-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N9pRVlheqdUMB2hTJndLCnH23zOFj+V68FJLN6vlcNElZvCTNOp2OHpq4g6DDzhJ xGtMSsTwYZa+APXg3ksciQ== 0000723610-96-000014.txt : 19960816 0000723610-96-000014.hdr.sgml : 19960816 ACCESSION NUMBER: 0000723610-96-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATUS COMPUTER INC CENTRAL INDEX KEY: 0000723610 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 042697554 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10405 FILM NUMBER: 96615254 BUSINESS ADDRESS: STREET 1: 55 FAIRBANKS BLVD CITY: MARLBORO STATE: MA ZIP: 01752 BUSINESS PHONE: 5084602000 MAIL ADDRESS: STREET 1: 55 FAIRBANKS BLVD CITY: MARLBORO STATE: MA ZIP: 01752 10-Q 1 Securities and Exchange Commission Washington, D.C. 20549 - --------------------------------------------------------------------------- Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1996 Commission File Number 0-12064 - --------------------------------------------------------------------------- Stratus Computer, Inc. (Exact name of registrant as specified in its Charter) Massachusetts No. 04-2697554 (State of Incorporation) (I.R.S. Employer Identification No.) 55 Fairbanks Boulevard, Marlborough, Massachusetts 01752 (Address of principal executive office) (Zip) (508) 460-2000 (Telephone number, including area code) - --------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No____. Number of Common Shares outstanding at the latest practicable date, August 5 , 1996: 25,993,815. STRATUS COMPUTER, INC. INDEX TO 10-Q Part I Financial information Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Consolidated statements of income - three months and six months ended June 30, 1996 and July 2, 1995 Consolidated balance sheets - June 30, 1996 and December 31, 1995 Consolidated statements of cash flows - six months ended June 30, 1996 and July 2, 1995 Notes to consolidated financial statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other information Item 1 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders Item 6 Exhibits and reports on Form 8-K Signatures PART I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS STRATUS COMPUTER, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) Second Quarter Ended Six Months Ended ---------------------- ------------------- June 30, July 2, June 30, July 2, 1996 1995 1996 1995 -------- -------- -------- -------- Revenues: Product sales $ 89,519 $ 90,836 $180,638 $172,336 Service 50,782 49,481 102,588 96,483 -------- -------- -------- -------- Total revenues 140,301 140,317 283,226 268,819 Costs and expenses: Product cost of sales 47,775 45,501 95,832 83,034 Service expense 31,791 27,053 62,540 53,499 Research and development expense 19,791 20,173 39,871 40,793 Selling, general and administrative expenses 32,344 41,709 64,710 80,406 Restructuring charge (see note 5) 4,623 0 4,623 0 -------- -------- -------- -------- Total costs and expenses 136,324 134,436 267,576 257,732 -------- -------- -------- -------- Operating income 3,977 5,881 15,650 11,087 Other income 1,734 1,731 3,629 4,542 -------- -------- -------- -------- Income before provision for income taxes 5,711 7,612 19,279 15,629 Provision for income taxes 1,256 1,523 4,241 3,126 -------- -------- -------- -------- Net income $ 4,455 $ 6,089 $ 15,038 $ 12,503 ======== ======== ======== ======== Net income per common share $ .19 $ .26 $ .64 $ .52 ======== ======== ======== ======== Weighted average number of shares of common stock and common stock equivalents 23,758 23,832 23,671 24,089 ======== ======== ======== ======== See accompanying notes. STRATUS COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) June 30, December 31, ASSETS 1996 1995 - ------------------------------ --------- --------- (Unaudited) Current assets: Cash and cash equivalents $ 81,735 $ 91,592 Marketable securities 64,125 63,505 Accounts receivable, net 144,740 165,643 Inventories: Finished products 42,117 35,640 Work-in-process 1,353 1,174 Parts and assemblies 32,600 24,457 --------- --------- 76,070 61,271 Prepaid expenses 14,274 10,901 Other current assets 18,595 22,331 --------- --------- Total current assets 399,539 415,243 Property, plant and equipment, at cost 338,670 323,529 Less: accumulated depreciation 217,146 207,148 --------- --------- Net property, plant and equipment 121,524 116,381 Other assets, net 76,625 76,185 --------- --------- Total assets $597,688 $607,809 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------- Current liabilities: Accounts payable $ 21,884 $ 31,842 Accrued expenses: Payroll 18,171 20,235 Other 31,159 38,129 Income taxes payable 2,760 8,617 Short-term borrowings and obligations 3,446 5,050 Deferred revenue 17,593 18,377 --------- --------- Total current liabilities 95,013 122,250 Long-term obligations and deferrals 4,215 7,168 Stockholders' equity: Common stock, $.01 par value, 150,000,000 shares authorized, 25,987,173 and 25,743,776 shares issued and outstanding, respectively 260 257 Junior common stock, $.01 par value, 500,000 shares authorized 0 0 Additional paid-in capital 213,914 208,308 Retained earnings 362,942 347,904 Cumulative translation adjustment (2,638) (2,060) --------- --------- 574,478 554,409 Less: 2,400,000 shares in treasury, at cost (76,018) (76,018) --------- --------- Total stockholders' equity 498,460 478,391 --------- --------- Total liabilities and stockholders' equity $597,688 $607,809 ========= ========= See accompanying notes. STRATUS COMPUTER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended ---------------------- June 30, July 2, 1996 1995 --------- --------- Cash flows from operating activities: Net income $ 15,038 $ 12,503 