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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
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OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to__________
Commission File Number 0-18238
SEQUOIA SYSTEMS, INC.
---------------------
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
DELAWARE 04-2738973
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5959 Corporate Drive, Houston, Texas 77036
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (713) 541-8200
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.40 per share
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Indicate by check mark whether 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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO____
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant, computed by reference to the closing sales price
of such stock quoted on the Nasdaq National Market on August 29, 1996, was
$30,973,976.
The number of shares outstanding of the Registrant's common stock, $.40 par
value per share, as of August 29, 1996 was 15,627,291.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in the following part
of this Form 10-K: information required in Items 10, 11, 12 and 13 Part III, of
this Annual Report on Form 10-K is incorporated from the Proxy Statement
relating to the 1996 Annual Meeting of Stockholders of the Company.
2
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PART I
ITEM 1 - BUSINESS
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Sequoia Systems, Inc. ("Sequoia" or the "Company") is a provider of specialized
microcomputers targeted at specific vertical markets. Under the Texas Micro(R)
brand, the Company markets highly reliable microcomputers for industrial and
communications applications. Industrial applications include manufacturing
process control, discrete manufacturing, data acquisition and man-machine
interfaces. Communications applications include telecommunications,
internetworking and networking. Under the Sequoia(R) brand, the Company's
Sequoia Enterprise Systems ("SES") unit provides fault tolerant and business
critical microcomputers and servers for enterprise computing. The Company's
computers are differentiated from conventional commercial desktops and servers
by architecture, functionality, integration services and value-added software
and are "open systems" that support "off-the-shelf" application software running
on Windows(R) and UNIX(R).
On March 31, 1995, the Company completed a merger and stock purchase (the
"Transaction") pursuant to which the Company acquired all of the common stock of
SPCO, Inc., along with its subsidiaries Texas Microsystems, Inc. and Texas Micro
Electronics, Inc. and their respective subsidiaries ("the TMI Group"). The
Company issued 5,272,944 shares of its common stock in exchange for all the
common stock and securities to acquire the common stock of each of the members
of the TMI Group. The Transaction was accounted for as a pooling of interests,
and accordingly, the consolidated financial statements for all comparative
periods have been restated to include the results of operations, the financial
position and cash flows of the TMI Group.
Sequoia was incorporated in Delaware in September 1981. The Company's principal
executive offices are located at 5959 Corporate Drive, Houston, Texas 77036.
The Company's telephone number is (713) 541-8200.
PRODUCTS
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The Company provides highly reliable Intel(R) and SPARC(R) microprocessor based
microcomputers and components under the Texas Micro brand that withstand harsh
conditions and demanding computing environments. The Company also provides
Intel and Motorola(R) microprocessor based systems and servers under the Sequoia
brand that meet critical business requirements for enterprise computing and are
designed to recover quickly from failures with a minimum loss of data. In
addition, since the Transaction, the Company has initiated joint development
activities to marry their technological strengths in new products.
TEXAS MICRO COMPUTERS
- ---------------------
Texas Micro brand highly reliable microcomputers are focused on critical
applications for the industrial and communications markets. The Company's Intel
and SPARC based microcomputers are designed to withstand wide temperature
ranges, shock, vibration, dust, moisture and electromagnetic and radio frequency
interference.
3
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These products address the needs of customers characterized as having extreme
environmental conditions and the need for unattended, uninterrupted operations.
The products feature:
Industry Standard Compatibility
-------------------------------
The Company's Intel and SPARC based microcomputers are open systems that
are fully compatible with Windows and UNIX as well as industry standard
peripherals and "off-the-shelf" application software. Texas Microsystems
pioneered the passive backplane PC architecture that is now the industry
standard for industrial microcomputers.
Modularity
----------
Texas Microsystems introduced the industry standard Intel based passive
backplane in 1983. Now a broadly accepted architecture for industrial and
communications microcomputers, the passive backplane provides for much
greater expandability and ease of repair than commercial motherboard based
systems. Passive backplanes can be configured with 5 to 20 expansion slots
depending on chassis selection, and a wide range of supporting peripherals.
Scaleable Growth
----------------
Highly reliable microcomputers are available in industry standard
rackmounted configurations with many options such as processor boards,
split systems (multiple systems in one chassis), expansion chassis and disk
farms. Typical customers will employ multiple rackmounted systems in a
configuration where scalability is achieved by adding additional modules or
by plug-in upgrades as needed.
High Reliability
-----------------
Texas Micro brand microcomputers address high reliability and availability
through robust engineering, providing higher mean-time-between-failure
performance and lower mean-time-to-repair features. The rugged construction
of these microcomputers means that they can withstand extreme environmental
conditions which directly translates into greater system reliability.
Longevity
---------
Customers of the Company's high reliability microcomputers are resistant to
rapid technological change. They typically invest from 9 to 18 months in
system development before deploying their systems. They expect extended
life cycles and very stable hardware environments. Therefore, technology
stability and longevity are major success factors in this marketplace. With
its own highly skilled engineering staff and special end-of-life programs,
the Company is able to provide expanded product lifetimes to meet the
requirements of this market.
