SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For The Year Ended December 31, 1995 Commission File No. 0-12064
STRATUS COMPUTER, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2697554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 FAIRBANKS BOULEVARD, MARLBOROUGH, MA 01752
(Address of principal executive offices) (Zip Code)
(508) 460-2000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of The Act:
Title of each class Name of each exchange on which registered
Common Stock , $.01 par NYSE, Boston Stock Exchange,
value per share Midwest Stock Exchange, Pacific Stock
Exchange
Common Stock Purchase Rights NYSE, Boston Stock Exchange,
Midwest Stock Exchange, Pacific Stock
Exchange
Securities Registered Pursuant to Section 12(g) of The Act:
NONE
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
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $692,502,288 based
on the last reported sale price of the Common Stock on the NYSE,
Boston Stock Exchange, Midwest Stock Exchange, and the Pacific Stock
Exchange on March 11, 1996.
Number of shares outstanding of each class of Common Stock as of
March 11, 1996: 25,767,527 shares of Common Stock (par $.01).
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
Portions of Annual Report to
Stockholders for the Year Ended
December 31, 1995. Parts I, II and IV
Portions of Proxy Statement for
Annual Meeting of Stockholders
on April 23, 1996. Part III
PART I
Item 1. Business
Founded in 1980, Stratus Computer, Inc. ("Stratus" or "the Company")
offers to its customers a broad range of continuous availability computer
hardware, software and service solutions where computer availability is a
critical need. Continuous availability, as compared to the term "high
availability," refers to Stratus (r) systems' ability to substantially
reduce the two main sources of downtime: 1) downtime due to unexpected system
failures, such as hardware or operating system crashes, and 2) downtime
associated with shutting down a system for planned maintenance and upgrade
procedures. Stratus systems are used primarily for on-line transaction
processing (OLTP), communications control, distributed computing and other
interactive applications in which system availability, rapid high-volume
processing and data integrity are critical. Examples of such applications
include securities quotation and trading, stock exchange control,
telecommunications network management, intelligent network services,
intelligent network middleware, electronic funds transfer, automated teller
machine networks, customer relationship marketing, credit authorization,
reservation systems, health insurance adjudication, and lottery and gaming
systems.
Stratus is organized around three major product areas: a core business of
continuously available hardware-based fault-tolerant computer systems;
hardware and software products and services that deliver continuous
availability in a distributed computing environment; and application software
and professional services for targeted vertical markets.
PRODUCTS
Core Business
Stratus Continuous Processing Systems are used as highly reliable and
expandable computer "platforms" on which businesses run critical online
business operations. Key Stratus product features which apply to this type of
computing and provide a high level of application availability include:
1) a hardware-based fault-tolerant design, which provides uninterrupted
operations in the even of hardware component failures; 2) online system
administration; 3) remote online service; 4) modular expansion: 5) high-volume
transaction processing; 6) systems compatability; 7) support of industry
standards; and 8) a productive development environment. Stratus systems link
with other systems such as terminals, workstations, shop floor devices and
retail terminals for user input and transaction colletion, and with large
systems such as mainframes and other superminicomputers for database, planning
and other business applications.
Stratus systems achieve fault tolerance through a proprietary hardware
architecture which uses comparative circuitry, duplication of off-the-shelf
microprocessors and the proprietary Stratus Virtual Operating System (VOS) or
Stratus FTX,(r) the Company's UNIX (r) System V.4-compliant operating system.
Stratus' hardware-based fault-tolerant design requires no programming, a
competitive advantage over most other fault-tolerant implementations. Stratus'
multiprocessor architecture and operating systems are specifically designed to
provide the functions and performance required by online transaction
processing and other complex communications-based applications that older
technologies such as batch processing, timesharing or general minicomputers
can not provide. For example, both VOS and FTX distribute the processing
workload across multiple microprocessors, allowing the system to handle heavy
transaction loads efficiently, and permitting multiple users to access and
update data simultaneously. To increase capacity, Stratus users simply add
additional processors without rewriting software, a feature which permits
economical online expansion.
From the user's perspective, a Stratus system consists of one or more
processing modules in any combination. A module can be regarded as the
composite of a cabinet which contains processors, memory, communications
subsystems and data storage devices. Any VOS-based processing module from any
Stratus product line can be linked to form a multimodule computer system. Up
to 32 VOS-based modules -- containing as many as 192 processors or CPUs -- can
be connected locally using StrataLINK,(r) a high-speed intermodule
communications bus. Using StrataNET,(r) a wide area network, thousands of
modules can be networked through standard telecommunications facilities to
appear as a single system running thousands of transactions per second.
Modules can also be connected to a wide variety of other processors and
devices using industry-standard and specialized communications protocols.
New products announced in 1995 were the most significant in the Company's
history. In February 1995, the Continuum (r) family of hardware
fault-tolerant computer systems was announced. Using Hewlett-Packard PA-RISC
(r) microprocessors, Continuum systems provide up to four times the
price/performance of the previous core product line, the XA/R Series of
fault-tolerant systems, and represent the largest increase in
price/performance in the Company's history.
The Continuum family offers high performance, guaranteed availability,
and robust open systems. Design innovations include incorporating up to
512MB memory on each CPU board, offloading the bus of memory traffic,
dedicated I/O processors and symmetric multiprocessing.
The Continuum Series offers two ranges of systems. Continuum Models 610S,
610, 620, and 625 are midrange, high-performance systems that provide open,
continuously available computing in distributed and departmental environments.
Continuum Models 1210, 1215, 1220, 1225, and 1245 are the family's high-end
systems for the expandability and growth path customers need for large online
transaction processing applications.
The Continuum architecture allows users to expand system capabilities
incrementally as needs increase. All Continuum models within each Series
utilize the same system logic cabinet and are upgradable simply by swapping
or adding processor boards.
Designs of the memory, disk, and I/O subsystems also simplify incremental
growth. The Continuum Series supports up to three I/O communications
processors, four logical RISC processors, 1GB of duplex memory, 178GB of
duplex disk, and 84 I/O adapters which allow up to 1344 direct connect
communications lines.
As with all Stratus systems, the Continuum Series is binary compatible
among all models and is source code compatible with all prior Stratus models,
including the previous XA/R Series based on i860 microprocessors from Intel
and the XA2000 Series based on the 680X0 microprocessors from Motorola. Full
source code compatibility protects existing software investments by allowing
earlier applications to easily run on Continuum with only a recompile.
The Continuum Series can be ordered with either VOS, the company's
original proprietary operating system, or with FTX which incorporates all of
the fault tolerance of VOS in Stratus' native implementation of the UNIX
System V, Release 4 operating system.
The VOS operating system provides a sophisticated environment tuned to
meet the needs of OLTP applications in critical online computing environments.
VOS also supports a large portfolio of industry-specific applications that
provide solutions to customers with critical computing needs.
The FTX operating system provides an industry standard computing
environment that complies with SVID (System V Interface Definition) Issue 3,
POSIX 1003.1, and X/Open's XPG3 standard. FTX facilitates customers'
implementations of heterogeneous networks based on open systems, and provides
for the portability of applications from other UNIX systems.
The Continuum Series also offers existing Stratus customers a migration
path forward. Both FTX and VOS on the Continuum Series provide application
source code compatibility across system architectures. This benefits
customers two ways: by preserving their investments in application software
and ensuring a continued growth path for the future. The FTX and VOS
operating system environments, available on all Continuum models, give
customers access to a wealth of end-user applications and layered software
products including database solutions communications, programming languages,
development tools, interfaces and transaction monitors for the VOS and FTX
operating envirnments.
The Continuum Series' robust architecture enables the Company to offer
the strongest availability guarantee in the industry. In the guarantee, the
Company agrees to refund a month's maintenance fees to a customer if that
customer experiences even one second of unplanned system downtime. Stratus
offers the availability guarantee in addition to the standard Stratus
Continuum one-year hardware and 90 day software warranty.
Stratus systems can identify and isolate many of their own failures, and
automatically dial in to a Stratus Customer Assistance Center (CAC) to report
system interruptions and order replacement parts. Duplicate hardware
components keep the system running the same as before the failure. Users can
readily replace these components. CAC personnel can diagnose and fix most
software problems remotely.
Stratus also has a broad range of products and solutions targeted at the
growing markets for open systems. Stratus FTX systems support most networking
software products to provide continuously available services to desktop
clients and other servers, including TCP/IP and IBM SNA; relational databases,
such as Oracle, Sybase and Informix and their client-server toolkits; and
software for building distributed transaction processing applications, such
as Tuxedo.
Stratus' previous XA/R system family comprises twelve fully software
compatible systems from entry-level models through powerful mainframe-class
platforms. The XA/R systems are equipped with RISC microprocessors and
deliver more efficient performance than Stratus' previous generation's CISC
(complex instruction set computing) microprocessor. The entire XA/R family,
consisting of the entry-level Models 5-S, 10-S and 15-S, midrange Models 25-S,
35-S, 45-S and 55-S, and high-end Models 300, 305, 310, 320 and 330, combines
RISC technology with advanced cache memory design. In addition, the Models
15-S, 45-S, 55-S, 310, 320 and 330 offer symmetric multiprocessing for higher
performance. This feature provides for a tightly coupled architecture in
which multiple processor resources are available to any system or application
task; system performance is thus improved. All system memory is available to
all system processors, providing further system overhead savings.
The XA/R Models 5-S, 10-S and 15-S are entry-level systems positioned as
critical servers for small to medium-sized applications and distributed
computing sites. The midrange XA/R Models 25-S, 35-S, 45-S and 55-S are
appropriate as critical servers where more expandability and growth are
required. The XA/R Series 300 provides the performance, growth path and
expandability demanded by large OLTP applications. CPU, memory,
communications and disks can be increased online while an application is
running, providing dynamic application growth. Specifically, the Models 305,
310 and 320 are upgraded by swapping or adding additional processor boards.
From one to eight I/O subsystems may be configured on the XA/R Series 300 to
provide a range of communications growth and flexibility. The Series 300
supports a maximum of six RISC processors, 512MB of duplex memory, 230GB of
duplex disk capacity and 112 I/O adapters that allow up to 1,744 direct
communications lines.
Distributed Computing
In October 1995, the Company announced a new cluster-based PC superserver
product named RADIO(tm), designed to bring Stratus' level of availability to
the rapidly growing market for distributed computing. Using the Pentium (r)
chip from Intel and running, Microsoft's Windows NT (r) operating system,
RADIO combines off-the-shelf technology with software from the Company's ISIS
Distributed Systems division (Isis) to provide the highest level of
reliability for distributed computing.
Software products from the Isis division provide the basis for creating
distributed applications with reliability, safeguards against failures in
clients and servers, system software, networks and application software, and
with scalability, the means to add servers across a network to boost
application performance and meet growing processing requirements. Isis
products include: the Isis Reliable Software Developer's Kit for Windows (r)
and Windows NT; Orbix+Isis, a joint development effort between Isis and IONA
Technologies of Dublin, Ireland; and Isis for database. These products
operate on both Stratus and non-Stratus platforms. Isis has customers
worldwide in the finacial service, telecommunications, manufacturing and
scientific computing fields.
