<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended October 1, 1995
Commission File Number 0-18238
SEQUOIA SYSTEMS, INC.
---------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2738973
- -------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
400 Nickerson Road, Marlborough, Massachusetts 01752
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (508) 480-0800
--------------
Indicate by check mark whether 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____
-----
Indicate the number of shares outstanding of each of the registrant's
classes of stock, as of the latest practicable date.
Class Outstanding at October 30, 1995
----- -------------------------------
Common Stock, $.40 par value 15,312,353
<PAGE>
CONSOLIDATED BALANCE SHEETS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
($ in thousands)
<TABLE>
<CAPTION>
ASSETS October 1, June 30,
1995 1995
(unaudited)
--------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $13,488 $15,317
Accounts receivable, net of allowance for doubtful accounts
of $1,276 at October 1, 1995 and $1,288 at June 30, 1995 16,116 12,739
Inventories 17,087 16,713
Other current assets 2,156 1,974
--------------------------
Total current assets 48,847 46,743
--------------------------
Equipment and Improvements, at cost:
Computer equipment 12,807 12,329
Machinery and equipment 4,785 4,687
Equipment under capital lease 2,666 2,666
Furniture and fixtures 1,417 1,306
Leasehold improvements 1,612 1,575
--------------------------
23,287 22,563
Less - Accumulated depreciation and amortization 18,401 17,828
--------------------------
4,886 4,735
--------------------------
Other Assets 753 763
--------------------------
Total Assets $54,486 $52,241
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $7,490 $6,809
Accrued expenses 8,103 9,037
Deferred revenue 1,239 888
Current portion of capital lease obligations 128 125
--------------------------
Total current liabilities $16,960 $16,859
--------------------------
Obligations under capital lease, net of current portion 23 56
--------------------------
Total long-term obligations 23 56
--------------------------
Commitments & Contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500,000 shares at October 1, 1995 and June 30, 1995
Issued--none
Common stock, $.40 par value:
Authorized--35,000,000 shares at October 1, 1995 and June 30, 1995
Issued and outstanding 15,312,000 shares at October 1, 1995,
and 15,165,000 shares at June 30, 1995 6,125 6,066
Additional paid-in capital 79,671 79,395
Accumulated deficit (48,548) (50,288)
Cumulative translation adjustment 255 153
--------------------------
Total stockholders' equity 37,503 35,326
--------------------------
Total Liabilities and Stockholders' Equity $54,486 $52,241
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended,
October 1, 1995 October 2, 1994
--------------- ---------------
(in thousands except per share data)
<S> <C> <C>
Revenues
Product $23,885 $17,794
Service 3,600 3,811
--------------- ---------------
Total revenues 27,485 21,605
Cost of Revenues
Product 14,231 9,814
Service 1,885 2,008
--------------- ---------------
Total cost of revenues 16,116 11,822
Gross profit 11,369 9,783
Research and Development Expenses 3,118 3,026
Selling, General and Administrative Expenses 6,576 6,026
--------------- ---------------
Total operating expenses 9,694 9,052
Income from operations 1,675 731
Interest Income 191 205
Interest Expense (7) (40)
Other Income (Expense) 15 (1)
--------------- ---------------
Income before provision for taxes 1,874 895
Provision for Income Taxes 134 191
--------------- ---------------
Net income $1,740 $704
=============== ===============
Net Income Per Common and Common Share Equivalent $0.11 $0.05
=============== ===============
Weighted Average Number of Common and Common Share
Equivalents Outstanding 16,121 15,535
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended: October 1, October 2,
1995 1994
==========================
( in thousands )
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 1,740 $ 704
Adjustments to reconcile net income to
net cash provided by (used in ) operating activities--
Depreciation 573 671
Amortization 161 43
Provision for bad debts (12) (36)
Changes in assets and liabilities:
Accounts receivable (3,365) 845
Accounts receivable from related parties 0 386
Accrued interest included in long-term debt 0 10
Inventories (374) (1,630)
Income taxes 114 423
Other current assets (182) (333)
Accounts payable 681 (784)
Accrued expenses (1,048) (912)
Deferred revenue 351 47
--------------------------
Net cash provided by (used in)
operating activities (1,361) (566)
--------------------------
Cash Flows From Investing Activities:
Purchase of equipment and improvements (724) (942)
Decrease (increase) in other assets (151) (137)
--------------------------
Net cash provided by (used in)
investing activities (875) (1,079)
--------------------------
Cash Flows From Financing Activities:
Repayment of obligations under capital leases (30) (36)
