Securities and Exchange Commission
Washington, D.C. 20549
- ---------------------------------------------------------------------------
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 29, 1996 Commission File
Number 0-12064
- ---------------------------------------------------------------------------
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 1, 1996: 26,012,642
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Item 1 Consolidated Financial Statements:
Consolidated statements of operations (unaudited) - three
months and nine months ended September 29, 1996
and October 1, 1995
Consolidated balance sheets -
September 29, 1996 (unaudited) and December 31, 1995
Consolidated statements of cash flows (unaudited) -
nine months ended September 29, 1996
and October 1, 1995
Notes to consolidated financial statements (unaudited)
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other information
Item 1 Legal Proceedings
Item 6 Exhibits and reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
---------------------- ------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Product sales $101,618 $ 99,509 $282,256 $271,845
Service 48,392 51,234 150,980 147,717
-------- -------- -------- --------
Total revenues 150,010 150,743 433,236 419,562
Costs and expenses:
Product cost of sales 55,117 49,949 150,949 132,983
Service expense 29,094 28,837 91,634 82,336
Research and development expense 19,439 21,928 59,310 62,721
Selling, general and
administrative expenses 33,726 40,503 98,436 120,909
Restructuring charge (see notes
6 and 7) 0 24,500 4,623 24,500
-------- -------- -------- --------
Total costs and expenses 137,376 165,717 404,952 423,449
-------- -------- -------- --------
Operating income (loss) 12,634 (14,974) 28,284 (3,887)
Other income 1,520 3,389 5,149 7,931
-------- -------- -------- --------
Income (loss) before provision
for income taxes 14,154 (11,585) 33,433 4,044
Provision for (benefit from)
income taxes 3,397 (2,317) 7,638 809
-------- -------- -------- --------
Net income (loss) $ 10,757 $ (9,268) $ 25,795 $ 3,235
======== ======== ======== ========
Net income (loss) per common
share $ .45 $ (.40) $ 1.09 $ .14
======== ======== ======== ========
Weighted average number of shares
of common stock and common stock
equivalents outstanding 23,816 23,066 23,719 23,836
======== ======== ======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Sept. 29, Dec. 31,
ASSETS 1996 1995
- ------------------------------ --------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $100,670 $ 91,592
Marketable securities 40,117 63,505
Accounts receivable, net 168,957 165,643
Inventories:
Finished products 44,363 35,640
Work-in-process 1,175 1,174
Parts and assemblies 27,774 24,457
--------- ---------
Total inventories 73,312 61,271
Prepaid expenses 13,108 10,901
Other current assets 18,437 22,331
--------- ---------
Total current assets 414,601 415,243
Property, plant and equipment, at cost 346,379 323,529
Less: accumulated depreciation 222,902 207,148
--------- ---------
Net property, plant and equipment 123,477 116,381
Other assets, net 77,270 76,185
--------- ---------
Total assets $615,348 $607,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable $ 22,697 $ 31,842
Accrued expenses:
Payroll 21,742 20,235
Other 31,335 38,129
Income taxes payable 4,493 8,617
Short-term borrowings and obligations 2,829 5,050
Deferred revenue 19,239 18,377
--------- ---------
Total current liabilities 102,335 122,250
Long-term obligations and deferrals 3,851 7,168
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 25,991,260 and
25,743,776 shares issued and outstanding,
respectively 260 257
Junior common stock, $.01 par value,
500,000 shares authorized 0 0
Additional paid-in capital 213,953 208,308
Retained earnings 373,699 347,904
Cumulative translation adjustment (2,732) (2,060)
--------- ---------
Subtotal 585,180 554,409
Less: 2,400,000 shares in treasury,
at cost (76,018) (76,018)
--------- ---------
Total stockholders' equity 509,162 478,391
--------- ---------
Total liabilities and stockholders'
equity $615,348 $607,809
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
----------------------
Sept. 29, Oct. 1,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $25,795 $ 3,235
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 48,801 49,885
Restructuring charge 4,623 24,500
Add (deduct) changes in working capital:
Increase in accounts receivable (3,203) (15,260)
Increase in inventory (12,041) (3,878)
Decrease in accounts payable and accrued
liabilities (17,484) (6,200)
Decrease in income taxes payable (5,465) (25,553)
Increase (decrease) in other working
capital items 2,570 (4,221)
--------- ---------
Net cash provided by operating activities 43,596 22,508
Cash flows from investing activities:
Acquisition of property, plant and equipment (39,112) (36,230)
Acquisition of businesses 0 (7,641)
Purchase of marketable securities (22,047) (84,170)
Proceeds from sale and maturity of
marketable securities 45,435 92,716
Acquisition of other assets (20,704) (13,594)
--------- ---------
Net cash used in investing activities (36,428) (48,919)
Cash flows from financing activities:
Net proceeds from employee stock plans 5,648 8,630
Acquisition of treasury stock 0 (44,616)
Reduction of long-term debt (3,150) (2,785)
--------- ---------
Net cash provided by (used in)
financing activities 2,498 (38,771)
Effect of exchange rate changes on cash (588) (240)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 9,078 (65,422)
Cash and cash equivalents at beginning of year 91,592 191,934
--------- ---------
Cash and cash equivalents at end of period $100,670 $126,512
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 1996 and October 1, 1995
(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 December 31, 1995. 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 year have been
reclassified to conform to the current year presentation. Such
reclassifications had no effect on previously reported results of
operations. The balance sheet at December 31, 1995 has been derived from
the audited financial statements at that date.
2. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
3. 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.
4. On October 22, 1996, the Company's board of directors authorized the
purchase of up to 1,200 shares of Stratus common stock on the open market.
The purpose of the program is to enhance shareholder value. The purchase
will be funded by normal working capital and will take place from time to
time as market conditions warrant.
5. There were no non-cash investing and financing activities for the
first nine months of 1996 or 1995. The Company made interest payments of
$568 and $356 and tax payments of $10,447 and $25,850 in the first nine
months of 1996 and 1995, respectively.
6. During the third quarter of 1995, the Company, after it had
completed an evaluation of its economic model and cost structure, approved
a plan to restructure its operations. As a result, in the 1995 third
quarter, the Company recorded a $24,500 restructuring charge for the
reduction of its worldwide workforce by approximately 575 employees as well
as the consolidation of certain manufacturing and sales operations. Of the
total charges, $13,000 was related to the workforce reduction and $11,500
was related to the consolidation of facilities and operations. This
restructuring action was completed in the second quarter of 1996.
7. During the second quarter of 1996, the Company restructured its
software business to improve operating results by aligning revenues with
expenses, and to focus on new strategic product offerings to be launched in
the coming months. The restructuring actions resulted in a charge of
$4,623 and included charges for workforce reductions and asset dispositions
related to the discontinuation of certain product programs.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
(In thousands)
Revenues
Total revenues in the third quarter of 1996 were $150,010 compared to
$150,743 in the third quarter of 1995. In the first nine months of 1996,
total revenues were $433,236, an increase of 3% from the same 1995 period.
The Company's total product revenue increased 2% in the third quarter
and 4% in the first nine months of 1996 compared to the same prior year
periods. Hardware product revenue increased 5% and 8% in the third quarter
and first nine months of 1996, respectively, compared to the same 1995
periods. The third quarter and year to date increases were driven primarily
by strong results in the telecommunications market sector, especially in the
U.S., Japan and Korea.
Domestic direct product revenues decreased 8% in the third quarter and
12% in the first nine months of 1996 from the same prior year periods, with
telecommunications sales up 47% and 17%, and non-telecommunications sales
down 32% and 25% in the corresponding periods . Total international direct
product revenues decreased 17% for the third quarter and 4% for the first
nine months of 1996 from the same prior periods. In the third quarter and
first nine months of 1996, direct product revenue in Europe increased 11%
and decreased 8%, respectively, from the same 1995 periods, while
Asia/Pacific sales during the same periods decreased 37% and 14%,
respectively, compared with the same periods of 1995.
Product revenue from indirect channels increased 46% and 42%
respectively, in both the 1996 third quarter and first nine months compared
to the same prior year periods. Sales to NEC increased 147% and 114% in the
third quarter and first nine months of 1996, respectively, compared to the
corresponding 1995 periods. Sales to NEC represented 27% and 23% of total
product revenue in the third quarter and first nine months of 1996,
respectively, compared to 11% of total product revenue in the same periods
of 1995. Product revenue from international distributors decreased 26% and
increased 11% in the third quarter and first nine months of 1996,
respectively, compared to the same 1995 periods. The third quarter
decrease, due mainly to weak sales in Europe, was somewhat offset by
increased sales in South Africa.