RADIO delivers a packaged, expandable PC server cluster with Compute,
Storage and high-speed Network Nodes configured with Isis' high availability
sofware providing automatic recovery and fail-over for uninterrupted
performance. In the event of component failures, application requests can be
automatically re-routed to available RADIO Compute nodes permitting
uninterrupted processing with transparent failover. Software from Isis is
incorporated in the RADIO product to provide customers with a choice of
availability levels: basic replicated disk storage and cluster management,
high availability or continuously availability.
All RADIO systems provide data protection as a standard availability
enhancement. Customers can also select a high availability mode of operation,
which provides fast restart and recovery in the event of failure of a process.
For the most critical applications, customers can incorporate Isis technology
in the application itself to achieve Active Replication, in which the
application runs in two or more locations in the network simultaneously.
Active Replication guarantees continuous availability despite the failure of
any one process or component.
RADIO provides an integrated hardware and software platform that
addresses scalability and upgradability. Adding or upgrading computing
performance or storage is achieved simply by sliding new nodes into the RADIO
cabinet while RADIO continues to operate. In addition, individual RADIOs can
be joined to form larger RADIO systems to meet the demanding performance
requirements.
All RADIO nodes are self diagnosing, hot pluggable and replaceable by
the user. They are monitored by dedicated maintenance facilities that
automatically call a Stratus Customer Assistance Center in the event of a
failure. Disk partitions can be replicated and automatically resynchronized
should a failure occur. The entire system can be uniformly managed with
powerful administrative and management capabilities that can be used locally
or remotely.
To implement high availability solutions, users simply add the Isis
Availability Manager (IAM). This layered software product enables users to
define, monitor and detect failures for recovery action, e.g., existing or
off-the-shelf applications can be automatically restarted on any node, or disk
partitions can be reallocated from failed storage units. IAM itself is
replicated to remove any possibility of loss of such a key capability.
To implement continuously available solutions, users can choose from a
variety of other layered Isis software products depending on their needs. For
example, Isis for Database(IDB) facilitates actively replicating industry
standard databases and provides load balancing for queries and automatic
recovery from failures. For new applications, the Orbix+Isis object-oriented
development environment provides a replicated CORBA compliant object request
broker allowing applications to be developed that are themselves replicated
on multiple RADIO nodes.
Application Software
Application software and professional services solutions, designed
specifically for the Stratus online platforms, are provided through the
company's wholly owned subsidiaries, S2 Systems, Inc. (S2) and the TCAM Group
of companies (TCAM), as well as through select third parties such as software
houses, systems integrators and value-added resellers.
S2 is a leading provider of business applications, advanced data
communications, middleware, and consulting and support services for businesses
in the financial services, banking, and brokerage, retail, healthcare,
insurance, and travel and transportation industries. Products include
ON/2 (tm) for banking solutions, the Customer Relationship Marketing suite for
retail solutions and HealthLine for medical claims processing. S2 also
specializes in high-performance communications and connectivity solutions with
its Network Express product, providing businesses from virtually any industry
a flexible gateway for their legacy systems -- central systems housing vital
business data -- to connect with a wide array of remote systems and terminals.
TCAM is a leading provider of application software and services to the
worldwide securities industry. TCAM offers a broad range of application
solutions, including its NuColt product for securities trading solutions, in
PC, client/server, distributed and continuous availability computing
environments using both open and proprietary operating systems on a broad
range of hardware platforms.
Stratus, the Stratus logo, Continuum, FTX, StrataLINK, and StrataNET are
registered trademarks, and XA/R and RADIO are trademarks of Stratus Computer,
Inc. All other trademarks are the property of their respective owners.
MARKETING, SALES AND SERVICE
Markets
Stratus products -- hardware, software and related maintenance and
consulting services -- are used primarily in industries such as
telecommunications, banking and financial services, brokerage, retail,
healthcare, gaming and entertainment, information services, insurance and
government. A headquarters staff of marketing professionals is employed with
responsibility for direction of the field sales force, marketing strategy,
technical support, advertising and public relations, customer and field
training, competitive analysis and product planning.
Sales Channels
Stratus sells its products and services to end users directly through its
sales organization in the United States, Mexico, Canada, Western Europe, the
Far East, Japan, Australia and New Zealand, and indirectly through or in
conjunction with its system integrators, VARs, application software houses and
distributors. The Company's distributors are located in Central and South
America, Central and Eastern Europe, the Middle East, Africa and the Far East.
The Company also sells through certain general purpose OEMs such as Olivetti
Systems & Networks S.R.L. (Olivetti) and NEC Corporation.
For information on sales by geographic segment, see Note 13 in Notes to
Consolidated Financial Statements included as part of the 1995 Annual Report
to Stockholders, which Note is incorporated herein by reference.
Olivetti has rights to distribute selected Stratus products on a
non-exclusive basis in Italy and the rest of the world. NEC has non-exclusive
rights to sell Stratus' UNIX-based, fault-tolerant systems worldwide.
Targeting the telecommunications market, NEC uses Stratus systems in a variety
of applications, including integration with various NEC telecommunications
solutions.
Competition
The Company faces intense competition from a growing number of firms who
offer a wide spectrum of business-class servers and employ a variety of
techniques aimed at maintaining system and data availability. Most of these
companies offer their solutions to the same markets targeted by Stratus.
While the Company's primary competitors are Tandem Computers, Inc.,
Hewlett-Packard Company, IBM, Sun Microsystems, Inc., and Digital
Equipment Corporation, the Company expects to encounter additional competition
in the future from vendors who integrate hardware and software products from
such providers as Intel Corp. and Microsoft. Companies that fall into this
category include Compaq Computer Corp. and Sequent Computer Systems, Inc.
While its primary competitors are substantially larger and have significantly
more resources, the Company believes that its singular focus on critical
on-line business applications, its expertise in continuous availability,
transaction processing, distributed computing, automated service and
specialized application solutions provide unique advantages compared with
those of its competitors. The Company also believes it competes successfully
on the basis of product capabilities, price and life cycle costs, ease of
programming and its third party marketing programs.
BACKLOG
Part of the Company's manufacturing and distribution strategy is to
minimize the elapsed time between receipt of customer purchase orders and
delivery of equipment. The final completion of the Company's manufactured
products is usually accomplished with standard parts and without the need for
additional engineering, generally permitting shipment of products within 30
to 60 days from receipt of order. Throughout the Company's history a very
substantial portion of quarterly shipments tend to be made in the last month
of each quarter, and any backlog is generally filled within weeks of the
beginning of the next quarter. For these reasons, the amount of backlog is
not important to an understanding of the Company's business.
RAW MATERIALS AND SUBCONTRACT LABOR
Stratus purchases substantially all of its parts and peripheral devices
from other manufacturers. The majority of printed circuit boards are now
purchased from board subcontractors in the United States and Europe who
manufacture in accordance with production standards and quality controls
established by Stratus. Presently, the Company believes it has adequate
supplies and commitments from vendors to satisfy 1996 forecasted requirements;
no delays in product shipments are expected. Most peripheral devices,
assemblies and parts are available from a number of different suppliers, but
certain integrated circuits, printed circuit boards, plastic parts, and disk
and tape drives are purchased from single sources of supply. During 1995, the
industry experienced occasional shortages in the availability of memory
devices due to a further tightening of the supply of these materials.
Although this increased the Company's costs for these devices it did not
impair its ability to meet the demands of production. The Company has not
experienced any significant difficulties in obtaining supplies of integrated
circuits, peripherals, assemblies or parts, but shortages, if any, could
result in production delays that may adversely affect its business.
PRODUCT DEVELOPMENT
Hardware and software development expenditures are expected to remain in
line with the general trend of product gross margin dollars over the next
several years. The Company's total research and development expenditures,
which include certain capitalized software development costs, were $96,200,000
in 1993 and $95,322,000 in 1994 and $94,227,000 in 1995. The major
development efforts are the next generation hardware fault-tolerant
architecture using Hewlett Packard's PA-RISC microprocessor and the RADIO PC
cluster for distributed computing envirnments using Intel's Pentium
microprocessor.
The Company owns patents and has patent applications pending in the
United States and abroad relating to certain of its products. While the
Company believes that the pending applications relate to patentable devices
or concepts, there can be no assurance that any patents will be issued or
that any patents issued can be successfully defended. The Company believes
that patents are less significant in its industry than such factors as
innovative and creative skills, technical experience and the management
ability of its personnel.
EMPLOYEES
As of December 31, 1995, the Company employed 2,441 persons.
Item 2. Properties
The Company currently occupies three buildings on a 112 acre site at its
corporate headquarters location in Marlborough, Massachusetts. Two of the
three buildings and the underlying land (approximately 27 acres) plus a 62
acre adjoining parcel are owned, while the third building is leased under an
operating lease. The aggregate amount of office, engineering, manufacturing
and customer service space that is owned is approximately 300,749 square feet.
A manufacturing facility, also located in Marlborough, Massachusetts, and
first occupied in 1993 was vacated in February 1996, and all rights and
obligations under the sublease were transferred to a third party.
Information relating to the above facilities is set forth in the
following table.
Owned/
Floor Leased
Space (Expiration
Plant Location Use (Sq. Ft.) Date) Renewals
- -------------- --------------- --------- ------------ ---------
Marlborough, Office, research and 202,087 Lease - 2000 2 successive
MA development periods of
10 years each.
Marlborough, Office, engineering 198,341 Own
MA and customer service
Marlborough, Office, manufacturing 102,408 Own
MA and engineering
Dublin, Office and
Ireland manufacturing 110,000 Own
The Company's fiscal year 1995 annual rent for the leased facilities was
approximately $2,983,000 plus real estate taxes and other occupancy expenses.
The Company also leases additional space at 33 locations in the United
States, 1 location in Canada, 11 locations in Europe, 7 locations in the Far
East, 1 location in Japan, 2 locations in Australia , 1 location in New
Zealand, 1 location in Mexico for sales, customer service and education and
also leases warehouse space at 2 locations in the United States and 1 location
in Italy at an aggregate annual rent of approximately $12,246,000 for fiscal
year 1995.
Item 3. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management believes that the outcome of
those matters will not have a material adverse effect on the Company's
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The approximate number of holders of record of the Company's common stock
at March 11, 1996 was 1,435. Additional information required by this item is
incorporated herein by reference to the "Common Stock Information" appearing
on page 30 of the 1995 Annual Report to Stockholders.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference
to the "Financial History" appearing on pages 10-11 of the 1995 Annual Report
to Stockholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is incorporated herein by reference
to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing on pages 12-15 of the 1995 Annual Report to
Stockholders.
Item 8. Financial Statements and Supplementary Data
The financial statements listed in the "Index to Consolidated Financial
Statements" filed as part of the Annual Report, together with the report of
Ernst & Young LLP dated January 20, 1996, are incorporated herein by
reference to the "Financial Statements and Supplementary Data" contained in
pages 16-31 of the 1995 Annual Report to Stockholders.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
A. Directors of the Company:
The information required by this item is incorporated herein by reference
to the "Election of Directors" appearing on pages 2 -3 of the Proxy Statement
for Annual Meeting of Stockholders on April 23, 1996.
