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 July 2, 1995 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 7, 1995: 25,356,368. STRATUS COMPUTER, INC. INDEX TO 10-Q Part I Financial information Consolidated statements of income - three months and six months ended July 2, 1995 and July 3, 1994 						 Consolidated balance sheets - July 2, 1995 and January 1, 1995 Consolidated statements of cash flows - six months ended July 2, 1995 and July 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 Submission of Matters to a Vote of Security Holders 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 Six Months Ended 						July 2, July 3, July 2, July 3, 						1995 1994 1995 1994 						-------- -------- -------- -------- Revenues: 	Product sales $90,836 $105,149 $172,336 $203,670 	Service 49,481 39,230 96,483 76,116 					 -------- -------- -------- -------- Total revenues 140,317 144,379 268,819 279,786 															 Costs and expenses: 	Product cost of sales 45,501 43,908 83,034 87,948 	Service expense 27,053 20,525 53,499 40,086 	Research and development expense 20,173 21,569 40,793 42,325 	Selling, general and administrative 	expenses 41,709 38,921 80,406 77,160 					 -------- -------- -------- -------- Total costs and expenses 134,436 124,923 257,732 247,519 															 Operating income 5,881 19,456 11,087 32,267 															 Other income 1,731 1,984 4,542 3,234 					 -------- -------- -------- -------- Income before provision for income 	taxes 7,612 21,440 15,629 35,501 															 Provision for income taxes 1,523 4,073 3,126 6,745 					 -------- -------- -------- -------- Net income $6,089 $17,367 $12,503 $28,756 					 ======== ======== ======== ======== 															 Net income per common share $.26 $.71 $.52 $1.17 					 ======== ======== ======== ======== 															 Weighted average number of shares of 	common stock and common stock 	equivalents 23,832 24,540 24,089 24,540 					 ======== ======== ======== ======== 															 					See accompanying notes. STRATUS COMPUTER, INC. 										 CONSOLIDATED BALANCE SHEETS 								 (In thousands, except share and per share amounts) 						 							July 2, January 1, 	ASSETS 1995 1995 ----------------------------------- -------- -------- 				 	(Unaudited) Current assets: 	Cash and cash equivalents $168,486 $230,010 	Accounts receivable, net 139,401 140,212 	Inventories: 	 Finished products 28,794 24,802 	 Work-in-process 2,062 2,836 	 Parts and assemblies 12,496 15,599 							-------- -------- 							 43,352 43,237 				 	Other current assets 26,922 24,080 							-------- -------- 		Total current assets 378,161 437,539 Property, plant and equipment, at cost 319,941 300,162 Less: accumulated depreciation 203,288 183,360 							-------- -------- 		Net property, plant and 		equipment 116,653 116,802 	 Other assets, net 66,605 59,069 							-------- -------- 		Total assets $561,419 $613,410 							======== ======== 				 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: 	Accounts payable $18,770 $20,020 	Accrued expenses 40,436 46,944 	Income taxes payable 7,272 27,887 	Short-term borrowings and obligations 2,972 5,783 	Deferred revenue 11,373 12,474 						 -------- -------- 		Total current liabilities 80,823 113,108 				 Long-term obligations 5,972 7,849 Deferred gain on sale-leaseback of land/building 2,019 2,301 				 Stockholders' equity: 	Common stock, $.01 par value, 150,000,000 	 shares authorized, 25,306,911 and 	 25,017,414 shares issued and outstanding, 	 respectively 253 250 	Junior common stock, $.01 par value, 	 500,000 shares authorized - - 	Additional paid-in capital 198,544 191,971 	Retained earnings 343,069 330,566 	Cumulative translation adjustment 987 (1,233) 						 -------- -------- 							542,853 521,554 	Less: shares in treasury, at cost, 2,191,200 	 and 888,200 shares, respectively (70,248) (31,402) 						 -------- -------- 		Total stockholders' equity 472,605 490,152 						 -------- -------- 		Total liabilities and 		 stockholders' equity $561,419 $613,410 						 ======== ======== 				 					See accompanying notes. 	 STRATUS COMPUTER, INC. 										 CONSOLIDATED STATEMENTS OF CASH FLOWS 			 									 (Unaudited) (In thousands) 							 Six Months Ended 							 -------------------- 							 July 2, July 3, 							 1995 1994 							 -------- -------- 									 Cash flows from operating activities: 			 	Net income $12,503 $28,756 									 	Adjustment to reconcile net income to net 	 cash provided by operating activities: 									 		Depreciation and amortization 32,819 24,498 	Add (deduct) changes in working capital: 										 	(Increase) decrease in accounts receivable (4,055) 11,730 	Decrease in inventory 554 270 	Decrease in accounts payable and accrued 	 liabilities (4,949) (14,190) 	Decrease in income taxes payable (21,368) (7,497) 	Increase (decrease) in other working capital 	 items (3,180) 1,293 							 -------- -------- Net cash provided by operating activities 12,324 44,860 									 Cash flows from investing activities: 			 	Acquisition of property, plant and equipment (23,437) (17,971) 	Acquisition of businesses (2,967) 0 	Acquisition of other long-term assets (12,270) (9,360) 							-------- -------- Net cash used in investing activities (38,674) (27,331) 									 Cash flows from financing activities: 			 	Net proceeds and benefits from employee 	 stock plans 6,576 6,288 	Purchase of treasury stock (38,846) (4,541) 	Reduction of long-term debt and capital 	 lease obligations (4,688) (2,636) 							 -------- -------- Net cash provided by (used in) financing 	activities (36,958) (889) 									 Effect of exchange rate changes on cash 1,784 521 							-------- -------- Net increase in cash and cash equivalents (61,524) 17,161 									 Cash and cash equivalents at beginning of year 230,010 191,005 							-------- -------- Cash and cash equivalents at end of period $168,486 $208,166 							======== ======== 									 									 					See accompanying notes. 									 STRATUS COMPUTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 2, 1995 and July 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. 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 six months of 1995 or 1994. The Company made interest payments of $327 and $557 and tax payments of $23,329 and $15,425 in the first six months of 1995 and 1994, respectively. STRATUS COMPUTER, INC. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Revenues 	Total revenues of $140,317 for the second quarter of 1995 declined 3% from the corresponding period in 1994. For the first six months of 1995, total revenues were $268,819, a decrease of 4% from the same 1994 period. 	The Company's total product revenue declined 14% for the second quarter and 15% for the first six months of 1995 compared to the same prior year periods due mainly to the unfavorable impact of product transition issues associated with the Company's introduction in the 1995 first fiscal quarter of its new Continuum product line. During the second quarter of 1995, the Company continued to increase shipments of its Continuum product line, meeting revenue expectations for that product line. Such shipments, however, were not sufficient to offset the decline in revenues associated with the XA/R product line. In addition, the Company's product mix shifted significantly toward the lower end of its product line, yet the actual aggregate number of systems shipped during the second quarter and first six months of 1995 increased slightly over the corresponding periods of 1994. 	The Company's direct product revenue decreased 23% for the second quarter and 21% for the first six months of 1995 from the same prior year periods. For the quarter, domestic direct and international direct revenues declined 33% and 1%, respectively. For the first six months, domestic direct and international direct revenues declined 26% and 12%, respectively. The domestic decline was due mainly to lower sales to the telecommunications industry in both time periods primarily due to the end of a major customer rollout in the second quarter of 1994, and lower than anticipated capital spending in other telecommunication channels. In the quarter, direct product revenue in Europe declined 8% from the prior year's second quarter as lower sales in France and Italy were somewhat offset by increased sales in Germany. Asia/Pacific sales during the quarter increased 9% from 1994. Higher revenues in Japan were somewhat offset by lower sales in the Far East and Australia. For the first six months of 1995, direct product revenue in Europe declined 19% from the same 1994 period. Lower sales in the United Kingdom, France, Italy and Sweden were somewhat offset by increased sales in Holland and Germany. Asia/Pacific sales during the first six months of 1995 declined 2% from 1994 as lower revenues in the Far East and Australia were mostly offset by increased sales in Japan. 	Product revenue from indirect channels increased 33% and 9% in the 1995 second quarter and the first six months compared to the same prior year periods. For the quarter, sales to NEC increased 160% compared to the same 1994 period, and were 12% of total product revenue. Product revenue from international distributors increased 28% from the prior year's second quarter. Sales to Olivetti declined 37% compared to the same 1994 period, and were 5% of total product revenue. For the first six months of 1995, sales to NEC increased 129% compared to the same 1994 period, and were 11% of total product revenue. Product revenue from international distributors decreased 21% from the same prior year period while sales to Olivetti declined 25%. 	Total service revenue increased 26% and 27% in the second quarter and first six months of 1995 over the corresponding periods 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 contributed 9 and 10 percentage points of the growth in total service revenue in the 1995 second quarter and first six months, respectively. Cost of Sales 	The gross margin on product revenue of 50% and 52% for the second quarter and first six months of 1995 declined eight and five percentage points, respectively, from the gross margin on product revenue achieved in the corresponding 1994 periods. This was the result of a shift in product mix to the lower end of the Company's product line, which carries lower margins, during the 1995 periods versus 1994, as well as higher discount levels on the Company's older product line. 	