4
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Texas Micro Industrial Microcomputers
-------------------------------------
The Company designs and manufactures a broad line of Intel based
microcomputers, including rackmounted system platforms and single board
computers ("SBCs") for use in data acquisition, process control, embedded
control and other applications requiring the ability to operate in extreme
environmental conditions. Typically, these robustly engineered products are
used in extremely critical seven day by 24 hour unattended operations where
high reliability and rapid reparability are essential.
Highly reliable microcomputer products for the industrial market consist
primarily of rackmounted system platforms which offer various combinations
of expansion slots, disk capacity, alarming capability, power options and a
choice of processors. Systems may also include various video, I/O, or
communication expansion cards which are sourced from outside vendors. These
products are offered at a wide range of price points depending on
configurations.
SBCs for embedded control include state-of-the-art Pentium and Pentium
Pro/TM/ products as well as a variety of 386 and 486 based products.
Designed for the ISA, PCI and EISA passive backplane architectures, these
highly integrated SBCs feature on-board SCSI, video and enhanced IDE. These
SBCs are embedded into manufactured system products and are also sold as
components to be integrated into specialized platforms by original
equipment manufacturer ("OEM") customers.
Texas Micro brand chassis products include 5 to 20-slot ISA, 8 to 18-slot
PCI/ISA and 12-slot PCI/EISA passive backplane systems. Designed to
withstand extreme environmental conditions, these chassis minimize EMI/RFI
emission, withstand elevated shock, vibration and temperature, provide
positive pressurized air and maximize cooling over the backplane area.
Additional features include front accessible drive bays and high mean-time-
between-failure autoswitching power supplies.
Texas Micro Mobile Computers
----------------------------
In the rugged handheld mobile computer market, the Company offers THE
HARDBODY HANDHELD COMPUTER, a robust 3 pound, fully featured Intel 486
running Windows applications with a touch screen interface. It is designed
to provide full Windows compatible software capability in a field
applications environment. The Company also offers the 7108 MOBILE COMPUTER,
designed for primary operation from vehicle power to provide computing
services under extreme environmental conditions. Using Pentium processors
and high capacity ruggedized disk drives, the 7108 provides state-of-the-
art capabilities for complex vehicle based global position system
applications.
Texas Micro Communications Servers
----------------------------------
During fiscal 1997, the Company plans to extend its highly reliable systems
offerings with a new line of Pentium based servers. The Texas Micro MODEL
SP5500 is designed to support up to four-way symmetric multi-processing in
conjunction with a superior server I/O architecture for data handling and
maximum throughput. A highly expandable passive backplane version of this
server, the 5100 SERIES, will offer many configuration options, which will
give customers the flexibility to add features and redundancy as their
needs dictate, from hot-plug disks, RAID, "hot-swappable" fans and power
supplies through full system redundancy utilizing our "split" backplanes.
5
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During 1994, Texas Microsystems co-founded the PCI Industrial Computer
Manufacturers Group ("PICMG"). The Company is currently an executive
member, and is actively involved in drafting standards for the development
of PCI bus applications for passive backplane CompactPCI(R), a new standard
published by PICMG, which offers PCI local BUS performance in a ruggedized
Eurocard format. The Company's initial CompactPCI product offering is
planned to be a Reference Platform for customers and card manufacturers to
design and integrate CompactPCI solutions into the computer telephony
marketplace. The Reference Platform, based on PICMG CompactPCI Design
Specification 1.0, will accommodate modules that can be inserted and
replaced easily - thereby simplifying installation, service and repair.
Using modular components, the chassis can be custom configured to meet a
variety of requirements, including redundant power supplies, multiple SCSI
drives and 6U I/O expansion cards. The system will be powered by a 6U
CompactPCI SBC with a Pentium class processor and a full complement of on-
board I/O interfaces.
The Company is already working with several key voice technology providers
and manufacturers of related internetworking products in an effort to port
and adopt CompactPCI into mainstream product offerings. While there can be
no assurance the Company will be successful in its efforts, it is planning
on targeting the fast growing communications market, and future CompactPCI
offerings are planned to support the Company's industrial computing
customers in embedded control applications.
The Company, under its Texas Micro brand, has been marketing SPARC based
communications servers since 1991. The industry award winning Texas Micro
Bellcore Network Equipment Building Systems ("NEBS") compliant product line
(the 9600 SERIES) has been an integral element in a variety of Advanced
Intelligent Network Central Office systems, deployed by several leading
switch manufacturers, Regional Bell Operating Companies and Public
Telephone Companies worldwide.
