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 1, 1995 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.
31,762,338 common shares were issued and outstanding as of April 28, 1995.
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - April 1, 1995
and December 31, 1994 3
Consolidated Statements of Operations -
Three months ended April 1, 1995 and
April 2, 1994 4
Consolidated Statements of Changes In
Shareholders' Equity - January 2, 1993
through April 1, 1995 5
Consolidated Statements of Cash Flows -
Three months ended April 1, 1995 and
April 2, 1994 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 1, 1995.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
April 1, 1995 Dec. 31, 1994
ASSETS
Current assets:
Cash and cash equivalents $ 58,232 $ 46,291
Restricted deposits 61,529 59,437
Receivables, net 117,518 133,571
Inventories 53,532 48,698
Prepaid royalties and other 16,798 12,812
Total current assets 307,609 300,809
Property and equipment, net 99,313 94,214
Capitalized software costs, net 40,551 38,555
Intangible assets and other, net 2,039 2,399
Total assets $ 449,512 $ 435,977
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 61,529 $ 59,437
Accounts payable and other 44,310 46,744
Accrued payroll 7,682 11,794
Unearned revenue 12,764 9,716
Income taxes payable 5,344 3,850
Current obligations under capital
leases and debt 835 800
Total current liabilities 132,464 132,341
Other accrued expenses 2,320 2,100
Long-term obligations under capital
leases and debt 10,379 10,341
Total liabilities 145,163 144,782
Shareholders' equity:
Preferred stock, $.01 par,
none outstanding -- --
Common stock, $.01 par,
31,749 and 31,360 shares outstanding 317 314
Paid-in capital 282,650 278,145
Retained earnings 23,825 17,872
Foreign currency translation adjustment (2,443) (5,136)
Total shareholders' equity 304,349 291,195
Total liabilities and shareholders'
equity $ 449,512 $ 435,977
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
(in thousands, except per share amounts)
Three Months Ended
April 1, 1995 April 2, 1994
Revenue:
Product revenue $ 81,981 $ 71,483
Service revenue 34,118 22,388
Total revenue 116,099 93,871
Costs and expenses:
Cost of products sold 38,930 33,450
Cost of service revenue 24,480 15,404
Research and development 9,416 7,739
Selling, general and administrative 34,107 31,173
Total costs and expenses 106,933 87,766
Operating income 9,166 6,105
Interest, net 73 (490)
Other, net (730) (192)
Income before provision for income taxes 8,509 5,423
Provision for income taxes 2,556 703
Net income $ 5,953 $ 4,720
Net income per share $ 0.18 $ 0.15
Weighted average number of common
and common equivalent shares
outstanding 33,082 31,470
See notes to consolidated financial statements.
<TABLE>
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, January 2, 1993 1,500 $ 15 22,450 $225 $186,027 $ (7,738) $ (6,027) $ 172,502
Common shares issued,
net of repurchases -- -- 4,795 47 79,883 -- -- 79,930
Conversion of preferred
stock (1,500) (15) 3,000 30 -- -- -- 15
Net loss -- -- -- -- -- (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 -- -- 1,115 12 12,235 -- -- 12,247
Net income -- -- -- -- -- 33,134 -- 33,134
Foreign currency
translation adjustment -- -- -- -- -- -- 2,326 2,326
Balance, December 31, 1994 -- $ -- 31,360 $ 314 $278,145 $17,872 $ (5,136) $291,195
Common shares issued -- -- 389 3 4,505 -- -- 4,508
Net income -- -- -- -- -- 5,953 -- 5,953
Foreign currency
translation adjustment -- -- -- -- -- -- 2,693 2,693
Balance, April 1, 1995 -- $ -- 31,749 $ 317 $282,650 $23,825 $ (2,443) $ 304,349
See notes to consolidated financial statements.
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Three Months Ended
April 1, 1995 April 2, 1994
Operating activities:
Net income $ 5,953 $ 4,720
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 12,434 10,343
Changes in assets and liabilities -
Receivables, net 16,053 10,367
Inventories (4,834) (6,289)
Prepaid royalties and other (3,947) (250)
Accounts payable and other (2,353) (15,336)
Accrued payroll (4,112) (3,437)
Unearned revenue 3,048 2,736
Income taxes payable 1,494 (43)
Deferred income taxes 892 (530)
Other, net (497) (156)
Net cash provided by operating activities 24,131 2,125
Investing activities:
Restricted deposits (2,092) (985)
Investments, net -- 5,000
Purchases of property and equipment, net (13,818) (10,425)
Capitalized software costs (5,646) (4,807)
Foreign currency translation 2,693 94
Net cash used for investing activities (18,863) (11,123)
Financing activities:
Notes payable, net 2,092 985
Payments under capital lease obligations (432) (849)
Long-term debt, net 505 22
Stock issuance proceeds, net 4,508 4,031
Net cash provided by financing activities 6,673 4,189
Net increase (decrease) in cash
and cash equivalents 11,941 (4,809)
Cash and cash equivalents at beginning of period 46,291 42,986
Cash and cash equivalents at end of period $ 58,232 $ 38,177
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 1995
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 December 31, 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
At April 1, 1995, accounts receivable in the accompanying consolidated balance
sheet is net of $8 million, received by the Company under its two year
agreement to sell its domestic accounts receivables.
