SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 2, 1994 or
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission file number: 0-15627
SEQUENT COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0826369
(State or other jurisdiction (I.R.S. Employer
of organization or incorporation) Identification Number)
15450 S.W. Koll Parkway
Beaverton, Oregon 97006-6063
(Address of principal executive offices, including zip code)
(503) 626-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), 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.
30,785,154 common shares were issued and outstanding as of July 31, 1994.
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SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 2, 1994
and January 1, 1994 3
Consolidated Statements of Operations -
Three months and six months ended
July 2, 1994 and July 3, 1993 4
Consolidated Statements of Changes
In Shareholders' Equity - December 28, 1991
through July 2, 1994 5
Consolidated Statements of Cash Flows -
Six months ended July 2, 1994
and July 3, 1993 6
Notes to Consolidated Financial Statement 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders.
At the meeting of the shareholders of the Company held on May 17,
1994, the shareholders voted on and approved the following items:
Affirmative Negative Votes Broker
Votes Cast Votes Cast Abstaining Non-Votes
An amendment to the Company's
1989 Stock Incentive Plan 21,421,174 5,086,494 104,258 662,510
Election of Directors:
Karl C. Powell Jr. 27,055,894 218,542
David R. Hathaway 27,102,849 171,587
Robert C. Mathis 27,086,848 187,588
Richard C. Palermo, Sr. 27,100,005 174,431
Michael S. Scott Morton 27,101,067 173,369
Robert W. Wilmot 27,099,213 175,223
Approval of Price Waterhouse
as Certified Public
Accountants of the Company
for next fiscal year 27,019,617 125,719 129,100
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of earnings per share.
(b) No reports on Form 8-K were filed by the Company during the fiscal
quarter ended July 2, 1994.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
July 2, 1994 Jan. 1, 1994
ASSETS
Current assets:
Cash and cash equivalents $ 37,153 $ 42,986
Restricted deposits 47,717 32,279
Investments -- 5,000
Receivables, net 108,634 115,561
Inventories 51,487 45,865
Prepaid royalties and other 14,889 11,587
Total current assets 259,880 253,278
Property and equipment, net 94,999 86,309
Capitalized software costs, net 35,766 32,217
Intangible assets and other, net 3,117 3,620
Total assets $ 393,762 $ 375,424
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 47,717 $ 32,279
Accounts payable and other 48,612 64,223
Accrued payroll 8,972 10,903
Unearned revenue 9,906 7,123
Income taxes payable 1,399 1,015
Current obligations under capital leases 2,478 3,425
Current portion of long-term debt 44 154
Total current liabilities 119,128 119,122
Other accrued expenses 1,012 1,908
Long-term obligations under capital leases 635 654
Long-term debt 10,360 10,252
Total liabilities 131,135 131,936
Shareholders' equity:
Common stock, $.01 par,
30,748 and 30,245 shares outstanding 307 302
Paid-in capital 271,627 265,910
Accumulated deficit (3,387) (15,262)
Foreign currency translation adjustment (5,920) (7,462)
Total shareholders' equity 262,627 243,488
Total liabilities and shareholders'
equity $ 393,762 $ 375,424
See notes to consolidated financial statements.