SEQUOIA ENTERPRISE PRODUCTS FOR THE TRANSACTION CRITICAL COMPUTING MARKET
-------------------------------------------------------------------------
Sequoia Fault Tolerant Platforms
--------------------------------
The Sequoia SERIES 400 and SERIES 500 system products are fault tolerant
Motorola based platforms running the TOPIX(R) operating system. In a fault
tolerant system, all faults are detected, isolated and fully recovered,
transparent to the end-user applications. Faults can range from transient
power fluctuations to hardware component failures; data storage device
outages to communications line errors; known software "panics" to transient
error conditions within the operating system. TOPIX based fault tolerant
systems will protect the end-user from an interruption in application
processing. The Company currently addresses fault tolerance by engineering
redundant component subsystems that have the ability to survive the failure
of individual hardware components. These systems can be repaired and
reconfigured without disrupting their continuing operations.
6
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Sequoia Business Critical Platforms
-----------------------------------
The SES/50 is a powerful, Intel based entry level server solution for small
businesses and can also act as a client in a Windows environment. It
includes a Pentium processor to match the most demanding business needs
with the most appropriate and cost effective solution.
The SES/110 Tower is designed to meet the needs of users requiring large
disk capacity and flexibility in peripheral selection in a high performance
ISA environment. This system utilizes a Pentium processor in a rugged
chassis with redundant cooling mechanisms to maintain high reliability.
This system is appropriate for critical applications and can withstand shop
floor conditions.
The SES/300 is designed to deliver server capabilities for the department
and small corporation. Single or dual Pentiums provide processing power for
superior data handling and throughput required by these customers.
The SES/500 is designed to meet the growing demands of the corporate server
market, delivering an innovative Intel architecture. This application
server is a modular server platform scaleable in an SMP environment for up
to four Pentium processors, incorporating an expandable memory subsystem,
with "hot-swappable" disk expansion.
Sequoia Software Products
-------------------------
SEQUOIApro/TM/ is recognized in the marketplace as the highest performance
native PICK(R) implementation, creating an environment that can be tailored
to handle a large number of users simply by adding the appropriate disk,
memory and terminals. SEQUOIApro offers enhanced BASIC performance and has
run time compatibility with a variety of legacy environments.
SEQUOIA/PICK, based on the multi-dimensional database model, has been
ported to the SCO UnixWare(R) Application Server operating system and is
available on SES/300 and SES/500 Intel based systems. It offers source code
compatibility with SEQUOIApro as well as Sequoia's TOPIX based fault
tolerant systems, allowing businesses to leverage their hardware and
software application investments.
jBASE/TM/ is an application development and database management system
which enhances and extends operating systems such as UNIX, including
UnixWare, Windows NT/TM/, and WIN 95/TM/. jBASE's development environment
includes tools for easy migration from existing environments. The Company
has entered into a strategic partnership with J A Computing, Ltd., based in
the United Kingdom, to sell, market and support jBASE. The product provides
a migration path for all PICK and PICK-like product users, including the
Company's own Sequoia/Pick, as well as providing a database solution for
software developers working in Microsoft Windows application development
environments.
7
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MARKETING, SALES AND CUSTOMERS
------------------------------
From July 1, 1991 through June 30, 1996, the Company has shipped more than
140,000 Texas Micro brand systems to more than 5,500 customers worldwide.
The Company's highly reliable microcomputers primarily serve two markets:
industrial and communications. In these markets, the products are most
frequently used in "mission-critical" or "job-critical" applications where
reliability, availability and/or data integrity are essential. The Company
believes that the growing need for extremely dependable microcomputers will
make "mission-critical" applications one of the most rapidly expanding
sectors of the microcomputer industry.
For the industrial market, the Company provides ruggedized products that
operate reliably under extreme environmental conditions, allowing them a
significant role in process control, discrete manufacturing and data
acquisition. The systems and SBC products are used in applications that
often have government-mandated requirements for up-to-the-minute reporting
of data, such as environmental safety information, financial data or
transit monitoring.
In the communications market, the public telephone network Central Office
environment has very rigorous standards for operating equipment. Central
Office computer systems in the United States must be Belcore NEBS compliant
including 48-volt power, heat and dust protection, earthquake resistance,
alarming and remote monitoring features. Because of its experience in
designing and building reliable rackmounted systems that operate under
extreme environmental conditions, the Company believes that the
communications industry presents significant opportunities for its
products.
Texas Micro brand highly reliable systems and SBCs are predominantly sold
through major OEMs, Value Added Resellers ("VARs"), Value Added
Distributors and Systems Integrators. These resellers typically specialize
in specific segments or applications for the industrial and communications
markets. In a given year, over 1,000 resellers will generally purchase
Texas Micro brand microcomputers.
In recent years, for the Sequoia brand product line, the Company has
focused its sales and marketing efforts in vertical markets such as
healthcare, retail catalog and financial services. The introduction of a
full line of Intel microprocessor based open systems allows customers to
expand their operations with industry standard technology.