B. The executive officers of the Company are as follows:
Name Age Position
William E. Foster 51 Chairman
Gary E. Haroian 44 President and Chief Executive Officer
Robert E. Donahue 47 Vice President, Finance and
Administration, Chief Financial Officer
and Treasurer
Stephen C. Kiely 50 Vice President, Continuum Products
J. Donald Oldham 54 Vice President, Worldwide Sales
David M. Weishaar 44 Vice President, Worldwide Operations
and Chief Quality Officer
John F. Young 53 Vice President, Human Resources
Eileen Casal 37 Vice President, General Counsel
David P. Gamache 38 Vice President, Corporate Controller
Mr. Foster, a founder of the Company, was, from February 1980, to January
1996, Chairman and Chief Executive Officer of the Company. From 1980 until
November 1993, Mr. Foster also served as President of the Company. Since
January 1996, he has been Chairman of the Company.
Mr. Haroian joined the Company in 1983 as Corporate Controller and was
elected Vice President, Finance and Administration and Treasurer in May 1985.
In April 1988, he was elected Senior Vice President, Finance and
Administration, Chief Financial Officer and Treasurer. He served as Vice
President and General Manager, Corporate Operations from October 1990 to
December 1991. Mr. Haroian served as Senior Vice President and General
Manager, Corporate Operations during 1992. From January 1993 to November
1993, he served as Executive Vice President and General Manager, Corporate
Operations. Mr. Haroian has served as President and Chief Operating Officer
since his election in November 1993. Since January 1996, he has been President
and Chief Executive Officer of the Company.
Mr. Donahue joined the Company in June 1986 as Corporate Controller. In
June 1988, he was elected Vice President of Finance. Mr. Donahue has served
as Vice President, Finance and Chief Financial Officer since his election in
October 1990.
Mr. Kiely was, prior to joining the Company in 1994, Vice President for
EON Corporation and prior to that from 1990 through June 1993 Vice President
for Bull HN Information Systems, Inc. He joined the Company and was elected
Vice President, Engineering in September 1994.
Mr. Oldham joined the Company in March 1984 as Regional Director for the
Company's Eastern Sales Region. In December 1990 he was appointed Vice
President, Telecommunications Sales. In May 1994 he was elected Vice
President, Telecommunications. In October 1994 he was elected Vice President
Worldwide Sales.
Mr. Weishaar joined the Company in August 1993 and was elected Vice
President, Worldwide Operations. Prior to that time, he was Vice President
of European Operations and prior to that Vice President, East Coast
Operations for Sun Micro Systems.
Mr. Young joined the Company in 1985 as Director, Human Resources. He
was elected Vice President, Human Resources in October 1990.
Ms. Casal joined the Company in September of 1986 as Corporate Staff
Attorney. From October 1990 to October 1995, she served as Division Counsel
for the Company's International Division. In October 1995 she served as
Associate General Counsel and in February 1996 she was elected Vice President,
General Counsel.
Mr. Gamache joined the Company in June of 1983. Since that time he has
served in several corporate and operational finance positions including
General Accounting Manager, International Sales Controller, Director, Finance
and Administration - International Division and Director, Finance and
Administration - Worldwide Sales. In October of 1995 he was elected Vice
President, Corporate Controller.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to the "Executive Compensation" appearing on pages 5 - 8 of the Proxy
Statement for Annual Meeting of Stockholders on April 23, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the tables on pages 1 and 5 of the Proxy Statement for Annual Meeting of
Stockholders on April 23, 1996.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The financial statements are listed in the Index to
Consolidated Financial Statements filed as part of this Annual
Report.
2. Schedule:
The schedule listed in the accompanying Index to Consolidated
Financial Statements is filed as part of this Annual Report.
3. Exhibits:
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this Annual Report.
(b) Reports on Form 8-K
None.
<TABLE>
FINANCIAL HISTORY
In thousands except per share and employee amounts, unaudited
1995(1) 1994(2) 1993(2) 1992 1991 1990 1989 1988 1987 1986
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Summary of operations
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Revenues $587,922 $576,556 $513,680 $486,266 $448,632 $403,850 $341,327 $265,314 $184,150 $124,559
- ---------------------------------------------------------------------------------------------------------------------------------
Product revenue percent 65% 72% 77% 79% 82% 84% 85% 88% 89% 90%
Service revenue percent 35% 28% 23% 21% 18% 16% 15% 12% 11% 10%
Gross profit margin 284,732 321,961 292,811 289,070 267,312 237,995 207,613 160,787 117,281 81,844
Gross profit margin
percent to sales 48.4% 55.8% 57.0% 59.4% 59.6% 58.9% 60.8% 60.6% 63.7% 65.7%
Operating expenses 272,664(1) 252,283(2) 267,395(2) 220,649 205,241 186,913 153,920 115,671 86,494 59,658
Operating expenses
percent to sales 46% 44% 52% 45% 46% 46% 45% 44% 47% 48%
Operating income 12,068 69,678 25,416 68,421 62,071 51,082 53,693 45,116 30,787 22,186
Operating income
percent to sales 2% 12% 5% 14% 14% 13% 16% 17% 17% 18%
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $17,338 $60,982 $16,607 $56,945 $49,705 $36,987 $35,393 $29,344 $19,395 $13,519
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flow data
Net cash provided by
operating activities $48,090 $140,621 $121,919 $97,445 $81,127 $36,102 $21,622 $12,696 $15,197 $1,780
Acquisition of property,
plant and equipment 54,734 53,858 33,668 60,759 31,478 27,395 36,963 17,807 9,801 10,781
Depreciation of property,
plant and equipment 42,864 40,395 35,111 31,778 28,910 19,893 16,889 10,547 8,056 5,463
Share Data
Average shares and equivalents
outstanding 23,757 24,649 23,769 23,457 22,419 20,894 20,712 20,257 19,974 19,391
Net income per share $0.73 $2.47 $0.70 $2.43 $2.22 $1.77 $1.71 $1.45 $0.97 $0.70
Common stock price
High $39.62 $38.50 $41.25 $54.25 $50.62 $29.00 $35.25 $31.50 $40.50 $26.00
Low $23.37 $23.25 $20.25 $29.50 $20.75 $14.62 $19.25 $19.50 $15.25 $17.25
Book value per share $20.49 $20.31 $18.13 $17.03 $14.18 $11.15 $9.12 $7.08 $5.34 $4.05
Year end position
Total assets $607,809 $613,410 $558,531 $467,182 $397,081 $327,574 $274,098 $199,787 $145,429 $107,162
Working capital 292,993 324,431 299,293 277,600 237,977 170,306 136,257 101,273 77,389 57,279
Long-term debt and obligations
under capital leases 5,330 7,849 10,879 523 2,552 14,267 29,402 10,170 6,157 5,685
Stockholders equity 478,391 490,152 435,960 389,663 314,026 230,281 183,972 138,985 102,360 75,698
Return on average
stockholders equity 4% 13% 4% 16% 18% 18% 22% 24% 22% 20%
Employees 2,441 2,878 2,610 2,622 2,492 2,381 2,147 1,711 1,224 1,069
- ---------------------------------------------------------------------------------------------------------------------------------
<FN1> Operating expenses in 1995 included a charge of $24,500 to cover the cost of reducing the Company's cost structure.
<FN2> Operating expenses in 1994 and 1993 included charges of $7,800 and $36,230, respectively, to write off purchased research and
development acquired in connection with the Company's acquisitions.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table summarizes the percentage relationships of income and
expense items included in the Consolidated Statements of Income for the three
years ended December 31, 1995 and the percentage changes in those items when
compared to the preceding year.
Percentage of Percentage increase
total revenues (decrease)
1995 1994 1993 1995 1994 1993
- -----------------------------------------------------------------
Product sales 65% 72% 77% (8%) 6% 2%
Service revenue 35% 28% 23% 27% 34% 20%
- -----------------------------------------------------------------
Total revenues 100% 100% 100% 2% 12% 6%
- -----------------------------------------------------------------
Product cost of sales 32% 29% 30% 11% 9% 13%
Service expense 20% 15% 13% 36% 30% 10%
Research & development
expense 14% 15% 16% (1%) 5% 2%
Selling, general
& administrative expenses 28% 28% 29% 3% 6% 6%
Restructuring charge 4% - - N/A - -
Charge for purchased
research & development - 1% 7% N/A (78%) N/A
Total costs and expenses 98% 88% 95% 14% 4% 17%
- -----------------------------------------------------------------
Operating income 2% 12% 5% (83%) 174% (63%)
Other income, including
interest income
and interest expense 2% 1% 1% 29% 42% 43%
- -----------------------------------------------------------------
Income before provision
for income taxes 4% 13% 6% (72%) 152% (57%)
Provision for income taxes 1% 2% 3% (73%) 15% (7%)
- -----------------------------------------------------------------
Net income 3% 11% 3% (72%) 267% (71%)
- -----------------------------------------------------------------
OVERVIEW
Stratus' business objective is to be the leading supplier of comprehensive
hardware, software and service solutions where computer availability is a
critical need. New products announced in 1995 were the most significant in
the Company's history. In February 1995, the Continuum family of hardware
fault-tolerant computer systems was announced. Using Hewlett-Packard PA-RISC
microprocessors, Continuum provides three to four times the
price/performance of the previous core product line, and represents the
largest increase in price/performance in the Company's history. By the fourth
quarter of 1995, Continuum volume had grown to half the Company's hardware
system revenue.
In October, the Company announced a totally new hardware architecture named
RADIO, designed to bring Stratus level of availability to the rapidly growing
market for distributed computing. Using the Pentium chip from Intel and
running standard operating systems, Windows NT and Unixware, RADIO combines
off-the-shelf technology with the Company's Isis software to provide the
highest level of reliability for distributed computing.
During 1995, the Company continued to strengthen the application software
product offerings at its S2 and TCAM subsidiaries. As part of the Company's
strategy of providing complete solutions to targeted vertical markets, leading
edge application suites provided by these subsidiaries supported much of the
Company's hardware revenues in 1995. Major application products include
ON/2 for banking solutions, the Customer Relationship Marketing Suite for
retail solutions, HealthLine for medical claims processing and NuColt for
securities trading solutions.
The Company's Isis division announced several new software products for the
high-growth distributed computing market in 1995, including the Isis Reliable
Software Developer's Kit for Windows and Window NT; Orbix+Isis, a joint
development between Isis and IONA Technologies and Isis for Database. Isis
products provide reliability solutions for distributed computing environments,
and operate on both Stratus and non-Stratus platforms.
The Company remains focused on computer availability, and intends to leverage
the technology advances of other companies such as Hewlett-Packard and Intel
to reduce costs and time to market for new generations of products. The
Company also plans to extend and strengthen the low end of the product line
to compete in broader markets at lower price points.
OPERATING RESULTS
The Company's 1995 net income of $17.3 million, or $0.73 per share, decreased
$43.6 million, or 72%, from 1994 net income of $61.0 million, or $2.47 per
share. Net income in 1994 had increased $44.4 million, or 267%, from 1993
net income of $16.6 million, or $0.70 per share.