Inventories
Inventories consist of the following:
(in thousands)
Apr. 1, Dec. 31,
1995 1994
Raw Materials $ 6,826 $ 5,377
Work in Process 3,107 2,065
Finished Goods 43,599 41,256
$ 53,532 $ 48,698
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Apr. 1, Dec. 31,
1995 1994
Land $ 5,037 $ 5,037
Operational Equipment 127,923 119,535
Furniture and Office Equipment 57,261 53,872
Leasehold Improvements 13,942 12,341
204,163 190,785
Less Accum. Depr. & Amort. 104,850 96,571
$ 99,313 $ 94,214
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $3.7 million and $2.7 million for the three month periods ended
April 1, 1995 and April 2, 1994, 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 $1.6 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
charge reduced operating expenses by approximately $400,000 and $2.1 million
for the first quarter ended April 1, 1995 and April 2, 1994, 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 $30 million. No borrowings were
outstanding at April 1, 1995.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge to cover certain foreign currency exposures to a maximum of
approximately $58.5 million. At April 1, 1995, borrowings of $50.5 million
were outstanding under this agreement.
The Company has a short-term borrowing agreement with a domestic bank for an
additional hedging facility to cover certain foreign currency exposures for a
maximum of $10 million, excluding foreign currency gain or loss fluctuations.
At April 1, 1995, borrowings of $11.0 million were outstanding under this
agreement.
Income Taxes
The Company utilizes 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 the utilization of both domestic and foreign tax
attributes carried forward from prior years.
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 April 1, 1995 and April 2, 1994.
Geographic Segment Information
Export and foreign revenue was $58.0 million (50% of total revenue) for the
first quarter ended April 1, 1995 and $42.1 million (45% of total revenue) for
the first quarter ended April 2, 1994. The Company's United States operations
generated operating income of $11.4 million and foreign operations generated
operating loss of $2.2 million for the three months ended April 1, 1995.
Comparable amounts for the first quarter of 1994 are $4.1 million operating
income for U.S. operations and $2.0 million operating income for foreign
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 1, 1995
GENERAL
Total revenue was $116.1 million in the first quarter of 1995 compared to
$93.9 million in the first quarter of 1994. Net income was $6.0 million,
increasing 26% from $4.7 million in the first quarter of 1994, despite an
increase in the Company's effective tax rate from 13 to 30 percent. The
Company historically experiences reduced first quarter end-user orders
compared to the preceding fourth quarter.
REVENUE
(dollars in millions)
Quarter Ended
Apr. 1, % Apr. 2,
1995 Chg 1994
End-user product revenue $ 79.0 24% $ 63.6
Service revenue 34.1 52% 22.4
Total end-user revenue 113.1 32% 86.0
OEM product revenue 3.0 (62)% 7.9
Total revenue $ 116.1 24% $ 93.9
Export and Foreign Revenue $ 58.0 38% $ 42.1
End-user product revenue for the first quarter of 1995 improved over the
corresponding quarter of 1994 due to increased results from the Western United
States operations and Europe.
Service 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 50% of total revenue in the first quarter of
1995 compared to 45% of total revenue in the first quarter of 1994. The
increase in export and foreign revenue as a percentage of total revenue in the
first quarter of 1995 compared to the first quarter in 1994 was due to
significant revenue increases in Europe.
