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 4, 1997 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.
42,719,427 common shares were issued and outstanding as of October 31, 1997.
SEQUENT COMPUTER SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - October 4, 1997 and
December 28, 1996 3
Consolidated Statements of Operations - Three months
and nine months ended October 4, 1997 and
September 28, 1996 4
Consolidated Statements of Shareholders' Equity -
December 28, 1996 through October 4, 1997 5
Consolidated Statements of Cash Flows - Nine months ended
October 4, 1997 and September 28, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
(a) Exhibit 11 - Statement regarding computation of earnings
per share. 16
(b) No reports on Form 8-K were filed by the Company during
the fiscal quarter ended October 4, 1997.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)
Oct. 4, 1997 Dec. 28, 1996
ASSETS
Current assets:
Cash and cash equivalents $ 133,469 $ 37,979
Restricted deposits 52,307 44,655
Receivables, net 275,748 209,752
Inventories 107,035 74,491
Prepaid royalties and other 31,823 30,577
Total current assets 600,382 397,454
Property and equipment, net 141,140 133,838
Capitalized software costs, net 64,838 59,567
Other assets, net 23,690 21,150
Total assets $ 830,050 $ 612,009
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 53,496 $ 59,925
Accounts payable and other 122,516 88,119
Accrued payroll 15,590 24,853
Unearned revenue 39,148 30,787
Income taxes payable 1,692 3,017
Current obligations under capital leases
and debt 2,267 7,325
Total current liabilities 234,709 214,026
Other accrued expenses 9,096 6,671
Long-term obligations under capital leases
and debt 10,692 16,503
Total liabilities 254,497 237,200
Shareholders' equity:
Common stock, $.01 par value,
42,680 and 34,188 shares outstanding 427 342
Paid-in capital 500,299 315,316
Retained earnings 80,318 60,715
Foreign currency translation adjustment (5,491) (1,564)
Total shareholders' equity 575,553 374,809
Total liabilities and shareholders' equity $ 830,050 $ 612,009
See notes to consolidated financial statements.
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 4, 1997 Sept. 28, 1996 Oct. 4, 1997 Sept. 28, 1996
<S> <C> <C> <C> <C>
Revenue:
Product $ 147,000 $ 101,669 $ 406,989 $ 282,327
Service 60,320 47,116 168,358 129,790
Total revenue 207,320 148,785 575,347 412,117
Costs and expenses:
Cost of products sold 76,326 46,278 205,371 132,425
Cost of service revenue 43,968 36,375 124,965 100,876
Research and development 16,516 14,405 48,434 38,932
Selling, general and administrative 57,051 49,479 166,884 132,146
Total costs and expenses 193,861 146,537 545,654 404,379
Operating income 13,459 2,248 29,693 7,738
Interest, net 413 105 (1,624) 533
Other, net (962) (490) (1,535) (1,055)
Income before provision for income taxes 12,910 1,863 26,534 7,216
Provision for income taxes 2,612 508 6,931 1,957
Net income $ 10,298 $ 1,355 $ 19,603 $ 5,259
Net income per share $ 0.24 $ 0.04 $ 0.50 $ 0.16
Weighted average number of common
and common equivalent shares
outstanding 43,351 33,780 38,941 33,854
</TABLE>
See notes to consolidated financial statements.
