14
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 29, 1997 Commission File
Number 0-12064
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Stratus Computer, Inc.
(Exact name of registrant as specified in its Charter)
Massachusetts No. 04-2697554
(State of Incorporation) (I.R.S. Employer Identification No.)
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752
(Address of principal executive office) (Zip)
(508) 460-2000
(Telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No.
Number of Common Shares outstanding at the latest practicable date,
August 5, 1997: 27,238,424
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated statements of income -
three months and six months ended June 29, 1997 and
June 30, 1996
Consolidated balance sheets -
June 29, 1997 and December 29, 1996
Consolidated statements of cash flows -
six months ended June 29, 1997 and June 30, 1996
Notes to consolidated financial statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II Other information
Item 1 Legal proceedings
Item 4 Submission of matters to a mote of security holders
Item 5 Other information
Item 6 Exhibits and reports on form 8-K
Exhibit 10 - Material contracts
Signatures
PART I - FINANCIAL INFORMATON
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Second Quarter Ended Six Months Ended
-------------------- -------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Product sales $117,418 $ 89,519 $223,945 $180,638
Service 50,154 50,782 99,292 102,588
-------- -------- -------- --------
Total revenues 167,572 140,301 323,237 283,226
Costs and expenses:
Product cost of sales 59,590 47,775 115,899 95,832
Service expense 32,039 31,791 61,446 62,540
Research and development expense 21,128 19,791 41,644 39,871
Selling, general and
administrative expenses 35,401 32,344 68,348 64,710
Restructuring charge - 4,623 - 4,623
-------- -------- -------- --------
Total costs and expenses 148,158 136,324 287,337 267,576
-------- -------- -------- --------
Operating income 19,414 3,977 35,900 15,650
Other income 2,895 1,734 5,355 3,629
-------- -------- -------- --------
Income before provision for income
taxes 22,309 5,711 41,255 19,279
Provision for income taxes 4,908 1,256 9,076 4,241
-------- -------- -------- --------
Net income $17,401 $ 4,455 $32,179 $15,038
======== ======== ======== ========
Net income per common share $.71 $.19 $1.33 $.64
======== ======== ======== ========
Weighted average number of
shares of common stock
and common stock equivalents 24,356 23,758 24,182 23,671
======== ======== ======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 29, December 29,
ASSETS 1997 1996
- ------------------------------- --------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $135,349 $131,683
Marketable securities 79,420 43,187
Accounts receivable, net 147,549 175,061
Inventories:
Finished products 42,513 35,921
Work-in-process 3,263 1,542
Parts and assemblies 39,483 25,820
--------- ---------
Total inventories 85,259 63,283
Prepaid expenses 12,201 14,540
Other current assets 19,797 13,773
--------- ---------
Total current assets 479,575 441,527
Property, plant and equipment, at cost 368,214 355,097
Less: accumulated depreciation 244,093 232,341
--------- ---------
Net property, plant and
equipment 124,121 122,756
Other assets, net 70,965 74,638
--------- ---------
Total assets $674,661 $638,921
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable $ 30,702 $ 30,357
Accrued expenses:
Payroll 17,416 17,422
Other 30,094 34,204
Income taxes payable 24,545 13,564
Short-term borrowings and obligations 2,455 2,667
Deferred revenue 23,144 17,589
--------- ---------
Total current liabilities 128,356 115,803
Long-term obligations and deferrals 1,725 3,634
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 27,060,885 and
26,252,242 shares issued and outstanding,
respectively 271 263
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 235,584 219,237
Retained earnings 423,603 391,424
Cumulative translation adjustment (3,727) (2,826)
--------- ---------
Subtotal 655,731 608,098
Less: shares in treasury, at cost, 3,600,000
and 2,934,300 shares, respectively (111,151) (88,614)
--------- ---------
Total stockholders' equity 544,580 519,484
--------- ---------
Total liabilities and stockholders' equity $674,661 $638,921
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
----------------------
June 29, June 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 32,179 $15,038
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,494 31,638
Restructuring charge - 4,623
Add (deduct) changes in working capital:
Decrease in accounts receivable 27,512 20,874
Increase in inventory (21,976) (14,800)
Increase(decrease) in accounts payable
and accrued liabilities 1,572 (22,259)
Increase (decrease) in income taxes payable 10,981 (7,199)
Decrease in other working capital items (3,555) (399)
--------- ---------
Net cash provided by operating activities 86,207 27,516