The Company believes it is one of the only companies in the PICK
marketplace that can deliver a wide choice of software and migration
options, installed on contemporary open systems platforms, offering a full
range of value-added support and services. Sequoia is able to provide
systems for a broad range of PICK based business applications available
from the reseller channel and spanning numerous vertical markets.
8
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VARs generally package Sequoia brand products with other hardware or
application programs for resale to end-users. Sequoia generally appoints
VARs and resellers which target particular applications or vertical
markets, or cover certain geographic areas. At the end of fiscal 1996, over
50 VARs were authorized to represent Sequoia brand products.
Internationally, the Company sells through a combination of direct sales
and distributors. The Company has approximately 40 distributors in over 25
countries with particular emphasis in Canada, Mexico, Europe, Israel,
Japan, Korea, China, Singapore and Australia.
COMPETITION
-----------
The Company competes against various companies across its different product
lines. The Company's highly reliable microcomputers and board level
products sold under the Texas Micro brand compete in the industrial market
with the products of Diversified Technology, Industrial Computer Source and
I-Bus and, to a lesser extent, IBM and others in the United States and with
Siemens A.G., Kontron and others in Europe. In the communications market,
the Company competes with Digital Equipment Corp., Motorola Inc., Tandem
Computers, Inc., Stratus Computer, Inc. and Hewlett-Packard, as well as
several smaller companies. The Company believes its Texas Micro brand
products compete effectively based on their engineering responsiveness to
specific vertical market requirements, the resulting functional
specialization of its products and its strategy of focusing on relatively
"sheltered" market niches where major competitors have difficulty tailoring
their offerings to specific application requirements. These strategies help
offset the greater name recognition and broader service and support
resources of the Company's major competitors.
Sequoia brand products compete in the 10 to 2,000-plus user range of the
on-line transaction processing ("OLTP"), open systems market. The Company
therefore competes against other fault tolerant companies and against a
wide range of general purpose open systems companies. For fault tolerant
products, the Company's primary competitors are Tandem Computers, Inc. and
Stratus Computer, Inc. In the broader, general purpose, transaction
processing marketplace, the Company's primary competitors include Hewlett-
Packard, Data General, Digital Equipment Corp., IBM and Motorola Inc. as
well as Tandem Computers, Inc. and Stratus Computer, Inc. The majority of
Sequoia's enterprise systems customers use the PICK database. When a sale
is determined primarily by the database software, Sequoia competes with
products from Pick Systems, General Automation, and to a lesser extent,
VMARK and Unidata. These products are available on a wide range of hardware
platforms. The Company believes that it competes effectively in this market
on the basis of its system architecture, price/performance attributes, its
commitment to support the PICK environment, its version of the UNIX
operating system and its system compatibility with industry standard
hardware and software.
9
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PRODUCT DEVELOPMENT
-------------------
The Company's engineering strategy is to continue to develop differentiated
microprocessor based capabilities that can be delivered in "open systems"
using industry standard technologies. Through this product development
strategy, the Company is able to provide highly reliable and highly
available microcomputers that are compatible with "off-the-shelf"
application software and hardware environments, and provide a much greater
degree of system availability to users by focusing on reliability,
availability and data integrity as core features.
Product development for Texas Micro brand products during fiscal 1997 is
planned to feature extensive efforts in several technology areas, including
the enhancement of the Hardbody product line of rugged handheld computers,
the planned introduction of several SBCs employing the latest Pentium and
Pentium-Pro processors and the planned development of processor boards,
passive backplanes and chassis based on the CompactPCI specification.
Development efforts for enterprise systems are focused on providing
industry standard products that are compatible with "off-the-shelf"
application software and "open systems" hardware environments with the
integration of hardware and software solutions. The Company plans to
continue to develop and enhance its high performance, multi-dimensional
PICK database software products. Sequoia/Pick is optimized for enterprise-
wide OLTP. It has been ported to a native Intel microprocessor architecture
as well as various UNIX environments including SCO UnixWare and Sequoia
TOPIX for Intel and Motorola microprocessors, respectively. Additional
ports of Sequoia/Pick are planned for release during the coming year.
The Company's PICK software development strategy is to provide a broad
range of product offerings meeting customers' price/performance needs
ranging from stand-alone application servers to large-scale servers
networked using Sequoia/Open Data Architecture/TM/ software. With the
inclusion and integration of jBASE into the Sequoia software product line,
the range of solutions expands to include client/server Windows based
implementations. Sequoia continues to invest in its Transaction Logger
software which provides data replication, recovery, and a very high degree
of fault resilience. Adding this software option to enterprise systems
servers not only provides added protection against application software
failures, but guards against human procedural and operational mistakes as
well.
A team of engineers with expertise in both high availability systems and
fault tolerant systems is working to develop a new line of high
availability specialty and communications servers. If successful, these
efforts may result in systems offering mainframe like features at
competitive Intel based Windows NT server prices and may give the Company a
competitive technical edge in the highly available systems and server
business. As work progresses, the Company plans to seek OEM partnerships
with larger, strategic companies who may license the technology for
integration into their own servers and high-end workstations for sale
worldwide, although there can be no assurance the Company will be
successful in establishing such partnerships.