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<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
July 2, 1994 July 3, 1993 July 2, 1994 July 3, 1993
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 82,530 $ 62,792 $ 154,013 $ 124,388
Service and other revenue 26,267 18,000 48,655 33,978
Total revenue 108,797 80,792 202,668 158,366
Costs and expenses:
Cost of products sold 41,283 29,496 74,733 56,091
Cost of service and other revenue 18,935 12,312 34,339 23,009
Research and development 8,564 7,033 16,303 13,620
Selling, general and administrative 32,124 30,520 63,297 59,105
Total costs and expenses 100,906 79,361 188,672 151,825
Operating income 7,891 1,431 13,99 6,541
Interest, net (302) (343) (792) (936)
Other, net 727 (826) 535 (1,040)
Income before provision for
income taxes 8,316 262 13,739 4,565
Provision for income taxes 1,161 -- 1,864 898
Net income $ 7,155 $ 262 $ 11,875 3,667
Net income per share $ 0.23 $ 0.01 $ 0.38 $ 0.12
Weighted average number of common
and common equivalent shares
outstanding 31,526 31,303 31,498 30,342
See notes to consolidated financial statements.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - Unaudited
(in thousands)
Foreign
Retained Currency
Preferred Stock Common Stock Paid-in Earnings Trans-
Shares Amount Shares Amount Capital (Deficit) lation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1991 1,500 $ 15 $ 20,603 $ 206 $ 172,204 $ (22,171) $ (793) $ 149,461
Common shares issued,
net of repurchases -- -- 1,847 19 13,823 - -- 13,842
Net income -- - - -- -- 14,43 -- 14,433
Foreign currency
translation adjustment -- -- - - -- -- (5,234) (5,234)
Balance, January 2, 1993 1,500 15 22,450 225 186,027 (7,738) (6,027) 172,502
Common shares issues,
net of repurchases -- - 4,795 47 79,883 -- - 79,930
Conversion of preferred
stock (1,500) (15) 3,000 30 - - -- 15
Net income -- -- - - -- (7,524) - (7,524)
Foreign currency
translation adjustment -- - - -- -- -- (1,435) (1,435)
Balance, January 1, 1994 -- - 30,245 30 265,910 (15,262 (7,462) 243,488
Common shares issued,
net of repurchases -- -- 503 5 5,717 -- -- 5,722
Net income - - -- -- -- 11,875 -- 11,875
Foreign currency
translation adjustment -- -- -- - -- - 1,542 1,542
Balance, July 2, 1994 -- $ - 30,748 $ 307 $ 271,627 $ (3,387) $(5,920) $ 262,627
See notes to consolidated financial statements.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Six Months Ended
July 2, 1994 July 3, 1993
Operating activities:
Net income 11,875 3,667
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 21,309 18,882
Changes in assets and liabilities -
Receivables, net 6,927 2,695
Inventories (5,622) (12,915)
Prepaid royalties and other (2,442) (3,146)
Accounts payable and other (15,752) 284
Accrued payroll (1,931) (3,347)
Unearned revenue 2,783 791
Income taxes payable 384 (14)
Deferred income taxes (538) 311
Other, net (1,018) (539)
Net cash provided by
operating activities 15,975 6,669
Investing activities:
Restricted deposits (15,438) 6,617
Investments, net 5,000 (12,500)
Purchases of property and equipment, net (23,701) (16,813)
Capitalized software costs (9,330) (10,344)
Foreign currency translation 1,542 (495)
Other, net (73) 707
Net cash used for investing activities (42,000) (32,828)
Financing activities:
Notes payable, net 15,438 (5,266)
Payments under capital lease obligations (966) (1,346)
Long-term debt, net (2) (1,041)
Stock issuance proceeds, net 5,722 66,004
Net cash provided by financing activities 20,192 58,351
Net increase (decrease) in cash and
cash equivalents (5,833) 32,192
Cash and cash equivalents at
beginning of period 42,986 14,365
Cash and cash equivalents at
end of period $ 37,153 $ 46,557
See notes to consolidated financial statements.
</TABLE>
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 2, 1994
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods. 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. These
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
annual report and Form 10-K for the fiscal year ended January 1, 1994.
The Company's fiscal year is based on a 52-53 week calendar ending the
Saturday closest to December 31. The accompanying consolidated financial
statements include the accounts of Sequent Computer Systems, Inc. and its
wholly owned subsidiaries (the Company or Sequent). All significant
intercompany accounts and transactions have been eliminated. The results for
interim periods are not necessarily indicative of the results for the entire
year.
Accounts Receivable
In July 1994, the Company entered into a two year agreement with a group of
banks to sell, without recourse, undivided ownership interests in a revolving
pool consisting of substantially all of the Company's domestic accounts
receivable for a maximum of $20 million. At July 2, 1994, accounts
receivable in the accompanying consolidated balance sheet is net of $8
million received by the Company under this agreement.