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - Unaudited
(In thousands)
<CAPTION>
Foreign
currency
Common Stock Paid-in Retained translation
Shares Amount capital earnings adjustment Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1996 34,188 $342 $315,316 $60,715 $(1,564) $374,809
Common shares issued 652 6 6,879 - - 6,885
Tax benefit of option exercises - - 263 - - 263
Net income - - - 708 - 708
Foreign currency translation
adjustment - - - - (3,070) (3,070)
Balance, March 29, 1997 34,840 $348 $322,458 $61,423 $(4,634) $379,595
Common shares issued 293 3 3,763 - - 3,766
Tax benefit of option exercises - - 88 - - 88
Net income - - - 8,597 - 8,597
Foreign currency translation
adjustment - - - - 269 269
Balance, June 28, 1997 35,133 $351 $326,309 $70,020 $(4,365) $392,315
Common shares issued 6,971 70 163,514 - - 163,584
Conversion of Debentures 576 6 8,941 8,947 - -
Tax benefit of option exercises - - 1,535 - - 1,535
Net income - - - 10,298 - 10,298
Foreign currency translation
adjustment - - - - (1,126) (1,126)
Balance, October 4, 1997 42,680 $427 $500,299 $80,318 $(5,491) $575,553
</TABLE>
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Nine Months Ended
Oct. 4, 1997 Sept. 28, 1996
Cash flow from operating activities:
Net income $ 19,603 $ 5,259
Reconciliation of net income to net cash
provided by operating activities -
Depreciation and amortization 61,413 47,779
Changes in assets and liabilities -
Receivables, net (65,996) 5,757
Inventories (32,544) (17,425)
Prepaid royalties and other (1,246) (18,520)
Accounts payable and other 34,397 2,064
Accrued payroll (9,263) 6,445
Unearned revenue 8,361 2,695
Income taxes payable (1,325) 630
Deferred income taxes (20) (21)
Other accrued expenses 2,444 8,925
Net cash provided by operating activities 15,824 43,588
Cash flow from investing activities:
Restricted deposits (7,652) 16,211
Purchases of property and equipment, net (50,108) (61,463)
Capitalized software costs (25,351) (24,788)
Intangibles and other assets (3,565) (19,212)
Net cash used for investing activities (86,676) (89,252)
Cash flow from financing activities:
Notes payable, net (6,429) (17,715)
Proceeds (payments) under capital lease obligations (1,914) 15,241
Long-term debt proceeds -- 2,200
Stock issuance proceeds, net 176,121 6,989
Net cash provided by financing activities 167,778 6,715
Foreign currency translation adjustment (1,436) (471)
Net increase (decrease) in cash and cash equivalents 95,490 (39,420)
Cash and cash equivalents at beginning of period 37,979 61,939
Cash and cash equivalents at end of period $ 133,469 $ 22,519
Supplemental schedule of noncash investing
and financing activities: Conversion of
Subordinated Debentures to Equity, net $ 8,947 $ --
See notes to consolidated financial statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 4, 1997
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 28, 1996.
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.
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 Standard
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS
128). FAS 128 replaces APB Opinion 15, Earnings Per Share, and requires
presentation of basic earnings per share and diluted earnings per share. The
pro forma effect of adoption of FAS 128 is included in the table below. See
Exhibit 11 for the computation of average shares outstanding and earnings per
share.
Three Months Ended Nine Months Ended
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
1997 1996 1997 1996
As reported:
Net income per share $ .24 $ .04 $ .50 $ .16
Weighted average number of common and
common equivalent shares outstanding 43,351 33,780 38,941 33,854
Pro forma:
Basic net income per share $ .26 $ .04 $ .54 $ .16
Weighted average number of common
shares outstanding 39,436 33,727 36,264 33,512
Diluted net income per share $ .24 $ .04 $ .50 $ .16
Weighted average number of common and
common equivalent shares outstanding 43,357 34,218 39,195 34,010
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (FAS 130). This statement requires
entities to report changes in equity that result from transactions and
economic events other than those with shareholders. This statement is
effective for fiscal years beginning after December 15, 1997, at which time it
will be adopted by the Company. Management expects that the adoption of this
pronouncement will have no effect on reported earnings. It is expected that
the Company's comprehensive income component will consist of the cumulative
translation adjustment which is reflected in the statement of shareholders'
equity.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (FAS
131). The objective of the standard is to provide information about the
different types of business activities in which an enterprise engages and the
different economic environments in which it operates. This pronouncement will
be adopted by the Company for fiscal 1998, as required by the statement. This
statement will have no impact on reported earnings and management expects that
it will not have a significant impact on disclosure requirements as the
company operates in one business segment.
Accounts Receivable
At October 4, 1997, accounts receivable in the accompanying consolidated
balance sheet is net of $20 million received by the Company under its
agreement to sell its domestic accounts receivable.
Inventories
Inventories consist of the following:
(in thousands)
Oct. 4, Dec. 28,
1997 1996
Raw materials $ 17,882 $ 14,205
Work-in-progress 2,951 2,166
Finished goods 86,202 58,120
$ 107,035 $ 74,491
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Oct. 4, Dec. 28,
1997 1996
Land $ 5,037 $ 5,037
Operational equipment 207,510 174,662
Furniture and office equipment 90,567 89,951
Leasehold improvements 23,025 22,584
326,139 292,234
Less accum. depr. & amort. (184,999) (158,396)
$ 141,140 $ 133,838
Research and Development
Amortization of capitalized software costs, generally based on a three-year
life, was $20.1 million and $14.6 million for the nine months ended October 4,
1997 and September 28, 1996, respectively. In December 1996, the Company
removed from its balance sheet capitalized software costs which had an
original cost of $40 million and were fully amortized. This did not affect
the realizable value of the Company's software products.
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. The line of credit
agreement extends through May 29, 1998. Individual borrowings on the credit
line have maturities of three months or less. There were no borrowings
outstanding under the line of credit at October 4, 1997 or September 28, 1996.
