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 28, 1997 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 New York Stock Exchange, Boston Stock
value per share Exchange, Chicago Stock Exchange,
Pacific Exchange
Common Stock Purchase Rights New York Stock Exchange, Boston Stock
Exchange, Chicago Stock Exchange,
Pacific 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 $1,046,322,161 based on the last reported sale
price of the Common Stock on the New York Stock Exchange, Boston Stock
Exchange,
Chicago Stock Exchange, and Pacific Exchange on March 23, 1998.
Number of shares outstanding of each class of Common Stock as of
March 23, 1998: 24,297,757 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 28, 1997. Parts I, II and IV
Portions of Proxy Statement for
Annual Meeting of Stockholders
on April 22, 1998. Part III
PART I
Item 1. Business
Stratus Computer, Inc. ("Stratus" or "the Company") was founded in
1980, The Company's business objective is to be the premier supplier of
hardware, software and service solutions to targeted telecommunications and
enterprise server markets where continuous 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,
message switching, communications control, distributed computing and other
interactive applications in which system availability and data integrity
are critical.
The Company competes in two major market areas: 1) telecommunications
where service providers use Stratus systems at critical points in their
networks and operations support systems, and 2) enterprise server
applications which support enterprise-wide computing in a client/server
architecture. Five key telecommunications applications have been targeted:
1) home location register; 2) local number portability; 3) internet
infrastructure; 4) intelligent network services; and 5) network operations
support systems. Enterprise server applications are found in the electronic
commerce, financial services, retail, travel, healthcare, and gaming
industries
PRODUCTS
The core business includes continuously available hardware-based fault-
tolerant computer systems, and a customer service organization providing
customer support, education and professional services. The Company's
software business offers application software and professional services for
targeted markets.
Core Business
Stratus Continuous Processing(TM) 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 a
hardware-based fault-tolerant design which provides uninterrupted
operations in the event of hardware component failures, remote online
service, customer-replaceable components and support of industry standards.
Stratus systems achieve fault tolerance through a proprietary hardware
architecture, duplication of off-the-shelf microprocessors and other
critical processing components, and one of four operating systems: 1) the
proprietary Stratus Virtual Operating System (VOS); 2) Stratus FTX(R), the
Company's UNIX(R) System V.4-compliant operating system; 3) the Company's
implementation of the HP-UX(TM) operating system; and 4) Windows NT(R)
Server running on its cluster-based hardware product. The hardware products
which use Stratus' hardware-based fault-tolerant design do not require
unique application programming, a competitive advantage over high-
availability clustering.
The Continuum(R) family of hardware fault-tolerant computer systems
was announced in 1995. Using Hewlett-Packard(TM) PA-RISC 7100(R)
microprocessors, Continuum systems provided up to four times the
price/performance of the previous core product line, the XA/R(TM) Series of
fault-tolerant systems, and represented the largest increase in
price/performance in the Company's history. In June 1996, Stratus began
shipments of the Continuum Series 400, an entry-level extension of the
existing Continuum hardware family, and in November 1996, made the HP-UX
operating system available on this new system. In 1997, the entire
Continuum family was upgraded to the Hewlett-Packard PA-RISC 8000
microprocessor, the PA-RISC 8000, providing a performance increase of two
to four times over previous Continuum products while maintaining binary
compatibility.
The Continuum Series offers three ranges of systems. Continuum Models
412, 415, 418, 422, 425, and 428 are entry-level systems. The Series 400's
Peripheral Component Interconnect subsystem leverages off-the-shelf
components to provide high-performance, industry-standard bus capabilities.
This means the system's I/O options can be expanded as readily as
technology allows. Continuum Models 610, 618, 620, 625 and 628 are
midrange high-performance systems that provide open continuously available
computing in distributed and departmental environments. Continuum Models
1210, 1215, 1218, 1220, 1225, 1228 and 1245 are the family's high-end
systems for the expandability and growth path customers need for large
online transaction processing applications. Models 418, 428, 618, 628, 1218
and 1228 were introduced in 1997 and use the Hewlett-Packard PA-RISC 8000
microprocessor.
The Continuum family offers high performance, continuous availability
and open systems. Design innovations include incorporating up to 2 GB of
memory on each CPU board, offloading memory traffic from the bus, dedicated
I/O processors and symmetric multiprocessing. The Continuum architecture
allows users to expand system capabilities incrementally as needs increase.
All Continuum models within each range and product generation 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, 2GB of duplex
memory, 855GB of duplex disk and 84 I/O adapters.
The Continuum Series' architecture enables the Company to offer one of
the strongest availability guarantees in the industry. In the guarantee,
the Company agrees to refund a month's maintenance fees to a customer if
the customer experiences even one second of unplanned downtime in hardware,
Stratus value-added software or operating system. Stratus offers the
guarantee in addition to the standard Stratus Continuum hardware one-year
warranty.
Stratus systems can identify and isolate many of their own component
failures, and automatically dial in to a Stratus Customer Assistance Center
(CAC) to report the failure 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.
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(TM) 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.
All Continuum models can be ordered with the FTX operating system,
Stratus' native implementation of the UNIX System V, Release 4 operating
system. All 400 Series Continuum products can also be ordered with Hewlett-
Packard's HP-UX operating system, and all Continuum Series 600 and 1200
products can be ordered with VOS, the Company's proprietary operating
system. The Company plans to make the HP-UX operating system available on
Continuum models 1218 and 1228 later in 1998.
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. FTX
is a fault-tolerant and scalable native port of UNIX System V, Release 4
Multiprocessing, maintaining all of the open features and benefits of
standard UNIX, with added extensions for reliability, availability and
serviceability. In addition, FTX provides an adaptable UNIX environment
that allows users to customize their telecommunications services to meet
local requirements.
The HP-UX operating system, running on the HP(TM) PA-RISC
microprocessor, is one of the most open UNIX operating systems available in
the industry today. It provides enterprise-level functionality, including
broad scalability, high performance, a large number of application
solutions and integrated system and network management solutions. The HP-
UX operating system running on Stratus hardware also provides complete
Application Binary Interface compatibility with other systems running the
same release of HP-UX operating system. This means that a broad range of
middleware and applications currently operating on HP-UX operating system
can be moved without change to Stratus' implementation of the HP-UX
operating system.
The VOS operating system provides a sophisticated environment tuned to
meet the needs of critical online computing environments. VOS also
supports a large portfolio of industry-specific applications that provide
solutions to customers with critical computing needs.
RADIO Cluster(TM) supports the Windows NT Server operating system to
provide a high level of reliability in a PC superserver. Redundancy of
RADIO Cluster's compute processing, storage handling and high-speed
networking eliminates the single points of failure common to PC servers.
In 1997, the Company announced its intention to base the next
generation of Continuum systems on the Intel(R) IA-64 microprocessor,
, which is being jointly developed by Intel and Hewlett-Packard. The
next generation will bring Stratus' continuous availability and the IA-64's
64-bit processing to both UNIX and Windows NT Server environments. In
1997, the Company began to re-deploy its Windows NT Server engineering
resources away from the RADIO Cluster product line to re-focus them on the
Merced-based fault-tolerant Continuum products which will run both the
Windows NT Server and HP-UX operating systems.
Application Software
Application software and professional services solutions, designed for
Stratus systems and other platforms, are provided through the company's
wholly owned subsidiaries, S2 Systems, Inc. (S2(TM)) and the TCAM Group of
companies (TCAM(TM)), 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, 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(TM) for medical claims
processing. S2 also specializes in high-performance communications and
connectivity solutions with its Network Express(TM) 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 Alaris product for stock lending, an Advanced
Order Management product for Internet-enabled retail brokerage
transactions, and its SWAN product for settlements 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 and FTX are registered
trademarks, and RADIO, RADIO Cluster, Continuous Processing, HealthLine, XA-
R and XA are trademarks of Stratus Computer, Inc. ON/2 is a registered
trademark and S2 and Network Express are trademarks of S2 Systems, Inc.
TCAM is a trademark of TCAM Systems, Inc. HP, Hewlett-Packard and HP-UX
are trademarks of Hewlett-Packard Company. All other trademarks are the
property of their respective owners.
MARKETING AND SALES
A headquarters staff of sales and 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. The Company is
in the process of expanding its marketing function in order to increase the
Company's identity in the marketplace and to improve its understanding of
product requirements in strategic market segments such as
telecommunications.
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 has reseller agreements with Hewlett-
Packard's Local Product Organizations in Germany/Switzerland, France and
the United Kingdom which allow the Hewlett-Packard organization to resell
Stratus products to their customers. The Company also sells through
certain general purpose OEMs such as NEC Corporation. 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.
The Company's strategy is to continue to focus the sales organization
on targeted vertical industries and major application opportunities within
the telecommunications and enterprise server markets, expand indirect sales
channels and improve selling efficiencies.
For information on sales by geographic segment, see Note 13 in Notes
to Consolidated Financial Statements included as part of the 1997 Annual
Report to Stockholders, which Note 13 is incorporated herein by reference.
Competition
The Company faces intense competition from a growing number of
companies 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 Compaq Computer
Corporation (as a result of its acquisition of Tandem Computers, Inc.),
Hewlett-Packard Company, IBM and Sun Microsystems, Inc., the Company
expects to encounter additional competition in the future from vendors such
as Sequent Computer Systems, Inc. who integrate hardware and software
products from such providers as Intel Corporation and Microsoft
Corporation. While its primary competitors are substantially larger and
have significantly more resources, the Company believes that its singular
focus on critical online business applications, its expertise in continuous
availability, automated service and its specialized vertical application
focus provide unique advantages compared with those of its competitors.
The Company also believes it competes successfully on the basis of product
capabilities, total cost of ownership 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. Customers have the
ability to accelerate, defer or cancel delivery of any orders placed with
the Company. For these reasons, the amount of backlog is not important to
an understanding of the Company's business.
RAW MATERIALS, SUBCONTRACT LABOR AND MANUFACTURING
The Company's volume manufacturing is located outside the United States at
the Company's manufacturing facility in Dublin, Ireland. The Company purchases
all of its system component parts and peripheral devices from other
manufacturers. The majority of printed circuit boards are purchased from board
subcontractors in the United States 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 1998 forecasted requirements, and no delays in product shipments are
expected. 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 the second half of 1997, the company experienced favorable cost
trends on the purchases of its disk drive products. This resulted from excess
capacity in most of the segments of the disk drive industry, which is expected
to continue in 1998. The Company has not experienced any significant
difficulties in obtaining supplies of memory devices, 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 grow in
absolute dollars over the next 12 months, but remain constant as as percentage
of total revenues. The Company's total research and development expenditures,
which include certain capitalized software development costs, were $101.5
million in 1997, $90.3 million in 1996, and $94.2 million in 1995. These
investments reflect the Company's long-standing commitment to provide leading-
edge hardware and software products to the telecommunications and reliable
enterprise server marketplaces, particularly in support of mission critical
applications. The Company leverages base hardware and software technologies
supplied by partners, with development activities primarily focused on
technologies which enhance systems and applications availability. The Company
has made significant investments in telecommunications middleware products
which simplify service creation for telecommunications providers and software
developers, and which provide a high level of reliability for the delivery of
those services.
In 1997, the major development efforts were directed towards the Company's
Continuum product line, and the Company began to transition resources away from
its RADIO Cluster product line. Resources not focused at sustaining
engineering for RADIO Cluster are being re-deployed to focus on the Company's
new Merced-based fault-tolerant products that will support the Microsoft(R)
Windows NT Server operating system.
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 28, 1997, the Company employed 2,487 persons.
Item 2. Properties
The Company currently occupies three buildings on a 112 acre site at its
corporate headquarters location in Marlborough, Massachusetts. These three
buildings and the underlying land (approximately 50 acres) plus a 62 acre
adjoining parcel are owned by the Company. In the third quarter of 1997, the
Company purchased the third building and underlying land (all of which had been
leased under an operating lease) for $21.6 million in cash. The Company also
owns its manufacturing and office facility in Dublin, Ireland. The aggregate
amount of office, engineering, manufacturing and customer service space that is
owned by the Company is approximately 612,836 square feet.
