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 3, 1999 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.
41,974,989 common shares were issued and outstanding as of May 4, 1999.
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - April 3, 1999 and
January 2, 1999 3
Consolidated Statements of Operations - Three months
ended April 3, 1999 and April 4, 1998 4
Consolidated Statements of Shareholders' Equity -
January 2, 1999 through April 3, 1999 5
Consolidated Statements of Cash Flows - Three months
ended April 3, 1999 and April 4, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Information with respect to quantitative and qualitative
disclosures about market risk is included under "Derivative
and Other Financial Instruments" under "Management's
Discussion and Analysis of Financial Conditions and
Results of Operations."
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 3, 1999 January 2, 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 153,455 $ 192,876
Restricted deposits 10,370 28,280
Receivables, net 214,969 221,611
Inventories 95,033 86,333
Prepaid royalties and other 37,071 23,282
Total current assets 510,898 552,382
Property and equipment, net 140,486 133,831
Capitalized software costs, net 74,098 72,469
Other assets, net 36,190 37,433
Total assets $ 761,672 $ 796,115
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,785 $ 29,908
Accounts payable and other 127,522 124,099
Accrued payroll 11,925 19,070
Unearned revenue 53,611 47,446
Income taxes payable 5,003 4,865
Current obligations under capital leases 4,754 2,320
Total current liabilities 213,600 227,708
Other accrued expenses 7,070 8,073
Long-term obligations under capital leases 7,427 7,480
Total liabilities 228,097 243,261
Shareholders' equity:
Common stock, $.01 par value, 100,000
shares authorized, 42,093 and 43,471
shares outstanding 421 435
Paid-in capital 494,567 511,169
Retained earnings 48,103 46,883
Accumulated other comprehensive income:
Foreign currency translation adjustment (9,516) (5,633)
Total shareholders' equity 533,575 552,854
Total liabilities and shareholders' equity $ 761,672 $ 796,115
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 3, 1999 April 4, 1998
Revenue:
Product $ 120,528 $ 118,445
Service 73,451 64,623
Total revenue 193,979 183,068
Costs and expenses:
Cost of products sold 77,184 62,906
Cost of service revenue 53,486 47,336
Research and development 17,934 17,064
Selling, general and administrative 46,313 49,620
Restructuring credits (998) -
Total costs and expenses 193,919 176,926
Operating income 60 6,142
Interest, net 1,456 621
Other, net 80 (934)
Income before provision for income taxes 1,596 5,829
Provision for income taxes 376 1,807
Net income $ 1,220 $ 4,022
Net income per share - basic $ .03 $ .09
Net income per share - diluted $ .03 $ .09
Shares used in the calculation
of net income per share - basic 42,961 43,184
Shares used in the calculation
of net income per share - diluted 43,495 45,395
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Foreign
Currency Total
Common Stock Paid-in Retained translation comprehensive
Shares Amount capital Earnings adjustment Total income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 2, 1999 43,471 $ 435 $511,169 $46,883 $(5,633) $552,854 $(50,246)
Common shares issued 677 7 4,362 - - 4,369
Common shares repurchased (2,055) (21) (21,117) - - (21,138)
Tax benefit of option exercises - - 153 - - 153
Net income - - - 1,220 - 1,220 1,220
Foreign currency translation adjustment - - - - (3,883) (3,883) (3,883)
Balance, April 3, 1999 (unaudited) 42,093 $ 421 $494,567 $48,103 $(9,516) $533,575 $(52,909)
</TABLE>
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,220 $ 4,022
Reconciliation of net income to net
cash and cash equivalents provided by
operating activities -
Depreciation and amortization 22,731 22,294
Restructuring charges not affecting cash 477 -
Deferred income taxes (336) (143)
Changes in assets and liabilities -
Receivables, net 6,642 101,276
Inventories (8,700) (6,138)
Prepaid royalties and other (14,332) (13,206)
Accounts payable and other 3,598 (36,338)
Accrued payroll (7,150) (10,275)
Unearned revenue 6,166 3,938
Income taxes payable 138 (15)
Other, net 232 664
Net cash provided by operating activities 10,686 66,079
Cash flow from investing activities:
Restricted deposits 17,910 1,067
Purchases of property and equipment, net (21,798) (15,985)
Capitalized software costs (10,514) (9,700)
Net cash used for investing activities (14,402) (24,618)
Cash flow from financing activities:
Notes payable, net (19,123) (1,096)
Proceeds (payments) under capital lease obligations 2,381 (495)
Stock issuance proceeds, net 4,522 8,888
Stock repurchases (21,138) -
Net cash provided (used) by financing activities (33,358) 7,297
Effect of exchange rate changes on cash (2,347) 1,395
Net increase (decrease) in cash and cash equivalents (39,421) 50,153
Cash and cash equivalents at beginning of period 192,876 133,299
Cash and cash equivalents at end of period $ 153,455 $ 183,452
</TABLE>
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 3, 1999
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 on Form 10-K for the fiscal year ended January 2, 1999.
