<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended March 31, 1996
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)
(508) 480-0800
- --------------
(Registrant's Telephone Number, Including Area Code)
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 June 30, 1996
----- ---------------------------
Common Stock, $.40 par value 15,579,471
<PAGE>
CONSOLIDATED BALANCE SHEETS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
($ in thousands, except share data)
ASSETS March 31, June 30,
1996 1995
(unaudited)
--------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $11,218 $15,317
Accounts receivable, net of allowance for doubtful accounts
of $1,052 at March 31, 1996 and $1,288 at June 30, 1995 15,084 12,739
Inventories 17,623 16,713
Other current assets 2,324 1,974
--------------------------
Total current assets 46,249 46,743
--------------------------
Equipment and Improvements, at cost:
Computer equipment 11,885 12,329
Machinery and equipment 5,216 4,687
Equipment under capital lease 2,338 2,666
Furniture and fixtures 1,500 1,306
Leasehold improvements 1,654 1,575
--------------------------
22,593 22,563
Less - Accumulated depreciation and amortization 17,985 17,828
--------------------------
4,608 4,735
--------------------------
Other Assets 680 763
--------------------------
Total Assets $51,537 $52,241
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $6,809 $6,809
Accrued expenses 9,980 9,037
Deferred revenue 714 888
Current portion of capital lease obligations 88 125
--------------------------
Total current liabilities 17,591 16,859
--------------------------
Obligations under capital lease, net of current portion - 56
--------------------------
Total long-term obligations - 56
--------------------------
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500,000 shares at March 31, 1996 and June 30, 1995
Issued--none - -
Common stock, $.40 par value:
Authorized--35,000,000 shares at March 31, 1996 and June 30, 1995
Issued and outstanding 15,563,000 shares at March 31, 1996,
and 15,165,000 shares at June 30, 1995 6,225 6,066
Additional paid-in capital 80,178 79,395
Accumulated deficit (52,669) (50,288)
Cumulative translation adjustment 212 153
-------------------------
Total stockholders' equity 33,946 35,326
-------------------------
Total Liabilities and Stockholders' Equity $51,537 $52,241
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
For the three months ended, For the nine months ended,
March 31, 1996 April 2, 1995 March 31, 1996 April 2, 1995
---------------- --------------- ---------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Revenues
Product $20,212 $26,951 $68,480 $66,004
Service and Other 3,442 3,694 10,597 11,183
---------------- --------------- ---------------- ---------------
Total revenues 23,654 30,645 79,077 77,187
Cost of Revenues
Product 13,998 15,034 43,128 35,533
Service and Other 2,666 1,961 6,450 5,932
---------------- --------------- ---------------- ---------------
Total cost of revenues 16,664 16,995 49,578 41,465
Gross profit 6,990 13,650 29,499 35,722
Research and Development Expenses 3,373 3,409 9,761 9,544
Selling, General and Administrative Expenses 6,230 9,084 19,364 21,968
Other Charges 3,010 - 3,010 -
---------------- --------------- ---------------- ---------------
Total operating expenses 12,613 12,493 32,135 31,512
Income/(loss) from operations (5,623) 1,157 (2,636) 4,210
Interest Income 113 214 515 604
Interest Expense (4) (128) (14) (274)
Other Income (Expense) 14 (109) 43 (35)
---------------- --------------- ---------------- ---------------
Income/(loss) before provision for taxes (5,500) 1,134 (2,092) 4,505
Provision for Income Taxes 47 301 289 945
---------------- --------------- ---------------- ---------------
Net income/(loss) ($5,547) $833 ($2,381) $3,560
================ =============== ================ ===============
Net Income/(Loss) Per Common and Common Share Equivalent ($0.35) $0.05 ($0.15) $0.23
================ =============== ================ ===============
Weighted Average Number of Common and Common
Share Equivalents Outstanding 15,894 15,564 16,016 15,575
================ =============== ================ ===============
</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 nine months ended: March 31, April 2,
1996 1995
--------------------------------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) $ (2,381) $ 3,560
Adjustments to reconcile net income to
net cash provided by (used in) operating activities--
Depreciation 1,563 2,006
Amortization 92 (77)
Write down of equipment 52 -
Provision for bad debts (236) 136
Other charges and inventory write-downs 2,391 -
Provision for deferred taxes (365) (378)
Changes in assets and liabilities:
Accounts receivable (2,109) (5,438)
Accounts receivable from related parties - 876
Accrued interest included in long-term debt - 31
Inventories (2,895) (6,409)
Income taxes 475 256
Other current assets (43) 17
Accounts payable - 2,919
Accrued expenses 396 1,256
Deferred revenue (174) 272
--------------------------------
Net cash provided by (used in)
operating activities (3,234) (973)
Cash Flows From Investing Activities:
Purchase of equipment and improvements (1,533) (2,066)
Decrease (increase) in other assets (240) (599)
--------------------------------
Net cash used in investing activities (1,773) (2,665)
Cash Flows From Financing Activities:
Proceeds from repayment of obligations under capital
leases (93) (83)
Proceeds from repayment of short-term debt - 2,080
Proceeds from repayment of long-term debt - (500)
Proceeds from issuance of common stock 942 401
--------------------------------
Net cash provided by (used in) financing
activities 849 1,898
Effect of exchange rates on cash 59 111
--------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,099) (1,629)
Cash and Cash Equivalents, beginning of period 15,317 21,024
--------------------------------
Cash and Cash Equivalents, end of period $ 11,218 $ 19,395
================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 14 $ 273
Income taxes paid (refunds received) $ 144 $ 1,023
</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 and
nine months ended March 31, 1996 are not necessarily indicative of results to be
expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect 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 those estimates.
