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 October 1, 1994 or
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission file number: 0-15627
SEQUENT COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0826369
(State or other jurisdiction (I.R.S. Employer
of organization or incorporation) Identification Number)
15450 S.W. Koll Parkway
Beaverton, Oregon 97006-6063
(Address of principal executive offices, including zip code)
(503) 626-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
31,151,967 common shares were issued and outstanding as of October 28, 1994.
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - October 1, 1994
and January 1, 1994 3
Consolidated Statements of Operations -
Three months and nine months ended
October 1, 1994 and October 2, 1993 4
Consolidated Statements of Changes In
Shareholders' Equity - December 28, 1991
through October 1, 1994 5
Consolidated Statements of Cash Flows -
Nine months ended October 1, 1994 and
October 2, 1993 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 October 1, 1994.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands, except per share amounts)
Oct. 1, 1994 Jan. 1, 1994
ASSETS
Current assets:
Cash and cash equivalents $ 27,945 42,986
Restricted deposits 53,443 32,279
Investments -- 5,000
Receivables, net 132,180 115,561
Inventories 48,279 45,865
Prepaid royalties and other 14,080 11,587
Total current assets 275,927 253,278
Property and equipment, net 96,414 86,309
Capitalized software costs, net 37,246 32,217
Intangible assets and other, net 3,084 3,620
Total assets $412,671 $375,424
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $53,443 $32,279
Accounts payable and other 48,911 64,223
Accrued payroll 10,604 10,903
Unearned revenue 9,947 7,123
Income taxes payable 2,327 1,015
Current obligations under capital leases 1,311 3,425
Current portion of long-term debt 43 154
Total current liabilities 126,586 119,122
Other accrued expenses 933 1,908
Long-term obligations under capital leases 495 654
Long-term debt 10,358 10,252
Total liabilities 138,372 131,936
Shareholders' equity:
Common stock, $.01 par,
31,084 and 30,245 shares outstanding 311 302
Paid-in capital 273,665 265,910
Retained earnings (deficit) 5,487 (15,262)
Foreign currency translation adjustment (5,164) (7,462)
Total shareholders' equity 274,299 243,488
Total liabilities and shareholders'
equity $412,671 $375,424
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 Nine Months Ended
Oct. 1, 1994 Oct. 2, 1993 Oct. 1, 1994 Oct. 2, 1993
Revenue:
Product revenue $93,235 $72,599 $247,248 $196,987
Service and other revenue 28,012 18,540 76,667 52,518
Total revenue 121,247 91,139 323,915 249,505
Costs and expenses:
Cost of products sold 47,477 35,162 122,210 91,253
Cost of service and other revenue 19,449 12,526 53,788 35,535
Research and development 9,383 7,679 25,686 21,299
Selling, general and administrative 34,235 30,358 97,532 89,463
Total costs and expenses 110,544 85,725 299,216 237,550
Operating income 10,703 5,414 24,699 11,955
Interest, net (28) (254) (820) (1,190)
Other, net (256) (606) 279 (1,646)
Income before provision for
income taxes 10,419 4,554 24,158 9,119
Provision for income taxes 1,545 615 3,409 1,513
Net income $ 8,874 $3,939 $20,749 $7,606
Net income per share $0.28 $0.13 $0.65 $0.25
Weighted average number of common
and common equivalent shares
outstanding 32,172 31,047 31,723 30,577
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - Unaudited
(in thousands)
Foreign
Retained Currency
Preferred Stock Common Stock Paid-in Earnings Trans-
Share Amount Shares Amount Capital (Deficit) lation Total
Balance, December 28, 1991 1,500 $15 20,603 $206 $172,204 $(22,171) $(793) $149,461
Common shares issued,
net of repurchases -- -- 1,847 19 13,823 -- -- 13,842
Net income -- -- -- -- -- 14,433 -- 14,433
Foreign currency
translation adjustment -- - - - - - (5,234) (5,234)
Balance, January 2, 1993 1,500 15 22,450 225 186,027 (7,738) (6,027) 172,502
Common shares issues,
net of repurchases -- -- 4,795 47 79,883 -- -- 79,930
Conversion of preferred
stock (1,500) (15) 3,000 30 -- -- -- 15
Net income -- -- -- -- -- (7,524) -- (7,524)
Foreign currency
translation adjustment -- -- -- -- -- -- (1,435) (1,435)
Balance, January 1, 1994 -- -- 30,245 302 265,910 (15,262) (7,462) 243,488
Common shares issued,
net of repurchases -- -- 83 7,755 - - 7,764
Net income -- -- -- -- -- 20,749 -- 20,749
Foreign currency
translation adjustment -- -- -- -- -- -- 2,298 2,298
