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 April 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.
30,621,386 common shares were issued and outstanding as of April 30, 1994.
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SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - April 2, 1994
and January 1, 1994 3
Consolidated Statements of Operations -
Three months ended April 2, 1994 and
April 3, 1993 4
Consolidated Statements of Changes In
Shareholders' Equity - December 28, 1991
through April 2, 1994 5
Consolidated Statements of Cash Flows -
Three months ended April 2, 1994 and
April 3, 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
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 April 2, 1994.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
<CAPTION>
April 2, 1994 Jan. 1, 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,177 $ 42,986
Restricted deposits 33,264 32,279
Investments -- 5,000
Receivables, net 105,194 115,561
Inventories 52,154 45,865
Prepaid royalties and other 12,726 11,587
Total current assets 241,515 253,278
Property and equipment, net 89,393 86,309
Capitalized software costs, net 34,296 32,217
Intangible assets and other, net 3,139 3,620
Total assets $ 368,343 $ 375,424
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 33,264 $ 32,279
Accounts payable and other 48,957 64,223
Accrued payroll 7,466 10,903
Unearned revenue 9,859 7,123
Income taxes payable 972 1,015
Current obligations under capital leases 2,831 3,425
Current portion of long-term debt 83 154
Total current liabilities 103,432 119,122
Other accrued expenses 1,834 1,908
Long-term obligations under capital leases 399 654
Long-term debt 10,345 10,252
Total liabilities 116,010 131,936
Shareholders' equity:
Common stock, $.01 par,
30,586 and 30,245 shares outstanding 306 302
Paid-in capital 269,937 265,910
Accumulated deficit (10,542) (15,262)
Foreign currency translation adjustment (7,368) (7,462)
Total shareholders' equity 252,333 243,488
Total liabilities and shareholders' equity $ 368,343 $ 375,424
See notes to consolidated financial statements.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended
April 2, 1994 April 3, 1993
<S> <C> <C>
Revenue:
Product revenue $ 71,483 $ 61,596
Service and other revenue 22,388 15,978
Total revenue 93,871 77,574
Costs and expenses:
Cost of products sold 33,450 26,595
Cost of service and other revenue 15,404 10,697
Research and development 7,739 6,587
Selling, general and administrative 31,173 28,585
Total costs and expenses 87,766 72,464
Operating income 6,105 5,110
Interest, net (490) (593)
Other, net (192) (214)
Income before provision for income taxes 5,423 4,303
Provision for income taxes 703 898
Net income $ 4,720 $ 3,405
Net income per share $ 0.15 $ 0.12
Weighted average number of common
and common equivalent shares
outstanding 31,470 29,381
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)
<CAPTION>
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 -- -- -- -- -- 14,433 -- 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 -- -- 30,245 302 265,910 (15,262) (7,462) 243,488
Common shares issued,
net of repurchases -- -- 341 4 4,027 -- -- 4,031
Net income -- -- -- -- -- 4,720 -- 4,720
Foreign currency
translation adjustment -- -- -- -- -- -- 94 94
Balance, April 2, 1994 -- $ -- 30,586 $ 306 $ 269,937 $ (10,542) $ (7,368) $ 252,333
See notes to consolidated financial statements.
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<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
<CAPTION>
April 2, 1994 April 3, 1993
<S> <C> <C>
Operating activities:
Net income $ 4,720 $ 3,405
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 10,343 9,310
Changes in assets and liabilities -
Receivables, net 10,367 6,824
Inventories (6,289) (5,757)
Prepaid royalties and other (250) (2,413)
Accounts payable and other (15,336) 2,371
Accrued payroll (3,437) (3,220)
Unearned revenue 2,736 492
Income taxes payable (43) 361
Deferred income taxes (530) 311
Other, net (156) (311)
Net cash provided by operating activities 2,125 11,373
Investing activities:
Restricted deposits (985) 2,782
Investments, net 5,000 (10,000)
Purchases of property and equipment, net (10,425) (9,002)
Capitalized software costs (4,807) (5,221)
Foreign currency translation 94 135
Other, net -- 152
Net cash used for investing activities (11,123) (21,154)
Financing activities:
Notes payable, net 985 (1,431)
Payments under capital lease obligations (849) (864)
Long-term debt, net 22 (1,012)
Stock issuance proceeds, net 4,031 63,815
Net cash provided by financing activities 4,189 60,508
Net increase (decrease) in cash and cash equivalents (4,809) 50,727
Cash and cash equivalents at beginning of period 42,986 14,365
Cash and cash equivalents at end of period $ 38,177 $ 65,092
See notes to consolidated financial statements.