Note 2 Other Charges and Inventory Write-downs
- ------
During the three months ended March 31, 1996, in response to the
refinement of its Enterprise Systems' strategy and the accelerating decline in
demand for the Motorola 68040 based products, the Company decided to curtail
investment in its Motorola products, focus its research and development
activities on a new line of high availability Enterprise Servers using Intel
processors and consolidate certain functions and operations. As a result of
management's plans, the Company recorded other charges of $3,010,000. Other
charges consist of $2,401,000 of severance and related costs and $284,000 to
write off other current and long term assets which were no longer to be used
under the new direction of the products comprising the Enterprise Systems and
$325,000 for other contractual obligations related to these actions. The
workforce reductions comprised approximately 10%, or 43 personnel, and were
across all functions. Payments of approximately $387,000 were made in connection
5
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
with these charges during the three months ended March 31, 1996. Remaining
liabilities of $2,200,000 at March 31, 1996 predominantly consisted of severance
and related costs which are expected to be paid out through the first half of
fiscal 1997. In addition, the Company recorded inventory write-downs of
$1,895,000 for estimated excess inventories as a result of these plans. These
costs had been previously included as a component of other charges, however in
light of recently issued guidelines, the Company has reclassified inventory
write-downs to cost of revenues. Accordingly, $1,050,000 and $845,000 have been
reclassified to product and service and other cost of revenues, respectively.
Note 3 Inventories
- ------
Inventory including materials, labor and manufacturing overhead consisted
of the following:
<TABLE>
<CAPTION>
(in thousands)
March 31, June 30,
1996 1995
------------------------
<S> <C> <C>
Raw materials $12,960 $ 9,966
Work-in-process 1,899 3,595
Finished goods 2,764 3,152
------- -------
$17,623 $16,713
------- -------
</TABLE>
Note 4 Net Income/(Loss) per Share
- ------
For the three and nine month periods ended March 31, 1996 and April 2,
1995, 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. For loss periods,
weighted average common shares are excluded from the calculation as their effect
would be antidilutive. Primary and fully diluted earnings per share are not
separately stated as they are substantially the same.
Note 5 Significant Customers
- ------
During the three months ended March 31, 1996, sales to one customer,
Boston Technology, Inc., represented $2,880,000 or 12% of total Company revenue.
During the nine months ended March 31, 1996, there were no sales to one customer
representing greater than
6
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
10% of total Company revenue. During the three and nine months ended April 2,
1995, sales to one customer, DSC Corporation, represented $7,571,000 or 25%, and
$10,149,000 or 13%, respectively, of total Company revenue.
Note 6 Bank Debt
- ------
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.
The Company received, effective March 31, 1996, a waiver related to
noncompliance of certain financial covenants for the period ended March 31,
1996. As of March 31, 1996, no amounts were outstanding under this agreement
and the Company had $8,742,000 available under the borrowing base formula.
Note 7 Accounting for Stock Based Compensation
- ------
In November 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." The Company intends to adopt the disclosure
requirements of SFAS 123 for the year ending June 30, 1997. Therefore, the
adoption of SFAS 123 will have no impact on the Company's financial position or
results of operations.
Note 8 Stock Options
- ------
During the three months ended March 31, 1996, the Company allowed holders
of 1,143,000 options that were to acquire an aggregate of 1,143,000 shares of
the Company's common stock previously granted under the Company's Stock Option
Plans at exercise prices ranging from $4.00 to $8.25 to exchange through the
cancellation of those options for options granted on similar terms but at an
exercise price of $3.875, the fair market value of a share of the Company's
common stock on the date of exchange. The vesting schedules with respect to
7
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
611,000 of such options remain unchanged. Vesting schedules for the balance of
the options, which were performance related, commenced on the effective date of
the exchange.