Information relating to the above facilities is set forth in the
following table.
Floor
Space Owned/
Plant Location Use (Sq. Ft.) Leased
- - -------------- --------------- --------- ------
Marlborough, Office, engineering 202,087 Own
MA
Marlborough, Office, engineering 198,341 Own
MA and customer service
Marlborough, Office, engineering 102,408 Own
MA and manufacturing
Dublin, Office, engineering
Ireland and manufacturing 110,000 Own
Prior to the purchase of the third building at the Marlborough site, the
Company's fiscal year 1997 rent for the leased Marlborough facility was
approximately $1.5 million for the eight month period plus real estate taxes
and other occupancy expenses.
The Company also leases additional sales, customer service and education
space at locations throughout the United States, Canada, Mexico, Europe, the
Far East, Australia, New Zealand and South Africa at an aggregate annual rent
of approximately $11.3 million for fiscal year 1997.
Item 3. 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
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 23, 1998 was 1,103. Additional information required by this item is
incorporated herein by reference to the "Common Stock Information" appearing on
page 34 of the 1997 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 14-15 of the 1997 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 16-20 of the 1997 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 21, 1998, are incorporated herein by reference
to the "Financial Statements and Supplementary Data" contained in pages 21-35
of the 1997 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 2-4 of the Proxy Statement
for Annual Meeting of Stockholders on April 22, 1998.
B. The executive officers of the Company are as follows:
Name Age Position
Bruce I. Sachs 38 President and Chief Executive Officer
William E. Foster 53 Chairman
Maurice L. Castonguay 46 Vice President, Finance and
Administration, and Chief Financial Officer
Stephen C. Kiely 52 Vice President, Platform Products
Edward J. Mezzanotte 53 Vice President, Stratus Software Group
J. Donald Oldham 56 Vice President, Worldwide Sales
Roderick K. Randall 39 Vice President, Worldwide Marketing
David M. Weishaar 46 Vice President, Worldwide Operations
John F. Young 55 Vice President, Human Resources
Eileen Casal 39 Vice President, General Counsel
David P. Gamache 40 Vice President, Corporate Controller
Mr. Sachs began his employment with Stratus in April 1997 and assumed the
positions of President and Chief Executive Officer in May 1997. 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.
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. From August
1996, to May 1997, he was President and Chief Executive Officer. From January
1996, he has been Chairman of the Company.
Mr. Castonguay was appointed Vice President of Finance and Administration,
and Chief Financial Officer in August 1997. Mr. Castonguay previously served
as Vice President of Finance and Chief Financial Officer at Gradient
Technologies, Inc. from March, 1996 to August, 1997. He also served as Chief
Financial Officer of Xylogics, Inc. from September, 1990 to March, 1996.
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. From January 1996 to November
1996, he served as Vice President, Continuum Products Group. From November
1996, he has served as Vice President, Platform Products.
Mr. Mezzanotte was appointed Vice President and General Manager,
Software Business Group in October 1997. Mr. Mezzanotte previously served
as Vice President and General Manager of the Company's Isis Distributed
Systems Division. Prior to joining the Company in 1996, Mr. Mezzanotte
served as President of Powertel Inc. from June 1995 to July 1996. From
April 1993 to June 1995 Mr. Mezzanotte was president of the Systems
Exchange, a company he co-founded in 1993.
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. He has served as Vice President,
Worldwide Sales since his election in October 1994.
Mr. Randall was appointed Vice President of Worldwide Marketing in
October 1997. Mr. Randall previously served as Vice President of Strategic
Market Development at Madge Networks, Inc. from May, 1996 to September,
1997, when the company he co-founded in 1987, Teleos Communication, Inc.
was acquired by Madge Networks, Inc. in 1996. Mr. Randall held a variety
of senior executive roles at Teleos between 1987 and 1996, most recently as
Vice President and Chief Technology Officer.
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.
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 1986 as Corporate Staff
Attorney. From October 1990 to October 1995, she served as Division Counsel
for the Company's International Division. From 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 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 1995 he was elected Vice
President, Corporate Controller. Effective April 27, 1998, Mr. Gamache will
resign from his position.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to the "Executive Compensation" appearing on pages 6-10 of the Proxy Statement
for Annual Meeting of Stockholders on April 22, 1998.
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 22, 1998.
Item 13. Certain Relationships and Related Transactions
None.
<TABLE>
Financial History
<CAPTION>
In thousands except per share amounts and employees, unaudited
1997 1996(F1) 1995(F1) 1994(F2) 1993(F2) 1992 1991 1990 1989 1988
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of operations
- - -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $688,275 $609,329 $587,922 $576,556 $513,680 $486,266 $448,632 $403,850 $341,327 $265,314
- - -----------------------------------------------------------------------------------------------------------------------------------
Product revenue percent 71% 67% 65% 72% 77% 79% 82% 84% 85% 88%
Service revenue percent 29% 33% 35% 28% 23% 21% 18% 16% 15% 12%
Gross profit margin 310,685 269,771 284,732 321,961 292,811 289,070 267,312 237,995 207,613 160,787
Gross profit margin percent
to sales 45.1% 44.3% 48.4% 55.8% 57.0% 59.4% 59.6% 58.9% 60.8% 60.6%
Operating expenses 228,545 219,637(F1) 272,664(F1) 252,283(F2) 267,395(F2) 220,649 205,241 186,913 153,920 115,671
Operating expenses percent
to sales 33% 36% 46% 44% 52% 45% 46% 46% 45% 44%
Operating income 82,140 50,134 12,068 69,678 25,416 68,421 62,071 51,082 53,693 45,116
Operating income percent
to sales 12% 8% 2% 12% 5% 14% 14% 13% 16% 17%
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 74,114 $ 43,520 $ 17,338 $ 60,982 $ 16,607 $ 56,945 $ 49,705 $ 36,987 $ 35,393 $ 29,344
- - -----------------------------------------------------------------------------------------------------------------------------------
Cash flow data
Net cash provided by
operating activities $186,268 $ 99,118 $ 48,090 $140,621 $121,919 $ 97,445 $ 81,127 $ 36,102 $ 21,622 $ 12,696
Acquisition of property,
plant and equipment 73,832 48,165 54,734 53,858 33,668 60,759 31,478 27,395 36,963 17,807
Depreciation of property,
plant and equipment 47,786 41,790 42,864 40,395 35,111 31,778 28,910 19,893 16,889 10,547
Share data
Shares used to compute
earnings per share-basic 23,522 23,437 23,417 24,132 23,271 22,564 21,314 20,378 19,872 19,441
Shares used to compute
earnings per share-diluted 24,635 23,774 23,757 24,649 23,769 23,457 22,419 20,894 20,712 20,257
Earnings per share-basic $ 3.15 $ 1.86 $ 0.74 $ 2.53 $ 0.71 $ 2.52 $ 2.33 $ 1.82 $ 1.78 $ 1.51
Earnings per share-diluted $ 3.01 $ 1.83 $ 0.73 $ 2.47 $ 0.70 $ 2.43 $ 2.22 $ 1.77 $ 1.71 $ 1.45
Common stock price
High $ 58.81 $ 34.87 $ 39.62 $ 38.50 $ 41.25 $ 54.25 $ 50.62 $ 29.00 $ 35.25 $ 31.50
Low $ 26.63 $ 17.12 $ 23.37 $ 23.25 $ 20.25 $ 29.50 $ 20.75 $ 14.62 $ 19.25 $ 19.50
Book value per share $ 25.09 $ 22.28 $ 20.49 $ 20.31 $ 18.13 $ 17.03 $ 14.18 $ 11.15 $ 9.12 $ 7.08
Year-end position
Total assets $750,361 $638,921 $607,809 $613,410 $558,531 $467,182 $397,081 $327,574 $274,098 $199,787
Working capital 383,875 325,724 292,993 324,431 299,293 277,600 237,977 170,306 136,257 101,273
Long-term obligations
and deferrals 887 3,634 7,168 10,150 13,743 3,951 6,543 18,822 29,402 10,170
Stockholders' equity 600,776 519,484 478,391 490,152 435,960 389,663 314,026 230,281 183,972 138,985
Return on average
stockholders' equity 13% 9% 4% 13% 4% 16% 18% 18% 22% 24%
Employees 2,487 2,293 2,441 2,878 2,610 2,622 2,492 2,381 2,147 1,711
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Operating expenses in 1996 and 1995 included charges of $4,623 and $24,500,
respectively, to cover the costs of reducing the Company's cost structure.
<F2> 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.
</FN>
</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 28, 1997 and the percentage changes in those items when
compared to the preceding year.
Percentage of total revenues Percentage increase (decrease)
1997 1996 1995 1997 1996 1995
- - -------------------------------------------------------------------------------
Product sales 71% 67% 65% 20% 6% (8%)
Service revenue 29% 33% 35% (2%) (1%) 27%
- - -------------------------------------------------------------------------------
Total revenues 100% 100% 100% 13% 4% 2%
- - -------------------------------------------------------------------------------
Product cost of
sales 37% 35% 32% 18% 14% 11%
Service expense 18% 21% 20% 0% 8% 36%
- - -------------------------------------------------------------------------------
Gross profit 45% 44% 48% 15% (5%) (12%)
- - -------------------------------------------------------------------------------
Research & development
expense 13% 13% 14% 14% (5%) (1%)
Selling, general &
administrative
expenses 20% 22% 28% 2% (18%) 3%
Restructuring charge - 1% 4% N/A (81%) N/A
- - -------------------------------------------------------------------------------
Total operating
expenses 33% 36% 46% 5% (1%) 8%
- - -------------------------------------------------------------------------------
Operating Income 12% 8% 2% 64% 315% (83%)
- - -------------------------------------------------------------------------------
Other income, including
interest income and
interest expense 2% 1% 2% 94% (31%) 29%
- - -------------------------------------------------------------------------------
Income before provision
for income taxes 14% 9% 4% 67% 162% (72%)
Provision for income
taxes 3% 2% 1% 58% 205% (73%)
- - -------------------------------------------------------------------------------
Net income 11% 7% 3% 70% 151% (72%)
- - -------------------------------------------------------------------------------
OVERVIEW
Stratus' mission is to be the premier supplier of computer systems and services
where continuous availability is a critical need. The Company differentiates
itself from its competitors with two core competencies: a hardware-based fault-
tolerant computer architecture which provides the most reliable computer
platforms on the market; and a customer service organization and service
products which are uniquely suited to supporting the most demanding computing
environments in the world. The Company intends to focus its sales and marketing
resources on those industry markets, applications and customers which place the
greatest value on computer availability and customer support.
In 1997, the largest and fastest growing of these markets was
telecommunications, accounting for 53 percent of product revenue. The Company
has reallocated a significant share of its engineering, marketing, and sales
resources to this market and believes that strong growth in telecommunications
will continue well into the future. The Company has made a significant
investment in telecommunications middleware products which simplify service
creation for telecommunications providers, and which provide the highest level
of reliability for the delivery of those services. Partnerships with key
application providers enable the Company to offer comprehensive solutions for
complex telecommunications requirements, including Local Number Portability
(LNP) and Home Location Register (HLR).
The second major market focus of the Company is financial services.
Marketing and sales resources are directed at the increasing number of online
applications which require continuous access by customers to account
information, and in which there is an absolute requirement for data integrity in
customer-initiated transactions. The Company's software subsidiaries, S2
Systems, Inc. and TCAM Systems, Inc., provide leading-edge application solutions
to the banking, securities, and retail industry markets.
The Company markets its products and services through direct sales
organizations in the U.S., and in certain countries internationally, as well as
through international distributors and international OEM partners. NEC, an OEM
partner since 1990, was the Company's largest customer in 1997, with product
revenues of $153.2 million. Increasing the proportion of its product sales
through indirect channels is part of the Company's strategy to increase
revenues. Selling efficiencies gained by this model allow the Company to include
a strong low-end offering in its product family, providing the Company access to
the much broader market available at lower price points. The Company markets
these products as open, easy-to-use and affordable. They are used to support a
wide variety of critical applications where fault tolerance was not previously
economical.