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,638 32,819 Restructuring charge 4,623 0 Add (deduct) changes in working capital: (Increase) decrease in accounts receivable 20,874 (4,055) (Increase) decrease in inventory (14,800) 554 Decrease in accounts payable and accrued liabilities (22,259) (4,949) Decrease in income taxes payable (7,199) (21,368) Decrease in other working capital items (399) (3,180) --------- --------- Net cash provided by operating activities 27,516 12,324 Cash flows from investing activities: Acquisition of property, plant and equipment (26,956) (23,437) Acquisition of businesses 0 (2,967) Purchase of marketable securities (12,365) (77,170) Proceeds from sale and maturity of marketable securities 11,745 57,291 Acquisition of other assets (12,265) (12,270) --------- --------- Net cash used in investing activities (39,841) (58,553) Cash flows from financing activities: Net proceeds from employee stock plans 5,606 6,576 Acquisition of treasury stock 0 (38,846) Reduction of long-term debt (2,650) (4,688) --------- --------- Net cash provided by (used in) financing activities 2,956 (36,958) Effect of exchange rate changes on cash (488) 1,784 --------- --------- Net decrease in cash and cash equivalents (9,857) (81,403) Cash and cash equivalents at beginning of year 91,592 191,934 --------- --------- Cash and cash equivalents at end of period $ 81,735 $110,531 ========= ========= See accompanying notes. STRATUS COMPUTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 and July 2, 1995 (Unaudited) (In thousands) 1. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly- owned. The information herein should be read in conjunction with the annual report on Form 10-K for the year ended December 31, 1995. It is management's opinion that the accompanying statements reflect all adjustments necessary for a fair presentation of the results for this interim period and the comparable periods presented. Certain amounts in the consolidated financial statements for the prior year have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported results of operations. The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date. 2. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 3. Primary earnings per share is based on the weighted average number of shares of common stock and common stock equivalents (stock options) outstanding. Fully diluted earnings per share has not been separately presented as the amount does not differ significantly from primary earnings per share. 4. There were no non-cash investing and financing activities for the first six months of 1996 or 1995. The Company made interest payments of $598 and $327 and tax payments of $8,572 and $23,329 in the first six months of 1996 and 1995, respectively. 5. During the second quarter of 1996, the Company restructured its software business to improve operating results by aligning revenues with expenses, and to focus on new strategic product offerings to be launched in the coming months. The restructuring actions resulted in a charge of $4.6 million and included charges for workforce reductions and asset dispositions related to the discontinuation of certain product programs. STRATUS COMPUTER, INC. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Revenues Total revenues of $140,301 for the second quarter of 1996 were unchanged when compared to the second quarter of 1995. For the first six months of 1996, total revenues were $283,226, an increase of 5% from the same 1995 period. The Company's total product revenue declined 1% for the second quarter and increased 5% for the first six months of 1996 compared to the same prior year periods. The second quarter decline was somewhat mitigated by strong sales to the telecommunications industry. The second quarter decrease was due mainly to a 56% decline in software license revenue from the Company's S2 Systems, Inc. (S2) subsidiary offset by a 4% increase in hardware product revenue, resulting from stronger sales of the Company's Continuum family of fault-tolerant computer systems. For the first six months of 1996 compared to 1995, hardware product revenue increased 10% with strong sales to NEC, as well as in Korea and Mexico, somewhat offset by weakness in the U.S. and Europe. The increase was further offset by a 52% decline in software license revenue from S2. Domestic direct product revenues decreased 20% for the second quarter and 15% for the first six months of 1996 from the same prior year periods due mainly to weak sales into the retail and banking/brokerage industries. In the second quarter and first six months of 1996, direct product revenue in Europe declined 22% and 16%, respectively, from the same 1995 periods primarily the result of lower sales in Holland, Belgium and Germany. Asia/Pacific sales during the second quarter and first six months of 1996 remained flat and increased 9%, respectively, compared with the same periods of 1995. Higher revenues in Australia and Hong Kong were offset by lower sales in Japan. In summary, total international direct product revenues decreased 9% for the second quarter and increased 5% for the first six months of 1996 from the same prior periods. Product revenue from indirect channels increased 39% in both the 1996 second quarter and the first six months compared to the same prior year periods. Sales to NEC increased 75% and 94% for the second quarter and first six months of 1996, respectively, compared to the same 1995 periods. Sales to NEC represented 22% and 21% of total product revenue in the second quarter and first six months of 1996, respectively, compared to 12% and 11% of total product revenue in the same periods