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
October 4, 1997, maximum borrowings allowed under the agreement were
approximately $59.8 million. The maximum borrowing limit is denominated in
specified foreign currencies and fluctuates with the change in foreign
exchange rates. Amounts outstanding were $52.3 million and $23.4 million at
October 4, 1997 and September 28, 1996, respectively.
In addition to the above borrowing agreements, the Company has entered into
certain other miscellaneous borrowing arrangements with a foreign bank. At
October 4, 1997, $1.2 million was outstanding. There were no borrowings
outstanding under these borrowing arrangements at September 28, 1996.
Obligations under Capital Leases and Long-Term Debt
In April 1992, the Company issued $20 million of 7.5% Convertible Subordinated
Debentures ("Convertible Debentures" or "Debentures") due March 31, 2000. The
Convertible Debentures were convertible into the Company's common stock at the
option of the holders at an initial conversion price of $15.81 per share. In
conjunction with the Company's equity offering in 1993, $9.9 million of the
Debentures were converted into 626,000 shares of common stock. In August
1995, an additional $1.0 million of the Debentures were converted into 63,000
shares of common stock. In August and September 1997, the remaining $9.1
million of the Debentures were converted into 576,000 shares of common stock.
The outstanding balance in long-term debt related to the debentures at
September 28, 1996 was $9.1 million.
During 1996 a U.S. subsidiary of the Company entered into a financing
arrangement with third parties for $2.2 million, of which $1 million was with
a related party. The financing consisted of short-term convertible notes with
an interest rate of 10% due February 1997. During the second quarter of 1997,
the notes were converted into preferred stock of the subsidiary. At October
4, 1997 there was no outstanding balance related to these notes. The balance
at September 28, 1996 was $2.2 million.
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 Company's foreign sales corporation and the federal research and
development tax credit.
Shareholders' Equity
Common Stock. On July 29, 1997, the Company sold approximately 5.7 million
shares of common stock in an equity offering. Net proceeds to the Company,
after deducting the underwriting discount and offering expenses, were
approximately $148.5 million. In August and September 1997, $9.1 million
($8.9 million, net of related expenses) of the Convertible Debentures were
converted into 576,000 shares of common stock. The conversion of the
Debentures into common stock is considered a significant noncash transaction
and is reflected in the supplemental schedule of noncash investing and
financing activities in the Consolidated Statement of Cash Flows.
Additionally, approximately 1.2 million shares of common stock were issued
during the third quarter of 1997, amounting to $16.6 million.
Significant Customers
The Company operates primarily in one business segment which includes the
design, manufacture and marketing of high-performance computer systems and
operating environment software for the data center. Project-oriented
offerings include consulting and professional services to help customers solve
complex information technology problems. Approximately 13% of the Company's
revenue in the third quarter of 1997 was from one customer. The Company had
no single customer that represented greater than 10% of total revenue for the
third quarter of 1996.
Geographic Segment Information
Export and foreign revenue was $89.7 million (43% of total revenue) for the
three months ended October 4, 1997 and $267.3 million (46% of total revenue)
for the first nine months of 1997. Export and foreign revenue was $78.8
million and $209.2 million (53% and 51% of total revenue, respectively) for
the corresponding periods in 1996. The Company's United States operations
generated operating income of $21.1 million for the three months ended October
4, 1997 and $50 million for the first nine months of 1997. Comparable periods
in 1996 included operating income of $8.1 million and $13.9 million for the
three months and nine months ended September 28, 1996, respectively. Foreign
operations generated net operating losses of $7.7 million for the quarter
ended October 4, 1997 and $20.3 million for the first nine months of 1997.
Comparable periods in 1996 included net operating losses of $5.9 million and
$6.2 million for the three months ended September 28, 1996 and first nine
months of 1996, respectively.
