18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 28, 1998
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 4, 1998: 24,032,395
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STRATUS COMPUTER, INC.
INDEX TO 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations (unaudited) -
three months and six months ended June 28, 1998 and
June 29, 1997 3
Condensed Consolidated Balance Sheets (unaudited) -
June 28, 1998 and December 28, 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
six months ended June 28, 1998 and June 29, 1997 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal proceedings 12
Item 4 Submission of matters to a vote of security holders 12
Item 5 Other information 12
Item 6 Exhibits and reports on Form 8-K 12
Exhibit 10 - Material contracts 12
SIGNATURES 13
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
STRATUS COMPUTER, INC.
Condensed Consolidated Statements Of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
-------------------- -------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
------- -------- -------- --------
Revenues:
Product sales $ 82,250 $117,418 $195,508 $223,945
Service 52,044 50,154 102,842 99,292
-------- -------- -------- --------
Total revenues 134,294 167,572 298,350 323,237
Cost of sales:
Product cost of sales 58,454 59,590 117,273 115,899
Service expense 33,470 32,039 66,289 61,446
-------- -------- -------- --------
Gross profit 42,370 75,943 114,788 145,892
Operating expenses:
Research and development expense 23,283 21,128 45,593 41,644
Selling, general and
administrative expenses 31,647 35,401 63,628 68,348
-------- -------- -------- --------
Total operating expenses 54,930 56,529 109,221 109,992
-------- -------- -------- --------
Operating income (loss) (12,560) 19,414 5,567 35,900
Other income, net 4,086 2,895 8,097 5,355
-------- -------- -------- --------
Income (loss) before provision for
income taxes (8,474) 22,309 13,664 41,255
Provision for income taxes 1,500 4,908 6,370 9,076
-------- -------- -------- --------
Net income (loss) $ (9,974) $ 17,401 $ 7,294 $ 32,179
======== ======== ======== ========
Earnings (loss) per share:
Basic $ (0.42) $ 0.75 $ 0.30 $ 1.39
Diluted $ (0.42) $ 0.71 $ 0.29 $ 1.33
Shares used to compute earnings (loss) per share:
Basic 23,955 23,171 23,928 23,204
Diluted 23,955 24,356 24,824 24,182
See accompanying Notes to Condensed Consolidated Financial Statements.
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STRATUS COMPUTER, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
June 28, December 28,
ASSETS 1998 1997
--------- ---------
Current assets:
Cash and cash equivalents $219,785 $178,611
Marketable securities 57,960 81,070
Accounts receivable, net 99,823 161,346
Inventories:
Finished products 21,675 32,872
Work-in-process 2,849 2,665
Parts and assemblies 50,611 41,098
--------- ---------
Total inventories 75,135 76,635
Prepaid expenses 14,243 14,699
Other current assets 19,857 20,212
--------- ---------
Total current assets 486,803 532,573
Property, plant and equipment, at cost 416,333 404,294
Less: accumulated depreciation (274,394) (255,504)
--------- ---------
Net property, plant and equipment 141,939 148,790
Other assets, net 68,638 68,998
--------- ---------
Total assets $697,380 $750,361
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,016 $ 34,860
Accrued expenses:
Compensation-related 21,570 24,395
Other 15,283 31,636
Income taxes payable 19,900 27,906
Short-term borrowings and obligations --- 1,487
Deferred revenue 17,856 28,414
-------- --------
Total current liabilities 96,625 148,698
Long-term deferred revenue 1,163 887
Stockholders' equity:
Common stock, $.01 par value, 150,000,000 shares
authorized, 28,202,336 and 27,645,033 shares issued
in 1998 and 1997, respectively 282 276
Junior common stock, $.01 par value,
500,000 shares authorized --- ---
Additional paid-in capital 269,249 255,691
Retained earnings 472,832 465,538
Cumulative translation adjustment (6,116) (5,877)
--------- --------
Subtotal 736,247 715,628
Less: shares in treasury, at cost, 4,176,900
and 3,700,000 in 1998 and 1997, respectively (136,655) (114,852)
--------- --------
Total stockholders' equity 599,592 600,776
--------- --------
Total liabilities and stockholders' equity $697,380 $750,361
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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STRATUS COMPUTER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
-------------------
June 28, June 29,
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 7,294 $ 32,179