The Company's fiscal year is based on a 52-53 week year 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.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates and
judgments made by management of the Company include matters such as
collectibility of accounts receivable, realizability of inventory and
recoverability of capitalized software, prepaid royalties and deferred tax
assets.
Reclassifications
Reclassifications have been made to amounts in certain prior years. These
changes had no impact on previously reported results of operations.
Recently Issued Accounting Standards
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133). This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. This statement is effective for fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). The Company
is currently assessing the impact that the adoption of FAS 133 will have on
its consolidated financial statements.
Accounts Receivable
At April 3, 1999, accounts receivable in the accompanying consolidated balance
sheet is net of $23 million received by the Company under its agreement to
sell its domestic accounts receivable.
Inventories
Inventories consist of the following:
(in thousands)
April 3, January 2,
1999 1999
Raw materials $ 9,828 $ 14,996
Work-in-progress 2,801 1,403
Finished goods 82,404 69,934
$ 95,033 $ 86,333
Property and Equipment
Property and equipment consist of the following:
(in thousands)
April 3, January 2,
1999 1999
Land $ 6,307 $ 6,307
Operational equipment 238,502 230,449
Furniture and office equipment 83,663 86,069
Leasehold improvements 26,297 27,498
354,769 350,323
Less accumulated depreciation (214,283) (216,492)
$ 140,486 $ 133,831
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $8.9 million and $7.8 million for the three month periods ended
April 3, 1999 and April 4, 1998, 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 $80 million. There was no
outstanding balance at either April 3, 1999 or January 2, 1999.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge to cover certain foreign currency exposures. Borrowings under the
agreement are denominated in various foreign currencies with terms of fourteen
days to three months. Proceeds from the borrowings are converted into U.S.
dollars and placed in a term deposit account with the foreign bank. At April
3, 1999, maximum borrowings allowed under the agreement were approximately
$80.5 million. The maximum borrowing limit is denominated in specified
foreign currencies and fluctuates with the change in foreign exchange rates.
Amounts outstanding were $10.4 million and $28.3 million at April 3, 1999 and
January 2, 1999, respectively.
In addition to the above borrowing agreements, the Company has entered into
certain other miscellaneous borrowing arrangements with a foreign bank. At
April 3, 1999 and January 2, 1999, $0.4 million and $1.6 million were
outstanding, respectively.
Common Stock
During 1998, the Company announced a plan to repurchase up to 4,000,000 shares
of its outstanding common stock. As of April 3, 1999, the Company has
repurchased 3,788,500 shares at an average price of $10.72 per share. On
April 27, 1999, the Board of Directors of the Company authorized the
repurchase of up to 8,000,000 shares of its outstanding common stock in
addition to the 4,000,000 shares previously authorized in 1998. From the
inception of the repurchase program in 1998 through May 4, 1999, the Company
has repurchased a total of 3,868,500 shares at an average price of $10.69 per
share.
Segment Reporting
The Company has determined that its reportable segments are those that are
based on the Company's primary basis of organization and method of internal
reporting - (1) Product, (2) Customer Services (CS), (3) Professional Services
(PS) and (4) Research and Development (R&D).
The tables below present information about reported segments for the three
months ended April 3, 1999 and April 4, 1998, respectively, and include a
reconciliation of segment activity to consolidated net income before the
provision for income taxes.