Cash flows from investing activities:
Acquisition of property, plant and equipment (25,031) (26,956)
Purchase of marketable securities (107,595) (12,365)
Proceeds from sale and maturity of marketable
securities 71,362 11,745
Acquisition of other long-term assets (12,200) (12,265)
--------- ---------
Net cash used in investing activities (73,464) (39,841)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 16,355 5,606
Purchase of treasury stock (22,537) -
Reduction of debt and capital
lease obligations (1,994) (2,650)
--------- ---------
Net cash provided by(used in) financing
activities (8,176) 2,956
Effect of exchange rate changes on cash (901) (488)
--------- ---------
Net increase (decrease) in cash and cash
equivalents 3,666 (9,857)
Cash and cash equivalents at beginning of year 131,683 91,592
--------- ---------
Cash and cash equivalents at end of period $135,349 $81,735
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 1997 and June 30, 1996
(Unaudited)
(In thousands, except share amounts)
1. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-
owned. The information herein should be read in conjunction with the
annual report on Form 10-K for the year ended December 29, 1996. It is
management's opinion that the accompanying statements reflect all
adjustments necessary for a fair presentation of the results for this
interim period and the comparable periods presented. The balance sheet at
December 29, 1996 has been derived from the audited financial statements at
that date.
2. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
3. Primary earnings per share is based on the weighted average number of
shares of common stock and common stock equivalents (stock options)
outstanding. Fully diluted earnings per share has not been separately
presented as the amount does not differ significantly from primary earnings
per share.
4. There were no non-cash investing and financing activities for the
first six months of 1997 or 1996. The Company made interest payments of $15
and $598 and tax payments of $3,543 and $8,572 in the first six months of
1997 and 1996, respectively.
5. During the first quarter of 1997, the Company completed its current
stock repurchase program. This program to purchase 1,200,000 shares of
Stratus common stock on the open market was authorized by the Company's
Board of Directors on October 22, 1996.
6. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128. Earnings per Share which is required to be adopted on
December 28, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating basic earnings
per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase in basic earnings per share
for the second quarter ended June 29, 1997 and the first six months of $.04
and $.06 per share, respectively, with no impact on the second quarter and
first six months of 1996. The impact of Statement 128 on the calculation of
diluted earnings per share for these quarters is not material.
7. During the second quarter of 1996, the Company restructured its
software business to improve operating results by aligning revenues with
expenses, and to focus on new strategic product offerings to be launched in
the coming months. The restructuring actions resulted in a charge of $4.6
million and included charges for workforce reductions and asset dispositions
related to the discontinuation of certain product programs.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. (In thousands)
Revenues
Revenues of $167,572 for the second quarter of 1997 increased 19% from
the corresponding period in 1996. For the first six months of 1997,
revenues were $323,237, an increase of 14% from the same 1996 period.
The company's total product revenue increased 31% and 24% for the
second quarter and first six months of 1997, respectively, compared to the
same prior year periods. Hardware product revenue grew 31% and 24% in the
second quarter and first six months of 1997 compared to the same 1996
periods, with strong year over year growth in the telecommunications and
financial services markets of 48% and 42%, respectively, for the second
quarter, and 53% and 40%, respectively, for the first six months.
Application software license revenue increased 46% and 38% in the second
quarter and first six months of 1997, respectively, driven primarily by
strong sales in the financial services and healthcare markets.
Domestic direct product revenues increased 9% for the second quarter
and 4% for the first six months of 1997 from the same prior year periods
primarily due to strong sales in the financial services markets.
International direct product revenues increased 7% from 1996's second
quarter as a result of strong sales in the Asia-Pacific region. For the
first six months of 1997, international direct product revenues declined 2%
compared with the same period in 1996 due to lower revenues in Europe,
Canada, and Mexico offsetting the increases in the Asia Pacific markets.