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SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 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.
Inventories
Inventories consist of the following:
(in thousands)
Apr. 2, Jan. 1,
1994 1994
Raw Materials $ 8,504 $ 5,011
Work in Process 5,502 7,743
Finished Goods 38,148 33,111
$ 52,154 $ 45,865
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Apr. 2, Jan. 1,
1994 1994
Land $ 5,037 $ 5,037
Operational Equipment 101,483 95,895
Furniture and Office Equipment 48,191 46,643
Leasehold Improvements 11,403 11,193
166,114 158,768
Less Accum. Depr. & Amort. 76,721 72,459
$ 89,393 $ 86,309
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Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $2.7 million for both three month periods ended April 2, 1994 and
April 3, 1993, respectively.
Notes Payable
The Company has an unsecured line of credit agreement with a group of banks
which provides short-term borrowings of up to $50 million. No borrowings were
outstanding at April 2, 1994.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge facility to cover certain foreign currency exposures. At April 2, 1994,
maximum borrowings allowed under the agreement were $39.4 million, of which
$33.3 million was outstanding.
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.
Long-Term Debt
The Company currently has $10.1 million of 7.5% Convertible Subordinated
Debentures (Debentures) outstanding which are due March 31, 2000. Beginning
June 30, 1997, the Company is required to provide approximately $1.3 million
quarterly through June 1999 to retire the outstanding Debentures.
Significant Customers
The Company has no single customer that represents greater than 10% of total
revenue for the quarters ending April 2, 1994 and April 3, 1993.
Geographic Segment Information
Export and foreign revenue was $42.1 million (45% of total revenue) for the
first quarter ended April 2, 1994 and $34.1 million (44% of total revenue) for
the first quarter ended April 3, 1993. The Company's United States operations
generated operating income of $4.1 million and foreign operations generated
operating income of $2.0 million for the three months ended April 2, 1994.
Comparable amounts for the first quarter of 1993 are $5.5 million operating
income for U.S. operations and $400,000 operating loss for foreign operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 2, 1994
GENERAL
Total revenue was $93.9 million in the first quarter of 1994 compared to $77.6
million in the first quarter of 1993 and $104.3 million in the fourth quarter
of 1993. Net income was $4.7 million in the first quarter of 1994 compared to
$3.4 million in the first quarter of 1993 and a net loss of $15.1 million in
the fourth quarter of 1993. Total revenue improved 21% over the first quarter
of 1993, but seasonally decreased 11% in the first quarter of 1994 compared to
the fourth quarter of 1993. The Company historically experiences reduced
first quarter end-user orders compared to the preceding fourth quarter. Total
revenue in North America and Europe increased as the Company continues to
benefit from system sales to large accounts along with increasing service and
other revenue. Overall earnings for the first quarter of 1994 compared to the
first quarter of 1993 benefited from incremental total gross margin dollars
and a decrease in other non-operating expenses, offset by incremental
operating expenses. The fourth quarter of 1993 included restucturing charges
of $22.3 million.
REVENUE
(dollars in millions)
Quarter Ended
Apr. 2, % Apr. 3,
1994 Chg 1993
End-user product revenue $ 63.6 15% $ 55.4
Service and other revenue 22.4 40% 16.0
Total end-user revenue 86.0 20% 71.4
OEM product revenue 7.9 27% 6.2
Total revenue $ 93.9 21% $ 77.6
Export and Foreign Revenue $ 42.1 24% $ 34.2
End-user product revenue for the first quarter of 1994 improved over the
corresponding quarter of 1993 due to improved results in North American
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 45% of total revenue in the first quarter of
1994 and 44% of total revenue in the corresponding quarter of 1993. The
increase in export and foreign revenue as a percentage of total revenue in the
first quarter of 1994 compared to the corresponding period in 1993 was due to
the increase of European revenue as a percentage of total revenue.