10
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CUSTOMER SERVICE AND SUPPORT
----------------------------
The Company provides service, training and technical support to its
customers in varying degrees depending both on the product line and on
customer contractual arrangements.
For the Texas Micro brand product lines, the Company's Houston based
technical support staff provides initial telephone troubleshooting service
for end user customers and distributors. These services include isolating
and verifying reported product failures, authorizing product returns,
tracking completion of repaired goods in support of customer requirements
and maintaining a Bulletin Board. Technical support also provides on-site
engineering support in the event that a technical issue can not be resolved
over the telephone. Field information is provided back to the appropriate
internal organizations so that corrective action may be implemented.
Sequoia brand Motorola based systems provide automated fault detection,
isolation and correction. These functions are designed to take place
without the user's intervention and while the system continues operating.
When a faulty component is detected, the system removes the component from
service, ensuring that no corrupted data will affect the rest of the
system. An electronic message is automatically sent to the Sequoia Global
Care Center by the malfunctioning system to report the error condition.
System use is not disrupted during the course of this activity. The system
assesses the remaining resources, automatically balances the work load
among them and continues operating. The Sequoia brand Intel based products
also utilize the Sequoia Global Care Center which provides seven day by 24
hour telephone assistance.
The architecture of the Sequoia brand products allows the Company to
utilize telemaintenance to perform many of the servicing tasks.
Telemaintenance, which consists of hot-line support, system monitoring,
remote diagnosis, operating system support and downloading, is provided by
the Sequoia Global Care Center. This enables the Company to minimize labor
costs by reducing the number of on-site visits.
The Company offers installation service on all Sequoia brand products it
sells. These services include: verification of power and site environment,
installation and testing of the system, verification of function by
execution of diagnostics, configuration and connection of all components to
existing building wiring at a single location.
The Company generally provides end-user purchasers of its systems with a 90
day to two year warranty depending on the product. Customer service
maintains a spares inventory to support the customer base. The Company
offers a variety of service agreements to its end-user customers and
resellers for ongoing system support and also provides technology
migration, system optimization, network services, and training programs to
customers on a fee basis.
11
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MANUFACTURING
-------------
The Company manufactures in two locations:
- Texas Micro brand products in Houston, Texas
- Sequoia brand products in Marlborough, Massachusetts
In Houston, the Company maintains surface mount technology ("SMT")
manufacturing capability for high quality, low-volume production run
printed circuit boards. High-volume production run manufacturing is
currently subcontracted to independent manufacturers. In addition to its
SMT manufacturing capability, the Company performs all subassembly, systems
configuration and testing in house.
In Marlborough, the Company's manufacturing process for Sequoia brand
Motorola based products consists primarily of assembly, testing and quality
control. The production of printed circuit boards is subcontracted to
independent manufacturers. The manufacturing process for the Intel based
Sequoia brand servers consists of configuring, integrating and testing
system hardware components in conjunction with operating system and
database software.
The Company purchases from other manufacturers substantially all peripheral
devices and components used in its products. Most of the components and
peripherals are available from a number of different suppliers, although
certain major items are procured from single sources. The Company believes
that alternate sources could be developed for such single-source items, if
necessary; however certain peripheral or component shortages, should they
occur, could have an adverse effect on the Company's business. Key
components for which alternative sources are not readily available are the
Intel and SPARC microprocessors.
The Company relies on a few key contract manufacturers for the manufacture
of some high-volume components used in the assembly of its microcomputers.
Although such subcontracting arrangements offer cost and capacity
advantages, and would eliminate the need to incur certain capital
expenditures associated with manufacturing, reliance on third-party
manufacturers gives the Company less control over the manufacturing process
for these components than if it undertook such activities itself. Any
failure of such subcontractors to manufacture and deliver components as
planned, or any problems with the quality of such components, could have a
material adverse effect on the Company's operations.
PROPRIETARY RIGHTS
------------------
The Company owns nine United States patents and 53 foreign patents.
Additional United States and foreign patent applications are pending. While
the Company believes that its patents provide it with protection for its
products and the processes through which its systems achieve fault
tolerance, it also believes that such patents may be of less significance
to its future success than such factors as innovation, technical skill and
management ability and experience. In addition, the Company relies on
copyright protection and its trade secret program to protect aspects of its
proprietary technology.
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EMPLOYEES
---------
As of June 30, 1996, the Company employed 396 people, including 140 in
sales, marketing and administration, 88 in research and development and
related engineering activities, 33 in customer service and support, and 135
in manufacturing. The Company believes that its future success will depend
in part upon its continued ability to attract and retain highly qualified
managerial, technical, sales, marketing, support and manufacturing
personnel. Competition in recruiting technical, marketing and sales
personnel in the computer industry is often intense. None of the Company's
employees is represented by a labor union, and the Company considers its
employee relations to be good.