Product revenue from indirect channels increased 72% for the second
quarter and 70% for the first six months of 1997 compared to the same prior
year periods. Sales to NEC increased 98% and 91% for the second quarter and
first six months, respectively, compared to the same 1996 periods, and
represented 33% and 32% of total product revenue in the respective 1997
periods. Product revenue from other international distributors increased
34% and 35% in the second quarter and first six months of 1997,
respectively, compared to the same 1996 periods with strong sales through
Olivetti and in Latin America. Sales to Olivetti were primarily in the
gaming and telecommunications markets.
Total service revenue decreased 1% for the second quarter and 3% for
the first six months of 1997 from the same prior year periods. Professional
service revenues decreased 18% and 19% from the second quarter and first six
months of 1997, respectively, primarily due to the completion of several
large system integration contracts in 1996, and the related lower
utilization rates. Maintenance revenues increased 3% in the second quarter
and 1% in the first six months of 1997 compared with the corresponding prior
year periods.
Cost of Sales
Total gross margin of 45% for the second quarter and first six months
of 1997 increased two and one percentage point(s), respectively, from the
total gross margin in the corresponding 1996 periods.
Product gross margin of 49% for the second quarter and 48% for the
first six months of 1997 increased two and one percentage point(s),
respectively, from the gross margin on product revenue achieved in the
corresponding 1996 periods with improvements in both the hardware and
application software businesses. The hardware margin increase was primarily
related to a favorable shift in product mix, reduced costs for memory
devices, and manufacturing efficiencies gained as a result of increased
volume. The application software increase relates to the increased volume
of license sales.
The gross margin on service revenue was 36% for the second quarter and
38% for the first six months of 1997. This compares to 37% and 39% for the
second quarter and first six months, respectively, in 1996. The decrease
was primarily due to the decline in professional service revenues noted
above.
Other Operating Expenses
Total operating expenses for the second quarter and first six months of
1997, excluding the 1996 restructuring charge, increased 8% and 5%,
respectively, from the corresponding 1996 periods. As a percentage of total
revenues, operating expenses, excluding the 1996 restructuring charge,
decreased to 34% for the second quarter and first six months of 1997 from
37% in the corresponding 1996 periods.
Research and development expense increased 7% and 4%, respectively, for
the second quarter and first six months of 1997 compared to the same periods
in 1996. As a percentage of total revenues, research and development
expense decreased one percentage point to 13% for the second quarter and
first six months of 1997 compared to the corresponding 1996 periods.
Throughout the remainder of 1997, the Company will continue its long-
standing commitment to provide leading edge hardware and software products
to the telecommunications and enterprise server marketplaces, particularly
in support of mission critical applications. Research and development
efforts directed towards the Company's Continuum(r) and RADIO Cluster(TM)
product lines will be ongoing. The Company will continue to enhance its
Continuum product line, leveraged by the successful incorporation of the
Hewlett-Packard(TM) industry leading PA-RISC microprocessor and HP-UX(TM)
operating system technologies. RADIO Cluster combines availability
software from the Company's Isis Distributed(TM) Systems division with
industry-standard hardware and networking components, and the Microsoft(r)
Windows NT(r) operating system. The Company will continue to invest in
these technologies to bring competitive products to market.
For the second quarter and first six months of 1997, selling, general,
and administrative expenses, excluding the 1996 restructuring charge,
increased 9% and 6%, respectively, from the same 1996 periods. Selling,
general, and administration expenses, excluding the 1996 restructuring
charge, were 21% of net revenues for both the 1997 second quarter and first
six months as compared to 23% of net revenues for the corresponding 1996
periods. The Company's strategy is to continue to focus the sales and
marketing organizations on strategic opportunities within targeted vertical
industries, expand indirect sales channels, and improve selling
efficiencies. In addition, the Company will continue to focus on effective
cost management.
Other Income and Expense
Other income increased $1,161 and $1,726 for the second quarter and
first six months of 1997, respectively, compared to the same prior year
periods. This was primarily due to an increase in interest income earned on
higher levels of invested cash, and a decrease in interest expense resulting
from lower levels of long-term debt.