COST OF SALES
(dollars in millions)
Quarter Ended
Apr. 1, Apr. 2,
1995 1994
Total cost of goods sold $ 63.4 $ 48.9
As a percentage of total revenue 55% 52%
Total cost of goods sold as a percentage of total revenue increased in the
first quarter of 1995 compared to the first quarter of 1994 primarily due to
unfavorable product mix resulting from lower margin service revenue increasing
as a percentage of total revenue.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Quarter Ended
Apr. 1, % Apr. 2,
1995 Chg 1994
Research and development $ 9.4 22% $ 7.7
As a percentage of total revenue 8% 8%
Software costs capitalized $ 5.6 17% $ 4.8
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 increased in the first quarter of 1995 compared to
the first quarter of 1994 due to an increased focus on software design for
computing solutions on future products.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Quarter Ended
Apr. 1, % Apr. 2,
1995 Chg 1994
Selling, general and admin. $ 34.1 9% $ 31.2
As a percentage of total revenue 29% 33%
Selling, general and administrative costs have increased in dollar amount in
the first quarter of 1995 compared to the first quarter of 1994 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 1995 compared to the first
quarter of 1994 due to greater 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 $1.6 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
charge reduced operating expenses by approximately $400,000 and $2.1 million
for the first quarter ended April 1, 1995 and April 2, 1994, respectively.
INTEREST AND OTHER, NET
(dollars in millions)
Quarter Ended
Apr. 1, Apr. 2,
1995 1994
Interest, net $ .1 $ (.5)
Other expense (.7) (.2)
Provision for income taxes 2.6 .7
Interest income in the first quarter of 1995 and 1994 was primarily generated
from restricted deposits held at foreign and domestic banks, short term
investments and cash and cash equivalents. Interest expense in the first
quarter of 1995 and 1994 includes costs related to the Convertible Debentures,
foreign currency hedging loans and capital lease obligations.
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 Company's
foreign sales corporation and the utilization of available domestic and
foreign tax attributes carried forward from prior years. The increase in the
Company's effective tax rate from 13% in the first quarter of 1994 to 30% in
the first quarter of 1995 is primarily attributed to utilization of a majority
of its remaining net operating loss carryforwards during December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $175.1 million at April 1, 1995 from $168.5
million at December 31, 1994. The Company's current ratio at April 1, 1995
and December 31, 1994 was 2.3:1.
For the first three months of 1995, cash and cash equivalents increased $11.9
million. The Company continues to invest in property and equipment ($13.8
million) and capitalized software ($5.6 million). Other uses of funds were
reductions in accounts payable and other ($2.4 million), increase in
inventories ($4.8 million), increase in prepaid and other ($3.9 million),
increase in foreign translation adjustment ($2.7 million), and reductions in
accrued payroll ($4.1 million). Primary sources of funds were net income
($6.0 million), depreciation and amortization ($12.4 million), reduction in
net receivables ($16.1 million), increase in unearned revenue ($3.0 million),
and stock issuance proceeds from employee stock purchase and stock option
plans ($4.5 million).
Inventories increased due to increasing international inventory levels coupled
with a significant foreign currency translation impact. 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.
At April 1, 1995, accounts receivable in the accompanying consolidated balance
sheet is net of $8 million received by the Company under its two year
agreement to sell its domestic accounts receivables.
The Company continues to maintain a $30 million line of credit with a group of
banks for operating purposes in addition to short-term borrowing agreements
totaling approximately $69 million as hedge facilities to cover certain
foreign currency exposures. At April 1, 1995, no borrowings were outstanding
under the line of credit and $61.5 million was outstanding under the short-
term borrowing agreements.
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 1995.
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
Senior Vice President - Finance, Treasurer
and Chief Financial Officer
Date: May 8, 1995
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
11 Statement regarding computation 14
of earnings per share
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 1, 1995 April 2, 1994
Weighted average number
of common shares outstanding 31,494 30,383
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 1,587 1,087
Weighted average number of common stock
equivalent shares attributable
to convertible debentures 639 639
Total common and common
equivalent shares, assuming
full dilution 33,720 32,109
Net income $ 5,953 $ 4,720
Add:
Interest on convertible debentures,
net of applicable income taxes 133 165
Net income, assuming full dilution $ 6,086 $ 4,885
Net income per common share,
assuming full dilution (A) $ 0.18 $ 0.15
(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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> APR-01-1995
<CASH> 119,761
<SECURITIES> 0
<RECEIVABLES> 120,125
<ALLOWANCES> 2,607
<INVENTORY> 53,532
<CURRENT-ASSETS> 307,609
<PP&E> 206,962
<DEPRECIATION> 107,649
<TOTAL-ASSETS> 449,512
<CURRENT-LIABILITIES> 132,464
<BONDS> 10,379
<COMMON> 317
0
0
<OTHER-SE> 304,032
<TOTAL-LIABILITY-AND-EQUITY> 449,512
<SALES> 81,981
<TOTAL-REVENUES> 116,099
<CGS> 38,930
<TOTAL-COSTS> 63,410
<OTHER-EXPENSES> 43,523
<LOSS-PROVISION> 303
<INTEREST-EXPENSE> 1,135
<INCOME-PRETAX> 2,556
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,953
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