BACKLOG
-------
At June 30, 1996, the Company had an unfilled order backlog of
approximately $5.1 million, which was subject to shipment in the subsequent
fiscal quarter, as compared to $8.7 million at June 30, 1995. This backlog
consists primarily of orders which were taken in the fourth quarter and are
shipped according to specific customer-scheduled requests. A substantial
portion of the Company's revenue in each quarter generally results from
orders received in that quarter. Therefore, differences in the receipt of
customer orders in any quarter may produce significant fluctuations in
quarterly revenue and profits. This pattern is likely to continue and makes
the Company's quarterly financial results difficult to predict.
SEASONALITY
-----------
Although the Company does not consider its business to be highly seasonal,
the Company in general experiences seasonally lower sales and earnings in
the first quarter of the fiscal year which is affected by the United States
and Europe summer slowdowns for business capital purchases.
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ITEM 2 - DESCRIPTION OF PROPERTIES
- ------
The Company occupies two primary facilities in the United States for
manufacturing, warehousing, marketing and sales, research and development and
administrative functions consisting of approximately 105,000 square feet in
Houston, Texas and 85,000 square feet in Marlborough, Massachusetts. The
Company occupies these premises under leases expiring in 2000 and 1997,
respectively. The Company leases ten additional offices, primarily for sales
and service, in various locations throughout the United States. The Company
also leases space for sales and service offices in the United Kingdom, the
Netherlands, Germany and Australia. The Company's aggregate annual rental
expense for these facilities for the fiscal year ended June 30, 1996 was
approximately $2,127,000. The Company believes that its current facilities are
adequate for its near term requirements. See Note 8 of Notes to Consolidated
Financial Statements for additional information regarding the Company's lease
obligations.
ITEM 3 - LEGAL PROCEEDINGS
- ------
In the normal course of business, the Company is, from time to time, subject to
various claims and legal proceedings. The Company believes that the ultimate
outcome of pending matters will not have a material effect on its financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
No matters were submitted to a vote of security holders of the Company, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 1996.
14
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------
The Company's common stock has been traded on the Nasdaq National Market under
the symbol SEQS since March 1990.
The following table reflects, for the fiscal quarters indicated, the high and
low closing sales prices of the Company's common stock as reported on the Nasdaq
National Market, in each case, based on published financial sources:
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HIGH LOW
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<S> <C> <C>
Fiscal 1994
Quarter ended October 3, 1993 $ 3.500 $ 1.750
Quarter ended January 2, 1994 $ 6.000 $ 2.750
Quarter ended April 3, 1994 $ 6.843 $ 3.938
Quarter ended June 30, 1994 $ 5.875 $ 3.250
Fiscal 1995
Quarter ended October 2, 1994 $ 5.875 $ 3.500
Quarter ended January 1, 1995 $ 4.750 $ 3.250
Quarter ended April 2, 1995 $ 4.313 $ 3.500
Quarter ended June 30, 1995 $ 4.563 $ 3.750
Fiscal 1996
Quarter ended October 1, 1995 $10.000 $ 4.125
Quarter ended December 31, 1995 $ 7.750 $ 4.750
Quarter ended March 31, 1996 $ 5.875 $ 3.438
Quarter ended June 30, 1996 $ 4.375 $ 3.000
</TABLE>
As of August 29, 1996, there were approximately 724 holders of record of the
Company's common stock. Except for a mandatory dividend paid to holders of the
Company's former Series A convertible preferred stock, the Company has not paid
any dividends since its inception and does not intend to pay any cash dividends
on its common stock in the foreseeable future.
15
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
- ------
The following selected financial data is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth below.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $102,222 $104,039 $91,826 $ 81,323 $100,015
Cost of revenues 66,264 57,079 48,009 46,867 48,505
--------- -------- -------- --------- --------
Gross profit 35,958 46,960 43,817 34,456 51,510
Research and development
expenses 12,780 13,044 11,621 15,104 17,774
Selling, general and
administrative expenses 25,206 28,052 22,053 31,187 37,083
Other Charges/Restruct. charge (credit) 3,010 - (1,109) 13,990 -
--------- -------- -------- --------- --------
Income (loss) from operations (5,038) 5,864 11,252 (25,825) (3,347)
Other income (expense), net 712 373 (113) (4,715) (484)
--------- -------- -------- --------- --------
Income (loss) before
provision for income taxes (4,326) 6,237 11,139 (30,540) (3,831)
--------- -------- -------- --------- --------
Provision for income taxes 191 960 658 512 (183)
--------- -------- -------- --------- --------
Income before cumulative effect
of change in accounting principle (4,517) 5,277 10,481 (31,052) (3,648)
Cumulative effect of change
in accounting principle - - - 171 -
--------- -------- -------- --------- --------
Net income (loss) ($4,517) $ 5,277 $10,481 ($30,881) ($3,648)
========= ======== ======== ========= ========
Net income (loss) per share ($0.29) $0.34 $0.69 ($2.23) ($0.27)
========= ======== ======== ========== ========
Weighted average number of
common and common share
equivalents outstanding 15,423 15,565 15,103 13,829 13,528
</TABLE>
See Note 1 to Consolidated Financial Statements for discussion on the Other
Charges/Restructuring charge (credit).