Operating income for 1995 included a $24.5 million, or $0.83 per share,
non-recurring restructuring charge. Included in 1994 and 1993 results were
non-recurring charges of $7.8 million and $36.2 million, or $0.32 and $1.52
per share, respectively, to write off purchased research and development
acquired in connection with the Company's acquisitions. Excluding these
non-recurring charges, 1995 net income would have been $36.9 million or $1.55
per share, 1994 net income would have been $68.8 million, or $2.79 per share
and 1993 net income would have been $52.8 million or $2.22 per share.
REVENUES
Total 1995 revenues increased $11.4 million to $587.9 million, 2% higher than
1994. This compares with an increase of $62.9 million, or 12%, from 1993 to
1994 and an increase of $27.4 million, or 6%, from 1992 to 1993. The
increase in 1995 was primarily due to increased software license and
professional services revenues from the 1993 and 1994 acquisitions, as well
as a 19% increase in the Company's hardware professional services and
maintenance revenues.
The following table details the percentage of product sales for each of the
Company's distribution channels:
PERCENT OF TOTAL
1995 1994 1993
- -----------------------------------------------------------------
Domestic direct 44 46 50
International direct 33 35 31
IBM 0 0 5
Olivetti 4 4 2
NEC 11 6 4
Distributors 8 9 8
- -----------------------------------------------------------------
Total 100 100 100
- -----------------------------------------------------------------
The Company's product sales decreased 8% in 1995 compared with 1994. This
compares to 6% growth in 1994 and 2% growth in 1993. On a quarterly basis in
1995, comparisons of product sales to the same quarter in the prior year were
as follows: quarter one decreased 17%, quarter two decreased 14%, quarter
three decreased 6% and quarter four grew by 5%. In 1995, international direct
product sales declined 12% from 1994, following an increase of 12% in 1994
and a decline of 4% in 1993. International direct sales in 1995 were strong
in Australia, Holland and Belgium with year over year growth of 33%, 36% and
123%, respectively, including the effects of foreign exchange. This growth
was more than offset by declines in the United Kingdom, France and Sweden.
The Company's 1995 direct product sales in the U.S. declined 12% from 1994
following a decline of 2% and growth of 22% in 1994 and 1993, respectively.
The decline in the U.S. in 1995 was due mainly to lower sales to the
telecommunications industry, primarily due to the end of a major customer
rollout in 1994 and lower than anticipated capital spending in other
telecommunication channels. Non-telecommunications product revenues in the
U.S. increased 9% from 1994. Revenue from the Company's indirect channels
grew by 9% in 1995 compared to 1994. Distributor sales decreased 22%, while
revenues from NEC and Olivetti increased 70% and decreased 3%, respectively,
compared to 1994.
The Company's service revenues grew 27% in 1995 compared with 1994. This
compares to growth of 34% in 1994 and 20% in 1993. The growth in 1995
consisted of a significant increase in hardware professional services revenue
primarily related to several large integration contracts, an 8% increase in
hardware maintenance revenues related to an increase in the number of
installed systems and a 73% increase in professional services and maintenance
revenues from the Company's software businesses.
COST OF GOODS SOLD
Product sales generated a gross margin of 51% in 1995 compared with 59% in
1994 and 60% in 1993. The eight point decline in product gross margin in
1995 was primarily the result of increased competitive pressure, an
aggressively priced Continuum product line that delivers substantial
price/performance improvement and a significant migration to the low end of
the Company's product line. Management believes that the downward pressure
on product margins will continue, but at a much slower pace.
Service gross margin was 44%, 47% and 46% of service revenues in 1995, 1994
and 1993, respectively. The decrease from 1994 to 1995 was due to a shift
in the mix of service revenues, with a higher percentage generated from
professional services versus maintenance contracts. In addition, new service
warranties provided with the new Continuum product offerings slowed revenue
growth and added pressure on the service gross margin.
RESEARCH AND DEVELOPMENT
Stratus' investment in research and development of $83.8 million in 1995
decreased slightly from 1994, compared with an increase of $3.8 million, or
5%, in 1994. As a percentage of total revenues, R&D expenses were 14% in
1995, 15% in 1994 and 16% in 1993. These investments reflect the Company's
long-standing commitment to provide leading edge hardware and software
products to the online computing marketplace, particularly in support of
critical applications. The Company leverages base hardware and software
technologies supplied by partners, with development activities primarily
focused on technologies which enhance system availability in a transparent
fashion.
In 1995, the Company's research and development efforts were directed towards
its new Continuum and RADIO product families, as well as to ongoing
investments in industry-targeted application software from its S2 subsidiary.
Continuum is the latest generation of Stratus' traditional hardware-based
fault tolerance architecture, leveraged by the successful incorporation of
Hewlett-Packard's industry leading PA-RISC microprocessor technology. The
first models of the Continuum family were announced early in 1995, and by year
end accounted for approximately half the revenues from new system shipments.
Ongoing development investments will further leverage the PA-RISC strategy, by
producing Continuum models that offer lower price points, increased
performance and improved price/performance across the line.
Stratus announced the first models of its RADIO family late in 1995. Like
Continuum, RADIO combines the Company's expertise in highly available
computing with base technologies provided by best-of-breed partners - in this
case Intel for microprocessors, and Microsoft and Santa Cruz Operation, Inc.
(SCO) for operating systems. RADIO uses distributed computing software
technology developed by StratusO Isis division to achieve system availability,
rather than the hardware fault tolerance approach used in Continuum. The two
approaches are highly complementary; the combination broadens the market
reach of the Company's product offerings significantly.
Management believes that ongoing expenditures in R&D, focused on core
competencies and leveraged by effective partnerships, are vital to future
growth. The Company expects to continue to invest in these technologies in
the normal course of its business cycle, to bring competitive products to
market, and to realize the benefits of purchased research and development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $4.1 million, or 3%,
in 1995 to $164.3 million, compared with an increase of $9.5 million, or 6%,
in 1994. As a percentage of total revenues, SG&A expenses were 28% in both
1995 and 1994, down slightly from 29% in 1993. The 1995 increase was
primarily related to an expansion of the distribution organizations in the
Company's software businesses.
RESTRUCTURING
During the third quarter of 1995, after completing an evaluation of the
Company's economic model and cost structure, management approved a plan to
restructure its operations. As a result, a $24.5 million restructuring
charge was recorded for the reduction of the worldwide workforce by
approximately 575 employees, as well as the consolidation of certain
manufacturing and sales operations. The action was taken to re-size the
expense structure of the Company as a result of a significant decline in
gross margins and place expense levels in line with the new economic model.
Of the total charge, $13.0 million was related to the workforce reduction and
$11.5 million was related to the consolidation of facilities and operations.
OTHER INCOME
Interest income increased in 1995 primarily due to higher interest rates on
securities held by the Company. Interest expense was virtually unchanged
from 1994 and relates primarily to payment terms of the 1993 acquisition of
Isis Distributed Systems, Inc. Through the use of forward foreign exchange
contracts, the Company substantially negates the effects of foreign currency
fluctuations on foreign currency denominated intercompany receivables and
payables. The cost of hedging the Company's currency exposures is included
in other income.
INCOME TAXES
The Company's effective tax rate was 20.0% in 1995, 20.9% in 1994 and 45.8%
in 1993. The 1993 rate was higher than in the two most recent years due to
the non-deductibility of a significant amount of purchased research and
development write-offs related to acquisitions.
The Company has recorded a net deferred tax asset at December 31, 1995.
Although realization is not assured, based on the Company's history of
profitability and expectation of future taxable income, management believes
it is more likely than not that the deferred tax asset will be realized.
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and marketable securities of $155.1 million at the end of
1995. Corresponding balances were $230.0 million and $191.0 million at the
end of 1994 and 1993, respectively. Total assets at year end decreased to
$607.8 million, compared with $613.4 million in 1994. Stockholders' equity
decreased to $478.4 million in 1995 from $490.2 million in 1994.
Cash generated from operating activities was $48.1 million in 1995 compared to
$140.6 million in 1994 and $121.9 million in 1993. The decrease in cash
generated from operating activities in 1995 compared to 1994 is attributable
to lower profits in 1995, coupled with increases in accounts receivable and
inventories required for new product releases as well as a decrease in taxes
payable.
In 1995, the Company used net cash of $13.7 million on the acquisition of
businesses as compared to $20.7 million and $26.8 million in 1994 and 1993,
respectively.
Capital expenditures were $77.9 million in 1995 compared to $67.0 million in
1994 and $51.2 million in 1993. The Company continues to invest in capital
improvements and other long-term assets, principally software technology used
to broaden the functionality of product offerings and aimed at targeted
vertical markets, in amounts sufficient to support future growth and enhance
operations so as to maintain the highest standards of overall quality. In
1996, the Company plans to spend approximately $60 million in capital
improvements and software technologies.
Net proceeds from the Employee Stock Purchase Plan and the Company's stock
option plans were $16.3 million in 1995, $19.9 million in 1994 and $14.4
million in 1993. In April 1994, the Board of Directors authorized the
purchase of up to 1.2 million shares of the Company's common stock in the
open market. Approximately 0.9 million shares were repurchased under this
authorization in 1994 for $31.4 million. In January 1995, the Board of
Directors authorized the purchase of an additional 1.2 million shares of the
Company's common stock on the open market. Repurchases under both
authorizations in 1995 totaled 1.5 million shares at a total cost of $44.6
million.
The Company believes that funds necessary to support its operations in the
foreseeable future will be generated by cash flow from operations,
supplemented by continued stock issuance from the Employee Stock Purchase
Plan and stock option plans. These sources can be augmented by short-term
borrowings and revolving credit arrangements which currently total $50.0
million.
OUTLOOK AND RISKS
Future operating results of the Company will be dependent, in part, upon its
ability to continue to execute its strategy for growth in its two principal
business areas; the core product line of fault-tolerant computer systems and
the new Isis-based RADIO products for distributed computing. 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 to invest in improvements in 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.
The Company historically ships a large percentage of its revenues in the
latter part of each quarter. This makes revenue forecasting unpredictable,
and could subject the Company to fluctuations in both revenues and earnings.
In addition, the overall level of discounting can change significantly and
rapidly. Fluctuations in channel mix and product mix in product sales can
also be significant. All of these factors can have a significant impact on
gross margin as a percentage of revenue and therefore on earnings per share.
Management believes that the introduction of the RADIO PC server for
distributed computing, and the timely future release of lower end products in
the Continuum line, now under development, will position the Company
competitively in the marketplace. Revenue growth, however, will be dependent
upon the continued migration of the customer base to the Continuum family,
successfully winning new accounts in a competitive and fast changing
marketplace and market acceptance of the new distributed computing products.
Management believes that the industry will become increasingly competitive,
creating downward pressure on gross margins, including those of the Company.
