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 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.
32,293,673 common shares were issued and outstanding as of July 31, 1995
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 1, 1995
and December 31, 1994 3
Consolidated Statements of Operations -
Three months and six months ended July 1, 1995
and July 2, 1994 4
Consolidated Statements of Changes In
Shareholders' Equity - January 2, 1993
through July 1, 1995 5
Consolidated Statements of Cash Flows -
Six months ended July 1, 1995 and July 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 4. Submission of matters to a vote of Security Holders.
At the meeting of the shareholders of the Company held on May 18,
1995, 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
Employee Stock Purchase Plan 20,834,121 1,564,291 85,917 5,073,281
Approval of the Company's 1995
Stock Incentive Plan 16,314,142 6,153,013 86,758 5,003,697
Election of Directors:
Karl C. Powell Jr. 27,382,764 174,846
David R. Hathaway 27,439,142 118,468
Robert C. Mathis 27,433,098 124,512
Richard C. Palermo, Sr. 27,384,465 173,145
Michael S. Scott Morton 27,437,748 119,862
Robert W. Wilmot 27,386,783 170,827
Approval of Price Waterhouse
as Certified Public Accountants
of the Company for next
fiscal year 27,441,478 55,768 60,364
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 1, 1995.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
July 1, 1995 Dec. 31, 1994
ASSETS
Current assets:
Cash and cash equivalents $ 47,458 $ 46,291
Restricted deposits 36,851 59,437
Receivables, net 148,570 133,571
Inventories 51,615 48,698
Prepaid expenses 18,948 12,812
Total current assets 303,442 300,809
Property and equipment, net 101,650 94,214
Capitalized software costs, net 42,005 38,555
Intangible assets and other, net 2,156 2,399
Total assets $ 449,253 $ 435,977
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 36,851 $ 59,437
Accounts payable and other 47,919 46,744
Accrued payroll 11,191 11,794
Unearned revenue 15,503 9,716
Income taxes payable 5,938 3,850
Current obligations under capital
leases and debt 639 800
Total current liabilities 118,041 132,341
Other accrued expenses 3,206 2,100
Long-term obligations under capital
leases and debt 10,184 10,341
Total liabilities 131,431 144,782
Shareholders' equity:
Preferred stock, $.01 par, none outstanding -- --
Common stock, $.01 par, 31,972 and 31,360
shares outstanding 320 314
Paid-in capital 285,596 278,145
Retained earnings 34,835 17,872
Foreign currency translation adjustment (2,929) (5,136)
Total shareholders' equity 317,822 291,195
Total liabilities and
shareholders' equity $ 449,253 $ 435,977
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
Revenue:
Product revenue $ 104,548 $ 82,530 $ 186,529 $ 154,013
Service revenue 34,659 26,267 68,777 48,655
Total revenue 139,207 108,797 255,306 202,668
Costs and expenses:
Cost of products sold 48,500 41,283 87,430 74,733
Cost of service revenue 25,625 18,935 50,105 34,339
Research and development 10,329 8,564 19,745 16,303
Selling, general and admin. 39,183 32,124 73,290 63,297
Total costs and expenses 123,637 100,906 230,570 188,672
Operating income 15,570 7,891 24,736 13,996
Interest, net 271 (302) 344 (792)
Other, net (170) 727 (900) 535
Income before provision for
income taxes 15,671 8,316 24,180 13,739
Provision for income taxes 4,661 1,161 7,217 1,864
Net income $ 11,010 $ 7,155 $ 16,963 $ 11,875
Net income per share $ 0.33 $ 0.23 $ 0.51 $ 0.38
Weighted average number of
common and common equivalent
shares outstanding 33,067 31,526 33,075 31,498
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 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 -- -- 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 -- -- 612 6 7,451 -- 7,457
Net income -- -- -- -- -- 16,963 -- 16,963
Foreign currency
translation adjustment -- -- -- -- -- -- 2,207 2,207
Balance, July 1, 1995 -- $ -- 31,972 $ 320 $285,596 $ 34,835 $ (2,929) $317,822
See notes to consolidated financial statements.