Inventories
Inventories consist of the following:
(in thousands)
July 2, Jan. 1,
1994 1994
Raw Materials $ 7,705 $ 5,011
Work in Process 4,697 7,743
Finished Goods 39,085 33,111
$ 51,487 $ 45,865
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Property and Equipment
Property and equipment consist of the following:
(in thousands)
July 2, Jan. 1,
1994 1994
Land $ 5,037 $ 5,037
Operational Equipment 108,689 95,895
Furniture and Office Equipment 50,911 46,643
Leasehold Improvements 11,952 11,193
176,589 158,768
Less Accum. Depr. & Amort. 81,590 72,459
$ 94,999 $ 86,309
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $3.1 million and $5.8 million for the three month and six month
periods ended July 2, 1994, respectively. Amortization for the same periods
in 1993 was $2.9 million and $5.6 million, respectively.
Restructuring Charge
The realignment of resources to provide open distributed client/server
computing solutions, professional service consulting and architecture-led
selling, marketing and engineering strategies is progressing according to
plan. The $3.5 million remaining accrual is primarily related to obligations
associated with closed facility leases and future extended employee benefit
costs. Management expects that the remaining accrual will be fully utilized
according to the realignment plan. The fourth quarter of 1993 restructuring
reduced operating expenses by approximately $2 million for the second quarter
and $4 million for the first six months of 1994.
Notes Payable
The Company has an unsecured line of credit agreement with a group of banks
which provides short-term borrowings of up to $30 million (reduced from $50
million). No borrowings were outstanding at July 2, 1994.
The Company has a short-term borrowing agreement with a foreign bank as a hedge
to cover certain foreign currency exposures. During July 1994, the Company re-
negotiated the agreement to a maximum of approximately $59 million and extended
the agreement through July 1995. At July 2, 1994, borrowings of $37.7 million
were outstanding under this agreement.
In July 1994, the Company entered into an agreement with a domestic bank for an
additional hedging facility to cover certain foreign currency exposures.
Proceeds from the borrowings are converted into U.S. dollars and placed in a
term deposit account. The agreement is for a maximum of $10 million and
expires December 31, 1994. Under this agreement, $10 million of the
borrowings were outstanding as of July 2, 1994.
<PAGE>
Income Taxes
Effective the beginning of fiscal 1992, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes" (FAS
109). The effective tax rate differs from the statutory tax rate principally
due to tax benefits from the Company's foreign sales corporation and tax
benefits related to the utilization of net operating loss carryforwards which
the Company has available.
Earnings Per Share
See Exhibit 11 for the computation of average shares outstanding and earnings
per share.
Significant Customers
The Company has no single customer that represents greater than 10% of total
revenue for the quarters ending July 2, 1994 and July 3, 1993.
Geographic Segment Information
Export and foreign revenue was $51.8 million (44% of total revenue) for the
three months ended July 2, 1994 and $93.9 million (35% of total revenue) for
the six months then ended. Export and foreign revenue was $35.9 million and
$69.6 million (44% and 44% of total revenue, respectively) for the
corresponding periods in 1993. The Company's United States operations
generated operating income of $7.0 million for the three months ended July 2,
1994 and $11.0 million for the six months then ended. Foreign operations
generated operating income of $900,000 and $2.9 million during the
corresponding periods in 1994. Comparable operating income for the second
quarter and first six months of 1993 were $1.9 million and $7.4 million for
U.S. operations and $500,000 and $900,000 for foreign operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 2, 1994
GENERAL
Total revenue was $108.8 million in the second quarter of 1994 compared to
$80.8 million in the second quarter of 1993. Total revenue was $202.7 million
in the first six months of 1994 compared to $158.4 million in the first six
months of 1993. Net income was $7.2 million in the second quarter of 1994
compared to $0.3 million in the second quarter of 1993. Net income was $11.9
million in the first six months of 1994 compared to $3.7 million in the first
six months of 1993. The Company's total revenue and net income for the second
quarter and first six months of 1994 have benefited from the Company's
continuing success in managing the Company's transition from platform vendor
to provider of open systems, architecture and professional services as well as
continued success in systems services business while at the same time keeping
selling, general and administrative and other expenses to modest increases
over 1993.