Short-term debt 0 (5)
Long-term debt 0 (167)
Proceeds from issuance of common stock 335 73
--------------------------
Net cash provided by (used in)
financing activities 305 (135)
--------------------------
Effect of exchange rates on cash 102 21
Net Increase (Decrease) in Cash and Cash Equivalents (1,829) (1,759)
Cash and Cash Equivalents, beginning of period 15,317 21,024
--------------------------
Cash and Cash Equivalents, end of period $13,488 $19,265
==========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $7 $94
Income taxes paid (refunds received) $20 ($271)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
- ------
The financial statements included herein have been prepared by Sequoia
Systems, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that the disclosures made are adequate to make the information not misleading.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest audited
financial statements, which are contained in the Company's Annual Report on Form
10-K for the year ended June 30, 1995, filed with the Commission on September
26, 1995, as amended by Amendment No. 1 on Form 10-K/A, filed with the
Commission on October 26, 1995.
This information includes all adjustments, (consisting of normal, recurring
adjustments) which the Company considers necessary for a fair presentation of
such information. The results of operations for the three months ended October
1, 1995 are not necessarily indicative of results to be expected for the entire
year.
NOTE 2 INVENTORIES
- ------
Inventories are stated at the lower of average cost (first-in, first-out)
or market which requires the periodic assessment of net realizable value. The
difference between cost and market is charged to income in the period the
impairment is determined. Inventory including materials, labor and
manufacturing overhead consists of the following:
<TABLE>
<CAPTION>
(in thousands)
October 1, June 30,
1995 1995
---------------------------------
<S> <C> <C>
Raw materials $11,199 $ 9,966
Work-in-process 2,923 3,595
Finished goods 2,965 3,152
---------------------------------
$17,087 $16,713
---------------------------------
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
NOTE 3 NET INCOME PER SHARE
- ------
For the three month periods ended October 1, 1995 and October 2, 1994,
respectively, net income per share was based on the weighted average number of
common and common share equivalents outstanding during the period, computed in
accordance with the treasury stock method. Primary and fully diluted earnings
per share are not separately stated as they are substantially the same.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company provides Motorola based systems and upgrade products for on-
line transaction processing and other interactive applications in which system
availability, fast response times and data integrity are critical. With the
acquisition of Texas Microsystems, Inc., the Company's expanded business lines
also include ruggedized, mission-critical computers, both SPARC and Intel based,
for the industrial market and Bellcore Network Equipment Building Systems
("NEBS") compliant products specifically designed for the telecommunications
market. As a leading supplier of ruggedized and mission critical computers from
the desktop to the mainframe, the Company operates in one segment, computer
systems, and addresses expanding market requirements for greater system
availability.
RESULTS OF OPERATIONS
REVENUES
--------
The Company's revenues increased by 27% to $27,485,000 for the three months
ended October 1, 1995, from $21,605,000 for the three months ended October 2,
1994. This is attributable to a 34% increase in product revenues slightly offset
by a 6% decrease in service revenues.
Sales outside the United States comprised $6,070,000, or 22% of total
revenues, for the three months ended October 1, 1995, as compared to $4,386,000
or 20% of total revenues for the three months ended October 2, 1994.
Product revenue growth of $6,091,000 was attributable to an increase of
approximately 240% in sales of NEBS compliant SPARC and Intel based products
specifically designed for the telecommunications market and a 37% increase in
sales of ruggedized Intel based products for the industrial market over the
corresponding period in the prior year. These gains were partially offset by a
13% decrease in sales of Motorola based products for the on-line transaction
processing market ("OLTP").
The increased sales of NEBS compliant SPARC and Intel based products was a
result of several large orders to certain telecommunications customers in the
U.S. These products are an integral part of switches and services used to
support the introduction of new revenue generating services by wireline and
wireless public network services providers. This revenue increase was comprised
of a 50% increase in units shipped and a significant increase in the average
system price, reflecting higher functionality and performance.
