<PAGE>
UNITED STATES
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 quarterly period ended September 29, 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.)
5959 Corporate Drive, Houston, Texas 77036
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (713) 541-8200
--------------
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 issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
----- -------------------------------
Common Stock, $.40 par value 15,360,629
<PAGE>
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(in thousands)
ASSETS September 29, June 30,
1996 1996
(unaudited)
-----------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $13,700 $12,287
Accounts receivable, net of allowance for doubtful accounts
of $1,032 at September 29, 1996 and $1,018 at June 30, 1996 10,629 13,371
Inventories 12,558 13,491
Other current assets 1,799 1,923
-----------------------------
Total current assets 38,686 41,072
-----------------------------
Equipment and Improvements, at cost:
Computer equipment 12,482 12,473
Machinery and equipment 5,343 5,293
Equipment under capital lease 2,338 2,337
Furniture and fixtures 1,537 1,504
Leasehold improvements 1,699 1,683
-----------------------------
23,399 23,290
Less - Accumulated depreciation and amortization 19,175 18,603
-----------------------------
4,224 4,687
-----------------------------
Other Assets 1,003 592
-----------------------------
Total Assets $43,913 $46,351
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,705 $ 4,743
Accrued expenses 8,171 9,203
Deferred revenue 669 558
Current portion of capital lease obligations 23 56
-----------------------------
Total current liabilities 13,568 14,560
-----------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500 shares at September 29, 1996 and June 30, 1996
Issued--none - -
Common stock, $.40 par value:
Authorized--35,000 shares at September 29, 1996 and June 30, 1996
Issued--15,643 shares at September 29, 1996, and 15,579 shares
at June 30, 1996 6,257 6,232
Additional paid-in capital 80,314 80,207
Accumulated deficit (55,935) (54,805)
Treasury stock, at cost, 204 shares at September 29, 1996 (458) 0
Cumulative translation adjustment 167 157
-----------------------------
Total stockholders' equity 30,345 31,791
-----------------------------
Total Liabilities and Stockholders' Equity $ 43,913 $ 46,351
=============================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
For the three months ended,
September 29, 1996 October 1, 1995
------------------ ---------------
(in thousands, except per share data)
<S> <C> <C>
Revenues
Product $ 15,107 $23,885
Service and Other 3,542 3,600
------------------ ---------------
Total revenues 18,649 27,485
Cost of Revenues
Product 10,253 14,231
Service and Other 1,648 1,885
------------------ ---------------
Total cost of revenues 11,901 16,116
Gross profit 6,748 11,369
Research and Development Expenses 3,076 3,118
Selling, General and Administrative Expenses 4,882 6,576
------------------ ---------------
Total operating expenses 7,958 9,694
Income (loss) from operations (1,210) 1,675
Interest Income 95 191
Other Income, net 11 8
------------------ ---------------
Income (loss) before provision for income taxes (1,104) 1,874
Provision for Income Taxes 26 134
------------------ ---------------
Net income (loss) ($1,130) $ 1,740
================== ===============
Net Income (Loss) Per Common and Common Share Equivalent ($0.07) $0.11
================== ===============
Weighted Average Number of Common and Common Share
Equivalents Outstanding 15,597 16,121
================== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
For the three months ended,
September 29, October 1,
1996 1995
--------------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,130) $ 1,740
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities--
Depreciation 591 573
Amortization 88 161
Provision for inventories 589 431
Provision for bad debts - (12)
Changes in assets and liabilities:
Accounts receivable 2,742 (3,365)
Inventories 339 (805)
Income taxes - 114
Other current assets 122 (182)
Accounts payable (36) 681
Accrued expenses (1,031) (1,048)
Deferred revenue 111 351
--------------------------------------
Net cash provided by (used in) operating activities 2,385 (1,361)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (127) (724)
Increase in other assets (499) (151)
--------------------------------------
Net cash used in investing activities (626) (875)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligations under capital leases (33) (30)
Proceeds from issuance of common stock 132 335
Purchase of treasury stock (458) -
--------------------------------------
Net cash provided by (used in) financing activities (359) 305
--------------------------------------
Effect of exchange rates on cash 13 102
--------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,413 (1,829)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,287 15,317
--------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,700 $13,488
======================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $2 $7
Income taxes paid (refunds received) (101) 20
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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, 1996, filed with the Commission on September
25, 1996, as amended by Amendment No. 1 on Form 10-K/A, filed with the
Commission on October 28, 1996.
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
September 29, 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 affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 2 - OTHER CHARGES
- ------
During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 in fiscal 1996 related to severance costs
and other asset write-downs. These other charges included: $2,401,000 of
severance and related costs, $284,000 to write off other current and long term
assets which were no longer to be used 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 $358,000 and $1,195,000 were made in connection with these charges
during the three months ended September 29, 1996 and the year ended June 30,
1996, respectively. Remaining liabilities of $1,031,000 at September 29, 1996
predominantly consisted of severance and related costs which are expected to be
paid out by June 30, 1997.