Note 9 Disclosure of Significant Risks and Uncertainties
- ------
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 revenue 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 ability to increase revenue in the
future will depend upon its ability to develop, manufacture and market new and
differentiated products which meet new market requirements and changing user
needs in a cost-effective and timely manner. There can be no assurance that
these efforts will be successful. These technology changes may also have an
impact on managing inventory changes.
The Company purchases most of the components of its products and virtually
all of its peripheral devices from a limited number of suppliers. Although the
Company believes that alternative sources of these items could be developed in a
short period of time if required, future shortages of such components or
peripherals could result in production delays. Certain microprocessors used in
the ruggedized product lines are available only from Intel Corporation and Sun
Microsystems, Inc., and changes in the availability of these components at any
time could adversely affect the Company's operations.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. There are a number of factors that
could cause the Company's actual results to differ materially from those
forecasted or projected in such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Certain
Factors That May Affect Future Results." Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligations to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or changed circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The Company's predominant business lines, as sold by its Texas Microsystems
subsidiary ("TMI"), include ruggedized, mission-critical computers and
components, both SPARC and Intel based, for the industrial market and Bellcore
Network Equipment Building Systems ("NEBS") compliant products specifically
designed for the telecommunications market. In addition, the Company provides
Motorola and Intel based systems and upgrade products for on-line transaction
processing ("OLTP") and other interactive applications, as sold by its
Enterprise Systems business, in which system availability, fast response times
and data integrity are critical. 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.
During the third quarter of fiscal 1996, the Company embarked upon a
refinement of its Enterprise Systems' business strategy, from previously being
primarily a supplier of fault tolerant hardware, to becoming a supplier of high
availability hardware, value added services and software that meet the critical
business requirements of enterprise computing in addition to its fault-tolerant
products. As the Company changed its strategy, the Company began to experience
an accelerated decline over the comparable quarter of the previous year in sales
of the Motorola 68040 based fault-tolerant products sold to the OLTP market.
This decline was due to the overall decline in demand for Motorola 68040 based
products reaching the end of their product life cycle, combined with specific
customer decisions to migrate from the Sequoia Motorola based platform. In
response to the refinement of its Enterprise Systems' strategy and the
accelerating decline in demand, the Company decided to curtail investment in its
Motorola products, focus its research and development activities on a new line
of high availability Enterprise Servers using Intel processors and seek to embed
its fault tolerant technology in its ruggedized servers sold by its TMI
subsidiary.
9
<PAGE>
RESULTS OF OPERATIONS
REVENUE
-------
The Company's revenue decreased by 23% to $23,654,000 for the three months
ended March 31, 1996, from $30,645,000 for the three months ended April 2, 1995.
This is primarily attributable to a 25% decrease in product revenue, and a 7%
decrease in service revenue. The Company's revenue increased by 2% to
$79,077,000 for the nine months ended March 31, 1996, from $77,187,000 for the
nine months ended April 2, 1995. This is attributable to a 4% increase in
product revenue substantially offset by a 5% decrease in service revenue.
As a percent of total product revenue, sales of all ruggedized products
comprised 85% for the three months ended March 31, 1996 and 73% for the
corresponding three months of the prior fiscal year. For the nine months ended
March 31, 1996 sales of all ruggedized products comprised 80% of total product
revenue compared to 67% in the corresponding nine months of the prior fiscal
year.
Product revenue decreased by $6,739,000 for the three months ended March 31,
1996 as compared to the corresponding three months for the prior year. The
decrease in the three month period is primarily attributable to (i) a decrease
of 60% in sales of Motorola based products for the OLTP market and (ii) a
decrease of 64% of NEBS compliant SPARC and Intel based products specifically
designed for the telecommunications market, which were partially offset by (iii)
an increase of 23% in sales of ruggedized Intel based products for the
industrial market.
Product revenue increased by $2,476,000 for the nine months ended March 31,
1996 as compared to the corresponding nine months for the prior year. The
increase in the nine month period is primarily attributable to (i) a decrease of
38% in sales of Motorola based products for the OLTP market and (ii) a decrease
of 10% of NEBS compliant SPARC and Intel based products specifically designed
for the telecommunications market, which were offset by (iii) an increase of 35%
in sales of ruggedized Intel based products for the industrial market.