Forward Looking Statements
Forward-looking statements may be made by the Company from time to time. The
following factors are among the factors that could cause actual results to
differ materially from the forward-looking statements: timely completion of
product development and continued customer acceptance of the Company's NUMA-Q
product line; 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. Readers should carefully review
the risk factors described in the Company's Prospectus dated July 29, 1997
filed with the Securities and Exchange Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 4, 1997
OVERVIEW
Total revenue was $207.3 million and $575.3 million for the third quarter and
first nine months of 1997, respectively. Total revenue for the same periods
in 1996 was $148.8 million and $412.1 million, respectively. Net income was
$10.3 million and $19.6 million for the third quarter and first nine months of
1997, respectively, compared to $1.4 million and $5.3 million for the same
periods in 1996. Total revenue increases of 39% and 40% for the third quarter
and first nine months of 1997 over the same periods in 1996 included increases
in product revenue of 45% and 44% and service revenue of 28% and 30%,
respectively. Factors contributing to the significant increases in revenue in
1997 included substantial growth in sales of the Company's NUMA-Q systems and
continued increases in major account project sales. In addition to increases
in revenue, 1997 net income was positively impacted by significant reductions
in operating expenses as a percentage of revenue as compared to 1996, when the
Company was investing heavily in its sales and professional services
organizations. Revenues from foreign operations decreased as a percentage of
the Company's total revenue in the third quarter and first nine months of
1997. Factors contributing to these decreases included substantial growth
rates in the Company's American and Asia Pacific operations, as well as a
historical seasonal selling weakness in Europe in the third quarter of 1997,
particularly in the United Kingdom.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenue:
Three months ended Nine months ended
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
1997 1996 1997 1996
Revenue:
End-user products 70.6% 68.2% 69.9% 66.9%
OEM products .3 .1 .8 1.6
Service 29.1 31.7 29.3 31.5
Total revenue 100.0 100.0 100.0 100.0
Cost of product and service revenue 58.0 55.6 57.4 56.6
Gross profit 42.0 44.4 42.6 43.4
Operating expenses:
Research and development 8.0 9.7 8.4 9.4
Selling, general and administrative 27.5 33.3 29.0 32.1
Total operating expenses 35.5 43.0 37.4 41.5
Operating income 6.5 1.4 5.2 1.9
Interest income (expense), net 0.2 .1 (0.3) .1
Other expense, net (0.5) (0.3) (0.3) (0.3)
Income before provision
for income taxes 6.2 1.2 4.6 1.7
Provision for income taxes 1.2 .3 1.2 .5
Net income 5.0% 0.9% 3.4% 1.2%
REVENUE
As a percentage of total revenue, the Company's product revenue increased
significantly in 1997 over 1996. Sales of the Company's NUMA-Q systems have
continued to increase substantially since the beginning of 1997 when the new
product line was formally introduced into the marketplace. NUMA-Q system
sales accounted for approximately 75% of total product revenue in the third
quarter of 1997. Service revenue increased by 28% and 30% in the third
quarter and first nine months of 1997, respectively, over the same periods in
1996. Factors contributing to increased service revenue include continued
growth in system sales with service contracts, as well as an increase in the
number of project bookings in the Company's professional service organization.
The decrease in service revenue as a percentage of total revenue was primarily
the result of the significant increase in product revenue volume.
COST OF SALES
The factors influencing gross margins in a given period generally 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. The Company's overall product gross margins were
approximately 48% and 50% for the three month and nine month periods ended
October 4, 1997, respectively, and 54% and 53% for the same periods in 1996.
During the third quarter and first nine months of 1997, the Company's product
margins were affected by increased sales of third party products, which yield
lower gross margins than standard Sequent products. Additionally, the
Company's overall gross margins were affected by lower margin sales of its
Symmetry products, which, as expected, are continuing to represent a lower
percentage of the Company's overall sales. Offsetting these lower margin
sales were sales from the Company's higher margin NUMA-Q products, which have
been increasing throughout 1997. The Company's service gross margins were 27%
and 26% in the third quarter of 1997 and nine months ended October 4, 1997,
increasing from approximately 23% for the same periods in 1996. A significant
factor contributing to this increase included strong performance in the
Company's professional services organization in 1997.
RESEARCH AND DEVELOPMENT
During the third quarter and first nine months of 1997, the Company continued
to invest in enhancements to its NUMA-Q product technology. Total research
and development expenses increased 15% and 24% in the third quarter and first
nine months of 1997 over the same periods in 1996. Due to the significant
increase in total revenue in 1997, however, research and development expenses
as a percentage of total revenue decreased. There was a slight increase in
software costs capitalized in the first nine months of 1997 over 1996, from
$24.8 million in 1996 to $25.4 million in 1997. However, capitalized software
development costs decreased from $9.1 million in the third quarter of 1996
compared to $8.6 million in the third quarter of 1997, primarily as a result
of significant software releases in 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased in volume during the
third quarter and first nine months of 1997, respectively, over the same
periods in 1996 primarily due to the increased activity associated with the
growth in overall sales volume. As a percentage of total revenue, however,
these expenses have continued to decrease in 1997 compared to 1996, when the
Company was just beginning a major product transition and was investing
heavily in its sales and professional services infrastructure. In the third
quarter and first nine months of 1997, selling, general and administrative
expenses were 28% and 29% of total revenue, respectively. In 1996, these
expenses were 33% and 32% of total revenue for the same periods.
