a reduction in the number of employees of approximately 1,600 people. Reclassifications consist principally of reclassifying a restructuring accrual as other exit costs of approximately $1.4 million, which was previously recorded as a direct write-off of a fixed asset. The reclassifications had no effect on the Company's reported results within the Consolidated Statement of Operations during the six months of 1996. While the majority of these remaining accruals are expected to result in future cash outflows, these outflows are not expected to have a material effect on the Company's liquidity. The elimination of recurring costs associated with the restructuring was expected to yield expense reductions on an annual basis of approximately $125 million at the time of the restructuring. 19 Form 10-Q Page 19 Based upon all currently available information, the Company anticipates that it is on track with this estimate. The Company does not expect to realize the full benefit of the expense reductions until the second half of 1997 when all associated restructuring activities are expected to be completed. While the Company is evaluating various outsourcing and automation projects in order to gain further improvements in operating efficiencies, the Company does not anticipate that any material incremental costs have been or will be incurred as part of the restructuring which would offset the anticipated expense reductions. The Company believes that its restructuring programs have eliminated certain non-essential functions and excess costs. Based on current short- and long-term forecasts, the Company believes that such cost reductions will benefit future operations. While the Company does not currently foresee any significant additional restructuring charges in the near future, the successful implementation of the action plans associated with the Company's restructuring during 1996 and 1997 is critical to achieving improved operating results in future periods. There can be no assurance that the anticipated expense reductions will be achieved, or that the Company's restructuring activities will otherwise be successful or sufficient to allow the Company to generate improved operating results in future periods. It is possible that changes in the Company's business or in its industry may necessitate future restructuring charges, which may be significant. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL The Company's cash balances increased $225.3 million from December 29, 1995, to June 28, 1996. The increase in cash during the six months of 1996 primarily resulted from cash generated from operations of $329.8 million which was partially offset by net repayments of nonrecourse borrowings and other debt of $96.9 million. The increase in net cash from operating activities during the six months of 1996 is a result of cash received from the sale of lease assets and increased cash from operations, partially offset by cash payments associated with the 1995 restructuring. In connection with the sale of lease assets, the Company used a portion of the cash proceeds to retire its remaining nonrecourse borrowings and its 9.53% Senior Secured Notes. Net cash from operating activities of $292.2 million during the six months of 1995 included cash generated from the sale of midrange lease assets and collections of income tax refunds and associated interest by Network Systems from the Internal Revenue Service of $18.9 million. The current ratio increased to 2.3 as of June 28, 1996, from 1.8 as of December 29, 1995. Accounts receivable increased slightly from $396.5 million as of December 29, 1995, to $400.3 million as of June 28, 1996. Inventories increased from $214.6 million as of December 29, 1995, to $274.8 million as of June 28, 1996, in anticipation of higher volumes of online and Nearline product sales. AVAILABLE FINANCING LINES On March 28, 1996, the Company entered into a $150 million secured credit agreement (the Revolver) which expires in May 1998. The interest rates available under the Revolver depend on the type of advance selected. The current primary advance rate is the agent bank's prime lending rate plus 0.125% (8.375% as of June 28, 1996). Under the Revolver, the Company is required to comply with certain financial and other covenants, including restrictions on the 20 Form 10-Q Page 20 payment of cash dividends on its common stock. As of June 28, 1996, the Company had issued letters of credit for approximately $22 million and had approximately $128 million of available credit under the Revolver. On January 29, 1996, the Company entered into a financing agreement with a bank which provides for the sale of certain U.S. and foreign based accounts receivable on a recourse basis, which currently expires on July 31, 1997. This agreement allows for receivable sales of up to $40 million at any one time and StorageTek's obligations under the agreement are secured by a letter of credit for the amount of the receivables sold. The selling price of the receivables is partially determined based upon foreign currency exchange rates and any gains or losses on the sales are recognized within MG&A and Other in the Consolidated Statement of Operations at the time the receivables are sold. As of June 28, 1996, the Company had committed to future cumulative sales of approximately $204 million. Gains and losses associated with the receivable sales are not expected to have a material effect on the Company's reported financial results after taking into consideration other transactions associated with the Company's international operations. 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 intends to continue to commit substantial amounts of its resources to research and development projects and may, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies. The Company may seek to fund these activities or possible transactions through the issuance of additional equity or debt. The issuance of equity or convertible debt securities could result in dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, can be completed on terms acceptable to the Company. TOTAL DEBT-TO-CAPITALIZATION The Company's total debt-to-capitalization ratio decreased from 32% as of December 29, 1995, to 20% as of June 28, 1996. The decrease resulted from the repayment of nonrecourse borrowings and certain other debt associated with the sale of lease assets to Leasetec during the first quarter of 1996, as well as the conversion of 7% Convertible Subordinated Debentures in the principal amount of $74 million into common stock during June 1996. REPAYMENT OBLIGATIONS AND CONVERSION FEATURES Pursuant to the indenture for the Company's 8% Convertible Subordinated Debentures due 2015 (8% Convertible Debentures), the Company is required to make semiannual interest payments on the $145.6 million principal amount of the 8% Convertible Debentures outstanding. The 8% Convertible Debentures are unsecured, subordinated obligations of the Company and are currently convertible at the option of the holder into common stock at a price of $35.25 per share. The 8% Convertible Debentures are currently redeemable at the option of the Company at a premium of 3.2%, and are redeemable at decreasing premiums through May 30, 2000. The Company is required to make annual principal payments of $8 million, plus accrued interest, into a sinking fund beginning May 31, 2000, to provide for the retirement of 75% of the 8% Convertible Debentures prior to their maturity on May 31, 2015. 8% Convertible Debentures purchased by the Company in the open market and 8% Convertible Debentures converted to common stock may be applied to the sinking fund requirements. As of June 28, 21 Form 10-Q Page 21 1996, the Company held 8% Convertible Debentures in the principal amount of $14.4 million available for sinking fund payments. On June 12, 1996, the Company called for redemption on July 12, 1996, all outstanding 7% Convertible Subordinated Debentures due 2008 (7% Convertible Debentures) in the principal amount of $171 million. During the six months of 1996, 7% Convertible Debentures in the principal amount of $74 million were converted at a price of $23.50 per share into 3.2 million shares of common stock. Substantially all of the remaining outstanding 7% Convertible Debentures were converted into 4.1 million shares of common stock on or before July 12, 1996. The Company redeemed all remaining outstanding 7% Convertible Debentures on July 12, 1996, in the principal amount of $67,000. INTERNATIONAL OPERATIONS AND HEDGING ACTIVITIES In the second quarter and six months of 1996, approximately 43% of the Company's revenue was generated by its international operations and the Company expects that it will generate a significant portion of its revenue from international operations in 1996. 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 U.S. dollar reduces the value of revenue and profits generated by the Company's international operations. As a result, the Company's operations and financial results can be materially affected by changes in foreign currency exchange rates. In an attempt to mitigate the impact of foreign currency fluctuations, the Company employs a hedging program which takes into account operating and financing activities to reduce exposures and utilizes foreign currency options and forward exchange contracts. The Company utilizes foreign currency options, generally with maturities of less than one year, to hedge a portion of its exposure to exchange-rate fluctuations in connection with anticipated revenue from its international operations. Gains and losses on the options are deferred and recognized as an adjustment to the hedged revenue. The Company also utilizes forward exchange contracts, generally with maturities of less than two months, to hedge its exposure to exchange-rate fluctuations in connection with net monetary assets held in foreign currencies. The forward contracts are marked-to-market each month with any gains or losses recognized within MG&A and Other as an adjustment to the foreign exchange gains and losses on the translation of net monetary assets. The Company's international business may be affected by changes in demand resulting from localized economic and market conditions. For example, in the past, the Company's business has been adversely affected by recessions in Europe. In addition, the Company is subject to the risks of conducting business outside 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. To date, the Company has not experienced any material adverse effects on its operations as a result of the foregoing factors. There can be no assurances, however, that one or more of the foregoing factors will not have a material adverse effect on the Company's business or financial results in the future. 22 Form 10-Q Page 22 OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS NEW PRODUCTS, SERVICES AND DISTRIBUTION CHANNELS The successful and timely development of new products, software applications and enhancements play a key role in determining the Company's results of operations and competitive strength. The market for the Company's products is characterized by rapid technological advances and changes in customer demand which necessitate frequent product introductions and enhancements. These factors can result in unpredictable product transitions, shortened product life cycles, and can render existing products obsolete or unmarketable. The Company must make significant investments in research and product development and successfully introduce competitive new products and enhancements on a timely basis. The success of new product introductions is dependent on a number of factors including market acceptance and effectively managing the risks associated with product transitions. The development of new technology, products, and enhancements is complex and involves uncertainties, which may result in delays in the introduction of new products and enhancements, and the manufacture of existing products. From time to time the Company has encountered delays that have adversely affected the Company's financial results and competitive position in the market. There can be no assurances that the Company will not encounter development or production delays, or that despite intensive testing by the Company, flaws in design or production will not occur in the future. Design flaws could result in the Company experiencing a rate of failure in its products that delay the shipment or sale of its products, trigger substantial repair or replacement costs, excessive warranty claims and damage to the Company's reputation and have a material adverse effect upon the Company's financial results. The Company has historically generated a significant portion of its revenue and operating profits from the sales and service of information storage and retrieval products in the mainframe marketplace. The Company is currently engaged in a variety of initiatives targeted at growing revenue outside its traditional marketplace and is committing substantial resources to these initiatives. These initiatives include developing new products for the open-systems marketplace; developing network-attached storage solutions; establishing a consulting services business to capitalize on the Company's expertise in computer data storage; and developing new channels for the distribution of products. There can be no assurances that the Company will be successful in expanding into these new marketplaces. DEPENDENCE ON IBM Many of the Company's products are designed to be compatible with certain IBM operating systems and many of its products function like IBM equipment due to the significance of the IBM computer operating environments. Future revenue from products and services is therefore dependent on the marketplace's continued widespread acceptance of and IBM's continued support of these products. OEM SUPPLIER In June 1996, the Company entered into a worldwide non-exclusive OEM agreement with IBM under which StorageTek will develop and manufacture mainframe online storage products for IBM and IBM will serve as StorageTek's primary distribution channel for these products through the term of the agreement. This OEM arrangement represents a significant change from the 23 Form 10-Q Page 23 Company's past business model. The Company's success in its mainframe online storage business is now significantly dependent upon managing this transition, IBM's continuous support for these products and its success in marketing these products to end-user customers. Because of lower OEM pricing and scheduled price reductions, the Company must achieve cost-savings associated with the manufacture of these online products in order to maintain its profit margins. In addition, subject to required lead times and minimum purchase commitment terms, the OEM business model arrangement may cause the Company to incur additional costs associated with unanticipated increases or decreases in manufacturing volumes. INTENSE COMPETITION; PRICING PRESSURES The Company competes with a number of large multinational companies that have substantially greater resources than the Company's, including IBM, Fujitsu Ltd., and Hitachi, Ltd., as well as similarly sized companies, including Amdahl Corp. and EMC Corp. In the networking marketplace, the Company competes with a number of companies that have a greater market presence, including 3Com Corp., Cisco Systems, Inc., Cabletron Systems, Inc. and Bay Networks, Inc. The Company's competitiveness could be affected by cooperative alliances and other relationships that may emerge and rapidly acquire market share. These alliances may result in other companies to be at various times collaborators, competitors and customers in different markets. Increased competition may result in price reductions, reduced margins and declining market share, which may have a material adverse effect on the Company's business and financial results. INTELLECTUAL PROPERTY The Company's competitive strength is affected by its ability to protect its proprietary information. StorageTek protects its intellectual property rights through a combination of patents, trademarks, copyrights, confidentiality procedures, trade secret laws and licensing arrangements. The Company's policy is to apply for patents, or other appropriate proprietary or statutory protection when it develops new or improved technology that is important to its business. Such protection, however, may not preclude competitors from developing products similar to the Company's products. In addition, competitors may attempt to restrict the Company's ability to compete by advancing various intellectual property law theories which could, if enforced by the courts, restrict the Company's ability to develop and manufacture interoperable products. Also, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company also relies on certain technology that is licensed from others. The Company is unable to predict whether these license arrangements can be renewed on terms acceptable to the Company. The Company's intellectual property rights are material to the Company's business, and the failure to successfully protect its intellectual property rights or obtain licenses from others as needed could have a material adverse effect on the Company's business and financial results. The high technology industry is characterized by vigorous pursuit and protection of intellectual property rights or positions, which in some instances has resulted in significant litigation that is often protracted and expensive. Litigation by or against the Company could result in significant expense and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in any determination unfavorable to the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages; cease the manufacture, use and sale of infringing products; expend significant resources to 24 Form 10-Q Page 24 develop non-infringing technology; discontinue the use of certain processes; enter into royalty arrangements; or obtain licenses to the infringing technology. There can be no assurances that the Company would be successful in such development or that such license or royalty arrangements would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. The Company has, from time to time, commenced actions against other companies to protect or enforce its intellectual property rights. Similarly, the Company has, from time to time, been notified that it may be infringing certain patent or other intellectual property rights of others. See Note 3 of Notes to Consolidated Financial Statements for additional information with respect to the Company's legal proceedings. INFORMATION SYSTEMS The Company is currently in the process of replacing its existing transaction systems (which include order management, distribution, and finance) with integrated systems as part of its ongoing effort to increase operational efficiencies. The Company's future operating results and financial condition could be adversely affected if the Company is unable to implement and effectively manage the transition to this new integrated system. MANUFACTURING RISKS; DEPENDENCE ON SUPPLIERS The Company generally uses standard parts and components for its products and believes that, in most cases, there are a number of alternative, competent vendors for most of those parts and components. However, the Company purchases certain important components and products from single suppliers that the Company believes are currently the only manufacturers of the particular components that meet the Company's qualification requirements and other specifications. In addition, the Company manufactures some key components, or its products include components, for which alternative sources of supply are not readily available. In the past, certain of the Company's suppliers have experienced occasional technical, financial or other problems that have delayed deliveries, without significant effect on the Company. An unanticipated failure of any sole source supplier to meet the Company's requirements for an extended period, or an interruption of the Company's ability to secure comparable components, could have a material adverse effect on its revenue and results of operations. In the event a sole source supplier was unable or unwilling to continue to supply components, the Company would have to identify and qualify other acceptable suppliers. This process could take an extended period and no assurance can be given that any additional source would become available or would be able to satisfy the Company's production requirements on a timely basis. EARNINGS FLUCTUATIONS The Company's reported earnings have fluctuated significantly and may continue to fluctuate significantly from quarter to quarter due to a variety of factors including, among others, the effects of (i) customers' historical tendencies to make purchase decisions near the end of the calendar year, (ii) the timing of the announcement and availability of products and product enhancements by the Company and its competitors, (iii) fluctuating foreign currency exchange rates, (iv) changes in the mix of products sold, and (v) variations in customer acceptance periods for the Company's products. 25 Form 10-Q Page 25 VOLATILITY OF STOCK PRICE The trading price of the Company's common stock has fluctuated and in the future may fluctuate substantially in response to reported earnings, industry conditions, new product or product development announcements by the Company or its competitors, announced acquisitions and joint ventures by the Company or its competitors, general market and economic conditions, international currency fluctuations and other events or factors. Further, the volatility of the stock markets in recent years has caused wide fluctuations in trading prices of stocks of high technology companiesindependent of their individual operating results. In the future, the Company's reported earnings may be below the expectations of stock market analysts and investors, and in such events, there could be an immediate and significant adverse effect on the trading price of the Company's common stock. 26 Form 10-Q Page 26 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS See Part II, Item 1 - Legal Proceedings, of the Company's Form 10-Q for the period ended March 29, 1996, electronically filed with the Commission on May 10, 1996. On June 29, 1995, Odetics, Inc. filed a patent infringement suit in the U.S. District Court for the Eastern District of Virginia against the Company and two of its customers alleging that the "pass-through" port in certain of the Company's tape library products infringed U.S. Patent No. 4,779,151 (the "151 Patent"). The complaint asked the court to impose injunctive relief, treble damages in an unspecified amount, and an award of attorneys fees and costs. A trial commenced on January 22, 1996, and on February 1, 1996, a jury found that the Company's products did not infringe the 151 Patent. A notice of appeal to the U.S. Court of Appeals for the Federal Circuit was filed by Odetics, Inc. on March 8, 1996. Oral argument on the appeal of this suit is expected in late 1996. On July 30, 1996, the Company received Civil Investigative Demands (CID) from the U.S. Department of Justice Antitrust Division. The CID requested production of documents and testimony in connection with a review, for compliance with the Sherman Act, of the OEM Agreement with International Business Machines Corporation concerning storage subsystems. Information concerning legal proceedings is also contained in Note 3 to the consolidated financial statements identified in Part I of this Form 10-Q. In addition, the Company is involved in various other less significant legal proceedings. The Company believes it has adequate legal defenses with respect to each of the suits cited above and intends to vigorously defend against these actions. However, it is reasonably possible that these cases could result in outcomes unfavorable to the Company. While the Company currently believes that the amount of the ultimate potential loss would not be material to the Company's financial position, the outcome of litigation is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material effect on the Company's financial position or reported results of operations in a particular quarter. An adverse 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. 27 Form 10-Q Page 27 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was held on May 30, 1996. A quorum of stockholders was represented at the meeting in person or by proxy. There was no solicitation in opposition to management's nominees as listed in the proxy statement and supplement to proxy statement and all nominees were elected. The directors elected include:
For Withheld -------------- -------- David E. Weiss 44,384,167 23,855 Judith E.N. Albino 43,871,007 537,015 William L. Armstrong 43,921,168 486,854 Robert A. Burgin 43,921,233 486,789 Paul Friedman 43,917,693 490,329 William R. Hoover 43,936,975 471,047 Stephen J. Keane 43,929,657 478,365 Robert E. LaBlanc 43,931,847 476,175 Robert E. Lee 43,928,950 479,072 Harrison Shull 43,917,351 490,671 Richard C. Steadman 43,931,357 476,665
At the annual meeting, the stockholders approved amendments to the 1987 Employee Stock Purchase Plan and the reservation of an additional 1,750,000 shares of Common Stock for issuance to employees under the Plan, by a vote of 41,539,513 in favor to 2,437,867 against, with 430,642 abstentions. The stockholders approved amendments of the Stock Option Plan for Non-Employee Directors and the reservation of an additional 180,000 shares of Common Stock for issuance under the Plan, by a vote of 30,889,136 in favor to 13,109,570 against, with 409,316 abstentions. The stockholders also ratified of the appointment of Price Waterhouse as the Company's independent accountants for the current fiscal year, by a vote of 44,102,999 in favor to 194,332 against, with 110,691 abstentions. There were no broker non-votes on any of the proposals. 28 Form 10-Q Page 28 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1*/** Tenth Amendment and Restatement of Storage Technology Corporation 1987 Employee Stock Purchase Plan. 10.2*/** Storage Technology Corporation Amended and Restated Stock Option Plan for Non-Employee Directors. 10.3*/** Employment Agreement between the Company and David E. Weiss, dated June 24, 1996. 10.4*/** Employment Agreement between the Company and David E. Lacey, dated June 24, 1996. 10.5* OEM Agreement between the Company and International Business Machines Corporation ("IBM"), dated June 7, 1996. 11.0* Computation of Earnings (Loss) Per Common Share. 27.0* Financial Data Schedule. (b) Reports on Form 8-K On May 23, 1996, the Company filed a current report on Form 8-K dated May 23, 1996, pursuant to Item 5, disclosing the appointment of David E. Weiss as Chairman of the Board, President and Chief Executive Officer to succeed Ryal Poppa who retired from his positions as an officer and director effective on such date, and the appointment of David E. Lacey as Executive Vice President and Chief Financial Officer of the Company. On June 12, 1996, the Company filed a current report on Form 8-K dated June 10, 1996, pursuant to Item 5, disclosing that the Company had entered into an OEM agreement with IBM, concerning the Company's mainframe online storage products. The Agreement provides that the Company will manufacture for IBM storage subsystems sold by the Company under the brand names Iceberg, Kodiak, and Arctic Fox, and, beginning July 1, 1996, intends to use IBM as its main worldwide distribution channel for these products. On June 13, 1996, the Company filed a current report on Form 8-K dated June 12, 1996, pursuant to Item 5, disclosing that the Company had called for redemption on July 12, 1996 all of its outstanding 7% Convertible Subordinated Debentures due March 15, 2008. - --------------- * Indicates Exhibits filed with this Quarterly Report on Form 10-Q. ** Contracts or compensation plan or arrangement in which directors an/or officers participate. 29 Form 10-Q Page 29 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STORAGE TECHNOLOGY CORPORATION (Registrant) August 12, 1996 /s/ DAVID E. WEISS - --------------------- -------------------------------- (Date) David E. Weiss Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) August 12, 1996 /s/ DAVID E. LACEY - --------------------- -------------------------------- (Date) David E. Lacey Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 30 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1*/** Tenth Amendment and Restatement of Storage Technology Corporation 1987 Employee Stock Purchase Plan. 10.2*/** Storage Technology Corporation Amended and Restated Stock Option Plan for Non Employee Directors. 10.3*/** Employment Agreement between the Company and David E. Weiss, dated June 24, 1996. 10.4*/** Employment Agreement between the Company and David E. Lacey, dated June 24, 1996. 10.5* OEM Agreement between the Company and International Business Machines Corporation ("IBM"), dated June 7, 1996. 11.0* Computation of Earnings (Loss) Per Common Share. 27.0* Financial Data Schedule.