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,979 39,494
Add (deduct) changes in working capital:
Accounts receivable, net 61,523 27,512
Inventories 1,500 (21,976)
Accounts payable and accrued liabilities (42,304) 1,572
Income taxes payable (8,006) 10,981
Other working capital items 811 (3,555)
Other 1,226 ---
-------- --------
Net cash provided by operating activities 61,023 86,207
Cash flows from investing activities:
Acquisition of property, plant and equipment (18,932) (25,031)
Purchases of marketable securities (25,555) (107,595)
Proceeds from sale and maturity of marketable
securities 48,665 71,362
Acquisition of other assets, net (13,637) (12,200)
-------- --------
Net cash used in investing activities (9,459) (73,464)
Cash flows from financing activities:
Net proceeds from employee stock plans 12,949 16,355
Acquisition of treasury stock (21,803) (22,537)
Reduction of short-term borrowings and obligations (1,487) (1,994)
-------- --------
Net cash used in financing activities (10,341) (8,176)
Effect of exchange rate changes on cash (49) (901)
-------- --------
Net increase in cash and cash equivalents 41,174 3,666
Cash and cash equivalents at beginning of year 178,611 131,683
-------- --------
Cash and cash equivalents at end of period $219,785 $135,349
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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STRATUS COMPUTER, INC.
Notes To Condensed Consolidated Financial Statements
June 28, 1998
(Unaudited)
(In thousands, except share amounts)
1. The accompanying condensed consolidated financial statements include
the accounts of Stratus Computer, Inc. (the "Company") and its subsidiaries,
all of which are wholly owned. The investment in the Company's joint
venture with Axime S.A. of France is accounted for using the equity method.
The information herein should be read in conjunction with the annual report
on Form 10-K for the year ended December 28, 1997. It is management's
opinion that the accompanying statements reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the
results for this interim period and the comparable periods presented. The
balance sheet at December 28, 1997 has been derived from the audited
financial statements at that date. 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 periods. Actual results could
differ from these estimates.
2. On August 3, 1998, the Company announced that it had signed a
definitive merger agreement ("Merger") with Ascend Communications, Inc.
("Ascend"), pursuant to which a wholly-owned subsidiary of Ascend will merge
with and into the Company; the Company shall survive the merger and become a
wholly-owned subsidiary of Ascend. Under the terms of the agreement each
share of the Company's common stock will be exchanged for 0.75 of a share of
Ascend common stock (the "Exchange Ratio"); outstanding options and rights
to purchase the Company's common stock will be assumed by Ascend and will
become an option or right to purchase shares of Ascend common stock, with
appropriate adjustments to the number of shares issuable thereunder and the
exercise price thereof based on the Exchange Ratio. The transaction is
intended to be accounted for as a purchase and to qualify as a tax-free
reorganization. The Merger has been approved by the boards of directors of
the Company and Ascend, but is still subject to various customary
conditions, including without limitation, clearance under the Hart-Scott-
Rodino Antitrust Improvements Act and the approval by shareholders of the
Company.
3. Basic earnings (loss) per share is calculated based on the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share includes the effect of dilutive stock options of 896,434 shares and
977,987 shares in the first six months of 1998 and 1997, respectively. For
the second quarter of 1998, diluted earnings (loss) per share was calculated
in the same manner as basic earnings (loss) per share, as required for the
periods in which there is a loss from continuing operations. The dilutive
effect of stock options was 1,185,283 in the second quarter of 1997.
4. For the second quarter and first six months ended June 28, 1998 the Company
recognized revenue of approximately $5,362 and $13,116, respectively, under
certain long term contracts. Revenue under these contracts has been recognized
using the percentage of completion method. Progress on these contracts is
measured based upon the assessment of several factors including risk assessment,
milestones, percentage of value delivered, and costs incurred to date.
