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 October 2, 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)
===============================================================================
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,
November 4, 1994: 24,243,657.
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Consolidated statements of income -
three months and nine months ended
October 2, 1994 and October 3, 1993
Consolidated balance sheets -
October 2, 1994 and January 2, 1994
Consolidated statements of cash flows -
nine months ended October 2, 1994
and October 3, 1993
Notes to consolidated financial statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other information
Legal Proceedings
Exhibits and reports on Form 8-K
Signatures
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------- -------------------------
October 2, October 3, October 2 October 3,
1994 1993 1994 1993
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $105,607 $96,791 $309,277 $279,510
Service 40,139 29,994 116,255 86,027
-------- --------- -------- --------
Total revenues 145,746 126,785 425,532 365,537
Costs and expenses:
Product cost of sales 43,529 38,356 131,477 110,163
Service expense 20,435 16,313 60,521 47,149
Research and development
expense 20,584 20,862 62,909 59,891
Selling, general and
administrative expenses 40,124 38,427 117,284 109,836
-------- --------- -------- --------
Total costs and expenses 124,672 113,958 372,191 327,039
-------- --------- -------- --------
Operating income 21,074 12,827 53,341 38,498
Other income 2,144 1,552 5,378 4,131
-------- --------- -------- --------
Income before provision for
income taxes 23,218 14,379 58,719 42,629
Provision for income taxes 4,411 3,020 11,156 8,952
-------- --------- -------- --------
Net income $18,807 $11,359 $47,563 $33,677
======== ======== ======== ========
Net income per common share $.76 $.48 $1.93 $1.42
======== ======== ======== ========
Weighted average number of
shares of common stock and
common stock equivalents 24,768 23,724 24,610 23,688
======== ======== ======== ========
</TABLE>
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
October 2, January 2,
ASSETS 1994 1994
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $244,108 $191,005
Accounts receivable, net 117,374 151,105
Inventories:
Finished products 22,914 16,854
Work-in-process 5,934 10,899
Parts and assemblies 17,969 12,153
---------- ----------
46,817 39,906
Other current assets 23,684 26,105
---------- ----------
Total current assets 431,983 408,121
Property, plant and equipment, at cost 286,211 246,293
Less: accumulated depreciation 176,989 143,610
---------- ----------
Net property, plant and
equipment 109,222 102,683
Other assets, net 47,804 47,727
---------- ----------
Total assets $589,009 $558,531
========== ==========
October 2, January 2,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
- - ------------------------------------ ---------- ----------
(Unaudited)
Current liabilities:
Accounts payable $21,212 $16,346
Accrued expenses 40,002 38,190
Income taxes payable 24,506 30,103
Short-term borrowings and obligations 5,314 4,372
Deferred revenue 12,573 19,817
---------- ----------
Total current liabilities 103,607 108,828
Long-term obligations 7,581 10,879
Deferred gain on sale-leaseback of land/building 2,442 2,864
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 24,666,920 and
24,047,391 shares issued and
outstanding, respectively 247 240
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 180,359 168,095
Retained earnings 317,147 269,584
Cumulative translation adjustment (1,310) (1,959)
---------- ----------
496,443 435,960
Less: 605,900 shares in treasury,
at cost (21,064) -
---------- ----------
Total stockholders' equity 475,379 435,960
---------- ----------
Total liabilities and
stockholders' equity $589,009 $558,531
========== ==========
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
----------------------------
October 2, October 3,
1994 1993
---------- ----------
Cash flows from operating activities:
Net income $47,563 $33,677
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,058 31,625
Add (deduct) changes in working capital:
Decrease in accounts receivable 41,094 12,631
(Increase) decrease in inventory (5,770) 11,545
Decrease in accounts payable and accrued
liabilities (2,809) (3,291)
Increase (decrease) in income taxes
payable (5,092) 635
Increase (decrease) in other working
capital items (8,777) 34
---------- ----------
Net cash provided by operating activities 104,267 86,856
Cash flows from investing activities:
Acquisition of property, plant
and equipment (30,280) (26,252)
Acquisition of other long-term assets (9,932) (13,374)
---------- ----------
Net cash used in investing activities (40,212) (39,626)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 12,271 9,791
Purchase of treasury stock (21,064) -
Reduction of long-term debt and capital
lease obligations (2,687) (1,795)
---------- ----------
Net cash provided by (used in) financing
activities (11,480) 7,996
Effect of exchange rate changes on cash 528 (211)
---------- ----------
Net increase in cash and cash equivalents 53,103 55,015
Cash and cash equivalents at beginning of year 191,005 134,962
---------- ----------
Cash and cash equivalents at end of period $244,108 $189,977
========== ==========
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1994 and October 3, 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 nine months of 1994 or 1993. The Company made interest payments of
$820 and $385 and tax payments of $17,811 and $8,704 in the first nine 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 $145,746 for the third quarter of 1994 increased 15%
over the corresponding period in 1993. For the first nine months of 1994,
total revenues were $425,532, an increase of 16% 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 4% for the third quarter and 5% for the first nine months of 1994
compared to the same prior year periods. These software subsidiaries
contributed $5,060 and $14,399 in revenues in the third quarter and first nine
months of 1994, respectively. This incremental revenue contributed an
additional 5% for the third quarter and first nine months of 1994, to product
revenue growth in each of the periods.