- --------------- * Indicates Exhibits filed with this Quarterly Report on Form 10-Q. ** Contracts or compensation plan or arrangement in which directors an/or officers participate. EX-10.1 2 10TH AMENDMENT OF EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.1 TENTH AMENDMENT AND RESTATEMENT OF STORAGE TECHNOLOGY CORPORATION 1987 EMPLOYEE STOCK PURCHASE PLAN DECEMBER 14, 1995 1. Recitals. On February 2, 1982, Storage Technology Corporation, a Delaware corporation (together with its Subsidiary Corporations, hereinafter referred to, unless the context otherwise requires, as the "Company"), established the Storage Technology Corporation 1982 Employee Stock Purchase Plan. Such plan was subsequently amended and restated by the Board of Directors on June 15, 1987 and renamed the Storage Technology Corporation 1987 Employee Stock Purchase Plan (the "1987 Plan" or the "Plan"). Under the provisions of Paragraph 19 of the 1987 Plan, the Company reserved the power, through its Board of Directors, to amend the Plan from time to time, subject in certain instances to approval of the Company's stockholders. Pursuant to that power, the Plan is hereby amended and restated in its entirety, effective at the time and under the conditions set forth in Paragraph 22 below. 2. Purposes. The 1987 Plan is intended to provide a method whereby employees of the Company will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the $.10 par value voting Common Stock of the Company (the "Common Stock"). It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 3. Definitions. (a) "Account" means an Employee's interest in the Segregated Account based on the contributions made thereto and the interest earned thereon. (b) "Base Pay" means, at the Employee's election, either: (i) an Employee's rate of base salary (before deduction for contributions to plans maintained pursuant to Sections 401(k) and 125 of the Code) in effect during the Offering Period, but EXCLUDING payments for overtime, shift premium, incentive compensation, bonuses, and other similar payments; or (ii) Employee's rate of base salary (before deduction for contributions to plans maintained pursuant to Sections 401(k) and 125 of the Code) in effect during the Offering Period, EXCLUDING payments for overtime, shift premium, incentive compensation, bonuses, and other similar payments, but INCLUDING all payments for bonuses, incentive compensation and various forms of commissions. Base Pay shall also include payments for short-term disability. (c) "Committee" means the Compensation Committee of the Company's Board of Directors or such other committee as is designated by the Board of Directors to administer the Plan. (d) "Employee" means any person who is a Regular Employee (per CP-3-3-14) customarily employed for more than 20 hours per week and more than five months in a calendar year by Storage Technology Corporation or any Subsidiary Corporation. 2 (e) "Offering Commencement Date" shall mean January 1, 1991 and each following November 1 and May 1 thereafter, unless otherwise specified by the Committee. (f) "Offering Periods" shall mean the period commencing January 1, 1991 and ending October 31, 1991 and thereafter the periods commencing each November 1 and May 1 and ending on the next following April 30 and October 31, respectively. The duration of Offering Periods may be changed pursuant to Paragraphs 5 and 21 of this Plan. (g) "Offering Termination Date" shall mean October 31, 1991 and each following April 30 and October 31 thereafter, unless otherwise specified by the Committee. (h) "Segregated Accounts" shall mean the depository accounts established by the Company and by Subsidiary Corporations for collection of Employee contributions to the Plan. (i) "Subsidiary Corporation" shall mean any present or future corporation which (i) would be a subsidiary corporation with respect to the Company as that term is defined in Section 425 of the Code, and (ii) is designated as a participant in the Plan by the Committee described in Paragraph 14. 4. Eligibility. (a) Participation in the Plan is completely voluntary. An Employee will be eligible to become a participant in each Offering Period if employed by the Company prior to the applicable Offering Commencement Date. (b) Any provision of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan: (i) if, immediately after the grant, such Employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary Corporation (for purposes of this Paragraph the rules of Section 425(d) of the Code shall apply in determining stock ownership of any Employee); or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans of the Company and its Subsidiary Corporations to -2- 3 accrue at a rate that exceeds $25,000 of the fair market value of the stock (determined at the time each option is granted) for each calendar year in which such option is outstanding; or (iii) for shares in excess of 25,000 in respect of any Offering Period, provided that this limitation is subject to increase or decrease by the Committee prior to the commencement of any Offering Period in respect of such Offering Period. 5. Plan Offerings. (a) The Plan is authorized to issue a total of 4,700,000 shares of Common Stock (of which 1,750,000 shares are subject to stockholder approval). (b) The Plan will be implemented by consecutive Offering Periods, with a new Offering Period commencing on each Offering Commencement Date and ending on the next Offering Termination Date, or on such other dates as the Committee shall determine prior to the commencement of the relevant Offering Period, and continuing until terminated in accordance with Paragraph 19 hereof. The Committee shall have the power to change the duration of Offering Periods (including the commencement and termination dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (c) A maximum of 300,000 shares of Common Stock, plus any unsold balances from earlier Offering Periods, shall be issued during any one Offering Period. The maximum number of shares to be issued in respect of any Offering Period may be increased or decreased by the Committee prior to the commencement of the affected Offering Period within the limits of total shares then available under the Plan. (d) Participation in any Offering Period under the Plan shall neither limit, nor require, participation in any other Offering Period (except as set forth in paragraphs 4(b)(i) and 4(b)(ii) hereof). 6. Participation. (a) An eligible Employee may become a participant by enrolling and authorizing payroll deductions on an Interactive Voice Response system ("IVR") in such manner as is prescribed by the Company or, if such Employee does not have access to IVR, by completing an authorization for payroll deduction on the form provided by the Company and filing it with the department designated by the Company or the designated country coordinator by the deadline established by the Company, which must precede the first day of the Plan for which the participant enrolls. (b) Payroll deductions for a participant shall commence on the applicable Offering Commencement Date when an authorization for a payroll deduction becomes effective and shall -3- 4 end on the Offering Termination Date of the Offering Period to which such authorization is applicable unless sooner terminated by the participant as provided in Paragraph 11. 7. Payroll Deductions. (a) At the time a participant enrolls and authorizes payroll deductions, the participant shall elect to have deductions made from his or her Base Pay and deposited in a Segregated Account during the time the Employee is a participant in an Offering Period. Deductions can be made at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9, or 10% of Base Pay. (b) All payroll deductions made for a participant shall be transferred to a Segregated Account as soon as practicable. For administrative convenience, the Company may offset amounts advanced by the Company to pay participant withdrawals pursuant to Paragraph 11 against amounts of payroll deductions otherwise payable into the Segregated Account. A participant may not make any separate cash payments into the Segregated Account. The Company shall maintain appropriate accounting records to reflect at all times the interest and total deductions of all participants in the Segregated Account. (c) A participant may discontinue participation in the Plan as provided in Paragraph 11, but no other change can be made during an Offering Period and, specifically, a participant may not alter the rate of payroll deductions for that Offering Period. 8. Terms and Conditions of Options. (a) On the applicable Offering Commencement Date, when a participant's authorization for a payroll deduction becomes effective, the participant shall be deemed to have been granted an option to purchase a maximum number of shares of Common Stock, subject to the limitations pursuant to Paragraph 4(b) above, equal to the lesser of: (a) the Option Price (as defined below) divided into the Employee's total deductions under the Plan in respect of the Offering Period or (b) the Employee's pro-rata share of all shares available for issuance under the Plan for that Offering Period, determined pursuant to Paragraph 13, below. (b) The option price per share (hereinafter "Option Price") of Common Stock purchased with payroll deductions made during each Offering Period shall be the lesser of: (i) 85% of the closing price per share of the Common Stock as quoted in The Wall Street Journal for the applicable Offering Commencement Date (or on the next business date on which shares of the Common Stock shall be traded on the New York Stock Exchange in the event that no shares of the Common Stock shall have been traded on the Offering Commencement Date); or (ii) 85% of the closing price per share of the Common Stock as quoted in The Wall Street Journal for the applicable Offering Termination Date (or for the next preceding business date on which shares of the Common Stock shall be traded on the New York -4- 5 Stock Exchange in the event that no shares of the Common Stock shall have been traded on the Offering Termination Date). (c) Fractional shares will not be issued under the Plan and any accumulated payroll deductions that would have been used to purchase fractional shares, together with any amounts that are in excess of the limitations of Paragraph 8(a), together with any net income of the Segregated Account allocable to each participant, shall be returned to each participant promptly following the termination of an Offering Period. 9. Exercise of Option. Unless a participant withdraws in accordance with Paragraph 11, his or her option to purchase Common Stock with payroll deductions made during any Offering Period will be deemed to have been exercised automatically on the applicable Offering Termination Date, for the purchase of the number of full shares of Common Stock that the accumulated payroll deductions will purchase at the applicable Option Price (but not in excess of the number of shares for which options have been granted to the participant pursuant to Paragraph 8(a)), and any excess in his or her Account at that time will be returned to the participant, together with any net income of the Segregated Account allocable to his or her Account, as provided in Paragraph 13. 10. Delivery. As promptly as practicable after the Offering Termination Date of each Offering Period, the Company will deliver to each participant, as appropriate, the shares of Common Stock purchased upon the exercise of the participant's option. 11. Withdrawal and Termination. (a) Prior to the 15th day of the month before the applicable Offering Termination Date, any participant may withdraw payroll deductions and net earnings thereon credited to the participant by following the procedures specified by the Company for effecting a withdrawal on the IVR system or, if the participant does not have access to IVR, by giving written notice of withdrawal to the department designated by the Company or the designated country coordinator. As promptly as practical after the participant's withdrawal, the payment to the participant of all the participant's payroll deductions credited to his or her account, together with any net earnings of the Segregated Account allocable to the participant's Account shall be made. No further payroll deductions for such participant will be made during such Offering Period. The Company may, for administrative convenience, elect to pay to participants (or beneficiaries) the amount of any withdrawals and earnings thereon and may then offset the amount of any such payments against payroll deductions otherwise payable to the Segregated Account. The Company may, at its option, treat any attempt to borrow by a participant on the security of the accumulated payroll deductions allocated to the participant's Account as an election under this Paragraph 11(a) to withdraw such amounts from the Segregated Account. (b) A participant's withdrawal from any Offering Period will not have any effect upon eligibility to participate in any subsequent Offering Period or in any similar plan that may hereafter be adopted by the Company. -5- 6 (c) Upon termination of the participant's employment with the Company for any reason (including retirement but excluding death or, in certain cases, disability while in the employ of the Company) prior to any Offering Termination Date, the payroll deductions credited to the participant, together with any net earnings of the Segregated Account allocable to his or her Account, will be returned to the participant, or, in the case of a participant's death subsequent to the termination of employment, to the person or persons entitled thereto under Paragraph 15. For purposes of the Plan, a participant shall be considered disabled if the Company determines that the participant is unable to perform the usual and customary requirements of his or her job with the Company and will be unable to do so for at least six months; provided, however, that such determination is subject to review by the Committee at its discretion. (d) Upon termination of the participant's employment because of death or disability prior to the Offering Termination Date, the participant or the participant's beneficiary (as defined in Paragraph 15) shall have the right to elect, by written notice given to the Company's General Counsel prior to the expiration of the period of 90 days commencing on the date of death or disability of the participant, and prior to the Offering Termination Date, either (i) to withdraw all of the payroll deductions credited to the participant, together with any net earnings of the Segregated Account allocable to his or her Account, or (ii) to exercise the participant's option to purchase of Common Stock for the then current Offering Period on the Offering Termination Date for the purchase of the number of full shares of Common Stock that the amount allocated to the participant's Account at the date of the participant's death or disability will purchase at the applicable Option Price, and any excess credited to such Account will be returned to said participant or his or her beneficiary. In the event that no such written notice of election shall be duly received by the office of the Company's General Counsel within the required time period, the participant or beneficiary shall automatically be deemed to have elected to withdraw the payroll deductions credited to the participant, together with the net earnings of the Segregated Account allocable to his or her Account at the date of the participant's death or disability, and the same will be paid promptly to said participant or beneficiary. Notwithstanding the foregoing, if a participant's employment with the Company and any Subsidiary Corporation terminates because of disability more than three months prior to the Offering Termination Date, the provisions of this Paragraph 11(d) shall not apply and the provisions of Paragraph 11(c) shall apply to such participant. 12. Income and Accounting. (a) Separate accounts shall not be established by the Company for Employees who participate in the Plan. The Employee's payroll deductions shall be transferred to the Segregated Account as soon as practical after each pay period and credited to the participant. -6- 7 (b) Each participant shall share proportionately in the income and expense of the Segregated Account and any net income shall be taxable to the participant, who shall be responsible for paying any income or other taxes applicable thereto. 13. Stock. (a) The maximum number of shares of Common Stock that shall be made available for sale under the Plan during any Offering Period under the Plan shall be the number of shares set forth in Paragraph 5, subject to adjustment upon changes in capitalization of the Company as provided in Paragraph 18; provided, however, that if less than the number of shares specified in Paragraph 5 with respect to any Offering Period are purchased during any period, the number of shares not purchased may be carried over and made available for sale under the Plan during any subsequent Offering Period. (For example, if only 250,000 shares were purchased during an Offering Period under the Plan, the shares not purchased will be carried over to the next succeeding Offering Period so that a maximum of 350,000 shares shall be made available for purchase during the next Offering Period.) If the total number of shares subject to options that would otherwise be exercised on any Offering Termination Date in accordance with Paragraph 9 exceeds the maximum number of shares available for sale, subject to adjustment as aforesaid, the Company shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions credited to each participant, together with the net earnings of the Segregated Account allocable thereto, shall be returned to him or her as promptly as possible. (b) A participant will have no interest in Common Stock covered by the participant's option until such option has been exercised. Participants in the Plan shall have no rights as stockholders with respect to any shares covered by the Plan until the date of issue of a stock certificate to him or her for such shares. Except as otherwise expressly provided in the Plan or in the corporate action relating to such event, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. (c) Common Stock to be delivered to a participant under the Plan will be registered in the name of the participant. (d) The Board of Directors may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly listed, upon official notice of issuance, upon the New York Stock Exchange, and that either (i) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall have become effective, or -7- 8 (ii) the participant shall have represented in form and substance satisfactory to the Company that it is the participant's intention to purchase for investment the shares being purchased under such option. 14. Administration. The Plan shall be administered by the Committee. The interpretation and construction of any provision of the Plan or any Segregated Account agreement and the adoption of rules and regulations for administering the Plan shall be made by the Committee, subject, however, at all times to the final concurrence of the Board of Directors of the Company. Determinations made by the Committee and approved by the Board of Directors with respect to any matter or provision contained in the Plan shall be final, conclusive and binding upon the Company and upon all participants, their heirs or legal representatives. Any rules, regulations or interpretations adopted by the Committee shall remain in full force and effect unless and until altered, amended, or repealed by the Committee or the Board of Directors. 15. Designation of Beneficiary. A participant may file with the Company, pursuant to rules adopted by the Committee, a written designation of a beneficiary who is to receive any Common Stock and/or cash pursuant to the provisions of the Plan in the event of the participant's death. Such designation of beneficiary may be changed by the participant at any time by written notice. Upon the death of a participant and upon receipt by the Company of proof of the identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such Common Stock to such beneficiary and/or pay any cash in the participant's Account in the Segregated Account to the beneficiary, as may be required under the provisions of Paragraph 11(d). In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall cause such cash to be paid to the person or persons or the entity duly designated by the participant, as shown on the Company's records, as his or her beneficiary for the proceeds of Company paid life insurance. In the absence of such a beneficiary who is living at the time of the participant's death, the Company shall cause such cash to be paid to the executor or administrator of the estate of the participant, or if no such executor or administrator of the estate has been appointed (to the knowledge of the Company), the Company, in its discretion, may cause such cash to be paid to the spouse or to any one or more dependents of the participant as the Company may designate. No beneficiary shall, prior to the death of the participant by whom he or she has been designated, acquire any interest in the Common Stock or in amounts credited to the participant's Account. 16. Transferability. Neither payroll deductions credited to a participant, nor earnings thereon, nor any rights with regard to the exercise of an option or to receive Common Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant otherwise than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Paragraph 11. -8- 9 17. Ownership of ESPP Assets. All contributions paid into Segregated Accounts shall be the property of the respective participants in the Plan and the Company shall have no interest in such amounts while held in the Segregated Account. 18. Effect of Changes in Capital Structure. If the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, stock dividend, combination, or subdivision, or if the Company takes any other action of a similar nature affecting such Common Stock (excluding, however, any reorganization under the United States Bankruptcy Code), then the number and class of shares of Common Stock that may thereafter be optioned, or the rights assigned thereto (in the aggregate and to any participant), shall be adjusted accordingly and, in the case of each option outstanding at the time of any such action, the number and class of shares that may thereafter be purchased pursuant to such option and the Option Price shall be adjusted, in each case to such extent and in such manner, if at all, as may be determined by the Board upon the recommendations of the Committee, with the approval of independent public accountants and counsel, to be necessary to preserve unimpaired the rights of the holder of such option. 19. Amendment or Termination. The Board of Directors of the Company may at any time terminate or amend the Plan. No such termination can affect options previously granted, nor may an amendment make any change in any option theretofore granted without prior approval of the stockholders of the Company if such approval is required under the laws or regulations administered by the U.S. Treasury (including Section 423 of the Code), the Securities and Exchange Commission (including Rule 16b-3), any other agency of the U.S. Government, or the New York Stock Exchange, or any other exchange or system on which the Company's stock is then registered or traded. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the General Counsel of the Company. 21. Dissolution, Merger or Asset Sale. (a) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (b) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Offering Termination Date (the "New Offering Termination Date") or to cancel each outstanding right to purchase and refund -9- 10 all sums collected from participants during the Offering Period then in progress. If the Board shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least ten (10) business days prior to the New Termination Date, that the Offering Termination Date for the option held by the participant has been changed to the New Offering Termination Date and that such option shall be exercised automatically on the New Offering Termination Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Paragraph 10 hereof. For purposes of this paragraph, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the sale of assets or merger was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock and the sale of assets or merger. 22. Effective Date - Approval of Stockholders. The Plan, as amended and restated herein, has been adopted on behalf of the Board of Directors of the Company by the Compensation Committee on December 14, 1995, and such amendment and restatement is effective as of such date, but such amendment and restatement to the extent stockholder approval is required under Paragraph 19 above, is subject to the approval of the stockholders of the Company at their next meeting. Offerings may commence under the Plan prior to approval by the stockholders but no Common Stock requiring stockholder approval may be purchased hereunder unless and until the requisite stockholder approval has been received. -10- EX-10.2 3 STOCK OPTION PLAN FOR NON EMPLOYEE DIRECTORS 1 EXHIBIT 10.2 STORAGE TECHNOLOGY CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS RECITALS A. Pursuant to a resolution dated June 15, 1987, the board of directors (the "Board") of Storage Technology Corporation, a Delaware corporation (the "Company"), adopted the Stock Option Plan for NonEmployee Directors (the "Plan"). The Plan was approved by the stockholders of the Company at a meeting held October 20, 1987 (the "Original Adoption Date"). The Plan was thereafter amended (the "First Amendment") by the Board on March 29, 1989 and such amendment was approved by the stockholders of the Company at a meeting held June 28, 1989, and again amended (the "Second Amendment") by the Board on November 7, 1990 and such amendment was approved by the stockholders of the Company at a meeting held May 29, 1991. This Amended and Restated Plan incorporates the above amendments, and amendments approved by the Board on July 26, 1995 and March 6, 1996. B. The Board reserved the right to amend the Plan from time to time with certain restrictions and only with the approval of the stockholders with respect to certain amendments, all as specified in the Plan. Pursuant to such authority, the Plan is hereby amended in its entirety as set forth below (the "Amended Plan"), provided, however, that the amendments made hereby and options first granted hereby, pursuant to Section 3.2.1.6, are all subject to the approval of the Company's stockholders at the Company's next annual meeting following the Board's adoption of this Amended Plan. C. The purposes of the Plan are to secure for the Company the benefits arising from capital stock ownership by its current and future nonemployee directors by providing to such directors added incentive to continue in the service of the Company and a more direct interest in the future success of the operations of the Company through the granting to such directors of options ("Option" or "Options") to purchase shares of the $.10 par value common stock of the Company (the "Stock") subject to the terms and conditions described below. ARTICLE I 1 GENERAL 1.1 Definitions. For purposes of this Amended Plan, and as used herein, a "nonemployee director" is an individual who (a) is a member of the board of directors of the Company, and (b) is not an employee of the Company. For purposes of this Amended Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under section 3401 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). 2 1.2 Options. The Options granted hereunder shall be options that are not qualified as incentive stock options under section 422A of the Code. ARTICLE II 2 ADMINISTRATION 2.1 The Stock Option Committee. The Amended Plan shall be administered by the Compensation Committee of the Board ("the Committee"), which shall be composed in such a manner to satisfy the requirements, if any, of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule ("Rule 16b-3") with respect to committees administering formula plans that comply with Rule 16b-3 and in accordance with the General Corporation Law of Delaware. The persons comprising the Committee shall be appointed by and serve at the pleasure of the Board. The Committee members shall all be members of the Board. 2.2 Quorum. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present or participating by the means described in the last sentence of this section 2.2, or acts approved in writing by all members of the Committee, shall be the acts of the Committee. The Committee shall keep minutes of its meetings. One or more members of the Committee may participate in a meeting of the Committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. 2.3 Authority of the Committee. The Committee shall have no authority or discretion or power to select the participants who will receive Options, to set the number of shares to be covered by each Option, or to set the exercise price or the period within which the Options may be exercised or to alter any other terms or conditions specified herein, except in the sense of administering the Amended Plan subject to the provisions of the Amended Plan. Subject to the foregoing limitations, the Committee shall have authority and power to adopt such rules and regulations and to take such action as it shall consider necessary or advisable for the administration of the Amended Plan and to construe, interpret and administer the Amended Plan and the decisions of the Committee shall be final and binding upon the Company, the Holders (as defined below) and all other persons. No member of the Committee shall incur any liability by reason of any action or determination made in good faith with respect to the Amended Plan or any stock option agreement. 2 3 ARTICLE III 3 OPTIONS 3.1 Participation. Each individual who was a nonemployee director of the Company on the Original Adoption Date or who becomes such thereafter shall receive Options to purchase Stock under the Plan on the terms and conditions described herein. 3.2 Stock Option Agreements. Each Option granted under the Amended Plan shall be evidenced by a written stock option agreement in substantially the form attached hereto, which shall be entered into by the Company and the nonemployee director to whom the Options are granted (the "Holder"), and which shall include or conform to the following terms and conditions, and which may include such other terms and conditions, if any, not inconsistent therewith or with the terms and conditions of this Amended Plan as the Committee considers appropriate: 3.2.1 Number of Options and Grant Dates. Each nonemployee director is entitled to receive, under the Plan, Options to purchase shares of Stock as described below and subject to adjustment from and after the Original Adoption Date as provided in section 4.2 hereof. 