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 June 30, 1996 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 , 1996: 25,993,815.
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated statements of income - three
months and six months ended June 30, 1996
and July 2, 1995
Consolidated balance sheets -
June 30, 1996 and December 31, 1995
Consolidated statements of cash flows -
six months ended June 30, 1996
and July 2, 1995
Notes to consolidated financial statements
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other information
Item 1
Legal Proceedings
Item 4
Submission of Matters to a Vote of Security Holders
Item 6
Exhibits and reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Second Quarter Ended Six Months Ended
---------------------- -------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Product sales $ 89,519 $ 90,836 $180,638 $172,336
Service 50,782 49,481 102,588 96,483
-------- -------- -------- --------
Total revenues 140,301 140,317 283,226 268,819
Costs and expenses:
Product cost of sales 47,775 45,501 95,832 83,034
Service expense 31,791 27,053 62,540 53,499
Research and development expense 19,791 20,173 39,871 40,793
Selling, general and
administrative expenses 32,344 41,709 64,710 80,406
Restructuring charge (see note 5) 4,623 0 4,623 0
-------- -------- -------- --------
Total costs and expenses 136,324 134,436 267,576 257,732
-------- -------- -------- --------
Operating income 3,977 5,881 15,650 11,087
Other income 1,734 1,731 3,629 4,542
-------- -------- -------- --------
Income before provision for
income taxes 5,711 7,612 19,279 15,629
Provision for income taxes 1,256 1,523 4,241 3,126
-------- -------- -------- --------
Net income $ 4,455 $ 6,089 $ 15,038 $ 12,503
======== ======== ======== ========
Net income per common share $ .19 $ .26 $ .64 $ .52
======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalents 23,758 23,832 23,671 24,089
======== ======== ======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, December 31,
ASSETS 1996 1995
- ------------------------------ --------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $ 81,735 $ 91,592
Marketable securities 64,125 63,505
Accounts receivable, net 144,740 165,643
Inventories:
Finished products 42,117 35,640
Work-in-process 1,353 1,174
Parts and assemblies 32,600 24,457
--------- ---------
76,070 61,271
Prepaid expenses 14,274 10,901
Other current assets 18,595 22,331
--------- ---------
Total current assets 399,539 415,243
Property, plant and equipment, at cost 338,670 323,529
Less: accumulated depreciation 217,146 207,148
--------- ---------
Net property, plant and equipment 121,524 116,381
Other assets, net 76,625 76,185
--------- ---------
Total assets $597,688 $607,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable $ 21,884 $ 31,842
Accrued expenses:
Payroll 18,171 20,235
Other 31,159 38,129
Income taxes payable 2,760 8,617
Short-term borrowings and obligations 3,446 5,050
Deferred revenue 17,593 18,377
--------- ---------
Total current liabilities 95,013 122,250
Long-term obligations and deferrals 4,215 7,168
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 25,987,173 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 213,914 208,308
Retained earnings 362,942 347,904
Cumulative translation adjustment (2,638) (2,060)
--------- ---------
574,478 554,409
Less: 2,400,000 shares in treasury,
at cost (76,018) (76,018)
--------- ---------
Total stockholders' equity 498,460 478,391
--------- ---------
Total liabilities and stockholders'
equity $597,688 $607,809
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
----------------------
June 30, July 2,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 15,038 $ 12,503
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 31,638 32,819
Restructuring charge 4,623 0
Add (deduct) changes in working capital:
(Increase) decrease in accounts receivable 20,874 (4,055)
(Increase) decrease in inventory (14,800) 554
Decrease in accounts payable and accrued
liabilities (22,259) (4,949)
Decrease in income taxes payable (7,199) (21,368)
Decrease in other working capital items (399) (3,180)
--------- ---------
Net cash provided by operating activities 27,516 12,324
Cash flows from investing activities:
Acquisition of property, plant and equipment (26,956) (23,437)
Acquisition of businesses 0 (2,967)
Purchase of marketable securities (12,365) (77,170)
Proceeds from sale and maturity of marketable
securities 11,745 57,291
Acquisition of other assets (12,265) (12,270)
--------- ---------
Net cash used in investing activities (39,841) (58,553)
Cash flows from financing activities:
Net proceeds from employee stock plans 5,606 6,576
Acquisition of treasury stock 0 (38,846)
Reduction of long-term debt (2,650) (4,688)
--------- ---------
Net cash provided by (used in) financing
activities 2,956 (36,958)
Effect of exchange rate changes on cash (488) 1,784
--------- ---------
Net decrease in cash and cash equivalents (9,857) (81,403)
Cash and cash equivalents at beginning of year 91,592 191,934
--------- ---------
Cash and cash equivalents at end of period $ 81,735 $110,531
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and July 2, 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. There were no non-cash investing and financing activities for the
first six months of 1996 or 1995. The Company made interest payments of
$598 and $327 and tax payments of $8,572 and $23,329 in the first six
months of 1996 and 1995, respectively.