of 1995. Product revenue from international distributors increased 7% and decreased 6% in the second quarter and first six months of 1996, respectively, compared to the same 1995 periods as strong sales in Korea were offset by weakness in Europe. Total service revenue increased 3% for the second quarter and 6% for the first six months of 1996 from the same prior year periods. Professional services revenue increased 21% and 33% from the second quarter and first six months of 1995, respectively, primarily driven by several large system integration contracts. For the second quarter and first six months of 1996, maintenance and education revenues were level with the same 1995 periods. Cost of Sales The gross margin on product revenue of 47% for the second quarter and first six months of 1996 declined three and five percentage points, respectively, from the gross margin on product revenue achieved in the corresponding 1995 periods. This was the result of increased competitive pressure, an aggressively priced Continuum product line that delivers substantial price/performance improvement, migration to the low end of the Company's product line and a significant drop in software license revenues which carry higher margins than traditional hardware product sales. Management believes that the downward pressure on product margins will continue, but at a slower pace. The gross margin on service revenue was 37% for the second quarter and 39% for the first six months of 1996. This compares to a 45% service margin realized in the second quarter and first six months of 1995. The decreased margins were due to a shift in the mix of service revenues, with a higher percentage generated from professional services versus maintenance contracts. The Company continues to see a shift in service revenues towards increased professional services sales, which yield a lower margin than traditional maintenance contract revenues. In addition, extended service warranties provided with the Continuum product offerings slowed revenue growth and added pressure on the service gross margin. Other Operating Expenses Total operating expenses for the second quarter and first six months of 1996, excluding the restructuring charge, decreased 16% and 14%, respectively, from the corresponding 1995 periods reflecting benefits derived from the Company's restructuring actions initiated in the third quarter of 1995 and completed in the second quarter of 1996. As a percentage of total revenues, operating expenses declined to 37% for both the second quarter and first six months of 1996 from 44% and 45% for the second quarter and first six months of 1995, respectively. During the second quarter of 1996, the Company restructured its software business to improve operating results by aligning revenues with expenses, and to focus on new strategic product offerings to be launched in the coming months. The restructuring actions resulted in a charge of $4.6 million and included charges for workforce reductions and asset dispositions related to the discontinuation of certain product programs. Research and development expense in the second quarter and first six months of 1996 decreased 2% from the same periods in 1995. As a percentage of total revenues, research and development expense was unchanged at 14%, for the second quarter of 1996 compared to the 1995 second quarter. For the first six months of 1996, R&D expense as a percentage of total revenues declined one percentage point to 14%, compared to the same 1995 period. Throughout the remainder of 1996, the Company will continue its long- standing commitment to provide leading edge hardware and software products to the on-line computing marketplace particularly in support of critical applications. Research and development efforts directed towards the Company's Continuum and RADIO (tm) product lines will be ongoing through the remainder of 1996. The Company will continue to enhance its Continuum product line, leveraged by the successful incorporation of Hewlett-Packard's industry leading PA-RISC microprocessor technology, and expanding its lower price point products. RADIO combines fault tolerant software from the Company's Isis Distributed Systems division with industry-standard hardware, operating system, and networking components. The Company will continue to invest in these technologies to bring competitive products to market, and to realize the benefits of purchased research and development. For the second quarter and first six months of 1996, selling, general and administrative expenses decreased 22% and 20%, respectively, from the same 1995 periods primarily due to the 1995 restructuring activities. Total selling, general and administrative expenses were 23% of net revenues for both the 1996 second quarter and the first six months as compared to 30% of net revenues for the corresponding 1995 periods. The Company's strategy in 1996 is to continue to focus the sales organization on strategic markets within vertical industries, expand indirect sales channels and improve selling efficiencies. In addition, the Company will continue to focus on effective cost management. Other Income Other income for the second quarter was unchanged compared to the second quarter of 1995. For the first six months of 1996, other income decreased $913, compared to the same 1995 period. Interest income decreased due to an $84 million reduction in the Company's cash balance since January 1, 1995, primarily resulting from stock repurchase programs, the acquisition of businesses and the restructuring actions. The effective tax rate of 22% in 1996's second quarter and first six months compares to 20% in 1995's