Total service revenue decreased 6% in the third quarter and increased
2% in the first nine months of 1996 from the same prior year periods
primarily driven by professional services revenue which decreased 20% and
increased 13% from the corresponding 1995 periods. The third quarter
decrease was due mainly to the completion of several large system
integration contracts in the Company's hardware product business during the
third quarter of 1995. In the third quarter and first nine months of 1996,
maintenance and education revenues declined 2% and remained level,
respectively, compared with the same 1995 periods.
Cost of Sales
The gross margin on product revenue of 46% and 47% in the third quarter
and first nine months of 1996, respectively, declined four percentage points
from the corresponding 1995 periods. This was the result of increased
competitive pressure, the unfavorable impact of foreign exchange rate
movement and a decrease in software license revenues which carry higher
margins than traditional hardware product sales. Management believes that
the downward pressure on product margins will continue, but at a slower
pace.
The gross margin on service revenue was 40% in the third quarter and
39% in the first nine months of 1996. This compares to a 44% service margin
realized in the third quarter and first nine months of 1995. The decreased
margins were due to a shift in the mix of service revenues, with a higher
percentage generated from professional services versus maintenance
contracts. In addition, extended service warranties provided with the
Continuum product offerings, combined with an increase in Continuum sales
into the existing installed base, slowed revenue growth and added pressure
on the service gross margin.
Other Operating Expenses
Total operating expenses in the third quarter and first nine months of
1996, excluding the restructuring charges, decreased 15% and 14%,
respectively, from the corresponding 1995 periods reflecting benefits
derived from the Company's restructuring actions initiated in the third
quarter of 1995 and completed in the second quarter of 1996. As a
percentage of total revenues, operating expenses declined to 35% in the
third quarter of 1996 compared to 41% in the 1995 third quarter, and
declined to 36% in the first nine months of 1996 from 44% in the first nine
months of 1995.
During the third quarter of 1995, the Company, after it had completed
an evaluation of its economic model and cost structure, approved a plan to
restructure its operations. As a result, in the third quarter of 1995, the
Company recorded a $24,500 restructuring charge for the reduction of its
worldwide workforce by approximately 575 employees, as well as the
consolidation of certain manufacturing and sales operations. Of the total
charges, $13,000 was related to the workforce reduction and $11,500 was
related to the consolidation of facilities and operations. Approximately
$3,000 related to the restructuring was paid and charged against the reserve
in the second quarter of 1996, completing this restructuring action.
During the second quarter of 1996, the Company restructured its
software business to improve operating results by aligning revenues with
expenses, and to focus on new strategic product offerings to be launched in
the coming months. The restructuring actions resulted in a charge of $4,623
and included charges for workforce reductions and asset dispositions related
to the discontinuation of certain product programs. Approximately $3,400
was incurred and charged against the reserve.
Research and development expense in the third quarter and first nine
months of 1996 decreased 11% and 5%, respectively, from the same periods in
1995. As a percentage of total revenues, research and development expense
decreased two percentage points to 13% in the third quarter of 1996 compared
to the 1995 third quarter. In the first nine months of 1996, R&D expense as
a percentage of total revenues declined one percentage point to 14%,
compared to the same 1995 period. Throughout the remainder of 1996 and into
1997, the Company will continue its long-standing commitment to provide
leading edge hardware and software products to the telecommunications and
enterprise server marketplaces, particularly in support of mission critical
applications. Research and development efforts directed towards the
Company's Continuum and RADIO product lines will be ongoing. The Company
will continue to enhance its Continuum product line, leveraged by the
successful incorporation of Hewlett-Packard's industry leading PA-RISC
microprocessor and HP-UX operating system technologies. RADIO combines
availability software from the Company's Isis Distributed Systems division
with industry-standard hardware and networking components, and Microsoft's
Windows NT operating system. The Company will continue to invest in these
technologies to bring competitive products to market, and to realize the
benefits of purchased research and development.