The Company's goal is to offset this trend with increased unit volumes, and
by broadening its traditional hardware offerings with comprehensive software
solutions and distributed computing products, concurrent with continued focus
on increasing the efficiency and productivity of all aspects of its business.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1995, January 1, 1995 and January 2, 1994
In thousands, except per share amounts
1995 1994 1993
- -----------------------------------------------------------------
Revenues
Product sales $383,850 $ 416,112 $ 393,804
Service 204,072 160,444 119,876
- -----------------------------------------------------------------
Total revenues 587,922 576,556 513,680
- -----------------------------------------------------------------
Costs and expenses
Product cost of sales 187,935 170,044 155,604
Service expense 115,255 84,551 65,265
Research and development expense 83,824 84,263 80,494
Selling, general and
administrative expenses 164,340 160,220 150,671
Restructuring charge 24,500 - -
Charge for purchased research
and development - 7,800 36,230
- -----------------------------------------------------------------
Total costs and expenses 575,854 506,878 488,264
- -----------------------------------------------------------------
Operating income 12,068 69,678 25,416
Interest income 8,715 7,408 4,613
Interest expense (1,077) (1,057) (567)
Other income 1,966 1,087 1,190
- -----------------------------------------------------------------
Income before provision for
income taxes 21,672 77,116 30,652
Provision for income taxes 4,334 16,134 14,045
- -----------------------------------------------------------------
Net income $17,338 $60,982 $16,607
- -----------------------------------------------------------------
Earnings per share $0.73 $2.47 $0.70
Shares used to compute
earnings per share 23,757 24,649 23,769
- -----------------------------------------------------------------
See accompanying notes
CONSOLIDATED BALANCE SHEETS
At December 31, 1995 and January 1, 1995
In thousands, except share and per share amounts
1995 1994
- -----------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 91,592 $191,934
Marketable securities 63,505 38,076
Accounts receivable, net 165,643 140,212
Inventories 61,271 43,237
Prepaid expenses 10,901 7,587
Other current assets 22,331 16,493
- -----------------------------------------------------
Total current assets 415,243 437,539
- -----------------------------------------------------
Property, plant and equipment,
less accumulated depreciation 116,381 116,802
Other assets, net 76,185 59,069
- -----------------------------------------------------
Total assets $607,809 $613,410
- -----------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 31,842 $ 20,020
Accrued expenses:
Payroll 20,235 18,777
Other 38,129 28,167
- -----------------------------------------------------
Total accrued expenses 58,364 46,944
Income taxes payable 8,617 27,887
Short-term borrowings
and obligations 5,050 5,783
Deferred revenue 18,377 12,474
Total current liabilities 122,250 113,108
- -----------------------------------------------------
Long-term obligations and
deferrals 7,168 10,150
Stockholders' equity
Common stock, $.01 par value,
150,000,000 shares authorized,
25,743,776 and 25,017,414 shares
issued and outstanding in 1995 and
1994, respectively 257 250
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 208,308 191,971
Retained earnings 347,904 330,566
Cumulative translation
adjustment (2,060) (1,233)
- ------------------------------------------------------
Subtotal 554,409 521,554
Less: shares in treasury, at
cost, 2,400,000 and 888,200
shares in 1995 and 1994,
respectively (76,018) (31,402)
- ------------------------------------------------------
Total stockholders' equity 478,391 490,152
Total liabilities and
stockholders' equity $607,809 $613,410
- -----------------------------------------------------
See accompanying notes
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the period January 3, 1993 to December 31, 1995
In thousands, except share amounts
<CAPTION>
Additional Cumulative Total
Common Paid-in Retained Treasury Translation Stockholders'
Stock Capital Earnings Stock Adjustment Equity
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 3, 1993 $229 $138,079 $252,977 - $(1,622) $389,663
Repurchase of 413 shares of
common stock - - - (12) - (12)
Exercise of 519,456 options issued
under employee stock option plans 5 8,032 - 12 - 8,049
Issuance of 242,660 shares of common
stock under employee stock
purchase plan 2 6,285 - - - 6,287
Foreign currency translation
adjustment - - - - (337) (337)
Tax benefit from non-qualified stock
options - 3,585 - - - 3,585
Compensation expense associated with
grant of stock options - 118 - - - 118
Issuance of 410,607 shares of common
stock related to the acquisition of
Isis Distributed Systems, Inc. 4 11,996 - - - 12,000
Net income for the year ended
January 2, 1994 - - 16,607 - - 16,607
- --------------------------------------------------------------------------------------------------------
Balance at January 2, 1994 240 168,095 269,584 - (1,959) 435,960
Repurchase of 888,523 shares of
common stock - - - (31,408) - (31,408)
Exercise of 641,881 options issued
under employee stock option plans 7 12,291 - 6 - 12,304
Issuance of 329,272 shares of common
stock under employee stock purchase
plan 3 7,481 - - - 7,484
Foreign currency translation
adjustment - - - - 726 726
Tax benefit from non-qualified stock
options - 4,029 - - - 4,029
Compensation expense associated grant
of stock options - 75 - - - 75
Net income for the year ended
January 1, 1995 - - 60,982 - - 60,982
- --------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 250 191,971 330,566 (31,402) (1,233) 490,152
Repurchase of 1,511,800 shares of
common stock - - - (44,616) - (44,616)
Exercise of 472,124 options issued
under employee stock option plans 5 9,688 - - - 9,693
Issuance of 248,332 shares of common
stock under employee stock purchase
plan 2 6,588 - - - 6,590
Foreign currency translation
adjustment - - - - (827) (827)
Compensation expense associated with
grant of stock options - 61 - - - 61
Net income for the year ended
December 31, 1995 - - 17,338 - - 17,338
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $257 $208,308 $347,904 $(76,018) $(2,060) $478,391
See accompanying notes
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, January 1, 1995 and January 2, 1994
In thousands 1995 1994 1993
- -----------------------------------------------------------------------
Operating activities
Cash flows from operating activities:
Net income $ 17,338 $ 60,982 $ 16,607
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 66,040 58,233 44,199
Restructuring charge 24,500 - -
Charge for purchased research
and development - 7,800 36,230
Add (deduct) changes in working capital:
(Increase) decrease in accounts
receivable (22,596) 20,756 (16,006)
(Increase) decrease in inventory (15,725) (2,439) 24,001
Increase in accounts payable
and accrued liabilities 7,233 2,751 1,767
Increase (decrease) in income
tax payables (24,710) (48) 6,394
Net increase (decrease) in other
working capital items (3,990) (7,414) 8,727
- -----------------------------------------------------------------------
Net cash provided by operating activities 48,090 140,621 121,919
- -----------------------------------------------------------------------
Investing activities
Cash flows from investing activities:
Acquisition of property, plant
and equipment (54,734) (53,858) (33,668)
Acquisition of businesses, net of
cash acquired (13,711) (20,659) (26,787)
Purchase of marketable securities (119,945) (87,276) (75,875)
Proceeds from sale and maturity
of marketable securities 94,516 94,100 56,845
Acquisition of other assets (23,172) (13,106) (17,498)
- ------------------------------------------------------------------------
Net cash used in investing activities (117,046) (80,799) (96,983)
- ------------------------------------------------------------------------
Financing activities
Cash flows from financing activities:
Net proceeds from employee stock plans 16,344 19,863 14,443
Acquisition of treasury stock (44,616) (31,408) -
Reduction of long-term debt (3,187) (2,684) -
Reduction of obligations under
capital lease - (514) (2,039)
- ------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (31,459) (14,743) 12,404
- -----------------------------------------------------------------------
Effect of exchange rate changes on cash 73 750 (327)
Net increase (decrease) in cash
and cash equivalents (100,342) 45,829 37,013
- ------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 191,934 146,105 109,092
Cash and cash equivalents at
end of year $ 91,592 $191,934 $146,105
- ------------------------------------------------------------------------
See accompanying notes
1. Significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All intercompany
transactions and balances have been eliminated in consolidation. Certain
amounts in the consolidated financial statements of the prior years have been
reclassified to conform to the current year presentation. Such
reclassifications had no effect on previously reported results of operations.
Cash equivalents and marketable securities
Cash equivalents include highly liquid investments with maturities generally
of three months or less at time of acquisition and are comprised primarily of
government securities, commercial paper and bank notes carried at cost, which
approximates fair value. Marketable securities consist of securities with
maturities greater than ninety-one days. Fair values are based on quoted
market prices.
Translation of foreign currencies
The Company translates the assets and liabilities of its foreign subsidiaries
at the exchange rates in effect at the balance sheet date. Revenues and
expenses are translated at average exchange rates for the period.
Gains and losses from foreign currency translation are recorded in
"cumulative translation adjustment", a separate component of stockholders'
equity.
Accounts receivable
The Company states its accounts receivable at their estimated net realizable
value. The allowance for doubtful accounts was $8.6 million at December 31,
1995, and $8.6 million at January 1, 1995.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation expense is
calculated using the straight-line method based upon the following estimated
useful lives:
Land improvements 15 years
Buildings and improvements 15-31 1/2 years
Machinery and equipment 2-5 years
Leasehold improvements terms of leases
Service and spare parts 3-5 years
Software
Costs related to the conceptual formulation and design of software are
expensed as research and development. Costs incurred subsequent to attaining
technological feasibility to produce the finished product are generally
capitalized. These costs are amortized over the lesser of three years or the
estimated product life cycle.
Intangible assets
The Company has classified as goodwill the cost in excess of fair value of net
assets acquired in purchase transactions. Unamortized goodwill costs,
included in other assets on the consolidated balance sheets, were $21.0
million at December 31, 1995 and $10.5 million at January 1, 1995. Goodwill
is being amortized using the straight-line method over a period of seven
years. The Company periodically evaluates the carrying value of intangible
assets for impairment. Any impairment is charged to expense in the period
identified.
Use of estimates
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 those estimates.
Revenue recognition
Revenue from product sales is generally recognized at the time of shipment.
Software revenue is recognized at the time of delivery. Service, product
support and professional services revenues are recognized over the contractual
period or as the services are provided.
Income taxes
The Company provides deferred taxes to recognize temporary differences
between financial reporting and tax accounting. The Company's practice is to
reinvest the earnings of its foreign subsidiaries in those operations and to
repatriate retained earnings only when it is advantageous to do so. Through
the end of 1995, there was approximately $192.8 million of unremitted
earnings from the Irish manufacturing subsidiary. Additional U.S. taxes
resulting from the incremental U.S. tax rate over the Irish tax rate will be
provided if these earnings are remitted.
Foreign exchange contracts
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with its
committed exposures. These contracts protect the Company from risk due to
exchange rate movements, because gains and losses on the contracts offset
losses and gains on the assets, liabilities and transactions being hedged.
As of December 31, 1995 and January 1, 1995, the Company had $87.2 million
and $62.1 million, respectively, of net foreign exchange contracts
outstanding, predominantly in European currencies and Japanese yen. The
maturities of foreign exchange contracts generally do not exceed six months.
Foreign currency transaction gains and losses, which are included in other
income, as well as unrealized gains and losses on forward foreign exchange
contracts, are not material to the Company's consolidated financial
statements.
Concentration of credit risk
The Company sells its products to customers in diversified industries,
primarily in the United States, the Americas, Europe and the Asia Pacific
Rim. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
The Company invests its excess cash principally in deposits with major banks
and in money market securities of companies and municipal government entities
with strong credit ratings. These securities typically mature within three
months of their purchase date and, therefore, are subject to minimal risk.
The Company's investments in marketable securities consist primarily of time
deposits, obligations of states and political subdivisions, U.S. and foreign
government issues, commercial paper and corporate bonds. These investments
typically mature within eighteen months.
Employee stock plans
Proceeds from the sale of common stock issued under the employee stock option
and purchase plans are credited to common stock at the par value. The excess
of the share price over par value is credited to additional paid-in capital.