Balance, October 1, 1994 -- $ - 31,084 $ 11 $273,665 $5,487 $(5,164) $274,299
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Nine Months Ended
Oct. 1, 1994 Oct. 2, 1993
Operating activities:
Net income $ 20,749 $ 7,606
Reconciliation of net income to net
cash provided by operating activities -
Depreciation and amortization 32,852 28,856
Changes in assets and liabilities -
Receivables, net (16,619) (17,560)
Inventories (2,414) (16,536)
Prepaid royalties and other (1,671) (1,907)
Accounts payable and other (14,906) 7,494
Accrued payroll (299) (2,429)
Unearned revenue 2,824 903
Income taxes payable 1,312 73
Deferred income taxes (541) 311
Other, net (853) (3)
Net cash provided by operating activities 20,434 6,808
Investing activities:
Restricted deposits (21,164) (126)
Investments, net 5,000 (10,000)
Purchases of property and equipment, net (33,890) (28,413)
Capitalized software costs (14,231) (15,768)
Foreign currency translation 2,298 (405)
Other, net (138) 115
Net cash used for investing activities (62,125) (54,597)
Financing activities:
Notes payable, net 21,164 2,982
Payments under capital lease obligations (2,273) (2,112)
Long-term debt, net (5) (1,032)
Stock issuance proceeds, net 7,764 68,716
Net cash provided by financing activities 26,650 68,554
Net increase (decrease) in cash and
cash equivalents (15,041) 20,765
Cash and cash equivalents at
beginning of period 42,986 14,365
Cash and cash equivalents at
end of period $ 27,945 $ 35,130
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 1994
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
annual report and Form 10-K for the fiscal year ended January 1, 1994.
The Company's fiscal year is based on a 52-53 week calendar ending the
Saturday closest to December 31. The accompanying consolidated financial
statements include the accounts of Sequent Computer Systems, Inc. and its
wholly owned subsidiaries (the Company or Sequent). All significant
intercompany accounts and transactions have been eliminated. The results for
interim periods are not necessarily indicative of the results for the entire
year.
Accounts Receivable
In July 1994, the Company entered into a two year agreement with a group of
banks to sell, without recourse, undivided ownership interests in a revolving
pool consisting of substantially all of the Company's domestic accounts
receivable for a maximum of $20 million. At October 1, 1994, accounts
receivable in the accompanying consolidated balance sheet is net of $8 million
received by the Company under this agreement.
Inventories
Inventories consist of the following:
(in thousands)
Oct. 1, Jan. 1,
1994 1994
Raw Materials $ 7,143 $ 5,011
Work in Process 4,165 7,743
Finished Goods 36,971 33,111
$48,279 $45,865
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Oct. 1, Jan. 1,
1994 1994
Land $ 5,037 $ 5,037
Operational Equipment 115,599 95,895
Furniture and Office Equipment 53,317 46,643
Leasehold Improvements 11,799 11,193
185,752 158,768
Less Accum. Depr. & Amort. 89,338 72,459
$ 96,414 $ 86,309
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $3.4 million and $9.2 million for the three month and nine month
periods ended October 1, 1994, respectively. Amortization for the same periods
in 1993 was $2.9 million and $8.5 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 $2.8 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 $700,000 for the third quarter and
$4.7 million for the first nine months of 1994.
Notes Payable
The Company has an unsecured line of credit agreement with a group of banks
which provides short-term borrowings of up to $30 million (reduced in the
second quarter of 1994 from $50 million). No borrowings were outstanding at
October 1, 1994.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge to cover certain foreign currency exposures. During July 1994, the
Company re-negotiated the agreement to a maximum of approximately $55 million
and extended the agreement through July 1995. At October 1, 1994, borrowings
of $43.1 million were outstanding under this agreement.
In July 1994, the Company entered into an agreement with a domestic bank for
an additional hedging facility to cover certain foreign currency exposures.
Proceeds from the borrowings are converted into U.S. dollars and placed in a
term deposit account. The agreement is for a maximum of $10 million, excluding
foreign currency gain or loss fluctuations, and expires December 31, 1994.
At October 1, 1994, borrowings of $10.3 million were outstanding under this
agreement.