3.2.1.1 Each nonemployee director who was such on October 20, 1987, has received an Option, granted as of October 20, 1987, to purchase 2,500 shares of Stock (after adjustment for the one-for-ten reverse stock split effected on May 19, 1989) pursuant to the Plan. 3.2.1.2 Each individual who became a nonemployee director of the Company after March 29, 1989, and prior to November 7, 1990, has received an Option, granted as of his or her election date, to purchase 2,500 shares of Stock pursuant to the First Amendment. 3.2.1.3 Between October 20, 1987 and November 7, 1990, each nonemployee director holding an Option granted under 3.2.1.1 or 3.2.1.2 above who had, after such grant, been elected to serve on the Board at two consecutive annual meetings of stockholders as a nonemployee director after receipt of the Option granted under 3.2.1.1 or 3.2.1.2 above, has received an additional Option, granted as of such election date, to purchase 2,500 shares of Stock. 3.2.1.4 Options granted under 3.2.1.1, 3.2.1.2 and 3.2.1.3 above will hereinafter be collectively referred to as "Initial Options". All Initial Options shall continue to be held pursuant to the terms and conditions of this Amended Plan. 3 4 3.2.1.5 Each nonemployee director who was such on November 7, 1990, or who first becomes such after November 7, 1990, shall receive an Option (the "New Option"), granted as of the later to occur of November 7, 1990, or his or her first election or appointment as a nonemployee director, to purchase a number of shares of Stock equal to 25,000 less any shares subject to the Initial Options granted to such director. 3.2.1.6 Each nonemployee director who was such on July 26, 1995 or is thereafter elected or appointed shall receive an additional option (the "Additional Option") granted as of the later to occur of July 26, 1995 or the third anniversary of his or her first election or appointment as a nonemployee director, to purchase 18,000 shares of Stock. 3.2.1.7 In the event that any grant hereunder would exceed the number of shares of Stock available for issuance under the Amended Plan, or is otherwise subject to stockholder approval, then each such grant shall be conditioned on and subject to subsequent stockholder approval to the extent it exceeds that number of shares determined by dividing the total number of shares remaining available for grant under the Amended Plan on such grant date by the number of eligible nonemployee directors, or to the extent that stockholder approval is otherwise required. 3.2.2 Price. The price at which each share of Stock covered by an Option may be purchased shall be the greater of 100 percent of the fair market value of such share on the date of grant of the Option or the par value per share. For purposes of this determination, "fair market value" means the closing price of a share of Stock as reported in the Wall Street Journal for the last business day prior to the date of the grant. If no such closing price is reported, then fair market value shall mean the average of the high and low sale prices (or if no sale prices are reported, the average of the high and low bid prices) as reported by the principal regional stock exchange, or if not so reported, as reported by NASDAQ or a quotation system of general circulation to brokers and dealers. 3.2.3 Service Required for Exercise. 3.2.3.1 Each Initial Option shall be exercisable in full six months after the date of grant, or at any time after November 7, 1990, whichever shall occur last. 3.2.3.2 Subject to 3.2.3.5 below, for each nonemployee director who is such on November 7, 1990, such director's New Option shall become exercisable as follows: a number of shares equal to 5,000 less any shares subject to Initial Options granted to such director, shall become exercisable six months after the grant date, and the balance shall become exercisable in 4 5 four equal amounts on the first through fourth anniversaries of such grant date. 3.2.3.3 Subject to 3.2.3.5 below, for each nonemployee director who becomes such after November 7, 1990, such director's New Option shall become exercisable as follows: 5,000 shares shall become exercisable six months after the grant date and the balance shall become exercisable in six equal amounts on the first through the sixth anniversaries of such grant date (with the first four years rounded down to the nearest whole share, and the last two years rounded up). 3.2.3.4 Subject to 3.2.3.5 below, each Additional Option shall become exercisable as follows: 6,000 shares on each of the first, second, and third anniversaries of the first date by which all shares that are subject to New Options held by such directors have become exercisable. 3.2.3.5 Except as set forth in this Article III, the Options shall not be exercisable as to any shares as to which the continuous service requirement shall not be satisfied, regardless of the circumstances under which the Holder's service to the Company shall be terminated. The number of shares as to which an Option may be exercised shall be cumulative, so that once an Option shall become exercisable as to any shares it shall continue to be exercisable as to such shares, until expiration or termination of the Options as provided in the Amended Plan. 3.2.4 Option Period. The period within which each Option may be exercised shall expire, in all cases, ten years from the date of grant of the Option (the "Option Period"), unless terminated sooner pursuant to subsection 3.2.5 below or fully exercised prior to the end of such period. 3.2.5 Termination of Service. With respect to the exercise of such Option in the event that the Holder ceases to be a nonemployee director of the Company for the reasons described in this 3.2.5: 3.2.5.1 As to all options granted before July 20, 1995, and as to options granted on or after July 20, 1995, if the option has not been outstanding, as of the date of the director ceasing to be a nonemployee director, for at least six years and such director has not been an outside director for at least ten years, the vesting of and expiration of the right to exercise such options shall occur as follows: 3.2.5.1.1 Disability. If the Holder terminates his or her service as a director due to becoming disabled (within the meaning of section 22(e)(3) of the Code) while in a directorship of the 5 6 Company or becomes disabled during the six-month period after his or her termination, Options vested as of the date of termination may be exercised within twelve months following the disability (if otherwise within the Option Period) but will expire at the end of such period to the extent they are not exercised; or 3.2.5.1.2 Death. If the Holder shall die while in a directorship of the Company or during the six-month period after his or her termination of service as a director, all Options, including, but not limited to, Options not otherwise vested may be exercised within twelve months following such death (if otherwise within the Option Period), but not thereafter, by the Holder's legal representative or representatives, or by the person or persons entitled to do so under the Holder's last will and testament, or if the Holder shall fail to make testamentary disposition of his or her Options or shall die intestate, by the person or persons entitled to receive said Options under the laws of descent and distribution; or 3.2.5.1.3 Other. If the directorship of a Holder is terminated for any reason prior to such director reaching age 70 (other than the circumstances specified in 3.2.5.1.1 and 3.2.5.1.2 of this 3.2.5.1) within the Option Period, the Options vested as of the date of termination may be exercised within six months following the date of such termination (if otherwise within the Option Period), but not thereafter, or 3.2.5.1.4 Retirement. If the directorship of a Holder is terminated for any reason after such director reaches age 70 (other than the circumstances specified in 3.2.5.1.1 and 3.2.5.1.2) within the Option Period, all Options, including, but not limited to, Options not otherwise vested may be exercised within six months following the date of such termination (if otherwise within the Option Period), but not thereafter. 3.2.5.2 As to all Options granted on or after July 20, 1995, if the Option has been outstanding, as of the date of the director's ceasing to be a nonemployee director, for at least six years or such director has been an outside director for at least ten years, the vesting of and expiration of the right to exercise such options shall occur as follows: 3.2.5.2.1 Disability. If the Holder terminates his or her service as a director due to becoming disabled (within the meaning of 6 7 section 22(e)(3) of the Code) while in a directorship of the Company, Options vested as of the date of termination may be exercised within the Option Period but will expire at the end of such period to the extent they are not exercised; or 3.2.5.2.2 Death. If the Holder shall die while in a directorship of the Company all Options, including, but not limited to, Options not otherwise vested may be exercised within the Option Period but not thereafter, by the Holder's legal representative or representatives, or by the person or persons entitled to do so under the Holder's last will and testament, or if the Holder shall fail to make testamentary disposition of his or her Options or shall die intestate, by the person or persons entitled to receive said Options under the laws of descent and distribution; or 3.2.5.2.3 Other. If the directorship of the Holder is terminated for any reason prior to such director reaching age 70 (other than the circumstances specified in 3.2.5.2.1 and 3.2.5.2.2 of this 3.2.5.2) within the Option Period, the Options vested as of the date of termination may be exercised within the Option Period, but not thereafter; or 3.2.5.2.4 Retirement. If the directorship of the Holder is terminated for any reason after such director reaches age 70 (other than the circumstances specified in 3.2.5.2.1 and 3.2.5.2.2) within the Option Period, all Options, including, but not limited to, Options not otherwise vested may be exercised within the Option Period, but not thereafter. 3.2.6 Transferability. Each Option granted under the Plan or the Amended Plan shall not be transferable by the Holder except (i) by will or pursuant to the laws of descent and distribution, or (ii) pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, or (iii) as may otherwise be permitted by applicable law, including the version of Rule 16b-3 that is applicable to this Amended Plan at the time of the transfer. Each Option shall be exercisable during the Holder's lifetime only by the Holder or by his or her permitted transferee(s) pursuant to clause (ii) or (iii) hereof. 3.2.7 Exercise of Option. The method for exercising each Option granted pursuant to the Plan or the Amended Plan shall be by delivery to the Company of written notice specifying the number of shares with respect to which the Options are being exercised. If requested by the Company, such notice shall contain the Holder's 7 8 representation that he or she is purchasing the Stock for investment purposes only and his or her agreement not to sell any Stock so purchased in any manner that is in violation of the Securities Act of 1933, as amended, or applicable state law. Such restrictions, or notice thereof, shall be placed on the certificates representing the Stock so purchased. The purchase of such Stock shall take place at the principal offices of the Company within twenty days following delivery of such notice, at which time the purchase price of the Stock shall be paid in full in cash, by check payable to the Company's order, by delivery to the Company of certificates representing the number of shares of Stock then owned by the exercising Holder, the fair market value of which, on the date of exercise, equals the purchase price of the Stock purchased pursuant to exercise of the Options, properly endorsed for transfer to the Company, or by a combination of such methods of payment. A properly executed certificate or certificates representing the Stock shall be delivered to the Holder upon payment therefor. ARTICLE IV 4 AUTHORIZED STOCK 4.1 The Stock. The total number of shares of Stock as to which Options may be granted pursuant to the Amended Plan shall not exceed 530,000 in the aggregate, except as such number of shares shall be adjusted from and after July 26, 1995 in accordance with the provisions of 4.2 hereof. If any outstanding Option granted under the Plan or the Amended Plan shall expire or be terminated for any reason before the end of the Option Period, the shares of Stock allocable to the unexercised portion of such Option shall be available for grants pursuant to 3.2.1.5 and 3.2.1.6 above. Fractional shares shall not be distributed and shall remain unallocated. The Company shall at all times during the life of any outstanding Options retain as authorized and unissued shares or treasury shares at least the number of shares from time to time included in the outstanding Options, or otherwise assure itself of its ability to perform its obligations under the Amended Plan. 4.2 Adjustment by Stock Split, Stock Dividend, Etc. In the event that the outstanding shares of Stock of the Company are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, reverse stock split, stock dividend, combination or subdivision, appropriate adjustment shall be made in the number and kind of shares available for grant under the Amended Plan and reserved for issuance under any Options granted under the Plan or the Amended Plan. Such adjustment to outstanding Options shall be made without change in the total price applicable to the unexercised portion of such Options, and a corresponding adjustment in the applicable exercise price per share shall be made. 8 9 4.3 Rights as a Stockholder. The holder of an Option shall have no rights as a stockholder with respect to any shares covered by an Option until the date of issue of a stock certificate to him or her for such shares. Except as otherwise expressly provided in the Amended Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 4.4 General Adjustment Rules. No adjustment or substitution provided for in this Article IV shall require the Company to sell a fractional share under any stock option agreement and the total substitution or adjustment with respect to each stock option agreement shall be limited by deleting any fractional share. In the case of any such substitution or adjustment, the exercise price per share in each such stock option agreement shall be equitably adjusted by the Committee to reflect the greater or lesser number of shares of Stock or other securities into which the Stock subject to an Option may have been changed. Adjustments under this Article IV shall be made by the Committee, whose determination with regard thereto shall be final and binding. ARTICLE V 5 REORGANIZATION OR LIQUIDATION In case the Company is merged or consolidated with another entity and the stockholders of the Company as of immediately prior to such merger or consolidation own 50% or less of the voting power of the surviving entity, or in case all or substantially all of the assets or more than 50% of the outstanding voting stock of the Company is acquired by any other person or entity, or in case of a reorganization (other than a reorganization under federal bankruptcy statutes) or liquidation of the Company that is approved by the stockholders of the Company (i) any outstanding Options shall be assumed or substituted on an equitable basis by the merged, consolidated or otherwise reorganized corporation, person or entity, provided that no additional benefits shall be conferred upon the Holders as a result of such assumption or substitution, and the excess of the aggregate fair market value of the shares subject to the Options immediately after such assumption or substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to the Options immediately before such assumption or substitution over the purchase price thereof, and (ii) the exercisability of all outstanding Options shall automatically be accelerated such that the Options shall become exercisable in full regardless of whether all conditions of exercise relating to vesting period or length of service of a director have been satisfied. In the event that the triggering event is an event that requires approval of the stockholders of the Company prior to its consummation, then the acceleration of exercisability shall be effective upon stockholder approval of such triggering event. If the triggering event does not require stockholder approval (such as the acquisition by a third party of more than 50% of the outstanding stock of the Company), then the acceleration of exercisability shall be effective upon the occurrence of such event. 9 10 ARTICLE VI 6 GENERAL PROVISIONS 6.1 Expiration. The Amended Plan shall terminate whenever the Board adopts a resolution to that effect. If not sooner terminated under the preceding sentence, the Amended Plan shall wholly cease and expire on March 29, 2010. After termination, no Option shall be granted under this Amended Plan, but the Company shall continue to recognize Options previously granted. 6.2 Amendments. The Board may from time to time amend, modify, suspend or terminate the Amended Plan; provided, however, that the provisions of the Amended Plan that determine which directors may be granted Options, the timing of the Option grants and the number of shares of Stock subject to Options granted hereunder may not be amended more frequently than is permitted for formula plans by Rule 16b-3. Nevertheless, no such amendment, modification, suspension or termination shall (a) impair any Option earlier granted under the Plan or the Amended Plan or deprive any Holder of any shares of Stock that he or she may have acquired through or as a result of the Plan or the Amended Plan or (b) be made without the approval of the stockholders of the Company if such approval is required to retain the exemption provided by Rule 16b-3 with respect to Options granted under the Plan or the Amended Plan. 6.3 Treatment of Proceeds. Proceeds from the sale of Stock pursuant to Options granted under the Plan or the Amended Plan shall constitute general funds of the Company. 6.4 Effectiveness. The effective date of the Plan was October 20, 1987. The "Effective Date" of this Amended Plan shall be July 26, 1995. 6.5 Paragraph Headings. The paragraph headings are included herein only for convenience, and they shall have no effect on the interpretation of the Plan. ADOPTED by the authority of the Board on March 6, 1996, effective as of the Effective Date of the Amended Plan. STORAGE TECHNOLOGY CORPORATION 10 EX-10.3 4 DAVID E. WEISS EMPLOYMENT AGREEMENT 1 EXHIBIT 10.3 June 24, 1996 David E. Weiss 6900 Pawnee Way Longmont, CO 80503 Dear David: This letter (the "Agreement") sets forth the terms and conditions of your employment with Storage Technology Corporation (the "Company"). It is intended to replace all prior agreements, including but not limited to the letter agreements of February 17, 1995, December 6, 1995 and May 22, 1996. In consideration of your employment by the Company on the terms and conditions set forth below, and the mutual covenants and agreements contained herein, you and the Company agree as follows: 1. Position: You will be employed full-time by the Company as Chairman of the Board of Directors, President and Chief Executive Officer. You will report to the Board of Directors of the Company and perform such duties as may be assigned you from time to time. During the Employment Term (as herein defined), you shall devote your entire working time, attention and energies to the business of the Company. Except for personal investments, which shall not conflict with the business of the Company, you shall not engage in any other business activity or activities that require personal services by you that may conflict with the proper performance of your duties hereunder. 2. Employment. The term of your employment pursuant to this agreement (the "Employment Term") is effective as of May 22, 1996 and shall thereafter continue through May 21, 1999 at the salary and terms contained herein unless otherwise modified by the Board of Directors. 3. Base Compensation. For your services during the Employment Term, the Company will pay you an annual base salary, effective May 22, 1996, of $550,000.00 per year. Such salary shall be payable in installments in accordance with the regular payroll policies of - -------------------------------------------------------------------------------- StorageTek Top Security 2 David E. Weiss June 24, 1996 Page 2 the Company in effect from time to time during the Employment Term. The amount of your base salary may be adjusted either upward or downward by the Company from time to time during the Employment Term. 4. Stock Options: In addition to stock options earlier granted to you, you have received a grant for an additional 250,000 shares, 40% of which vest over the next three years in equal installments on the anniversary of the grant date and 60% of which vest eight years from the date of grant, unless vesting is accelerated to the first, second or third year anniversaries of the grant date, in one-third increments, based on performance against goals to be established by the Board. You continue to be eligible for future grants in accordance with the policies of the Company in effect from time to time. 5. Bonuses. (a) MBO Bonus Program. The Company currently maintains a Management By Objective Bonus Program (the "MBO Program"). During the Employment Term, you shall be eligible for such bonuses as may be established from time to time in accordance with the MBO Program by the Company's Board of Directors (the "Board"). For 1996, the Board has established for you an On Plan Bonus potential percentage of 70%. Such percentage may be adjusted either upward or downward for subsequent years during the Employment Term. Any payments under the MBO Program shall be made in accordance with the provisions of, and under the conditions contained in, the MBO Program and the terms of any bonus award authorized for you by the Board. 6. Termination of Employment. (a) Termination Without Cause. If, during the Employment Term, the Company elects to terminate your employment without "Cause" (as that term is defined in paragraph 6(d)), except for terminations covered by the provisions of 6(b), or if you should die without Cause existing at such time, you shall be entitled to receive, as a severance payment, a payment equal to the greater of (i) your base salary through the end of the Employment Term, or (ii) one year's base salary plus 100% of your On Plan Bonus potential percentage under the MBO Program, for the year of termination (whether or not such bonus would be otherwise payable). Such amount shall be paid to you in a cash lump sum within thirty days after your - -------------------------------------------------------------------------------- StorageTek Top Security 3 David E. Weiss June 24, 1996 Page 3 termination of employment pursuant to this paragraph 6(a). In addition, you shall be entitled to exercise any vested stock options then held to acquire shares of Common Stock in accordance with the Option Agreement. (b) Termination in the Event of Sale, Merger or Change of Control. If, during the Employment Term, the Company is sold, or merged with or into another company (in a transaction in which the Company is not the surviving entity), or in which the stockholders of the Company immediately prior to the merger own 50% or less of the Company after the merger, or all or substantially all of the assets of the Company are sold, or more than 25% of the outstanding voting capital stock of the Company is acquired by another person or persons (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) acting as a group, (any of which events is referred to hereinafter as a "Change in Control"), and your employment is terminated either by you for any reason or by the Company without Cause and such termination occurs within 24 months after the date of any such Change in Control, then, upon such termination, and subject to the provisions of section 6(c) below, (i) the Company will pay you an amount equal to the greater of the amount due pursuant to paragraph 6(a), above, or two times your annual base salary then in effect, plus two times 100% of your On Plan Bonus under the MBO Program based on your annual salary and On Plan Bonus potential percentage in effect immediately prior to the Change in Control (which shall be calculated as if the Company meets its plan for such year and which shall be payable whether or not the Company does in fact meet its plan), (ii) all outstanding stock options shall fully vest and become exercisable in full, and (iii) the Company's right to repurchase shall terminate with respect to any stock earlier purchased by you under the Company's 1987 Equity Participation Plan, and all such stock shall become fully vested. In addition, after such termination of employment, you shall be entitled to exercise all stock options in accordance with the terms of the Option Agreements. To the extent you would be entitled to payments or your rights to restricted stock or stock options would vest not only pursuant to the terms of this section 6(b), but also pursuant to the provisions of other section(s) of this agreement, or other agreements with the Company, then such payments shall be deemed made and such vesting shall be deemed - -------------------------------------------------------------------------------- StorageTek Top Security 4 David E. Weiss June 24, 1996 Page 4 to occur pursuant to the terms of such other section(s) or other agreements, and not under the terms of this section 6(b). (c) Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to you (i) would constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this section (c), would be subject to the excise tax imposed by Section 4999 of the Code, then such severance benefits shall be either (i) delivered in full, or (ii) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by you on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless you and the Company agree otherwise in writing, any determination required under this section 6(c) shall be made in writing by the Company's independent public accountants (the "Accountants") immediately prior to Change of Control or, if the termination is pursuant to section 6(a), immediately after such termination. Such determination shall be conclusive and binding upon you and the Company for all purposes. For purposes of making the calculations required by this section 6(c), the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. You and the Company shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section 6(c). (d) Termination for Cause. If the Company, during the Employment Term, elects to terminate your employment for Cause, your employment will terminate on the date fixed for termination by the Company (provided, however, that if the Company so elects during the 24-month period following a Change in Control, you shall be given prior notice and shall - -------------------------------------------------------------------------------- StorageTek Top Security 5 David E. Weiss June 24, 1996 Page 5 be permitted to voluntarily terminate your employment pursuant to section 6(b) hereof, in which case this section 6(d) shall be inapplicable). Following a Termination for Cause under this section, the Company will not be obligated to pay you any additional compensation, whether in the way of base compensation, bonus or otherwise, other than the compensation due and owing through the date of termination. "Cause," for purposes of this Agreement, shall mean any of the following: (i) willful breach by you of any provision of this Agreement or any other written agreement between you and the Company; (ii) gross negligence or dishonesty in the performance of your duties hereunder; (iii) engaging in conduct or activities or holding any position that materially conflicts with the interest of, or materially interferes with your duties owed to, the Company; (iv) engaging in conduct that is materially detrimental to the business of the Company; or (v) any intentional violation of Company policies applicable to employees of your position with the Company. 7. Benefit Programs. You shall also be entitled to such benefits and benefit programs that apply to you and your position as the Company and the Board may adopt from time to time, in accordance with the provisions of such programs then in effect. Certain presently existing benefit programs (which may or may not remain in effect) are outlined below: a. Life Insurance: Your life insurance coverage will be three times your base salary. b. Medical Coverage: You will have executive medical coverage. This insurance covers 100% of your family's medical expenses up to $5,000 over our group insurance coverage annually. 8. Compensation Deferral: You will be able to defer your compensation in accordance with the terms of our Executive Deferred Compensation Plan. 9. Automobile: You will receive Auto allowance reimbursement on leased automobile payments and reimbursement for regular maintenance and automobile insurance on your leased automobile, to the limit approved by the Board of Directors. 10. Miscellaneous Executive Perquisites: During your Employment Term, you shall be eligible for the following: - -------------------------------------------------------------------------------- StorageTek Top Security 6 David E. Weiss June 24, 1996 Page 6 - First class air travel as long as StorageTek is profitable. - Membership in an airline VIP club. - Financial and tax counseling in an amount per yearequal to 1% of annual base salary. - Company-paid physical examination. 