The decline in sales of OLTP products was attributable to a continued
decline in overall market demand for the Company's Motorola 68040 based systems
and in the size of the installed base of such systems. In addition, the
associated service revenue for the three and nine months ended March 31, 1996
has also declined. During fiscal 1995, OLTP based product revenue consisted
substantially of sales of additional systems and upgrades to existing customers
who have increased information processing requirements. Revenue from the sales
of Motorola based expansion systems and upgrades is expected to continue to
decline during fiscal 1996. During the first half of fiscal 1996, the Company
announced a new line of Enterprise Servers using Intel processors and recorded
approximately $130,000 and $430,000 of revenue, respectively, from sales of a
limited number of these
10
<PAGE>
servers for the three and nine month periods ended March 31, 1996. The growth in
sales of Intel based products for this market is expected to only slightly
offset the decline of Motorola based products sales for the fourth fiscal
quarter of 1996.
The decline in sales of NEBS compliant SPARC and Intel based products
specifically designed for the telecommunications market resulted from
exceptionally strong sales to one customer during the three months ended April
2, 1995. The lower level of sales is expected to continue for the short term.
The growth in sales of ruggedized Intel based products for the industrial
market was comprised of a 40% and 48% increase in units shipped partially offset
by a 11% and 9% decline in average unit price for the three and nine months
ended March 31, 1996 as compared to the three and nine months ended April 2,
1995, respectively. Average unit price decreases reflect a mature product life
cycle of 486 CPU based products and a continued transition to Pentium and
Pentium Pro products. Sales of ruggedized Intel based products for the
industrial market for the three and nine months ended March 31, 1996, included
approximately $770,000 in sales of the Company's new mobile computer, the
HARDBODY/TM/, for which product shipments commenced in March, 1996.
Sales outside the United States, which have remained relatively stable in
levels, comprised $5,972,000 or 25% of total revenue, for the three months ended
March 31, 1996, as compared to $6,672,000 or 22% of total revenue for the three
months ended April 2, 1995. For the nine months ended March 31, 1996, sales
outside the United States comprised $17,093,000 or 22% of total revenue, as
compared to 16,418,000 or 21% of total revenue for the nine months ended April
2, 1995. The composition of sales outside the United States has changed
geographically with increases in sales of ruggedized products in Germany and
Western Europe offset by the decrease in sales of Motorola based products in
Australia and the United Kingdom.
During the three months ended March 31, 1996, sales to one customer, Boston
Technology, Inc., represented $2,880,000 or 12% of total Company revenue.
During the nine months ended March 31, 1996, sales to a single customer
represented greater than 10% of total Company revenue. During the three and
nine months ended April 2, 1995, sales to one customer, DSC Corporation,
represented $7,571,000 or 25% and $10,149,000 or 13%, respectively, of total
Company revenue.
GROSS MARGIN
------------
Gross margin declined 15% to 30% for the three months ended March 31, 1996,
compared to 45% for the three months ended April 2, 1995. During the nine
months ended March 31, 1996, gross margin declined 9% to 37% from 46% in the
corresponding
11
<PAGE>
period of the prior fiscal year. These decreases were a result of decreases in
both product and service margins.
Decreased product margin was caused by inventory write-downs reflecting a
lower level of inventory required to support Motorola based product sales and
the cost of discontinued products not offered for future sales. Including these
inventory write-downs, the Company's product margin declined 13% to 31% for the
three months ended March 31, 1996, compared to 44% for the three months ended
April 2, 1995 and declined 9% to 37% for the nine months ended March 31, 1996
from 46% for the comparable period in the prior fiscal year.
The Company's product margin, excluding the inventory write-downs,
declined 8% to 36% for the three months ended March 31, 1996, compared to 44%
for the three months ended April 2, 1995. During the nine months ended March 31,
1996, excluding the inventory write-downs, the Company's product margin
declined 7% to 39% from 46% for the comparable period in the prior fiscal year.
This decrease in product margin was caused primarily by a shift in the mix of
sales to a higher proportion of lower margin ruggedized products. In addition,
ruggedized product margin decreased for the three and nine months ended March
31, 1996 due to a lower volume of telecommunications sales, which carry a higher
margin, in the third quarter as compared to the three months ended March 31,
1995. Motorola based products also experienced a decrease in margin for the
three and nine months ended March 31, 1996 due to a higher mix of recently
introduced low end systems, which carry a lower margin.
Decreased service and other margin for the three and nine months ended March
31, 1996 was caused primarily by inventory write-downs related to the reduction
in the amount of spares required to support Motorola based product sales as well
as spares of discontinued products not offered for future sales. Service and
other margin, excluding inventory write-downs, remained unchanged from
comparable periods in fiscal 1995.