<TABLE>
Three months ended April 3, 1999:
<CAPTION>
Professional Customer Research &
Product Service Service Development Consolidated
<S> <C> <C> <C> <C> <C>
Revenue $ 120,528 $ 26,421 $ 47,030 $ 193,979
Cost of products sold 77,184 77,184
Cost of service revenue 24,781 28,705 53,486
Gross margin 43,344 1,640 18,325 63,309
R&D expenses 17,934 17,934
Selling, general & administrative 46,313
Restructuring credits (998)
Operating income 60
Interest, net 1,456
Other income, net 80
Income before provision for
income taxes $ 1,596
</TABLE>
<TABLE>
Three months ended April 4, 1998:
<CAPTION>
Professional Customer Research &
Product Service Service Development Consolidated
<S> <C> <C> <C> <C> <C>
Revenue $ 118,445 $ 21,999 $ 42,624 $ 183,068
Cost of products sold 62,906 62,906
Cost of service revenue 21,267 26,069 47,336
Gross margin 55,539 732 16,555 72,826
R&D expenses 17,064 17,064
Selling, general & administrative 49,620
Operating income 6,142
Interest, net 621
Other expense, net (934)
Income before provision for
income taxes $ 5,829
</TABLE>
Information concerning principal geographic areas is as follows:
Three Months Ended
April 3, 1999 April 4, 1998
Revenue from external customers:
United States $ 101,635 $ 82,697
United Kingdom 55,223 70,998
Other foreign 30,839 18,635
Export 6,282 10,739
Total $ 193,979 $ 183,068
April 3, 1999 January 2, 1999
Identifiable assets:
United States $ 597,044 $ 594,715
United Kingdom 104,457 123,346
Other foreign 60,171 78,054
Total $ 761,672 $ 796,115
Revenues are attributed to geographic areas based on the location of the
identifiable assets producing the revenues. Foreign revenue is that which is
produced by identifiable assets located in foreign countries while export
revenue is that which is generated by identifiable assets located in the
United States. Intercompany sales between geographic areas, primarily from
the United States to Europe, were $25.4 million and $41.6 million for the
first quarters of 1999 and 1998, respectively.
Restructuring Charges
During 1998, the Company recorded restructuring charges net of estimate
revisions totaling $61.4 million in connection with management's decision to
accelerate changes in its business model to leverage the strength of its
technology roadmap and market position. In addition, a change in the
restructuring estimate during the first quarter of 1999 resulted in a $1.0
million credit. Please refer to the discussion of restructuring costs and
current period adjustments included in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Income Taxes
The Company's general practice is to reinvest the earnings of its foreign
subsidiaries' operations, unless it would be advantageous to the Company to
repatriate the foreign subsidiaries' retained earnings. The effective tax
rate differs from the statutory tax rate principally due to the benefit from
the research tax credit and the Company's Foreign Sales Corporation.
Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
Three Months Ended Three Months Ended Three Months Ended
Apr. 3, Apr. 4, Apr. 3, Apr. 4, Apr. 3, Apr. 4,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $ 1,220 $ 4,022 42,961 43,184 $ .03 $ .09
Effect of Dilutive Securities
Stock options 347 2,104
Employee stock purchase plan 187 107
Diluted EPS
Income available to
common shareholders
+ assumed conversions $ 1,220 $ 4,022 43,495 45,395 $ .03 $ .09
</TABLE>
Significant Customers
The core business operations of the Company include the design, manufacture
and marketing of high-performance computer systems and operating environment
software. Project-oriented offerings include consulting and professional
services to help customers solve complex information technology problems. The
Company had no single customer that represented greater than 10% of total
revenue in either of the first quarters of 1999 or 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported total revenue and net income of $194.0 and $1.2
million, respectively in the first quarter of 1999 as compared to $183.1
million and $4.0 million, for the same period in 1998. Earnings for the
quarter were down in relation to the prior year owing primarily to the
Company's aggressive pricing of its mid-range NUMA-Q product lines.
Consequently, product revenue growth was virtually flat over the two quarters.
Professional and Service revenues, however, were up moderately, thus
sustaining a composite 6% growth in total revenue. International revenue was
approximately 48% of the Company's total revenue in the first quarter of 1999,
down from 55% in the same period in 1998. Overall results reflect the
Company's shift in strategic initiative to focus efforts on broadening product
offerings and expanding its distribution channels.
REVENUE/NET INCOME
Three Months Ended
(dollars in millions) April 3, % April 4,
1999 change 1998
Total Revenue $ 194.0 6% $ 183.1
Product $ 120.5 2% $ 118.4
Professional Service 26.5 20% 22.0
Customer Service 47.0 10% 42.7
US $ 101.6 23% $ 82.7
United Kingdom 55.2 (22%) 71.0
International 37.2 27% 29.4
Net Income $ 1.2 (70%) $ 4.0
PRODUCT
Competition in the hardware vendor market continues to challenge the
product segment of the business and place pressures on pricing and sales
margins. NUMA-Q product lines introduced during the quarter were priced
aggressively to compete with these downward price pressures in the market. As
a result, product revenue growth for the first quarter of 1999 increased
narrowly at a rate of 2% over the same period in 1998. Normal seasonal
softness also contributed to the difficulties in achieving sustained revenue
growth along with significant decreases in international revenues,
particularly from the Company's United Kingdom operations.