11. Miscellaneous Provisions. (a) Withholding. All payments to you pursuant to this Agreement shall be subject to withholding of all amounts required to be withheld by applicable Internal Revenue Service and State tax authorities by the Company and shall be conditioned upon your submission of all information or execution of all instruments necessary to enable the Company to comply with such withholding requirements. (b) Confidentiality Agreement. As a condition of your employment, you have executed the Company's standard form of confidential inventions and trade secrets agreement. You reaffirm that during the Employment Term you will comply with all provisions of said agreement and agree that you will enter into such modifications or amendments thereof as the Company may reasonably request from time to time. (c) Notice. Any notice required to be given in accordance with the provisions of this Agreement shall be given in writing, either by personal delivery or by causing such written notice to be mailed, first class postage prepaid, in the United States mail to you at the address set forth above or to the Company at its principal business address, or at such other address for a party as shall be specified by like notice, provided that notices of change of address shall be effective only upon receipt thereof. (d) Governing Law. This Agreement is entered into in accordance with, and shall be interpreted pursuant to the provisions of, the internal laws of the State of Colorado (without regard to conflict of law principles). (e) Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect or impair the validity or - -------------------------------------------------------------------------------- StorageTek Top Security 7 David E. Weiss June 24, 1996 Page 7 enforceability of the remaining provisions of this Agreement, which shall remain in full force and effect in accordance with their terms. (f) Entire Agreement. This Agreement embodies the entire agreement between the parties relating to the subject matter hereof, and supersede all previous agreements or understandings, whether oral or written. (g) Amendment of Agreement. This Agreement may not be modified or amended, and no provision of this Agreement may be waived, except by a writing signed by the parties hereto. If this letter accurately sets forth the terms of our agreement relating to your employment, please sign the enclosed copy of this letter in the space provided below and return it to the Company. Very truly yours, /s/ STEPHEN J. KEANE Stephen J. Keane Chairman, Human Resources and Compensation Committee Board of Directors /s/ DAVID E. WEISS -------------------------- Name 6 Aug 96 -------------------------- Date - -------------------------------------------------------------------------------- StorageTek Top Security EX-10.4 5 DAVID LACEY EMPLOYMENT AGREEMENT 1 EXHIBIT 10.4 June 24, 1996 David E. Lacey 1860 East Cedar Avenue Denver, CO 80209 Dear David: This letter (the "Agreement") sets forth the terms and conditions of your employment with Storage Technology Corporation (the "Company"). It is intended to replace all prior agreements, including but not limited to the letter agreements of February 17, 1995 and May 22, 1996. In consideration of your employment by the Company on the terms and conditions set forth below, and the mutual covenants and agreements contained herein, you and the Company agree as follows: 1. Position: You will be employed full-time by the Company as Executive Vice President and Chief Financial Officer. You will report to the Chief Executive Officer of the Company, or such other officer as he or she may designate from time to time, and perform such duties as may be assigned you from time to time. During the Employment Term (as herein defined), you shall devote your entire working time, attention and energies to the business of the Company. Except for personal investments, which shall not conflict with the business of the Company, you shall not engage in any other business activity or activities that require personal services by you that may conflict with the proper performance of your duties hereunder. 2. Employment. The term of your employment pursuant to this agreement (the "Employment Term") is effective as of May 22, 1996 and shall thereafter continue on an "at will" basis at the salary and terms contained herein unless otherwise modified by the chief executive officer ("CEO") or his or her designee. 3. Base Compensation. For your services during the Employment Term, the Company will pay you an annual base salary, effective May 22, 1996, of $255,000.00 per year. - -------------------------------------------------------------------------------- StorageTek Top Security 2 David E. Lacey June 24, 1996 Page 2 Such salary shall be payable in installments in accordance with the regular payroll policies of the Company in effect from time to time during the Employment Term. The amount of your base salary may be adjusted either upward or downward by the Company from time to time during the Employment Term. 4. Stock Options: In addition to stock options earlier granted to you, you have received a grant for an additional 35,000 shares, 40% of which vest over the next three years in equal installments on the anniversary of the grant date and 60% of which vest eight years from the date of grant, unless vesting is accelerated to the first, second or third year anniversaries of the grant date, in one-third increments, based on performance against goals to be established by the Board. You continue to be eligible for future grants in accordance with the policies of the Company in effect from time to time. 5. Bonuses. (a) MBO Bonus Program. The Company currently maintains a Management By Objective Bonus Program (the "MBO Program"). During the Employment Term, you shall be eligible for such bonuses as may be established from time to time in accordance with the MBO Program by the Company's Board of Directors (the "Board"). For 1996, the Board has established for you an On Plan Bonus potential percentage of 50%. Such percentage may be adjusted either upward or downward for subsequent years during the Employment Term. Any payments under the MBO Program shall be made in accordance with the provisions of, and under the conditions contained in, the MBO Program and the terms of any bonus award authorized for you by the Board. 6. Termination of Employment. (a) Termination Without Cause. If, during the Employment Term, the Company elects to terminate your employment without "Cause" (as that term is defined in paragraph 6(d)), except for terminations covered by the provisions of paragraph 6(b), or if you should die without Cause existing at such time, you shall be entitled to receive, as a severance payment, a payment equal to the sum of (i) your then current rate of annual base salary and (ii) 100% of your On Plan Bonus potential percentage under the MBO Program for the year of termination (whether or not such bonus would be otherwise payable). Such amount shall be - -------------------------------------------------------------------------------- StorageTek Top Security 3 David E. Lacey June 24, 1996 Page 3 paid to you in a cash lump sum within thirty days after your termination of employment pursuant to this paragraph 6(a). In addition, you shall be entitled to exercise any vested stock options then held to acquire shares of Common Stock in accordance with the Option Agreement. (b) Termination in the Event of Sale, Merger or Change of Control. If, during the Employment Term, the Company is sold, or merged with or into another company (in a transaction in which the Company is not the surviving entity), or in which the stockholders of the Company immediately prior to the merger own 50% or less of the Company after the merger, or all or substantially all of the assets of the Company are sold, or more than 25% of the outstanding voting capital stock of the Company is acquired by another person or persons (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) acting as a group, (any of which events is referred to hereinafter as a "Change in Control"), and your employment is terminated either by you for any reason or by the Company without Cause and such termination occurs within 24 months after the date of any such Change in Control, then, upon such termination, and subject to the provisions of paragraphc 6(c) below, (i) the Company will pay you an amount equal to two times your annual base salary then in effect, plus two times 100% of your On Plan Bonus under the MBO Program based on your annual salary and On Plan Bonus potential percentage in effect immediately prior to the Change in Control (which shall be calculated as if the Company meets its plan for such year and which shall be payable whether or not the Company does in fact meet its plan), (ii) all outstanding stock options shall fully vest and become exercisable in full, and (iii) the Company's right to repurchase shall terminate with respect to any stock earlier purchased by you under the Company's 1987 Equity Participation Plan, and all such stock shall become fully vested. In addition, after such termination of employment, you shall be entitled to exercise all stock options in accordance with the terms of the Option Agreements. To the extent you would be entitled to payments or your rights to restricted stock or stock options would vest not only pursuant to the terms of this section 6(b), but also pursuant to the provisions of other section(s) of this agreement, or other agreements with the Company, then such payments shall be deemed - -------------------------------------------------------------------------------- StorageTek Top Security 4 David E. Lacey June 24, 1996 Page 4 made and such vesting shall be deemed to occur pursuant to the terms of such other section(s) or other agreements, and not under the terms of this section 6(b). (c) Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to you (i) would constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this section (c), would be subject to the excise tax imposed by Section 4999 of the Code, then such severance benefits shall be either (i) delivered in full, or (ii) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by you on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless you and the Company agree otherwise in writing, any determination required under this section 6(c) shall be made in writing by the Company's independent public accountants immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon you and the Company for all purposes. For purposes of making the calculations required by this section 6(c), the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. You and the Company shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section 6(c). (d) Termination for Cause. If the Company, during the Employment Term, elects to terminate your employment for Cause, your employment will terminate on the date fixed for termination by the Company (provided, however, that if the Company so elects during the 24-month period following a Change in Control, you shall be given prior notice and shall be permitted to voluntarily terminate your employment pursuant to section 6(b) hereof, in - -------------------------------------------------------------------------------- StorageTek Top Security 5 David E. Lacey June 24, 1996 Page 5 which case this section 6(d) shall be inapplicable). Following a Termination for Cause under this section, the Company will not be obligated to pay you any additional compensation, whether in the way of base compensation, bonus or otherwise, other than the compensation due and owing through the date of termination. "Cause," for purposes of this Agreement, shall mean any of the following: (i) willful breach by you of any provision of this Agreement or any other written agreement between you and the Company; (ii) gross negligence or dishonesty in the performance of your duties hereunder; (iii) engaging in conduct or activities or holding any position that materially conflicts with the interest of, or materially interferes with your duties owed to, the Company; (iv) engaging in conduct that is materially detrimental to the business of the Company; or (v) any intentional violation of Company policies applicable to employees of your position with the Company. 7. Benefit Programs. You shall also be entitled to such benefits and benefit programs that apply to you and your position as the Company and the Board may adopt from time to time, in accordance with the provisions of such programs then in effect. Certain presently existing benefit programs (which may or may not remain in effect) are outlined below: a. Life Insurance: Your life insurance coverage will be three times your base salary. b. Medical Coverage: You will have executive medical coverage. This insurance covers 100% of your family's medical expenses up to $5,000 over our group insurance coverage annually. 8. Compensation Deferral: You will be able to defer your compensation in accordance with the terms of our Executive Deferred Compensation Plan. 9. Automobile: You will receive up to $700.00 Auto allowance per month reimbursement on leased automobile payments and reimbursement for regular maintenance and automobile insurance on your leased automobile. Contact Marti Jordan (x33977) for more information on this program. 10. Miscellaneous Executive Perquisites: During your Employment Term, you shall be eligible for the following: - First class air travel as long as StorageTek is profitable. - -------------------------------------------------------------------------------- StorageTek Top Security 6 David E. Lacey June 24, 1996 Page 6 - Membership in an airline VIP club. - Financial and tax counseling in an amount per year equal to 1% of annual base salary. - Company-paid physical examination. 10. Miscellaneous Provisions. (a) Withholding. All payments to you pursuant to this Agreement shall be subject to withholding of all amounts required to be withheld by applicable Internal Revenue Service and State tax authorities by the Company and shall be conditioned upon your submission of all information or execution of all instruments necessary to enable the Company to comply with such withholding requirements. (b) Confidentiality Agreement. As a condition of your employment, you have executed the Company's standard form of confidential inventions and trade secrets agreement. You reaffirm that during the Employment Term you will comply with all provisions of said agreement and agree that you will enter into such modifications or amendments thereof as the Company may reasonably request from time to time. (c) Notice. Any notice required to be given in accordance with the provisions of this Agreement shall be given in writing, either by personal delivery or by causing such written notice to be mailed, first class postage prepaid, in the United States mail to you at the address set forth above or to the Company at its principal business address, or at such other address for a party as shall be specified by like notice, provided that notices of change of address shall be effective only upon receipt thereof. (d) Governing Law. This Agreement is entered into in accordance with, and shall be interpreted pursuant to the provisions of, the internal laws of the State of Colorado (without regard to conflict of law principles). (e) Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect or impair the validity or enforceability of the remaining provisions of this Agreement, which shall remain in full force and effect in accordance with their terms. - -------------------------------------------------------------------------------- StorageTek Top Security 7 David E. Lacey June 24, 1996 Page 7 (f) Entire Agreement. This Agreement, together with the other agreements referenced herein, embody the entire agreement between the parties relating to the subject matter hereof, and supersede all previous agreements or understandings, whether oral or written. (g) Amendment of Agreement. This Agreement may not be modified or amended, and no provision of this Agreement may be waived, except by a writing signed by the parties hereto. If this letter accurately sets forth the terms of our agreement relating to your employment, please sign the enclosed copy of this letter in the space provided below and return it to the Company. Very truly yours, /s/ DAVID E. WEISS David E. Weiss Chairman, President and Chief Executive Officer /s/ DAVID E. LACEY -------------------------- Name 7/08/96 -------------------------- Date - -------------------------------------------------------------------------------- StorageTek Top Security EX-10.5 6 OEM AGREEMENT DATED JUNE 7, 1996 1 EXHIBIT 10.5 CONFIDENTIAL TREATMENT THE FOLLOWING IS A REDACTED VERSION OF THE OEM AGREEMENT DATED AS OF JUNE 7, 1996 BY AND BETWEEN STORAGE TECHNOLOGY CORPORATION AND INTERNATIONAL BUSINESS MACHINES CORPORATION THIS MATERIAL IS BEING SUBMITTED IN CONNECTION WITH A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 OEM AGREEMENT BETWEEN INTERNATIONAL BUSINESS MACHINES CORPORATION AND STORAGE TECHNOLOGY CORPORATION JUNE 7, 1996 3 TABLE OF CONTENTS BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. SCOPE OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 9 4. COMPONENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5. AGREEMENT ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . 9 6. PURCHASE COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . 10 6.1 1996-1998 ** Volumes . . . . . . . . . . . . . . . . . . . 10 6.2 1999 ** Volumes/Pricing . . . . . . . . . . . . . . . . 10 6.3 Qualified Upgrades . . . . . . . . . . . . . . . . . . . . . 12 6.4 Credits . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.5 Liquidated Damages/ ** Payments . . . . . . . . . . . . . 12 6.6 Other StorageTek Distribution . . . . . . . . . . . . . . . 14 6.7 Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.8 Additional StorageTek Sales . . . . . . . . . . . . . . . . 16 7. PRICING & PAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . 17 7.5 ** Price . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.6 ** Payments . . . . . . . . . . . . . . . . . . . . . . . . 17 7.7 FRU Prices . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.8 Lowest Cost Sourcing . . . . . . . . . . . . . . . . . . . . 19 7.9 Taxes/Duties . . . . . . . . . . . . . . . . . . . . . . . . 19 7.10 Payment Terms . . . . . . . . . . . . . . . . . . . . . . . 19 7.11 Snapshot Feature . . . . . . . . . . . . . . . . . . . . . . 20 8. IBM SALES TO STORAGETEK . . . . . . . . . . . . . . . . . . . . . . 20 9. QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.1 Manufacturing Testing . . . . . . . . . . . . . . . . . . . 21 9.2 Engineering Changes . . . . . . . . . . . . . . . . . . . . 21 9.3 Quality Levels . . . . . . . . . . . . . . . . . . . . . . . 24 9.4 Quality Assurance . . . . . . . . . . . . . . . . . . . . . 28 9.5 ISO 9000 Certification and Use of Subcontractors . . . . . . 28
- ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment i 4 10. PRODUCT LEAD TIMES AND FORECAST . . . . . . . . . . . . . . . . . . . 29 10.4 Current Quarter . . . . . . . . . . . . . . . . . . . . . . 31 10.5 StorageTek's Capacity/Allocation . . . . . . . . . . . . . . 31 11. PURCHASE ORDERS, ALTERATIONS & RESCHEDULING . . . . . . . . . . . . 32 12. CONSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 13. DELIVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 13.1 On-time Delivery . . . . . . . . . . . . . . . . . . . . . . 36 13.2 Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . 37 13.3 Title/Risk of Loss . . . . . . . . . . . . . . . . . . . . 38 13.4 Packaging . . . . . . . . . . . . . . . . . . . . . . . . . 38 14. EQUIPMENT WARRANTY . . . . . . . . . . . . . . . . . . . . . . . . . 38 14.10 Licensed Programs, Microcode and Maintenance Code Warranty 40 15. FRUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 15.4 FRU Rework Procedures and Prices . . . . . . . . . . . . . . 42 16. FIELD SERVICE & SUPPORT . . . . . . . . . . . . . . . . . . . . . . 42 16.1 Installation Support . . . . . . . . . . . . . . . . . . . . 42 16.2 Training . . . . . . . . . . . . . . . . . . . . . . . . . . 43 16.3 Service of Equipment . . . . . . . . . . . . . . . . . . . . 44 16.4 Emergency and Expert Maintenance Coverage . . . . . . . . . 44 16.5 Labor Rate Table . . . . . . . . . . . . . . . . . . . . . . 44 16.6 New Product Development Center Support . . . . . . . . . . . 44 16.7 Maintenance and Installation Tools . . . . . . . . . . . . . 45 16.8 Maintenance and Technical Support . . . . . . . . . . . . . 45 16.9 ** Access . . . . . . . . . . . . . . . . . . . . . . . . . 47 17. MARKETING RIGHTS & SUPPORT . . . . . . . . . . . . . . . . . . . . . 47 17.2 Marketing Support Organization . . . . . . . . . . . . . . . 47 17.3 Training . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.4 Additional Initial Training . . . . . . . . . . . . . . . . 47 17.5 Ongoing Training . . . . . . . . . . . . . . . . . . . . . . 47 17.6 Marketing Materials . . . . . . . . . . . . . . . . . . . . 48 17.7 Marketing Tools . . . . . . . . . . . . . . . . . . . . . . 48 17.8 Systems Engineering Support . . . . . . . . . . . . . . . . 49
- ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment ii 5 18. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . 49 19. TRADEMARK & ADVERTISING . . . . . . . . . . . . . . . . . . . . . . 50 19.1 Trademark and Design Rights . . . . . . . . . . . . . . . . 50 19.2 Advertising/Disclosure . . . . . . . . . . . . . . . . . . . 50 20. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . 51 21. ASSIGNMENT & CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . 51 22. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . 51 22.1 Escalation Process . . . . . . . . . . . . . . . . . . . . . 51 22.2 Mediation Process . . . . . . . . . . . . . . . . . . . . . 52 23. TERMINATION/REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . 53 23.1 Termination by Mutual Consent . . . . . . . . . . . . . . . 53 23.2 Termination by Bankruptcy . . . . . . . . . . . . . . . . . 53 23.3 Termination for Cause . . . . . . . . . . . . . . . . . . . 53 23.4 Material Breach . . . . . . . . . . . . . . . . . . . . . . 55 23.5 License . . . . . . . . . . . . . . . . . . . . . . . . . 55 23.6 Manufacturing Make or Have Made Rights . . . . . . . . . . . 55 23.7 Termination for Convenience . . . . . . . . . . . . . . . . 56 23.8 Termination for Burdensome Condition . . . . . . . . . . . . 56 23.9 Wind Down . . . . . . . . . . . . . . . . . . . . . . . . . 57 23.10 ** After Termination . . . . . . . . . . . . . . . . . . . 58 24. INDEMNIFICATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . 58 24.1 Intellectual Property Indemnity . . . . . . . . . . . . . . 58 24.2 General Indemnity . . . . . . . . . . . . . . . . . . . . . 58 24.3 Obligations of IBM . . . . . . . . . . . . . . . . . . . . . 59 25. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 25.1 New York Law . . . . . . . . . . . . . . . . . . . . . . . . 59 25.2 Limitation of Actions . . . . . . . . . . . . . . . . . . . 60 25.3 Limitation of Liability . . . . . . . . . . . . . . . . . . 60
- ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment iii 6 26. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 26.1 Compliance with Laws . . . . . . . . . . . . . . . . . . . . 60 26.2 Relationship of the Parties . . . . . . . . . . . . . . . . 60 26.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 61 26.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 62 26.5 Headings and Attachments . . . . . . . . . . . . . . . . . . 62 26.6 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 62 26.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 26.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . 62 26.9 Weekends and Holidays . . . . . . . . . . . . . . . . . . . 62 26.10 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . 63 26.11 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 63 26.12 Order of Precedence . . . . . . . . . . . . . . . . . . . . 63
iv 7 EXHIBITS, ATTACHMENTS, APPENDICES Exhibit 1 - Prices Attachment 1 - Product Prices Attachment 2 - Volume Recovery Tables Appendix A - 1996 ** Payment Table Appendix B - 1997 ** Payment Table Appendix C - 1998 ** Payment Table Appendix D - 1999 ** Payment Table Attachment 3 - Upgrade Pricing Exhibit 2 - Specifications Attachment 1 - Manufacturing Test Specifications Attachment 2 - Product Specifications Exhibit 3 - IBM Developer Agreement Between IBM and StorageTek: Base Agreement Attachment 1 - Statement of Work Appendix A - Functional, Technical and Quality Specifications Schedule 1 - Iceberg Items Schedule 2 - Kodiak Items Schedule 3 - IXFP and IXOF Items Schedule 4 - Iceberg Performance Commitments for 7/96 Schedule 5 - Iceberg Performance Commitments for 6/97 Schedule 6 - Kodiak Performance Commitments for 10/96 Schedule 7 - Kodiak Performance Commitments for 10/1/97 Schedule 8 - Capacity Ratio Specification Appendix B - Completion and Acceptance Criteria Schedule 1 - Monterey System Test Schedule 2 - Current Volume Assumptions Appendix C - [Intentionally Left Blank] Appendix D - Certificate of Originality Appendix E - IBM Source Code Custody Agreement Appendix F - Performance Assessment Workload (PAWS) Appendix G - Product Development Plan Attachment 2 - Description of Licensed Works Appendix A - IBM LIC Terms Appendix B - StorageTek LIC Terms Exhibit 4 - Consignment Agreement Exhibit 5 - FRU Prices/Lead Times Exhibit 6 - Data Items Exhibit 7 - List of Countries for IP Indemnity Exhibit 8 - Examples of Calculations of IBM Volume Credit Due to RAS Criteria
- ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. v 8 OEM AGREEMENT This agreement is made and entered into as of June 7, 1996, by and between International Business Machines Corporation, having an office for the transaction of business at 5600 Cottle Road, San Jose, California 95193 (hereinafter called "IBM" or "Monterey"), and Storage Technology Corporation, having an office for the transaction of business at 2270 South 88th Street, Louisville, Colorado 80028 (hereinafter called "StorageTek," "STK" or "Oahu"). StorageTek and IBM may be individually referred to herein as a "Party" and collectively as the "Parties." BACKGROUND StorageTek manufactures and sells, among others, certain Equipment as more fully described below. IBM wishes to purchase such Equipment from StorageTek on an Original Equipment Manufacturer (OEM) basis at large volume prices in order to resell or lease such Equipment to its customers throughout the world, both directly and indirectly through its distributors, Subsidiaries, and other channels. In order to secure access to IBM's distribution channels, to provide StorageTek with the opportunity to reach more customers, to provide more product choices for customers and also due to IBM's willingness to invest a substantial amount in product research and development and in product engineering, StorageTek is willing to sell such Equipment to IBM at such prices if IBM will purchase a substantial amount of the Products and Upgrades, advertise and market the Products and Upgrades, provide maintenance and repair service for the Equipment sold or leased by it, maintain an inventory of spare parts and take certain other related actions. The provisions of this section are intended to generally explain the reasons that StorageTek and IBM have entered into this Agreement, but do not constitute a portion of the contractual obligations, terms or conditions agreed to by the Parties, which are set forth in the following sections of this Agreement. WITNESSETH THAT: In consideration of the mutual premises and covenants herein contained, the Parties hereto agree as follows: 1. DEFINITIONS 1.1 "Agreement" shall mean this OEM Agreement, its Exhibits, their Attachments, their Appendices and their Schedules. 1.2 "Agreement Administrator" shall have the meaning set forth in Section 5. 1.3 "Annual Volumes" shall have the meaning set forth in Section 6.1. 1.4 "APAR" shall mean a completed form entitled "Authorized Program Analysis Report," that is used by IBM to report suspected Code or documentation errors in a 9 Licensed Program (including updates or enhancements thereto) and to request their investigation and correction. 1.5 "Audit Rights" (Section 7.5c) shall mean a Party's right to have Price Waterhouse, Arthur Andersen or Ernst & Young, or their lawful successors, audit the other Party's books and records on reasonable prior notice for the purpose of making a factual determination of whether a specified event has occurred. The Parties shall request the firms in the order set forth above, and shall only request the second or third listed firm if the earlier listed firms decline to serve. In carrying out such audit responsibilities, said accounting firm shall use generally accepted accounting principles (hereafter "GAAP"), as consistently applied by the audited party. The auditor's working papers shall not be made available to the Party requesting the audit. 1.6 "Base Iceberg Package" shall have the meaning set forth in the IDA. 1.7 "Burdensome Condition" (Section 23.8) shall mean: ** 1.8 "Change of Control" (Section 21) shall mean: ** 1.9 "Commit Date" shall have the meaning set forth in Section 13.1i. 1.10 "Contract Coordinators" (Section 5) shall mean those individuals described in Section 11.1 of the Statement of Work (Attachment 1 to Exhibit 3). 1.11 "Cost Exclusions" (Section 9.3f) shall mean those parts costs that are incurred by IBM for (i) FRUs returned for warranty credit, (ii) FRU removals which are not in accordance with FRU removal procedure to the extent that such removals exceed StorageTek's actual experience during the first six (6) months of 1996, (iii) defective IBM Drives, and (iv) FRUs replaced due to a confirmed IBM Drive or any other IBM-supplied component failure (without a defect in the associated StorageTek FRU package). 1.12 "Count Key Data Systems" (Section 6.6a) shall mean storage subsystems or solutions which present a count key data or extended count key data image to the host. 1.13 "Day(s)," "month(s)," "quarter(s)" and "year(s)" shall mean calendar days, months, quarters or years, unless otherwise specified. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 2 10 1.14 "Delivery," "Delivered," "Deliver" (Section 2.1) or other forms of the term shall mean the physical transfer of Equipment by StorageTek to an IBM-specified common carrier, freight forwarder, or IBM's agent at StorageTek's plant of manufacture. 1.15 "Devices" (Section 6.2) shall mean products which would be ** 1.16 "Disclosing Party" shall have the meaning set forth in Section 20. 1.17 "Drives" shall have the meaning set forth in Section 12.1. 1.18 "Effective Date" shall have the meaning set forth in Section 3. 1.19 "Emergency Engineering Change" shall have the meaning set forth in Section 9.2b. 1.20 "Equipment" (Section 2) shall mean Products, Upgrades and FRUs. 1.21 "Error Free Installation" (Section 9.3b) shall mean installations of Products and Upgrades Delivered that both (i) Plug and Play; and (ii) meet the following criteria: (a) arrives configured according to IBM's written instructions; (b) has all of the correct documentation, cables and accessories included; and (c) is Delivered in the correct packaging and with the shipping documents. Such criteria shall specifically not include any failures caused by IBM or the customer, or for which IBM or the customer is responsible, including without limitation, I/O control program generations, shipping damage, failure (for any reason) of Drives or other IBM-supplied components. 1.22 "Estimated Volumes" shall have the meaning set forth in Section 7.6a. 1.23 "FAST" shall mean Iceberg, as described in the Specifications. 1.24 "FASTER" shall mean Kodiak, as described in the Specifications. 1.25 "FRU" (Section 6.2) shall mean any part, assembly or subassembly of Products, Devices or Upgrades supplied by StorageTek that are designed to be replaceable in the field. 1.26 "Gigabyte" or "GB" shall mean one billion bytes of storage. 1.27 "IBM Customer Engineering" shall have the meaning set forth in Section 16.2. 1.28 "IBM Total" shall have the meaning set forth in Section 7.6c. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 3 11 1.29 "IDA" (Section 2.2) shall refer to the IBM Developer Agreement, which is attached hereto as Exhibit 3. 