The effective tax rate in the second quarter and first half of 1997 of
22% decreased from 23% for the full year 1996. The reduction was due to a
change in the mix of taxable income in the Company's international
subsidiaries. The tax rate for the second quarter and first six months of
1997 was the same as the corresponding 1996 periods.
Liquidity and Capital Resources
At June 29, 1997, the Company had cash and cash equivalents of
$135,349, an increase of $3,666 from the balance at the beginning of the
year. This was primarily due to collection of accounts receivable and
proceeds from employee stock plans, partially offset by purchases of
marketable securities, the stock repurchase program completed in the first
quarter, capital expenditures, and purchase of inventory in preparation for
product shipments in the second half of 1997.
On January 3, 1997, the Company canceled its $50 million Multi-
currency Revolving Credit Agreement because management believes it is
no longer needed. There were never any borrowings against this Agreement.
At June 29, 1997, the Company had $1,573 in outstanding debt related
to the Isis(TM) acquisition.
Certain subsidiaries have entered into credit arrangements with local
banks, principally Overdraft Agreements, for the purpose of short-term
liquidity management. Borrowings under these Agreements were $873 at June
29, 1997.
The ratio of current assets to current liabilities for the Company as
of June 29, 1997 was 3.7 to 1. Based upon its current cash position, and
expected cash flow from operating activities supplemented by ongoing stock
issuance from the Employee Stock Purchase Plan and stock option plans,
management believes that the Company's capital resources are sufficient to
meet its financial requirements for the foreseeable future.
The Company plans to invest approximately $75 million in capital
improvements and software technologies in 1997.
Outlook
Future operating results of the Company will be dependent, in part,
upon its ability to continue to execute its strategy for growth in its three
principal business areas: the core product line of Continuum fault-tolerant
computer systems, the RADIO Cluster products for distributed computing and
application software products provided by the Company's S2(TM) and TCAM(TM)
subsidiaries. The Company will align its product strategies to meet the
industry-specific requirements of targeted growth markets, specifically the
telecommunications, financial services, and enterprise server markets.
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 plans to continue to invest in
improvements in the functionality, serviceability and ease-of-use of its
distributed computing products. The development and delivery of
telecommunications middleware, application software and professional
services will be targeted towards those market segments where computer
availability is a critical need.
Factors That May Affect Future Results
Forward looking statements made within this report speak only as of
the date made. The Company cautions readers to recognize that actual
results could differ materially from those suggested, as a result of the
following factors:
The Company's future operating results are dependent upon the timing
and market acceptance of new and enhanced product introductions, including
but not limited to the Continuum family of computers and the RADIO Cluster
products which began shipment in 1996. The transition of customers from
existing to new products in a rapidly changing technological environment, as
well as unexpected delays and/or cancellations in customer purchases of
existing products in anticipation of new products, are inherent risks in
this process.
The Company historically ships a large percentage of its revenues
towards the end of each quarter, making revenue forecasting unpredictable.
In addition, product volumes and product and service mixes comprising the
forecast are dependent upon customers' changing demands and needs. As the
Company increases its product and service offerings, the process of planning
and forecasting revenue becomes increasingly difficult. Each of these
factors may subject the Company to fluctuations in revenues and earnings.
Essentially all of the Company's product manufacturing and many suppliers
are located outside the United States. In conjunction with the forecast process
discussed above, the Company must adjust operations to satisfy production
requirements as the need for demand changes. Production capacity is dependent
upon the ability of the Company's suppliers to provide components on time and at
reasonable prices. Supply constraints, foreign currency exchange rate
fluctuations, foreign country political and economic changes, as well as changes
in export and trade regulations could adversely impact the Company's operations.
In addition to its direct channels, the Company continues to expand its
indirect distribution channels through resellers and distributors. In the
second quarter and first six months of 1997, one customer, NEC, represented 23%
and 22%, respectively, of total Company sales. The financial condition of, and
ongoing business relationship with, such resellers and distributors is important
to the Company's financial success. Fluctuations in channel mix may be
significant and can have a significant impact on gross margins as a percentage
of revenue and therefore on earnings per share.