SERVICE
Revenues from customer and professional service segments increased
approximately 10% and 20%, respectively, in the first quarter of 1999 over the
same period in 1998. Steady increases in the number of installed customer
systems under service contracts as well as continued growth in professional
service opportunities, were both factors in the overall solid revenue growth
for these segments during the quarter.
The following table sets forth certain operating data as a percentage
of total revenue:
Three Months Ended
April 3, April 4,
1999 1998
Revenue:
End-user products 62% 62%
OEM products - 3
Service 38 35
Total revenue 100 100
Cost of product and service 67 60
Gross profit 33 40
Operating expenses:
Research and development 9 9
Selling, general and administrative 24 27
Rounding - 1
Restructuring charges (credits) - -
Total operating expenses 33 37
Operating income - 3
Interest and other, net 1 -
Income before provision
for income taxes 1 3
Provision for income taxes - 1
Net income 1% 2%
GROSS MARGINS
Three Months Ended
April 3, April 4,
1999 1998
Product 36% 47%
Service 27% 27%
The factors influencing gross margins in a given period include unit
volumes (which affect economies of scale), product configuration mix
(including the amount of third party products), 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 in the
first quarter of 1999 over the same period in 1998. Product cost of sales as
a percentage of revenue continues to be negatively impacted by competitive
pricing pressures and the impact of product transitioning. Specifically, the
Company's margins were impacted by sales of Pentium Pro-based NUMA-Q products
subjected to greater discounting in order to transition to the new Pentium II
Xeon-based NUMA-Q product lines. Also impacting the Company's declining
margins were competitive pricing on new products as well as volume of sales of
third-party products, which generally yield lower margins than the Company's
products.
Service segment gross margins maintained a flat rate for the first
quarter of 1999 when compared to the same period in 1998. Margin rates for
services were primarily the result of the impact of cost control initiatives
and other efficiencies achieved by experienced professionals in the service
segments.
RESEARCH AND DEVELOPMENT
Three Months Ended
(dollars in millions) April 3, % April 4,
1999 change 1998
Research and development expense $17.9 5% $17.1
As a percentage of total revenue 9% 9%
Software costs capitalized $10.4 7% $ 9.7
Research and development expense dollars increased slightly in the first
quarter of 1999 in comparison with the same period in 1998. Expense as a
percentage of total revenue, however, was maintained at a rate of 9%. During
the first quarter of 1999, the Company continued to make investments in new
software development for its next-generation of NUMA-Q products, including
further development of software for the Company's NUMA-Q 1000 mid-range
product line as well as enhancements to NUMACenter architecture which runs
both Unix and Windows NT applications. In addition, development work began
towards next-generation products to be based on 64-bit architecture.
SELLING, GENERAL AND ADMINISTRATIVE
Three Months Ended
(dollars in millions) April 3, % April 4,
1999 change 1998
Selling, general and administrative $46.3 (7%) $49.6
As a percentage of revenue 24% 27%
First quarter 1999 selling, general and administrative (SG&A) expenses
decreased $3.3 million over the same period in 1998. Factors contributing to
the decrease include the restructure during the second quarter of 1998 with
its resulting impact to worldwide headcount, as well as continued cost control
measures.
RESTRUCTURING CHARGES
During 1998, the Company recorded net restructuring charges totaling
$61.4 million in connection with management's decision to accelerate changes
in its business model to leverage the strength of its technology roadmap and
market position. In addition, a change in the restructuring estimate during
the first quarter of 1999 resulted in a $1.0 million credit. It is
anticipated that the restructuring actions taken in 1998 will yield operating
cost reductions of approximately $25 million during 1999.
Remaining cash outlays expected from the restructuring consist of $14.6
million for facilities and $0.2 million relating to employee termination
costs. Expenditures and adjustments totaling ($1.4) million for facilities
were made for the costs of excess space incurred during the period.
The following table presents a summary of the activity in the
restructuring accrual during the first quarter of 1999 and the resulting net
balance sheet amounts as of April 3, 1999. The balance of accrued
restructuring costs of $14.8 million at April 3, 1999 is included in Accounts
Payable and Other in the accompanying balance sheet.