7
<PAGE>
The 37% growth in industrial ruggedized sales was comprised of a 47%
increase in units shipped offset by a 6% decline in average system price which
reflects a more mature product life cycle of shipping 486 CPU based products.
Product transitions during 1996 to Pentium and Pentium Pro CPU's may result in
higher average system prices. However, these are expected to be offset by
higher discounts expected as the Company plans to derive a higher proportion of
its revenues through an independent distribution channel.
During the three months ended October 1, 1995 and October 2, 1994,
approximately 62% and 60%, respectively, of revenues from sales of ruggedized
products and products designed for the industrial and telecommunications markets
were derived from the sale of computer systems and peripherals and approximately
38% and 40%, respectively, were derived from the sale of board-level products.
The 13% decline in sales of Motorola based products was attributable to a
decline in overall market demand for the Company's Motorola based systems,
particularly in Australia. During fiscal 1995, Motorola based product revenues
consisted primarily of sales of additional systems and upgrades to existing
customers who have increased information processing requirements, rather than
systems sales to new customers. Revenues from the sales of these expansion
systems and upgrades have begun to decline and are expected to continue this
trend during fiscal 1996. The Company intends to direct its development of
upgrade or expansion features for these products to ensure that its customers
have interoperability options to open systems, multiple platforms, and data
bases. During the first fiscal quarter of 1996, the Company announced the
introduction of a new line of Enterprise Servers using Intel processors and
shipped a limited number of servers. This product line is expected to grow over
time and may offset the decline of Motorola based products as fiscal 1996
progresses.
During the three month periods ended October 1, 1995, and October 2, 1994,
there were no sales to one customer representing greater than 10% of total
company revenues. The Company believes that certain Value Added Resellers
("VAR's") in the healthcare market and customers in the telecommunications
market will continue to represent a substantial portion of overall sales.
Changes in the Company's relationship with, performance by or loss of such
customers could have a significant adverse effect on the Company's revenues and
operating results.
The markets for NEBS compliant SPARC and Intel based products and
ruggedized Intel based products are characterized by rapidly changing technology
and user needs, requiring significant investment for product development. The
Company believes that a large part of its potential to increase revenues in the
future will depend upon its ability to develop, manufacture and market new and
differentiated products which meet changing user needs in a cost-effective and
timely manner.
8
<PAGE>
GROSS MARGIN
------------
Gross margin declined by 4% to 41% for the three months ended October 1,
1995, compared to 45% for the three months ended October 2, 1994, primarily as a
result of a decrease in product margins.
The decreased product margin was caused primarily by a shift in the mix of
sales to a higher proportion of Intel and SPARC based ruggedized products which
carry lower margins than the Motorola based systems, upgrades and expansions.
Ruggedized product margins held constant for the three months ended October 1,
1995, as compared to the three months ended October 2, 1994. Motorola based
products experienced a decrease in margins for the three months ended October 1,
1995, as compared to the three months ended October 2, 1994, due to lower volume
of upgrades sold.
Fluctuations in future margin levels may result from the mix of product
revenues and respective varying margin contributions from sales of the different
product lines, including ruggedized products to the telecommunication and
industrial markets and Motorola based products to the OLTP market.
Gross profits increased $1,586,000 to $11,369,000 for the three months
ended October 1, 1995, as compared to $9,783,000 for the three months ended
October 2, 1994. This increase resulted from higher revenues and was partially
offset by the decline in margin percentage.
RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------
The Company's research and development expenses increased 3% to $3,118,000
for the three months ended October 1, 1995, from $3,026,000 for the three months
ended October 2, 1994. This increase resulted primarily from efforts to further
expand product offerings for the telecommunications market and to continue
development of ruggedized mobile products.
Research and development expenses as a percentage of revenues decreased to
11% for the three months ended October 1, 1995, as compared to 14% for the three
months ended October 2, 1994. The decrease resulted primarily from the
substantial growth in the Company's revenues during the three months ended
October 1, 1995.
9
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses increased 9% to $6,576,000
for the three months ended October 1, 1995, as compared to $6,026,000 for the
three months ended October 2, 1994. This increase was the result of selling
expenses related to additions in personnel focused on expanding distribution
channels in the U.S. and Europe for ruggedized products and for increased
presence in the U.S. telecommunications market.
