SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 1, 1995 or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission file number: 0-15627 SEQUENT COMPUTER SYSTEMS, INC. (Exact name of registrant as specified in its charter) Oregon 93-0826369 (State or other jurisdiction (I.R.S. Employer of organization or incorporation) Identification Number) 15450 S.W. Koll Parkway Beaverton, Oregon 97006-6063 (Address of principal executive offices, including zip code) (503) 626-5700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 31,762,338 common shares were issued and outstanding as of April 28, 1995. SEQUENT COMPUTER SYSTEMS, INC. PART I. FINANCIAL INFORMATION Page No. Item 1. Consolidated Financial Statements Consolidated Balance Sheets - April 1, 1995 and December 31, 1994 3 Consolidated Statements of Operations - Three months ended April 1, 1995 and April 2, 1994 4 Consolidated Statements of Changes In Shareholders' Equity - January 2, 1993 through April 1, 1995 5 Consolidated Statements of Cash Flows - Three months ended April 1, 1995 and April 2, 1994 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 - Statement regarding computation of earnings per share. (b) No reports on Form 8-K were filed by the Company during the fiscal quarter ended April 1, 1995. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - Unaudited (in thousands, except per share amounts) April 1, 1995 Dec. 31, 1994 ASSETS Current assets: Cash and cash equivalents $ 58,232 $ 46,291 Restricted deposits 61,529 59,437 Receivables, net 117,518 133,571 Inventories 53,532 48,698 Prepaid royalties and other 16,798 12,812 Total current assets 307,609 300,809 Property and equipment, net 99,313 94,214 Capitalized software costs, net 40,551 38,555 Intangible assets and other, net 2,039 2,399 Total assets $ 449,512 $ 435,977 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 61,529 $ 59,437 Accounts payable and other 44,310 46,744 Accrued payroll 7,682 11,794 Unearned revenue 12,764 9,716 Income taxes payable 5,344 3,850 Current obligations under capital leases and debt 835 800 Total current liabilities 132,464 132,341 Other accrued expenses 2,320 2,100 Long-term obligations under capital leases and debt 10,379 10,341 Total liabilities 145,163 144,782 Shareholders' equity: Preferred stock, $.01 par, none outstanding -- -- Common stock, $.01 par, 31,749 and 31,360 shares outstanding 317 314 Paid-in capital 282,650 278,145 Retained earnings 23,825 17,872 Foreign currency translation adjustment (2,443) (5,136) Total shareholders' equity 304,349 291,195 Total liabilities and shareholders' equity $ 449,512 $ 435,977 See notes to consolidated financial statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited (in thousands, except per share amounts) Three Months Ended April 1, 1995 April 2, 1994 Revenue: Product revenue $ 81,981 $ 71,483 Service revenue 34,118 22,388 Total revenue 116,099 93,871 Costs and expenses: Cost of products sold 38,930 33,450 Cost of service revenue 24,480 15,404 Research and development 9,416 7,739 Selling, general and administrative 34,107 31,173 Total costs and expenses 106,933 87,766 Operating income 9,166 6,105 Interest, net 73 (490) Other, net (730) (192) Income before provision for income taxes 8,509 5,423 Provision for income taxes 2,556 703 Net income $ 5,953 $ 4,720 Net income per share $ 0.18 $ 0.15 Weighted average number of common and common equivalent shares outstanding 33,082 31,470 See notes to consolidated financial statements. 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- Shares Amount Shares Amount Capital (Deficit) lation Total Balance, January 2, 1993 1,500 $ 15 22,450 $225 $186,027 $ (7,738) $ (6,027) $ 172,502 Common shares issued, net of repurchases -- -- 4,795 47 79,883 -- -- 79,930 Conversion of preferred stock (1,500) (15) 3,000 30 -- -- -- 15 Net loss -- -- -- -- -- (7,524) -- (7,524) Foreign currency translation adjustment -- -- -- -- -- -- (1,435) (1,435) Balance, January 1, 1994 -- $ -- 30,245 $302 $265,910 $(15,262) $(7,462) $243,488 Common shares issued -- -- 1,115 12 12,235 -- -- 12,247 Net income -- -- -- -- -- 33,134 -- 33,134 Foreign currency translation adjustment -- -- -- -- -- -- 2,326 2,326 Balance, December 31, 1994 -- $ -- 31,360 $ 314 $278,145 $17,872 $ (5,136) $291,195 Common shares issued -- -- 389 3 4,505 -- -- 4,508 Net income -- -- -- -- -- 5,953 -- 5,953 Foreign currency translation adjustment -- -- -- -- -- -- 2,693 2,693 Balance, April 1, 1995 -- $ -- 31,749 $ 317 $282,650 $23,825 $ (2,443) $ 304,349 See notes to consolidated financial statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited (in thousands) Three Months Ended April 1, 1995 April 2, 1994 Operating activities: Net