(dollars in millions)
<TABLE>
<CAPTION>
First
Balance at Quarter Write-offs/ Balance at
January 2, 1999 Expenditures Adjustments April 3, 1999
<S> <C> <C> <C> <C>
Employee termination and
related costs $ 0.2 $ - $ - $ 0.2
Prepaid software licenses 0.3 - (0.3) -
Facilities 16.0 (1.3) (0.1) 14.6
Capital assets - - - -
Capitalized software - - - -
Goodwill - - - -
Other assets - - - -
$ 16.5 $ (1.3) $ (0.4) $ 14.8
</TABLE>
INTEREST AND OTHER, NET
(dollars in millions)
Three Months Ended
April 3, % April 4,
1999 change 1998
Interest income $ 2.1 11% $ 1.9
Interest expense (0.6) (54%) (1.3)
Other, net 0.1 (111%) (0.9)
Interest income is primarily generated from invested cash and cash
equivalents and restricted deposits held at foreign and domestic banks.
Interest expense includes costs related to foreign currency hedging loans,
interim short-term borrowings and capital lease obligations. The decrease in
interest expense in the first quarter of 1999 over the same period in 1998 is
attributed to the decrease in the use of the Company's short-term borrowing
agreement in 1999 to manage foreign currency exposures.
Other income (expense) consists primarily of net realized and unrealized
foreign exchange gains and losses. Other net income of $0.1 million in the
first quarter of 1999 is a result of effective hedge activity during the
quarter.
INCOME TAXES
The Company provided $375,000 for income taxes in the first quarter of 1999
based on a net profit before tax of $1.6 million. The difference between the
statutory rate and the effective tax rate of 23.5% for the first quarter of 1999
is principally due to the benefit from the research tax credit and the
Company's Foreign Sales Corporation.
The effective rate of 23.5% for the first quarter of 1999 compares to an
effective tax rate benefit of 31.0% for 1998. The change in the tax rate is due
primarily to permanent tax benefits such as the Foreign Sales Corporation and
research and experimentation credits which do not fluctuate based on differences
in pre-tax earnings (losses) year over year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $297.3 million at April 3, 1999 compared to $324.7
million at January 2, 1999. The Company's current ratio was 2.4:1 at both
April 3, 1999 and January 2, 1999.
Cash and cash equivalents decreased $39.4 million during the first quarter
of 1999. The decrease resulted primarily from cash used in financing
activities, specifically, payments of $19.1 million for notes payable and $21.1
million for stock repurchases. Investments during the quarter in property and
equipment and capitalized software approximated $21.8 million and $10.5 million,
respectively.
The Company has a $40 million receivable sales facility with a group of
banks. At April 3, 1999, accounts receivable in the accompanying consolidated
balance sheet is net of $23 million received by the Company under this
agreement to sell its domestic accounts receivable.
The Company maintains an $80 million revolving line of credit agreement.
The line is unsecured and extends through April 3, 2001. The line contains
certain financial covenants and prohibits the Company from paying dividends
without the lenders' consent. At April 3, 1999, there was no outstanding
balance under the line of credit.
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 $80.5 million, of which $10.4 million was
outstanding at April 3, 1999 (based on currency exchange rates on such date).
The Company also maintains a miscellaneous borrowing arrangement with a
foreign bank. At April 3, 1999, $0.4 million was outstanding under this
agreement.
Management expects that current funds from operations and the bank lines
of credit will provide adequate resources to meet the Company's anticipated
operational cash requirements for at least the next twelve months.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
software programs and microcircuitry that have date-sensitive features may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 Issue affects the Company's internal systems as well
as any of the Company's products that include date-sensitive software.
Sequent is executing a company-wide Year 2000 Readiness Program (Program)
for the Company's products, on-going operations (operations), mission-critical
information systems (IS) and key suppliers (suppliers). While the majority of
business critical century date change issues were identified and remediated
before the end of 1998, ongoing remediation, testing and contingency planning
is expected to continue throughout 1999. The Year 2000 Readiness Program is
organized into six major phases: 1) exposure inventory, 2) risk assessment,
3) prioritization, 4) remediation (either by repair or replacement),
5) contingency planning and 6)testing/verification. These stages have been
largeley completed for the Company's standard products and are in progress for
ongoing operational issues as well as critical suppliers. The Program
organization consists of a Steering Committee made up of Company executives, a
Year 2000 taskforce representing each of the Company's major departments and
a Year 2000 Project Management Office. In addition, several Focus Teams have
been set up to deal with cross-functional issues related to customers, partners,
suppliers and major business process contingency plans. Operational program
work is being done by each of the Company's departments with oversight by the
Year 2000 Program Office. Operational program work includes the Company's
critical business computer applications, data and infrastructure. Mission-
critical third party service and equipment suppliers are being contacted via
written inquiry, as well as direct discussion, to understand and mitigate
potential risks.