OPERATING INCOME
----------------
The Company reported income from operations of $1,675,000 for the three
months ended October 1, 1995, as compared to $731,000 for the three months ended
October 1, 1994. The increase was primarily the result of a 27% increase in
revenues, and was partially offset by the decrease in product margins and
operating cost increases which grew more slowly than the rate of revenue growth.
OTHER INCOME / (EXPENSE)
------------------------
The Company had other income of $199,000 for the three months ended October
1, 1995, as compared to other income of $164,000 for the comparable period in
1994. The increase in other income resulted from having no outstanding bank
borrowings during the three months ended October 1, 1995.
INCOME TAXES
------------
The Company recorded provisions for income taxes of $134,000 for the three
months ended October 1, 1995 and $191,000 for the three months ended October 2,
1994.
LIQUIDITY AND CAPITAL RESOURCES
At October 1, 1995, the Company had cash and cash equivalents and working
capital of $13,488,000 and $31,887,000, respectively, compared to cash and cash
equivalents and working capital of $15,317,000 and $29,884,000, respectively, at
June 30, 1995.
In the three months ended October 1, 1995, the Company's cash balance
decreased due to a significant increase in accounts receivable resulting from
strong September sales. At October 1, 1995, the Company's net accounts
receivable totaled $16,116,000 compared to $12,739,000 at June 30, 1995. The
Company's days sales outstanding at
10
<PAGE>
October 1, 1995, increased to 53 days from 44 days at June 30, primarily related
to the significant portion of revenue which was recorded in September.
The Company generally ships systems within 30 days after receipt of
specific purchase orders from customers. Inventories including customer spares
increased slightly to $17,087,000 at October 1, 1995, from $16,713,000 at June
30, 1995.
Capital expenditures totaled $724,000 for the three months ended October 1,
1995, and were comprised of computer equipment, including the capitalization of
internally manufactured systems and software licenses. The Company expects
continued capital expenditures in fiscal 1996 related to increased investment
and development in the Intel and SPARC based product lines.
The Company maintains a line of credit with State Street Bank and Trust
Company and Texas Commerce Bank, National Association, that provides for maximum
borrowings of $20,000,000 secured by substantially all the assets of the
Company. At the Company's option, loans may be drawn down subject to two
interest rate alternatives: (i) a prime rate option bearing interest at the
then current prime rate and (ii) a LIBOR option bearing interest at the LIBOR
rate plus 2%. The Company is required to meet specific covenants throughout
the duration of this agreement. Available borrowings under this agreement are
subject to a borrowing base formula. The agreement expires on October 31, 1996.
At October 1, 1995, no amounts were outstanding under this agreement and the
Company had $10,285,000 available under the borrowing base formula.
The Company believes that its present cash and cash equivalents, working
capital levels, and borrowing capacity are adequate for its operating needs
through fiscal 1996.
11
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings.
The Company is from time to time a party to various lawsuits arising
in the ordinary course of business. The Company knows of no pending litigation
which is reasonably likely to have a material adverse impact on its financial
condition or its results of operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: November 13, 1995
Sequoia Systems, Inc.
By:/s/ Richard B. Goldman
---------------------------------
Richard B. Goldman
Executive Vice President,
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000724621
<NAME> SEQUOIA SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> OCT-01-1995
<EXCHANGE-RATE> 1
<CASH> 13,488
<SECURITIES> 0
<RECEIVABLES> 17,392
<ALLOWANCES> 1,276
<INVENTORY> 17,087
<CURRENT-ASSETS> 48,847
<PP&E> 23,287
<DEPRECIATION> 18,401
<TOTAL-ASSETS> 54,486
<CURRENT-LIABILITIES> 16,960
<BONDS> 0
<COMMON> 6,125
0
0
<OTHER-SE> 31,378
<TOTAL-LIABILITY-AND-EQUITY> 54,486
<SALES> 23,885
<TOTAL-REVENUES> 27,485
<CGS> 14,231
<TOTAL-COSTS> 16,116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 1,874
<INCOME-TAX> 134
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-DILUTED> 0.11
</TABLE>