5. 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 $4.6
million 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.
Revenues
Total revenues of $140,301 for the second quarter of 1996 were
unchanged when compared to the second quarter of 1995. For the first six
months of 1996, total revenues were $283,226, an increase of 5% from the
same 1995 period.
The Company's total product revenue declined 1% for the second quarter
and increased 5% for the first six months of 1996 compared to the same prior
year periods. The second quarter decline was somewhat mitigated by strong
sales to the telecommunications industry. The second quarter decrease was
due mainly to a 56% decline in software license revenue from the Company's
S2 Systems, Inc. (S2) subsidiary offset by a 4% increase in hardware product
revenue, resulting from stronger sales of the Company's Continuum family of
fault-tolerant computer systems. For the first six months of 1996 compared
to 1995, hardware product revenue increased 10% with strong sales to NEC, as
well as in Korea and Mexico, somewhat offset by weakness in the U.S. and
Europe. The increase was further offset by a 52% decline in software license
revenue from S2.
Domestic direct product revenues decreased 20% for the second quarter
and 15% for the first six months of 1996 from the same prior year periods
due mainly to weak sales into the retail and banking/brokerage industries.
In the second quarter and first six months of 1996, direct product revenue
in Europe declined 22% and 16%, respectively, from the same 1995 periods
primarily the result of lower sales in Holland, Belgium and Germany.
Asia/Pacific sales during the second quarter and first six months of 1996
remained flat and increased 9%, respectively, compared with the same periods
of 1995. Higher revenues in Australia and Hong Kong were offset by lower
sales in Japan. In summary, total international direct product revenues
decreased 9% for the second quarter and increased 5% for the first six
months of 1996 from the same prior periods.
Product revenue from indirect channels increased 39% in both the 1996
second quarter and the first six months compared to the same prior year
periods. Sales to NEC increased 75% and 94% for the second quarter and first
six months of 1996, respectively, compared to the same 1995 periods. Sales
to NEC represented 22% and 21% of total product revenue in the second
quarter and first six months of 1996, respectively, compared to 12% and 11%
of total product revenue in the same periods of 1995. Product revenue from
international distributors increased 7% and decreased 6% in the second
quarter and first six months of 1996, respectively, compared to the same
1995 periods as strong sales in Korea were offset by weakness in Europe.
Total service revenue increased 3% for the second quarter and 6% for
the first six months of 1996 from the same prior year periods. Professional
services revenue increased 21% and 33% from the second quarter and first six
months of 1995, respectively, primarily driven by several large system
integration contracts. For the second quarter and first six months of 1996,
maintenance and education revenues were level with the same 1995 periods.
Cost of Sales
The gross margin on product revenue of 47% for the second quarter and
first six months of 1996 declined three and five percentage points,
respectively, from the gross margin on product revenue achieved in the
corresponding 1995 periods. This was the result of increased competitive
pressure, an aggressively priced Continuum product line that delivers
substantial price/performance improvement, migration to the low end of the
Company's product line and a significant drop 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 37% for the second quarter and
39% for the first six months of 1996. This compares to a 45% service margin
realized in the second quarter and first six 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. The Company continues to see a shift in service revenues towards
increased professional services sales, which yield a lower margin than
traditional maintenance contract revenues. In addition, extended service
warranties provided with the Continuum product offerings slowed revenue
growth and added pressure on the service gross margin.