5
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
NOTE 3 - INVENTORIES
- ------
Inventories including materials, labor and manufacturing overhead consisted of
the following:
(in thousands)
September 29, June 30,
1996 1996
------------- --------
Raw materials $ 7,537 $ 9,884
Work-in-process 3,168 2,057
Finished goods 1,853 1,550
------- -------
$12,558 $13,491
------- -------
NOTE 4 - NET INCOME (LOSS) PER SHARE
- ------
Primary and fully diluted earnings per share are not separately stated as they
are substantially the same. Net income (loss) 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 share equivalents are excluded from the
calculation as their effect would be antidilutive.
NOTE 5 - IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- ------
Effective July 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of". The adoption of SFAS No.
121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.
NOTE 6 - COMMON STOCK
- ------
On September 10, 1996, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock, on the open market or in
negotiated transactions, during the fiscal year ending June 30, 1997. During
the period ended September 29, 1996, the Company repurchased 203,600 shares of
its common stock at $2.25 per share for an aggregate purchase price of
approximately $458,000.
6
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
NOTE 7 - SUBSEQUENT EVENTS
- ------
DISPOSITION OF ASSETS
On October 3, 1996, the Company announced that it had entered into an agreement
for the sale of substantially all of the net assets of its Sequoia Enterprise
Systems business unit, which markets the Sequoia brand, to General Automation,
Inc. for approximately $11,000,000 in General Automation, Inc. common stock,
warrants and deferred payments. Sequoia Enterprise Systems markets fault
tolerant and business critical 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. The
transaction closed on October 11, 1996.
LINE OF CREDIT
The Company maintained a line of credit with Texas Commerce Bank, National
Association (TCB), which expired on October 31, 1996. No balance was
outstanding under this line of credit at September 29, 1996. The Company has
commenced negotiating a new $5,000,000 line-of-credit facility with TCB.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is a provider of specialized microcomputers targeted at specific
vertical markets. Under the Texas Micro brand, the Company provides Intel based
highly reliable microcomputer systems and single board computers ("SBCs") for
the industrial and communications markets and highly reliable SPARC based NEBS
compliant products specifically designed for the Central Office
telecommunications market. In addition, under the Sequoia brand, the Company
markets fault tolerant and business critical 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. The
Company operates in one segment, computer systems, and is a leading supplier of
highly reliable and business critical microcomputers addressing market
requirements for greater system availability from the desktop to the mainframe.
On October 3, 1996, the Company announced that it had entered into an agreement
for the sale of substantially all of the net assets of its Sequoia Enterprise
Systems business unit, which markets the Sequoia brand, to General Automation,
Inc. for approximately $11,000,000 in General Automation, Inc. common stock,
warrants and deferred payments. Sequoia Enterprise Systems markets fault
tolerant and business critical 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. The
transaction closed on October 11, 1996.
RESULTS OF OPERATIONS
REVENUES
- --------
The Company's revenues for the first quarter of fiscal 1997, which ended
September 29, 1996, of $18,649,000 decreased 32% from $27,485,000 for the first
quarter of fiscal 1996. Product revenues contributed primarily to the decline,
while service and other revenues were relatively unchanged.
Product revenues for the first quarter of fiscal 1997 of $15,107,000 declined
37% from the first quarter of fiscal 1996 revenues of $23,885,000. Revenues for
highly reliable products for the industrial market decreased 12%, to $12,687,000
for the first quarter of 1997 compared with $14,461,000 for first quarter of
1996. During the first quarter of 1997, units shipped of highly reliable
products decreased 4% and the average unit selling price declined 8% as compared
with the first quarter of 1996. Revenues for the first quarter of 1997 for
Motorola based, business critical products decreased 75% and revenues for NEBS
compliant products decreased 74% as compared to the first quarter of 1996. The
decline in sales of Motorola based products was attributable to a continued
decline in overall market demand. The decline in sales of NEBS compliant
products resulted from a sharp reduction in sales to two customers to whom the
Company had made significant sales during the first quarter of fiscal 1996.
Although there can be no assurance that the Company will meet its expectations,
the Company expects fiscal 1997
8
<PAGE>
sales of highly reliable products for the industrial market to exceed fiscal
1996 levels and expects NEBS compliant based products to continue to be below
fiscal 1996 levels.
Sales outside the United States for the first quarter of fiscal 1997 increased
to $6,547,000 or 35% of total revenues, from $6,070,000, or 22% of total
revenues for the first quarter of fiscal 1996.
GROSS MARGIN
- ------------
Gross margin of 36% for the first quarter of fiscal 1997 reflected a decline of
5 percentage points from 41% in the first quarter of fiscal 1996. The decrease
was primarily attributable to a decrease in product margin of 8 percentage
points. This decrease in product margin was substantially caused by a shift in
the mix of sales to a higher proportion of lower margin highly reliable products
compared to the first quarter of 1996.