The current status of the Company's Year 2000 Readiness Program is as
follows:
The Company's current line of hardware products, which are designed and
manufactured to the Company's specifications, are Year 2000 ready if utilized
with the appropriate version of the operating system software. The Company
cannot ensure that its software products do not contain undetected problems
associated with Year 2000 compliance. Such problems, should they occur, may
result in material adverse effects on future operating results. Of the
Company's eight Operations remediations programs, five have completed the
remediation phase and three are still in process. Among the latter, remediation
status ranges from 40% to 90% complete. Identified business critical exposures
are expected to be resolved by the second quarter of 1999. The Company's
Supplier readiness program is managed through its Global Sourcing and
Procurement group. Of those suppliers identified as business critical, all
have informed the Company that they have remediation plans in place and
completion is planned on or before the end of the second quarter of 1999. The
Company's Information Systems group is remediating both critical IS applications
and IT infrastructure. Of the identified enterprise level business critical
appliations, 100% have now been remediated. All IS-manged applications,
regardless of business criticality, will be remediated, replaced or retired,
worldwide. Remediation of the Company's worldwide IT infrastructure (networks,
servers and PCs) is 90% complete. Any other IT exposures, such as workgroup
level software applications, are being identified and dealt with as part of
individual department Y2K programs.
The total cost of the Program is currently estimated to be approximately
$10 million and is being funded through operating cash flows. The Company is
expensing costs associated with identification and resulting changes to these
systems, but does not expect the amounts to have a material effect on its
financial position or results of operations. These costs are not incremental
as the Company's internal IS development resources were re-directed solely to
the Year 2000 remediation effort during 1998. In 1999, resources required for
the remediation effort have not materially affected new development projects
scheduled and budgeted. As of April 3, 1999, the total amount expended on the
Program was approximately $6 million, with the majority of the costs
representing hardware and labor expenditures.
The Company has classified potential worst case scenarios as either 1)
Year 2000 related failures in internal business critical information system
applications or 2) the development of service or product supply difficulties
by business critical suppliers. These circumstances are not considered
probable, but have been reviewed as part of the Company's due diligence
efforts. For Year 2000 type failures in internal applications (scenario 1),
business critical applications have been identified, assessed as to possible
business impact of their failure and are being repaired, upgraded or replaced
based on the severity of potential impact. For each of these applications, a
business continuity contingency plan is expected to be in place by the end of
the first half of 1999. For service and product supplier type failures, an
inventory has been completed and the business critical suppliers have been
identified. A variety of risk reduction strategies have commenced, including
but not limited to, developing possible alternative suppliers, acquiring
safety stock and establishing enhanced testing programs and process audits.
For the identified business critical suppliers, the Company expects to
establish a contingency plan by mid 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be converted timely or
that any such failure to convert by a vendor, customer or another company
would not have an adverse effect on the Company's systems or results of
operations.
EURO CONVERSION
The European Economic and Monetary Union (EMU) and a new currency, the
"Euro", went into effect in Europe on January 1, 1999. This is a significant
and critical element in the European Union's (EU) plan to blend the economies
of the EU's member states into one integrated market, with unrestricted and
unencumbered trade and commerce across borders. Eleven European countries
(the "participating countries") of the fifteen member EU countries will
initially participate (Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal and Spain). Other member states
(Denmark, Greece, the United Kingdom and Sweden) may join in the years to
come. The Euro will trade on currency exchanges and the legacy currencies
will remain legal tender for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, public and private companies
may pay for goods and services using either the Euro or the participating
country's legacy currency.
The Company is currently determining the necessary modifications to its
internal systems to accommodate Euro-denominated transactions and is assessing
the business implications of the conversion to the Euro, including long-term
competitive implications and the effect of market risk with respect to
financial instruments. The Company does not believe the financial impact of
these matters, if any, will be material to its results of operations,
financial condition or cash flows. However, the Company will continue to
assess the impact of Euro conversion issues as the applicable accounting, tax,
legal and regulatory guidance evolves.
DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
Risk Management Strategy
In the normal course of business, Sequent enters into various financial
instruments, including derivative financial instruments, for purposes other
than trading. Derivative financial instruments are not entered into for
speculative purposes. These instruments primarily consist of accounts
receivable, short-term investments, short-term debt, forward exchange
contracts and option contracts which are used to reduce Sequent's exposure to
currency exchange rates. At inception, foreign exchange contracts are
designated as hedges of firmly committed or forecasted transactions. These
transactions are generally expected to be completed in less than one year.