<PAGE>
REVENUE
(dollars in millions)
Quarter Ended Six Months Ended
July 2, % July 3, July 2, % July 3,
1994 Chg 1993 1994 Chg 1993
End-user product revenue $ 74.5 32% $ 56.4 $ 138.1 24% $ 111.8
Service and other revenue 26.3 46% 18.0 48.7 43% 34.0
Total end-user revenue 100.8 35% 4.4 186.8 28% 145.8
OEM product revenue 8.0 25% 6.4 15.9 26% 12.6
Total revenue $ 108.8 35% $ 80.8 202.7 28% $ 158.4
Export and Foreign Revenue $ 51.8 44% $ 35.9 $ 93.9 35% $ 69.6
End-user product revenue for the second quarter and first six months of 1994
improved over the corresponding quarter and six month period in 1993 due to
strong results from the Western United States operations and Europe.
Service and other revenue continued to benefit from the growing installed
customer base and increases in professional services revenue. OEM product
revenue is substantially sales to Unisys Corporation.
Export and foreign revenue was 48% of total revenue in the second quarter and
46% of total revenue in the first six months of 1994 and 44% of total revenue
in both the corresponding quarter and six months of 1993. The increase in
export and foreign revenue as a percentage of total revenue in the second
quarter and first six months of 1994 compared to the corresponding periods in
1993 was due to significant revenue increases in Europe.
COST OF SALES
(dollars in millions)
Quarter Ended Six Months Ended
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
Total cost of goods sold $ 60.2 $ 41.8 $ 109.1 $ 79.1
As a percentage of total revenue 55% 52% 54% 50%
Total cost of goods sold as a percentage of total revenue increased in the
second quarter and first six months of 1994 compared to the corresponding
periods of 1993 primarily due to product mix with lower margin service and
other revenue increasing as a percentage of total revenue, product pricing
pressures and, in the second quarter of 1994, lower margin third party pass
through product.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Quarter Ended Six Months Ended
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
Research and Development $ 8.6 $ 7.0 $ 16.3 $ 13.6
As a percentage of total revenue 8% 9% 8% 9%
Software costs capitalized $ 4.5 $ 5.1 $ 9.3 $ 10.3
<PAGE>
Research and development costs remained relatively constant as a percentage of
total revenue comparing both the second quarter and first six months of 1994
and 1993. Research and development costs include continued investment in new
product development and enhancements to existing products.
Software costs capitalized decreased in the second quarter and first six
months of 1994 due to greater emphasis on hardware development for future
products, which costs are expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Quarter Ended Six Months Ended
July 2, % July 3, July 2 July 3,
1994 Chg 1993 1994 Chg 1993
Selling, general and administrative $ 32.1 5% $ 30.5 $ 63.3 7% $ 59.1
As a percentage of total revenue 30% 38% 31% 37%
Selling, general and administrative costs increased 5% and 7% in the second
quarter and first six months of 1994, respectively, compared to the
corresponding periods in 1993. Selling, general and administrative costs
decreased as a percentage of total revenue in the first six months of 1994
compared to the corresponding period in 1993 due to greater total revenue
levels along with cost control.
RESTRUCTURING CHARGE
The realignment of resources to provide open distributed client/server
computing solutions, professional service consulting and architecture-led
selling, marketing and engineering strategies is progressing according to
plan. The $3.5 million remaining accrual is primarily related to obligations
associated with closed facility leases and future extended employee benefit
costs. Management expects that the remaining accrual will be fully utilized
according to the realignment plan. The fourth quarter of 1993 restructuring
reduced operating expenses by approximately $2 million for the second quarter
and $4 million for the first six months of 1994.
INTEREST AND OTHER, NET
(dollars in millions)
Quarter Ended Six Months Ended
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
Interest, net $ (0.3) $ (0.3) $ (0.8) $ (0.9)
Other, net 0.7 (0.8) 0.5 (1.0)
Provisions for income taxes 1.2 -- 1.9 0.9
Interest income in the second quarter and first six months of 1994 and 1993
was primarily generated from deposits related to the proceeds of borrowings
from a foreign bank to cover foreign currency exposures and, in 1993, the
investment of proceeds from the February 1993 common stock offering.