To strengthen its market position as a supplier of open systems, the
Company offers four operating systems: The Hewlett-Packard HP-UX Operating
system (OS), which is the most commercially successful UNIX operating system
available; the Microsoft Windows NT Server, the fastest growing operating
system; FTX, Stratus' own fault-tolerant UNIX offering; and VOS, Stratus'
proprietary operating system. Sales of systems running the HP-UX OS, introduced
in late 1996, began to increase rapidly in the fourth quarter of 1997. The
Company expects continued strong growth in sales of systems using the HP-UX OS
due to the very large number of third-party HP-UX application software providers
who are now able to combine their products with Stratus' continuous availability
for critical applications.
The Company maintains a significant level of engineering investment to
ensure that its products remain competitive in terms of price/performance. In
1997, the Continuum family of computer platform products was upgraded to the
Hewlett-Packard PA-RISC 8000 microprocessor, providing a performance increase of
two to four times over previous Continuums. Since the new generation is fully
compatible with previous Continuum PA-RISC models, the Company anticipates a
smooth product transition. Also in 1997, the Company announced its intention to
base the next generation of Continuum products 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 OS and Windows
NT Server computing environments.
The Company remains focused on computer availability and intends to
leverage the technology advances of other companies such as Hewlett-Packard,
Intel and Microsoft to reduce cost and time to market for future generations of
products. The Company plans to improve performance, functionality and
price/performance across all of its product lines to compete in broader markets.
OPERATING RESULTS
The Company's 1997 net income of $74.1 million, or $3.01 per share (diluted),
increased $30.6 million, or 70% from 1996 net income of $43.5 million, or $1.83
per share (diluted). Net income in 1996 increased $26.2 million, or 151% from
1995 income of $17.3 million, or $0.73 per share (diluted). Operating income for
1996 and 1995 included restructuring charges of $4.6 million, or $0.19 per share
(diluted) and $24.5 million, or $1.03 per share (diluted), respectively.
Excluding these charges, 1996 net income would have been $47.1 million, or $1.98
per share (diluted) and 1995 net income would have been $36.9 million, or $1.55
per share (diluted).
NET REVENUES
Total 1997 net revenues increased $78.9 million to $688.3 million, 13% higher
than in 1996. This compares with an increase of $21.4 million, or 4%, from 1995
to 1996 and an increase of $11.4 million, or 2%, from 1994 to 1995. The increase
in 1997 was primarily due to product revenue growth in the telecommunications
and financial services markets, while the 1996 increase was primarily
attributable to growth in telecommunications.
The following table details the percentage of product sales for each of the
Company's distribution channels:
Percent of total
1997 1996 1995
- - ------------------------------------------------
Domestic direct 34 38 44
International direct 22 28 33
NEC 31 22 11
Distributors 13 12 12
- - ------------------------------------------------
Total 100 100 100
- - ------------------------------------------------
The Company's product sales increased 20% in 1997 compared with 1996. This
compares to 6% growth in 1996 and an 8% decline in 1995. The 1997 increase was
driven primarily by increased hardware product revenues. Strong results in 1997
were realized through domestic direct and sales to NEC. In spite of competitive
pressure, there was not a material impact on the Company's pricing structure.
The 1996 increase was driven primarily by increased hardware product revenues
through the NEC and domestic direct channels into the telecommunications market
sector.
In 1997, international direct product sales decreased 4% from 1996,
following a decline of 8% in 1996 and 12% in 1995. International direct sales in
1997 were strong in the United Kingdom, Hong Kong, PRC and Singapore, but were
more than offset by declines in Mexico and several continental European
countries. The Company's direct product sales in the U.S. increased 9% from 1996
following declines of 9% in 1996 and 12% in 1995. The increase in the U.S. was
mainly due to stronger sales in the financial services and electronic commerce
industries.
Revenue from the Company's indirect product channels grew by 52%, 53% and
9% in 1997, 1996 and 1995, respectively. This revenue growth was due primarily
to increased sales to NEC. In 1997, sales to NEC grew by 70%, following
increases of 111% in 1996 and 70% in 1995. Distributor sales increased 20% in
1997 compared with a 2% increase in 1996 and a 17% decline in 1995. Year-over-
year 1997 distributor revenues increased due to stronger sales through Olivetti
and in Europe. While the Far East region contributed 35% of the Company's
revenues during 1997, the sales in Far Eastern countries currently experiencing
significant economic, currency devaluation and liquidity problems during the
year contributed only 4% of total revenues.
The Company's service revenue declined 2% in 1997 compared with 1996. This
decline compares to a decrease of 1% in 1996 and 27% growth in 1995. The decline
in 1997 was mainly due to an 18% decrease in professional services revenue due
to the completion of several large integration projects during 1997. This
decline was partially offset by a 2% increase in maintenance and education
revenue.
GROSS PROFIT
Product sales generated a gross profit of 48% in 1997 compared with 47% in 1996
and 51% in 1995. The one point growth in 1997 was primarily the result of a
favorable product mix and manufacturing efficiencies gained as a result of
increased volume. The decline from 1995 to 1996 resulted primarily from
increased competitive pressure, an aggressively priced Continuum product line
introduced early in the year, unfavorable impact of foreign exchange rate
movement and a decrease in software license revenues.
Service gross profit was 37%, 38%, and 44% in 1997, 1996, and 1995,
respectively. The decreases from 1996 to 1997 and from 1995 to 1996 were due
primarily to lower professional services revenues.
RESEARCH AND DEVELOPMENT
The Company's investment in research and development of $90.6 million in 1997
increased 14% over 1996, compared with a 5% decrease in 1996 and a 1% decrease
in 1995. Research and development expense as a percent of revenue was 13% for
both 1997 and 1996, and 14% in 1995. These investments reflect the Company's
long-standing commitment to provide leading-edge hardware and software products
to the telecommunications and reliable enterprise server marketplaces,
particularly in support of mission critical applications.
In 1997, the Company's research and development efforts were directed
primarily towards the Company's Continuum product line. The Company continued to
enhance its Continuum 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 1997, the Company began to
transition resources away from its RADIO Cluster product line. Resources not
focused at sustaining engineering for RADIO Cluster are being re-deployed to
focus on the Company's new Merced-based fault-tolerant products that will
support the Microsoft Windows NT Server operating system. This Intel IA-64
microprocessor technology with 64-bit processing will be brought to the next
generation of Continuum products.
Management believes that ongoing expenditures in research & development,
and focusing on core competencies further 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 EXPENSES
Selling, general and administrative expenses increased $2.7 million, or 2%, in
1997 to $137.9 million compared with a decrease of $29.1 million, or 18%, in
1996 and an increase of $4.1 million, or 3%, in 1995. As a percentage of total
revenues, selling, general and administrative expenses were 20% in 1997, down
from 22% in 1996 and 28% in 1995. The Company's strategy is to continue to focus
the sales organization on targeted vertical industries and application
opportunities within the telecommunications and enterprise server markets,
expand indirect sales channels and improve selling efficiencies. The Company is
in the process of expanding its marketing function in order to increase the
Company's identity in the marketplace and to improve its understanding of
product requirements in strategic market segments such as telecommunications.
RESTRUCTURING
During 1996, the Company restructured its software business to improve operating
results by aligning expenses with revenues, and to focus on new strategic
product offerings. As a result, a $4.6 million restructuring charge was recorded
for workforce reductions and asset write-downs related to the discontinuation of
certain product programs.
During 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, bringing 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 1997 primarily due to higher amounts of invested
cash and marketable securities as compared to 1996. A decrease in 1997 interest
expense was attributable to lower levels of long-term debt. 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 22.0% in 1997, 23.3% in 1996 and 20.0% in
1995. The 1997 tax rate was lower than the previous year due to a change in the
mix of the taxable income among the Company's subsidiaries, and the increased
utilization of research credits.
The Company has recorded a net deferred tax asset at December 28, 1997.
Although realization is not assured, based on the Company's history of
profitability and expectation of future income, management believes it is likely
that the deferred tax asset will be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and marketable securities of $259.7
million at the end of 1997. Corresponding balances at the end of 1996 and 1995
were $174.9 million and $155.1 million, respectively. Total assets at the end of
1997 increased to $750.4 million compared with $638.9 million in 1996.
Stockholders equity increased to $600.8 million in 1997 from $519.5 million in
1996.
Cash generated from operating activities was $186.3 million in 1997
compared to $99.1 million in 1996 and $48.1 million in 1995. The increase in
cash generated from operating activities in 1997 compared with 1996 is primarily
attributable to higher profits in 1997.
The Company used net cash of $13.7 million for the acquisition of
businesses in 1995. There were no such expenditures in 1996 or 1997.
Capital expenditures were $73.8 in 1997 compared to $48.2 million in 1996
and $54.7 million in 1995. In the third quarter of 1997, the Company purchased
the third building and underlying land (all of which had been leased under an
operating lease) at its corporate headquarters site in Marlborough,
Massachusetts for $21.6 million in cash. In addition, the Company expended $28.8
million in 1997, $25.1 million in 1996 and $23.2 million in 1995 on other long-
term assets. The Company continues to invest in capital equipment and other
long-term assets, principally software technologies used to broaden the
functionality of product offerings aimed at target markets. Investments will be
made in amounts sufficient to support future growth and enhance operations in
order to maintain the highest standards of overall quality. In 1998, the
Company plans to spend approximately $45 million on capital equipment and $25
million for other long-term assets.
Net proceeds from the Company's Employee Stock Purchase Plan and stock
option plans were $29.8 million in 1997, $10.5 million in 1996, and $16.3
million in 1995. For fiscal years 1997, 1996, and 1995, the Company repurchased
common stock on the open market as follows: 765,700 shares for $26.2 million,
534,300 shares for $12.6 million, and 1,511,800 shares for $44.6 million,
respectively. The Company has an approved stock repurchase program designed to
fund the Employee Stock Purchase Plan and stock option plans. The Company
anticipates that it will repurchase approximately 1.1 million shares in the open
market in 1998.
The Company believes its existing cash balance, including cash equivalents
and marketable securities and cash generated from future operations, will be
sufficient to meet the Company's cash requirements for the foreseeable future.
YEAR 2000
In 1996, the Company recognized the need to ensure its operations would not be
adversely impacted by Year 2000 software failures. The Company has dedicated
resources to coordinate the identification, evaluation and implementation of the
changes to computer systems and applications necessary to achieve a Year 2000
data conversion with no effect on customers or disruption to business
operations. These actions are necessary to ensure that the systems and
applications will recognize and process information in the year 2000 and beyond.
Major areas of potential business impact have been identified and initial
conversion efforts are underway. In 1997, the Company replaced its core
financial, order management and manufacturing systems with year 2000 compliant
applications. The Company also is communicating with customers, suppliers,
dealers, financial institutions and others with which it does business to
coordinate year 2000 conversion. The Company estimates these activities will be
completed by June 1999. In addition, the Company has funded internal development
plans to ensure that all products for sale are year 2000 compliant by the end of
1998. The total cost of compliance is not expected to have a material adverse
impact on the Company's financial position or results of operations.
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 two principal
business areas: 1) the telecommunications and financial services markets with
focus on the core product line of Continuum fault-tolerant computer systems, and
2) the application software markets addressed by the Company's S2 and TCAM
subsidiaries. The Company will align its product strategies to meet the
industry-specific requirements of targeted growth 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 support customer needs for
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
Except for the historical information contained herein, the matters discussed in
this Annual Report are forward-looking statements. The Company cautions readers
to recognize that actual future results could differ materially from historical
performance as a result of the following and other factors:
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. While existing business levels in
countries which are currently experiencing significant economic, currency
devaluation and liquidity problems did not materially impact the Company during
1997, there is no assurance that future financial results will not be adversely
impacted by economic events in other parts of the Far East or elsewhere.
In addition to its direct channels, the Company continues to expand its
indirect distribution channels through resellers and distributors. One customer,
NEC, represented 22%, 15% and 7% of net revenues in 1997, 1996 and 1995,
respectively. 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 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.