Fluctuations in future margin levels may result from the mix of product
revenue 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 profit decreased $6,660,000 for the three months ended March 31, 1996,
compared to the three months ended April 2, 1995. The decrease resulted from
the inventory write-downs as well as lower revenue in the current three month
period and sales of lower margin products in the current period compared to the
same period in the prior year. Gross profit decreased $6,223,000 for the nine
month period ended March 31, 1996, as compared to the nine months ended April 2,
1995. The decrease resulted from both the inventory write-downs and the shift
in mix of sales to a higher proportion of
12
<PAGE>
ruggedized products as compared to the same period in the prior year which carry
a lower margin than telecommunications products and the decline in higher margin
Motorola based systems, upgrades and expansions.
RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------
The Company's research and development expenses decreased by 1% to
$3,373,000 and increased by 2% to $9,761,000 respectively, for the three and
nine months ended March 31, 1996, as compared to the three and nine months ended
April 2, 1995, respectively. The increase in expenses for the nine month period
resulted primarily from efforts to further expand product offerings for the
ruggedized Intel based products for the industrial markets, and, in particular,
the introduction of the HARDBODY/TM/, a mobile handheld PC. In conjunction with
the refinement of its Enterprise Systems' strategy, the Company has curtailed
investment in the Motorola products, focused its research and development
activities on a new line of Enterprise Servers using Intel processors and plans
to embed its fault tolerant technology in its ruggedized servers sold by its TMI
subsidiary.
Research and development expenses as a percentage of revenue were 14% and
12%, respectively, for the three and nine months ended March 31, 1996, as
compared to 11% and 12%, respectively, for the three and nine months ended April
2, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses decreased by 31% and 12% to
$6,230,000 and $19,364,000, respectively, for the three and nine months ended
March 31, 1996, as compared to the three and nine months ended April 2, 1995.
The higher spending for the three and nine months ended April 2, 1995 related,
in part, to merger transaction expenses of $1,472,000 and $2,134,000,
respectively, incurred in those periods.
OTHER CHARGES
-------------
In response to the refinement of its Enterprise Systems' business strategy
and the accelerating decline in demand for Motorola 68040 based products, the
Company decided to curtail investment in its Motorola products, focus its
research and development activities on a new line of high availability
Enterprise Servers using Intel processors and seek to embed its fault tolerant
technology in its ruggedized servers sold by its TMI subsidiary. Additionally,
early in the third quarter, the Company appointed a new Chief Executive Officer
and decided to relocate its corporate headquarters to Houston, Texas, the
location of the TMI brand products and the dominant product line. The Company
has also
13
<PAGE>
commenced a reorganization of certain general and administrative functions.
These actions resulted in workforce reductions and a write-down of certain
assets.
These management decisions resulted in a reduction of the Company's work-
force affecting all functions and businesses by approximately 10%, or 43
personnel, which included (i) a planned relocation and reduction of corporate
personnel, (ii) a centralizing of TMI operations and (iii) a reduction within
the functional areas supporting the sale of Motorola based products. Severance
and related costs contained in Other Charges for the three months ended March
31, 1996 total $2,401,000.
In addition, the Company wrote down other assets of $284,000 consisting of
software licenses related to the Motorola based product line and also incurred
other costs of $325,000 as a result of these actions, the most material of which
included $157,000 related to a contract cancellation for development work.
The cash impact of the Other Charges is $2,514,000 and is comprised
primarily of severance and related benefits. Of this amount, $387,000 has been
incurred in the three months ended March 31, 1996 with the remainder expected to
be paid out through the first half of fiscal 1997. Expense reductions resulting
from the personnel actions are expected to be realized beginning in the fourth
fiscal quarter and amount to approximately $3,200,000 on an annualized basis.
OPERATING INCOME
----------------
The Company reported a loss from operations of $5,623,000 and $2,636,000 for
the three and nine months ended March 31, 1996, compared to income from
operations of $1,157,000 and $4,210,000 for the three and nine months ended
April 2, 1995. The decreases in operating income resulted primarily from the
Other Charges incurred during the three months ended March 31, 1996 as well as
decreases in product margins.
OTHER
------
The Company had net other income of $123,000 as compared to net other
expense of $23,000 for the three months ended March 31, 1996, and April 2, 1995,
respectively and net other income of $544,000 compared to $295,000 for the nine
months ended March 31, 1996 and April 2, 1995, respectively. These increases
resulted from having no outstanding bank borrowings during the three month and
nine month periods ended March 31, 1996.
14
<PAGE>
INCOME TAXES
------------
The Company recorded provisions for income taxes of $47,000 and $301,000 for
the three months ended March 31, 1996 and April 2, 1995, respectively.
Provisions for income taxes of $289,000 and $945,000 were recorded for the nine
months ended March 31, 1996 and April 2, 1995, respectively. These provisions
are primarily income taxes for foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash and cash equivalents and working
capital of $11,218,000 and $28,658,000, respectively, compared to cash and cash
equivalents and working capital of $15,317,000 and $29,884,000, respectively, at
June 30, 1995.