The Company's stock plans are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Earnings per share
Primary earnings per share is based on the weighted average number of shares
of common stock and common stock equivalents outstanding. Fully diluted
earnings per share has not been presented as the amount does not differ
significantly from primary earnings per share.
2. Restructuring
During the third quarter of 1995, after completing an evaluation of the
Company's economic model and cost structure, management approved a plan to
restructure its operations. As a result, a $24.5 million restructuring
charge was recorded for the reduction of its worldwide workforce by
approximately 575 employees, as well as the consolidation of certain
manufacturing and sales operations. The action was taken to re-size the
expense structure of the Company as a result of a significant decline in
gross margins and place expense levels in line with the new economic model.
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.
The restructuring charge and related reserves were recorded based on the best
information available at the time. The facilities related reserves were
established to recognize the lower of the amount of remaining lease
obligations, net of any sublease rentals, or the expected lease settlement
costs. Workforce-related charges, consisting principally of severance costs,
were established based on specific identification of the number of employees
to be terminated, their job classifications or functions and their location.
In 1995, the Company released approximately 450 employees. Also in 1995,
approximately $15.0 million related to the restructuring was incurred and
charged against the reserve. The Company expects that cash outlays to
complete the Company's restructuring initiatives will approximate $9.5
million and be paid during the first six months of 1996.
3. Acquisitions and strategic investments
In December 1995, the Company entered into a joint venture relationship with
Axime, S.A. of Paris, France. The Company invested approximately $6.0 million
in cash for 50% ownership of Axime's banking and retail application software
and professional services business. This investment will be accounted for
under the equity method. The companies will combine their resources to
develop, support and market certain integrated solutions for the Automated
Teller Machines/Point of Sale ("ATM/POS") market in France and other
authorized countries. Axime has been an exclusive distributor of S2 products
in France since 1988 and controls approximately 50% of the ATM/POS market.
In July 1995, the Company acquired all the outstanding stock of
Comercializacion TEA, S.A. DE C.V. (COMTEA), for approximately $4.1 million
in cash. COMTEA is a major distributor of Stratus hardware and software in
Mexico. In addition to distributing Stratus continuous processing hardware
systems over the past three years, COMTEA also has distributed application
software solutions from the Stratus subsidiary S2 Systems, Inc. for banking,
retail, credit authorization and inter-networking applications.
In January 1995, the Company, through its TCAM Systems, Inc. subsidiary,
acquired all the outstanding stock of Femcon Associates, Inc. for
approximately $3.0 million in cash. Femcon Associates, Inc. provides system
integration and customized software solutions to the worldwide securities
industry, and offers a broad range of application solutions on PC,
client/server, distributed and continuously available computing environments.
This acquisition, and the integration of TCAM Systems, Inc. and Femcon
Associates, will bring together two complementary product sets for the
securities and exchange markets.
In December 1994, the Company acquired certain assets of AST/Transact Ltd. of
London (OASTO) for $2.9 million in cash. AST's primary product acquired by
the Company is its UM-20 electronic funds transfer (EFT) and credit card
processing software for retail banking. AST develops and markets retail
banking application software and professional services to customers in the
United Kingdom and continental Europe.
In November 1994, the Company acquired all of the outstanding stock of the
TCAM Group of companies (OTCAMO) for approximately $16.0 million in cash plus
additional consideration of up to $33.0 million based upon TCAM's attainment,
if achieved, of certain objectives over the next three years. The TCAM
Systems Group includes TCAM Systems, Inc. in New York and TCAM Systems (U.K.)
Ltd. in London and Edinburgh, Scotland. TCAM provides system integration and
customized software solutions to the worldwide securities industry, and
offers a broad range of application solutions on PC, client/server,
distributed and continuously available computing environments.
In December 1993, the Company acquired all of the outstanding stock of Isis
Distributed Systems, Inc. ("Isis") for an aggregate purchase price of
approximately $24.0 million, consisting of 410,607 shares of the Company's
common stock valued at $12.0 million, $7.5 million in promissory notes,
$4.1 million in deferred compensation payments to Isis stock option holders
and $0.4 million in cash. Isis develops advanced middleware products
involving networked desktop computers and shared systems. As part of this
acquisition, the Company became aware of a claim of patent infringement filed
against Isis by Teknekron Software Systems, Inc. Prior to completing the
acquisition, the Company diligently investigated the claim and determined
that there were strong defenses. The Company believes that the outcome will
not materially affect its business.
In October 1993, the Company acquired all of the outstanding stock of Shared
Financial Systems, Inc. ("Shared") and substantially all of the assets and
certain liabilities of BellSouth Systems Integration, Inc. for approximately
$14.6 and $16.8 million in cash, respectively. The assets and liabilities
acquired from BellSouth Systems Integration, Inc. were placed into a
wholly-owned subsidiary of the Company, known as SoftCom Systems, Inc.
("SSI"). Shared develops and markets an extensive line of software and
professional services to the financial services, retail and healthcare
industries. SSI develops and markets communications middleware and related
professional services. The two companies were merged in 1994 to form S2
Systems, Inc.
Each of the Company's acquisitions, with the exception of the Axime joint
venture, has been accounted for using the purchase method of accounting. The
excess cost over the fair value of the net assets is $24.7 million, which is
being amortized on a straight-line basis over seven years. In connection
with its acquisitions, the Company incurred non-recurring charges of $7.8
million in 1994 and $36.2 million in 1993 for purchased research and
development. These amounts were charged to operations because, in
management's opinion, technological feasibility for this purchased research
and development had not been established.
4. Available-for-sale investments
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such designation as of each balance sheet
date. All of the Company's investments at December 31, 1995 and
January 1, 1995 have been classified as being "available-for-sale", and are
included in cash equivalents and marketable securities on the balance sheet.
Available-for-sale investments are carried at fair value with the unrealized
gains and losses reported in stockholdersO equity. Unrealized gains and
losses were not material in 1995 and 1994. The amortized cost of investments
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in other income. Realized gains and
losses and declines in value judged to be other than temporary on investments
are included in other income. Interest and dividends on investments are
included in other income. The cost of investments sold is based on the
specific identification method.
The following is a summary of available-for-sale investments at
December 31, 1995 and January 1, 1995:
Estimated Estimated
Fair Value Fair Value
In thousands 1995 1994
- -----------------------------------------------------------------
Time deposits at banks $ 57,140 $ 138,460
Obligations of states and political
subdivisions 29,857 32,145
Government issues - U.S. and foreign 19,883 -
Commercial paper 1,853 26,150
Corporate bonds 8,706 -
- -----------------------------------------------------------------
Total available-for-sale investments $117,439 $196,755
- -----------------------------------------------------------------
5. Inventories
Inventories consisted of the following:
In thousands 1995 1994
- -----------------------------------------------------------------
Finished products $35,640 $24,802
Work in process 1,174 2,836
Parts and assemblies 24,457 15,599
- -----------------------------------------------------------------
Total inventories $61,271 $43,237
- -----------------------------------------------------------------
6. Property, plant and equipment
Property, plant and equipment consisted of the following:
In thousands 1995 1994
- -----------------------------------------------------------------
Land and improvements $ 3,241 $ 3,241
Buildings 31,714 31,403
Machinery and equipment 234,419 220,317
Leasehold improvements 26,128 24,711
Service and spare parts 21,455 17,071
Construction in progress 6,572 3,419
- -----------------------------------------------------------------
Total property, plant and equipment 323,529 300,162
- -----------------------------------------------------------------
Less accumulated depreciation 207,148 183,360
Net property, plant and equipment $116,381 $116,802
- -----------------------------------------------------------------
7. Capitalized software development costs
Unamortized software development costs, included in other assets on the
consolidated balance sheets, were $34.3 million and $31.2 million at
December 31, 1995 and January 1, 1995, respectively. Amortization expense,
along with adjustments to net realizable value, is included in product cost
of sales, and amounted to $20.6 million in 1995, $16.7 million in 1994 and
$8.8 million in 1993.
8. Income taxes
The components of income (loss) before provisions for income taxes consisted
of the following:
In thousands 1995 1994 1993
- -----------------------------------------------------------------
Domestic $(27,157) $13,010 $(18,771)
Foreign 48,829 64,106 49,423
- -----------------------------------------------------------------
Income before provision for
income taxes $ 21,672 $77,116 $ 30,652
- -----------------------------------------------------------------
The provisions (benefits) for income taxes consisted of the
following:
In thousands 1995 1994 1993
- -----------------------------------------------------------------
Current
Federal $ (3,312) $ 6,612 $ 10,620
State 250 1,216 736
Foreign 14,465 9,666 10,444
Total current 11,403 17,494 21,800
- -----------------------------------------------------------------
Deferred
Federal (4,612) (759) (5,235)
State (382) (192) (312)
Foreign (2,075) (409) (2,208)
- -----------------------------------------------------------------
Total deferred (7,069) (1,360) (7,755)
- -----------------------------------------------------------------
Provision for income taxes $ 4,334 $16,134 $14,045
- -----------------------------------------------------------------
The following table reconciles the Federal income tax rate to the tax rate
used in the calculation of the provisions for income taxes as reported in the
financial statements:
1995 1994 1993
- -----------------------------------------------------------------------------
Income tax at U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit (0.4%) 0.9% 0.9%
Foreign sales corporation exempt income (0.6%) (0.3%) (0.5%)
Tax effect of foreign operations (15.5%) (17.3%) (7.7%)
Research and development credits - (1.0%) (9.2%)
Tax exempt interest income (3.4%) (1.3%) (2.3%)
Non-deductible charge in connection
with acquisitions - 3.5% 29.1%
Other, net 4.9% 1.4% 0.5%
- -----------------------------------------------------------------------------
Effective tax rate 20.0% 20.9% 45.8%
- -----------------------------------------------------------------------------
The Company paid income taxes of $26.3 million in 1995, $18.4 million in 1994
and $10.7 million in 1993.
The earnings from products manufactured and sold by the Company's Ireland
manufacturing subsidiary are subject to a 10% tax rate through December 2010.
The Company has research and development credit carryforwards of $1.6 million
that begin to expire in the year 2010 and alternative minimum tax credit
carryforwards of $1.5 million which carry forward indefinitely.
Significant components of the Company's deferred tax assets and (liabilities)
as of December 31, 1995 and January 1, 1995 were as follows:
In thousands 1995 1994
- -----------------------------------------------------------------
Deferred tax assets
Depreciation/amortization $ 9,773 $ 6,453
Inventory/other reserves 15,087 13,427
Carryforward losses, federal and
state tax credits 9,164 5,804
Deferred gain on sale of building 925 1,151
Intercompany profit elimination 856 826
Deferred compensation 1,112 1,541
Other 3,070 2,810
- -----------------------------------------------------------------
Total deferred tax assets 39,987 32,012
Valuation allowance (3,947) (3,947)
- -----------------------------------------------------------------
Net deferred tax assets $36,040 $28,065
- -----------------------------------------------------------------
9. Debt
The Company has a Multicurrency Revolving Credit Agreement providing for up
to $50 million in borrowings on a revolving basis through March 1997, at the
lower of the bank's base rate (8.5% at December 31, 1995) or the domestic
Certificate of Deposit rate plus 0.50 of 1% per annum or at the London
Interbank Offered Rate plus 0.375 of 1% per annum. There have never been
any borrowings against this Agreement. This Agreement requires the Company
to maintain stated minimum fixed charge coverage, debt to net worth and quick
ratio levels. At December 31, 1995 and January 1, 1995, the Company was in
compliance with these covenants.