1.30 "IDC Methodology" shall have the meaning set forth in Section 7.6b. 1.31 "Impact Error" (Section 9.3a) shall mean an incident, as reasonably determined by IBM, that either results in: (1) the loss of data, or (2) the loss of access to data resulting in an application interrupt (e.g., an abnormal program ending or "abend" or inability to bring up an application) or system interrupt (e.g., a system outage or requirement to initiate an initial program load command in order to resolve or clear an error condition). Any Impact Error due to improper use of the Equipment by the customer, or an IBM agent or employee will be excluded. 1.32 "Invention" shall mean any idea, design, concept, process, technique, invention, discovery or improvement, whether or not patentable, either conceived or reduced to practice solely by one or more employees of one of the Parties or its Subsidiaries (Inventing Party) or jointly by one or more employees of IBM or its Subsidiaries and one or more employees of StorageTek or its Subsidiaries (Joint Invention) in the performance, and during the term, of this Agreement. 1.33 "Level 1" support are those activities that assist the user in resolving "how to" and operational-type questions, as well as technical questions on installation procedures. 1.34 "Level 2" support are those activities that require additional research and analysis of a user problem. The Problem Management System database is checked to locate a duplicate of the problem being reported and the previous solution applied to that problem. 1.35 "Level 3" support are those activities that require duplication of the user problem, analysis of APAR or PMR records and distribution of a fix to resolve the user problem. 1.36 "Licensed Programs" shall mean IXFP, IXOF and the Snapshot Feature (as defined in Section 1.13 of the DLW). 1.37 "Liquidated Damages" shall mean those damages described in Section 6.5. 1.38 "Machine Month" or "MM" (Section 9.3a) shall mean a measurement, established at the end of such calendar month, of the number of units of Product installed and operational during a month at an end user's location, prorated on a daily basis (e.g., the sum of the total number of machine days [i.e., number of machines installed and operational at an end user's location on a particular day] in a calendar month, divided by the number of days in that month). 1.39 "Maintenance Code" shall be as defined in the DLW. 4 12 1.40 "Major Enhancements" shall be as defined in the IDA. 1.41 "Mandatory Engineering Changes" shall have the meaning set forth in Section 9.2. 1.42 "Maximum Percentage" shall have the meaning set forth in Section 10.2. 1.43 "Megabyte" or "MB" shall mean one million bytes of storage. 1.44 "Microcode" shall have the meaning set forth in the Description of Licensed Works. 1.45 "Minimum Percentage" shall have the meaning set forth in Section 10.2. 1.46 "Minimum Volumes" shall have the meaning set forth in Section 6.5. 1.47 ** Price" shall have the meaning set forth in Section 7.5. 1.48 "New FRU Cost" (Section 7.7a) shall mean StorageTek's price for FRUs, as specified in Section 7.7a. StorageTek will provide IBM a schedule setting forth this cost for each FRU (the current version set forth in Exhibit 5 to this Agreement, FRU Prices and Lead Times) which list will be adjusted semiannually (in January and July). 1.49 "New Product Development Center Support" shall have the meaning set forth in Section 16.6. 1.50 "Non-RMM Device" shall have the meaning set forth in Section 1.11 of the DLW. 1.51 "Notification Date" shall have the meaning set forth in Section 6.2a. 1.52 "Object Code" shall have the meaning set forth in the SOW. 1.53 "Plug and Play" means that a unit of Product or Upgrade, when installed following StorageTek's recommended installation procedures, operates without experiencing any functional failures during installation and passes all installation verification tests, that internal diagnostic routines execute successfully and generally that each such unit of Product or Upgrade is observed to operate properly and in accordance with the Specifications (as the same may be changed in any applicable Product Development Plan) through the installation of such unit. A functional failure is defined as any repair/replacement/adjustment corrective action that is required to install or make the subsystem functional that is not specified as part of the installation instructions. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 5 13 1.54 "PMR" shall mean a problem management report that is used by IBM to report machine failures. 1.55 "Product(s)" (Section 6.1) shall mean the products purchased from StorageTek by IBM and consist of the StorageTek-manufactured Iceberg, Kodiak and Arctic Fox high performance storage subsystems, including any Deliverables, Enhancements and Maintenance Modifications hereafter made pursuant to the IDA, and controllers, A-boxes, B-boxes, Microcode and Licensed Works, and which are further described in Exhibit 2, Specifications, and Appendices A and B to Attachment 1 of Exhibit 3. Products also include related documentation and other supporting materials. 1.56 "Product Engineering Services" shall mean the support and services as described in Section 3.7 of the SOW. 1.57 "Qualified Upgrades" shall have the meaning set forth in Section 6.3. 1.58 "Quarterly Cost" (Section 6.2b(1) shall mean ** 1.59 "Quarterly Volumes" shall have the meaning set forth in Section 6.2. 1.60 "QUICK" shall mean Arctic Fox. 1.61 "RAS criteria" shall have the meaning set forth in Section 9.3a. 1.62 "Receiving Party" shall have the meaning set forth in Section 20. 1.63 "Recovery Payments" shall have the meaning set forth in Section 7.6. 1.64 "Remainder Percentage" shall have the meaning set forth in Section 10.2. 1.65 "Service Call" (Section 9.3a) shall mean any service call due to a failure condition resulting from either a subsystem hardware or Microcode error (including the Microcode portion of Snapshot Feature) (e.g., 01, 02 and 04 service codes). 1.66 "Service Call Rate" (Section 9.3a) shall mean a rate which is calculated as follows: number of service 180 GB for Iceberg or calls during month 360 GB for Kodiak ------------------ X ---------------------- number of average capacity Machine Months in GB per machine - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 6 14 1.67 "Severity Level" shall mean a designation (i.e., Severity 1, Severity 2, Severity 3 and Severity 4) assigned to errors that is intended to indicate the seriousness of the error based upon the impact that the error has on the user's operation. 1.68 "Severity 1" is a "critical problem"; the product is unusable or an error severely impacts a customer's operation. Severity 1 requires maximum effort to resolve a critical problem until an emergency fix is developed, implemented and made generally available to IBM's customers who experience such problem. 1.69 "Severity 2" is a "major problem"; important function is not available resulting in operations being severely restricted. 1.70 "Severity 3" is a "minor problem"; inability to use a function occurs, but it does not seriously affect the user. 1.71 "Severity 4" is a "minor problem" that is not significant to the user's operation; the user may be able to circumvent the problem. 1.72 "Source Code" shall have the meaning as set forth in the SOW. 1.73 "Specifications" (Section 2.1) shall mean the descriptions contained in Appendices A and B to Attachment 1 of Exhibit 3 and Exhibit 2, Specifications. 1.74 "Standard Parts Cost" (Section 9.3f) shall mean the following with respect to the following specific periods of this Agreement: a. First twelve months of the Agreement: ** of the New FRU Cost plus ** of the Used FRU Cost for each FRU, plus actual freight; and b. Thereafter: ** of the New FRU Cost plus ** of the Used FRU Cost for each FRU, plus actual freight. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 7 15 1.75 "StorageTek Installed Base" shall mean ** prior to the Effective Date and ** distributed by StorageTek pursuant to the terms of Section 6.7 and 6.8, below. 1.76 "Subsidiary" (Section 6.6) shall mean a corporation, company, limited liability company or other entity: a. more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto; or b. which does not have outstanding shares or securities, as may be the case in a partnership, joint venture, or unincorporated association, but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is, now or hereafter, owned or controlled, directly or indirectly, by a party hereto; but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. 1.77 ** 1.78 "Terabyte" or "TB" (Section 6.1) shall mean one trillion bytes of storage which is accessible to the customer. For calculating storage capacities of purchases of ** 1.79 "Upgrade(s)" (Section 6.2b) shall mean additional features or functions, including but not limited to Major Enhancements, which improve performance or increase capacity of previously sold or leased Products or Devices. 1.80 "Used FRU Cost" (Section 7.7a) shall mean the price of rework for FRUs as determined by Section 15.4. This cost as of the execution of this Agreement is set forth in Exhibit 5 to this Agreement, FRU Prices and Lead Times, which will be adjusted semiannually (in January and July). 1.81 Capitalized terms not otherwise defined in the OEM Agreement shall have the definitions set forth elsewhere in the Agreement. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 8 16 2. SCOPE OF AGREEMENT 2.1 StorageTek agrees to develop IBM requested enhancements to the Equipment, to provide continuing engineering and marketing and service support for the Equipment, and to manufacture, test, sell and Deliver Equipment to IBM and desires that IBM supply Drives for use in such Equipment all in accordance with the Specifications, procedures and conditions contained in this Agreement. 2.2 IBM (i) agrees to fund the continuing engineering on, and the future development of, specific enhancements to the Equipment as set forth in the IDA, (ii) intends to add value to such Equipment by consigning IBM Drives to StorageTek for inclusion in the Equipment, and (iii) has the right to market and sell Equipment purchased from StorageTek, all in accordance with the terms of this Agreement. 2.3 Changes to Specifications, procedures and conditions contained in the Agreement, its Exhibits, their Attachments and their Schedules may be made from time to time upon mutual written agreement, specifically identifying this Agreement and stating an intent to make such changes. 3. TERM OF AGREEMENT Unless earlier terminated, the term of this Agreement shall be for a period from the date first set forth above (hereinafter "Effective Date"), through December 31, 1999. 4. COMPONENTS Because the Equipment purchased by IBM from StorageTek is likely to be associated with the IBM brand, IBM wishes to be assured that such Equipment, when sold to its customers, will have the quality that its customers expect from items so branded. Accordingly, IBM believes that, to the extent that StorageTek can utilize components in such Equipment that are manufactured by or for IBM under its high quality standards, it would be desirable for StorageTek to obtain such components from IBM for use in manufacturing the Equipment. ** 5. AGREEMENT ADMINISTRATOR Each Party will identify an Agreement Administrator no later than June 15, 1996, who shall have overall responsibility for managing this Agreement for such Party. Until such time, the Agreement Administrators are set forth below. The Agreement Administrators may not amend the terms of this Agreement. In addition to other responsibilities as may be agreed, - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 9 17 such Administrators or any successor named by the Party designating such Administrator, will complete as soon as possible after the Effective Date, and will update throughout the term of this Agreement their respective entries in Exhibit 6, "Data Items." The Administrators shall also be responsible for the exchange of data, as provided in this Agreement. The Agreement Administrators are: For StorageTek: ** For IBM: ** 6. PURCHASE COMMITMENTS 6.1 1996-1998 ** VOLUMES IBM intends to purchase a specified volume of Products and Qualified Upgrades during 1996, 1997 and 1998 from StorageTek ** (hereafter ** ). The ** Volumes, based upon the capacity, in Terabytes, of Products and Qualified Upgrades purchased by IBM and credited to IBM pursuant to other provisions of this Agreement, are ** Terabytes in 1996, ** Terabytes in 1997, and ** Terabytes in 1998. If IBM's purchases and credits do not equal or exceed the ** Volume, then IBM will make Recovery Payments as set forth in Section 7.6, and, in certain circumstances, IBM will be obligated to pay Liquidated Damages as set forth in Section 6.5b or 6.5c. 6.2 1999 ** VOLUMES/PRICING IBM may continue to purchase Products and Upgrades from StorageTek during 1999 according to the process detailed below: a. On or before ** the Parties will ** then IBM must notify StorageTek according to the following schedule ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 10 18
Notification Date | For Shipment in -------------------------------------------------- ** | ** ** | ** ** | ** ** | **
b. Prices which StorageTek shall charge to IBM for Products in 1999 will be based on price quotes. Thirty (30) days prior to each Notification Date described in paragraph 6.2a, above, StorageTek shall provide a price quote to IBM for Products to be shipped to IBM in the corresponding ** as indicated above. Such price shall be the greater of: (1) ** (2) ** IBM's purchase volumes for ** (hereafter " ** Volumes") shall depend on the price determined as set forth above. If StorageTek provides the cost described in paragraph 6.2b(1), above, as its price, IBM's ** Volumes shall be ** Terabytes of Products and Upgrades. If StorageTek provides the price described in paragraph 6.2b(2), above, as its price, IBM's ** Volumes shall be ** Terabytes of Products and Upgrades. c. Prices provided to IBM by StorageTek pursuant to paragraph 6.2b, above, shall be based on StorageTek's ** d. Notwithstanding the above, if IBM fails to notify StorageTek prior to ** of its desire to purchase Products for ** 1999, and if, on or before ** IBM decides that it wishes to continue to purchase Products ** 1999, then, ** 1999 only, IBM may elect to purchase such Products at the price quoted pursuant to paragraph 6.2b, above ** by providing a noncancelable purchase order for such units of Products as IBM may require. e. If IBM does not attain its ** Volumes for any quarter, then IBM shall pay a ** Volume Recovery Payment computed in accordance with Exhibit 1, Attachment 2, Appendix D. IBM's payment of these Recovery Payments shall be the sole and exclusive remedy to StorageTek for IBM's failure to purchase the ** Volumes pursuant to this Agreement. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 11 19 f. If IBM does not attain its ** Volumes for ** then StorageTek may use IBM Materials ** to sell or distribute Devices and Major Enhancements therefor, subject, however, to the applicable provisions of the Description of Licensed Works Transaction Document. 6.3 QUALIFIED UPGRADES ** if the total of IBM's purchases and credits is more than ** then the capacity of any and all Upgrades purchased during such year as measured in Terabytes shall be credited toward IBM's attainment of its ** Volumes in such year. If the total of IBM's purchases and credits is ** Terabytes or less ** then IBM may credit a maximum of ** Terabytes of Upgrade purchases ** in determining attainment of its ** Volumes. Such Upgrades shall be hereafter referred to as "Qualified Upgrades." Upgrades ** will count toward achievement of the ** Volumes to the extent that the capacity of Upgrades purchased and credited does not exceed ** of the total capacity purchased and credited. 6.4 CREDITS IBM's ** Volumes are subject to credits based upon StorageTek's failure to meet agreed-to specifications relating to quality, availability, supply, delivery, technical milestones and other such items to the extent that such credits are provided for elsewhere in this Agreement. As applied herein, credits shall be additive to any actual purchase of Equipment by IBM. 6.5 LIQUIDATED DAMAGES/ ** PAYMENTS IBM intends, through a combination of purchases of Equipment from StorageTek and credits to volumes as provided elsewhere in this Agreement, to achieve a minimum of ** Terabytes ("Minimum Volumes") of its ** Volumes in ** a. If, ** IBM has not purchased its Minimum Volumes, then, except as otherwise provided in Sections 6.6a, 6.6b and 21, StorageTek may elect to terminate this Agreement and receive from IBM ** pursuant to Sections 6.5b or 6.5c, below. StorageTek will provide IBM with notice of such failure by ** in which a shortfall occurs. IBM shall have the option to avoid such termination and ** respectively; provided that IBM has received at least twenty (20) days' prior written notice of such shortfall. Such ** If IBM ** subject to Section 23.9, StorageTek - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 12 20 may terminate this Agreement effective upon notice, which must be provided no later than ** of such year. b. If IBM's total volume of purchases ** is less than its Minimum Volumes, and StorageTek elects to terminate this Agreement ** but no later than ** pursuant to Section 6.5a above, then IBM will pay to StorageTek: (1) ** in the amount of ** ; plus (2) The net sum of any ** as determined in accordance with Section 7.6d, provided, however, that such ** shall not exceed the sum of ** ; plus (3) Any ** provided, however, that no additional ** shall be due ** and, provided further, that ** shall not exceed the sum of ** . c. If IBM's total volume of purchases for ** is less than its Minimum Volumes, and StorageTek elects to terminate this Agreement ** but no later than ** pursuant to Section 6.5a above, then IBM will pay to StorageTek: (1) ** in the amount of ** ; plus (2) The net sum of any ** as determined in accordance with Section 7.6d; provided, however, that such ** shall not exceed the sum of ** . d. If IBM terminates this Agreement for convenience ** then, except as otherwise provided in Sections 6.6a, 6.6b and 21, IBM will pay ** as described in Section 7.6, below, to the extent not already paid, ** plus the sum of ** e. If IBM terminates this Agreement for convenience between ** then, except as otherwise provided in Sections 6.6a, 6.6b and 21, IBM will pay to StorageTek: (1) ** in the amount of ** (2) The net sum of any ** provided, however, that no additional ** shall be due ** . f. ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 13 21 g. The Parties acknowledge and agree that the foregoing ** amount is not a penalty but represents a good faith estimate by the Parties of the amount of damages incurred by StorageTek upon the occurrence of the events set forth in Sections 6.5b through 6.5e. The Parties have entered into this provision after each Party has had the opportunity to consult counsel, and pursuant to a mutual intent to avoid the expenses of any dispute resolution process. 6.6 OTHER STORAGETEK DISTRIBUTION a. StorageTek and its Subsidiaries may, at their sole discretion, sell, lease or otherwise distribute Devices and products competitive with Equipment to third parties, provided, however, that neither StorageTek nor its Subsidiaries are ** and, provided further, that, except for situations as described in Section 6.7, below, if StorageTek chooses to use, sell, lease or otherwise distribute, either directly or indirectly: (1) any ** or (2) ** then, unless the sale is excepted pursuant to Section 6.8, below, IBM shall be ** its obligations and liabilities related to ** as well as any obligation to pay any ** in the year in which the sale occurred and thereafter. StorageTek shall also have no right to terminate this Agreement for failure of IBM to meet its ** and shall immediately notify IBM in writing that such use, sale, lease or other distribution has occurred, and shall indicate that IBM ** the foregoing obligations. IBM shall also have the right to ** . Each Party may also terminate ** b. If StorageTek licenses, transfers, sells or assigns to a third party all or a portion of a Licensed Work ** then IBM shall be ** its obligations and liabilities related to ** , as well as any obligation to ** in the year in which the sale occurred and thereafter. StorageTek shall also have ** for failure of IBM to meet its ** and shall immediately notify IBM in writing that such license, transfer, sale or assignment has occurred, and shall indicate that IBM ** the foregoing obligations. IBM shall also have the right to ** Each Party may also terminate ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 14 22 c. If IBM learns of facts that indicate that StorageTek is selling, leasing or otherwise distributing the products described in Section 6.6a, above, directly or indirectly, to customers other than IBM, or has licensed, transferred, sold or assigned the Licensed Works described in Section 6.6b, above, then upon written notice by IBM to StorageTek: (1) StorageTek shall investigate the facts and circumstances relating to the incident thoroughly, and share the results, but not the customer-specific details, with IBM. If both Parties agree that no such sale, lease or other distribution occurred or no such license was granted, then the rights and obligations of the Parties shall not change. If the Parties are unable to agree on the facts relating to such incident, then the matter will be handled pursuant to the dispute resolution process described in Section 22. (2) if StorageTek or its Subsidiaries has made a sale, lease or other distribution to third parties, as described in Section 6.6a, above, or has licensed, transferred, sold or assigned the Licensed Works to a third party, as described in Section 6.6b, above, other than IBM, then IBM's obligations shall be modified as set forth in such sections. 6.7 EXCEPTIONS a. Sales, leases, or other distribution or use of Devices by StorageTek or its Subsidiaries in the following situations are excepted from the provisions of Section 6.6, and will be credited toward calculation of IBM's purchase volume for the purpose of determining whether IBM has achieved its ** Volumes: (1) Sales, leases or other distribution of ** . For the purpose of determining the ** which shall be credited to IBM's ** Volumes, ** (2) Sales of Devices by StorageTek or its Subsidiaries ** (a) ** (b) ** and further provided that, in the case of (a) or (b), shipments made prior to ** will not be credited to IBM's ** Volumes; and (3) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 15 23 b. Uses, sales, leases or other distribution of Equipment or Devices by StorageTek or its Subsidiaries in the following situations are excepted from the provisions of Section 6.6a, ** (1) Sales or leases by StorageTek or it Subsidiaries of Equipment that ** (2) Use of Equipment or Devices internally by StorageTek or its Subsidiaries ** (3) Use of Equipment or Devices internally by StorageTek ** (4) Sales or leases of used Equipment, Devices or Count Key Data Systems ** (5) Sales or use of FRUs for maintenance purposes only. However, nothing in this clause 6.7b(5) shall be interpreted as granting StorageTek an implied license to distribute FRUs that are or contain IBM Materials or other IBM Code not licensed under this Agreement. (6) Sales or leases of Arctic Fox and Arctic Fox Upgrades, ** (7) Sales of Non-RMM Devices, ** (8) Use of Count Key Data Systems that are not Equipment or Devices by StorageTek or its Subsidiaries. 6.8 ADDITIONAL STORAGETEK SALES In the event that StorageTek or its Subsidiaries makes sales which are not within the scope of the sales enumerated in Section 6.7, above, IBM shall nevertheless continue its obligations for future ** and ** if the total units of Product, Upgrades, Count Key Data Systems and Devices sold by StorageTek and its Subsidiaries, and not included under Section 6.7, above, in any consecutive ** period, does not exceed ** units; provided that under no circumstances shall any units of Product, Upgrades, Count Key Data Systems and Devices sold by StorageTek and its Subsidiaries pursuant to this Section 6.8, include ** . IBM will receive credit against the attainment of its ** Volumes in an amount equal to two times the amount of Terabytes sold pursuant to this Section 6.8. For the purposes of determining the capacity that shall be so credited, ** will be used. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 16 24 7. PRICING & PAYMENT TERMS 7.1 Prices charged to IBM by StorageTek for Products sold hereunder in 1996, 1997 and 1998 shall be as set forth in Attachment 1 to Exhibit 1 to this Agreement. These prices include necessary cables, software, packaging, packing and shipping materials and such other items (excluding manuals) as StorageTek currently includes in its Product shipments. Manuals normally included with Product shall also be included through September 31, 1996. Prior to such date the Parties will meet to discuss methods by which StorageTek could assist in preparing or having such manuals prepared at IBM's expense. 7.2 Prices charged to IBM for Upgrades shall be as set forth in Attachment 3 to Exhibit 1 to this Agreement. 7.3 In the case of Products or Upgrades manufactured by StorageTek in Europe, an additional charge equivalent to ** will be added by mutual agreement to the prices set forth in Attachments 1 and 3 to Exhibit 1, which charge initially shall be ** . 7.4 Prices charged for Products in 1999 shall be as set forth in Section 6.2. 7.5 ** PRICE Notwithstanding any other provisions in this Agreement, in no event will any price charged by StorageTek to IBM exceed ** Prices, as defined below: a. ** b. ** c. ** 7.6 RECOVERY PAYMENTS a. If IBM fails to purchase volumes from StorageTek equal to its ** Volumes ** IBM will pay to StorageTek a sum referred to herein as a Recovery Payment. This amount shall be calculated, ** . The amount of such Recovery Payments shall be calculated at least ** and shall be based on ** (hereinafter " ** Volumes"). If the parties cannot agree on such ** Volumes, then they shall resolve the dispute pursuant to Section 22. No later than the last day of such quarter, IBM will pay to StorageTek or StorageTek will pay to IBM the estimated net sum of any Recovery Payment due to the other Party. For ** such ** Recovery Payment shall not be reconciled to actual volumes of - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 17 25 shipments and credits. For ** such ** Recovery Payment shall ** of the following year. Such Recovery Payment shall not exceed the sum of ** in any year. b. Definition of IBM Total. As used in Appendices B and C of Attachment 2 to Exhibit 1 hereto, "IBM Total" shall mean (1) ** IBM volumes of all ** sold by IBM ** expressed in Terabytes, ** using the methodology that is consistent with ** then current outlook report for ** or, if such data is not available, as otherwise mutually agreed; and (2) for ** , subject to StorageTek's Audit Rights, the total ** during such year. c. 1996. The Recovery Payment for 1996 shall be ** d. 1997-1998. The Recovery Payment for 1997 and 1998 shall be ** e. 1999. The Recovery Payments, if any, for 1999 shall be ** f. Notwithstanding anything to the contrary in this Section 7.6, in the event that StorageTek terminates this Agreement based on IBM's failure to purchase its ** Volumes or if IBM terminates this Agreement for convenience, then ** 7.7 FRU PRICES Prices charged by StorageTek to IBM for new FRUs will be ** of such FRUs and the multiples set forth in Section 7.7a, below. For the purpose of this section and Section 15.4, cost shall be determined by using ** . The standard cost will be reviewed ** and any differences in cost will be adjusted in the following period. Compliance with this section shall be subject to IBM's Audit Rights. a. Multiples for New FRUs. (1) During 1996 the multiple is ** (2) During the remaining term of this Agreement the multiple is ** (3) After the termination of this Agreement the multiple is ** b. FRU Rework. Prices for FRUs returned by IBM will be determined in accordance with Section 15.4. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 18 26 7.8 LOWEST COST SOURCING. The Parties agree that it is in their mutual interest for StorageTek to obtain parts for new production and maintenance purposes at the lowest practicable cost. If IBM identifies a potential alternative source for any part, StorageTek will make a good faith reasonable effort to qualify the alternative. If such bid is comparable with the quality, terms and conditions and offers a better price compared to the then current source of such parts, and awarding such alternative source a supply contract pursuant to such bid does not adversely impact the terms of StorageTek's purchases of other parts from the then current source, then the lower cost will be used in determining prices to IBM for Equipment whether or not StorageTek actually obtains the part or parts from such alternative source. 7.9 TAXES/DUTIES The prices for Equipment supplied under this Agreement are exclusive of any customs charges and duties and sales, use, privilege, excise and similar taxes levied by the USA, foreign territories, or any other governmental entity on the Products, their export, import, shipment, purchase or sale. IBM shall pay and be responsible for the payment of any such taxes (excluding taxes based upon StorageTek's net income) or duties; and, to the extent legally required, StorageTek shall collect any applicable taxes unless IBM establishes its exemption therefrom. If StorageTek is required to pay any such taxes or duties, IBM will reimburse StorageTek pursuant to StorageTek's invoice. IBM hereby represents to StorageTek that it is purchasing the Products hereunder for the purpose of resale, rent, lease or in-house use, and, if required by applicable law, IBM will furnish StorageTek with pertinent and valid sales and use tax exemption certificates. 7.10 PAYMENT TERMS a. StorageTek will invoice IBM for Equipment on or after the date on which such Equipment is Delivered. If any unit of Equipment is Delivered and is not suitable to be installed, then the Equipment shall not be considered as Delivered until such time that such Equipment is rendered suitable for installation. IBM or its designee will exercise reasonable efforts to install Equipment that it receives. IBM will promptly notify StorageTek when such Equipment is not suitable for installation. Subject to Section 13.1k, payment terms will be the number of days from date of receipt of a correct invoice by IBM as shown in the following table: 19 27
Invoice Date Payment Term | -------------------- ----------------------- 1996 | ** days 1997 or later | ** days
