Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 3, 1994 Commission File
Number 0-12064
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Stratus Computer, Inc.
(Exact name of registrant as specified in its Charter)
Massachusetts No. 04-2697554
(State of Incorporation) (I.R.S. Employer Identification No.)
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752
(Address of principal executive office) (Zip)
(508) 460-2000
(Telephone number, including area code)
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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. Yes x No____.
Number of Common Shares outstanding at the latest practicable date,
August 5, 1994: 24,286,244.
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STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Consolidated statements of income -
three months ended July 3, 1994
and July 4, 1993
Consolidated balance sheets -
July 3, 1994 and January 2, 1994
Consolidated statements of cash flows -
six months ended July 3, 1994
and July 4, 1993
Notes to consolidated financial statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other information
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Exhibits and reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
<TABLE>
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Quarter Ended Six Months Ended
----------------------- -------------------------
July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $105,149 $95,250 $203,670 $182,719
Service 39,230 28,854 76,116 56,033
-------- -------- -------- --------
Total revenues 144,379 124,104 279,786 238,752
Costs and expenses:
Product cost of sales 43,908 36,827 87,948 71,807
Service expense 20,525 15,965 40,086 30,836
Research and development
expense 21,569 19,492 42,325 39,029
Selling, general and
administrative expenses 38,921 36,100 77,160 71,409
------- ------- ------- -------
Total costs and expenses 124,923 108,384 247,519 213,081
------- ------- ------- -------
Operating income 19,456 15,720 32,267 25,671
Other income 1,984 1,365 3,234 2,579
------- ------- ------- -------
Income before provision for
income taxes 21,440 17,085 35,501 28,250
Provision for income taxes 4,073 3,587 6,745 5,932
-------- -------- -------- --------
Net income $17,367 $13,498 $28,756 $22,318
======== ======== ======== ========
Net income per common share $.71 $.57 $1.17 $.94
======== ======== ======== ========
Weighted average number of
shares of common stock and
common stock equivalents 24,540 23,754 24,540 23,670
======== ======== ======== ========
See accompanying notes.
</TABLE>
<TABLE>
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
July 3, January 2,
ASSETS 1994 1994
- - ---------------------------------- ---------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $208,166 $191,005
Accounts receivable, net 146,332 151,105
Inventories:
Finished products 23,148 16,854
Work-in-process 5,673 10,899
Parts and assemblies 12,612 12,153
-------- --------
41,433 39,906
Other current assets 26,439 26,105
-------- --------
Total current assets 422,370 408,121
Property, plant and equipment, at cost 273,055 246,293
Less: accumulated depreciation 168,350 143,610
-------- --------
Net property, plant and equipment 104,705 102,683
Other assets, net 48,639 47,727
-------- --------
Total assets $575,714 $558,531
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- - ------------------------------------
Current liabilities:
Accounts payable $18,686 $16,346
Accrued expenses 34,152 38,190
Income taxes payable 22,327 30,103
Short-term borrowings and obligations 5,465 4,372
Deferred revenue 17,951 19,817
-------- --------
Total current liabilities 98,581 108,828
Long-term obligations 7,514 10,879
Deferred gain on sale-leasback of
land/building 2,583 2,864
Stockholders' equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
24,377,189 and 24,047,391 shares
issued and outstanding, respectively 244 240
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 174,379 168,095
Retained earnings 298,340 269,584
Cumulative translation adjustment (1,386) (1,959)
-------- --------
471,577 435,960
Less: 155,400 shares in treasury, at
cost (4,541) -
--------- --------
Total stockholders' equity 467,036 435,960
-------- --------
Total liabilities and
stockholders' equity $575,714 $558,531
======== ========
See accompanying notes.
</TABLE>
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six
Months Ended
------------------
July 3, July 4,
1994 1993
--------- ---------
Cash flows from operating activities:
Net income $28,756 $22,318
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,498 20,843
Add (deduct) changes in working capital:
Decrease in accounts receivable 11,730 18,172
Decrease in inventory 270 6,328
Decrease in accounts payable and accrued liabilities (14,190) (6,966)
Increase/(decrease) in income taxes payable (7,497) 1,373
(Increase)/decrease in other working capital items 1,293 (1,702)
-------- --------
Net cash provided by operating activities 44,860 60,366
Cash flows from investing activities:
Acquisition of property, plant and equipment (17,971) (19,865)
Acquisition of other long-term assets (9,360) (9,643)
-------- --------
Net cash used in investing activities (27,331) (29,508)
Cash flows from financing activities:
Net proceeds and benefits from employee stock plans 6,288 9,023
Purchase of treasury stock (4,541) -
Reduction of long-term debt and capital lease
obligations (2,636) (1,553)
--------- --------
Net cash provided by (used in) financing activities (889) 7,470
Effect of exchange rate changes on cash 521 (214)
--------- ---------
Net increase in cash and cash equivalents 17,161 38,114
Cash and cash equivalents at beginning of year 191,005 134,962
-------- --------
Cash and cash equivalents at end of period $208,166 $173,076
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 3, 1994 and July 4, 1993
(Unaudited)
(In thousands)
1. The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned. The
information herein should be read in conjunction with the annual report on Form
10-K for the year ended January 2, 1994. It is management's opinion that the
accompanying statements reflect all adjustments necessary for a fair
presentation of the results for this interim period and the comparable periods
presented. Certain amounts in the consolidated financial statements for the
prior years have been reclassified to conform to the current year presentation.