5. Beginning in April 1994 through December 1997, the Board of Directors
has approved four plans to repurchase up to 4.8 million shares of common
stock on the open market. During the six months ended June 28, 1998, the
Company repurchased 476,900 shares, at a cost of $21,803, bringing total
purchases to 4,176,900 shares under this program.
6. Revenues from NEC represented 21% and 22% of total revenues during the
second quarter and first six months of 1998 compared with 23% and 22% in the
corresponding 1997 periods. The Company has informed the investment
community that it expects revenue from NEC in the second half of fiscal 1998
to be significantly less than the first half of 1998 or the comparable
period in 1997.
7. Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income".
Statement 130 establishes rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income (loss) or stockholders' equity.
During the second quarter and first six months of 1998, total comprehensive
income (loss) amounted to $(10,250) and $7,055, respectively, and $17,438
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and $31,278 for the corresponding 1997 periods, respectively. The
difference between total comprehensive income (loss) and net income (loss)
is attributable to cumulative translation adjustments.
8. For the second quarter of 1998 and 1997, the Company made interest payments
of $1 and $15 and tax payments of $9,783 and $3,543, respectively. The Company
made interest payments of $103 and $137 and tax payments of $11,316 and $5,181
in the first six months of 1998 and 1997, respectively.
9. In July of 1998, the Company approved and announced a plan of
restructuring to reduce employee headcount by 350 positions, recognize the
impairment of assets utilized by those employees, and downsize the Company's
facilities costs, which would have resulted in a $20,000 restructuring
charge in the third quarter. In anticipation of the Company's planned
merger with Ascend, as discussed in Note 2, the Company will defer this plan
of restructuring until the merger is complete.
10. Income tax expense reflects several factors and estimates including
income taxes for profitable operations, the inability to recognize currently
certain tax benefits from operating losses, and increases in the valuation
allowance for certain deferred tax assets. The Company revised its estimate
of the realization of certain deferred tax assets due to changes in the
Company's mix of earnings between taxing jurisdictions, which occurred during
the quarter. Based upon reasonable and prudent tax planning strategies and
future income projections the Company believes it is more likely than not that
the remaining deferred tax assets will be realized. Realization of the
remaining deferred tax assets is dependent on the Company's future mix of
earnings and other factors.
11. In the second quarter of 1998, as a result of the decline in business
from Japan and the rest of Asia, the Company recorded charges of
approximately $10,000 primarily to revalue inventory purchased specifically
for the Asian market.
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STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. (In thousands)
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes as well as the
section below under the heading "Factors That May Affect Future Results".
Further reference should be made to the 1997 Form 10K for the year ended
December 28, 1997. Various trends and factors that are beyond the Company's
control may affect the Company's future operating results. These include,
but are not limited to, risks associated with the announcement of the
proposed business combination with Ascend, changes in general economic
conditions, rapid or unexpected changes in technologies, activities of
competitors, timing of product shipments and uncertain business conditions
that affect the industries in which the Company operates. Accordingly, past
results and trends should not be used by investors to anticipate future
results or trends.
Revenues
Revenues of $134,294 and $298,350 for the second quarter and first six
months of 1998 decreased 20% and 8%, respectively, from the corresponding
periods in 1997. Product revenue decreased 30% and 13% for the second
quarter and first six months of 1998, respectively, compared to the same
prior year periods. Service revenue increased 4% in both the second quarter
and first six months compared to the same prior year periods.
Product revenue from the Company's hardware business declined 32% and
14% in the second quarter and first six months of 1998 compared to the same
1997 periods, primarily attributable to weaker than anticipated business in
the Asia-Pacific and U.S. regions. Product sales in the telecommunication
market decreased 31% and 16%, respectively, in the second quarter and first
six months of 1998 compared to the same periods of 1997. As a percentage of
product revenue, sales in the telecommunications and financial services
markets were 75% and 80%, respectively, for the second quarter and first six
months of 1998, compared with 68% and 75%, respectively, for the same
periods in 1997. Hardware service revenue increased 4% in both the second
quarter and first six months of 1998 compared to the corresponding 1997
periods as a result of increases in both maintenance and professional
services revenues. Revenues from the Company's software business increased
6% in the second quarter and 3% in the first six months of 1998 compared
with the same periods in 1997.