16
<PAGE>
SELECTED FINANCIAL DATA
(In thousands)
CONSOLIDATED BALANCE SHEET DATA
As of June 30,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $26,512 $29,884 $26,270 $13,266 $37,974
Total assets $46,351 $52,241 $50,409 $46,162 $69,195
Short-term debt
including current portion of
long-term debt $ 56 $ 125 $ 2,484 $ 6,611 $ 3,552
Long-term obligations $ 0 $ 56 $ 1,835 $ 4,225 $ 4,654
Stockholders' equity $31,791 $35,326 $29,484 $15,844 $46,253
</TABLE>
17
<PAGE>
The following information may be utilized in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
PERCENT OF REVENUES Years ended June 30, YEAR TO YEAR PERCENT CHANGE
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
100% 100% 100% Revenues (2%) 13% 13%
65% 55% 52% Cost of revenues 16% 19% 2%
- -------- -------- -------- -------- -------- --------
35% 45% 48% Gross profit (23%) 7% 27%
13% 13% 13% Research and development (2%) 12% (23%)
Selling, general and
25% 27% 24% administrative expenses (10%) 27% (29%)
Other charges/
3% N.M. (1%) restructuring (credit) N.M. N.M. N.M.
- -------- -------- -------- -------- -------- --------
Income (loss) from
(5%) 6% 12% operations (186%) (48%) N.M.
1% N.M. N.M. Other income (expense) N.M. N.M. N.M.
(4%) 6% 12% Income (loss) before taxes (169%) (44%) N.M.
N.M. 1% 1% Provision for income taxes (80%) 46% N.M.
(4%) 5% 11% Net income (loss) (186%) (50%) N.M.
======== ======== ======== ======== ======== ========
</TABLE>
N.M. = Not Meaningful
18
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ RESULTS OF OPERATIONS
The Company is a provider of specialized microcomputers targeted at specific
vertical markets. Under the Texas Micro brand, the Company provides Intel based
highly reliable (previously referred to as ruggedized) microcomputer systems and
single board computers ("SBCs") for the industrial and communications markets
and highly reliable SPARC based NEBS compliant products specifically designed
for the Central Office telecommunications market. In addition, under the
Sequoia brand, the Company markets fault tolerant and business critical systems
and upgrade products for on-line transaction processing and other interactive
applications, in which system availability, fast response times and data
integrity are critical. The Company operates in one segment, computer systems,
and is a leading supplier of highly reliable and business critical
microcomputers addressing market requirements for greater system availability
from the desktop to the mainframe.
RESULTS OF OPERATIONS - YEARS ENDED JUNE 30, 1996 AND 1995
REVENUES
- --------
The Company's revenues for fiscal 1996 of $102,222,000 decreased 2% from
$104,039,000 for fiscal 1995. While product revenues were relatively unchanged
from fiscal 1995 to 1996, service and other revenues decreased 10% from fiscal
1995 to 1996, primarily the result of a one-time license fee of $1,000,000
recorded in fiscal 1995.
Although product revenues for fiscal 1996 of $87,940,000 were relatively
unchanged from fiscal 1995 revenues of $88,145,000, the mix of revenues changed
significantly. Revenues for highly reliable products for the industrial market
increased 27%, to $57,166,000 for fiscal 1996 compared with $44,933,000 for
fiscal 1995. Market demand for these products resulted in a 34% increase in
units shipped, partially offset by a 5% decline in average unit selling prices
for fiscal 1996. This increase in sales of highly reliable products for the
industrial market was offset by a 41% decrease in sales of Motorola based,
business critical products and a 13% decrease in sales of NEBS compliant
products. The decline in sales of Motorola based products was attributable to a
continued decline in overall market demand. During both fiscal 1996 and 1995,
Motorola based product revenues primarily consisted of sales of additional
systems and upgrades to existing customers. The decline in sales of NEBS
compliant products resulted from a sharp reduction in sales to one customer to
whom the Company had made significant sales during fiscal 1995. Although there
can be no assurance that the Company will meet its expectations, the Company
expects fiscal 1997 sales of highly reliable products for the industrial market
to exceed 1996 levels and expects NEBS compliant and Motorola based products to
further decline in fiscal 1997.
Sales outside the United States for fiscal 1996 increased to $24,163,000, or 24%
of total revenues, from $23,445,000, or 22% of total revenues for fiscal 1995.
The composition of sales outside the United States changed geographically with
increases in sales in Western Europe partially offset by decreases in sales in
Australia and Japan.
19
<PAGE>
During fiscal 1995, sales to one customer represented 13% of total Company
revenues. During fiscal 1996, there were no sales to any customer representing
greater than 10% of total Company revenues.
