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 March 30, 1996 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.
33,464,317 common shares were issued and outstanding as of May 3, 1996.
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 30, 1996
and December 30, 1995 3
Consolidated Statements of Operations -
Three months ended March 30, 1996 and
April 1, 1995 4
Consolidated Statements of Changes In
Shareholders' Equity - January 1, 1994
through March 30, 1996 5
Consolidated Statements of Cash Flows -
Three months ended March 30, 1996 and April 1, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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 March 30, 1996.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
Mar. 30, 1996 Dec. 30, 1995
ASSETS
Current assets:
Cash and cash equivalents $ 68,083 $ 61,939
Restricted deposits 37,684 39,642
Receivables, net 144,431 178,322
Inventories 76,012 60,853
Prepaid royalties and other 17,568 13,464
Total current assets 343,778 354,220
Property and equipment, net 105,647 98,165
Capitalized software costs, net 48,107 45,381
Intangible assets and other, net 6,166 6,157
Total assets $ 503,698 $ 503,923
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 37,964 $ 41,146
Accounts payable and other 54,676 60,095
Accrued payroll 13,916 11,723
Unearned revenue 25,127 21,466
Income taxes payable 4,867 4,981
Current obligations under capital
leases and debt 72 60
Total current liabilities 136,622 139,471
Other accrued expenses 2,630 2,158
Long-term obligations under capital
leases and debt 9,337 9,106
Total liabilities 148,589 150,735
Shareholders' equity:
Preferred stock, $.01 par,
none outstanding -- --
Common stock, $.01 par,
33,454 and 33,221 shares outstanding 335 332
Paid-in capital 304,700 302,186
Retained earnings 53,543 52,945
Foreign currency translation adjustment (3,469) (2,275)
Total shareholders' equity 355,109 353,188
Total liabilities and
shareholders' equity $ 503,698 $ 503,923
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
Mar. 30, 1996 Apr. 1, 1995
Revenue:
Product revenue $ 81,109 $ 81,981
Service revenue 39,636 34,118
Total revenue 120,745 116,099
Costs and expenses:
Cost of products sold 38,653 38,930
Cost of service revenue 30,611 24,480
Research and development 12,262 9,416
Selling, general and admin. 38,245 34,107
Total costs and expenses 119,771 106,933
Operating income 974 9,166
Interest, net 213 73
Other, net (363) (730)
Income before provision for income taxes 824 8,509
Provision for income taxes 226 2,556
Net income $ 598 $ 5,953
Net income per share $ 0.02 $ 0.18
Weighted average number of common
and common equivalent shares
outstanding 33,616 33,082
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 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 -- -- 1,798 18 18,298 -- 18,316
Tax benefit of option exercises -- -- -- -- 4,743 -- -- 4,743
Conversion of debentures -- -- 63 -- 1,000 -- -- 1,000
Net income -- -- -- -- -- 35,073 -- 35,073
Foreign currency
translation adjustment -- -- -- -- -- -- 2,861 2,861
Balance, Dec. 30, 1995 -- $ -- 33,221 $ 332 $ 302,186 $ 52,945 $ (2,275) $ 353,188
Common shares issued -- -- 233 3 2,468 2,471
Tax benefit of option exercises -- -- -- -- 46 -- -- 46
Net income -- -- -- -- -- 598 -- 598
Foreign currency
translation adjustment -- -- -- -- -- -- (1,194) (1,194)
Balance, March 30, 1996 -- -- 33,454 $ 335 $ 304,700 $ 53,543 $ (3,469) $ 355,109
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
<CAPTION>
Three Months Ended
Mar. 30, 1996 Apr. 1, 1995
<S> <C> <C>
Operating activities:
Net income $ 598 $ 5,953
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 14,641 12,434
Changes in assets and liabilities -
Receivables, net 33,891 16,053
Inventories (15,159) (4,834)
Prepaid expenses (4,104) (3,947)
Accounts payable and other (5,419) (2,353)
Accrued payroll 2,193 (4,112)
Unearned revenue 3,660 3,048
Income taxes payable (113) 1,494
Deferred income taxes 7 892
Other, net 405 (497)
Net cash provided by operating activities 30,600 24,131
Investing activities:
Restricted deposits 1,957 (2,092)
Purchases of property and equipment, net (17,220) (13,818)
Capitalized software costs (7,531) (5,646)
Foreign currency translation (1,194) 2,693
Net cash used for investing activities (23,988) (18,863)
Financing activities:
Notes payable, net (3,182) 2,092
Proceeds (payments) under capital lease obligations 244 (432)
Long-term debt, net -- 505
Stock issuance proceeds, net 2,470 4,508
Net cash (used) provided by financing activities (468) 6,673
Net increase in cash and cash equivalents 6,144 11,941
Cash and cash equivalents at beginning of period 61,939 46,291
Cash and cash equivalents at end of period $ 68,083 $ 58,232
See notes to consolidated financial statements.