Competition for employees with the skills required by the Company is
intense in the geographic areas in which the Company's primary operations are
located. The Company believes that its future success will depend on its
continued ability to attract and retain qualified employees, especially in the
high-technology engineering areas.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 28, 1997, December 29, 1996, and December 31, 1995
In thousands, except per share amounts 1997 1996 1995
- - -------------------------------------------------------------------------------
Revenues
Product sales $489,214 $406,956 $383,850
Service 199,061 202,373 204,072
- - -------------------------------------------------------------------------------
Total revenues 688,275 609,329 587,922
- - -------------------------------------------------------------------------------
Cost of sales
Product cost of sales 252,487 214,580 187,935
Service expense 125,103 124,978 115,255
- - -------------------------------------------------------------------------------
Gross profit 310,685 269,771 284,732
- - -------------------------------------------------------------------------------
Operating expenses
Research and development expense 90,647 79,818 83,824
Selling, general and administrative
expenses 137,898 135,196 164,340
Restructuring charge - 4,623 24,500
- - -------------------------------------------------------------------------------
Total operating expenses 228,545 219,637 272,664
- - -------------------------------------------------------------------------------
Operating income 82,140 50,134 12,068
Interest income 10,903 6,545 8,715
Interest expense (354) (760) (1,077)
Other income 2,328 836 1,966
- - -------------------------------------------------------------------------------
Income before provision for income taxes 95,017 56,755 21,672
Provision for income taxes 20,903 13,235 4,334
- - -------------------------------------------------------------------------------
Net income $ 74,114 $ 43,520 $ 17,338
- - -------------------------------------------------------------------------------
Earnings per share:
Basic $ 3.15 $ 1.86 $ 0.74
Diluted $ 3.01 $ 1.83 $ 0.73
Shares used to compute earnings per share:
Basic 23,522 23,437 23,417
Diluted 24,635 23,774 23,757
- - -------------------------------------------------------------------------------
See accompanying notes
CONSOLIDATED BALANCE SHEETS
At December 28, 1997 and December 29, 1996
In thousands, except share and per share amounts 1997 1996
- - -------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $178,611 $131,683
Marketable securities 81,070 43,187
Accounts receivable, net 161,346 175,061
Inventories 76,635 63,283
Prepaid expenses 14,699 14,540
Other current assets 20,212 13,773
- - -------------------------------------------------------------------------------
Total current assets 532,573 441,527
- - -------------------------------------------------------------------------------
Property, plant and equipment, less
accumulated depreciation 148,790 122,756
Other assets, net 68,998 74,638
- - -------------------------------------------------------------------------------
Total assets $750,361 $638,921
- - -------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 34,860 $ 30,357
Accrued expenses:
Compensation-related 24,395 17,422
Other 31,636 34,204
- - -------------------------------------------------------------------------------
Total accrued expenses 56,031 51,626
Income taxes payable 27,906 13,564
Short-term borrowings and obligations 1,487 2,667
Deferred revenue 28,414 17,589
- - -------------------------------------------------------------------------------
Total current liabilities 148,698 115,803
Long-term obligations and deferrals 887 3,634
Stockholders' equity
Common stock, $.01 par value, 150,000,000 shares
authorized, 27,645,033 and 26,252,242 shares
issued and outstanding in 1997 and 1996, respectively 276 263
Junior common stock, $.01 par value, 500,000 shares
authorized - -
Additional paid-in capital 255,691 219,237
Retained earnings 465,538 391,424
Cumulative translation adjustment (5,877) (2,826)
- - -------------------------------------------------------------------------------
Subtotal 715,628 608,098
Less: shares in treasury, at cost, 3,700,000
and 2,934,300 shares in 1997 and 1996, respectively (114,852) (88,614)
- - -------------------------------------------------------------------------------
Total stockholders' equity 600,776 519,484
- - -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $750,361 $638,921
- - -------------------------------------------------------------------------------
See accompanying notes
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
For the period January 1, 1995 to December 28, 1997
Additional Cumulative Total
Common paid-in Retained Treasury translation stockholders'
In thousands, except share amounts stock capital earnings stock adjustment equity
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Repurchase of 534,300 shares of common stock - - - (12,596) - (12,596)
Exercise of 242,091 options issued
under employee stock option plans 3 4,480 - - - 4,483
Issuance of 264,028 shares of common stock
under Employee Stock Purchase Plan 3 5,963 - - - 5,966
Foreign currency translation adjustment - - - - (766) (766)
Tax benefit from non-qualified stock options - 424 - - - 424
Compensation expense associated with
grant of stock options - 62 - - - 62
Net income for the year ended December 29, 1996 - - 43,520 - - 43,520
- - --------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 263 219,237 391,424 (88,614) (2,826) 519,484
Repurchase of 765,700 shares of common stock - - - (26,238) - (26,238)
Exercise of 1,035,751 options issued
under employee stock option plans 10 21,882 - - - 21,892
Issuance of 357,040 shares of common stock
under employee stock purchase plan 3 7,856 - - - 7,859
Foreign currency translation adjustment - - - - (3,051) (3,051)
Tax benefit from non-qualified stock options - 6,219 - - - 6,219
Compensation expense associated with
grant of stock options - 497 - - - 497
Net income for the year ended December 28, 1997 - - 74,114 - - 74,114
- - --------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 $276 $255,691 $465,538 $(114,852) $(5,877) $600,776
- - --------------------------------------------------------------------------------------------------------------------
See accompanying notes
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 28, 1997, December 29, 1996 and December 31, 1995
In thousands 1997 1996 1995
- - -------------------------------------------------------------------------------
Operating activities
Cash flows from operating activities:
Net income $ 74,114 $ 43,520 $ 17,338
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 80,974 67,345 66,040
Restructuring charge - 4,623 24,500
Add (deduct) changes in working capital:
Accounts receivable, net 13,715 (9,485) (22,596)
Inventory (13,352) (2,013) (15,725)
Accounts payable and accrued
liabilities 8,290 (12,301) 7,233
Income tax payables 14,342 4,947 (24,710)
Other working capital items 8,185 2,482 (3,990)
- - -------------------------------------------------------------------------------
Net cash provided by operating activities 186,268 99,118 48,090
Investing activities
Cash flows from investing activities:
Acquisition of property, plant
and equipment (73,832) (48,165) (54,734)
Acquisition of businesses, net of
cash acquired - - (13,711)
Purchases of marketable securities (129,295) (31,557) (119,945)
Proceeds from sale and maturity of
marketable securities 91,412 51,875 94,516
Acquisition of other assets (28,846) (25,092) (23,172)
- - -------------------------------------------------------------------------------
Net cash used in investing activities (140,561) (52,939) (117,046)
Financing activities
Cash flows from financing activities:
Net proceeds from employee stock plans 29,751 10,511 16,344
Acquisition of treasury stock (26,238) (12,596) (44,616)
Reduction of long-term obligations
and deferrals (1,776) (3,531) (3,187)
- - -------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities 1,737 (5,616) (31,459)
Effect of exchange rate changes on cash (516) (472) 73
- - -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 46,928 40,091 (100,342)
Cash and cash equivalents at beginning
of year 131,683 91,592 191,934
- - -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $178,611 $131,683 $ 91,592
- - -------------------------------------------------------------------------------
See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The investment in the
Company's joint venture with Axime S.A. of France (see Note 12) is accounted
for using the equity method. All intercompany transactions and balances have
been eliminated in consolidation.
Cash equivalents and marketable securities
Cash equivalents include highly liquid investments with maturities 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. Marketable securities are reported at fair values which
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 $8.3 million at December 28, 1997
and December 29, 1996.
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 of $47.8
million in 1997, $41.8 million in 1996 and $42.9 million in 1995 was calculated
using the straight-line method based upon the following estimated useful lives:
Land improvements 15 years
Buildings and improvements 15-39 years
Machinery and equipment 2-5 years
Leasehold improvements shorter of term of lease
or life of asset
Service and spare parts 4 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 $14.2 million at
December 28, 1997 and $18.5 million at December 29, 1996. 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.
Significant estimates include, but are not limited to, collectibility of
accounts receivable, carrying value of inventory, and recoverability of
capitalized software, goodwill and deferred tax assets. Actual results could
differ from those estimates.
Revenue recognition
Revenue from product sales is generally recognized at the time of shipment.
Software license 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. The American Institute of Certified
Public Accountants issued Statement of Position 97-2 "Software Revenue
Recognition" (SOP 97-2) in October 1997. SOP 97-2 will be effective for the
Company beginning with transactions entered into on or after December 29, 1997.
The Company believes SOP 97-2 will not have a material impact on the Company's
financial position or results of operations.
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 unremitted earnings only when
it is advantageous to do so.
Foreign exchange contracts
The Company continually enters into forward foreign exchange contracts to hedge
foreign currency transactions 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 28, 1997
and December 29, 1996, the Company had $42.5 million and $71.9 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, Europe, the Asia Pacific Rim, and Central and South
America. 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 cash equivalents principally in deposits with major
banks and in money market securities of companies and municipal government
entities with strong credit ratings. These securities 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. government issues,
commercial paper and corporate bonds. The weighted average maturity of these
investments does not exceed eighteen months.
Employee stock plans
Proceeds from the sale of common stock issued under the Employee Stock Purchase
Plan and stock option 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.
Income tax benefits arising from employee's premature disposition of
purchased shares and exercise of non-qualified stock options are credited to
additional paid-in capital.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. In accordance with
this Statement, the Company changed the method previously used to compute
earnings per share and restated all prior periods presented. Basic earnings per
share is calculated based on the weighted average number of common shares
outstanding. Diluted earnings per share includes the effect of dilutive stock
options of 1,113,000 shares in 1997, 337,000 shares in 1996 and 340,000 shares
in 1995. The anti-dilutive impact of employee stock options was not material in
each of the three years. There is no difference between diluted earnings per
share and amounts previously reported as earnings per share.
Effect of recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income includes unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments, both of which currently are reported in stockholders' equity.
Application of Statement 130 only changes the display and disclosure of
previously reported information and will not impact amounts previously reported
for net income or stockholders equity, nor affect the comparability of
previously issued financial statements. Adoption of this standard is not
expected to have a material impact on the Company's financial statements or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. The
Statement changes the way that public companies report segment information in
annual financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and therefore, the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of Statement 131 and therefore, has not concluded
whether the adoption of this statement will have a significant effect on the
Company's reported segments.
2. 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 28, 1997 and December 29, 1996 have
been classified as being "available-for-sale", and are included in cash
equivalents and marketable securities on the consolidated balance sheets.
Gross realized and unrealized gains and losses were not material in 1997,
1996 and 1995. The cost of investments sold is based on the specific
identification method.
The following is a summary of available for sale investments at December 28,
1997 and December 29, 1996:
Estimated Estimated
fair value fair value
In thousands 1997 1996
- - ----------------------------------------------------------------
Time deposits at banks $130,726 $ 74,155
Obligations of states and
political subdivisions 2,000 30,242
U.S. government issues 58,712 4,900
Commercial paper 20,903 -
Corporate bonds 16,500 4,000
- - ----------------------------------------------------------------
Total available-for-sale investments $228,841 $113,297
- - ----------------------------------------------------------------
3. INVENTORIES
Inventories consisted of the following:
In thousands 1997 1996
- - ----------------------------------------------------------------
Finished products $32,872 $35,921
Work in process 2,665 1,542
Parts and assemblies 41,098 25,820
- - ----------------------------------------------------------------
Total inventories $76,635 $63,283
- - ----------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
In thousands 1997 1996
- - ----------------------------------------------------------------
Land and improvements $ 6,424 $ 3,241
Buildings 50,175 33,620
Machinery and equipment 296,817 267,083
Leasehold improvements 25,057 24,282
Service and spare parts 19,333 19,829
Construction in progress 6,488 7,042
- - ----------------------------------------------------------------
Total property, plant and equipment 404,294 355,097
- - ----------------------------------------------------------------
Less accumulated depreciation 255,504 232,341
Net property, plant and equipment $148,790 $122,756
- - ----------------------------------------------------------------
5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Unamortized software development costs, included in other assets on the
consolidated balance sheets, were $33.8 million and $34.0 million at December
28, 1997 and December 29, 1996, respectively. Amortization expense, along with
adjustments to net realizable value, is included in product cost of sales, and
amounted to $29.0 million in 1997, $23.1 million in 1996 and $20.1 million in
1995.