COST OF SALES
(dollars in millions)
Quarter Ended
Apr. 2, Apr. 3,
1994 1993
Total cost of goods sold $ 48.9 $ 37.3
As a percentage of total revenue 52% 48%
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Total cost of goods sold as a percentage of total revenue increased in the
first quarter of 1994 compared to the first quarter of 1993 primarily
unfavorable product mix due to lower margin service and other revenue
increasing as a percentage of total revenue and product pricing pressures.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Quarter Ended
Apr. 2, % Apr. 3,
1994 Chg 1993
Research and development $ 7.7 17% $ 6.6
As a percentage of total revenue 8% 8%
Software costs capitalized $ 4.8 (8)% $ 5.2
Research and development costs remained constant as a percentage of total
revenue. Research and development costs include continued investment in new
product development and enhancements to existing products.
Software costs capitalized decreased in the first quarter of 1994 due to the
initial shift in focus from host terminal-based products to open distributed
client-server solutions and architecturally led engineering efforts, which are
not capitalizable.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Quarter Ended
Apr. 2, % Apr. 3,
1994 Chg 1993
Selling, general and administrative $ 31.2 9% $ 28.6
As a percentage of total revenue 33% 37%
Selling, general and administrative costs have increased in dollar amount in
the first quarter of 1994 compared to the first quarter of 1993 primarily due
to sales and marketing expenditure levels related to higher total revenue
levels. Selling, general and administrative costs have decreased as a
percentage of total revenue in the first quarter of 1994 compared to the first
quarter of 1993 primarily due to larger individual orders increasing sales
productivity. The fourth quarter of 1993 restructuring reduced operating
expenses by approximately $2 million for the first quarter of 1994.
INTEREST AND OTHER, NET
(dollars in millions)
Quarter Ended
Apr. 2, Apr. 3,
1994 1993
Interest, net $ (.5) $ (.6)
Other expense (.2) (.2)
Provision for income taxes .7 .9
Interest income in the first quarter 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 investment of the proceeds from the
February 1993 common stock offering.
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Interest expense in the first quarter 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 with a foreign bank.
Other expense primarily represents effects of foreign currency transactions
and other miscellaneous non-operating expenses.
The provision for income taxes 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $138.1 million at April 2, 1994 from $134.2
million at January 1, 1994. The Company's current ratio at April 2, 1994 and
January 1, 1994 was 2.3:1 and 2.1:1, respectively.
For the first three months of 1994, cash and cash equivalents decreased $4.8
million. The Company continues to invest in property and equipment ($10.4
million) and capitalized software ($4.8 million). Other uses of funds were
reductions in accounts payable and other ($15.3 million), increase in
inventories ($6.3 million) and reductions in accrued payroll ($3.4 million).
Primary sources of funds were net income and depreciation and amortization
($15.1 million), reduction in net receivables ($10.4 million), reductions in
investments ($5.0 million) and stock issuance proceeds from employee stock
purchase and stock option plans ($4.0 million).
Inventories increased due to investments in the transition to the Symmetry
5000 product family. Accounts receivable decreased due to seasonally lower
revenue in the first quarter. Accounts payable and other decreased due to the
liquidation of outstanding trade accounts payable.
The Company continues to maintain a line of credit with a group of banks of
$50 million for operating purposes and a short-term borrowing agreement with a
foreign bank of approximately $39 million as a hedge facility to cover certain
foreign currency exposures. At April 2, 1994 no borrowings were outstanding
under the line of credit and $33.3 million was outstanding under the short-
term borrowing agreement with the foreign bank.
Management expects that current funds, funds from operations, and the bank
lines of credit 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: May 13, 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
April 2, 1994 April 3, 1993
Weighted average number
of common shares outstanding 30,383 27,503
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 1,087 1,878
Weighted average of common stock
equivalent shares attributable
to convertible debentures 639 962
Total common and common
equivalent shares, assuming
full dilution 32,109 30,343
Net income $ 4,720 $ 3,405
Add:
Interest on convertible debentures,
net of applicable income taxes $ 165 $ 226
Net income, assuming full dilution 4,885 3,631
Net income per common share,
assuming full dilution (A) $ 0.15 $ 0.12
(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.