Other Operating Expenses
Total operating expenses for the second quarter and first six months of
1996, excluding the restructuring charge, decreased 16% 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 37% for both the second
quarter and first six months of 1996 from 44% and 45% for the second quarter
and first six months of 1995, respectively.
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 $4.6
million and included charges for workforce reductions and asset
dispositions related to the discontinuation of certain product programs.
Research and development expense in the second quarter and first six
months of 1996 decreased 2% from the same periods in 1995. As a percentage
of total revenues, research and development expense was unchanged at 14%,
for the second quarter of 1996 compared to the 1995 second quarter. For the
first six 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, the Company will continue its long-
standing commitment to provide leading edge hardware and software products
to the on-line computing marketplace particularly in support of critical
applications. Research and development efforts directed towards the
Company's Continuum and RADIO (tm) product lines will be ongoing through the
remainder of 1996. The Company will continue to enhance its Continuum
product line, leveraged by the successful incorporation of Hewlett-Packard's
industry leading PA-RISC microprocessor technology, and expanding its lower
price point products. RADIO combines fault tolerant software from the
Company's Isis Distributed Systems division with industry-standard hardware,
operating system, and networking components. 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.
For the second quarter and first six months of 1996, selling, general
and administrative expenses decreased 22% and 20%, respectively, from the
same 1995 periods primarily due to the 1995 restructuring activities. Total
selling, general and administrative expenses were 23% of net revenues for
both the 1996 second quarter and the first six months as compared to 30% of
net revenues for the corresponding 1995 periods. The Company's strategy in
1996 is to continue to focus the sales organization on strategic markets
within vertical industries, expand indirect sales channels and improve
selling efficiencies. In addition, the Company will continue to focus on
effective cost management.
Other Income
Other income for the second quarter was unchanged compared to the
second quarter of 1995. For the first six months of 1996, other income
decreased $913, compared to the same 1995 period. Interest income decreased
due to an $84 million 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 22% in 1996's second quarter and first six
months 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 June 30, 1996, the Company had cash, cash equivalents and marketable
securities of $145,860, a decrease of $9,237 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 second half of 1996, reductions of accounts payable and accrued
liabilities, and the acquisition of property, plant, and equipment and other
long-term assets.
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 June 30, 1996, the Company had $3,978 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 $911 at June
30, 1996.
The ratio of current assets to current liabilities for the Company as
of June 30, 1996 was 4.2 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 for the foreseeable future.
The Company plans to invest approximately $60 million in capital
improvements and software technologies in 1996.
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 $24.5 million 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, $13.0 million was related to the workforce reduction and $11.5
million was related to the consolidation of facilities and operations.
Approximately $3.0 million related to the restructuring was paid and charged
against the reserve in the second quarter of 1996, completing this
restructuring action.
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 vertical
industries that require continuous availability. The Company's targeted
markets include telecommunications, banking, brokerage, retail, travel and
transportation, healthcare and gaming.
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, winning new accounts in a fast and changing marketplace
and market acceptance of the new distributed computing products.
UNIX is a registered trademark of UNIX System Laboratories, Inc.
Stratus and Continuum are registered trademarks, and RADIO, Isis and Isis
Distributed Systems are trademarks 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 23, 1996, the Annual Meeting of Stockholders was held
and, in addition to the ratification of the selection of Ernst & Young LLP
as independent auditors (20,309,838 shares in favor; 26,698 shares against;
14,218 shares abstained), Messrs. Alexander V. d'Arbeloff, Gary E. Haroian
and Robert M. Morill were elected as Directors of the Company to serve for
a three year term (each receiving 20,139,238 votes).
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter
ended June 30, 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 August 12, 1996 ROBERT E. DONAHUE
- --------------------- ----------------------------
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer,
hereunto duly authorized
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