Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 2, 1995 Commission File
Number 0-12064
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Stratus Computer, Inc.
(Exact name of registrant as specified in its Charter)
Massachusetts No. 04-2697554
(State of Incorporation) (I.R.S. Employer Identification No.)
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752
(Address of principal executive office) (Zip)
(508) 460-2000
(Telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No.
Number of Common Shares outstanding at the latest practicable date,
May 12, 1995: 23,530,716.
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Consolidated statements of income -
three months ended April 2, 1995
and April 3, 1994
Consolidated balance sheets -
April 2, 1995 and January 1, 1995
Consolidated statements of cash flows -
three months ended April 2, 1995
and April 3, 1994
Notes to consolidated financial statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other information
Legal Proceedings
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)
Quarter Ended
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April 2, April 3,
1995 1994
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Revenues:
Product sales $81,500 $98,521
Service 47,002 36,886
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Total revenues 128,502 135,407
Costs and expenses:
Product cost of sales 37,533 44,040
Service expense 26,446 19,561
Research and development expense 20,620 20,756
Selling, general and administrative
expenses 38,697 38,239
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Total costs and expenses 123,296 122,596
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Operating income 5,206 12,811
Other income 2,811 1,250
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Income before provision for income taxes 8,017 14,061
Provision for income taxes 1,603 2,672
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Net income $6,414 $11,389
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Net income per common share $.26 $.46
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Weighted average number of shares of
common stock and common stock
equivalents outstanding 24,341 24,527
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See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
April 2, January 1,
ASSETS 1995 1995
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(Unaudited)
Current assets:
Cash and cash equivalents $213,922 $230,010
Accounts receivable, net 133,610 140,212
Inventories:
Finished products 28,866 24,802
Work-in-process 2,614 2,836
Parts and assemblies 13,146 15,599
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44,626 43,237
Other current assets 25,953 24,080
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Total current assets 418,111 437,539
Property, plant and equipment, at cost 310,423 300,162
Less: accumulated depreciation 195,228 183,360
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Net property, plant and
equipment 115,195 116,802
Other assets, net 65,311 59,069
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Total assets $598,617 $613,410
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LIABILITIES AND
STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $16,691 $20,020
Accrued expenses 41,874 46,944
Income taxes payable 26,344 27,887
Short-term borrowings and obligations 4,325 5,783
Deferred revenue 13,315 12,474
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Total current
liabilities 102,549 113,108
Long-term obligations 6,096 7,849
Deferred gain on sale-leaseback of
land/building 2,160 2,301
Stockholders' equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
25,108,108 and 25,017,414 shares
issued and outstanding, respectively 251 250
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 193,750 191,971
Retained earnings 336,980 330,566
Cumulative translation adjustment 469 (1,233)
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531,450 521,554
Less: shares in treasury, at cost,
1,322,000 and 888,200 shares,
respectively (43,638) (31,402)
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Total stockholders'
equity 487,812 490,152
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Total liabilities
and stockholders'
equity $598,617 $613,410
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See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
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April 2, April 3,
1995 1994
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Cash flows from operating activities:
Net income $6,414 $11,389
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,267 12,955
Add (deduct) changes in working capital:
Decrease in accounts receivable 8,081 21,390
Increase in inventory (733) (62)
Decrease in accounts payable and accrued
liabilities (11,818) (4,226)
Decrease in income taxes payable (2,158) (4,070)
Decrease in other working capital items (58) (918)
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Net cash provided by operating activities 15,995 36,458
Cash flows from investing activities:
Acquisition of property, plant and equipment (9,213) (11,154)
Acquisition of businesses (2,967) -
Acquisition of other long-term assets (7,314) (5,299)
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Net cash used in investing activities (19,494) (16,453)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 1,780 1,575
Purchase of treasury stock (12,235) -
Reduction of long-term debt and capital
lease obligations (3,211) (2,639)
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Net cash used in financing activities (13,666) (1,064)
Effect of exchange rate changes on cash 1,077 442
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Net increase in cash and cash equivalents (16,088) 19,383
Cash and cash equivalents at beginning of year 230,010 191,005
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Cash and cash equivalents at end of period $213,922 $210,388
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See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 2, 1995 and April 3, 1994
(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 January 1, 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 years have been reclassified to conform to the current year presentation.
Such reclassifications had no effect on previously reported results of
operations.
2. 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.
3. There were no non-cash investing and financing activities for the first
three months of 1995 or 1994. The Company made interest payments of $307 and
$301 and tax payments of $1,450 and $7,532 in the first three months of 1995
and 1994, respectively.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Revenues
Net revenues of $128,502 for the first quarter of 1995 declined 5% from
the corresponding period in 1994.
The Company's total product revenue declined 17% in 1995's first quarter
compared to the same 1994 period due mainly to the unfavorable impact of
product transition issues.
The Company's direct product revenue declined 19% from the first quarter
of 1994. Domestic direct product revenues declined 17% due mainly to weak
sales to the retail, telecommunications and gaming industries. Also,
international direct product revenues declined 21% from 1994's first quarter.