Such reclassifications had no effect on previously reported results of
operations.
2. Primary earnings per share is based on the weighted average number of
shares of common stock and common stock equivalents (stock options)
outstanding. Fully diluted earnings per share has not been separately
presented as the amount does not differ significantly from primary earnings per
share.
3. There were no non-cash investing and financing activities for the first six
months of 1994 or 1993. The Company made interest payments of $557 and $291
and tax payments of $15,425 and $4,850 in the first six months of 1994 and
1993, respectively.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Revenues
Net revenues of $144,379 for the second quarter of 1994 increased 16%
over the corresponding period in 1993. For the first six months of 1994, total
revenues were $279,786, an increase of 17% over the same 1993 period.
The Company's product revenue, exclusive of revenues generated by the
three software subsidiaries acquired during the fourth quarter of 1993,
increased 5% for the second quarter and 6% for the first six months of 1994
compared to the same prior year periods. These software subsidiaries
contributed $4,941 and $9,338 in the second quarter and first six months of
1994, respectively. This incremental revenue contributed an additional 5% to
product revenue growth in each of the periods.
Exclusive of revenue from the Company's three software subsidiaries,
direct product revenue increased 4% for the second quarter and 7% for the first
six months of 1994 over the same prior year periods. For the quarter, this
reflects a variety of factors including 21% domestic growth rate, led by sales
in the telecommunications, financial services and gaming industries. Also,
international direct product revenue decreased 20% from 1993's second quarter.
Within Europe for the second quarter, revenue increases in France, Holland, and
Italy were offset by declines in Belgium, Germany, and the United Kingdom. In
the Asia/Pacific region, revenues declined 27% over the prior years second
quarter.
Product revenue from indirect channels increased 14% and 2% in the 1994
second quarter and the first six months compared to the same prior year
periods. For the quarter, sales to Olivetti increased 376% compared to the
same 1993 period, and were 7% of total product revenue. This was caused by a
migration of sales from the Company's lower end to higher end systems. Product
revenue from international distributors decreased 10% from the prior year's
second quarter while sales to NEC increased by 35% for the second quarter when
compared to 1993.
Total service revenue increased 36% in both the second quarter and
first six months of 1994 over the corresponding periods in the previous year.
This growth was due to the increased service and education provided to the
expanding customer base. The Company's three software subsidiaries contributed
$4,924 and $9,522, or 17 percentage points of the growth in total service
revenue for the second quarter and first six months, respectively.
Cost of Sales
The gross margin on product revenue of 58% and 57% for the second
quarter and first six months of 1994 declined three and four percentage points,
respectively, from the gross margin on product revenue achieved in the
corresponding 1993 periods. This was primarily the result of higher
discounting due to competitive pressures, as well as a higher proportion of
mid-range and low-end RISC-based systems shipped during the 1994 periods versus
1993.
The gross margin on service revenue was 48% for the second quarter and
47% for the first six months of 1994. This compares to the 45% service margin
realized in the second quarter and first six months of 1993. This increase in
the service margin percentage was primarily due to the service revenue growth,
combined with well-managed expense growth in the service organization.
Other Operating Expenses
Total operating expenses for the second quarter of 1994 increased 9%
over the corresponding 1993 period. As a percentage of net revenues, operating
expenses decreased by 3 percentage points in the second quarter of 1994 to 42%
compared to 1993's second quarter. For the first six months of 1994, total
operating expenses grew 8% over the corresponding 1993 period, but declined as
a percentage of net revenues from 46% to 43%.
Research and development expense in the second quarter of 1994
increased $2,077, or 11%, from the second quarter of 1993. The total amount of
the increase was attributable to the Company's three software subsidiaries.