In 1993, the Company issued $7.5 million of promissory notes and $4.1 million
of deferred compensation obligations in connection with the Isis acquisition.
The remaining balances of the promissory notes are payable in three annual
installments of $1.6 million in each January of 1996, 1997 and 1998. These
notes accrue interest at a floating rate equal to the sum of .00465 plus the
applicable federal rate for mid-term obligations. The remaining deferred
compensation is payable in annual installments in January of each of the
following years: $1.0 million in 1996 and $0.8 million in 1997. These
payments are not interest bearing and thus were recorded at their net present
value using a 6.5% discount rate. The fair value of these instruments is not
significantly different from their carrying value at December 31, 1995.
Certain subsidiaries have entered into credit arrangements with local banks,
principally in the form of overdraft borrowings, for the purpose of
short-term liquidity management. Borrowings under these agreements, whose
carrying amounts approximated fair value, were $1.9 million and $1.5 million
at December 31, 1995 and January 1, 1995, respectively, with weighted average
interest rates of 4.7% in 1995 and 3.2% in 1994.
The Company paid interest of approximately $0.4 million in 1995, $0.3 million
in 1994 and $0.5 million in 1993.
10. Stock plans
Employee option plans
The Company maintains two active stock option plans: the 1983 Stock Option
Plan and the Non-Qualified Stock Option Plan. The 1983 Stock Option Plan
provides for the granting of both incentive stock options and non-statutory
(non-qualified) stock options. The Plans have a maximum authorized number of
shares available for grant of 9,380,200 and limit the number of shares for
which options may be granted to any person in any fiscal year to a maximum of
100,000 shares. The option prices for non-qualified grants under each plan
are determined by the Compensation and Stock Option Committee of the Board of
Directors, subject to a minimum option price of not less than 50% of the fair
market value of the stock at the time of grant for options issued under the
1983 Stock Option Plan. The option price for grants intended to qualify as
incentive stock options under Section 422A of the Internal Revenue Code, as
amended, shall not be less than 100% of the fair market value of the stock on
the date of grant. The terms of exercise of the options are also determined
by the Committee. All options granted to date become exercisable in full not
later than one year from the date of grant and vest over a five year period
from the date of grant.
At December 31, 1995 and January 1, 1995, a combined total of 1,638,344 and
1,556,025 shares, respectively, were available for future grants under both
Plans. Substantially all options have been issued at the fair market value
of the stock on the date of grant.
Stock option activity was as follows:
Option price
Shares per share
- --------------------------------------------------------------
Outstanding, January 3, 1993 2,717,237 $ 1.50-53.37
- --------------------------------------------------------------
Granted 1,637,083 11.62-35.37
Exercised (519,456) 1.50-38.00
Canceled (1,008,990) 12.44-53.37
Outstanding, January 2, 1994 2,825,874 $ 8.75-51.25
- --------------------------------------------------------------
Granted 1,236,475 18.69-38.25
Exercised (641,881) 8.75-30.75
Canceled (274,953) 15.25-51.25
Outstanding, January 1, 1995 3,145,515 $ 8.94-46.37
- --------------------------------------------------------------
Granted 1,226,168 23.87-37.25
Exercised (472,124) 10.06-32.75
Canceled (708,487) 15.25-44.75
Outstanding, December 31, 1995 3,191,072 $ 8.94-46.37
Exercisable, December 31, 1995 3,191,072 $ 8.94-46.37
- --------------------------------------------------------------
During 1993, the Board of Directors authorized the Company to offer holders
of all outstanding, unexercised stock options granted between March 1, 1991
and January 20, 1993 under the Company's stock option plans ("old options")
the opportunity to exchange such options for an equal number of options ("new
options") under the 1983 Stock Option Plan and the Non-Qualified Stock Option
Plan. Approximately 651,000 shares were exchanged, with all new options
issued at the fair market value ($23.25) of the Company's common stock on the
date of the exchange (September 8, 1993). These new options were
non-qualified and began a new five year vesting schedule.
Employee purchase plan
Under the Company's Employee Stock Purchase Plan, employees may purchase the
Company's common stock, at a price equal to 85% of the fair market value of
the stock, as defined. In April 1995, the shareholders approved an increase
in the number of shares which may be issued under the Plan from 2,700,000 to
3,100,000. An amendment to the Purchase Plan was adopted by the Board of
Directors on August 1, 1995, to ensure that the plan administrators were
"disinterested persons" for purposes of Section 16(b)(3) of the Securities
and Exchange Act of 1934. On April 19, 1994, the shareholders approved the
amendment adopted by the Board of Directors to extend the Plan to
December 31, 2004. Common stock reserved for future grants aggregated
437,015 and 285,347 shares at December 31, 1995 and January 1, 1995,
respectively. There were 248,332 shares issued at an average price of $26.56
in 1995, 329,272 shares issued at an average price of $22.76 in 1994 and
242,660 shares issued at an average price of $25.91 in 1993.
Stockholder rights plan
In December 1990, the Company adopted a Stockholder Rights Plan and declared a
distribution of Rights under the Plan to holders of record of common stock on
December 20, 1990. The Plan is designed to assure that all Stratus Computer,
Inc. stockholders receive fair and equal treatment in the event of any
unsolicited attempt to acquire control of the Company. Under the Plan, each
share of common stock carries one Right to purchase additional stock at a
purchase price of $110.00 subject to adjustment in certain circumstances. The
Rights are not exercisable or transferable apart from the common stock until
ten days after, (i) another person or group of persons has acquired, or
obtained the right to acquire, at least 20% of the common stock, (ii) notice
of a tender or exchange offer that would result in another person or group of
persons beneficially owning at least 20% of the outstanding shares of common
stock or (iii) determination by the Board of Directors of the Company that a
15% stockholder is an "Adverse Person".
On the occurrence of certain Triggering Events, as described in the Plan,
holders of Rights become entitled, upon exercise, to purchase shares of the
Company's common stock at a substantial discount. The Rights are redeemable
by the Company for $0.01 per Right and expire on December 4, 2000.
Common stock repurchase program
In April 1994, the Board of Directors approved a plan to repurchase up to
1.2 million shares of common stock on the open market. In fiscal 1994, the
Company repurchased 888,200 shares at a cost of approximately $31.4 million
under the program. On January 31, 1995, the Board of Directors approved a
second open market share repurchase program to extend the total amount of
shares to be repurchased by another 1.2 million shares for a total of 2.4
million shares. In fiscal 1995, the Company completed this program when it
repurchased an additional 1,511,800 shares at a cost of approximately
$44.6 million.
11. Employee benefit plan
Stratus employee capital accumulation plan (SECAP)
The Company has a benefit plan available to all domestic employees which
qualifies as a deferred compensation plan under Section 401(k) of the
Internal Revenue Code. Employees may contribute to the plan from 2% to 15%
of their salary, on a pre-tax basis, subject to certain statutory limitations
($9,240 in 1995). The Company matches up to 100% of the first 3% of pre-tax
contributions based on performance criteria established by the Board of
Directors. Contributions are invested at the direction of the employee in
one or more investment funds. There were no Company contributions to the
plan in 1995, and contributions of $3.3 million and $2.7 million were made in
1994 and 1993, respectively.
12. Commitments
Lease obligations
The Company leases certain corporate and branch sales offices. The leases
range from one to seven years and generally contain renewal options for
periods ranging from one to twenty years and require the Company to pay all
executory costs.
The following is a schedule of required future minimum lease payments under
operating leases at December 31, 1995:
Operating
In thousands leases
- -----------------------------------------------------------------
1996 $13,553
1997 11,320
1998 8,276
1999 7,043
2000 4,126
Subsequent years 3,995
- -----------------------------------------------------------------
Total minimum lease payments $48,313
- -----------------------------------------------------------------
Total rental expense was $18.7 million in 1995, $16.3 million in 1994 and
$17.5 million in 1993.
13. Segment, geographic and customer information
The Company operates in one industry segment, the design, manufacture,
marketing and service of continuously available online transaction processing
systems and related software.
Geographic information for 1995, 1994 and 1993 was as follows:
in thousands 1995 1994 1993
- -----------------------------------------------------------------
Revenues
United States $289,500 $ 310,864 $ 287,813
Intercompany 46,165 27,377 27,673
- -----------------------------------------------------------------
Total United States 335,665 338,241 315,486
Ireland 66,760 55,857 59,151
Intercompany 110,003 89,909 80,563
- -----------------------------------------------------------------
Total Ireland 176,763 145,766 139,714
Europe 124,956 122,812 91,866
Other international 106,706 87,023 74,850
Eliminations (156,168) (117,286) (108,236)
- -----------------------------------------------------------------
Total revenues $587,922 $576,556 $513,680
- -----------------------------------------------------------------
Operating income (loss)
United States $ (3,260) $ 9,010 $ (24,968)
Ireland 29,741 47,158 48,316
Europe (16,918) 2,602 (1,155)
Other international 3,960 9,302 1,298
Eliminations (1,455) 1,606 1,925
- -----------------------------------------------------------------
Total operating income $ 12,068 $69,678 $ 25,416
- -----------------------------------------------------------------
Assets
United States $507,638 $458,551 $413,252
Ireland 67,926 61,946 58,882
Europe 72,335 47,121 41,410
Other international 51,180 38,155 33,575
Corporate assets (cash, cash
equivalents and marketable
securities) 155,097 230,010 191,005
Eliminations (246,367) (222,373) (179,593)
- -----------------------------------------------------------------
Total assets $607,809 $613,410 $558,531
- -----------------------------------------------------------------
Intercompany transactions are accounted for at prices which approximate arm's
length transactions.
The operating results for the United States include non-recurring charges of
$7.8 million and $36.2 million to write off purchased research and development
acquired in connection with the Company's acquisitions in 1994 and 1993,
respectively.
Unaudited Quarterly Financial Data
In thousands, except per share amounts and stock prices
Net Income
Total Gross Net Income (loss) Stock Prices
Revenues Profit (loss) Per Share High Low
- -------------------------------------------------------------------------------
Fiscal 1995
First quarter $128,502 $ 64,523 $ 6,414 $ 0.26 $39.62 $26.37
Second quarter 140,317 67,763 6,089 0.26 31.75 26.37
Third quarter 150,743 71,957 (9,268) (0.40) 32.75 23.37
Fourth quarter 168,360 80,489 14,103 0.60 35.50 24.25
Total $587,922 $284,732 $17,338 $ 0.73
- -------------------------------------------------------------------------------
Fiscal 1994
First quarter $135,407 $ 71,806 $11,389 $ 0.46 $31.75 $25.00
Second quarter 144,379 79,946 17,367 0.71 30.37 23.25
Third quarter 145,746 81,782 18,807 0.76 38.50 27.75
Fourth quarter 151,024 88,427 13,419 0.54 38.50 33.75
Total $576,556 $321,961 $60,982 $ 2.47
- -------------------------------------------------------------------------------
Fiscal 1993
First quarter $114,648 $ 64,797 $ 8,820 $ 0.37 $36.50 $29.75
Second quarter 124,104 71,312 13,498 0.57 41.25 29.62
Third quarter 126,785 72,116 11,359 0.48 33.12 20.25
Fourth quarter 148,143 84,586 (17,070) (0.72) 32.25 24.62
Total $513,680 $292,811 $ 16,607 $0.70
- -------------------------------------------------------------------------------
Third quarter 1995 results include a non-recurring pre-tax charge of $24.5
million to cover the cost of a 21% workforce reduction and the consolidation
of certain manufacturing and sales facilities.