b. StorageTek's invoices must state the IBM purchase order number, description of the item(s) being invoiced, quantity shipped, ship date, unit price, total amount due and the remit-to address. StorageTek will mail or deliver invoices to the address indicated on the purchase order. c. Payment of an invoice by IBM under IBM purchase order(s) will not be construed as and will not constitute an acceptance of Product failing to conform to specifications or agreed upon quality levels, nor will any payment to StorageTek be construed as or constitute a waiver of any of IBM's legal rights or remedies. d. StorageTek will invoice, and IBM will pay, in US Dollars to the address listed on StorageTek's invoice. All payments will be made by wire transfer of immediately available funds. 7.11 SNAPSHOT FEATURE IBM will license the Snapshot Feature as set forth in the Description of Licensed Works for the license fees set forth in Attachment 3 to Exhibit 1 hereto. 8. IBM SALES TO STORAGETEK 8.1 StorageTek, in its sole discretion, may acquire Equipment from IBM ** . The prices for the first ** units of Products will be ** . The prices for all other units of Products will not exceed ** . The prices for Upgrades will not exceed ** . Such Equipment may be sold by StorageTek ** . Sales by IBM to StorageTek will be pursuant to ** with a one (1) day transit period, except that all Equipment supplied pursuant to this section by IBM to StorageTek shall be provided ** . Moreover, StorageTek shall not be subject to ** for such units. 8.2 IBM agrees to sell StorageTek the Upgrades it reasonably requires to meet the ongoing remarketing obligations StorageTek has as of the ** with respect to ** . The prices for Upgrades ** which IBM will charge Storagetek shall be commercially reasonable and not exceed ** of IBM's average selling price ** but under no circumstance shall such prices be any less than ** of the price charged to IBM by StorageTek per MB of Product as set forth in Section 7. Any such Upgrades, when - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 20 28 purchased by IBM from StorageTek, will be counted as IBM's volumes in calculating IBM's attainment of its ** , and will not be subject to the limitations of Section 6.3, and will be counted in addition to the Qualified Upgrades. 9. QUALITY 9.1 MANUFACTURING TESTING Prior to Delivery, StorageTek shall conduct a mutually agreed-upon preshipment manufacturing test at its plant on each unit of Equipment. Notwithstanding such preshipment manufacturing testing, all Equipment must conform to the Specifications. StorageTek will provide IBM on a quarterly basis with a complete, summarized record of inspection and tests performed on each unit of Equipment during the term of the Agreement. Detailed records of inspection and tests (in manual and electronic form) performed for each unit of Equipment shall also be kept by StorageTek for three (3) years. Upon IBM's request, StorageTek will provide IBM with access to an electronic copy of the specific test results for each unit of Equipment within two (2) business days after receipt of such request. IBM's representative may, if it so requests and at its sole expense, witness the preshipment tests carried out by StorageTek, provided such request is made at least three (3) days prior to the scheduled Delivery of the items being tested. Any such observation by IBM shall be subject to StorageTek's reasonable safety and security rules and shall be conducted to the extent feasible on a noninterference basis. IBM may also conduct its own testing to the extent feasible on a non- interference basis either at StorageTek's plant, its own facilities or IBM's customers' facilities, at IBM's own expense, to confirm that the Equipment meets the Specifications. Any testing performed at StorageTek's plant shall be subject to StorageTek's reasonable safety and security rules. 9.2 ENGINEERING CHANGES a. Mandatory Engineering Changes. If changes that may affect the form, fit, function, interface, reliability or serviceability of the Equipment (including interchangeability with previously purchased FRUs) are required in order to make the Equipment sold hereunder conform to the Specifications ("Mandatory Engineering Changes"), StorageTek shall first obtain IBM's approval. If it is mutually agreed that the change is to be made, StorageTek shall make the changes at no charge to IBM in all units of Equipment which are not yet delivered to IBM. If such changes are required to make delivered units of Equipment conform to those Specifications, they shall be supplied in the form of mandatory field change kits at no charge to IBM in accordance with the procedure set forth below. 21 29 IBM shall supply labor to install, subject to Section 9.3h, all Mandatory Engineering Changes in delivered units of Equipment. Field change kits resulting from Mandatory Engineering Changes described above will be administered as follows: (1) StorageTek will promptly send an engineering change notice (ECN) to IBM prior to Delivery of the first shipment of Equipment that contains a Mandatory Engineering Change. IBM shall issue a no-charge purchase order for all mandatory field change kits that IBM desires. Such kits and any Equipment returned which are covered by the Mandatory ECNs shall be shipped freight prepaid by StorageTek, at no charge to IBM. (2) StorageTek will ship the mandatory field change kits according to the schedule that is set forth in clause (4), below, and issue a no-charge invoice to IBM for all parts ordered and shipped as a part of the mandatory field change kits. (3) Subject to the terms of Section 15.3, IBM will use reasonable efforts to see that repairable parts (displaced by field change kits) from Equipment are packaged separately from other parts returned. IBM will send Products to StorageTek, freight prepaid, and Upgrades and FRUs, freight collect. (4) For each Mandatory Engineering Change the parties will agree upon an appropriate round- robin process for distributing field change kits to the field and securing the return of displaced FRUs for rework by StorageTek. b. Emergency Engineering Changes. Notwithstanding Section 9.2a, above, StorageTek may issue any engineering change necessary to remedy an Equipment-down situation at a customer of IBM or to make any unit of the Equipment safe (an "Emergency Engineering Change") upon notice to IBM but without any prior evaluation or approval by IBM; provided, however, that StorageTek agrees to follow the procedures as set forth in Section 9.2a in order to implement a permanent solution to resolve the safety or down situation that arose precipitating the need for the engineering change. As to any affected Equipment from time to time in IBM's inventory or control, or already accepted by IBM, IBM shall use reasonable efforts to promptly accomplish the installation of such Emergency Engineering Change. In the event of installation of Emergency Engineering Changes by IBM hereunder, StorageTek shall implement a corrective action plan, including the provision of information, materials, tools and parts necessary to effect the installation of such Emergency Engineering Changes on the affected Equipment (all without cost to IBM), subject to Section 9.3h. 22 30 c. Optional Engineering Changes. In addition to Mandatory Engineering Changes, it is recognized by the Parties that there may be optional changes requested by either IBM or StorageTek, which are not required to make the units of Equipment conform to the Specifications. The cost of implementing such changes (including kits and labor) on delivered Equipment shall be divided between the parties as they mutually agree. StorageTek will deliver field change kits for such changes to IBM, as specified in IBM's purchase order, which purchase order shall be given by IBM to StorageTek within such time period as the Parties shall mutually agree. d. Procedures Regarding Proposed Engineering Changes. In connection with any engineering changes proposed pursuant to Section 9.2a, above, StorageTek will forward to IBM, at IBM's request, a minimum of two (2) samples of each such proposed engineering change, as well as the details of any proposed change, to enable IBM to determine whether to approve such change, including: (1) the effect of the change on the form, fit, function, interface, reliability or serviceability of the Equipment; (2) StorageTek's reference number for the proposed change; (3) StorageTek's identification of the item to be changed and whether any items should be returned; (4) description of and reason for the change with sufficient engineering detail and applicable validation data, as endorsed by StorageTek's quality control process, to enable the proposal to be assessed; (5) the date and, if available at the time, StorageTek's serial number from which StorageTek proposes to implement the change; (6) whether retroactive action is proposed and, if so, the details of any necessary field action and the initial availability of FRUs (on Engineering Changes, StorageTek will advise IBM about the effect on (a) outstanding orders for Equipment; (b) units of Equipment which are at the time of such proposed change in for repair or replacement; and (c) the next batch of units of Equipment to be delivered from StorageTek's plant on which the Engineering Change should be implemented); (7) intended alterations to FRUs, documentation, tools and other relevant material supplied or to be supplied to IBM; and (8) whether any parts will become obsolete as a result of the change. 23 31 Except for any Emergency Engineering Changes, StorageTek is required to obtain IBM's prior written approval for each Engineering Change before StorageTek's implementation of the same. e. Revalidation. Upon implementation of each engineering change, StorageTek agrees to perform revalidation testing at no charge to IBM to ensure that the Equipment so changed meets the Specifications. f. Obsolete Upgrades and FRUs. If StorageTek makes any Mandatory, Emergency or StorageTek-initiated Engineering Change which renders any Upgrades and FRUs obsolete (i.e., unusable), StorageTek shall replace the obsolete Upgrades and FRUs at no charge to IBM in accordance with the procedures set forth in Section 9.2a, above. No returns are authorized for field change kits that are requested as a result of an optional IBM- initiated engineering change which renders any Upgrade or FRU obsolete. 9.3 QUALITY LEVELS a. RAS Criteria. StorageTek shall maintain (i) throughout the term of this Agreement, and (ii) for a period of ** after the date of last Delivery of each type of Product (provided IBM pays for the Product Engineering Services unless it is not required to do so and StorageTek is still providing Product Engineering Services for its own distribution of Equipment or Devices); the following reliability, availability and service ("RAS") levels for the Products: SERVICE CALL CALCULATION
Effective RAS Criteria Date Iceberg Kodiak ------------ ----------- ------- ------ Service Call Rate ** ** ** Guardband ** **
For measuring Service Calls, the calculation of a Machine Month is based on the use of a 180 GB and 360 GB machine configuration for Iceberg and Kodiak, respectively. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 24 32 IMPACT ERROR CALCULATION
- ------------------------------------------------------------------------------------------------------- IMPACT ERRORS - -------------------------------------------------------------------------------------------------------- ** ** ** ** ** ** ** - -------------------------------------------------------------------------------------------------------- ICEBERG -- ** ** ** ** ** - -------------------------------------------------------------------------------------------------------- KODIAK -- -- ** ** ** ** ** - -------------------------------------------------------------------------------------------------------- GUARDBAND -- ** ** ** ** ** ** - --------------------------------------------------------------------------------------------------------
Such rates will be calculated based on the total number of Impact Errors that occur during a calendar quarter divided by the total number of Machine Months during said quarter for Iceberg and Kodiak, respectively. EXAMPLE:
- -------------------------------------------------------------------------------------------------------- OCTOBER NOVEMBER DECEMBER TOTAL - -------------------------------------------------------------------------------------------------------- End of Month - -------------------------------------------------------------------------------------------------------- Install Base ** ** ** ** - -------------------------------------------------------------------------------------------------------- Impact Errors ** ** ** ** - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Failure Rate ** - --------------------------------------------------------------------------------------------------------
Impact Error measurements for Kodiak will not count toward any criteria until the earlier of: (i) the first quarter in which ** units of Kodiak have been installed by IBM, or (ii) the second quarter of 1997, provided that at least ** units have been installed by IBM as of the last day of such quarter. Impact Error measurements for Iceberg will not count toward any criteria until ** units of Iceberg have been installed by IBM. The RAS measurements shall exclude impacts or failures of Products where a microcode or engineering change is available which, if installed, would have prevented the impact or failure from occurring; provided, however, that such microcode or engineering change was made available by StorageTek for - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 25 33 installation pursuant to a nonemergency (i.e., generally distributed) engineering change at least three (3) months prior to the date of an Impact Error or Service Call. The RAS measurements will exclude any Impact Errors and Service Calls that arise from ** concurrent Drive failures in the same array, and any Service Calls and Impact Errors for units of Iceberg and Kodiak installed as part of the ESP, as defined in the SOW. For the first ninety (90) days following the availability of a Major Enhancement, IBM will exercise reasonable efforts to install within 30 days engineering changes that StorageTek designates as "critical." Calculations of the actual Service Call Rate and Error Rate will be made based on U.S. installations only. b. Error Free Installation Criteria. StorageTek shall maintain a ** Error Free Installation rate for Products and Upgrades (separately calculated) until the date on which IBM no longer markets Products and Upgrades. These measurements will be calculated separately for Products and Upgrades. This rate assumes that an average IBM-customer subsystem installation is comprised of an Iceberg subsystem, or a Kodiak control unit and one connecting storage cabinet. If the average IBM-customer installation for the Kodiak Product involves more than one connecting storage cabinet, then the ** rate for Kodiak will be reduced by ** for each connecting storage cabinet in calculating such average. c. Levels for Future Functions. Features or functions added after the initial shipment in volume of Iceberg and Kodiak will be measured against specific reliability, availability and service criteria that is to be documented and addressed in each applicable product development plan and related specification for the future feature or function, but in any event they must meet the Iceberg and Kodiak criterion as specified herein. d. Guardband. StorageTek shall not be considered to be failing to meet the criterion unless the percentage by which IBM's actual measurements exceeds the criterion is at least higher than the Guardband percentage set forth above in Section 9.3a for Service Calls or Impact Errors. e. Action Plan. If StorageTek fails to meet the Service Call Rate, Impact Error Rate, or Error Free Installation Rate, then StorageTek shall promptly investigate the cause of the failures, and generate and provide to IBM within ten (10) days a root cause failure analysis that describes the cause of the failures. StorageTek will promptly develop and implement an action plan acceptable to IBM to resolve such failures, which plan shall include remedies for failure to - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 26 34 meet the Service Call Rate, Impact Error Rate, or Error Free Installation Rate in such action plan. StorageTek shall provide all support necessary to meet an agreed upon repair turnaround time that is established in the action plan to maintain IBM's customers' satisfaction. StorageTek's plan may include, but is not limited to increased repair capacity (i.e., labor, equipment, facilities); expedited freight; and providing new, repaired and/or upgraded buffer stock to IBM's stocking locations, distributors and customer sites. f. Price Reduction for FRU Costs. StorageTek shall provide a price reduction to IBM ** after the date of last Delivery of each type of Products in an amount that is equal to ** ("Excess FRU Cost"). The calculation of this price reduction shall specifically exclude ** . The price reduction provided hereunder may ** . Any claim to such price reduction will be deemed waived if not made by IBM no later than ** days after the ** in which such Excess FRU Cost occurred. g. Reporting of FRU Consumption. IBM will provide a quarterly report to StorageTek that summarizes IBM-reported fault symptom information for the consumption of FRUs in repair actions that are undertaken by IBM in the United States. The summarized information in this report will be adjusted by IBM to exclude those items which qualify as Cost Exclusions. This information is considered to be IBM confidential, and StorageTek agrees to keep such information confidential under the terms of the Agreement for Exchange of Confidential Information between the Parties. h. Credit for Labor Costs. The target for labor required for repair actions (including ** during a Machine Month. StorageTek shall provide a credit to IBM ** after the date of last Delivery of Product, upon StorageTek's receipt of appropriate supporting documentation, for average labor costs per Machine Month incurred by IBM in connection with repair actions that are in excess of ** of that ** target ("Excess Labor Cost"). The amount of this credit will be calculated by multiplying the number of hours in excess of ** of that ** target by a rate of ** per hour. In the event that IBM incurs labor costs in excess of ** of that ** target ** . The calculation of Excess Labor Cost will be based on ** . The credit provided hereunder may ** . Any claim to such credit will be deemed waived if not made by IBM no later than ** days after the ** in which such Excess Labor Cost occurred. i. Attainment. The RAS criteria will be separately calculated and applied to Iceberg and Kodiak. If StorageTek fails to meet the established RAS criteria - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 27 35 for Service Calls or Impact Error rates set forth in Section 9.3a for Iceberg and Kodiak in any calendar quarter (after taking into consideration the applicable Guardbands), then StorageTek shall be given until the end of the next succeeding quarter to implement the action plan described in Section 9.3e, above. If the RAS criteria is missed again during such next quarter, then ** ** 9.4 QUALITY ASSURANCE StorageTek shall maintain at its sole cost and expense an effective quality control system to maintain under continuous control the entire process of design, manufacture and FRU repairs, including the packaging and shipping of Equipment. This system shall include checks to verify that all requirements of the Specifications are satisfied. StorageTek is responsible to insure that workmanship, construction and other standards specified by this system satisfy the requirements of the Specifications. StorageTek's quality assurance shall be applied in a manner that will maintain a consistent level of quality. StorageTek's quality control procedures and instructions shall be made available to StorageTek's employees, agents, contractors and subcontractors, and to IBM, at the place of manufacture. Upon request, IBM may conduct inspections on a non-interference basis at StorageTek's manufacturing and repair plants at any time during normal working hours provided that, within 24 hours if an emergency situation exists or at least three (3) days under non-emergency situations, prior written notice is given by IBM. StorageTek will use reasonable efforts to accommodate visits on shorter notice. Such inspection may, at IBM's option, include the witnessing of tests and inspection of Equipment, whether completed or not. StorageTek will promptly take appropriate corrective action with regard to any deficiencies found by IBM and reasonably agreed to by StorageTek. 9.5 ISO 9000 CERTIFICATION AND USE OF SUBCONTRACTORS StorageTek shall maintain ISO 9000 certification, and use statistical process control systems to monitor quality, for its manufacturing and development processes for Equipment supplied to IBM during the term of the Agreement. StorageTek shall ensure that its subcontractors that are involved with the manufacturing and development of Equipment shall maintain ISO 9000 certification, __________________________________ ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 28 36 and use similar statistical process control systems to monitor quality. StorageTek shall also ensure that its suppliers who provide parts, assemblies or subassemblies that are used in the manufacturing and development of Equipment shall maintain ISO 9000 certification or use reasonable process control systems to monitor quality. It is the sole responsibility of StorageTek to select and manage its suppliers. StorageTek will make available to IBM, upon request, a list of all suppliers that are used to supply parts or components in StorageTek's manufacturing process for Equipment. StorageTek agrees to use its best efforts to notify IBM of any additions or changes made in its suppliers. If IBM reasonably determines that there is a supplier that may be of concern to it, then StorageTek shall develop and implement a mutually agreeable plan to address IBM's concerns. StorageTek shall provide, upon written request by IBM, all information pertaining to the measurements of quality that are made for Equipment, and generated or derived from StorageTek's statistical process control systems. StorageTek is solely responsible for the quality of Equipment supplied to IBM. Review and approval by IBM of StorageTek's or any of its subcontractor's quality process systems does not relieve StorageTek of this responsibility. StorageTek agrees to notify IBM of any planned significant changes that may adversely affect its manufacturing processes or could adversely affect the form, fit, function, quality, reliability, serviceability or safety of the Equipment to be supplied to IBM no later than ninety (90) days before planned implementation. 10. PRODUCT LEAD TIMES AND FORECAST 10.1 IBM will provide a monthly build forecast to StorageTek for a ** period (or a period equal to the remaining term of this Agreement if less than ** ). The current quarter forecast will be broken down by week and by Delivery location. Volumes, specified in units of Product and Upgrades by Delivery location, for the quarter following the then-current quarter will be established and provided to StorageTek no later than ** prior to the start of any given quarter. At such time, the forecast for the upcoming quarter will be binding, subject to the quarterly volume modifications referred to in Sections 10.2 and 10.3. Except as otherwise provided in the preceding sentence, volume forecasts are provided as good faith estimates of IBM's anticipated requirements for Products and Upgrades for the periods indicated based on current market conditions and do not constitute commitments to purchase any fixed quantity of Products. - ---------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 29 37 10.2 StorageTek agrees to supply, and IBM agrees to take Delivery of, during any current quarter, and to pay in accordance with Section 7, above, for not less than the Minimum Percentage (as shown in the table below) of the units forecasted as of the date the volumes became binding as provided in Section 10.1. StorageTek agrees to use the Remainder Percentage (as shown in the table below) to satisfy the next quarter's orders. StorageTek will hold additional units in excess of the Remainder Percentage provided that IBM purchases and pays for such additional units. Any units of inventory not required under this section to be purchased and delivered in the then-current quarter will be applied to and delivered to fulfill the next-following quarter's volume requirements before any new orders for such next-following quarter are fulfilled. 1996 1Q-3Q 1997 4Q 1997-end ---- ---------- ----------- Minimum Percentage ** ** ** Remainder Percentage ** ** ** With ** prior written notice, IBM may elect to adjust the flexibility for ** to correspond to the other elements of the above table, as well as the Maximum Percentage described for the same quarters in Section 10.3, below, by changing the payment terms set forth for those quarters in Section 7.10 from 45 to 30 days. Initial purchases of Iceberg Product shall exclusively be ** until such time as IBM has purchased up to ** 10.3 IBM may also require StorageTek to deliver during the current quarter, for which IBM shall pay in accordance with Section 7, above, up to the Maximum Percentage as shown in the table below of the units forecasted as of date the volumes became binding as provided in Section 10.1, except as adjusted as set forth in the penultimate paragraph of Section 10.2, above. Q4 1996 1Q-3Q 1997 4Q 1997-end ------- ---------- ----------- Maximum Percentage ** ** ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 30 38 10.4 CURRENT QUARTER Subject to Sections 10.2 and 10.3, in order to assist StorageTek in planning its manufacturing operations, IBM will provide modifications to the previously submitted weekly schedules in the current forecast, as follows: FLEXIBILITY NOTICE REQUIRED TARGET (in days from anticipated Delivery date) ----------- ------------------------- +/- ** within ** +/- ** within ** +/- ** within ** +/- ** within ** +/- ** within ** +/- ** beyond ** All volume increases will be allowable per the matrix above up to StorageTek's maximum capacity. StorageTek's initial maximum capacity is stated in the following table: CAPACITY IN UNITS OF PRODUCT PER WEEK, FOR: Iceberg Kodiak ------- ------ 1996 ** | ** 1997 ** | ** 1998 ** | ** Upon mutual agreement, StorageTek will add additional capacity if IBM increases its forecasted volumes beyond the current maximum capacity with at least six months' prior written notice to StorageTek. StorageTek agrees to use reasonable efforts to accommodate variations greater than those stated above, including but not limited to accepting assistance from IBM. 10.5 STORAGETEK'S CAPACITY/ALLOCATION a. StorageTek expressly represents that StorageTek has, as of the Effective Date of this Agreement, and will maintain throughout the term of this Agreement, adequate product and manufacturing capacity to fulfill in a timely fashion all its existing contractual commitments as well as the quantities committed to in this Agreement by IBM (when taking into account Section 10.4) and any - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 31 39 commitments StorageTek subsequently enters into, without allocation of production among its customers. However, if StorageTek is unable to meet its Delivery commitments and must allocate its capacity, inventory, test equipment, resources, use of personnel, parts, components, supplier resources and capabilities, etc., that are used to produce Equipment, then StorageTek agrees to: (1) act in good faith; and (2) allocate its capacity, supplier resources and capabilities, inventory, test equipment, resources, use of personnel, parts, components, and available supply of Equipment to fill orders for IBM in the following order of priorities: (i) ** ; and (ii) ** b. StorageTek will allocate parts, components and materials in accordance with the following priorities: (1) Code A FRUs order/requirements are filled first; and (2) then a fair allocation between manufacturing orders and nonemergency maintenance parts order/requirements. 11. PURCHASE ORDERS, ALTERATIONS & RESCHEDULING 11.1 IBM may submit purchase orders at any time; provided, however, that subject to Section 11.6, any order shall be binding on both Parties if such order is within the forecast range set forth in Sections 10.2 and 10.3, and is submitted not less than ten (10) business days before IBM's requested date of Delivery. IBM may request that StorageTek deliver in fewer than ten (10) business days and StorageTek may agree to do so. 11.2 This Agreement does not constitute a purchase order. IBM may issue purchase orders from time to time during the term of this Agreement in either electronic (EDI) or written form. Authorization to StorageTek to perform any work or produce any Equipment under this Agreement will be through IBM purchase orders only. Alterations to the quantity, delivery date, engineering level, or other items on purchase orders may be made by IBM from time to time, subject to StorageTek's - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 32 40 agreement. Purchase orders will be considered noncancelable within ten (10) days of the scheduled Delivery date. 11.3 IBM shall submit its purchase orders to StorageTek at the address set forth in the Notices section of this Agreement. IBM's purchase orders will include: a. IBM's part, model or feature numbers, configuration and description of Equipment; b. quantity required; c. unit or item price and total order price; d. required delivery date(s); e. delivery instructions (including a carrier who will accept delivery at StorageTek's address); and f. reference to this Agreement. Unless otherwise specifically agreed to in writing, additional terms and conditions on IBM's purchase orders or on StorageTek's acknowledgment, whether in conflict with this Agreement or not, are superseded hereby and are of no force and effect. 11.4 StorageTek agrees to accept conforming IBM purchase orders and to manufacture, supply and Deliver Equipment in accordance with the terms and conditions of this Agreement. StorageTek agrees to provide written acknowledgment of IBM's purchase orders within two (2) days, for volumes within IBM's forecast, or within five (5) days, for volumes in excess of IBM's forecast, as measured from StorageTek's actual receipt of the purchase order (without regard to the Notices section of this agreement, except for EDI) which purchase order may be made verbally and/or in advance of StorageTek's receipt of a hard copy confirming such order. If StorageTek's acknowledgment is not received by IBM within the two (2) or five (5) day period, as described above, from the date of receipt of the purchase order from IBM, then the purchase order, including the requested delivery date(s) will be deemed to be accepted by StorageTek. StorageTek may not reject any IBM purchase order that conforms to the requirements of this Agreement and covers quantities forecasted by IBM, as described in Section 10. 