International product sales from all channels decreased 30% and 10%
for the second quarter and first six months of 1998 compared with the second
quarter and first six months of 1997. For the same periods, domestic
product sales declined 29% and 19%, respectively. Due to strong growth
throughout the region, direct sales in Europe increased 122% and 127% in the
second quarter and first six months of 1998 compared with the second quarter
and first six months of 1997. However, direct sales in the Asia-Pacific
region declined 79% and 53% for the same comparable periods.
Product revenue from indirect channels decreased 38% and 21% for the
second quarter and first six months of 1998 compared to the same prior year
periods. Sales to NEC decreased 26% and 7% for the second quarter and first
six months of 1998, respectively, compared to the same 1997 periods, and
represented 34% of total product revenues during both 1998 periods compared
to 33% and 32% during the corresponding 1997 periods. Product revenue from
other international distributors decreased 63% and 55% in the second quarter
and first six months of 1998 compared to the same 1997 periods. The decline
in product revenue was primarily attributable to the global effect of the
financial instability in Asia. As a percentage of total revenues, sales to
other international distributors were 6% in both the second quarter and
first six months of 1998 compared to 12% and 10%, respectively, in the same
prior year periods.
Gross Profit
Total gross margin of 32% and 38% for the second quarter and first six
months of 1998 decreased 13 and 7 percentage points, respectively, from the
total gross margin percentage realized in the second quarter and first six
months of 1997. The second quarter 1998 margin included charges of $10,000,
primarily to reserve for excess inventory which had been focused at Asian
markets. These charges adversely impacted total gross margin by 7 and 3
percentage points for the second quarter and first six months of 1998,
respectively.
Product gross margin of 29% in the second quarter of 1998 declined 20
percentage points from the second quarter of 1997. Product gross margin of
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40% in the first six months of 1998 decreased 8 percentage points from the
corresponding 1997 period. This decrease was primarily related to the
$10,000 charges, the reduction in volume, and a product mix favoring smaller
average system configurations. The $10,000 charges adversely impacted
product margins by 12 and 5 percentage points for the second quarter and
first six months of 1998, respectively.
The gross margin on service revenue was 36% for both the second
quarter and first six months of 1998 compared to 36% and 38%, respectively,
for the same periods of 1997. The year-to-date gross margin decrease was
primarily due to the investments made in the core service business to
support new product introductions.
Other Operating Expenses
Total operating expenses for the second quarter and first six months
of 1998 decreased 3% and 1% from the corresponding 1997 periods, primarily
due to decreased selling, general and administrative expenses. As a
percentage of total revenues, operating expenses increased to 41% and 37% in
the second quarter and first six months of 1998 from 34% in both the
corresponding 1997 periods.
Research and development expense increased approximately 10% and 9% in
the second quarter and first six months of 1998 compared to the same periods
in 1997. As a percentage of total revenues, research and development
expense increased 4 percentage points to 17% and 2 percentage points to 15%,
respectively, for the second quarter and first six months of 1998 compared
to the corresponding 1997 periods.
The Company continues to enhance its Continuumr product line,
leveraged by the successful incorporation of the Hewlett-Packard industry
leading PA-RISC microprocessor, and the HP-UX, FTX, and VOS operating system
technologies. During the second quarter of 1998, the Company introduced the
Continuum 400-CO, the industry's new price/performance leader for
continuously available central office (CO) systems. In addition to
providing the best price/performance of any system in it's class, the
Continuum 400-CO is the only continuously available CO system running the HP-
UX operating system. Resources have also been deployed to develop future
Continuum products. Among these products will be a family of products based
on the Intel IA-64 microprocessor, code-named Merced, which is being jointly
developed by Intel and Hewlett-Packard, and which is planned to support both
the HP-UX operating system and the Microsoft Windows NT Server computing
environments. During the second quarter of 1998, Intel announced the Merced
chip will be introduced in the year 1999 rather than in 1998 as previously
planned. The Company is currently evaluating the impact of the Merced
release date on its product roadmap and resource plans. The Company is
evaluating the need for interim products as a result of the Merced chip
delay.