Fourth quarter 1994 results include a non-recurring charge of $7.8 million to
write off purchased research and development acquired in connection with the
Company's 1994 acquisitions.
Third quarter 1993 results include a non-recurring pre-tax charge of $3.8
million to cover the cost of a 6% workforce reduction.
Fourth quarter 1993 results include a non-recurring charge of $36.2 million
to write off purchased research and development acquired in connection with
the Company's 1993 acquisitions.
Stratus Computer, Inc. Common Stock is traded via the New York Stock Exchange,
the Boston Stock Exchange, the Midwest Stock Exchange and the Pacific Stock
Exchange under the trading symbol SRA. No dividends have been declared on
the Common Stock.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Stratus Computer, Inc.
We have audited the accompanying consolidated balance sheets of Stratus
Computer, Inc. as of December 31, 1995 and January 1, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stratus Computer, Inc. at December 31, 1995 and January 1, 1995 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 20, 1996
STRATUS COMPUTER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
Item 14(a) Reference
(page)
------ -------------
Form Annual Report
10-K to
Stockholder
------ -------------
Data incorporated by reference to the
attached 1995 Annual Report to
Stockholders:
Consolidated Balance Sheets at
January 1, 1995 and
December 31, 1995 17
For the years ended January 2, 1994,
January 1, 1995 and
December 31, 1995:
Consolidated Statements of
Income 16
Consolidated Statements of
Stockholders' Equity 18
Consolidated Statements of
Cash Flows 19
Notes to Consolidated Financial
Statements 20-29
Supplementary information:
Quarterly Financial Data (unaudited) 30
Consolidated schedule for the year ended
December 31, 1995:
II - Valuation and qualifying accounts F-1
All other schedules have been omitted since the required information is
not applicable or not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
Consolidated Financial Statements or the Notes thereto.
The financial statements listed in the preceding index which are included
in the 1995 Annual Report to Stockholders are hereby incorporated by
reference. With the exception of the pages listed in the preceding index, and
pages 10 - 15 and 30 noted in items 5 through 7, the 1995 Annual Report to
Stockholders is not to be deemed filed as part of this report.
STRATUS COMPUTER, INC.
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
ACCOUNTS BALANCE AT BALANCE AT
RECEIVABLE BEGINNING OF END OF
ALLOWANCE PERIOD ADDITIONS DEDUCTIONS(1) PERIOD
FISCAL
YEAR 1993 $ 5,789,002 2,372,966 (2,029,129) $6,132,839
FISCAL
YEAR 1994 $ 6,132,839 4,547,856 (2,087,061) $8,593,634
FISCAL
YEAR 1995 $ 8,593,634 7,520,111 (7,478,021) $8,635,724
(1) Write-offs of uncollectible accounts net of recoveries.
F-1
INDEX TO EXHIBITS
3.1 - Articles of Organization of Registrant. (1)
3.1 (a) - Amendments to Articles of Organization. (2) (4)
3.2 (b) - By-Laws of Registrant, as amended through January 31, 1995, (1)
4.11 - Stock Option Plan (January 1983). (3)
4.11(a) - Restatement of Employee Stock Option Plan dated
January 28, 1992.(9)
4.11(b) - Amendment to Option Plans dated January 25, 1994. (7).
4.11(c) - Amendment to Option Plans dated January 31, 1995.
4.11(d) - Amendment to Option Plans dated August 1, 1995, (10)
4.13 - Employee Stock Purchase Plan. (3)
4.13(a) - Amended and Restated Employee Stock Purchase Plan dated
April 21, 1992. (9)
4.13(b) - Amendment to Employee Stock Purchase Plan dated January 25, 1994.
4.13(c) - Amendment to Employee Stock Purchase Plan dated January 31, 1995.
4.13(d) - Employee Stock Purchase Plan amended and restated as of
August 1, 1995. (10)
4.15 - Non-Qualified Stock Option Plan (November 1984). (3)
4.15(a) - Restatement of Non-Qualified Common Stock Option Plan dated
January 28, 1992. (9)
4.15(b) - Non-Qualified Common Stock Option Plan Restatement Number 4
effective August 1, 1995. (10)
4.18 - Rights Agreement dated December 4, 1990. (5)
4.19 - Multicurrency Revolving Credit Agreement between Registrant and The
First National Bank of Boston, N.A., National Westminster Bank
PLC, and Banque Nationale de Paris. (8)
10.6 - Equipment Lease Agreement, dated November 12, 1981, among Firstbank
Financial Corporation, FFC Boston Leasing Corporation and
Registrant. (1)
10.17 - Lease dated March 23, 1989, between Registrant and Industrial
Development Authority, Ireland, Blanchardstown, Ireland. (6)
10.18 - Lease dated January 30, 1990 between Registrant and LePercq
Corporate Income Fund, L.P. (2)
13.0 - 1995 Annual Report to Stockholders (which is not deemed to be
"filed" except to the extent that portions thereof are expressly
incorporated by reference in this Annual Report on Form 10-K).
22.1 - Subsidiaries of the Registrant, filed herewith.
23.0 - Consent of Ernst & Young LLP, filed herewith.
(1) Incorporated herein by reference to same exhibit number of
Item 16 to Registration Statement on Form S-1 (No. 2-85169)
filed with the Securities and Exchange Commission on July 15,
1983 as amended on August 25, 1983 and August 26, 1983.
(2) Incorporated herein by reference to same exhibit number of
Item 14 to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1990.
(3) Incorporated herein by reference to Items 4 through 13 of
Registration Statements on Form S-8 (No. 33-2174, No. 33-11864
and No. 33-28742) filed with the Securities and Exchange
Commission on December, 16, 1985, February 17, 1987 and May
15, 1989, respectively.
(4) Incorporated herein by reference to same exhibit number of
Item 14 to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1988.
(5) Incorporated herein by reference to Exhibit 1 to Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission on December 6, 1990.
(6) Incorporated herein by reference to same exhibit number of
Item 14 to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1989.
(7) Incorporated herein by reference to same exhibit number of
Item 14 to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1994.
(8) Incorporated herein by reference to same exhibit number of
Item 14 to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1991.
(9) Incorporated herein by reference to Exhibit 28 of Registration
Statement on form S-8 (33-67758) filed with the Securities and
Exchange Commission on August 23, 1993.
(10) Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3
of Registration Statement on form S-8 (33-64709) filed with
the Securities and Exchange Commission on December 4, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29 th day
of March 1996.
Stratus Computer, Inc.
BY: ROBERT E. DONAHUE
---------------------
Robert E. Donahue, Vice President, Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Name Title Date
WILLIAM E. FOSTER Chairman March 29, 1996
- ----------------- & Director
(William E. Foster) (Principal Executive Officer)
GARY E. HAROIAN President & Chief Executive March 29, 1996
- --------------- Officer, Director
(Gary E. Haroian) (Principal Executive Officer)
ROBERT E. DONAHUE Vice President, Finance and March 29, 1996
- ----------------- Administration, Chief
(Robert E. Donahue) Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
ARTHUR CARR Director March 29, 1996
- -----------
(Arthur Carr)
ALEXANDER V. D'ARBELOFF Director March 29, 1996
- -----------------------
(Alexander V. d'Arbeloff)
PAUL J. FERRI Director March 29, 1996
- -------------
(Paul J. Ferri)
GARDNER C. HENDRIE Director March 29, 1996
- ------------------
(Gardner C. Hendrie)
ROBERT M. MORRILL Director March 29, 1996
- -----------------
(Robert M. Morrill)
CANDY M. OBOURN Director March 29, 1996
- ---------------
(Candy M. Obourn)
EXHIBIT 22.1
SUBSIDIARIES:
The following is a list of the Company's current subsidiaries,
all of which are wholly-owned:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Securities Corp. Massachusetts
Stratus World Trade Corp. Delaware
Stratus International, Inc. Massachusetts
Stratus F.S.C., Inc. U.S. Virgin Islands
S2 Systems, Inc. Delaware
TCAM Systems, Inc. New York
The following is a list of subsidiaries of Stratus World Trade
Corp., all of which are wholly-owned:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Computer Belgium S.A. Belgium
Stratus Computer GmbH Federal Republic
of Germany
Stratus Computer B.V. Netherlands
Stratus Holding & Finance, B.V. Netherlands
Stratus Computer (H.K.) Ltd. Hong Kong
Stratus Computer Corporation Canada
Stratus Computer Japan Co., Ltd. Japan
Stratus Computer S.A. France
Stratus Computer PTY, Ltd. Australia
Stratus Holding & Finance Company, Ltd. Ireland
Stratus Computer AB Sweden
Stratus Computer AG Switzerland
Stratus Computer (Singapore) Pte. Ltd. Singapore
Stratus Computer (NZ) Limited New Zealand
Stratus Computer Luxembourg S.A. Luxembourg
Stratus Computer (Korea) Ltd. Korea
Stratus Computer Philippines, Inc. Philippines
The following are wholly-owned subsidiary companies of Stratus
Holding & Finance Company Ltd:
Stratus Computer Limited Ireland
Stratus Investments Limited Bermuda
Stratus UK Holding and Finance Limited United Kingdom
The following is wholly-owned subsidiary companies of Stratus
Computer Limited:
Stratus Computer Ireland Ireland
The following is a wholly-owned subsidiary company of Stratus
Holding & Finance B.V.:
Stratus Computer S.A. Spain
The following is an 80% owned subsidiary company of Stratus
Holding & Finance B.V. and a 20% owned subsidiary of Stratus World
Trade Corp.:
Stratus Italia S.R.L. Italy
The following are wholly-owned subsidiary companies of Stratus
UK Holding & Finance Company Limited:
Stratus Computer Ltd. United Kingdom
S2 Systems International Limited United Kingdom
Comercializacion TEA, S.A. de C.V. Mexico
The following is an 90% owned subsidiary company of Stratus UK
Holding & Finance Company Limited and a 10% owned subsidiary of
Stratus World Trade Corp.:
TCAM Systems International Ltd. United Kingdom
EXHIBIT 23.0
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Stratus Computer, Inc. of our report dated January 20, 1996, included in
the 1995 Annual Report to Stockholders of Stratus Computer, Inc.
Our audits also included the financial statement schedule of Stratus Computer,
Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statements (Forms S-8 Nos. 2-88104, 2-89901, 33-2174, 33-11864, 33-28742,
33-67758 and 33-64709 and Form S-3 No. 33-77764 and in the related
prospectus) of our report dated January 20, 1996, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of Stratus
Computer, Inc.
Ernst & Young LLP
Boston, Massachusetts
March 26, 1996
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