In the third quarter and first nine months of 1996, selling, general
and administrative expenses decreased 17% and 19%, respectively, from the
same 1995 periods primarily due to benefits from the 1995 restructuring
activities and a shift to more of an indirect selling model. Total selling,
general and administrative expenses were 22% and 23% of net revenues in the
1996 third quarter and the first nine months, respectively, as compared to
27% and 29% of net revenues in the corresponding 1995 periods. The
Company's strategy is to continue to focus the sales organization on the
telecommunications and enterprise server marketplaces, expand indirect sales
channels and improve selling efficiencies. In addition, the Company will
continue to focus on effective cost management.
Other Income
Other income in the third quarter and first nine months of 1996
decreased $1,869 and $2,782, respectively, compared to the same periods in
1995. Interest income decreased due to a substantial reduction in the
Company's cash balance since January 1, 1995, primarily resulting from stock
repurchase programs, the acquisition of businesses and the restructuring
actions.
The effective tax rate of 24% and 23% in the third quarter and first
nine months of 1996, respectively, compares to 20% in 1995's corresponding
periods. The increase is primarily due to the expiration of the R&D tax
credit and a change in the mix of taxable income in the Company's
international subsidiaries.
Liquidity and Capital Resources
At September 29, 1996, the Company had cash, cash equivalents and
marketable securities of $140,787, a decrease of $14,310 from the balance at
the beginning of the year. This decrease was primarily due to the increase
of inventory balances in anticipation of volume shipments of new products in
the latter part of 1996 and reductions of accounts payable and accrued
liabilities.
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 1996.
At September 29, 1996, the Company had $3,283 in outstanding debt
related to the Isis acquisition.
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 $902 at
September 29, 1996.
The ratio of current assets to current liabilities for the Company as
of September 29, 1996 was 4.0 to 1. Based upon its current cash position,
and expected cash flow from operating activities supplemented by ongoing
stock issuance from the Employee Stock Purchase Plan and stock option plans,
management believes that the capital resources are sufficient to meet the
Company's financial requirements in the foreseeable future.
The Company plans to invest approximately $72,000 and $70,000 in
capital improvements and software technologies in 1996 and 1997,
respectively.
Outlook and Risks
On August 6, 1996, Gary E. Haroian resigned from his position as
President and CEO. William E. Foster, the Company's founder and Chairman,
was re-appointed as the Company's CEO. Mr. Foster, together with the senior
management team, will focus on refining and improving the Company's business
strategy.
The Company's future operating results are dependent upon a number of
factors, including the ability of the Company to continue to execute its
strategy for growth. The Company will continue to invest in its core
business by developing and introducing products which will expand the
breadth of the Continuum product family. In addition, the Company will
continue making investments to improve the functionality, serviceability and
ease-of-use of its distributed computing products. In support of these
product directions, the Company will continue to develop and deliver
application software and professional services to high-growth market niches.
The Company's targeted markets include telecommunications and the reliable
enterprise server marketplace.
A key challenge to the Company's continued growth is selling increased
unit volumes of computer systems at competitive prices, while concurrently
controlling the cost structure of the Company in an increasingly competitive
environment. Increased volume shipments are dependent upon continued
migration of the customer base to the Continuum family, timeliness to market
with new products, development of indirect selling channels, winning new
accounts in a fast and changing marketplace, and market acceptance of the
new distributed computing products.
Stratus and Continuum are registered trademarks, and RADIO, Isis and Isis
Distributed are trademarks of Stratus Computer, Inc. Other registered
trademarks and trademarks are the property of their respective owners.
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 September 29, 1996.
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 12, 1996 ROBERT E. DONAHUE
- ------------------------- ----------------------------
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer,
hereunto duly authorized
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000723610
<NAME> STRATUS COMPUTER, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 100670
<SECURITIES> 40117
<RECEIVABLES> 164429
<ALLOWANCES> 6258
<INVENTORY> 73311
<CURRENT-ASSETS> 414601
<PP&E> 346379
<DEPRECIATION> 222902
<TOTAL-ASSETS> 615348
<CURRENT-LIABILITIES> 102335
<BONDS> 3851
<COMMON> 260
0
0
<OTHER-SE> 508902
<TOTAL-LIABILITY-AND-EQUITY> 615348
<SALES> 282255
<TOTAL-REVENUES> 433236
<CGS> 150949
<TOTAL-COSTS> 404952
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5149)
<INCOME-PRETAX> 33433
<INCOME-TAX> 7638
<INCOME-CONTINUING> 25795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25795
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