Within Europe, revenue declines in the United Kingdom and Sweden were somewhat
offset by increases in Holland and Germany, resulting in a 27% overall decline.
In the Asia/Pacific region, revenues declined 12% from 1994's first quarter,
particularly in Hong Kong. Product revenue from indirect channels declined 11%
in the 1995 first quarter compared to the same 1994 period. Sales to Olivetti
declined 4% in the first quarter of 1995 compared to the same 1994 period, and
were 5% and 4% of total product revenue, respectively. Product revenue to
other international distributors decreased 45% from the prior year's first
quarter, declining from 13% to 9% of total product revenues. Partially
offsetting these declines was an increase in sales to NEC of 97% for the first
quarter of 1995 when compared to 1994, increasing from 4% to 10% of total
product revenue.
During the quarter, the Company began shipping its new Continuum product
line, which exceeded revenue expectations. Such shipments, however, were not
sufficient to offset the factors noted above.
Total service revenue increased 27% in the first quarter of 1995 over the
corresponding period in the previous year. This growth was due to the
increased professional service, maintenance and education products provided to
the expanding customer base. The Company's TCAM subsidiary acquired in the
fourth quarter of 1994 was responsible for $3,821, or 10 percentage points of
the growth in total service revenue.
Cost of Sales
The gross margin on product revenue of 54% for the first quarter of 1995
declined one percentage point from the gross margin on product revenue achieved
in the corresponding 1994 period. This was due primarily to a shift in product
mix to the lower end of the Company's product line, which carries lower
margins, during the 1995 period versus 1994, as well as lower gross margins on
the new Continuum products.
The gross margin on service revenue was 44% for the first quarter of 1995.
This compares to the 47% service margin realized in the first quarter of 1994.
This decline in the service margin percentage was primarily due to the higher
proportion of professional services revenue, which earns a lower margin, in the
1995 period versus the same 1994 period.
Other Operating Expenses
Total operating expenses for the first quarter of 1995 increased 1% over
the corresponding 1994 period. As a percentage of net revenues, operating
expenses increased to 46% in the first quarter of 1995 from 44% in 1994's first
quarter.
Research and development expense in the first quarter of 1995 decreased
1% from the first quarter of 1994 as the Company continued to manage costs. As
a percentage of net revenues, R&D expense increased one percentage point to 16%
for the first quarter of 1995 compared to the same 1994 period. Stratus has a
commitment to provide both hardware and software products to the critical
online computing marketplace. Throughout 1995, the Company will enhance its
new Continuum product line by integrating the latest PA-RISC microprocessor
technology, and expanding its lower price point products. In addition, the
Company is developing a new highly reliable hardware product line, based on its
unique Isis software, that will provide guaranteed message delivery in a
distributed computing environment. Also, the Company will continue the
transition to open systems technology by increasing the functionality of FTX,
its UNIX"System V Release 4 operating system, and integrating open architecture
standards into its hardware platforms.
For the first quarter of 1995, selling, general and administrative expenses
increased 1% over the same 1994 period as the Company continued to focus on
improving efficiencies. Total SG&A expenses were 30% of net revenues for the
1995 first quarter as compared with 28% for the same 1994 period. The Company's
strategy in 1995 is to continue to focus the sales organization on strategic
markets within vertical industries, as well as continue to improve selling
efficiencies and focus on effective cost management.
Other Income
Other income for the first quarter of 1995 increased $1,561 over the same
period in 1994. Interest income continued to increase in connection with the
Company's increased cash balance and higher interest rates. Interest expense
declined as part of the debt incurred for the acquisition of Isis Distributed
Systems, Inc. in the fourth quarter of 1993 was paid.
The effective tax rate increased to 20% in 1995's first quarter from 19%
in 1994's first quarter due to reduced U.S. tax credits and a less favorable
mix of foreign tax rates.
Liquidity and Capital Resources
At April 2, 1995, the Company had cash and cash equivalents of $213,922
which reflects a $16,088 decrease from the balance at the beginning of the
year. The continued purchase of treasury stock, reductions of accounts payable
and accrued liabilities and debt repayments were primary factors in the
declining cash balance. These factors were partially offset by profitable
operations and a decline in accounts receivable.
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 1995.
At April 2, 1995, the Company had $6,459 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 $1,733 at April 2, 1995.
The ratio of current assets to current liabilities for the Company as of
April 2, 1995 was 4.1 to 1. Based upon its current cash position, and expected
cash flow from operating activities supplemented by continued stock issuance
from the Employee Stock Purchase Plan and stock option plans, management
believes that the Company's capital resources are sufficient to meet its
financial requirements for the foreseeable future.
The Company plans to invest approximately $95 million in capital
improvements and software technologies in 1995.
UNIX is a registered trademark of UNIX System Laboratories, Inc.
Stratus is a registered trademark 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 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter ended
April 2, 1995.
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 May 17, 1995 ROBERT E. DONAHUE
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Vice President, Finance and
Chief Financial Officer
hereunto duly authorized