The forward contracts and options generally mature within twelve months. The
majority of Sequent's foreign exchange forward contracts are to exchange
Japanese Yen, Australian Dollars and New Zealand Dollars. The option
contracts are no-cost collars and exchange British Pounds and Korean Won.
Exposure to credit risk is managed through credit approvals and
monitoring procedures, and management believes that the reserves for losses
are adequate.
The counterparties to these financial instruments are substantial and
creditworthy corporations, state agencies and multinational commercial banks.
In management's opinion the risk of counterparty nonperformance associated
with these instruments is not considered to be significant.
Interest Rate Risk
The Company routinely invests in short-term financial instruments within
the parameters of its investment policy with maturities of less than three
months. The instruments pay a fixed rate of return. These instruments are
subject to overall market interest rate sensitivity upon maturity.
As part of the Company's foreign currency hedging activities, the Company
maintains short-term loans with a multinational commercial bank. These loans
are for durations ranging from fifteen days to three months and carry a fixed
interest rate. Upon maturity, these instruments are subject to overall market
interest rate sensitivity.
The Company also maintains two long-term leases with variable interest
rates based on LIBOR (London Inter Bank Offer Rate). The table below
illustrates the effect on lease payments of a +/-10% change in the underlying
base rate:
1999 Forecast Rental Payments
Base Rate $1,957K
Base Rate plus 10% $2,072K
Base Rate less 10% $1,748K
Foreign Exchange Risk
The table below presents foreign exchange contracts, options and debt at
April 3, 1999 and January 2, 1999 (in thousands). The notional amounts
represent agreed upon amounts on which calculations of dollars to be exchanged
are based, and are an indication of the extent of Sequent's involvement in
such instruments. They do not represent amounts exchanged by the parties and,
therefore, are not a measure of the instruments.
(in thousands)
Contract Carrying Amount Fair Value
Amount Asset Liability Asset Liability
April 3, 1999
FX Forward Contracts $ 8,975 $ - $ - $ 8,975 $ 8,975
FX Options (net) 97,570 - - 1,439 71
Debt 10,370 - 10,370 - 10,370
January 2, 1999
FX Forward Contracts $ 8,086 $ - $ - $ 8,086 $ 8,086
FX Options (net) 129,100 - - 135 123
Debt 28,244 - 28,244 - 28,244
Fair values of financial instruments represent estimates of possible
value that may not be realized in the future.
EUROPEAN SALES OPERATIONS
In January 1999, the Company signed a strategic partnership agreement
with Comparex, one of Europe's leading suppliers of complete solutions for IT
infrastructures. The partnership, which was effective March 1, 1999, allows
Comparex to take responsibility for Sequent's sales activities in Austria,
Belgium, Germany, the Netherlands, Portugal, Spain and Switzerland. The
Company's operations in the United Kingdom and France geographies, which
represent the majority of the Company's European business, were not included
in the partnership agreement. The majority of the Company's personnel in the
countries included under the agreement became employees of Comparex with the
exception of certain individuals retained to manage and support the
relationship with Comparex and to provide specialist skills and expertise.
The agreement provided for the sale of certain assets to Comparex at recorded
net book value. Total book value of the assets sold during the first quarter
of 1999 was approximately $9 million. Management anticipates that the
relationship with Comparex will positively impact both revenues and operating
income in 1999 and 2000 in these geographies.
FORWARD-LOOKING STATEMENTS
Information in this report that is not historical information, including
information regarding development and release of new products, anticipated
savings resulting from the restructure, year 2000 issues and the Company's
relationship with Comparex, constitutes forward-looking statements that
involve a number of risks and uncertainties. A number of factors could cause
actual results to differ materially from the forward-looking statements. New
product development may be delayed or unsuccessful due to technical
difficulties encountered, resource constraints and other reasons. Factors
that affect year 2000 issues are set forth above under the section titled
"Impact of the Year 2000 Issue". Anticipated benefits from the arrangement
with Comparex could be adversely affected if Comparex does not sell Sequent
products at the expected levels. Additional information regarding factors
that may affect the Company's future results is set forth at the end of Item 1
in the Company's Annual Report on Form 10-K for the year ended January 2,
1999. The Company's forward-looking statements apply only as of the date
made. The Company undertakes no obligation to publicly release the results of
any revisions to forward-looking statements which may be made to reflect
events or circumstances after the date made or to reflect the occurrence of
unanticipated events.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Statement regarding computation of earnings per share
(b) Exhibit 27 - Financial Data Schedule
(c) The Company filed a report on Form 8-K, dated March 26, 1999,
reporting under Item 4 the approval of the Audit Committee of the
Board of Directors to dismiss PricewaterhouseCoopers LLP as its
independent auditors. The Company is in the process of selecting new
independent auditors for its current fiscal year.