Selling, general and administrative expenses declined 11% and 7% in
the second quarter and first six months of 1998 compared to the same 1997
periods. These declines were due primarily to lower personnel levels, and
less commission expense as a result of the lower product revenue levels. In
the second quarter and first six months of 1998, selling, general and
administrative expenses were 24% and 21%, respectively, of net revenues,
compared to 21% in both the corresponding 1997 periods.
Other Income
Other income increased $1,191 and $2,742 in the second quarter and
first six months of 1998 compared to the same prior year periods. This was
primarily due to an increase in interest income resulting from higher levels
of invested cash.
Income tax expense for the second quarter and first six months of
fiscal 1998 was $1,500 and $6,370, respectively, compared to $4,908 and
$9,076 for the same periods last year. Income tax expense reflects several
factors and estimates including income taxes for profitable operations, the
inability to recognize currently certain tax benefits from operating losses,
and increases in the valuation allowance for certain deferred tax assets.
The Company revised its estimate of the realization of certain deferred tax
assets due to changes in the Company's mix of earnings between taxing
jurisdictions which occurred during the quarter. Based upon reasonable and
prudent tax planning strategies and future income projections the Company
believes it is more likely than not that the remaining deferred tax assets
will be realized. Realization of the remaining deferred tax assets is
dependent on the Company's future mix of earnings and other factors.
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Liquidity and Capital Resources
At June 28, 1998, the Company had cash and cash equivalents of
$219,785, an increase of $41,174 from the beginning of the year. This was
primarily due to collection of accounts receivable, reinvestment of proceeds
from matured marketable securities into short-term investments, and proceeds
from employee stock plans. The growth in cash was partially offset by the
stock repurchase program, capital expenditures, and a reduction of accounts
payable and accrued expenses.
At June 28, 1998, the Company had no outstanding long-term debt, as
the final payments related to the acquisition of Isis Distributed Systems,
Inc. were transacted during the first quarter of 1998.
Certain subsidiaries have entered into credit arrangements with local
banks, principally Overdraft Agreements, for the purpose of short-term
liquidity management. There were no outstanding borrowings under these
agreements at June 28, 1998.
The ratio of current assets to current liabilities for the Company as
of June 28, 1998 was 5 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.
At June 28, 1998, the Company had non-cancelable inventory purchase
commitments of approximately $20,418.
Business Combination
On August 3, 1998, the Company announced that it had signed a
definitive merger agreement ("Merger") with Ascend Communications, Inc.
("Ascend"), pursuant to which a wholly-owned subsidiary of Ascend will merge
with and into the Company; the Company shall survive the merger and become a
wholly-owned subsidiary of Ascend. Under the terms of the agreement, each
share of the Company's common stock will be exchanged for 0.75 of a share of
Ascend common stock (the "Exchange Ratio"); outstanding options and rights
to purchase the Company's common stock will be assumed by Ascend and will
become an option or right to purchase shares of Ascend common stock, with
appropriate adjustments to the number of shares issuable thereunder and the
exercise price thereof based on the Exchange Ratio. The transaction is
intended to be accounted for as a purchase and to qualify as a tax-free
reorganization. The Merger has been approved by the boards of directors of
the Company and Ascend, but is still subject to various customary
conditions, including without limitation, clearance under the Hart-Scott-
Rodino Antitrust Improvements Act and the approval by shareholders of the
Company.
In July of 1998, the Company approved and announced a plan of
restructuring to reduce employee headcount by 350 positions, recognize the
impairment of assets utilized by those employees, and downsize the Company's
facilities costs, which would have resulted in a $20,000 restructuring
charge in the third quarter. In anticipation of the Company's planned
merger with Ascend, as discussed in Note 2, the Company will defer this plan
of restructuring until the merger is complete.