6. INCOME TAXES
The components of income (loss) before provisions for income taxes consisted of
the following:
In thousands 1997 1996 1995
- - -------------------------------------------------------------------
Domestic $ 5,667 $(3,087) $(27,157)
Foreign 89,350 59,842 48,829
- - -------------------------------------------------------------------
Income before provision
for income taxes $95,017 $56,755 $ 21,672
- - -------------------------------------------------------------------
The provision for income taxes includes $6.2 million and $0.4 million in
1997 and 1996, respectively, resulting from the allocation of tax benefits from
non-qualified stock options directly to additional paid-in capital.
The provision (benefit) for income taxes consisted of the following:
In thousands 1997 1996 1995
- - -------------------------------------------------------------------
Current
Federal $ 6,290 $ 452 $(3,312)
State 750 295 250
Foreign 17,032 11,518 14,465
- - -------------------------------------------------------------------
Total current 24,072 12,265 11,403
- - -------------------------------------------------------------------
Deferred
Federal (2,815) 419 (4,612)
State (699) 105 (382)
Foreign 345 446 (2,075)
- - -------------------------------------------------------------------
Total deferred (3,169) 970 (7,069)
Provision for income taxes $20,903 $13,235 $ 4,334
- - -------------------------------------------------------------------
The following table reconciles the Federal income tax rate to the tax rate
used in the calculation of the provision for income taxes as reported in the
financial statements:
1997 1996 1995
- - -------------------------------------------------------------------
Income tax at U.S.
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net
of Federal benefit 0.1% 0.5% (0.4%)
Foreign sales corporation
exempt income (0.1%) - (0.6%)
Tax effect of foreign
operations (14.4%) (13.8%) (15.5%)
Research and
development credits (2.1%) (1.3%) -
Tax exempt interest
income (0.3%) (0.9%) (3.4%)
Goodwill 1.2% 1.1% 1.6%
Other, net 2.6% 2.7% 3.3%
- - -------------------------------------------------------------------
Effective tax rate 22.0% 23.3% 20.0%
- - -------------------------------------------------------------------
The Company paid income taxes of $10.3 million in 1997, $12.4 million in
1996 and 26.3 million in 1995.
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 $6.4
million that begin to expire in the year 2005, and alternative minimum tax
credit carryforwards of $0.6 million which carry forward indefinitely.
Deferred tax assets and (liabilities) included in other current assets and
other non-current assets on the consolidated balance sheets as of December 28,
1997 and December 29, 1996 were comprised of the following:
In thousands 1997 1996
- - --------------------------------------------------------
Deferred tax assets
Depreciation/amortization, net $11,988 $10,862
Inventory/other reserves 15,581 14,052
Carryforward losses, federal
and state tax credits 8,207 7,169
Deferred gain on sale of building - 698
Intercompany profit elimination 563 741
Deferred compensation 355 706
Other 2,316 3,128
- - --------------------------------------------------------
Total deferred tax assets 39,010 37,356
Valuation allowance (3,947) (3,947)
- - --------------------------------------------------------
Net deferred tax assets $35,063 $33,409
- - --------------------------------------------------------
Taxes are not provided on unremitted earnings of subsidiaries outside the
United States as such earnings are permanently reinvested. Unremitted earnings
at December 28, 1997 and December 29, 1996 approximated $327.2 million and
$256.9 million, respectively. If these earnings are remitted in the form of
dividends or otherwise, the Company will be potentially subject to both U.S.
income taxes and foreign withholding taxes less an adjustment for applicable
foreign tax credits. It is not practical to estimate the amount of taxes payable
on these foreign earnings.
The Company has recorded a net deferred tax asset on December 28, 1997.
Although realization is not assured, based on the Company's history of
profitability and expectation of future taxable income, management believes it
is likely that the deferred tax asset will be realized.
7. DEBT
On January 3, 1997, the Company canceled its $50 million Multicurrency Revolving
Credit Agreement because management concluded that it was no longer needed.
There were never any borrowings against this Agreement.
In 1993, the Company issued $7.5 million of promissory notes and $4.1
million of deferred compensation obligations in connection with the acquisition
of Isis Distributed Systems, Inc. The remaining balance of $1.5 million on these
obligations was paid in January 1998.
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 $0.9 million at December 29, 1996
with a weighted average interest rate of 4.8%. There were no outstanding
borrowings at December 28, 1997. The Company paid interest of approximately
$0.4 million in 1997, $0.7 million in 1996 and $1.2 million in 1995.
8. STOCK PLANS
Employee option plans The Company maintains three active stock option plans: the
1983 Stock Option Plan; the Non-Qualified Stock Option Plan; and the 1997 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. On April 23,1997, both the 1983 Stock Option Plan and the Non Qualified
Stock Option Plan increased the number of shares reserved for option grants
under the plans by a combined 1,500,000 for a total of 10,880,200. In addition,
the number of options a participant may be granted under these plans increased
from 100,000 to 500,000 shares. The 1997 Non-Qualified Plan was adopted and
approved by the Board of Directors of the Company on January 13, 1997 and
provided for the reservation of 3,000,000 shares of common stock for issuance
upon the exercise of options. The option prices for non-qualified grants under
all plans are determined by the Compensation and Stock Option Committee of the
Board of Directors (the Committee), 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 granted under the 1983 Stock Option Plan and, for options granted under
the Non-Qualified Stock Option Plan to persons whose transactions are subject to
Section 16(b) of the Securities Exchange Act of 1934. 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, have a ten
year life and vest over a four or five year period from the date of grant.
At December 28, 1997, shares available for future grants consisted of
1,808,136 for the 1997 plan and 2,128,341 on a combined basis for the 1983 Stock
Option Plan and the Non-Qualified Stock Option Plan. At December 29, 1996,
930,927 shares were available for future grants on a combined basis under the
1983 Stock Option Plan and the Non-Qualified Stock Option Plan.
The Company applies APB Opinion No.25 and related interpretations in
accounting for its stock-based compensation plans, including its Employee Stock
Purchase Plan. During 1997, the Company issued options to certain executives at
exercise prices which were below the market value of the stock on the date of
grant. The compensation expense related to these options, which was $0.5 million
in 1997, will be recognized over the vesting period of four years. Had
compensation expense for the Company's stock-based compensation plans been
determined based upon the fair market value at the grant date for stock option
awards (stock options) and at the end of the plan period for stock purchased
under its Employee Stock Purchase Plan (stock purchase shares), the Company's
net income and diluted earnings per share on a pro forma basis would have been
$64.2 million, or $2.61 per share (diluted) in 1997, $37.8 million, or $1.59 per
share (diluted) in 1996 and $14.1 million, or $0.59 per share (diluted) in 1995.
The fair value of stock options granted and stock purchase shares issued
during 1997, 1996 and 1995 was estimated at the date of the grant and the end of
the plan period, respectively, using the Black-Scholes option-pricing model with
the following weighted-average assumptions: volatility 46.9%, 36.3% and 29.5%,
respectively; risk-free interest rate of 6.25%, 6.13% and 5.99%, respectively;
and no dividends. The weighted-average expected life was 3.0 years for 1997 and
4.0 years for both 1996 and 1995. The effects on fiscal 1997, 1996 and 1995 pro
forma net income and earnings per share of expensing the estimated fair value of
stock options and stock purchase shares are not necessarily representative of
the effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options and stock purchase shares in future years.
Stock option activity was as follows:
Shares Weighted-
under average
options exercise price
- - -------------------------------------------------------------
Outstanding, January 1, 1995 3,145,515 $24.74
Granted 1,226,168 $26.79
Exercised (472,124) $20.11
Canceled (708,487) $27.61
- - -------------------------------------------------------------
Outstanding, December 31, 1995 3,191,072 $25.58
- - -------------------------------------------------------------
Exercisable, December 31,1995 3,191,072 $25.58
- - -------------------------------------------------------------
Granted 3,779,521 $20.08
Exercised (242,091) $20.14
Canceled (3,072,104) $26.53
- - -------------------------------------------------------------
Outstanding, December 29, 1996 3,656,398 $19.57
- - -------------------------------------------------------------
Exercisable, December 29, 1996 3,656,398 $19.57
- - -------------------------------------------------------------
Granted 2,039,846 $31.85
Exercised (1,035,751) $21.13
Canceled (545,396) $21.01
- - -------------------------------------------------------------
Outstanding, December 28, 1997 4,115,097 $25.09
- - -------------------------------------------------------------
Exercisable, December 28, 1997 4,115,097 $25.09
- - -------------------------------------------------------------
The weighted-average fair value of stock options granted during 1997 was
$14.51 for options issued at market price and $28.12 for below market options.
The weighted-average fair value of stock options granted in 1996 and 1995 was
$7.78 and $9.77, respectively. The weighted average fair value of stock
purchase shares issued during 1997, 1996 and 1995 was $8.35, $7.61 and $9.95,
respectively.
Stock options outstanding at December 28, 1997 are summarized as follows:
Weighted-
average Weighted-
Range of Number remaining average
exercise outstanding contractual exercise
prices at 12/28/97 life price
- - -------------------------------------------------------------
$11.88-$26.75 2,824,752 8.3 $20.45
$27.00-$41.63 961,530 8.9 $32.13
$43.00-$56.75 328,815 9.5 $44.40
- - -------------------------------------------------------------
$11.88-$56.75 4,115,097 8.6 $25.09
During 1996, the Board of Directors authorized the Company to offer holders
of all outstanding unexercised stock options granted between January 1, 1994,
and July 25, 1996, under the Company's stock option plans the opportunity to
exchange such options for an equal number of new options under the 1983 Stock
Option Plan and the Non-Qualified Stock Option Plan. Approximately 2,467,000
shares were exchanged for new options issued at the fair market value ($17.125)
of the Company's common stock on the date of the exchange (July 25, 1996). These
new options were non-qualified and began a new four-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 1997, the shareholders approved an increase in the
number of shares which may be issued under the Plan from 3,100,000 to 4,100,000.
Common stock reserved for future grants aggregated 815,898 and 172,938 shares at
December 28, 1997 and December 29, 1996, respectively. There were 357,040 shares
issued at an average price of $23.64 in 1997, 264,028 shares issued at an
average price of $21.36 in 1996 and 248,332 shares issued at an average price of
$26.56 in 1995.
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 inanother 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
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. In 1997, 1996, and 1995 the Company repurchased 765,700 shares
for $26.2 million, 534,300 shares for $12.6 million and 1,511,800 shares for
$44.6 million, respectively.
9. EMPLOYEE BENEFIT PLANS
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 ($9,500 in
1997). The Company matches 100% of the first 11/2% of the employee's pre-tax
contributions. The Company may make an additional contribution of 11/2% of the
employee's pre-tax contributions, up to a maximum of $4,800 per participant,
based on the achievement of certain performance criteria established by the
Board of Directors. Contributions are invested at the direction of the employee
in one or more investment funds. Company contributions accrued to the plan were
$3.4 million in 1997 and $2.6 million in 1996. There were no Company
contributions accrued to the plan in 1995. Employees in several countries
outside of the U.S. are covered by defined contribution plans in accordance with
applicable government regulations and local practices. Expenses attributable to
these plans were not material in 1997, 1996 and 1995.
10. COMMITMENTS AND CONTINGENCIES
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 28, 1997:
In thousands Operating leases
- - --------------------------------------------
1998 $10,843
1999 8,430
2000 5,570
2001 2,878
2002 1,161
Subsequent years 1,166
- - --------------------------------------------
Total minimum lease payments $30,048
- - --------------------------------------------
Total rental expense was $15.2 million in 1997, $18.1 million in 1996 and
$18.7 millon in 1995.