Income Taxes
Effective the beginning of fiscal 1992, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes" (FAS
109). The effective tax rate differs from the statutory tax rate principally
due to tax benefits from the Company's foreign sales corporation and tax
benefits related to the utilization of net operating loss carryforwards which
the Company has available.
Earnings Per Share
See Exhibit 11 for the computation of average shares outstanding and earnings
per share.
Significant Customers
The Company has no single customer that represents greater than 10% of total
revenue for the quarter and nine months ending October 1, 1994. Sales to
Unisys Corporation were $4.8 million for the third quarter and $17.1 million
for the first nine months of 1993.
Geographic Segment Information
Export and foreign revenue was $60.4 million (50% of total revenue) for the
three months ended October 1, 1994 and $154.3 million (48% of total revenue)
for the nine months then ended. Export and foreign revenue was $36.4 million
and $106.0 million (40% and 42% of total revenue, respectively) for the
corresponding periods in 1993. The Company's United States operations
generated operating income of $10 million for the three months ended October 1,
1994 and $21.1 million for the nine months then ended. Foreign operations
generated operating income of $700,000 and $3.6 million during the
corresponding periods in 1994. Comparable operating income for the third
quarter and first nine months of 1993 were $5.9 million and $13.3 million for
U.S. operations. Foreign operations generated losses of $500,000 and $1.4
million during the corresponding periods in 1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OCTOBER 1, 1994
GENERAL
Total revenue was $121.2 million in the third quarter of 1994 compared to
$91.1 million in the third quarter of 1993. Total revenue was $323.9 million
in the first nine months of 1994 compared to $249.5 million in the first nine
months of 1993. Net income was $8.9 million in the third quarter of 1994
compared to $3.9 million in the third quarter of 1993. Net income was $20.7
million in the first nine months of 1994 compared to $7.6 million in the first
nine months of 1993. The Company's total revenue and net income for the third
quarter and first nine months of 1994 have benefited from the Company's
continuing success in managing the Company's transition from platform vendor
to provider of open systems, architecture and professional services as well as
continued success in systems services business while at the same time keeping
selling, general and administrative and other expenses to modest increases
over 1993.
REVENUE
(dollars in millions)
Three Months Ended Nine Months Ended
Oct. 1, % Oct. 2, Oct. 1, % Oct. 2,
1994 Chg 1993 1994 Chg 1993
End-user product revenue $ 88.0 30% $67.8 $ 26.1 26% $179.6
Service and other revenue 28.0 51% 18.5 76.7 46% 52.5
Total end-user revenue 116.0 34% 86.3 302.8 30% 232.1
OEM product revenue 5. 8% 4.8 21.1 21% 17.4
Total revenue $ 121.2 33% 91.1 $ 323.9 30% 249.5
Export and Foreign Revenue $ 60.4 66% $ 36.4 $ 154.3 46% $ 106.0
End-user product revenue for the third quarter and first nine months of 1994
improved over the corresponding quarter and nine months of 1993 due to strong
results from the Western United States operations and Europe.
Service and other revenue continued to benefit from the growing installed
customer base and increases in professional services. OEM product is
substantially sales to Unisys Corporation.
Export and foreign revenue was 50% of total revenue in the third quarter and
48% of total revenue in the first nine months of 1994 and 40% and 42% of total
revenue in the corresponding quarter and nine months of 1993. The increase in
export and foreign revenue as a percentage of total revenue in the third
quarter and first nine months of 1994 compared to the corresponding periods in
1993 was due to significant revenue increases in Europe.
COST OF SALES
(dollars in millions)
Three Months Ended Nine Months Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Total cost of goods sold $ 66.9 $ 47.7 $ 176.0 $ 126.8
As a percentage of
total revenue 55% 52% 54% 51%
Total cost of goods sold as a percentage of total revenue increased in the
third quarter and first nine months of 1994 compared to the corresponding
periods of 1993 primarily due to product mix with lower margin service and
other revenue increasing as a percentage of total revenue, product pricing
pressures and lower margin third party pass through product.
RESEARCH AND DEVELOPMENT
(dollars in millions)
Three Months Ende Nine Months Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Research and Development $ 9.4 $ 7.7 $ 25.7 $ 21.3
As a percentage of
total revenue 8% 8% 8% 9%
Software costs capitalized $ 4.9 $ 5.4 $ 14.2 $ 15.8
Research and development costs remained relatively constant as a percentage of
total revenue comparing both the third quarter and first nine months of 1994
and 1993. Research and development costs include continued investment in new
product development and enhancements to existing products.