income $ 5,953 $ 4,720 Reconciliation of net income to net cash provided by operating activities - Depreciation and amortization 12,434 10,343 Changes in assets and liabilities - Receivables, net 16,053 10,367 Inventories (4,834) (6,289) Prepaid royalties and other (3,947) (250) Accounts payable and other (2,353) (15,336) Accrued payroll (4,112) (3,437) Unearned revenue 3,048 2,736 Income taxes payable 1,494 (43) Deferred income taxes 892 (530) Other, net (497) (156) Net cash provided by operating activities 24,131 2,125 Investing activities: Restricted deposits (2,092) (985) Investments, net -- 5,000 Purchases of property and equipment, net (13,818) (10,425) Capitalized software costs (5,646) (4,807) Foreign currency translation 2,693 94 Net cash used for investing activities (18,863) (11,123) Financing activities: Notes payable, net 2,092 985 Payments under capital lease obligations (432) (849) Long-term debt, net 505 22 Stock issuance proceeds, net 4,508 4,031 Net cash provided by financing activities 6,673 4,189 Net increase (decrease) in cash and cash equivalents 11,941 (4,809) Cash and cash equivalents at beginning of period 46,291 42,986 Cash and cash equivalents at end of period $ 58,232 $ 38,177 See notes to consolidated financial statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 1995 Basis of Presentation The accompanying consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report and Form 10-K for the fiscal year ended December 31, 1994. The Company's fiscal year is based on a 52-53 week calendar ending the Saturday closest to December 31. The accompanying consolidated financial statements include the accounts of Sequent Computer Systems, Inc. and its wholly owned subsidiaries (the Company or Sequent). All significant intercompany accounts and transactions have been eliminated. The results for interim periods are not necessarily indicative of the results for the entire year. Accounts Receivable At April 1, 1995, accounts receivable in the accompanying consolidated balance sheet is net of $8 million, received by the Company under its two year agreement to sell its domestic accounts receivables. Inventories Inventories consist of the following: (in thousands) Apr. 1, Dec. 31, 1995 1994 Raw Materials $ 6,826 $ 5,377 Work in Process 3,107 2,065 Finished Goods 43,599 41,256 $ 53,532 $ 48,698 Property and Equipment Property and equipment consist of the following: (in thousands) Apr. 1, Dec. 31, 1995 1994 Land $ 5,037 $ 5,037 Operational Equipment 127,923 119,535 Furniture and Office Equipment 57,261 53,872 Leasehold Improvements 13,942 12,341 204,163 190,785 Less Accum. Depr. & Amort. 104,850 96,571 $ 99,313 $ 94,214 Research and Development Amortization of capitalized software costs, generally based on a three-year life, was $3.7 million and $2.7 million for the three month periods ended April 1, 1995 and April 2, 1994, respectively. Restructuring Charge The realignment of resources to provide open distributed client/server computing solutions, professional service consulting and architecture-led selling, marketing and engineering strategies is progressing according to plan. The $1.6 million remaining accrual is primarily related to obligations associated with closed facility leases and future extended employee benefit costs. Management expects that the remaining accrual will be fully utilized according to the realignment plan. The fourth quarter of 1993 restructuring charge reduced operating expenses by approximately $400,000 and $2.1 million for the first quarter ended April 1, 1995 and April 2, 1994, respectively. Notes Payable The Company has an unsecured line of credit agreement with a group of banks which provides short-term borrowings of up to $30 million. No borrowings were outstanding at April 1, 1995. The Company has a short-term borrowing agreement with a foreign bank as a hedge to cover certain foreign currency exposures to a maximum of approximately $58.5 million. At April 1, 1995, borrowings of $50.5 million were outstanding under this agreement. The Company has a short-term borrowing agreement with a domestic bank for an additional hedging facility to cover certain foreign currency exposures for a maximum of $10 million, excluding foreign currency gain or loss fluctuations. At April 1, 1995, borrowings of $11.0 million were outstanding under this agreement. Income Taxes The Company utilizes Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). The effective tax rate differs from the statutory tax rate principally due to tax benefits from the Company's foreign sales corporation and the utilization of both domestic and foreign tax attributes carried forward from prior years. Earnings Per Share See Exhibit 