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Six Months Ended
July 1, 1995 July 2, 1994
Operating activities:
Net income $ 16,963 11,875
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 25,237 21,309
Changes in assets and liabilities -
Receivables, net (14,999) 6,927
Inventories (2,917) (5,622)
Prepaid expenses (6,136) (2,442)
Accounts payable and other 1,175 (15,752)
Accrued payroll (603) (1,931)
Unearned revenue 5,787 2,783
Income taxes payable 2,088 384
Other, net 1,043 (1,556)
Net cash provided by operating activities 27,638 15,975
Investing activities:
Restricted deposits 22,586 (15,438)
Investments, net 0 5,000
Purchases of property and equipment, net (24,740) (23,701)
Capitalized software costs (11,077) (9,330)
Foreign currency translation 2,207 1,542
Other, net 0 (73)
Net cash used for investing activities (11,024) (42,000)
Financing activities:
Notes payable, net (22,586) 15,438
Payments under capital lease obligations (534) (966)
Long-term debt, net 216 (2)
Stock issuance proceeds, net 7,457 5,722
Net cash provided by financing activities (15,447) 20,192
Net increase (decrease) in cash and cash equivalents 1,167 (5,833)
Cash and cash equivalents at beginning of period 46,291 42,986
Cash and cash equivalents at end of period $ 47,458 $ 37,153
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 July 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)
July 1, Dec. 31,
1995 1994
Raw Materials $ 9,985 $ 5,377
Work in Process 2,048 2,065
Finished Goods 39,582 41,256
$ 51,615 $ 48,698
Property and Equipment
Property and equipment consist of the following:
(in thousands)
July 1, Dec. 31,
1995 1994
Land $ 5,037 $ 5,037
Operational Equipment 132,674 119,535
Furniture and Office Equipment 60,776 53,872
Leasehold Improvements 15,263 12,341
213,750 190,785
Less Accum. Depr. & Amort. 112,100 96,571
$ 101,650 $ 94,214
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $4.0 million and $7.6 million for the three month and six month
periods ended July 1, 1995, respectively. Amortization for the same periods
in 1994 was $3.1 million and $5.8 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 $1.4 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 $200,000 for the second quarter
ended July 1, 1995 and $600,000 for the first six months of 1995.
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 (increased from $30
million). No borrowings were outstanding at July 1, 1995.
The Company has a short-term borrowing agreement with a foreign bank as a hedge
to cover certain foreign currency exposures for a maximum of approximately
$57.7 million. At July 1, 1995, borrowings of $36.9 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.
No borrowings were outstanding at July 1, 1995.
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 July 1, 1995 and July 2, 1994.
Geographic Segment Information
Export and foreign revenue was $78.5 million (56% of total revenue) for the
three months ended July 1, 1995 and $136.5 million (53% of total revenue) for
the first six months of 1995. Export and foreign revenue was $51.8 million and
$93.9 million (48% and 46% of total revenue, respectively) for the corresponding
periods in 1994. The Company's United States operations generated operating
income of $12.5 million for the three months ended July 1, 1995 and $23.9
million for the first six months of 1995. Foreign operations generated
operating income of $3.1 million and $800,000 for the corresponding periods in
1995. Comparable operating income for the three months ended July 2, 1994 and
for the first six months of 1994 were $7.0 million and $11.0 million for U.S.
operations and $900,000 and $2.9 million for foreign operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 1, 1995
GENERAL
Total revenue was $139.2 million in the second quarter of 1995 compared to
$108.8 million in the second quarter of 1994. Total revenue was $255.3
million in the first six months of 1995 compared to $202.7 million in the
first six months of 1994. Net income was $11.0 million in the second quarter
of 1995 compared to $7.2 million in the second quarter of 1994. Net income
was $17.0 million in the first six months of 1995 compared to $11.9 million in
the first six months of 1994.
REVENUE
(dollars in millions)
Quarter Ended Six Months Ended
July 1, % July 2, July 1, % July 2,
1995 Chg 1994 1995 Chg 1994
End-user product revenue $ 103.0 38 $ 74.5 $ 182.0 32 $ 138.1
Service and other revenue 34.7 32 26.3 68.8 41 48.7
Total end-user revenue 137.7 37 100.8 250.8 34 186.8
OEM product revenue 1.5 (81) 8.0 4.5 (72) 15.9
Total revenue $ 139.2 28 $108.8 $ 255.3 26 $ 202.7
Export and Foreign Revenue $ 78.5 52 $ 51.8 $ 136.5 45 $ 93.9
End-user product revenue for the second quarter and first six months of 1995
improved over the corresponding quarter and six month period in 1994 due to
continued strong and increased results from the Western United States
operations and Europe, and improvements in the Central and Eastern United
States operations.
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 56% of total revenue for the three months ended
July 1, 1995 and 53% of total revenue for the first six months of 1995 and 48%
and 46% of total revenue for the corresponding periods in 1994. The increase
in export and foreign revenue as a percentage of total revenue in the second
quarter and first six months of 1995 compared to the corresponding periods in
1994 was due to significant revenue increases in Europe.