Interest expense in the second quarter and first six months of 1994 and 1993
represents charges related to the Company's capital lease obligations, long-
term debt and borrowings under the short-term borrowing agreement to cover
certain foreign currency exposures.
Other, net primarily represents effects of foreign currency transactions and
other miscellaneous non-operating income and expenses.
The provision for income taxes in the second quarter and first six months of
1994 includes benefits related to the utilization of net operating loss
carryforwards. The Company has unused net operating loss carryforwards which
are available to reduce future income taxes expense and income taxes payable.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $140.8 million at July 2, 1994 from $134.2
million at January 1, 1994. The Company's current ratio at July 2, 1994 and
January 1, 1994 was 2.2:1 and 2.1:1, respectively.
For the first six months of 1994, cash and cash equivalents decreased $5.8
million. The Company continues to invest in property and equipment ($23.7
million) and capitalized software ($9.3 million). Other uses of funds were
reductions in accounts payable and other ($15.8 million) and increase in
inventories ($5.6 million). Primary sources of funds were net income and
depreciation and amortization ($33.2 million), reduction in net receivables
($6.9 million), reductions in investments ($5.0 million) and stock issuance
proceeds from employee stock purchase and stock option plans ($5.7 million).
Inventories increased due to investments in the transition to the Symmetry
5000 product family. Accounts payable and other decreased due to the
liquidation of outstanding trade accounts payable.
In July 1994, the Company entered into a two year agreement with a group of
banks to sell, without recourse, undivided ownership interests in a revolving
pool consisting of substantially all of the Company's domestic accounts
receivable for a maximum of $20 million. At July 2, 1994, accounts
receivable in the accompanying consolidated balance sheet is net of $8 million
received by the Company.
The Company continues to maintain a line of credit with a group of banks of
$30 million (reduced from $50 million) for operating purposes and a short-term
borrowing agreement with a foreign bank of approximately $59 million as a
hedge facility to cover certain foreign currency exposures. At July 2, 1994
no borrowings were outstanding under the line of credit and $37.7 million was
outstanding under the short-term borrowing agreement with the foreign bank.
In July 1994, the Company entered into an agreement with a domestic bank for
an additional hedging facility to cover certain foreign currency exposures.
Proceeds from the borrowings are converted into U.S. dollars and placed in a
term deposit account. The agreement is for a maximum of $10 million and
expires December 31, 1994. Under this agreement, $10 million of the
borrowings were outstanding as of July 2, 1994.
Management expects that current funds, funds from operations, the bank lines
of credit and sales of accounts receivables will provide adequate resources to
meet the Company's anticipated cash requirements through 1994.
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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.
SEQUENT COMPUTER SYSTEMS, INC.
________________________________
Robert S. Gregg
Vice President - Finance, Treasurer and
Chief Financial Officer
Date: August 15, 1994
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EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
11 Statement regarding computation
of earnings per share
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT SHOWING CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING AND EARNINGS
PER AVERAGE COMMON SHARE
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
July 2, 1994 July 2, 1994
Weighted average number
of common shares outstanding 30,663 30,523
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 864 976
Weighted average of common stock
equivalent shares attributable
to convertible debentures 639 639
Total common and common
equivalent shares, assuming
full dilution 32,166 32,138
Net income $ 7,155 $ 11,875
Add:
Interest on convertible debentures,
net of applicable income taxes $ 163 $ 326
Net income, assuming full dilution 7,318 12,201
Net income per common share,
assuming full dilution (A) $ 0.23 $ 0.38
(A) In accordance with generally accepted accounting principles, fully-diluted
earnings per share may not exceed primary earnings per share. As such, the
fully-diluted earnings per share amounts equal the primary earnings per share
amounts.
The computation of primary net income per common share is not included as
the computation can be clearly determined from the material contained in this
report.