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 30, 1996
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 30, 1995.
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 March 30, 1996, accounts receivable in the accompanying consolidated
balance sheet is net of $11.4 million received by the Company under its two
year agreement to sell its domestic accounts receivables.
Inventories
Inventories consist of the following:
(in thousands)
Mar. 30, Dec. 30,
1996 1995
Raw Materials $ 16,969 $ 9,385
Work in Process 2,222 1,736
Finished Goods 56,821 49,732
$ 76,012 $ 60,853
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Mar. 30, Dec. 30,
1996 1995
Land $ 5,037 $ 5,037
Operational Equipment 143,442 134,897
Furniture and Office Equipment 71,094 67,010
Leasehold Improvements 16,251 15,974
235,824 222,918
Less Accum. Depr. & Amort. 130,177 124,753
$ 105,647 $ 98,165
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $4.8 million and $3.7 million for the three month periods ended
March 30, 1996 and April 1, 1995, 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. The line of credit
agreement extends through May 30, 1996. No borrowings were outstanding at
March 30, 1996.
The Company has a short-term borrowing agreement with a foreign bank as a hedge
to cover certain foreign currency exposures. At March 30, 1996, maximum
borrowings allowed under the agreement were approximately $55.0 million.
Borrowings under the agreement are denominated in various foreign currencies.
Proceeds from the borrowings are converted into U.S. dollars and placed in a
term deposit account with the foreign bank. Amounts outstanding were $37.7
million at March 30, 1996.
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 fluctuations. No borrowings
were outstanding at March 30, 1996.
In addition to the above borrowing agreements, the Company maintains certain
other miscellaneous borrowing arrangements with a foreign bank aggregating $.3
million at March 30, 1996.
Income Taxes
The Company accounts for income taxes in accordance with 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.
Earnings Per Share
See Exhibit 11 for the computation of average shares outstanding and earnings
per share.
Significant Customers
The Company had no single customer that represented greater than 10% of total
revenue for the quarters ending March 30, 1996 or April 1, 1995.
Geographic Segment Information
Export and foreign revenue was $64 million (53% of total revenue) for the three
months ended March 30, 1996. Export and foreign revenue was $58 million (50%
of total revenue) for the corresponding period in 1995. The Company's United
States operations generated operating income of $1.3 million for the three
months ended March 30, 1996 and $11.4 million for the corresponding period in
1995. Foreign operations generated operating losses of $.3 million and $2.2
million for the three months ended March 30, 1996 and April 1, 1995,
respectively.
Forward Looking Statements
Information included in Management's Discussion and Analysis of Financial
Conditions and Results of Operations regarding product development schedules
and planned expenditure levels constitute forward-looking statements that
involve a number of risks and uncertainties. The following factors are among
the factors that could cause actual results to differ materially from the
forward-looking statements: business conditions and growth in the electronics
industry and general economies, both domestic and international; lower than
expected customer orders, delays in receipt of orders or cancellation of
orders; competitive factors, including increased competition, new product
offerings by competitors and price pressures; the availability of third party
parts and supplies at reasonable prices; changes in product mix and the mix
between product and service revenue; significant quarterly performance
fluctuations due to the receipt of a significant portion of customer orders
and product shipments in the last month of each quarter; and product shipment
interruptions due to manufacturing problems.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 30, 1996
GENERAL
Total revenue was $120.7 million in the first quarter of 1996 compared to
$116.1 million in the first quarter of 1995. Net income was $.6 million in the
first quarter of 1996 compared to $6.0 million in the first quarter of 1995.