11.5 Orders for FRUs needed on a "Code A" basis (i.e., emergency-customer down) will be shipped by StorageTek within twenty-four (24) hours at a price not to exceed the lesser of ** of the price in Exhibit 5 or such price plus ** , with IBM designating - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 33 41 the carrier and being responsible for freight and insurance costs. However, IBM will not pay any premium (i.e. pay only 100%) for Code A FRUs necessitated because StorageTek has failed to deliver nonemergency FRU orders within the lead times set forth in Exhibit 5. 11.6 IBM may cancel purchase order(s) or any portions thereof for any reason by notifying StorageTek in writing at least ten (10) days prior to the scheduled Delivery date. Cancellation will be effective upon StorageTek's receipt of the written cancellation notice from IBM. StorageTek will immediately cease building such units for the affected purchase order(s) in accordance with the cancellation notice. IBM will have no liability for canceled purchase orders other than as set forth in Section 10.2, and, if applicable, any Recovery Payment as described in Section 7.6 hereof. 11.7 If for any reason StorageTek is unable to Deliver as required by accepted IBM purchase order(s), and fails to correct such inability within ** of such failure, IBM will have the right to cancel such purchase order(s) or portions thereof by notifying StorageTek in writing. If IBM cancels purchase orders under this Section 11.7, IBM's only obligation will be to pay for Products or Upgrades already delivered at the time of IBM's cancellation notice ** . 11.8 Due to ongoing and unpredictable market conditions, StorageTek agrees to permit IBM, upon written notice to StorageTek, to require StorageTek to reconfigure units of Products and Upgrades as follows: a. Configuration changes that do not change a unit model number may be made without additional cost until ** before scheduled Delivery; and b. Any other configuration changes may be made at any time (including Product and Upgrades that require reconfiguration after Delivery) and such configuration changes will be ** . StorageTek and IBM will agree in advance on a schedule of lead times and costs that will apply to such configurations. 11.9 Subject to Section 10, IBM may reschedule purchase order(s) or any portions thereof for any reason by notifying StorageTek in writing at least ** prior to the Delivery Date specified on the purchase order(s). 11.10 For the last quarter of this Agreement, the purchase orders submitted by IBM to StorageTek shall be noncancelable unless StorageTek is manufacturing Devices. 11.11 Products and Upgrades that are supplied to IBM hereunder will consist of new parts and components. FRUs that IBM returns will be reworked by StorageTek to an equivalent-to-new reliability level. Such reworked FRUs will not be used in any new - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 34 42 Products or Upgrades Delivered to IBM hereunder, but may instead be returned to IBM as reworked FRUs. 12. CONSIGNMENT 12.1 IBM will consign certain disk drives ("Drives") to StorageTek for use in Equipment. Drives supplied by IBM to StorageTek shall only be used by StorageTek to build Equipment for IBM and shall remain the property of IBM. 12.2 StorageTek agrees to sign and adhere to the terms and conditions of the IBM Consignment Agreement, attached hereto as Exhibit 4, provided, however, that the terms of this Section 12 prevail over those of Exhibit 4. 12.3 IBM agrees to consign Drives to StorageTek in accordance with a mutually agreed Profile based on at least a five-day buffer ahead of StorageTek's build cycle, and including a yield factor based upon the previous quarter's experience and calculated using a mutually agreed formula. Any Drives, or other IBM-supplied parts and components, that are not used by StorageTek due to integration fall-out will be returned to IBM within ten (10) days after such fall-out. 12.4 If IBM fails to provide consigned Drives to StorageTek in accordance with Section 12.3, and StorageTek's manufacturing line is down such that StorageTek cannot meet its Delivery dates to IBM, then StorageTek will agree, per Section 10.2, to hold up to ** , as the case may be, of such undelivered and forecasted Products and Upgrades, without Drives, in inventory for up to ** . If the amount of such Products and Upgrades held in inventory exceeds ** of the forecasted volumes then StorageTek will notify IBM, and IBM will ** . 12.5 If IBM Drives are not available for an extended period of time, IBM may request assistance from StorageTek in securing drives from other drive manufacturers in lieu of using IBM Drives. StorageTek agrees, on a best effort basis, to assist in securing the most cost effective, high quality alternative, and with the agreement of IBM, to take the steps necessary to integrate such drives into the Product. In such event, the parties will agree in advance on an equitable division of StorageTek's cost of securing, qualifying and integrating such drives, including any cost relating to inventory or required firm purchase commitments even if such substitution is only temporary in nature. 12.6 StorageTek agrees to return to IBM freight collect any IBM consigned Drives in StorageTek's inventory, within five (5) days of receipt of IBM's written (or EDI) request. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 35 43 13. DELIVERY 13.1 ON-TIME DELIVERY a. StorageTek shall use its best efforts to ensure that every scheduled Delivery date is met. StorageTek must notify IBM in advance if a scheduled Delivery date will not be met. StorageTek will make every reasonable effort at its expense to ensure the earliest possible Delivery date and quantities for late Equipment, including, but not limited to, overtime and expedite charges. "On schedule" means ** . Unless delay is caused by IBM's delay in its supply of Drives or IBM-supplied parts and components, StorageTek will arrange for premium transportation and pay, at StorageTek's sole cost and expense, for the difference between normal transportation and such premium transportation, including, but not limited to, air transportation and expedited freight charges. StorageTek also agrees to provide, at IBM's request, an action plan to correct late shipments and to resolve any Delivery problems. b. If, during any ** period, StorageTek fails, on a one-time basis only, to Deliver more than ** , but not more than ** , of the units of Equipment that are scheduled for Delivery in a calendar month by their scheduled Delivery dates, then StorageTek shall be required to expedite shipment of such units in accordance with Section 13.1. ** . c. If StorageTek fails to Deliver more than ** of the units of Equipment that are scheduled for Delivery by their scheduled Delivery dates in the next following month, and except for Volumes subject to the one time per ** provision defined in 13.1b, above, then ** . d. If, in the month following any month in which a ** adjustment was credited to ** Volumes under this Section 13.1, StorageTek fails to Deliver more than ** of the units of Equipment that are scheduled for Delivery by their scheduled Delivery dates, then ** . e. If, in the next following month, StorageTek fails to Deliver more than ** of the units of Equipment that are scheduled for Delivery by their scheduled Delivery dates, ** . f. If, in the next following month, and for each additional consecutive month, StorageTek fails to Deliver more than ** of the units of Equipment that are scheduled for Delivery by their scheduled Delivery dates, then ** . - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 36 44 g. Notwithstanding anything to the contrary in this Section, and in lieu of credits provided in other paragraphs of this Section, if, in any calendar month, and subject to Section 13.1b. above, StorageTek fails to Deliver more than ** of the units of Equipment that are scheduled for Delivery by their scheduled Delivery dates, then ** . h. ** i. Notwithstanding anything to the contrary in this Section, units of Equipment which StorageTek fails to Deliver by the Delivery date will not be counted as failures to Deliver if StorageTek causes such units to be delivered to IBM customers by the delivery date IBM has committed to such customers (the "Commit Date"). IBM will notify StorageTek in writing of each unit of Equipment which fails to arrive by the Commit Date within ten (10) business days after StorageTek notifies IBM that such shipment was expedited. j. ** k. If StorageTek fails to deliver to IBM more than ** of the units of Equipment scheduled for Delivery by the scheduled Delivery dates in a month, for ** consecutive calendar months then the payment terms in Section 7.10a will be immediately extended to ** days until ** after the first month in which StorageTek Delivers ** or more of Equipment on its scheduled Delivery date. l. IBM expressly reserves the right to assert that any failure to ship Equipment on a timely basis, including, but not limited to, failures for which volume adjustments are provided for in this section, could constitute a material breach of StorageTek's obligations under this Agreement. 13.2 CARRIER It is understood and agreed that IBM shall make all arrangements for shipments of the Equipment. It shall be the responsibility of IBM, at its own expense, to supply StorageTek with detailed documentation and instructions and all necessary export licenses, customs declarations and certificates in properly executed form required for successful shipment of Equipment from the Manufacturing Site and entry into foreign territories. StorageTek shall notify IBM when Equipment is ready for shipment from StorageTek's plant. IBM will pay all shipping and transportation charges directly to the carrier or freight forwarder as long as shipped in accordance with IBM's routing instructions. If IBM requests that StorageTek arrange shipping, IBM shall reimburse StorageTek for the shipping charges pursuant to StorageTek's invoice. In no event will IBM reimburse StorageTek for, or pay any C.O.D. charges, should StorageTek - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 37 45 ship by another carrier without prior IBM approval. If StorageTek ships using other than an IBM- approved carrier, StorageTek is responsible for any incremental increase in freight charges. 13.3 TITLE/RISK OF LOSS Title to Equipment and risk of loss shall pass to IBM at StorageTek's plant of manufacture loading dock. [F.O.B. by UCC/ExWorks by INCOTERMS]; provided, however, that notwithstanding anything to the contrary in this Agreement title to all Licensed Works will remain with StorageTek, except as provided in the IDA and its related Attachments. All claims for shipping damage shall be resolved between IBM, carriers or freight forwarders handling the Equipment and the insurance companies and agents responsible for adjusting such claims, and StorageTek shall have no responsibility with respect thereto. However, at IBM's request, StorageTek agrees to cooperate reasonably with IBM in filing and settling such claims. 13.4 PACKAGING StorageTek will package each unit of Equipment according to an agreed-upon Specification for packaging. The prices for Equipment include all packaging costs. 14. EQUIPMENT WARRANTY 14.1 StorageTek warrants that units of Equipment (excluding Drives and nonserialized FRUs) that are to be provided to IBM hereunder conform to the Specifications and are and shall remain free from defects in materials and workmanship, for the time periods specified in this Section 14.1. a. The warranty period for each unit of Products and Upgrades shall be ** after the earlier of: (1) ** (2) ** b. StorageTek will serialize the FRUs identified as serialized on Exhibit 5, and as to those FRUs the warranty period shall be ** after the earlier of: (1) ** (2) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 38 46 14.2 All warranties provided by StorageTek to IBM hereunder shall survive any inspection, delivery, acceptance and payment and shall not be affected by the fact that IBM has resold, rented or leased units of Equipment to others. 14.3 IBM will maintain failure records for Products and Upgrades to the same extent as IBM maintains such records for similar high-end direct access storage device products marketed by it. If IBM believes failures for a given serial number unit of Equipment warrants replacement, IBM may request and StorageTek may agree to replace the same at no cost to IBM. StorageTek's agreement will not unreasonably be withheld. In order to improve Equipment quality and minimize costs, StorageTek may request relevant information from the data which IBM retains regarding failure by machine serial number. IBM may agree to provide such information to StorageTek. Such agreement will not be unreasonably withheld. 14.4 StorageTek's liability under warranty pursuant to Section 14.1 is limited to: Delivery to the IBM regional stocking locations specified by IBM of retrofit kits (containing FRUs) with installation instructions (at no charge to IBM) as necessary to make Equipment conform to the Specifications, or otherwise be free from defects in materials and workmanship; or repair or replacement, at StorageTek's option, without cost to IBM, of the defective Equipment. IBM will use reasonable efforts to resolve customer issues through use of FRUs or retrofit kits before requesting repair or replacement of the defective Product or Upgrade. Labor to remove defective FRUs and install replacement FRUs under this warranty shall be supplied by IBM at no charge to StorageTek, subject to Section 9.3h. Where warranty can be provided by replacing a FRU, StorageTek will provide and IBM will install the replacement FRU. 14.5 All warranty claims shall be made by IBM, regardless of any transfer of title or possession of the Equipment by IBM to other parties, and StorageTek agrees that IBM may make warranty claims against StorageTek on the behalf of any rightful user or possessor of the Equipment. 14.6 StorageTek's liability to perform warranty under this Section 14 shall not apply to failures of any unit of Equipment caused by: a. Physical abuse or use that is not consistent with operating instructions for the Equipment; or b. Modification (by other than StorageTek's personnel or agents) in any way other than approved by StorageTek; provided, however, that the warranty shall not be voided by repair or replacement of FRUs or the attachment of items in the manner described in maintenance or installation instructions provided by StorageTek. 14.7 Claims under the terms of this warranty shall be submitted to StorageTek in writing (including EDI) and shall clearly state the Product or Upgrade serial number. Where 39 47 available, IBM shall send StorageTek its field defect report. Defective FRUs replaced under this warranty become the property of StorageTek. 14.8 Both Parties will ensure that FRUs returned to the other Party are properly and adequately packaged, and IBM agrees to use the same or equivalent packaging as StorageTek uses to package such FRUs. 14.9 StorageTek shall use reasonable commercial efforts to complete repairs of FRUs for in-warranty units within thirty (30) business days after the date StorageTek receives the defective FRUs, but in any case, it will complete repairs of the FRUs at no charge to IBM within sixty (60) days after receipt. If, upon receipt, StorageTek determines that such defective FRUs are not repairable or if StorageTek has not completed its failure analysis on any FRU within ten (10) business days after StorageTek's receipt, then replacement FRUs will be provided at no charge by StorageTek to IBM within ten (10) business days. If StorageTek cannot find a defect or assignable cause in a FRU that is returned by IBM as defective, StorageTek will replace the received FRU and will ensure that the FRU is not included in Equipment and cannot be returned in the future to IBM. 14.10 LICENSED PROGRAMS, MICROCODE AND MAINTENANCE CODE WARRANTY a. StorageTek warrants that the Licensed Programs and Microcode will conform to the Specifications, as such Specifications may be modified by any Product Development Plan, and are and shall remain free from defects in workmanship. The Maintenance Code shall remain free from defects in workmanship. The warranties set forth in this Section 14.10 shall not apply to: (1) ** (2) ** (3) ** (4) ** (5) ** (6) ** StorageTek does not warrant that the functions contained in the Licensed Program and Maintenance Code will ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 40 48 b. In the event of a breach of the warranties contained in this Section 14.10, StorageTek will exercise reasonable commercial efforts to implement appropriate procedures to correct such breach in accordance with Section 16.8, for Licensed Programs and Microcode and Section 16.7 for Maintenance Code. 14.11 StorageTek warrants that it will competently perform all work relating to the Deliverables in a manner consistent with ordinary Microcode programmers skilled in the art, and, further, all Deliverables will conform to the mutually agreed-upon Specifications. 14.12 THE WARRANTIES IN SECTIONS 14 AND 18 OF THIS OEM AGREEMENT, AND IN PART 6 OF THE SOURCE CODE CUSTODY AGREEMENT, ARE IN LIEU OF ALL OTHER WARRANTIES EITHER WRITTEN, ORAL OR IMPLIED WITH RESPECT TO THE EQUIPMENT, DELIVERABLES, LICENSED PROGRAMS AND MAINTENANCE CODE. STORAGETEK DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE PROVIDED IN SECTION 18.2, STORAGETEK ALSO DISCLAIMS THE IMPLIED WARRANTY OF NONINFRINGEMENT. STORAGETEK'S WARRANTY OBLIGATIONS SHALL EXTEND ONLY TO IBM, AND STORAGETEK SHALL HAVE NO LIABILITY ARISING OUT OF ANY WARRANTIES PROVIDED BY IBM WHICH ARE BEYOND STORAGETEK'S WARRANTY OBLIGATIONS IN THIS AGREEMENT. IBM'S EXCLUSIVE REMEDY FOR A BREACH OF THE WARRANTY SET FORTH IN THIS SECTION 14 IS SET FORTH IN SECTION 14.4 FOR EQUIPMENT, AND SECTION 14.10(b); FOR LICENSED PROGRAMS, MICROCODE AND MAINTENANCE CODE, PROVIDED, HOWEVER, THAT STORAGETEK PROMPTLY PERFORMS ITS WARRANTY OBLIGATIONS PURSUANT TO SECTION 14. 15. FRUS 15.1 During the term of this Agreement and for ** after the last Delivery of Product or Upgrades, or for so long as StorageTek makes FRUs available to any other entity, whichever is later, StorageTek agrees to provide FRUs to IBM. The list of FRUs and their respective prices and lead times are described in Exhibit 5, which Exhibit will be updated semiannually (in January and July). - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 41 49 15.2 Notwithstanding anything herein to the contrary, if StorageTek intends to discontinue producing or making available any FRU after the ** obligation set forth above, StorageTek agrees to provide IBM with twelve (12) months' prior written notice of such intent and permit IBM to purchase as many FRUs as IBM reasonably believes it will need for the Products. In the alternative, and at IBM's option, StorageTek agrees to grant IBM the right to manufacture such FRUs in accordance with Section 23.6. 15.3 FRUs shall be packaged in the same or equivalent packaging as StorageTek used to package such FRUs. Return of FRUs for repair or replacement is subject to a reasonable material return procedure to be mutually agreed between the Parties. 15.4 FRU REWORK PROCEDURES AND PRICES a. StorageTek will attempt to rework/repair all FRUs returned from IBM and return them to IBM within 30 days of receipt. At IBM's request, StorageTek will also ship to IBM any unrepairable FRUs. b. Except as otherwise provided in Section 9, Quality, and Section 14, Equipment Warranty, StorageTek will invoice IBM, and IBM agrees to pay, ** for FRUs as described in Section 7.7, plus normal transportation charges unless IBM requests special handling. Such costs will be subject to IBM's Audit Rights. 16. FIELD SERVICE & SUPPORT 16.1 INSTALLATION SUPPORT a. Upon IBM's written request, StorageTek will, at no charge to IBM, assist IBM in installing units purchased under this Agreement, including on-site installation if necessary, in accordance with the table below provided ** . IBM's written requests will specify the installation site, date of installation, whether the site is classified and any special installation instructions. StorageTek may provide at IBM's request additional installation services beyond those required in this section at the rates described in Section 16.5. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 42 50 PERCENTAGE OF INSTALLATIONS STORAGETEK WILL SUPPORT (BY PRODUCT)
TIME PERIOD ICEBERG KODIAK ----------- ------------------------ 3Q96 ** ** 4Q96 ** ** 1Q97 ** **
b. The services and charges referred to in this section ** . 16.2 TRAINING a. ** : (1) ** (2) ** (3) ** (4) ** (5) ** In addition, StorageTek will conduct ** training sessions for IBM's ** personnel at StorageTek's expense ** . The goal of this training will be to ** . b. At IBM's request, StorageTek will provide up to ** additional initial training sessions beyond the sessions described above at a fee of ** , plus reasonable travel and living expenses for StorageTek trainers if such sessions are held at a location other than StorageTek's training facility. StorageTek also agrees to make its training facilities available to IBM at StorageTek's cost for IBM to provide education to its personnel through the end of 1996. c. StorageTek will also provide "on-the-job" training for IBM customer engineering personnel by assisting them, at IBM's option, in any Product and Upgrade installations as described in Section 16.1. d. For all new Products and Upgrades StorageTek makes available to IBM during the term of this Agreement, StorageTek agrees to provide IBM personnel with assistance at no charge to develop training for IBM's customer engineering personnel at the same level as the training StorageTek provides to its own personnel on its other products. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 43 51 16.3 SERVICE OF EQUIPMENT To assist IBM in product transition, ** at IBM's request, StorageTek agrees to ** a. ** b. ** At the beginning of each quarter, IBM agrees to commit to, and to pay for as set forth in Section 16.5, and StorageTek thereafter agrees to provide, the number of hours of such customer engineering support IBM will require at the beginning of each quarter. The maximum fee StorageTek will charge IBM for each hour of such customer engineering support actually provided (except for the no charge installation support) is set forth in the table found in Section 16.5. To the extent StorageTek is unable to provide service hereunder, StorageTek will promptly refund unearned payments. 16.4 EMERGENCY AND EXPERT MAINTENANCE COVERAGE In every country/territory where IBM installs Products and Upgrades, StorageTek agrees to make available upon IBM's request and on the shortest possible notice customer service engineers to support critical customer situations. The maximum fee StorageTek will charge IBM for each hour of such support actually provided is set forth in the table in Section 16.5. In addition, IBM will reimburse StorageTek for actual and reasonable travel expenses incurred by StorageTek's personnel in providing this support in countries where StorageTek does not have a service organization. 16.5 LABOR RATE TABLE
Calendar Quarter Maximum Hourly Rate ------------------------------------------------ ** ** ** ** ** ** ** ** ** ** and beyond **
16.6 NEW PRODUCT DEVELOPMENT CENTER SUPPORT a. StorageTek will provide its New Product Development Center Support ("NPDC") ** . In addition, ** StorageTek will ** . StorageTek agrees to provide IBM ** . StorageTek grants IBM a license to ** in accordance with the Description of Licensed Works. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 44 52 b. To assist IBM in transitioning to its own service center, StorageTek agrees that ** . c. StorageTek shall provide comparable levels of response times for NPDC support to IBM as those that StorageTek provides to its own customer service base (including StorageTek's tape and service products). 16.7 MAINTENANCE AND INSTALLATION TOOLS To assist IBM in providing optimum hardware and software maintenance service to customers, StorageTek agrees to: a. ** b. Promptly provide to IBM ** . StorageTek grants IBM a license to the ** in accordance with the Description of Licensed Works. StorageTek also agrees to provide ** . 16.8 MAINTENANCE AND TECHNICAL SUPPORT a. Maintenance. IBM will be responsible to provide Level 1, Level 2 and Level 3 support to its customers. IBM agrees to use its commercially reasonable efforts to perform the following: (1) ** (2) ** (3) ** (4) ** (5) ** b. Technical Support. StorageTek agrees, upon IBM's request, ** to provide technical support to IBM for the Equipment, Licensed Programs and Microcode, including without limitation, assistance in problem determination, problem source identification and problem diagnosis, in the following manner: (1) Equipment. StorageTek will provide IBM with reasonable assistance for the Equipment ** . - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 45 53 In addition, if a malfunction or failure in Equipment ** then StorageTek shall, ** . Prior to honoring a request ** . Upon receipt of appropriate supporting documentation, ** . StorageTek agrees to use its commercially reasonable efforts to assist IBM in resolving problems within the time frames set forth below: (a) Any Severity 1 level problem: Within ** after notification by IBM of any such problem; (b) Any Severity 2 level problem: Within ** after notification by IBM of any such problem; (c) Any Severity 3 level problem: Within ** after notification by IBM of any such problem; and (d) Any Severity 4 level problem: Within ** after notification by IBM of any such problem. For purposes of this Section 16.8b(1), ** . (2) Licensed Programs and Microcode. The following is a description of the support that StorageTek shall provide to IBM: (a) ** (b) ** (c) ** (d) ** (e) ** (f) ** (g) ** (h) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 46 54 16.9 ** ACCESS During the term of the Agreement, IBM agrees to allow StorageTek to have access to ** solely to support ** . StorageTek's use of and access to ** and may be terminated if such use or access ** . 17. MARKETING RIGHTS & SUPPORT 17.1 On the Effective Date, the Parties will announce that they have entered into an agreement under which IBM will market Products worldwide that it purchases on an OEM basis from StorageTek. 17.2 MARKETING SUPPORT ORGANIZATION StorageTek agrees to establish a marketing support organization to provide timely sales and marketing support to IBM on a worldwide basis. This organization will ** a. ** b. ** 17.3 TRAINING StorageTek agrees to provide marketing training and support to IBM to facilitate IBM's sales of Products and Upgrades. a. Initial Training. (1) Sales. During ** StorageTek will provide, ** . (2) Systems Engineering. During ** StorageTek will provide, ** . 17.4 ADDITIONAL INITIAL TRAINING StorageTek will provide up to ** . 17.5 ONGOING TRAINING StorageTek agrees to provide IBM with material, documentation, and support from StorageTek's Engineering and Technical Support Staff similar to that provided as of - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 47 55 the Effective Date on StorageTek's new products, for IBM to provide its personnel with training for all new Products and Upgrades. 17.6 MARKETING MATERIALS StorageTek will promptly provide IBM with electronic and paper copies, to the extent available, of all marketing materials used by StorageTek within one year prior to the Effective Date of this Agreement, to market StorageTek products similar to Products and Upgrades, including without limitation all "white papers," materials describing the advantages and benefits of such StorageTek products, and materials related to comparisons of such StorageTek products with competitive products. In, addition StorageTek will provide samples, artwork, and camera ready copy (to the extent available) of all collateral materials (e.g., brochures and product guides) and advertising related to StorageTek products similar to Products and Upgrades. ** To the extent that StorageTek has the right to do so, StorageTek hereby grants IBM ** worldwide right and license to all of the marketing and collateral materials relating to the Products and Upgrades it receives from StorageTek, during the term of this Agreement, to use, reproduce, display, distribute, create and have created Derivative Works of any or all such materials without attribution and grant sublicenses of equivalent scope to its Subsidiaries but not otherwise; provided IBM does not use StorageTek's trademarks or trade names except as specifically permitted. StorageTek will identify portions of the materials which are subject to third-party rights. 17.7 MARKETING TOOLS StorageTek will provide all of its marketing tools, software and related documentation related to the Products and Upgrades, excluding third-party confidential materials, ** . In addition, StorageTek will reasonably assist IBM in updating its own tools to support Products and Upgrades. StorageTek agrees to provide IBM such tools and software (in Source Code form, to the extent not prevented by supplier license transferability restrictions and if StorageTek discontinues its support of such tools and software, and in Object Code form). StorageTek hereby grants IBM ** worldwide right and license to the tools, software and related documentation it receives from StorageTek during the terms of this Agreement, to use, reproduce, display, distribute, and create, and have created Derivative Works of any or all such tools and software without attribution, and grant sublicenses of equivalent scope to its Subsidiaries but not otherwise. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 48 56 17.8 SYSTEMS ENGINEERING SUPPORT StorageTek agrees to provide IBM ** . To the extent StorageTek is unable to provide hours hereunder, StorageTek will promptly refund unearned payments. 18. REPRESENTATIONS AND WARRANTIES 18.1 Each Party represents and warrants that it has the authority and right to enter into this Agreement, and has no existing obligations, and shall not assume any obligations, that conflict with its obligations or the rights granted to it in this Agreement. Each Party also represents and warrants that it has the authority to convey the rights granted or assigned by it in this Agreement. Each Party will provide, upon request, copies of agreements or other documentation necessary to establish such rights. If a Party is unable to supply a copy of such agreements or other documentation, then such Party shall use its best efforts to obtain such agreements or other documentation to sufficiently establish that it has been granted these rights. 18.2 ** 18.3 StorageTek represents and warrants that, with respect to the Deliverables, Licensed Programs and Maintenance Code created outside the United States, all authors have waived their moral rights in all Deliverables, Licensed Programs and Maintenance Code to the extent permitted by law. 18.4 StorageTek represents and warrants that the Equipment (or Devices if manufactured by IBM pursuant to Section 23.6), when used in accordance with the Specifications, will not present a health or safety risk to persons or property; and the Equipment shall comply with all applicable regulatory health and safety standards, including UL, CSA, VDE, IEC, FCC, European Economic Community CE-mark standards, any other standards that are described in the Specifications or as required by law. StorageTek agrees to provide IBM with copies of all reports, certifications, and other relevant documents related to such standards at StorageTek's expense. 