For the first six months, research and development expense increased $3,296, or
8% from 1993. As a percentage of net revenues, R&D expense declined one
percentage point, to 15%, for the second quarter and first six months of 1994,
respectively, compared to the same 1993 periods due mainly to the Company's
continued focus on strong cost controls. Stratus has a commitment to provide
comprehensive hardware and software solutions to the online computing
marketplace where availability is a critical need. Throughout 1994, the
Company will continue to develop the next generation of RISC machines. In
addition, the Company will continue the transition to open systems technology
by increasing the functionality of FTX, its UNIXrSystem V Release 4 operating
system, and integrating open architecture standards into its hardware
platforms.
For the second quarter of 1994, selling, general and administrative
expenses increased $2,821, or 8%, over the same 1993 period. The three
software subsidiaries contributed $4,424 to this increase in SG&A expenses.
This increase was mitigated by savings of $1,603 due to the continued focus on
strong cost controls throughout the Company. For the first six months,
selling, general and administrative expenses increased $5,751, or 8%, compared
to the same 1993 period. Total SG&A expenses were 27% and 28% of net revenues,
down two percentage points, for the 1994 second quarter and first six months,
respectively, as compared with the same 1993 periods. The Company's strategy
in 1994 is to focus the sales organization on strategic markets within vertical
industries, as well as continue to improve selling efficiencies and focus on
strong cost management.
Other Income
Other income for the second quarter and first six months of 1994
increased $619 and $655, or 45% and 25%, over the same 1993 periods. Interest
income continued to increase in both the second quarter and the first six
months, in connection with the Company's larger cash balance. Interest expense
increased in connection with the debt incurred for the acquisition of Isis
Distributed Systems, Inc. in the fourth quarter of 1993, and was somewhat
offset by the continued decline in capital lease activity.
The effective tax rate decreased to 19% in 1994's second quarter and
first six months from 21% in 1993's respective periods due to increased U.S.
tax credits and a more favorable mix of foreign tax rates.
Liquidity and Capital Resources
At July 3, 1994, the Company had cash and cash equivalents of $208,166
which reflects a $17,161 increase over the balance at the beginning of the
year. Profitable operations, improved collections on receivables, strong
inventory controls, and capital generated through employee stock plans were the
major factors in the increased cash balance, partially offset by the repurchase
of 155,400 shares of common stock. The repurchase is part of a program to fund
existing employee stock plans. In April 1994, the board of directors
authorized the purchase of up to 1.2 million shares of Stratus common stock to
be funded by normal working capital and to take place from time to time as
market conditions warrant.
The Company has a Multicurrency Revolving Credit Agreement providing
up to $50 million of borrowings through March 1997. There have been no
borrowings against this Agreement, and the Company anticipates no borrowings
during the remainder of 1994.
At July 3, 1994, the Company had $9,332 in outstanding debt related to
the Isis acquisition and $177 in capital lease obligations.
Certain subsidiaries have entered into credit arrangements with local
banks, principally Overdraft Agreements, for the purpose of short-term
liquidity management. Borrowings under these Agreements were $1,521 at July 3,
1994.
The ratio of current assets to current liabilities for the Company as
of July 3, 1994 was 4.3 to 1. Based upon its current cash position, and
expected cash flow from operating activities supplemented by continued stock
issuance from the Employee Stock Purchase Plan and stock option plans,
management believes that the Company's capital resources are sufficient to meet
its financial requirements for the foreseeable future.
The Company plans to invest approximately $37 million in capital
equipment and $25 million in capitalized software in 1994.
In August 1994, as previously announced, the Company signed a letter of
intent to acquire TCAM Systems, Inc. and its affiliated companies through the
purchase of all outstanding shares for approximately $17 million in cash, plus
additional consideration up to $15 million based upon TCAM's attainment of
certain objectives over the next three years. The company will become a
wholly-owned subsidiary and will be recorded using purchase accounting.
UNIX is a registered trademark of UNIX System Laboratories, Inc.
Stratus is a registered trademark of Stratus Computer, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings, either outstanding or pending,
with respect to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On April, 19, 1994, the Annual Meeting of Stockholders was held and, in
addition to the ratification of the selection of Ernst & Young as Independent
Public Accountants, Messrs. Arthur Carr and William E. Foster were elected as
Directors of the Company to serve for a three year term. A proposal was
approved to amend the 1983 Stock Option Plan and the Non Qualified Common Stock
Option Plan. A proposal to amend the Employee Stock Purchase Plan was also
approved.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter ended
July 3, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned duly authorized.
STRATUS COMPUTER, INC.
(Registrant)
Date August 12, 1994 ROBERT E. DONAHUE
--------------- ------------------
Robert E. Donahue
Vice President, Finance and
Chief Financial Officer
hereunto duly authorized