11 for the computation of average shares outstanding and earnings per share. Significant Customers The Company has no single customer that represents greater than 10% of total revenue for the quarters ending April 1, 1995 and April 2, 1994. Geographic Segment Information Export and foreign revenue was $58.0 million (50% of total revenue) for the first quarter ended April 1, 1995 and $42.1 million (45% of total revenue) for the first quarter ended April 2, 1994. The Company's United States operations generated operating income of $11.4 million and foreign operations generated operating loss of $2.2 million for the three months ended April 1, 1995. Comparable amounts for the first quarter of 1994 are $4.1 million operating income for U.S. operations and $2.0 million operating income for foreign operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS April 1, 1995 GENERAL Total revenue was $116.1 million in the first quarter of 1995 compared to $93.9 million in the first quarter of 1994. Net income was $6.0 million, increasing 26% from $4.7 million in the first quarter of 1994, despite an increase in the Company's effective tax rate from 13 to 30 percent. The Company historically experiences reduced first quarter end-user orders compared to the preceding fourth quarter. REVENUE (dollars in millions) Quarter Ended Apr. 1, % Apr. 2, 1995 Chg 1994 End-user product revenue $ 79.0 24% $ 63.6 Service revenue 34.1 52% 22.4 Total end-user revenue 113.1 32% 86.0 OEM product revenue 3.0 (62)% 7.9 Total revenue $ 116.1 24% $ 93.9 Export and Foreign Revenue $ 58.0 38% $ 42.1 End-user product revenue for the first quarter of 1995 improved over the corresponding quarter of 1994 due to increased results from the Western United States operations and Europe. Service revenue continued to benefit from the growing installed customer base and increases in professional services revenue. OEM product revenue is substantially sales to Unisys Corporation. Export and foreign revenue was 50% of total revenue in the first quarter of 1995 compared to 45% of total revenue in the first quarter of 1994. The increase in export and foreign revenue as a percentage of total revenue in the first quarter of 1995 compared to the first quarter in 1994 was due to significant revenue increases in Europe. COST OF SALES (dollars in millions) Quarter Ended Apr. 1, Apr. 2, 1995 1994 Total cost of goods sold $ 63.4 $ 48.9 As a percentage of total revenue 55% 52% Total cost of goods sold as a percentage of total revenue increased in the first quarter of 1995 compared to the first quarter of 1994 primarily due to unfavorable product mix resulting from lower margin service revenue increasing as a percentage of total revenue. RESEARCH AND DEVELOPMENT (dollars in millions) Quarter Ended Apr. 1, % Apr. 2, 1995 Chg 1994 Research and development $ 9.4 22% $ 7.7 As a percentage of total revenue 8% 8% Software costs capitalized $ 5.6 17% $ 4.8 Research and development costs remained constant as a percentage of total revenue. Research and development costs include continued investment in new product development and enhancements to existing products. Software costs capitalized increased in the first quarter of 1995 compared to the first quarter of 1994 due to an increased focus on software design for computing solutions on future products. SELLING, GENERAL AND ADMINISTRATIVE (dollars in millions) Quarter Ended Apr. 1, % Apr. 2, 1995 Chg 1994 Selling, general and admin. $ 34.1 9% $ 31.2 As a percentage of total revenue 29% 33% Selling, general and administrative costs have increased in dollar amount in the first quarter of 1995 compared to the first quarter of 1994 primarily due to sales and marketing expenditure levels related to higher total revenue levels. Selling, general and administrative costs have decreased as a percentage of total revenue in the first quarter of 1995 compared to the first quarter of 1994 due to greater revenue levels along with cost control. RESTRUCTURING CHARGE The realignment of resources to provide open distributed client/server computing solutions, professional service consulting and architecture-led selling, marketing and engineering strategies is progressing according to plan. The $1.6 million remaining accrual is primarily related to obligations associated with closed facility leases and future extended employee benefit costs. Management expects that the remaining accrual will be fully utilized according to the realignment plan. The fourth quarter of 1993 restructuring charge reduced operating expenses by approximately $400,000 and $2.1 million for the first quarter ended April 1, 1995 and April 2, 1994, respectively. INTEREST AND OTHER, NET (dollars in millions) Quarter