COST OF SALES
(dollars in millions)
Quarter Ended Six Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
Total cost of goods sold $ 74.1 $ 60.2 $ 137.5 $ 109.1
As a percentage of total revenue 53% 55% 54% 54%
As a percentage of total revenue, total cost of goods sold decreased in the
second quarter and remained constant during the first six months of 1995
compared to the corresponding periods of 1994. The decrease in the second
quarter of 1995 in comparison to 1994 is primarily attributed to the lower
margin on third party pass through product in the second quarter of 1994.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Quarter Ended Six Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
Research and Development $ 10.3 $ 8.6 $ 19.7 $ 16.3
As a percentage of total revenue 7% 8% 8% 8%
Software costs capitalized $ 5.4 $ 4.5 $ 11.0 $ 9.3
Research and development costs remained relatively constant as a percentage of
total revenue comparing both the second quarter and first six months of 1995
and 1994. Research and development costs include continued investment in new
product development and enhancements to existing products.
Software costs capitalized increased in the second quarter and first six
months of 1995 due to an increased focus on software design for computing
solutions on future products.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Quarter Ended Six Months Ended
July 1, % July 2, July 1, % July 2,
1995 Chg 1994 1995 Chg 1994
Selling, general and admin. $ 39.2 22 $ 32.1 $ 73.3 16 $ 63.3
As a percentage of total revenue 28% 30% 29% 31%
Selling, general and administrative costs have increased in dollar amount in
the second quarter and first six months of 1995, respectively, compared to the
corresponding periods in 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 second quarter and the first six months of 1995 compared to the
corresponding periods in 1994 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 $1.4 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 $200,000 for the second quarter
ended July 1, 1995 and $600,000 for the first six months of 1995.
INTEREST AND OTHER, NET
(dollars in millions)
Quarter Ended Six Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
Interest, net $ 0.3 $ (0.3) $ 0.3 $ (0.8)
Other, net (0.2) 0.7 (0.9) 0.5
Provisions for income taxes 4.7 1.2 7.2 1.9
Interest income in the second quarter and first six months 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 second quarter and first six months of 1995 and 1994 includes costs
related to Convertible Debentures, foreign currency hedging loans and capital
lease obligations.
Other expenses primarily represents effects of foreign currency transactions
and other miscellaneous non-operating income and expenses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $185.4 million at July 1, 1995 from $168.5
million at December 31, 1994. The Company's current ratio at July 1, 1995 and
December 31, 1994 was 2.6:1 and 2.3:1, respectively.
For the first six months of 1995, cash and cash equivalents increased $1.2
million. The Company continues to invest in property and equipment ($24.7
million) and capitalized software ($11.0 million). Other uses of funds were
increases in accounts receivables ($15.0 million) increases in prepaid
expenses ($6.1 million), and increase in inventories ($2.9 million). Primary
sources of funds were net income ($17.0 million), depreciation and
amortization ($25.2 million), increases in unearned revenue ($5.8 million),
increases in income taxes payable ($2.1 million), increases in accounts
payable and other ($1.2 million) and stock issuance proceeds from employee
stock purchase and stock option plans ($7.5 million).
At July 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 $50 million line of credit (increased from
$30 million) with a group of banks for operating purposes in addition to
short-term borrowing agreements totaling approximately $67.7 million as hedge
facilities to cover certain foreign currency exposures. At July 1, 1995, no
borrowings were outstanding under the line of credit and $36.9 million was
outstanding under the short-term borrowing agreements.
Management expects that current funds, funds from operations and the bank line
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
Sr. Vice President - Finance, Treasurer and
Chief Financial Officer
Date: August 9, 1995
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
11 Statement regarding computation
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 Six Months Ended
July 1, 1995 July 1, 1995
Weighted average number
of common shares outstanding 31,821 31,658
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 1,536 1,562
Weighted average of common stock
equivalent shares attributable
to convertible debentures 639 639
Total common and common
equivalent shares, assuming
full dilution 33,996 33,858
Net income $ 11,010 $ 16,963
Add:
Interest on convertible debentures,
net of applicable income taxes 133 265
Net income, assuming full dilution $ 11,143 $ 17,228
Net income per common share,
assuming full dilution (A) $ 0.33 $ 0.51
(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.
9
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> JUL-01-1995
<CASH> 84,309,000
<SECURITIES> 0
<RECEIVABLES> 151,098,000
<ALLOWANCES> 2,528,000
<INVENTORY> 51,615,000
<CURRENT-ASSETS> 303,442,000
<PP&E> 216,549,000
<DEPRECIATION> 114,899,000
<TOTAL-ASSETS> 449,253,000
<CURRENT-LIABILITIES> 118,041,000
<BONDS> 10,184,000
<COMMON> 320,000
0
0
<OTHER-SE> 317,502,000
<TOTAL-LIABILITY-AND-EQUITY> 449,253,000
<SALES> 186,529,000
<TOTAL-REVENUES> 255,306,000
<CGS> 87,430,000
<TOTAL-COSTS> 137,535,000
<OTHER-EXPENSES> 93,035,000
<LOSS-PROVISION> 574,000
<INTEREST-EXPENSE> 2,252,000
<INCOME-PRETAX> 0
<INCOME-TAX> 7,217,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,963,000
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
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