INTEREST AND OTHER, NET
Interest income is 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 interim short-term
borrowing, foreign currency hedging loans, capital lease obligations and
convertible debentures. Interest income for the third quarter and first nine
months of 1997 was $1.9 million and $3.4 million, respectively, compared to
$0.8 million and $2.4 million for the same periods in 1996. The increase in
interest income is a result of investment of cash proceeds from the July 29,
1997 stock offering. Interest expense for the same periods in 1997 and 1996
was $1.5 million and $5.1 million and $0.7 million and $1.9 million,
respectively. The Company's use of funds for its continued investment in its
NUMA-Q product line and related interim increase in short-term borrowings were
factors in the increase in interest expense in 1997 over 1996.
Other expense consists primarily of net realized and unrealized foreign
exchange gains and losses.
INCOME TAXES
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 third quarter of 1997 was 20%, compared to 27% for the
corresponding period in 1996 and overall annual effective tax rate for 1996.
The decrease in the tax rate for the third quarter when compared to the 32%
and 31.7% tax rates, respectively, in the first two quarters of 1997, is due
primarily to the extension of the federal research and development tax credit
through June 30, 1998 and other changes in estimates. Prior to the extension,
the credit expired on May 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $365.7 million at October 4, 1997 compared to $183.4
million at December 28, 1996. The Company's current ratio at October 4, 1997
and December 28, 1996 was 2.6:1 and 1.9:1, respectively.
Cash and cash equivalents increased $95.5 million during the nine months ended
October 4, 1997. The increase included cash flows from operating activities
of $15.8 million and issuances of common stock of $176.1 million, which
included net proceeds of $148.5 million from the sale of the Company's common
stock in its equity offering in August 1997. Funds were used for investments
in property and equipment ($50.1 million), inventories ($32.5 million) and
capitalized software ($25.4 million), which were primarily related to product
and software development and enhancements associated with its NUMA-Q product
line.
The Company has a $20 million receivable sales facility with a group of banks.
At October 4, 1997 accounts receivable in the accompanying consolidated
balance sheet is net of $20 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 May 29, 1998. The line contains certain
financial covenants and prohibits the Company from paying dividends without
the lenders' consent. In August, the Company used approximately $30 million
of the net proceeds from the August stock offering to repay the outstanding
balance in full.
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 $59.8 million, of which $52.3 million was
outstanding at October 4, 1997 (based on currency exchange rates on such
date).
The Company also maintains a miscellaneous borrowing arrangement with a
foreign bank. At October 4, 1997, $1.2 million was outstanding under this
agreement.
Management expects that current funds, 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.
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/ By Robert S. Gregg
Sr. Vice President of Finance and Legal and
Chief Financial Officer
Date: November 17, 1997
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
11 Statement regarding computation
of earnings per share 15
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT 11
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 4, 1997 October 4, 1997
Weighted average number
of common shares outstanding 39,436 36,264
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans (A) 3,921 3,497
Total common and common
equivalent shares, assuming
full dilution 43,357 39,761
Net income $ 10,298 $ 19,603
Add: Interest on Convertible Debentures,
net of applicable income taxes (B) -- 232
Net income, assuming full dilution $ 10,298 $ 19,835
Net income per common share,
assuming full dilution $ 0.24 $ 0.50
(A) Effective with the third quarter of 1996 and through the second
quarter of 1997, the Company applied the "Modified Treasury Stock" method
to calculate outstanding shares for stock options in accordance with APB
15.
(B) During the third quarter of 1997 the remaining outstanding Convertible
Debentures were converted into shares of common stock.
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> JAN-04-1998
<PERIOD-END> OCT-04-1997
<CASH> 185,776,000
<SECURITIES> 0
<RECEIVABLES> 278,687,000
<ALLOWANCES> 2,939,000
<INVENTORY> 107,035,000
<CURRENT-ASSETS> 600,382,000
<PP&E> 326,139,000
<DEPRECIATION> 184,999,000
<TOTAL-ASSETS> 830,050,000
<CURRENT-LIABILITIES> 234,709,000
<BONDS> 10,692,000
0
0
<COMMON> 427,000
<OTHER-SE> 500,299,000
<TOTAL-LIABILITY-AND-EQUITY> 830,050,000
<SALES> 147,000,000
<TOTAL-REVENUES> 207,320,000
<CGS> 76,326,000
<TOTAL-COSTS> 120,294,000
<OTHER-EXPENSES> 73,567,000
<LOSS-PROVISION> 429,000
<INTEREST-EXPENSE> 1,454,000
<INCOME-PRETAX> 0
<INCOME-TAX> 2,612,000
<INCOME-CONTINUING> 10,298,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,298,000
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