As the technology marketplace continues to emerge in anticipation of
meeting customers' changing needs, the industry continues to experience
competitive pressures on price and gross margins. Downward pressures on price
and gross margins and unexpected revenue and margin trends may cause the Company
to change its operations and as such, may adversely impact the Company's
financial results.
Stratus, the Stratus logo, and Continuum are registered trademarks, and
RADIO Cluster, Isis and Isis Distributed are trademarks of Stratus Computer,
Inc. S2 is a trademark of S2 Systems, Inc. TCAM is a trademark of TCAM
Systems, Inc. Hewlett-Packard and HP-UX are trademarks of the Hewlett-Packard
Company. Microsoft and Windows NT are registered trademarks of Microsoft
Corporation. Bay Networks, Xylogics, and Gradient Technologies are registered
trademarks of the respective companies. All other registered trademarks are the
property of their respective owners.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims, including claims of
patent infringement and other matters, which arose in connection with the
acquisition of businesses. 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
On April 23, 1997, the Annual Meeting of Stockholders was held, and the
following matters were submitted to a vote of security holders:
Election of Mr. William E. Foster (18,474,167 votes received; 943,843 votes
withheld), and Ms. Candy Obourn (18,474,887 votes received; 943,123 votes
withheld) as Class I Directors of the Company to serve for a three-year term.
Approval of amendments to the 1983 Stock Option Plan and the Non-Qualified
Common Stock Option Plan increasing the maximum combined aggregate number of
shares of Common Stock authorized to be issued under both plans from 9,380,200
to 10,880,200 (8,775,777 shares for; 8,319,709 shares against; 27,526 shares
abstained; 2,294,998 shares broker non-votes).
Approval of amendments to the 1983 Stock Option Plan and the Non-Qualified
Common Stock Option Plan increasing the maximum aggregate annual limitation on
shares for which options may be granted to a participant under both plans from
100,000 to 500,000 (11,256,391 shares for; 8,001,135 shares against; 52,977
shares abstained; 107,507 shares broker non-votes).
Approval of an amendment to the Non-Qualified Common Stock Option Plan
increasing the number of shares for which options are to be granted to outside
Directors from 6,000 to 8,000 upon new appointment and from 3,000 to 4,000
annually thereafter (10,781,246 shares for; 8,576,080 shares against; 60,684
shares abstained; zero shares broker non-votes).
Approval of an amendment to the Employee Stock Purchase Plan increasing the
aggregate number of shares that may be issued thereunder from 3,100,000 to
4,100,000 (13,462,942 shares for; 3,611,611 shares against; 48,459 shares
abstained; 2,294,998 shares broker non-votes).
Ratification of the selection by the Board of Directors of Ernst & Young
LLP as the Company's independent auditors (19,361,891 shares for; 19,940 shares
against; 36,179 shares abstained; zero shares broker non-votes).
Item 5. Other Information
On May 16, 1997, William E. Foster resigned from his position as President
and Chief Executive Officer. Mr. Foster, the Company's founder, continues to
hold the position of Chairman of the Board.
On May 16, 1997, Bruce I. Sachs was appointed President and Chief
Executive Officer. Previously, Mr. Sachs served as executive vice president
and general manager of the Internet Telecom Business Group at Bay Networks,
Inc. from December, 1995, to May, 1997. He also served as Chief Executive
Officer of Xylogics, Inc. from August, 1993 until the company was purchased
by Bay Networks in December, 1995. Mr. Sachs joined Xylogics in May 1989 as
Director of Engineering.
On August 1, 1997, Robert E. Donahue resigned from his position as
Chief Financial Officer, Treasurer, and Vice President of Finance and
Administration.
On August 25, 1997, Maurice L. Castonguay will be appointed as Chief
Financial Officer, Treasurer, and Vice President of Finance and Administration.
Mr. Castonguay previously served as Vice President of Finance and Chief
Financial Officer at Gradient Technologies from March, 1996 to August, 1997. He
also served as Chief Financial Officer of Xylogics, Inc. from September, 1990 to
March, 1996.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter ended June 29,
1997.