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.
11. RESTRUCTURING
During the second quarter of 1996, the Company restructured its software
business to improve operating results by aligning expenses with revenues, and to
focus on new strategic product offerings. The restructuring action resulted in a
charge of $4.6 million, and included charges for workforce reductions and asset
write-downs related to the discontinuation of certain product programs. This
restructuring was substantially completed in 1996.During the third quarter of
1995, the Company recorded a $24.5 million restructuring charge for the
reduction of its worldwide workforce, 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 to place expense levels in line with its 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. In 1995 and 1996,
the Company released 575 employees and charged $15.0 million and $9.5 million,
respectively, against the reserve for severance and facility related actions,
thereby completing the restructuring action.
12. ACQUISITIONS AND STRATEGIC INVESTMENTS
In December 1995, the Company entered into a joint venture relationship with
Axime, S.A. of Paris, France to develop, support and market certain integrated
solutions for the Automated Teller Machines/Point of Sale market in France and
other authorized countries. 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 is accounted for using the
equity method. The difference between the carrying amount of the investment and
the underlying equity net assets of the joint venture entity is being amortized
over seven years.
In July 1995, the Company acquired all the outstanding stock of
Comercializacion TEA, S.A. DE C.V. (COMTEA), its Mexico distributor, for
approximately $4.1 million in cash plus additional consideration of up to $13.6
million based upon COMTEA's attainment, if achieved, of certain objectives over
a three-year period commencing at acquisition.
In January 1995, the Company, through its TCAM Systems, Inc. subsidiary,
acquired all the outstanding stock of Femcon Associates, Inc., which provides
system integration and customized software solutions to the worldwide securities
industry, for approximately $3.0 million in cash.
The 1995 acquisitions were accounted for using the purchase method of
accounting. The excess cost over the fair value of the acquired net assets is
being amortized on a straight-line basis over seven years.
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 1997, 1996 and 1995 was as follows:
In thousands 1997 1996 1995
- - -------------------------------------------------------------------------------
Revenues
United States $289,151 $274,892 $289,500
Intercompany 37,789 41,296 46,165
- - -------------------------------------------------------------------------------
Total United States 326,940 316,188 335,665
Ireland 187,546 129,145 66,760
Intercompany 189,478 155,342 110,003
- - -------------------------------------------------------------------------------
Total Ireland 377,024 284,487 176,763
Europe 103,846 107,136 124,956
Other international, principally
the Far East 107,732 98,156 106,706
Eliminations (227,267) (196,638) (156,168)
- - -------------------------------------------------------------------------------
Total revenues $688,275 $609,329 $587,922
Operating income (loss)
United States $ 296 $ (8,734) $ (3,260)
Ireland 82,726 42,642 29,741
Europe 849 5,448 (13,365)
Other international, principally
the Far East 9,165 7,631 4,691
Eliminations (10,896) 3,147 (5,739)
- - -------------------------------------------------------------------------------
Total operating income $ 82,140 $ 50,134 $ 12,068
Assets
United States $627,063 $526,333 $507,638
Ireland 125,454 122,234 67,926
Europe 102,635 62,585 72,335
Other international, principally
the Far East 45,716 48,893 51,180
Corporate assets (cash, cash equivalents
and marketable securities) 259,681 174,870 155,097
Eliminations (410,188) (295,994) (246,367)
- - -------------------------------------------------------------------------------
Total assets $750,361 $638,921 $607,809
- - -------------------------------------------------------------------------------
Intercompany transactions are accounted for at prices which approximate arm's-
length transactions. The Company has distribution agreements with various
companies, including NEC. During 1997,1996 and 1995, product and service revenue
from NEC accounted for 22%, 15% and 7% of total revenues, respectively.
<TABLE>
UNAUDITED QUARTERLY FINANCIAL DATA
<CAPTION>
Diluted earnings
In thousands, except Total Gross Net income (loss) Stock prices
per share amounts and stock prices revenues profit (loss) per share High Low
<S> <C> <C> <C> <C> <C> <C>
- - -------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
First quarter $155,665 $ 69,949 $14,778 $0.62 $34.50 $26.63
Second quarter 167,572 75,943 17,401 0.71 50.25 30.63
Third quarter 175,023 78,976 19,260 0.77 58.81 48.25
Fourth quarter 190,015 85,817 22,675 0.91 50.13 31.44
- - -----------------------------------------------------------------------------
Total $688,275 $310,685 $74,114 $3.01
- - -------------------------------------------------------------------------------------------------------------------------
Fiscal 1996
First quarter $142,925 $ 64,119 $10,583 $0.45 $34.87 $25.50
Second quarter 140,301 60,735 4,455 0.19 31.75 26.50
Third quarter 150,010 65,799 10,757 0.45 29.00 17.12
Fourth quarter 176,093 79,118 17,725 0.74 27.75 19.12
- - -----------------------------------------------------------------------------
Total $609,329 $269,771 $43,520 $1.83
- - -------------------------------------------------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------------------------------------------------
Second quarter 1996 results include a non-recurring pre-tax charge of $4.6
million to cover the cost of workforce reductions and asset dispositions
relating to the Company's software business.
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.
Stratus Computer, Inc. common stock is traded via the New York Stock Exchange,
the Boston Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange
under the trading symbol SRA. No dividends have been declared on the common
stock.
</TABLE>
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 28, 1997 and December 29, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 28, 1997. 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 28, 1997 and December 29, 1996 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 28, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 21, 1998
Senior Management List
Directors
Alexander V. d'Arbeloff
Chairman, Teradyne, Inc.
Paul J. Ferri
General Partner, Matrix Partners
William E. Foster
Chairman, Stratus Computer, Inc.
Gardner C. Hendrie
Sigma Partners
Robert M. Morrill
Private Investor
Candy M. Obourn
Vice President, Eastman Kodak Company
President, Business Imaging Systems
Bruce I. Sachs
President and Chief Executive Officer, Stratus Computer, Inc.
Paul J. Severino
Former Chairman, Bay Networks, Inc.
Officers
Bruce I. Sachs
President and Chief Executive Officer
William E. Foster
Chairman
Eileen Casal
Vice President, General Counsel
Maurice L. Castonguay
Vice President, Finance and Administration
and Chief Financial Officer
David P. Gamache
Vice President, Corporate Controller
Stephen C. Kiely
Vice President, Platform Products
Edward J. Mezzanotte
Vice President, Stratus Software Group
J. Donald Oldham
Vice President, Worldwide Sales
Roderick K. Randall
Vice President, Worldwide Marketing
David M. Weishaar
Vice President, Worldwide Operations
John F. Young
Vice President, Human Resources
Clerk
Richard N. Hoehn, Esq.
Partner, Choate, Hall & Stewart
Treasurer
Gerald P. Campenella
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.
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 1997 Annual Report to
Stockholders:
Consolidated Balance Sheets at
December 29, 1996 and
December 28, 1997 22
For the years ended December 31, 1995,
December 29, 1996 and
December 28, 1997:
Consolidated Statements of
Income 21
Consolidated Statements of
Stockholders' Equity 23
Consolidated Statements of
Cash Flows 24
Notes to Consolidated Financial
Statements 25-33
Supplementary information:
Quarterly Financial Data (unaudited) 34
Consolidated schedule for the year ended December 28, 1997:
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 1997 Annual Report to Stockholders are hereby incorporated by reference.
With the exception of the pages listed in the preceding index, and pages 14-20
and 34 noted in items 5 through 7, the 1997 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 28, 1997
ACCOUNTS BALANCE AT BALANCE AT
RECEIVABLE BEGINNING OF END OF
ALLOWANCE PERIOD ADDITIONS DEDUCTIONS(1) PERIOD
- - ---------- ------------ --------- ------------- ----------
FISCAL
YEAR 1995 $8,593,634 7,520,111 (7,478,021) $8,635,724
FISCAL
YEAR 1996 $8,635,724 5,852,630 (6,168,457) $8,319,897
FISCAL
YEAR 1997 $8,319,897 4,587,320 (4,600,297) $8,306,920
(1) Write-offs of uncollectible accounts receivable 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.(7)
4.11(b) - Amendment to Option Plans dated January 25, 1994. (6).
4.11(c) - Amendment to Option Plans dated January 31, 1995.
4.11(d) - Amendment to Option Plans dated August 1, 1995. (8)
4.11(e) - Amendment to Option Plans dated April 23, 1997. (11)
4.13 - Employee Stock Purchase Plan. (3)
4.13(a) - Amended and Restated Employee Stock Purchase Plan dated
April 21, 1992. (7)
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. (8)
4.13(e) - Employee Stock Purchase Plan amended and restated as of
April 23, 1997. (11)
4.15 - Non-Qualified Common Stock Option Plan (November 1984). (3)
4.15(a) - Restatement of Non-Qualified Common Stock Option Plan dated
January 28, 1992. (7)
4.15(b) - Non-Qualified Common Stock Option Plan Restatement Number 4
effective August 1, 1995. (8)
4.15(c) - Non-Qualified Common Stock Option Plan Restatement Number 5
effective April 23, 1997. (11)
4.18 - Rights Agreement dated December 4, 1990. (5)
4.20 - 1997 Non-Qualified Common Stock Option Plan (January 1997). (11)
10.18 - Lease dated January 30, 1990 between Registrant and LePercq
Corporate Income Fund, L.P. (2)
10.19 - Employment Agreement for Bruce I. Sachs, dated April 23, 1997. (9)
10.20 - Consultant Agreement for Bruce I. Sachs, dated April 23, 1997. (9)
10.21 - Employment Agreement for Maurice L. Castonguay, dated July 17,
1997.
10.22 - Employment Agreement for William E. Foster, dated September 10,
1997.
10.23 - Employment Agreement for Roderick K. Randall, dated October 23,
1997. (10)
13.0 - 1997 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).
21.1 - Subsidiaries of the Registrant, filed herewith.
23.1 - 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, No. 33-28742,
No. 33-67758, No. 33-64709 and No. 333-27147) filed with the Securities
and Exchange Commission on December, 16, 1985, February 17, 1987, May 15,
1989, August 23, 1993, December 4, 1995 and May 15, 1997, 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 30, 1994.
(7) 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.
(8) 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.
(9) Incorporated herein by reference to same exhibit number of Item 6 of
Form 10-Q filed with the Securities and Exchange Commission on August 13,
1997.
(10) Incorporated herein by reference to Exhibit 10 of Item 6 of Form 10-Q
filed with the Securities and Exchange Commission on November 12, 1997.
(11) Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 of
Registration Statement on form S-8 (333-27147) filed with the Securities
and Exchange Commission on May 15, 1997.
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 27th day of
March 1998.
Stratus Computer, Inc.
BY: Maurice L. Castonguay
---------------------
Maurice L. Castonguay, Vice President, Finance
and Administration, 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
BRUCE I. SACHS President March 27, 1998
- - -------------- and Chief Executive Officer
(Bruce I. Sachs) (Principle Executive Officer)
MAURICE L. CASTONGUAY Vice President, Finance and March 27, 1998
- - --------------------- Administration, and Chief
(Maurice L. Castonguay) Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
WILLIAM E. FOSTER Chairman March 27, 1998
- - ----------------- and Director
(William E. Foster)
ALEXANDER V. D'ARBELOFF Director March 27, 1998
- - -----------------------
(Alexander V. d'Arbeloff)
PAUL J. FERRI Director March 27, 1998
- - -------------
(Paul J. Ferri)
GARDNER C. HENDRIE Director March 27, 1998
- - ------------------
(Gardner C. Hendrie)
ROBERT M. MORRILL Director March 27, 1998
- - -----------------
(Robert M. Morrill)
CANDY M. OBOURN Director March 27, 1998
- - ---------------
(Candy M. Obourn)
PAUL J SEVERINO Director March 27, 1998
- - ---------------
(Paul J.Severino)
Exhibit 10 - Material Contracts
10.21
July 17, 1997
Mr. Maurice Castonguay
Dear Maurice:
On behalf of Stratus Computer, Inc. ("Stratus") it is my pleasure to offer you
the position of Vice President of Finance and Administration, Chief Financial
Officer and Treasurer of Stratus, reporting to me.