Factors contributing to the decrease in net income included substantial
investments made by the Company in the first quarter of 1996 for expansion of
its sales channels and development of its NUMA-Q product technology, as well
as lower margin service increasing as a percentage of total revenue.
Consistent with historical results, the Company experienced reduced first
quarter end-user orders compared to the preceding fourth quarter.
REVENUE
(dollars in millions)
Three Months Ended
Mar. 30, % Apr. 1,
1996 Chg 1995
End-user product revenue $ 76.2 (4)% $ 79.0
Service revenue 39.6 16% 34.1
Total end-user revenue 115.8 2% 113.1
OEM product revenue 4.9 63% 3.0
Total revenue $ 120.7 4% $ 116.1
Export and Foreign Revenue $ 64.0 10% $ 58.0
End-user product revenue decreased 4% in the first quarter of 1996 over the
corresponding quarter of 1995. A factor impacting comparison between quarters
included a significant order from a single customer received during the first
quarter of 1995.
During 1995 and 1996, the Company's service revenue continued to increase in
dollar amount and as a percentage of total revenue primarily due to the
growing customer base and associated customer service/maintenance contracts,
as well as the Company's emphasis on professional services consulting. Total
service revenue was $39.6 million in the first quarter of 1996 compared to
$34.1 million in the first quarter of 1995. The increase was due to
significant revenue increases in Europe, specifically in the United Kingdom.
The Company has continued to benefit from its significant investment in
developing worldwide sales and distribution channels. International revenue
increased as a percentage of total revenue from 50% in 1995 to 53% in 1996,
the majority of which is from Europe (particularly the United Kingdom), with
the balance coming from Asia-Pacific and Canada.
COST OF SALES
(dollars in millions)
Three Months Ended
Mar. 30, Apr. 1,
1996 1995
Costs of products sold $ 38.7 $ 38.9
As a percentage of product revenue 47.7% 47.5%
Costs of service revenue $ 30.6 $ 24.5
As a percentage of service revenue 77.2% 71.8%
The factors influencing gross margins in a given period include unit volumes
(which affect economies of scale), product configuration mix, changes in
component and manufacturing costs, product pricing and the mix between product
and service revenue.
Total cost of sales as a percentage of total revenue increased both in 1996
and 1995 primarily due to product mix with lower margin professional service
increasing as a percentage of total revenue. The Company's continued
investment in growing its consulting services business contributed to the
increase of cost of service as a percentage of service revenue.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Three Months Ended
Mar. 30, % Apr. 1,
1996 Change 1995
Research and Development $ 12.3 31% $ 9.4
As a percentage of total revenue 10% 8%
Software costs capitalized $ 7.5 34% $ 5.6
The Company has continued to invest significantly in new product development
in addition to ongoing enhancements to existing products. Research and
development costs as a percentage of total revenue were approximately 8% for
1995, 1994 and 1993, increasing to 10% in the first quarter of 1996.
Consistent with its expectations and plans for 1996, management made
significant investments during the first quarter of 1996 in order to deliver
its next-generation (NUMA-Q) products into the market by the end of 1996.
Software costs capitalized increased in the first quarter of 1996 as a result
of the effect of greater emphasis on hardware development for future products.
The Company has continued its focus on software design for computing solutions
and its next-generation products, resulting in greater investments in software
development and products.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Three Months Ended
Mar. 30, % Apr. 1,
1996 Chg 1995
Selling, general and administrative $ 38.2 12% $ 34.1
As a percentage of total revenue 32% 29%
Consistent with its plans for 1996, the Company's selling, general and
administrative costs increased both in dollars and as a percentage of revenue
in the first quarter of 1996 over the corresponding quarter in 1995. The
Company has made substantial investments to strengthen its worldwide sales
force and to strategically position itself for the delivery of the NUMA-Q
product line beginning in late 1996.
INTEREST AND OTHER, NET
(dollars in millions)
Three Months Ended
Mar. 30, Apr. 1,
1996 1995
Interest, net $ 0.2 $ 0.1
Other, net (0.4) (0.7)
Provision for income taxes 0.2 2.6
Interest income in the first quarter in 1996 was primarily generated from
restricted deposits held at foreign and domestic banks, short-term investments
and cash and cash equivalents. Interest expense includes costs related to
Convertible Debentures, foreign currency hedging loans and capital lease
obligations.