The reduction in cash was primarily due to a significant increase in
accounts receivable and inventory. At March 31, 1996, the Company's net accounts
receivable were $15,084,000 compared to $12,739,000 at June 30, 1995. The
Company's days sales outstanding at March 31, 1996 increased to 57 days compared
to 44 days at June 30, 1995. The increase in DSO was primarily the result of
lower revenue in the third quarter, fiscal 1996 than the first two quarters of
fiscal 1996 and less favorable terms on cash receipts.
The increase in inventory is due primarily to the purchase of inventory
related to the HARDBODY/TM/ handheld computer which was announced during the
quarter and inventory for sales of Intel based products expected to be shipped
in the fourth quarter of fiscal 1996. The Company expects to continue to manage
its inventory at current levels through the end of fiscal 1996.
Capital expenditures totaled $1,533,000 for the nine months ended March 31,
1996, and were comprised primarily of computer equipment, including the
capitalization of internally manufactured systems. The Company expects
continued capital expenditures in the balance of fiscal 1996 related to
increased investment in the development of 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.
The Company received, effective March 31, 1996, a waiver related to
noncompliance of certain financial covenants for the period ended March 31,
1996. As of March 31, 1996, no amounts were outstanding under this agreement
and the Company had $8,742,000 available under the borrowing base formula.
15
<PAGE>
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 and the expected cash requirement to settle its severance
and related obligations included in Other Charges of approximately $2,200,000.
In November 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The Company intends to adopt the disclosure requirements of SFAS
123 for the year ending June 30, 1997. Therefore, the adoption of SFAS 123 will
have no impact on the Company's financial position or results of operations.
16
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Quarterly Report on Form 10-Q and presented elsewhere by management from time to
time.
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 revenue 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. During the
three months ended March 31, 1996, the Company introduced a new product, the
HARDBODY/TM/, a mobile handheld PC. The Company believes that a large part of
its ability to increase revenue in the future will depend upon its ability to
develop, manufacture and market new and differentiated products such as the
HARDBODY/TM/, which meet new market requirements and changing user needs in a
cost-effective and timely manner. There can be no assurance that these efforts
will be successful.
The Company competes against other fault-tolerant companies, against a wide
range of open systems non-fault-tolerant companies which market their products
as achieving high availability, and against a range of companies focused on
ruggedized systems and board-level products. The Company believes that it
competes effectively based on its engineering responsiveness to special needs
and the price/performance characteristics and hardware specialization of its
products. However, the computer marketplace is highly competitive. Many of the
Company's competitors have significantly greater financial, marketing and
technological resources. There can be no assurance that the Company will have
the resources necessary to compete successfully in the future.
The Company purchases most of the components of its products and virtually
all of its peripheral devices from a limited number of suppliers. Although the
Company believes that alternative sources of these items could be developed in a
short period of time if required, future shortages of such components or
peripherals could result in production delays. Certain microprocessors used in
the ruggedized product lines are available only from Intel Corporation and Sun
Microsystems, Inc., and changes in the availability of these components at any
time could adversely affect the Company's operations.
A substantial portion of the Company's revenue in each quarter generally
results from shipments during the quarter of orders received in that quarter.
Minor timing differences in receipt of customer orders and shipments may,
therefore, produce significant fluctuations in quarterly revenue and profits.
17
<PAGE>
As is common in the computer industry, the Company frequently ships more
product in the third month of each quarter than in either of the first two
months of the quarter, and shipments in the third month are higher at the end of
that month. This pattern is likely to continue. The concentration of sales in
the last month of the quarter makes the Company's quarterly financial results
difficult to predict. Also, if sufficient business does not materialize or a
disruption in the Company's production or shipping occurs near the end of a
quarter, the Company's revenue for that quarter may be materially reduced.
18
<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 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on March 12, 1996,
the following proposals were adopted by the vote specified below:
Proposal 1 Election of Directors
For Withheld from
Nominee Nominee
------- -------
Francis J. Hughes, Jr. 14,171,913 255,838
A. Theodore Engkvist 14,180,273 247,478
Dennis M. Malloy 14,177,293 250,458
Proposal 2 Approval of the 1996 Long Term Incentive Plan
Broker
For Against Abstain No Vote
--- ------- ------- -------
10,921,276 3,261,251 100,087 145,137
Proposal 3 Ratification of the appointment of Coopers & Lybrand L.L.P.
as the Company's Independent Accountants
For Against Abstain
--- ------- -------
12,660,772 1,705,281 61,698
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Separation Agreement dated January 30, 1996 between the Company and
Cornelius P. McMullan
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<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: August 15, 1996
Sequoia Systems, Inc.