The gross margin on service revenue was 45% for the second quarter and first six months of 1995. This compares to the 48% and 47% service margins realized in the second quarter and first six months of 1994, respectively. This decrease in the service margin percentage was primarily due to the higher proportion of professional services revenue, which earns a lower margin, in the 1995 periods versus the corresponding 1994 periods. Other Operating Expenses 	Total operating expenses for the second quarter of 1995 increased 2% over the corresponding 1994 period. As a percentage of net revenues, operating expenses increased by 2 percentage points in the second quarter of 1995 to 44% compared to 1994's second quarter. For the first six months of 1995, total operating expenses grew 1% over the corresponding 1994 period, increasing as a percentage of net revenues from 43% to 45%. 	Research and development expense in the second quarter and first six months of 1995 decreased 6% and 4%, respectively, from the same 1994 periods, as the Company continued to manage costs. As a percentage of total revenues, R&D expense declined one percentage point, to 14%, for the second quarter of 1995 compared to the 1994 second quarter. For the six month period, R&D expense remained at 15% of total revenues. Stratus has a commitment to provide both hardware and software solutions to the critical online computing marketplace. Throughout 1995, the Company will continue to enhance its 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 UNIXrSystem V Release 4 operating system, and integrating open architecture standards into its hardware platforms. 	For the second quarter and first six months of 1995, selling, general and administrative expenses increased 7% and 4%, respectively, over the same 1994 periods. The total amount of the increase for the quarter was attributable to the Company's TCAM acquisition. For the first six months of 1995, the TCAM acquisition contributed $5,748 to the increase in SG&A expenses. This increase was mitigated by savings of $2,502 due to the continued focus on strong cost controls throughout the Company. Total SG&A expenses were 30% of net revenues, up three and two percentage points, for the 1995 second quarter and first six months, respectively, as compared with the same 1994 periods. 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. 	As a result of the 1995 second quarter and first six month financial performance, the Company is currently evaluating its economic model and conducting a thorough evaluation of its cost structure, and expects that any plan resulting from this effort will be announced in the latter part of the third quarter of 1995. Other Income 	Other income for the second quarter and first six months of 1995 decreased $253 and increased $1,308, respectively, compared to the same 1994 periods. Interest income declined in the second quarter and increased in the first six months, compared to the corresponding 1994 periods. Interest expense declined due to the lower amount of outstanding debt in connection with the acquisition of Isis Distributed Systems, Inc. in 1993. 	The effective tax rate increased to 20% in 1995's second quarter and first six months from 19% in 1994's respective periods due to reduced U.S. tax credits and a less favorable mix of foreign tax rates. Liquidity and Capital Resources 	At July 2, 1995, the Company had cash and cash equivalents of $168,486 which reflects a $61,524 decrease from the balance at the beginning of the year. The continued purchase of treasury stock, expenditures for capital and other long-term assets and tax payments were primary factors in the declining cash balance. These factors were partially offset by profitable operations and capital generated through employee stock plans. 	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 July 2, 1995, the Company had $6,718 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 $292 at July 2, 1995. 	The ratio of current assets to current liabilities for the Company as of July 2, 1995 was 4.7 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 $75 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 4. Submission of Matters to a Vote of Security Holders 	On April, 18, 1995, the Annual Meeting of Stockholders was held and, in addition to the ratification of the selection of Ernst & Young LLP as Independent Public Accountants, Messrs. Paul J. Ferri and Gardner C. Hendrie were elected as Directors of the Company to serve for a three year term. A proposal was approved to amend the 1983 Stock Option Plan and the Non Qualified Common Stock Option Plan. A proposal to amend the Employee Stock Purchase Plan was also approved. Item 6. Exhibits and reports on Form 8-K 	No reports on Form 8-K have been filed during the second quarter ended July 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 August 11, 1995 ROBERT E. DONAHUE ---------------------------- -------------------------- 					Vice President, Finance and 					Chief Financial Officer 					hereunto duly authorized