Other Matters
The Company is in the process of conducting an internal review of all
systems and contacting all software suppliers to determine major areas of
exposure to Year 2000 ("Y2K") issues. Although the core financial and reporting
systems have been identified as being Y2K compliant due to their recent
implementation, a number of applications in the financial and information system
area are not Y2K compliant. In the manufacturing area, the Company is in the
process of correcting areas of exposure. In the third-party area, the Company
has begun contacting its major third parties. Most of these parties have stated
they intend to be Y2K compliant by 2000.
The Company is in the process of evaluating the impact of the European
Union's pending conversion to a new common currency, the Euro. At present,
the Company does not expect the impact to be material to operations.
Factors That May Affect Future Results
Except for the historical information contained herein, the matters
discussed in this Quarterly Report are forward-looking statements. The
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Company cautions readers to recognize that actual future results could
differ materially from historical performance as a result of the following
and other factors:
Various risks associated with the announcement of the proposed Merger
with Ascend could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that
customers of the Company will continue their current and historical buying
patterns without regard to the proposed Merger, or that certain customers
will not defer purchasing decisions as they evaluate, among other things,
the proposed Merger, or that certain existing and prospective customers will
not ultimately decide to purchase competitors' products in lieu of the
Company's products. The Company's success depends to a significant degree
upon the continuing contribution of key employees. A number of factors
relating to the proposed Merger, including without limitation the
recruitment activities of competitors, may make it more difficult to retain
and attract key employees. In addition, the Company expects to incur
significant expenses in connection with the proposed Merger, whether or not
consummated.
Future operating results are dependent upon the timing and market
acceptance of new and enhanced product introductions by the Company or its
competitors, several of which are larger than the Company, including
competitors offering high-availability solutions.
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.
Revenues and earnings may be impacted by the Company's ability to
strengthen its position in open systems by increasing sales of its Continuum
systems running the HP-UX operating system.
The Company historically books and ships a large percentage of its
revenues towards the end of each quarter, making revenue forecasting
difficult. In addition, product volumes and product mix 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.
Substantially all of the Company's product manufacturing and many of
its 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 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, dependence on single-
source vendors, 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.
A significant amount of the Company's business is derived from
international markets, including the Far East. In the second quarter and
first six months of 1998, business levels in Asia were adversely affected by
the economic problems in the region. There is no assurance that future
financial results will not be adversely impacted by economic events in the
Far East or elsewhere.
In addition to its direct channels, the Company maintains indirect
distribution channels through resellers and distributors. One customer,
NEC, represented 21% and 22% of total revenues in the second quarter and
first six months of 1998 and 23% and 22% for the same periods in 1997. The
Company has informed the investment community that it expects revenue from
NEC in the second half of fiscal 1998 to be significantly less than the
first half of 1998 or the comparable period in 1997. The financial
condition of, and ongoing business relationship with, such resellers and
distributors are important to the Company's financial success. Fluctuations
in channel mix may be significant and can have a significant impact on gross
margins and therefore on earnings per share.
As the technology marketplace continues to evolve 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 shifts 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
FTX is a trademark of Stratus Computer, Inc. Hewlett-Packard and HP-UX are
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trademarks of Hewlett-Packard Company. Microsoft and Windows NT are
registered trademarks of Microsoft Corporation. Intel is a registered
trademark of Intel Corporation in the United States and other countries.
All other trademarks and registered trademarks are the property of their
respective holders.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management does not believe these actions will
have a material adverse affect on the financial position or results of
operations of the Company.
Item 4. Submission of matters to a vote of security holders
On April 22, 1998, the Annual Meeting of Stockholders was held and, in
addition to the ratification of the selection of Ernst & Young LLP as
independent auditors (21,342,785 shares in favor, 6,382 shares against, 16,580
shares abstained), Messrs. Paul J. Ferri and Gardner C. Hendrie were elected as
Directors of the Company to serve for a three-year term (Ferri receiving
20,963,363 shares in favor and 402,384 shares against; Hendrie receiving
20,964,563 shares in favor and 401,184 against).