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.
/S/ Robert S. Gregg
Robert S. Gregg
Sr. Vice President of Finance and Legal and
Chief Financial Officer
Date: May 17, 1999
Exhibit 11
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT SHOWING CALCULATION
OF THE BASIC AND DILUTED
EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
Three Months Ended Three Months Ended Three Months Ended
Apr. 3, Apr. 4, Apr. 3, Apr. 4, Apr. 3, Apr. 4,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $ 1,220 $ 4,022 42,961 43,184 $ .03 $ .09
Effect of Dilutive Securities
Stock options 347 2,104
Employee stock purchase plan 187 107
Diluted EPS
Income available to
common shareholders
+ assumed conversions $ 1,220 $ 4,022 43,495 45,395 $ .03 $ .09
</TABLE>
Exhibit 27
SEQUENT COMPUTER SYSTEMS, INC.
FINANCIAL DATA SCHEDULE
APRIL 3, 1999
Amount Item Number Item Description
153,455,000 5-02 (1) Cash and Cash Items
- 5-02 (2) Marketable Securities
218,555,000 5-02 (3) (a) (1) Notes and Accounts Receivable-Trade
3,586,000 5-02 (4) Allowances for Doubtful Accounts
95,033,000 5-02 (6) Inventory
510,898,000 5-02 (9) Total Current Assets
354,769,000 5-02 (13) Property, Plant and Equipment
214,283,000 5-02 (14) Accumulated Depreciation
761,672,000 5-02 (18) Total Assets
213,600,000 5-02 (21) Total Current Liabilities
- 5-02 (22) Bonds, Mortgages and Similar Debt
- 5-02 (28) Preferred Stock - Mandatory Redemption
- 5-02 (29) Preferred Stock - No Mandatory Redemption
421,000 5-02 (30) Common Stock
494,567,000 5-02 (31) Other Shareholders Equity
761,672,000 5-02 (32) Total Liabilities and Stockholders' Equity
120,528,000 5-03 (b) 1(a) Net Sales of Tangible Products
193,979,000 5-03 (b) 1 Total Revenue
77,184,000 5-03 (b) 2(a) Cost of Tangible Goods Sold
193,919,000 5-03 (b) 2 Total Costs and Expenses Applicable to
Sales and Revenues
80,000 5-03 (b) 3 Other Costs and Expenses
- 5-03 (b) 5 Provision for Doubtful Accounts and Notes
418,000 5-03 (b) 8 Interest and Amortization of Debt Discount
1,596,000 5-03 (b) (10) Income Before Taxes and Other Items
376,000 5-03 (b) (11) Income Tax Expenses
1,220,000 5-03 (b) (14) Income/Loss Continuing Operations
- 5-03 (b) (15) Discontinued Operations
- 5-03 (b) (17) Extraordinary Items
- 5-03 (b) (18) Change in Accounting Principle
1,220,000 5-03 (b) (19) Net Income or Loss
0.03 5-03 (b) (20) Earnings Per Share - Basic
0.03 5-03 (b) (20) Earnings Per Share - Diluted
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> JUN-28-1997
<CASH> 54,688
<SECURITIES> 0
<RECEIVABLES> 240,526
<ALLOWANCES> 3,287
<INVENTORY> 82,262
<CURRENT-ASSETS> 454,279
<PP&E> 322,162
<DEPRECIATION> 183,000
<TOTAL-ASSETS> 676,862
<CURRENT-LIABILITIES> 261,978
<BONDS> 13,711
0
0
<COMMON> 351
<OTHER-SE> 326,309
<TOTAL-LIABILITY-AND-EQUITY> 676,862
<SALES> 154,422
<TOTAL-REVENUES> 210,653
<CGS> 78,590
<TOTAL-COSTS> 120,788
<OTHER-EXPENSES> 76,059
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 1,541
<INCOME-PRETAX> 0
<INCOME-TAX> 3,991
<INCOME-CONTINUING> 8,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,597
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