Ended Apr. 1, Apr. 2, 1995 1994 Interest, net $ .1 $ (.5) Other expense (.7) (.2) Provision for income taxes 2.6 .7 Interest income in the first quarter of 1995 and 1994 was primarily generated from restricted deposits held at foreign and domestic banks, short term investments and cash and cash equivalents. Interest expense in the first quarter of 1995 and 1994 includes costs related to the Convertible Debentures, foreign currency hedging loans and capital lease obligations. Other expense primarily represents effects of foreign currency transactions and other miscellaneous non-operating expenses. The provision for income taxes includes benefits related to the Company's foreign sales corporation and the utilization of available domestic and foreign tax attributes carried forward from prior years. The increase in the Company's effective tax rate from 13% in the first quarter of 1994 to 30% in the first quarter of 1995 is primarily attributed to utilization of a majority of its remaining net operating loss carryforwards during December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $175.1 million at April 1, 1995 from $168.5 million at December 31, 1994. The Company's current ratio at April 1, 1995 and December 31, 1994 was 2.3:1. For the first three months of 1995, cash and cash equivalents increased $11.9 million. The Company continues to invest in property and equipment ($13.8 million) and capitalized software ($5.6 million). Other uses of funds were reductions in accounts payable and other ($2.4 million), increase in inventories ($4.8 million), increase in prepaid and other ($3.9 million), increase in foreign translation adjustment ($2.7 million), and reductions in accrued payroll ($4.1 million). Primary sources of funds were net income ($6.0 million), depreciation and amortization ($12.4 million), reduction in net receivables ($16.1 million), increase in unearned revenue ($3.0 million), and stock issuance proceeds from employee stock purchase and stock option plans ($4.5 million). Inventories increased due to increasing international inventory levels coupled with a significant foreign currency translation impact. Accounts receivable decreased due to seasonally lower revenue in the first quarter. Accounts payable and other decreased due to the liquidation of outstanding trade accounts payable. At April 1, 1995, accounts receivable in the accompanying consolidated balance sheet is net of $8 million received by the Company under its two year agreement to sell its domestic accounts receivables. The Company continues to maintain a $30 million line of credit with a group of banks for operating purposes in addition to short-term borrowing agreements totaling approximately $69 million as hedge facilities to cover certain foreign currency exposures. At April 1, 1995, no borrowings were outstanding under the line of credit and $61.5 million was outstanding under the short- term borrowing agreements. Management expects that current funds, funds from operations, and the bank lines of credit will provide adequate resources to meet the Company's anticipated cash requirements through 1995. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEQUENT COMPUTER SYSTEMS, INC. ________________________________ Robert S. Gregg Senior Vice President - Finance, Treasurer and Chief Financial Officer Date: May 8, 1995 EXHIBIT INDEX Sequential Exhibit No. Description Page No. 11 Statement regarding computation 14 of earnings per share SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES STATEMENT SHOWING CALCULATION OF AVERAGE COMMON SHARES OUTSTANDING AND EARNINGS PER AVERAGE COMMON SHARE (in thousands, except per share amounts) Three Months Ended April 1, 1995 April 2, 1994 Weighted average number of common shares outstanding 31,494 30,383 Application of the "treasury stock" method to the stock option and employee stock purchase plans 1,587 1,087 Weighted average number of common stock equivalent shares attributable to convertible debentures 639 639 Total common and common equivalent shares, assuming full dilution 33,720 32,109 Net income $ 5,953 $ 4,720 Add: Interest on convertible debentures, net of applicable income taxes 133 165 Net income, assuming full dilution $ 6,086 $ 4,885 Net income per common share, assuming full dilution (A) $ 0.18 $ 0.15 (A) In accordance with generally accepted accounting principles, fully- diluted earnings per share may not exceed primary earnings per share. As such, the fully-diluted earnings per share amounts equal the primary earnings per share amounts. The computation of primary net income per common share is not included as the computation can be clearly determined from the material contained in this report.