Continued fluctuations in future margin levels may result from the mix of
product revenues and the respective varying margin contributions from sales of
the various product lines.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
The Company's research and development expenses of $3,076,000 for the first
quarter of fiscal 1997 decreased 1% from $3,118,000 for the first quarter of
fiscal 1996. As a percent of revenues, research and development expenses
increased to 16% for the first quarter of 1997, as compared to 11% for the first
quarter of 1996. The increase as a percentage of revenue is a result of the
decline in Company's revenues. Research and development spending for the first
quarter of 1997 was focused on efforts to further expand product offerings for
highly reliable products for the industrial markets. In addition, the Company
continued its research and development activities on a new line of low cost
Intel based servers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses decreased 26% to $4,882,000, or 26%
of revenues, for the first quarter of fiscal 1997 from $6,576,000, or 24% of
revenues, for the first quarter of fiscal 1996. The significant decline in
spending was a result of the actions taken in fiscal 1996 to refine the
business strategy, including reducing the workforce and relocating the corporate
office to Houston.
OPERATING INCOME (LOSS)
- -----------------------
The Company reported a loss from operations of $1,210,000 for the first quarter
of fiscal 1997, compared to income from operations of $1,675,000 for the first
quarter of fiscal 1996. The decrease in operating income resulted from the
significant decline in revenues as well as the decrease in gross margin.
9
<PAGE>
OTHER INCOME
- ------------
The Company generated other income of $106,000, primarily interest income,
during the first quarter of fiscal 1997, as compared to $199,000 for the first
quarter of fiscal 1996. The decrease in other income resulted primarily from a
decrease in cash and cash equivalents and a decline in interest rates.
INCOME TAXES
- ------------
The Company recorded provisions for income taxes of $26,000 for the first
quarter of fiscal 1997 compared to $134,000 for the first quarter of fiscal
1996. The 1997 and 1996 first quarter provisions are primarily for state income
taxes. The decrease from the comparable prior year period resulted from losses
incurred during the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 1996, the Company had cash and cash equivalents of $13,700,000
and working capital of $25,118,000. This compared to cash and cash equivalents
of $12,287,000 and working capital of $26,512,000 at June 30, 1996.
The increase in cash was primarily a result of $2,385,000 net cash generated
from operations during the quarter. Cash provided from operations was favorably
impacted by the significant decrease in accounts receivable.
During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. Payments of approximately $358,000 were made in
connection with these charges during the first quarter of 1997. Remaining
liabilities of $1,031,000 at September 29, 1996 predominantly consisted of
severance and related costs which are expected to be paid out by June 30, 1997.
On September 10, 1996, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock, on the open market or in
negotiated transactions, during the fiscal year ending June 30, 1997. During
the first quarter of 1997, the Company repurchased approximately 203,600 shares
of its common stock at $2.25 per share for an aggregate purchase price of
approximately $458,000.
The Company's capital expenditures during the first quarter of fiscal 1997 were
held to a minimum in response to the Company's current operating results.
However, capital expenditures, primarily for manufacturing equipment, are
expected to increase in the second quarter.
10
<PAGE>
The Company maintained a line of credit with Texas Commerce Bank, National
Association (TCB), which expired on October 31, 1996. No balance was
outstanding under this line of credit at September 29, 1996. The Company has
commenced negotiating a new $5,000,000 line-of-credit facility with TCB.
The Company believes that its present cash flow and cash balances are adequate
for its operating needs, capital expenditures and stock repurchases through
fiscal 1997 as well as the expected cash requirement to settle its remaining
severance and related obligations, resulting from the other charges recorded in
fiscal 1996, of approximately $1,031,000.
Effective July 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of". The adoption of SFAS No.
121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.
Effective July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation". The Company has adopted only the disclosure requirements
of SFAS No. 123. Therefore, the adoption did not have an impact on the
Company's financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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. 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 obligation 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 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 markets for NEBS compliant products and highly reliable products for the
industrial market 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.
11
<PAGE>
The Company competes against a wide range of companies. 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 alternate 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 highly reliable 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 orders received in that quarter. Therefore, differences in the
receipt of customer orders in any quarter may produce significant fluctuations
in quarterly revenue and profits. This pattern is likely to continue and
makes the Company's quarterly financial results difficult to predict.
12
<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 2. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
On October 25, 1996, the Company filed with the SEC Form 8-K
relating to the disposal of certain assets.
13
<PAGE>
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, thereunto duly authorized.
SEQUOIA SYSTEMS, INC.
Date: November 11, 1996 By:/s/ J. Michael Stewart
----------------------
J. Michael Stewart
President and Chief Executive Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 13,700
<SECURITIES> 0
<RECEIVABLES> 11,661
<ALLOWANCES> 1,032
<INVENTORY> 12,558
<CURRENT-ASSETS> 38,686
<PP&E> 23,399
<DEPRECIATION> 19,175
<TOTAL-ASSETS> 43,913
<CURRENT-LIABILITIES> 13,568
<BONDS> 0
0
0
<COMMON> 6,257
<OTHER-SE> 24,088
<TOTAL-LIABILITY-AND-EQUITY> 43,913
<SALES> 15,107
<TOTAL-REVENUES> 18,649
<CGS> 10,253
<TOTAL-COSTS> 11,901
<OTHER-EXPENSES> 7,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,104)
<INCOME-TAX> 26
<INCOME-CONTINUING> (1,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,130)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
