-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rc5wrIuUa5DbFnS0rpStWU+a6YZLmMJ7iBuBmgQ0fU2E6RdfcnQIEJF9YUItym9w y5+wiB8VOULixJ7ltqKvOw== 0000811716-97-000011.txt : 19971118 0000811716-97-000011.hdr.sgml : 19971118 ACCESSION NUMBER: 0000811716-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971004 FILED AS OF DATE: 19971117 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUENT COMPUTER SYSTEMS INC /OR/ CENTRAL INDEX KEY: 0000811716 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 930826369 STATE OF INCORPORATION: OR FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15627 FILM NUMBER: 97722678 BUSINESS ADDRESS: STREET 1: 15450 SW KOLL PKWY STREET 2: ED02-803 CITY: BEAVERTON STATE: OR ZIP: 97006-6063 BUSINESS PHONE: 5036265700 MAIL ADDRESS: STREET 1: 15450 SW KOLL PKWY STREET 2: ED02 -803 CITY: BEAVERTON STATE: OR ZIP: 97006-6063 10-Q 1 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. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited (in thousands, except per share amounts)
Three Months Ended Nine Months Ended Oct. 4, 1997 Sept. 28, 1996 Oct. 4, 1997 Sept. 28, 1996 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
See notes to consolidated financial statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - Unaudited (In thousands)
Foreign currency Common Stock Paid-in Retained translation Shares Amount capital earnings adjustment Total 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
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. EX-27 2
5 3-MOS JAN-04-1998 OCT-04-1997 185,776,000 0 278,687,000 2,939,000 107,035,000 600,382,000 326,139,000 184,999,000 830,050,000 234,709,000 10,692,000 0 0 427,000 500,299,000 830,050,000 147,000,000 207,320,000 76,326,000 120,294,000 73,567,000 429,000 1,454,000 0 2,612,000 10,298,000 0 0 0 10,298,000 0.24 0.24
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