You will be paid in accordance with Stratus' Executive Variable Compensation
Program which is composed of the following elements:
Base Salary of $10,000 bi-weekly, which is equivalent to $260,000
annually.
Variable compensation component at a rate of 48% of your base salary
as listed above, under Stratus' current Variable Compensation Plan ("VC Plan").
This equates to $125,000 annually at 100% attainment of your goals. The annual
variable compensation is based on 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 will be discussed with you after having
been set by the Board and the Compensation Committee at the beginning of each
fiscal year.
Guaranteed variable compensation for the first twelve (12) months of
your employment, at the annual rate of $125,000 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.
Your total compensation at 100% attainment of goals is $385,000
annually. You will also be eligible for the over-achievement rates, if
applicable, as outlined in the VC Plan documents.
You will have the option to purchase 100,000 shares of Stratus common
stock under the Company's 1983 Employee Stock Option Plan and/or the 1997 Non-
Qualified Stock Option Plan ("Plans"). The purchase price for these options
will be discounted by $10.00/share below the fair market value on the date
determined by the Stock and Compensation Committee. All options will vest over
a four (4) year period and have a ten (10) year exercise period as provided in
the Plans. 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. Enclosed is a copy of the
additional benefits which you receive as a member of my staff.
Due to the Immigration Control and Reform Act of 1986, you will be required to
verify your identity and employment eligibility by completing the I-9
Employment Eligibility Form and supplying Stratus with the required documents
on your fist day of employment. Your acceptance of this offer of employment is
contingent upon compliance with the Immigration Act of 1986. Failure to
complete the I-9 form or provide original documentation may result in
termination of employment.
You will be required to sign Stratus' Standard Employee Proprietary Information
Agreement covering inventions, concepts and protection of confidential and
proprietary information. A copy of this agreement is available for your review
upon request.
In the event that your employment with the Company is terminated upon certain
change of control events (as defined in the Plans), you shall be entitled to a
lump sum payment of one year's total compensation (base and target salary at
100% attainment) as of the termination date upon execution of a separate
mutually agreed termination agreement containing customary release and non-
competition language.
Maurice, I am excited about the prospect of having an individual with your
background and experience on the Executive Management Team at Stratus. I would
like your official start date to be on or before September 2, 1997. If this
letter sets forth the terms of the offer we have negotiated with you, kindly
indicate your acceptance in the space provided and send one signed original
back to me or John Young, Vice President, Human Resources.
Welcome aboard.
Very truly yours, I accept the position of Vice President
of Finance and Administration, Chief Financial
Officer and Treasurer commencing on or before
September 2, 1997 in accordance with the terms
hereof.
- - ------------------------------ ------------------------------
John F. Young, Maurice Castonguay
Vice President, Human Resources
on behalf of
Bruce I. Sachs ------------------------------
President, Date
Chief Executive Officer ------------------------------
Start Date
Exhibit 10 - Material Contracts
10.22
EMPLOYMENT AGREEMENT
AND
RELEASE
Issue Date: September 10, 1997
The following is an agreement between William E. Foster, as undersigned
Employee (hereinafter referred to as "you" or "your"), and Stratus
Computer, Inc. ("Company") regarding the termination of your employment
with the Company. The Effective Date shall be the last date that the
Agreement is executed by both you and the Company.
A. EMPLOYMENT
(1) Employment/Benefits: Your regular employment with the
Company shall continue until 5:00 PM, EST, on January 30, 2001,
or, when you begin full time employment elsewhere, whichever date
is earlier ("Termination Date"). (For the purposes of this
Agreement "full time employment" shall be defined to mean your
accepting any position for which a W-2 form will be submitted to
the Internal Revenue Service and for which the average weekly
hours to be worked by you can reasonably be expected to exceed 30
hours per week but shall expressly exclude any consultancy
arrangements you may enter into). From May 16, 1997 through the
Termination Date, inclusive, ("Relevant Period") you acknowledge
that you have been and will continue to be on special assignment
to the Company's Chief Executive Officer ("CEO").
Notwithstanding this and subject only to Sections C, D, and E
below, the Company understands that nothing contained in this
Agreement shall prohibit Employee from entering into consultancy
arrangements.
(2) For the period of September 10, 1997 - December 31, 1997 you
shall continue to be paid a salary, in accordance with the
Company's standard practices, based on your current base salary
of four hundred thousand and ten dollars ($400,010), at a bi-
weekly rate of fifteen thousand, three hundred and eighty-five
dollars ($15,385). In addition you shall be eligible to receive
any 1997 variable compensation pursuant to the terms of the 1997
Stratus' Executive Variable Compensation Plan ("VC Plan"),
attached hereto as Appendix A.
(3) For the period of January 1, 1998 - January 30, 2001, you
shall be paid a salary, in accordance with the Company's standard
practices, based on a total compensation figure (base salary plus
variable compensation) of one million five hundred thousand
dollars ($1,500,000) for the entire period, at a bi-weekly rate
of eighteen thousand, seven hundred and fifty dollars ($18,750).
In the event January 30, 2001 does not fall on the last day of
the pay period, the last applicable pay period will be prorated
based on the biweekly rate stated herein, so that you are paid
until January 30, 2001.
(4) In the event that (a) you begin full time employment prior
to January 30, 2001 as defined above, your employment with the
Company shall cease, all payments being made to you and all
benefits being provided to you under this Agreement shall cease
and your stock options shall cease vesting, effective as of the
date you begin such full time employment elsewhere.
(5) For so long as your regular employment continues pursuant to
the terms of this Agreement, you shall continue to:
(i) participate in the Company's Benefit Plans
and Programs, either directly; and/or
(ii) be offered participation in separate but
comparable plans and programs to those
of the Company; and/or
(iii) be offered monetary compensation necessary
to allow you to obtain comparable benefits
under separate plans and programs to
those of the Company,
to the same extent as you participated in such plans and
programs and with the same levels of Company contribution as were
provided to you prior to the Effective Date (or under such plans
or programs and with such contributions as are provided by the
Company under amendments to any such plans or programs made after
the Effective Date affecting generally executive employees in
positions comparable to that you held prior to the Effective
Date). The Company's Benefit Plans and Programs shall include the
following: health and dental insurance plans, the short term
disability plan, the long term disability plan, life insurance
plan, Section 401(k) SECAP plan, Employee Stock Purchase Plan and
stock option plans. Further the coverages alternatives described
in (i)-(iii) above are not limited to one coverage alternative
being applied against all plans and programs (i.e. some plans and
programs may utilize coverage alternative (i), while others may
utilize coverage alternative (ii) or (iii)). The application of
which option shall apply to which plans and programs shall be
mutually agreed between the parties but shall take into account
that which the Company is legally capable of providing.
Notwithstanding the generality of the foregoing you agree
that there is no vacation balance owing to you and that you will
stop accruing vacation hours as of the Issue Date.
(6) Beginning on May 16, 1997 through the Termination Date,
inclusive, ("Relevant Period") you acknowledge that you have been
and will continue to be on special assignment to the Company's
CEO. It is agreed that you will have those duties specifically
requested by the CEO which shall include the following:
(a) Assisting the CEO with developing, monitoring, maintaining
and modifying the Company's Strategic Planning Program and
Process.
(b) Regularly reviewing, commenting upon and providing
recommendations on the Company's Product Plans and Product
Development;
(c) Reviewing and assessing, on an on-going basis, the Company's
(including its subsidiaries) corporate structure as it
relates to possible asset and stock mergers, acquisitions
and dispositions.
(d) Reviewing and assessing possible merger, acquisition and
disposition strategies for the Company and its subsidiaries;
(e) Furthering the Company's Channel Development by assisting to
foster key strategic alliance relationships;
(f) Promoting major customer account growth; and
(g) Enhancing the Company's market recognition and penetration
in order to generate new Customer accounts.
The Company shall reimburse you for any normal and customary
expenses incurred by you when performing any duties requested by
the CEO.
(7) In addition, in consideration of your releasing the Company from
any claims that you may have with regard to your age, as such
release is stated in Section I below, including rights under the
ADEA, you will be paid an additional one hundred dollars
($100.00), which sum shall be included with your last payment
under this Agreement.
(8) Stock Options
(a) Notwithstanding any provision to the contrary contained
in any other agreement between the parties hereto, it is
agreed that any options to purchase Stratus Common Stock
which you have been previously granted (as of the Issue
Date) and which are currently unvested shall continue to
vest during your employment until your Termination Date
pursuant to the terms of their applicable Stock Option
Agreements and Stock Option Plans. A summary of such
options, as of the Issue Date, is contained in Appendix B to
this Agreement.
(b) You may exercise all fully vested stock options
identified in Appendix B during the period commencing with
the Issue Date and ending thirty (30) days after your
Termination Date.
(c) For purposes of clarity, in the event you begin full
time employment elsewhere, prior to January 30, 2001, your
stock options shall cease to vest and you shall have thirty
(30) days after the date you begin full time employment
elsewhere to exercise all fully vested stock options.
(9) Financial Planning: From the date of this Agreement until your
Termination Date the Company agrees to pay for your financial
planning with The AYCO Company, L.P., P.O. Box 15073, Albany, NY.
12212-5073, to the same extent as was provided to you prior to the
Effective Date.
(10)Benefits Upon Death: With the exception of the right to exercise
stock options, and life insurance benefits, if any, all rights and
benefits of the Employee under this Agreement shall terminate upon
your death. In the event that any options remain unvested on the
date of your death, it is agreed that said unvested options shall
have their vesting date accelerated so that they vest on the date of
your death and that your estate shall have thirty (30) days from
said date to exercise any and all remaining options.
B. DIRECTORSHIPS
(1) Notwithstanding anything to the contrary herein, Employee and
the Company acknowledge that this Agreement shall have no impact or
effect on the Employee's position as a member of the Company's Board
of Directors ("Board") and/or as Chairman of said Board. As such,
all Company and Employee rights and obligations arising solely from
such Board and Chairman positions shall remain unaffected by the
execution of this Agreement.
(2) Further to Section B(1) above, Employee understands that:
Commencing in 1998 and continuing through 2,000 or the earlier
termination of this Agreement, the Employee shall, as a result of
his Director position with the Company and pursuant to the terms of
one of the Company's Stock Option Plans be granted, on an annual
basis, an amount of non-qualified stock options equivalent in number
and comparable in terms of grant date, price, and vesting schedule
with those granted, on an annual basis, to Outside Directors under
the NQ Plan, so long as the Employee is a Director of the Company on
the date of the stock option award.
(3) Notwithstanding anything to the contrary herein, the Company
acknowledges that nothing in this Agreement shall prohibit the
Employee from maintaining his Directorship positions at Avid
Technology, Inc. and Video Server, Inc. and his Advisory Board
position at Greenwich Street Travelers Fund. Additionally, nothing
in this Agreement shall prohibit or restrict the Employee from
serving as a Board of Director member for additional companies whose
principal business is not in competition with the fault tolerant
computer products of the Company.
C. NONCOMPETITION
With respect to any consultancy arrangement that the Employee enters into
during the term of this Agreement, the Employee agrees, until January 30,
2001, he will not, directly or indirectly, without the prior written
consent of the entire Board of Directors of the Company, (i) provide such
consultancy service with or without pay, or (ii) own, manage, operate,
join, control, participate in, or be connected as a stockholder, partner,
or otherwise with any consultancy business whose principal business is in
competition with the fault tolerant computer products of the Company as
listed in the Company's price book or under development by or for the
Company as of the Effective Date.
It is further expressly agreed that the Company will or would suffer
irreparable injury if Employee were to compete with said businesses of
Company or any subsidiary or affiliate of the Company in violation of
this Agreement and that Company would by reason of such competition be
entitled to injunctive relief in a court of appropriate jurisdiction, and
Employee further consents and stipulates to the entry of such injunctive
relief in such a court prohibiting Employee from competing with the
Company or any subsidiary or affiliate of the Company, as set forth
above, in violation of this Agreement.