Exhibit 10 - Material Contracts
10.19
April 23, 1997
Mr. Bruce I. Sachs
770 Forest Street
North Andover, MA 01845
Dear Bruce:
On behalf of the Board of Directors of Stratus Computer, Inc. ("Stratus") and
its Compensation Committee, it is my pleasure to offer you the position of
President, Chief Executive Officer of Stratus and a seat on the Stratus Board of
Directors, pursuant to the following terms and conditions:
Base Salary of $450,000 per annum, subject to normal yearly review for
increases by the Compensation Committee.
Variable compensation of $400,000 under Stratus' current Variable
Compensation Plan ("VC Plan"). The annual variable compensation is based upon
your attainment of certain individual goals in combination with the Company
meeting or exceeding designated financial performance goals, as approved by the
Board of Directors and the Compensation Committee. The terms of the VC Plan
for each fiscal year will be discussed with you and set by the Board and the
Compensation Committee at the beginning of each fiscal year, which is consistent
with existing Board policy.
Guaranteed variable compensation for the first twelve (12) months of
your employment, at the annual rate of $400,000 per annum. Your 1998 annual
variable compensation shall be paid to you on a pro-rata basis for those months
remaining in 1998 following the end of your guaranteed twelve (12) month period,
in accordance with the terms of the VC Plan.
Stock options to purchase 800,000 shares of Stratus Common Stock under
the Company's 1983 Stock Option Plan and the 1997 Non-Qualified Stock Option
Plan ("Plans"). Option prices for 400,000 shares will be at $33.625/share, the
fair market value as of the close of business on April 23, 1997, the
commencement date of your consultancy arrangement, and will be issued from the
Company's 1997 Non-Qualified Stock Option Plan. The remaining 400,000 shares
will be issued to you from the 1983 Stock Option Plan once you have commenced
your employment, under which 200,000 shares will be issued to you at fair
market value on the date determined by the Stock and Compensation Committee, and
the remaining 200,000 shares will be issued to you on a discounted basis, to the
lower grant price (your cost basis) of (a) $25.00/share or (b) $10.00/share
below the fair market value on the date determined by the Stock and Compensation
Committee, but in no event shall the discount in either case be greater than
$15.00/share. All options will vest over a four (4) year period at a rate of
6.25% every three (3) months. All options will have a ten (10) year exercise
period. All options vest in full, immediately, in the event of certain change
of control events further described in the Plans.
Participation in such Stratus executive officer and employee benefit
programs as shall be in effect from time to time, subject to the terms and
conditions of such programs, including but not limited to life insurance,
medical insurance, disability, financial planning, annual executive physical,
and reimbursement of business expenses.
You will be immediately eligible for four (4) weeks vacation per year,
increasing to five (5) weeks vacation per year after five (5) years with the
Company.
You will be required to sign Stratus' standard "Employee Proprietary
Information Non-Disclosure Agreement" covering inventions, concepts and
protection of confidential and proprietary information. A copy of the Agreement
is attached for your review.
In the event that your employment with the Company is terminated by
the Board of Directors for any reason, other than Cause (as defined in
Attachment A hereto), you shall immediately tender your resignation as a
Director of the Company and you shall be entitled to the following, which, along
with customary release and non-competition language, shall be the subject of a
separate mutually agreed termination agreement:
a) two (2) years base pay (as of the termination date), payable as either
a lump sum payment or on a deferred two (2) year basis, at your option;
b) immediate vesting in full of all unvested options (as of the
termination date). You will have thirty (30) days following the lump sum or
deferred compensation termination date (which you elect) to exercise all vested
options. Should you elect the deferred compensation option and begin employment
elsewhere consisting of thirty (30) hours or more per week, you will, as of the
date of such other employment, immediately be converted to the lump sum payment
option and thereafter shall have thirty (30) days to exercise all vested
options.
c) a payment equivalent to your participation levels (as of the date of
termination) for medical insurance and life insurance, and Stratus'
participation levels for executive financial planning and tax assistance, to
cover the two (2) year period immediately following termination.
To clarify several points, we want to be clear that your duties as President and
Chief Executive Officer shall be those customarily assigned to those offices
plus such other duties as the Board may, from time to time, designate after
discussion with you. In addition, those duties will require your entire work
time, attention and energies to Stratus and your commitment not to render
substantial services in self employment to any individual or entity other than
Stratus without Board approval.