By: /s/ J. Michael Stewart
----------------------
J. Michael Stewart
President &
Chief Executive Officer
20
<PAGE>
EXHIBIT 10.1
AGREEMENT AND RELEASE
This Agreement and Release is made by and between Cornelius P. McMullan, of
117 Forest Street, Wellesley, Massachusetts, ("you") and Sequoia Systems, Inc.,
of 400 Nickerson Road, Marlborough, Massachusetts, (the "Company") and is
effective as of January 30, 1996.
RECITALS
--------
A. You and the Company have agreed that you will resign from the office of
President and Chief Executive Officer of the Company and as a member of the
Board of Directors of the Company (as well as from any offices held in any
Company subsidiaries) effective as of the above date.
B. You and the Company wish to agree on the terms and conditions of such
resignation and to grant each other releases from certain claims and
liabilities, as described below.
AGREEMENTS
----------
In consideration of the mutual obligations and promises contained herein,
you and the Company agree as follows:
1. You will on January 30, 1996 execute a letter of even date resigning as
President and Chief Executive and as a Director of the Company. Your last day
of active employment as a Company employee will be January 31, 1996.
2. The Company will continue to pay you your present base salary of $235,000
annually on its normal bi-weekly payroll schedule from February 1, 1996 through
April 30, 1997. In addition, the Company will maintain and continue to furnish
you with health and welfare benefits, including life, health and dental
benefits, substantially in accordance with the terms of the current plans for
such benefits, through April 30, 1997, provided, however, that such insured
benefits will to terminate at the time substantially similar benefits are made
available to you by a subsequent employer, if sooner than April 30, 1997 upon
the commencement of new employment providing substantially similar benefits.
Taxes and co-payments for insured benefits will continue to be deducted from
your salary payments as they are currently. Deductions in respect of the
Employee Stock Purchase Plan and the 401(k) Plan, if any, will cease January 31,
1996.
<PAGE>
3. The following in-the-money stock options granted to you under the Company's
1986 Stock Option Plan (the "Plan") remain only partially vested as of January
31, 1996:
<TABLE>
<CAPTION>
Date of Grant Number Granted Strike Price
- -------------------------- -------------- ---------------
<S> <C> <C>
5/16/93 60,000 $ 2.25
8/03/93 100,000 $2.0265
10/24/94 50,000 $3.8125
</TABLE>
These options will vest in their entirety on January 31, 1996, and may be
exercised by you in whole or in part at anytime within 90 days thereafter.
Stock options, other than those specified above, that are unvested as of January
31, 1996 will remain unvested. Stock options, other than those specified above,
that are vested on January 31, 1996 may be exercised only in accordance with the
terms of the Plan.
4. The Company acknowledges that as of December 31, 1995, the Company's year-
to-date performance for fiscal 1996 was ahead of its 1996 fiscal-year Plan.
5. You will be provided with the services of New Directions, a recognized,
professional outplacement firm, for a period of twelve months following
January 31, 1996.
6. The parties agree that neither will say or do anything, directly or
indirectly, orally or in writing, to disparage the other or the other's
reputation, its products or services or its employees, officers and directors.
7. You agree to hold in confidence and not disclose to any other person or
party or use for your own benefit or for the benefit of any third party all
confidential or proprietary information of the Company (including its
subsidiaries), whether concerning the Company's business plans, strategies,
products, technology, finances, marketing activities or plans or otherwise. The
Company agrees that the foregoing obligations shall not apply to any information
which: a) becomes lawfully known or available to you from a source other than
the Company without breach of this Agreement and Release
2
<PAGE>
by you; b) is within or later becomes part of the public domain without breach
of this Agreement and Release by you; or c) is provided by the Company to others
on an unrestricted basis.
8. The Company hereby agrees to indemnify you in accordance with Article VII of
its Restated Certificate of Incorporation, a copy of which is attached hereto
and incorporated herein as Exhibit A. The foregoing shall be unlimited as to
time.
9. You agree that certain of the severance related payments and benefits
provided to you under this Agreement and Release are in addition to those
provided for under the Company's usual severance practices.