D. ANTISOLICITATION
With respect to any consultancy arrangement that the Employee enters into
during the term of this Agreement the Employee promises and agrees, until
January 30, 2001, that he will not influence or attempt to influence
customers of the Company or any of its present or future subsidiaries or
affiliates, either directly or indirectly, to divert their business to
(i) Employee as a consultant or (ii) to any other consultancy business
which the Employee owns, manages, operates, joins, controls, participates
in or is connected to as a shareholder, partner or otherwise that is then
in competition with the business of the Company, or any subsidiary or
affiliate of the Company.
E. SOLICITING EMPLOYEES
With respect to any consultancy arrangement that the Employee enters into
during the term of this Agreement, the Employee promises and agrees that
he will not, before January 30, 2001, directly or indirectly solicit any
of the Company employees who earned annually $50,000 or more as a Company
employee during the last six (6) months of his or her own employment to
work for (i) Employee's consultancy service; or (ii) any consultancy
arrangement in which the Employee owns, arranges, operate, joins,
controls, participates in or is connected to as a shareholder, partner or
otherwise.
F. SAVINGS AND SURVIVAL CLAUSE
(1) Should any valid federal or state law or final determination of any
administration agency or court of competent jurisdiction affect any
provision of this Agreement, the provision or provisions so affected
shall be automatically conformed to the law or determination and
otherwise this Agreement shall continue in full force and effect.
(2) Notwithstanding anything to the contrary herein, the Company agrees
that this Agreement and the rights and obligations herein shall
survive any change of ownership of the Company including but not
limited to a merger, consolidation, disposition or acquisition such
that the surviving or acquiring entity shall be required to honor
the terms of this Agreement.
G. ELECTION OF EMPLOYMENT AGREEMENT
You understand, notwithstanding anything to the contrary, that you
have twenty-one (21) days from physical receipt of this Agreement, as
stated above, to execute this Agreement, but are under no obligation
to do so.
H. PROPRIETARY INFORMATION
You have previously signed a Proprietary Information Agreement with
the Company, which shall remain in full force and effect. Included
among the materials the Company considers to be trade secrets or
otherwise confidential, and thus covered by that Proprietary
Information Agreement, and which you agree not to disclose to anyone
else without the Company's written consent signed by a Company
officer, are customer lists and marketing strategies; this list is not
all encompassing.
I. RELEASE
In consideration of the foregoing Sections A(1) - A(10) of this
Employment Agreement you hereby release and discharge the Company and
its officers, directors, stockholders, employees, agents, subsidiaries
and affiliates from any and all claims, demands or liabilities
("Claims") whatsoever, whether known or unknown or suspected to exist
by you, which you ever had or may now have against the Company, or any
of them, including, without limitation, any Claims, in connection with
your employment with the Company and the termination of that
employment, or pursuant to any federal, state, or local employment or
discrimination laws, regulations, executive orders, or other
requirements, including any actions related to age (including any
Claims related to the ADEA), sex, sexual orientation, race or handicap
discrimination, excepting any Claims arising solely from your
positions as Chairman of and a member of the Company's Board, and
excepting the obligations of the Company pursuant hereto. In addition
you agree not to bring any action against the Company or any employee,
director, officer, agent, subsidiary or affiliate of the Company,
based on any of the foregoing.
J. INDEMNIFICATION
In consideration for your continuing cooperation with and assistance
to Stratus as may be requested from time to time from the Company's
Board, CEO or Executive Staff, and notwithstanding anything contained
herein to the contrary, the Company agrees that this Employment
Agreement and Release shall not release the Company or otherwise
modify the Company's obligation to defend and indemnify the Employee
against any and all claims, demands or liabilities arising out of the
Employee's activities and duties which were performed within the scope
of work of the Employee in his various positions with the Company
including, without limitation, as President, COO, CEO, Chairman,
Officer or Director of the Company or any of its subsidiaries or
affiliates, which obligation the Company acknowledges and confirms and
further agrees shall survive the Termination Date or any termination
of this Agreement. The Company agrees to reimburse you for all
expenses that you incur in providing such cooperation and assistance.
K. DISCONTINUANCE OF EMPLOYMENT
It is understood that if you violate any of your commitments under
this Agreement, the Company may discontinue your employment and/or all
payments and benefits it is hereby agreeing to pay to you in addition
to exercising all other rights it may have under the law. Without
limiting the foregoing, should this Agreement be terminated by Stratus
pursuant to this Section K, you will receive no further payments, or
any of the other rights and/or benefits contained herein.
L. ENTIRE AGREEMENT
It is expressly understood that there is no agreement or understanding
between you and the Company about or pertaining to the termination or
reinstatement of your employment with the Company, or the Company's
obligations to you with respect to such termination, except what is
set forth in this Agreement. It is specifically agreed that in any
event such employment shall cease on the Termination Date.
M. ARBITRATION/GOVERNING LAW
Employee and the Company agree to arbitrate any disputes that might
arise under this Agreement. Such arbitration shall take place in front
of one arbitrator, before the American Arbitration Association (AAA),
in Massachusetts. The arbitrator may award legal fees if deemed
appropriate.
This Agreement shall be construed, enforced and governed by the Laws
of the Commonwealth of Massachusetts.
N. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of any
successor of the Company and any such successor shall be deemed
substituted for the Company for all purposes. As used herein,
"successor" shall include any person, firm, corporation or other business
entity which at any time, whether by purchase, merger or otherwise,
directly or indirectly acquires the assets or business or stock of the
Company.
O. INDEPENDENT REVIEW
Employee declares that he has read the foregoing, has been given the
opportunity to have the agreement reviewed by an attorney of his
choice and agrees to the conditions and obligations as set forth.
Employee understands that he has seven (7) days from the date of
execution to revoke this Agreement in writing.
Dated:---------------------- ------------------------------------
William E. Foster
Dated:---------------------- ------------------------------------
On Behalf of the Company & the Board of Directors:
Bruce I. Sachs
Chief Executive Officer
President
Director
APPENDIX A
Bill's incentive is $350K, 50% or $175K is for corporate performance and
50% or $175K is for performance on individual goals.
His individual goals and the percentages of his award were:
30% Add one new major partner during 1997 that will produce a minimum
of $50M when the partnership matures.
30% Achieve at least 90% of each target market: $219.7M for Telco;
$79.7M for RES and $24.5M for Radio.
40% Hire a CEO by June 1997.
The individual performance component is leveraged by an EPS multiplier.
For example if Bill made 90% of his goals and the company achieved EPS
of $2.30, Bill's individual award would be .9 x $175 x 1.00 = $157.5K.
The corporate score is based on two metrics: (1) Increase revenue by
14% in 1997 over 1996; and (2) improve customer satisfaction, i.e.
reduce below satisfactory responses on our customer satisfaction survey
by 10% over 1996 score. These two components are not weighted. The
Board sets the overall score in January. If the Board said the score
was .9, then Bill would receive .9 x $175K = $157.5.
APPENDIX B
<TABLE>
Stock Option Personnel Summary
<CAPTION>
AS OF 9/10/97 Stratus Computer, Inc. ID: 04-2697554
55 Fairbanks Boulevard Marlboro, MA 01752
WILLIAM E. FOSTER ID: 0001
32 Saddlebrook Road
Sherborn, MA USA 01770
Option
Number Date Plan Type Granted Price Exercised Vested Cancelled Unvested Outstanding Exercisable
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
000011 5/12/80 80 RSP 800,000.00 $0.01 800,000.00 800,000.00 0.00 0.00 0.00 0.00
000264 5/10/83 83 ISO 16,000.00 $1.50 16,000.00 16,000.00 0.00 0.00 0.00 0.00
000401 11/15/83 83 ISO 4,000.00 $11.75 4,000.00 4,000.00 0.00 0.00 0.00 0.00
000940 11/28/84 83 ISO 10,000.00 $9.50 10,000.00 10,000.00 0.00 0.00 0.00 0.00
002853 10/26/87 83 NQ 15,000.00 $15.25 15,000.00 15,000.00 0.00 0.00 0.00 0.00
006159 10/12/90 83 NQ 85,000.00 $15.25 85,000.00 85,000.00 0.00 0.00 0.00 0.00
006715 10/12/90 83 NQ 30,000.00 $15.25 15,000.00 30,000.00 0.00 0.00 15,000.00 15,000.00
007532 2/25/93 83 NQ 30,000.00 $30.75 0.00 27,000.00 0.00 3,000.00 30,000.00 27,000.00
008276 9/ 8/93 83 NQ 30,000.00 $23.25 0.00 24,000.00 0.00 6,000.00 30,000.00 24,000.00
010656 7/25/96 83 NQ 100,000.00 $17.13 0.00 25,000.00 0.00 75,000.00 100,000.00 25,000.00
011203 1/13/97 83 NQ 40,000.00 $26.75 0.00 5,000.00 0.00 35,000.00 40,000.00 5,000.00
TOTAL 1,160,000.00 [$5.6560] 945,000.00 1,041,000.00 0.00 119,000.00 215,000.00 96,000.00
</TABLE>
EXHIBIT 21.1 - SUBSIDIARIES
The following is a list of the Company's current subsidiaries,
all of which are wholly-owned:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Securities Corporation Massachusetts
Stratus World Trade Corporation Delaware
Stratus International, Inc. Massachusetts
Stratus F.S.C., Inc. U.S. Virgin Islands
S2 Systems, Inc. Delaware
SRA Holding L.L.C. Delaware
SRA Investments L.L.C. Delaware
TCAM Systems, Inc. New York
The following is a list of subsidiaries of Stratus World Trade
Corporation, all of which are wholly-owned:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Computer Belgium N.V. Belgium
Stratus Computer GmbH 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 Company, 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 (N.Z.) Ltd New Zealand
Stratus Computer Luxembourg S.A. Luxembourg
Stratus Computer (Korea) Ltd. Korea
Stratus Computer Philippines, Inc. Philippines
Stratus Computer (Pty.) Ltd. South Africa
Stratus (Bermuda) Holding Ltd. Bermuda
Stratus (Bermuda) Financing Ltd. Bermuda
Stratus Computer C.V. The Netherlands
The following are wholly-owned subsidiary companies of Stratus
Holding & Finance Company, Ltd:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Computer Limited Ireland
Stratus Investments Limited Bermuda
Stratus U.K. Holding and Finance, Ltd. United Kingdom
The following is a wholly-owned subsidiary company of Stratus
Computer, Ltd.:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Computer Ireland Ireland
The following is a wholly-owned subsidiary company of Stratus
Holding & Finance B.V.:
ORGANIZED
UNDER LAWS OF
-------------
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 Corporation:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Italia S.R.L. Italy
The following are wholly-owned subsidiary companies of Stratus
UK Holding & Finance Company, Ltd.:
ORGANIZED
UNDER LAWS OF
-------------
Stratus Computer Limited United Kingdom
S2 Systems International Limited United Kingdom
Stratus de Mexico S.A. de C.V. Mexico
The following is a 90% owned subsidiary company of Stratus U.K.
Holding & Finance Company, Ltd., and a 10% owned subsidiary of
Stratus World Trade Corporation:
ORGANIZED
UNDER LAWS OF
-------------
TCAM Systems (U.K.) Limited United Kingdom
The following is a list of the Company's current joint ventures, all of
which are 50% owned:
ORGANIZED
UNDER LAWS OF
-------------
Astria S.A. France
EXHIBIT 23.1 - 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 21, 1998, included in the
1997 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 on this
schedule based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
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 (Form S-8 Nos. 2-88104, 2-89901, 33-2174, 33-11864, 33-28742,
33-67758, 33-64709 and 333-27147, and Form S-3 No. 33-77764 and in the related
prospectus) of our report dated January 21, 1998, with respect to the
consolidated financial statements and schedule of Stratus Computer, Inc.
included or incorporated by reference in the Annual Report (Form 10-K) for the
year ended December 28, 1997.
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1998
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0
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