Exclusive of revenue from the Company's three software subsidiaries,
direct product revenue decreased 3% for the third quarter and increased 4% for
the first nine months of 1994 over the same prior year periods. For the
quarter, the decrease in direct product revenue is due to a 24% decline in
domestic business, primarily from lower sales in the retail, gaming and
healthcare industries, which were partially offset by a 32% increase in
international direct product revenue. Within Europe for the third quarter,
revenue increases in the United Kingdom, France, Holland, Spain, and Italy were
offset by declines in Belgium and Germany. In the Asia/Pacific region,
revenues increased 16% over the prior year's third quarter.
Product revenue from indirect channels increased 36% and 13% in the
1994 third quarter and first nine months, respectively, compared to the same
prior year periods. Product revenue from international distributors increased
97% from the prior year's third quarter. In addition, sales to NEC increased
by 148% for the third quarter when compared to 1993. For the quarter, sales
to Olivetti increased 159% compared to the same 1993 period. As expected,
product revenue to IBM declined by $6,769 when compared to Q3 1993.
Total service revenue increased 34% and 35% for the third quarter and
first nine months of 1994, respectively, over the corresponding periods in the
previous year. The Company's three software subsidiaries contributed $5,613
and $15,134, or 19 and 18 percentage points of the growth in total service
revenue for the third quarter and first nine months, respectively.
Cost of Sales
The gross margin on product revenue of 59% and 58% for the third
quarter and first nine months of 1994 declined one and three 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 49% for the third quarter and
48% for the first nine months of 1994. This compares to the 46% and 45%
service margin realized in the third quarter and first nine months,
respectively, 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 third quarter of 1994 increased 2%
over the corresponding 1993 period. As a percentage of net revenues, operating
expenses decreased by five percentage points in the third quarter of 1994 to
42% compared to 1993's third quarter. For the first nine months of 1994, total
operating expenses grew 6% over the corresponding 1993 period, but declined as
a percentage of net revenues from 46% to 42%.
Research and development expense in the third quarter of 1994 decreased
$278, or 1%, from the third quarter of 1993. For the first nine months,
research and development expense increased $3,018, or 5% from 1993. As a
percentage of net revenues, R&D expense declined two percentage points, to 14%,
for the third quarter and one percentage point, to 15%, for the first nine
months of 1994, 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 third quarter of 1994, selling, general and administrative
expenses increased $1,697, or 4%, over the same 1993 period. The three
software subsidiaries contributed $4,579 to this increase in SG&A expenses.
This increase was mitigated by savings of $2,882 due to the continued focus on
strong cost controls throughout the Company. For the first nine months,
selling, general and administrative expenses increased $7,448, or 7%, compared
to the same 1993 period. Total SG&A expenses were 28% of net revenues, down
two percentage points, for the 1994 third quarter and first nine months, 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.
Other Income
Other income for the third quarter and first nine months of 1994
increased $592 and $1,247, or 38% and 30%, over the same 1993 periods.
Interest income continued to increase in both the third quarter and the first
nine months, due to larger cash balances and, to a lesser extent, higher
interest rates.
The effective tax rate decreased to 19% in 1994's third quarter and
first nine 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 October 2, 1994, the Company had cash and cash equivalents of
$244,108 which reflects a $53,103 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 605,900 shares of common stock. 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 October 2, 1994, the Company had $9,360 in outstanding debt related
to the Isis acquisition and $102 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 $1,493 at
October 2, 1994.
The Company plans to invest approximately $43 million in capital
equipment and $21 million in capitalized software in 1994.
In November 1994, as previously announced, the Company acquired TCAM
Systems, Inc. and its affiliated companies through the purchase of all
outstanding shares of TCAM for approximately $16 million in cash, plus
additional consideration based upon TCAM's attainment of certain objectives
over the next three years. The company will become a wholly-owned subsidiary
of Stratus.
The ratio of current assets to current liabilities for the Company as
of October 2, 1994 was 4.2 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.
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 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the third quarter ended
October 2, 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 November 11, 1994 ROBERT E. DONAHUE
----------------- -----------------
Vice President, Finance and
Chief Financial Officer
hereunto duly authorized
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<NAME> STRATUS COMPUTER, INC.
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<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-END> OCT-02-1994
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<OTHER-SE> 475132
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