corresponding periods. The increase is primarily due to the expiration of the R&D tax credit and a change in the mix of taxable income in the Company's international subsidiaries. Liquidity and Capital Resources At June 30, 1996, the Company had cash, cash equivalents and marketable securities of $145,860, a decrease of $9,237 from the balance at the beginning of the year. This decrease was primarily due to the increase of inventory balances in anticipation of volume shipments of new products in the second half of 1996, reductions of accounts payable and accrued liabilities, and the acquisition of property, plant, and equipment and other long-term assets. The Company has a Multicurrency Revolving Credit Agreement providing up to $50 million of borrowings through March 1997. There have been no borrowings against this Agreement, and the Company anticipates no borrowings during the remainder of 1996. At June 30, 1996, the Company had $3,978 in outstanding debt related to the Isis acquisition. Certain subsidiaries have entered into credit arrangements with local banks, principally Overdraft Agreements, for the purpose of short-term liquidity management. Borrowings under these Agreements were $911 at June 30, 1996. The ratio of current assets to current liabilities for the Company as of June 30, 1996 was 4.2 to 1. Based upon its current cash position, and expected cash flow from operating activities supplemented by ongoing stock issuance from the Employee Stock Purchase Plan and stock option plans, management believes that the capital resources are sufficient to meet the Company's financial requirements for the foreseeable future. The Company plans to invest approximately $60 million in capital improvements and software technologies in 1996. During the third quarter of 1995, the Company, after it had completed an evaluation of its economic model and cost structure, approved a plan to restructure its operations. As a result, in the third quarter of 1995, the Company recorded a $24.5 million restructuring charge for the reduction of its worldwide workforce by approximately 575 employees, as well as the consolidation of certain manufacturing and sales operations. Of the total charges, $13.0 million was related to the workforce reduction and $11.5 million was related to the consolidation of facilities and operations. Approximately $3.0 million related to the restructuring was paid and charged against the reserve in the second quarter of 1996, completing this restructuring action. Outlook and Risks On August 6, 1996, Gary E. Haroian resigned from his position as President and CEO. William E. Foster, the Company's founder and Chairman, was re-appointed as the Company's CEO. Mr. Foster, together with the senior management team, will focus on refining and improving the Company's business strategy. The Company's future operating results are dependent upon a number of factors, including the ability of the Company to continue to execute its strategy for growth. The Company will continue to invest in its core business by developing and introducing products which will expand the breadth of the Continuum product family. In addition, the Company will continue making investments to improve the functionality, serviceability and ease-of-use of its distributed computing products. In support of these product directions, the Company will continue to develop and deliver application software and professional services to high-growth vertical industries that require continuous availability. The Company's targeted markets include telecommunications, banking, brokerage, retail, travel and transportation, healthcare and gaming. A key challenge to the Company's continued growth is selling increased unit volumes of computer systems at competitive prices, while concurrently controlling the cost structure of the Company in an increasingly competitive environment. Increased volume shipments are dependent upon continued migration of the customer base to the Continuum family, timeliness to market with new products, winning new accounts in a fast and changing marketplace and market acceptance of the new distributed computing products. UNIX is a registered trademark of UNIX System Laboratories, Inc. Stratus and Continuum are registered trademarks, and RADIO, Isis and Isis Distributed Systems are trademarks of Stratus Computer, Inc. PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings, either outstanding or pending, with respect to the Company. Item 4. Submission of Matters to a Vote of Security Holders On April 23, 1996, the Annual Meeting of Stockholders was held and, in addition to the ratification of the selection of Ernst & Young LLP as independent auditors (20,309,838 shares in favor; 26,698 shares against; 14,218 shares abstained), Messrs. Alexander V. d'Arbeloff, Gary E. Haroian and Robert M. Morill were elected as Directors of the Company to serve for a three year term (each receiving 20,139,238 votes). Item 6. Exhibits and reports on Form 8-K No reports on Form 8-K have been filed during the second quarter ended June 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. STRATUS COMPUTER, INC. (Registrant) Date August 12, 1996 ROBERT E. DONAHUE - --------------------- ---------------------------- Vice President, Finance and Administration, Chief Financial Officer and Treasurer, hereunto duly authorized EX-27 2
5 0000723610 STRATUS COMPUTER, INC. 1000 6-MOS DEC-29-1996 JAN-01-1996 JUN-30-1996 81735 64125 148896 9175 76070 399539 338670 217145 597688 95013 4125 260 0 0 498200 597688 180638 283226 95832 262576 0 0 (3629) 19279 4241 15038 0 0 0 15038 .64 .64
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