Bruce, I am very excited about the potential of your joining the Stratus team.
Your experience, knowledge, and vision will be a tremendous addition to this
Company, which I think you know by now is a first rate organization. I would
like your official start date to be on or before May 16, 1997, so that you can
participate in the management meeting beginning on May 21, 1997. This is our
yearly off-site management meeting of about 100 of our top people from around
the world and it's very important that you be there. I realize that you may be
ready for some well-deserved vacation, and that will easily be accomplished
after this meeting.
I, along with the entire Board look forward to your acceptance of this offer -
the start of a long and successful partnership.
If this letter accurately sets forth the terms of the offer that we have
negotiated with you, would you kindly indicate your acceptance in the space
provided and send one signed copy back to me.
Welcome aboard!!
Sincerely, I accept the position of President and
Chief Executive Officer of Stratus
commencing May 16, 1997 in accordance
with the terms hereof:
____________________________ ___________________________________
William E. Foster Bruce I. Sachs
Chairman of the Board
On Behalf of the Board and __________________________________
Compensation Committee Date:
ATTACHMENT A
For purposes of clarification, "Cause" shall be defined as:
(i) a conviction by a court of competent jurisdiction or a plea of nolo
contendere for any felony or other crime involving moral turpitude or financial
wrongdoing;
(ii) the commission of an act of fraud upon the Company or its
subsidiaries;
(iii) performing or engaging in any illegal activity while on the work
place or while conducting Company business off the Company's premises;
(iv) engaging in any act of moral turpitude on the work place or while
conducting Company business off the Company's premises;
(v) possession of dangerous weapons on the work place premises;
(vi) your willful and continued failure to substantially perform your
duties with the Company or comply with the Company's written policies and
procedures (other than any failure resulting from your incapacity due to
physical or mental illness) provided a written demand for substantial
performance has been delivered to you by the Company specifically identifying
the manner in which the Company believes you have not substantially performed
your duties and you have not cured any such failure within thirty (30) days
after such demand.
(vii) material failure to honor the terms of the Employee Proprietary
Information Non-Disclosure Agreement.
Exhibit 10 - Material Contracts
10.20
April 23, 1997
Mr. Bruce I. Sachs
770 Forest Street
North Andover, MA 01845
Dear Bruce:
On behalf of the Board of Directors of Stratus Computer, Inc. ("Stratus") and
its Compensation Committee, it is my pleasure to offer you the position of
consultant to the President and Chief Executive Officer, for the period April
23, 1997 - May 15, 1997. In this position, you will report directly to me and
shall perform such duties and responsibilities as I may request. You shall, of
course, be reimbursed for any normal and customary expenses incurred by you when
performing duties so requested and all activities during this period shall be
considered confidential. Your compensation for duties performed shall consist
of stock options to purchase 400,000 shares of Stratus Common Stock under the
Company's 1997 Non-Qualified Stock Option Plan, provided you accept the position
of President and Chief Executive Officer with the Company on or before May 15,
1997. Option prices for these 400,000 shares will be at $33.625/share, the fair
market value as of the close of business on April 23, 1997, the commencement
date of your consultancy arrangement. All options will vest over a four (4)
year period at a rate of 6.25% every three (3) months. All options will have a
ten (10) year exercise period.
Bruce, I look forward to working with you in this consultancy arrangement and
believe this will be the start of a long and successful relationship.
If you agree to accept this consultant arrangement, please indicate your
acceptance in the space provided below and send one signed copy back to me.
Welcome aboard!!
Sincerely, I accept the consultant position in
accordance with the terms hereof:
____________________________ ___________________________________
William E. Foster Bruce I. Sachs
Chairman of the Board
On Behalf of the Board and __________________________________
Compensation Committee Date:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned duly authorized.
STRATUS COMPUTER, INC.
(Registrant)
Date: August 13, 1997 BRUCE I. SACHS
- --------------------- ---------------------
Bruce I. Sachs
President and Chief Executive Officer
(Principal Executive Officer)
DAVID P. GAMACHE
---------------------
David P. Gamache
Vice President, Corporate Controller
(Principal Accounting Officer)
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