Item 5. Other Information
On July 14, 1998, Charles Giambalvo was appointed as Vice President of
Telecommunications Sales for North America. Mr. Giambalvo joined the Company
from ECI Telecom, Inc., an international supplier of compressed voice, data and
video telecommunications transmission systems. He most recently served as ECI's
Senior Vice President of Sales and Customer Service, where he managed sales,
service, training, and application engineering functions.
Effective July 1, 1998, Donald Oldham resigned from his position as Vice
President of Worldwide Sales. Mr. Oldham will remain employed by the Company
with reduced responsibilities reporting to the president and CEO until
year end. 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 Division, and in October 1994 he was elected
Vice President, Worldwide Sales.
Effective July 10, 1998, David Weishaar resigned from his position as Vice
President of Worldwide Operations. Mr. Weishaar will remain employed by the
Company with reduced responsibilities reporting to the president and CEO until
year-end. 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 Microsystems, Inc.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
(2) Agreement and Plan of Merger, by and among the Registrant, Ascend
Communications Inc. and Wildcard Merger Corporation dated as of
August 3, 1998. Filed as part of August 3, 1998 Form 8-K and
incorporated herein by reference.
(4) Amendment to Rights Agreement dated August 3, 1998. Filed as part
of August 3, 1998 Form 8-K and incorporated herein by reference.
(10) Material Contracts
(a) August 1, 1998 Amendment to Employment Agreement for
Bruce I. Sachs dated April 23, 1997.
(b) August 1, 1998 Amendment to Employment Agreement for
Maurice L. Castonguay dated July 17, 1997.
(b) The following report on Form 8-K was filed and is incorporated herein by
reference:
12
<PAGE>
(1) Current Report on Form 8-K dated August 3, 1998 and filed August 5,
1998 relating to the proposed business combination of the Company
with Ascend Communications, Inc.
SIGNATURES
In accordance with 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 thereunto duly authorized.
STRATUS COMPUTER, INC.
(Registrant)
Date: August 12, 1998
- ---------------------
MAURICE L. CASTONGUAY
---------------------
Maurice L. Castonguay
Vice President, Finance and Administration
and Chief Financial Officer, hereunto duly
authorized
13
<PAGE>
Exhibit 10
10.24
As of August 1, 1998
Mr. Bruce I. Sachs
Dear Bruce:
This letter supplements and amends the letter agreement between you and
Stratus Computer, Inc. (the "Company") dated April 23, 1997 (the "Letter
Agreement").
In light of the proposed transaction with Ascend Communications, Inc.
currently being considered by the Board of Directors of the Company, which would
significantly impact the nature and status of your duties as President and Chief
Executive Officer of the Company, in the event that you voluntarily terminate
your employment of the Company within one year following the consummation of
such transaction, it is agreed that you shall be entitled to the same rights and
benefits as if your employment with the company was terminated by the Board of
Directors other than for Cause as defined in the Letter Agreement.
Your signature below will evidence your agreement with the foregoing.
Very truly yours,
STRATUS COMPUTER, INC.
Accepted and agreed:
BRUCE I. SACHS EILEEN CASAL
___________________________ By:_________________________
/s/Bruce I. Sachs /s/ Eileen Casal
10.25
As of August 1, 1998
Mr. Moe L. Castonguay
Dear Moe:
This letter supplements and amends the letter agreement between you and
Stratus Computer, Inc. (the "Company") dated July 17, 1997 (the "Letter
Agreement").
In light of the proposed transaction with Ascend Communications, Inc.
currently being considered by the Board of Directors of the Company, which would
significantly impact the nature and status of your duties as Vice President of
Finance and Administration and Chief Financial Officer of the Company, in the
event that (i) you voluntarily terminate your employment with the Company or
(ii) the Company terminates your employment, in either case within one year
following the consummation of such transaction, it is agreed that you shall be
entitled to the same rights and benefits as if your employment with the Company
was terminated upon such event.
Your signature below will evidence your agreement with the foregoing.
Very truly yours,
STRATUS COMPUTER, INC.
Accepted and agreed:
MAURICE L. CASTONGUAY EILEEN CASAL
___________________________ By:_________________________
/s/Moe L. Castonguay /s/ Eileen Casal
15
<PAGE>
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