Software costs capitalized decreased in the third quarter and first nine
months of 1994 due to greater emphasis on hardware development for future
products, which costs are expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions)
Three Months Ended Nine Months Ended
Oct. 1, % Oct. 2, Oct. 1, % Oct. 2,
1994 Chg 1993 1994 Chg 1993
Selling, general and administrative $ 34.2 13% $ 30.4 $ 97.5 9% $ 89.5
As a percentage of total revenue 28% 33% 30% 36%
Selling, general and administrative costs increased 13% and 9% in the third
quarter and first nine months of 1994, respectively, compared to the
corresponding periods in 1993. Selling, general and administrative costs
decreased as a percentage of total revenue in the third quarter and first nine
months of 1994 compared to the corresponding periods in 1993 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 $2.8 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 $0.7 million for the third quarter
and $4.7 million for the first nine months of 1994.
INTEREST AND OTHER, NET
(dollars in millions)
Quarter Ended Nine Months Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1994 1993 1994 1993
Interest, net $ (0.0) $ (0.3) $ (0.8) $ (1.2)
Other, net (0.3) (0.6) 0.3 (1.6)
Provisions for income taxes 1.5 0.6 3.4 1.5
Interest income in the third quarter and first nine months of 1994 and 1993
was primarily generated from deposits related to the proceeds of borrowings
related to the foreign currency hedge agreements and, in 1993, the investment
of proceeds from the February 1993 common stock offering.
Interest expense in the third quarter and first nine months of 1994 and 1993
represents charges related to the Company's capital lease obligations, long-
term debt and borrowings under the short-term borrowing agreement to cover
certain foreign currency exposures.
Other, net primarily represents effects of foreign currency transactions and
other miscellaneous non-operating income and expenses.
The provision for income taxes in the third quarter and first nine months of
1994 includes benefits related to the utilization of net operating loss
carryforwards. The Company has unused net operating loss carryforwards which
are available to reduce future income taxes expense and income taxes payable.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $149.3 million at October 1, 1994 from $134.2
million at January 1, 1994. The Company's current ratio at October 1, 1994
and January 1, 1994 was 2.2:1 and 2.1:1, respectively.
For the first nine months of 1994, cash and cash equivalents decreased $15.0
million. The Company continues to invest in property and equipment ($33.9
million) and capitalized software ($14.2 million). Other uses of funds were
increases in net receivables ($16.6 million), increases in inventories ($2.4
million), and reduction in accounts payable and other ($14.9 million).
Primary sources of funds were net income and depreciation and amortization
($53.6 million), reductions in investments ($5.0 million) and stock issuance
proceeds from employee stock purchase and stock option plans ($7.8 million).
Receivables increased due to higher 1994 revenue levels. Accounts payable and
other decreased due to the liquidation of outstanding trade accounts payable.
In July 1994, the Company entered into a two year agreement with a group of
banks to sell, without recourse, undivided ownership interests in a revolving
pool consisting of substantially all of the Company's domestic accounts
receivable for a maximum of $20 million. At October 1, 1994, accounts
receivable in the accompanying consolidated balance sheet is net of $8 million
received by the Company under this agreement.
The Company continues to maintain a line of credit with a group of banks of
$30 million (reduced in the second quarter of 1994 from $50 million) for
operating purposes and short-term borrowing agreements for a total of
approximately $65 million as a hedge facility to cover certain foreign
currency exposures. At October 1, 1994 no borrowings were outstanding under
the line of credit and $53.4 million was outstanding under the hedge facility
short-term borrowing agreements.
Management expects that current funds, funds from operations, the bank lines
of credit and sales of accounts receivables will provide adequate resources to
meet the Company's anticipated cash requirements into 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
Vice President - Finance, Treasurer and
Chief Financial Officer
Date: November 15, 1994
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 Nine Months Ended
October 1, 1994 October 1, 1994
Weighted average number
of common shares outstanding 30,877 30,641
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 1,509 1,153
Weighted average of common stock
equivalent shares attributable
to convertible debentures 639 639
Total common and common
equivalent shares, assuming
full dilution 33,025 32,433
Net income 8,874 20,749
Add:
Interest on convertible debentures,
net of applicable income taxes 163 489
Net income, assuming full dilution 9,037 21,238
Net income per common share,
assuming full dilution (A) $ 0.27 $ 0.65
(A) In accordance with generally accepted accounting principles, fully-diluted
earnings per share may no 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.
6