Other expense consists primarily of net gains and losses on sale of assets.
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 effective tax
rate for the first quarter of 1996 was 27%, compared to 30% for the first
quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $207.2 million at March 30, 1996 compared to $214.7
million at December 30, 1995. The Company's current ratio at March 30, 1996
and December 30, 1995 was 2.5:1.
During the first quarter of 1996, cash and cash equivalents increased $6.1
million. The Company continues to invest in property and equipment ($17.2
million, net), and capitalized software ($7.5 million). Other uses of funds
were net decreases in accounts payable and other ($5.4 million), increases in
inventories ($15.2 million), net payments on notes payable ($3.2 million) and
increases in prepaid expenses ($4.1 million). Primary sources of funds were
decreases in net accounts receivables ($33.9 million), depreciation and
amortization ($14.6 million), increases in unearned revenue ($3.7 million),
increases in accrued payroll and other accrued liabilities ($2.6 million), and
stock issuance proceeds from employee stock purchases and stock option plans
($2.5 million).
The Company has a $20 million receivable sales facility with a group of banks.
At March 30, 1996 accounts receivable in the accompanying consolidated balance
sheet is net of $11.4 million received by the Company under this agreement to
sell its domestic accounts receivable.
The Company continues to maintain a $50 million revolving line of credit
agreement. The line is unsecured and extends through May 30, 1996. The line
contains certain financial covenants and prohibits the Company from paying
dividends without the lenders' consent. No borrowings were outstanding under
the line of credit as of March 30, 1996.
The Company maintains a short-term borrowing agreement with a foreign bank to
cover foreign currency exposures. Maximum borrowings allowed under the
foreign bank agreement were $55.0 million, of which $37.7 million was
outstanding at March 30, 1996 (based on currency exchange rates on such date).
The Company maintains a short-term borrowing agreement with a domestic bank as
an additional hedging facility to cover certain foreign currency exposures.
At March 30, 1996, no borrowings were outstanding under this agreement.
In addition to the above borrowing agreements, the Company maintains
miscellaneous borrowing arrangements with a foreign bank of which $.3 million
was outstanding at March 30, 1996.
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 during 1996 resulting from its operations and
planned investments in its sales force and NUMA-Q product technology.
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 of Finance and
Chief Financial Officer
Date: May 14, 1996
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
11 Statement regarding computation
of earnings per share 15
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
March 30, 1996 April 1, 1995
Weighted average number
of common shares outstanding 33,298 31,494
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 318 1,587
Weighted average of common stock
equivalent shares attributable
to convertible debentures 575 639
Total common and common
equivalent shares, assuming
full dilution 34,191 33,720
Net income $ 598 $ 5,953
Add:
Interest on convertible debentures,
net of applicable income taxes 119 133
Net income, assuming full dilution $ 717 $ 6,086
Net income per common share,
assuming full dilution (A) $ 0.02 $ 0.18
(A) In accordance with generally accepted accounting principles, fully-diluted
earnings per share may not exceed primary earnings per share. The
difference between primary and fully-diluted earnings per share is due
to rounding.
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-28-1996
<PERIOD-END> MAR-30-1996
<CASH> 105,767,000
<SECURITIES> 0
<RECEIVABLES> 147,235,000
<ALLOWANCES> 2,804,000
<INVENTORY> 76,012,000
<CURRENT-ASSETS> 343,778,000
<PP&E> 235,824,000
<DEPRECIATION> 130,177,000
<TOTAL-ASSETS> 503,698,000
<CURRENT-LIABILITIES> 136,622,000
<BONDS> 9,337,000
<COMMON> 335,000
0
0
<OTHER-SE> 354,774,000
<TOTAL-LIABILITY-AND-EQUITY> 503,698,000
<SALES> 81,109,000
<TOTAL-REVENUES> 120,745,000
<CGS> 38,653,000
<TOTAL-COSTS> 69,264,000
<OTHER-EXPENSES> 50,507,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 669,000
<INCOME-PRETAX> 0
<INCOME-TAX> 226,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 598,000
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