18.5 StorageTek represents that ** . - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 49 57 19. TRADEMARK & ADVERTISING 19.1 TRADEMARK AND DESIGN RIGHTS Except as provided in Section 8, but notwithstanding any other provisions of this Agreement, neither party hereto is granted the right to use the trademarks, trade names, or service marks of the other party (including those of Subsidiaries), directly or indirectly, in connection with any product, promotion or publication without the prior written approval of the other party, except that IBM may use StorageTek's trademarks and trade names for the aforementioned purposes on any Equipment shipped by StorageTek which bears such trademarks or trade names. Any approved use of one Party's trademark or trade name shall enure to the benefit of the Party owning such trademark or trade name. 19.2 ADVERTISING/DISCLOSURE Neither party shall, without first obtaining the written consent of the other party, in any manner disclose any details of the work to be performed herein, the terms, conditions and subject matter of this Agreement, or documents issued hereunder, except as may be required by law or government rule or regulation. To the extent that a party is compelled to make a disclosure due to government rule or regulation, such disclosure shall be limited to the extent required, and the other party shall have an opportunity to review the information prior to its release. Each party may independently and without the consent of the other party inform customers of the fact that an OEM distribution arrangement exists between the Parties; however, to the extent that such communication includes any additional information about the other party, such party shall have an opportunity to review such information prior to disclosure. 19.3 Upon request by IBM, StorageTek shall apply IBM's, its Subsidiaries', its distributors' and/or its OEMs' trademarks, logos and other information designated by IBM for the Product and Upgrades as may be provided to StorageTek by IBM. 19.4 ** 19.5 Use of a Party's trademarks by the other Party shall not diminish the owner's right, title or interest to such trademarks. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 50 58 20. CONFIDENTIALITY 20.1 It is anticipated that confidential information will be exchanged between the Parties. Where confidential information must be exchanged, it will be exchanged under an IBM Agreement for the Exchange of Confidential Information (hereafter "AECI"). 20.2 With respect to all nonconfidential information disclosed by one party (hereafter the "Disclosing Party") to the other party (hereafter the "Receiving Party"), except to the extent such information is protected by the Disclosing Party's patent or copyright rights, the Disclosing Party grants to the Receiving Party, to the extent, if any, of its interest therein, a nonexclusive, royalty-free, irrevocable, unrestricted, worldwide license to use, have used, disclose to others, make copies in the case of documents, and dispose of, all without limitation, such nonconfidential information in any manner as it determines, including the use of such nonconfidential information in the development, manufacture, marketing and maintenance of products and services incorporating such nonconfidential information. 21. ASSIGNMENT & CHANGE OF CONTROL Neither Party shall assign or subcontract this Agreement, or any right or obligation hereunder, without the prior written consent of the other Party, except that subcontracts pursuant to StorageTek's normal manufacturing procedures may be assigned, provided, however, that StorageTek may not subcontract final assembly and test without IBM's prior written consent. Any attempted assignment or subcontract not in compliance with this paragraph shall be void. StorageTek shall promptly notify IBM in writing of any Change of Control ** 21.1 In the event that a Change in Control occurs whereby control of StorageTek is acquired by (i) ** . 21.2 In the event that a Change of Control occurs ** ** 22. DISPUTE RESOLUTION 22.1 ESCALATION PROCESS The Parties will attempt in good faith to promptly resolve any controversy or claim arising out of or relating to this Agreement by negotiations between executives of the Parties. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 51 59 If a controversy or claim should arise, the Agreement Administrators, or their respective successors, or their superiors, will meet in person or phone, as they decide, at least once and will attempt to resolve the matter. Either Agreement Administrator may require the other to meet within seven days at a mutually agreed upon time and location. If the matter has not been resolved within ten days of their first meeting, or a request for such meeting if no meeting occurs, the Agreement Administrators shall refer the matter to senior executives, who shall have authority to settle the dispute (hereafter "Senior Executives"). The Senior Executive for IBM shall be the General Manager of IBM's Storage System business or his/her designee and the Senior Executive of StorageTek shall be its Chief Executive Officer, or his/her designee. Thereupon, the Agreement Administrators shall promptly prepare and exchange memoranda stating the issues in dispute, and their positions, summarizing the negotiations which have taken place, and attaching relevant documents. The Senior Executives will meet in person or by telephone within seven (7) days of the end of the ten- (10) day period referred to above, at a mutually agreed time. The first meeting shall be held at the offices of the Agreement Administrator receiving the request to meet. If more than one meeting is held, the meetings shall be held in rotation at the offices of IBM and StorageTek. If the matter has not been resolved within fifteen (15) days of the first meeting of the Senior Executives (which period may be extended by mutual agreement), the Parties will attempt in good faith to resolve the controversy or claim in accordance with the following mediation process. During the course of negotiations between the representatives, all reasonable requests made by one party to the other for nonprivileged information will be honored in order that each of the parties may be fully informed of the circumstances relevant to the dispute. 22.2 MEDIATION PROCESS If the escalation process fails to resolve a dispute in connection with this Agreement, any such dispute shall be submitted to expedited mediation prior to the commencement of any litigation with respect to such dispute. In the event either party intends to seek recourse against the other by an action at law or in equity, such party shall first give notice to the other party. Within ten (10) business days of such notice, the Parties shall attempt to agree on one mediator who shall be a person mutually agreeable to both Parties and who shall be experienced in the DASD industry. In the event the Parties cannot agree on one mediator, each shall have the right to appoint one mediator, and the two mediators shall appoint a third. Mediation shall commence within twenty (20) business days of the notice of request for mediation. Each party agrees to cooperate fully with the mediator(s) in an attempt to resolve any disputes. The mediator(s) shall use the rules of the American Arbitration Association in conducting the mediation. Any decision reached through mediation shall be in writing but shall not be legally binding upon the Parties nor admissible as evidence in any legal 52 60 proceedings. If the Parties cannot resolve their differences to their mutual satisfaction within thirty (30) business days of the request for mediation, either Party shall be free to pursue any and all other remedies available to such Party, including, but not limited to, litigation. Costs of the Mediator shall be born equally by the Parties. 23. TERMINATION/REMEDIES 23.1 TERMINATION BY MUTUAL CONSENT This Agreement shall be subject to termination prior to the expiration of the term at any time by mutual consent of the parties, evidenced by a written agreement providing for termination. Such agreement will include provisions to allow StorageTek access to IBM disk drives of the same type as are then being consigned to StorageTek and to provide IBM ongoing maintenance, FRUs and Product Engineering Services if StorageTek offers such items to any other entity. 23.2 TERMINATION BY BANKRUPTCY This Agreement may be immediately terminated by either Party if any of the following events ("Triggering Events") occur: (1) the other Party files a voluntary petition under any provision of the U.S. Bankruptcy Code or under any similar insolvency law, makes an assignment for the benefit of its creditors, (2) any involuntary petition in bankruptcy under any provision of the U.S. Bankruptcy Code or under any similar insolvency law is filed against such other Party, or (3) a receiver is appointed for, or a levy or attachment is made against all or substantially all of its assets, and such involuntary petition is not dismissed or such receiver or levy or attachment is not discharged within sixty (60) days after the filing, appointment or making thereof. To the extent that applicable bankruptcy law does not permit the exercise of rights under the immediately preceding paragraph, the bankrupt party agrees that adequate assurance of performance by the bankrupt party of the balance of this Agreement as a "Debtor-in-possession" or any similar entity under successor bankruptcy laws will include assurances both of such entity's ability to adequately produce products for the specifically permitted Agreement and such entity's willingness and ability to protect the other party's proprietary rights. As a personal contract, exercise of rights by a trustee or assignment of rights hereunder would not be appropriate and such understanding is an essential part of each Party's willingness to enter into this Agreement. 23.3 TERMINATION FOR CAUSE a. If either Party is in material breach of this Agreement, the other Party may give written notice to the defaulting Party specifying the respects in which the defaulting Party has failed to perform or comply with the terms and conditions 53 61 of this Agreement. In the event that any defaults so indicated shall not be remedied by the defaulting Party within sixty (60) days (ten (10) days as to a failure to pay any amounts indisputably due) unless a different period is provided for elsewhere in this Agreement after such notice, the party not in default may, by written notice to the defaulting Party, terminate this Agreement. b. Either Party may submit disputes related to the notice of termination to the Escalation Process or Mediation Process described in Section 22 but such termination notice shall not be stayed by submission to escalation or mediation and termination shall take effect as set forth above. Failure of either Party to terminate this Agreement due to a breach on the part of the other Party shall not prejudice its rights to terminate for a subsequent breach on the part of the defaulting Party. c. The right of a Party to terminate this Agreement, and the exercise of such right by such Party, shall be in addition to any other remedies or rights granted in this Agreement or which a Party would have in law or equity. d. If IBM terminates this Agreement for cause: (1) ** (2) ** (3) ** (4) ** (5) ** e. If StorageTek terminates this Agreement for cause: (1) ** (2) ** (3) ** (4) ** (5) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 54 62 23.4 MATERIAL BREACH A material breach shall include, but not be limited to, a material failure to: a. pay any amounts that are undisputably due; b. deliver Equipment or to supply software, tools and licenses in accordance with this Agreement; c. comply with the reliability, availability, and service levels specified in the Agreement; d. manufacture Equipment in accordance with the Agreement; e. supply Deliverables in accordance with Attachment 1 to Exhibit 3; or f. comply with Section 18, Representations and Warranties. A Party may not be declared to be in material breach of any provision of this Agreement if, and to the extent that its failure to perform has been caused by the other Party's breach of this Agreement. 23.5 ** LICENSE StorageTek hereby grants to IBM a fully paid-up license to ** . 23.6 MANUFACTURING MAKE OR HAVE MADE RIGHTS ** a. ** b. ** c. ** d. ** e. ** f. ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 55 63 g. ** h. ** 23.7 TERMINATION FOR CONVENIENCE IBM shall also have the right to terminate this Agreement for convenience ** by providing StorageTek with a ** of its election to do so. In the event IBM elects to terminate this Agreement for convenience, ** and based upon IBM's standard OEM terms and conditions at the time of termination. 23.8 TERMINATION FOR BURDENSOME CONDITION a. Upon the occurrence of a Burdensome Condition ** (1) ** (2) ** (3) ** (4) ** (5) ** (6) ** (7) ** b. Upon the occurrence of a Burdensome Condition ** (1) ** (2) ** c. Upon the occurrence of a Burdensome Condition ** (1) ** (2) ** (3) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment 56 64 (4) ** (5) ** (6) ** (7) ** d. For purposes of this Section 23.8, ** . e. In no event will either Party's liability to the other for termination pursuant to this Section 23.8 exceed (i) the sum of ** in the event of a termination of this Agreement only as a result of a circumstance described in Section 1.7(ii); or (ii) the sum of ** in the event of a termination of this Agreement as a result of a circumstance described in Section 1.7(i). ** 23.9 WIND DOWN Upon termination of this Agreement by either Party for any reason prior to the expiration of the term set forth in Section 3: a. IBM may continue, for ** following the date of notice of such termination, to place noncancelable purchase orders at prices for the quarter in which such notice is effective for Equipment, and StorageTek agrees to accept such orders and to manufacture supply and Deliver such Equipment to IBM if ordered for Delivery within ** of such purchase orders and within appropriate lead times; and b. StorageTek may continue for ** following the date of notice of termination (unless a longer period is otherwise provided for in this Agreement), to place noncancelable purchase orders for disk drives of the same type as the Drives that are being consigned, or similar replacements therefor, at a price ** , and based on IBM's standard terms and conditions; and IBM agrees to accept such purchase orders and to manufacture, supply and deliver such disk drives, if ordered for delivery by StorageTek within appropriate lead times. Except for a termination of this Agreement by StorageTek pursuant to Sections 6.5b or 6.5c, Equipment ordered by IBM hereunder, if Delivered after termination, will be - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment 57 65 credited toward IBM's attainment of its ** Volumes, as the case may be, for the quarter in which the Agreement was terminated. 23.10 ** AFTER TERMINATION Subject to Sections 23.3 and 23.8, ** if either Party terminates this Agreement, ** for Product Engineering Services required under the SOW; or (iii) receive such Product Engineering Services as it may request, up to the levels as then required under the SOW, on a time and materials basis at ** . 24. INDEMNIFICATION RIGHTS 24.1 INTELLECTUAL PROPERTY INDEMNITY a. ** b. ** c. ** d. ** (1) ** (2) ** 24.2 GENERAL INDEMNITY a. StorageTek shall indemnify, defend and hold harmless IBM in respect to any cost, expenses, liability or damages, including reasonable attorney's fees, for any third-party claims arising out of or related to: (1) ** (2) ** (3) ** (4) ** (5) ** - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 58 66 b. StorageTek shall, however, have no liability to indemnify IBM if and only to the extent that: (1) ** (2) ** (3) ** 24.3 OBLIGATIONS OF IBM The obligation of StorageTek to defend and make payments under Sections 24.1 and 24.2 is conditioned on the following: a. ** b. ** c. ** IBM may participate, at its sole cost and expense, in the defense of any action on such claim and any negotiations for its settlement or compromise. 25. GOVERNING LAW 25.1 NEW YORK LAW The relationship between the Parties and this Agreement are governed by the substantive laws of the state of New York. Any action between the Parties must be brought before a court of competent jurisdiction located in the United States Southern District of New York. Each Party hereby waives any right to a jury trial in any dispute between them. The Parties agree that the United Nations convention on the international sale of goods shall not apply to this Agreement. It shall be a condition precedent to the filing of any such actions that the dispute resolution procedure set forth in Section 22 will have been followed prior to the filing of such action, excepting only that a Party may institute an action seeking a preliminary injunction, temporary restraining order, or other equitable relief, if necessary in the opinion of that Party to avoid material harm to its property, rights or other interest, before commencing or at any time during the course of the dispute procedure in Section 22. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment 59 67 25.2 LIMITATION OF ACTIONS Neither Party will bring a legal action in connection with this Agreement against the other more than ** after the cause of action arose. This limitation does not apply to actions brought to enforce (i) indemnification rights (Section 24) or (ii) violation of intellectual property rights. 25.3 LIMITATION OF LIABILITY Except as may be required pursuant to Section 6.5, in no event shall either Party hereto be liable to the other for more than ** for any and all causes of action and claims of any nature (including, but not limited to, claims that obligations, representations or warranties hereunder have failed of their essential purpose) in connection with this Agreement; provided, however, that: (a) ** (b) ** 26. GENERAL 26.1 COMPLIANCE WITH LAWS Each Party agrees to comply at its own expense with all applicable laws and regulations of the United States, the European Union, and all other countries or country groups. 26.2 RELATIONSHIP OF THE PARTIES Each Party acknowledges and agrees that it is it is independent of the other. Neither Party is, or will claim to be, a partner, employee, joint venturer, agent, or legal representative of the other Party except as specifically stated in this Agreement. Neither Party will assume or create any obligation or responsibility, expressly or by implication, on behalf of or in the name of the other Party. Each Party is responsible for the direction and compensation of its employees. Each Party may have similar agreements with others. Each Party may design, develop, manufacture, acquire or market its own or competitive products and services. - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 60 68 26.3 NOTICES All notices by one party to the other in connection with this Agreement shall be in writing and will be sent to the following addresses: Notices related to forecasts, orders, and shipment will be sent to: For IBM: For StorageTek: ** Agreement Administrator Procurement Manager for IBM Agreement IBM Corporation Storage Technology Corporation 5600 Cottle Road 2270 South 88th Street San Jose, CA 95193 Louisville, CO 80028
All other notices, including without limitation notices of breach, default, will be sent to the following addresses: For IBM: For StorageTek: ** Agreement Administrator Vice President, Worldwide Materials for IBM Agreement IBM Corporation Storage Technology Corporation 5600 Cottle Road 2270 South 88th Street San Jose, CA 95193 Louisville, CO 80028 with a copy to: For IBM: For StorageTek: Legal Department General Counsel IBM Corporation StorageTechnology Corporation 5600 Cottle Road 2270 South 88th Street San Jose, CA 95193 Louisville, CO 80028
Either Party may change any address at which it will receive notices by notifying the other Party in writing. Notices and other communications between the Parties in connection with this Agreement shall be deemed given: a. three days after being sent by U.S. mail, postage prepaid, certified or registered, to the address listed above; or - ----------------------------------- ** Confidential portions omitted and filed separately with the Securities and Exchange Commission under an application for confidential treatment. 61 69 b. on the date it is sent via facsimile transmission with confirmation from the receiving party that the transmission was completed successfully, with the original document sent as described above in item a. Notices related to order, forecast, shipment, and delivery may also be sent via confirmed electronic mail (EDI) to the address listed above and shall be deemed given on the date of confirmation of delivery. 26.4 COUNTERPARTS This Agreement may be executed simultaneously in two (2) counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same. 26.5 HEADINGS AND ATTACHMENTS The headings in this Agreement are for reference only and will not affect its meaning or interpretation. The Exhibits, their Attachments, their Appendices and their Schedules, are attached to and referenced in this Agreement and are incorporated herein by reference. 26.6 AMENDMENT For any change to this Agreement to be valid, it must be signed by both Parties. 26.7 WAIVER The failure by either Party at any time to enforce the provisions of this Agreement, to exercise any option or election, or to require at ant time the performance by the other Party of any provisions herein will not be construed as a waiver of such provision. 26.8 SEVERABILITY If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired provided the original intentions of both Parties are maintained. 26.9 WEEKENDS AND HOLIDAYS If any obligation of a party hereunder falls due on a weekend day or a Federal holiday, then that obligation shall be due on the next business day following such weekend day or Federal holiday. 62 70 26.10 FORCE MAJEURE Neither StorageTek nor IBM shall be liable for any delay or failure of performance hereunder due to any contingency beyond its control which renders performance commercially unreasonable including, but not limited to, an act of God, war, mobilization, riot, strike, embargo, fire, flood, hurricane, earthquake or power failure ("force majeure incident"). When only part of StorageTek's or IBM's ability to perform is excused under this section, StorageTek or IBM must allocate production and deliveries or receipt of deliveries among various customers or suppliers then under contract for similar goods during the period when StorageTek or IBM is unable to perform. The allocation must be effected in accordance with Section 10.5 of the Agreement. If either StorageTek or IBM claims excuse for nonperformance under this section, it must give notice in writing to the other party. If StorageTek is unable to Deliver or IBM is unable to sell Equipment, or if IBM is unable to deliver Drives, due to a force majeure incident, any units of Equipment that were properly ordered by IBM and not Delivered will be counted toward IBM's attainment of its ** Volumes, Annual Volumes and Minimum Volumes. If a Party's inability continues for more than one hundred twenty (120) days, the other Party may terminate this Agreement and IBM shall have no liability hereunder for Recovery Payments and Liquidated Damages. 26.11 SURVIVAL The rights and obligations of Sections 1, 7.6, 7.7a, 7.8, 7.10, 9, 14, 15, 16.8, 18, 19.1, 19.2, 19.5, 20, 22, 23, 24, 25 and 26, and 11, 13.1a, 13.2, 13.3 and 13.4 (with respect to FRUs), shall survive and continue after any expiration or termination of this agreement and shall bind the parties and their legal representatives, successors and assigns. 26.12 ORDER OF PRECEDENCE In the event that there is an inconsistency or conflict between the terms in the Specifications and other terms of this Agreement, then such other terms in this Agreement shall take precedence over the terms in the Specifications. THIS AGREEMENT SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN, AND ALL NEGOTIATIONS, CONVERSATIONS OR DISCUSSIONS HERETOFORE HAD BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT. THE PARTIES BOTH ACKNOWLEDGE THAT THEY HAVE NOT BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY ANY REPRESENTATIONS OR STATEMENTS, ORAL OR 63 71 WRITTEN, NOT EXPRESSLY CONTAINED HERE. THE TERMS AND CONDITIONS OF THIS AGREEMENT SHALL PREVAIL, NOTWITHSTANDING ANY VARIANCE WITH THE TERMS AND CONDITIONS OF ANY ORDER OR OTHER INSTRUMENT SUBMITTED BY THE PARTIES. INTERNATIONAL BUSINESS MACHINES STORAGE TECHNOLOGY CORPORATION CORPORATION By: By: ------------------------ ------------------------- Name: Name: ------------------------ ------------------------- Title: Title: ------------------------ ------------------------- Date: Date: ------------------------ -------------------------
64 72 Please note: The Exhibits, Attachments and Appendices are not filed herewith as such documents contain confidential pricing information and other proprietary materials and are otherwise immaterial to an understanding of the OEM Agreement between Storage Technology Corporation and International Business Machines Corporation. EX-11.0 7 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 STORAGE TECHNOLOGY CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (In thousands, except per share amounts) (Unaudited)
QUARTER ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 28, JUNE 30, JUNE 28, JUNE 30, 1996 1995 1996 1995 ----------- ----------- ------------ ----------- PRIMARY (a) Earnings (loss) Income before extraordinary item $ 37,860 $ 11,855 $ 63,449 $2,941 Extraordinary gain on sale of lease assets, net of income taxes of $8,200 9,535 ----------- ----------- ------------ ----------- Net income 37,860 11,855 72,984 2,941 Preferred dividend requirement (3,019) (6,038) ----------- ----------- ------------ ----------- Income (loss) applicable to common shares $ 37,860 $ 8,836 $ 72,984 ($3,097) =========== =========== ============ =========== Shares Weighted average common shares outstanding 53,778 52,734 53,546 52,613 Dilutive effect of outstanding options and warrants (as determined under the treasury stock method) 639 113 397 ----------- ----------- ------------ ----------- Weighted average common shares and equivalents 54,417 52,847 53,943 52,613 =========== =========== ============ =========== Earnings (loss) per common share: Income (loss) before extraordinary item $ 0.70 $ 0.17 $ 1.18 ($0.06) Extraordinary gain, net 0.17 ----------- ----------- ------------ ----------- $ 0.70 $ 0.17 $ 1.35 ($0.06) =========== =========== ============ ===========
2
QUARTER ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 28, JUNE 30, JUNE 28, JUNE 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- FULLY DILUTED Earnings Income before extraordinary item $ 37,860 $ 11,855 $ 63,449 $ 2,941 Adjustment for interest and amortization of debt issue costs on 7% Convertible Debentures, net of estimated tax effects 2,525 5,113 Adjustment for interest and amortization of debt issue costs on 8% Convertible Debentures, net of estimated tax effects 2,450 2,480 4,900 4,959 ----------- ----------- ----------- ----------- Income before extraordinary item 42,835 14,335 73,462 7,900 Extraordinary gain on sale of lease assets, net of income taxes of $8,200 9,535 ----------- ----------- ----------- ----------- Net income, as adjusted $ 42,835 $ 14,335 $ 82,997 $ 7,900 =========== =========== =========== =========== Shares Weighted average common shares outstanding 53,778 52,734 53,546 52,613 Dilutive effect of outstanding options and warrants (as determined under the treasury stock method) 1,103 178 1,126 191 Adjustment for shares issuable upon assumed conversion of 7% Convertible Debentures 7,107 7,195 Adjustment for shares issuable upon assumed conversion of 8% Convertible Debentures 4,132 4,132 4,132 4,132 Adjustment for shares issuable upon assumed conversion of $3.50 Convertible Exchangeable Preferred Stock 7,340 7,340 ----------- ----------- ----------- ----------- Weighted average common shares and equivalents, as adjusted 66,120 64,384 65,999 64,276 =========== =========== =========== =========== Earnings per common share: Income before extraordinary item $ 0.65 $ 0.22 $ 1.11 $ 0.12 Extraordinary gain, net 0.15 ----------- ----------- ----------- ----------- $ 0.65(a) $ 0.22(b) $ 1.26(a) $ 0.12(b) =========== =========== =========== ===========
3
QUARTER ENDED SIX MONTHS ENDED --------------- ----------- ---------------------------- JUNE 28, JUNE 30, JUNE 28, JUNE 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- SUPPLEMENTARY (c) Earnings Income before extraordinary item $ 37,860 $ 63,449 Adjustment for interest and amortization of debt issue costs on 7% Convertible Debentures, net of estimated tax effects 2,523 5,110 ----------- ----------- Income before extraordinary item 40,383 68,559 Extraordinary gain on sale of lease assets, net of income taxes of $8,200 9,535 ----------- ----------- Net income, as adjusted $ 40,383 $ 78,094 =========== =========== Shares Weighted average common shares outstanding 53,778 53,546 Dilutive effect of outstanding options and warrants (as determined under the treasury stock method) 639 397 Adjustment for shares issuable assuming the conversion of 7% Convertible Debentures occurred at the beginning of the period 7,104 7,193 ----------- ----------- Weighted average common shares and equivalents, as adjusted 61,521 61,136 =========== =========== Earnings per common share: Income before extraordinary item $ 0.66 $ 1.12 Extraordinary gain, net 0.16 ----------- ----------- ----------- ----------- $ 0.66 N/A $ 1.28 N/A =========== =========== =========== ===========
(a) These figures agree with the related amounts in the Consolidated Statement (b) This calculation is submitted in accordance with Regulation S-K, Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15, because it produces an anti-dilutive result. (c) On June 12, 1996, Storage Technology Corporation called for the redemption on July 12, 1996, of all its outstanding 7% Convertible Subordinated Debentures Due 2008. Substantially all of the 7% Convertible Subordinated Debentures were converted into common stock on or before July 12, 1996. The supplemental earnings per share amounts reflect the primary earnings per share amounts as if the conversion had occurred at the beginning of the period. EX-27.0 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-Q DATED JUNE 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-27-1996 JUN-28-1996 489,780 0 404,446 0 274,815 1,174,143 327,653 0 1,919,188 506,963 268,726 0 0 5,701 1,119,775 1,919,188 658,080 932,786 385,467 532,556 98,617 0 17,018 86,849 23,400 63,449 0 9,535 0 72,984 1.35 1.26 Asset values for the interim period represent net amounts.
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