10. (a) In consideration of the Company's payments and undertakings contained
in this Agreement and Release and except for any vested interest in the
Company's 401(k) Savings and Retirement Plan, 1986 Stock Option Plan and 1993
Employee Stock Purchase Plan, you hereby release and forever discharge, and
covenant not to sue or commence proceedings against, the Company, its
subsidiaries or affiliates and its and their respective officers, directors,
employees, agents, successors and assigns ("Releasees"), from and with respect
to any and all claims, debts, demands, damages, actions and causes of action of
any kind whatsoever, based on facts or circumstances of which you have present
knowledge, which you now have, ever had or may in the future have against such
Releasees, arising to the date of this Agreement and Release, including, without
limitation, those arising out of or in any manner relating to your employment by
the Company or the termination of such employment, including, without
limitation, any claim for reinstatement, back or future pay, bonuses,
commissions, fringe benefits, medical expenses, attorneys' fees and expenses,
damages or consequential damages, including but not limited to any claim,
complaint, charge or lawsuit under Title VII of the Civil Rights Act of 1964,
the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967,
the Equal Pay Act of 1963, the Employee Retirement Income Security Act of 1974,
the Rehabilitation Act of 1973, Executive Order 11246, the Massachusetts Fair
Employment Practices Act, the Massachusetts Civil Rights Act, the Massachusetts
Equal Rights Act and any other state, federal or municipal law, statute, public
policy, order or regulation affecting or relating to the claims or rights of
employees, including any and all claims and suits in tort or contract. You
hereby represent and warrant to the Company that you have no
3
<PAGE>
present knowledge of any facts or circumstances that may give rise to a claim
against the Company or other Releasees.
(b) Notwithstanding the foregoing, in view of the fact that your health,
dental and life insurance benefits will continue in effect through April 30,
1997, nothing herein shall be construed to limit your rights to make claims and
receive payments under such insurance policies for claims arising through such
date.
(c) With respect to any rights you may have under the Age Discrimination in
Employment Act of 1967, which rights are being released under this Agreement and
Release, you understand that you have 2121 days to consider this Agreement
and Release, which, if you choose to sign this document before the 2121-day
period expires, you hereby waive; that for a period of seven days following your
execution of this Agreement and Release you may revoke it and your release as to
such rights; that this Agreement and Release shall not become effective or
enforceable as to the release of such rights until this seven-day revocation
period has expired; and that the Company has no obligation to pay any sums or
provide any benefits referred to in this Agreement and Release, except those to
which you are entitled under existing Company policy, until it becomes effective
or enforceable.
11. The Company hereby releases and forever discharges, and covenants not to
sue or commence proceedings against, you with respect to any and all claims,
debts, demands, damages, actions and causes of action of any kind whatsoever,
based on facts or circumstances of which it has present knowledge, which it now
has, ever had or may in the future have against you, arising to the date of this
Agreement and Release, including, without limitation, those arising out of or in
any manner relating to your service as an employee, officer or director of the
Company. The Company hereby represents and warrants to you that it has no
present knowledge of any facts or circumstances that may give rise to a claim
against you.
12. This Agreement and Release shall be binding on the parties hereto and
their respective heirs, successors and assigns.
13. The parties agree to maintain this Agreement and Release in confidence
and not to disclose its terms to any third-party, except as may be required by
Securities and Exchange Commission disclosure requirements or otherwise by
law.
4
<PAGE>
14. This Agreement and Release shall be governed by the laws of the
Commonwealth of Massachusetts without reference to its conflicts of laws
principles. In the event either party undertakes legal action to enforce
the terms hereof, the successful party, after such action is finally determined,
shall be entitled to court costs and reasonable attorney fees.
15. The Company encourages you to seek the advice of your attorney before
executing this Agreement and Release if you wish to do so.
16. This Agreement and Release sets forth the entire agreement and
understanding between you and the Company concerning the
5
<PAGE>
matters specified above. It may be executed in counterparts that, taken
together, shall constitute a single Agreement and Release. It may only be
amended in writing signed by you and the Company.
AGREED: Sequoia Systems, Inc.
By:/s/ Cornelius P. McMullan By:/s/ Francis J. Hughes, Jr.
------------------------- --------------------------
Cornelius P. McMullan Francis J. Hughes, Jr.
2/29/96 2/27/96
- ---------------------------- -----------------------------
Date Date
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,218
<SECURITIES> 0
<RECEIVABLES> 16,136
<ALLOWANCES> 1,052
<INVENTORY> 17,623
<CURRENT-ASSETS> 46,249
<PP&E> 22,593
<DEPRECIATION> 17,985
<TOTAL-ASSETS> 51,537
<CURRENT-LIABILITIES> 17,591
<BONDS> 0
0
0
<COMMON> 6,225
<OTHER-SE> 27,721
<TOTAL-LIABILITY-AND-EQUITY> 51,537
<SALES> 68,480
<TOTAL-REVENUES> 79,077
<CGS> 43,128
<TOTAL-COSTS> 49,578
<OTHER-EXPENSES> 3,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (2,092)
<INCOME-TAX> 289
<INCOME-CONTINUING> (2,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,381)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