GROSS MARGIN
- ------------
Gross margin of 35% for fiscal 1996 reflected a decline of 10 percentage points
from 45% in fiscal 1995. The decrease was attributable to a decrease in product
margin of 10 percentage points and a decrease in service and other margin of 8
percentage points.
The decreased product margin was substantially caused by inventory write-downs
of $4,058,000 resulting primarily from a decline in overall market demand for
the Company's Motorola based systems as well as a shift in the mix of sales to a
higher proportion of lower margin highly reliable products compared to fiscal
1995.
The decreased service and other margin was caused by inventory write-downs of
$1,294,000 related to the reduction in the amount of spares required to support
Motorola based products as well as a one-time license fee margin of $1,000,000
included in fiscal 1995.
Continued fluctuations in future margin levels may result from the mix of
product revenues, service and other revenues and the respective varying margin
contributions from sales of the various product lines.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
The Company's fiscal 1996 research and development expenses of $12,780,000
decreased 2% from $13,044,000 for fiscal 1995. As a percent of revenues,
research and development expenses remained relatively unchanged, at 13% of
revenues. Research and development spending for fiscal 1996 was focused on
efforts to further expand product offerings for highly reliable products for the
industrial markets, and in particular on the introduction of the Hardbody, a
handheld, mobile PC. In addition, the Company continued its research and
development activities on a new line of business critical servers using Intel
processors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses decreased 10% to $25,206,000, or
25% of revenues, for fiscal 1996 from $28,052,000, or 27% of revenues, for
fiscal 1995. The higher spending for fiscal 1995 included non-recurring merger
transaction expenses of $2,134,000. During the fourth quarter of fiscal 1996,
the Company began realizing the benefits of reduced expenses which resulted from
workforce reductions (see Other Charges).
OTHER CHARGES
- -------------
During the third quarter of fiscal 1996, and resulting from the declining demand
for the Company's Motorola based products, the Company took actions that
included curtailing investment in its Motorola based products and refocusing its
research and development activities.
20
<PAGE>
In addition, the Company appointed a new Chief Executive Officer, announced that
it would relocate its corporate headquarters to Houston, Texas and commenced a
reorganization of certain related general and administrative functions. These
decisions resulted in overall workforce reductions of approximately 10% and a
writedown of certain assets resulting in a charge of $3,010,000 for fiscal 1996.
Severance and related costs contained in other charges total $2,401,000. In
addition, the Company wrote down other assets of $284,000, consisting of
software licenses and incurred other costs of $325,000, the most material of
which included $157,000 related to a contract cancellation for development work.
The cash impact of the other charges is $2,584,000 and is comprised primarily of
severance and related benefits. Of this amount, $1,195,000 was paid in fiscal
1996 with the remainder expected to be paid during fiscal 1997. Expense
reductions resulting from the workforce reductions began to be realized during
the fourth quarter of fiscal 1996 and amount to approximately $3,200,000 on an
annualized basis.
OPERATING INCOME (LOSS)
- -----------------------
The Company reported a loss from operations of $5,038,000 for fiscal 1996,
compared to income from operations of $5,864,000 for fiscal 1995. The decrease
in operating income resulted from the other charges incurred during fiscal 1996
as well as the decrease in gross margin.
OTHER INCOME
- ------------
The Company generated other income of $712,000, primarily interest income,
during fiscal 1996, as compared to $373,000 for fiscal 1995. The increase in
other income resulted primarily from having no outstanding bank borrowings
during fiscal 1996.
INCOME TAXES
- ------------
The Company recorded provisions for income taxes of $191,000 for fiscal 1996
compared to $960,000 for fiscal 1995. The fiscal 1996 provisions are primarily
for state income taxes and income taxes on foreign operations. The decrease
from fiscal 1995 resulted from losses incurred during fiscal 1996.
RESULTS OF OPERATIONS - YEARS ENDED JUNE 30, 1995 AND 1994
REVENUES
- --------
The Company's revenues for fiscal 1995 of $104,039,000 increased 13% from
$91,826,000 for fiscal 1994. The increase in revenues was comprised of a 15%
increase in product revenues and a 9% increase in service and other revenues.
Product revenue growth of $11,620,000 was attributable to sales, which more than
doubled, of NEBS compliant products caused primarily by significantly higher
demand from one customer in fiscal 1995 as well as a 5% increase in sales of
highly reliable products for the industrial market resulting primarily from the
Company's 1995 acquisition of Intel's OmniRACK and XpressRACK product lines.
21
<PAGE>
The increases were partially offset by a 5% decrease in sales of Motorola based
products. The decline in sales of Motorola based products was attributable to a
substantially lower level of new systems shipped compared to fiscal 1994. The
decline in new systems was partially offset by an increased level of upgrade and
expansion sales to the Company's installed base as well as the increased sales
resulting from the Company's July 1, 1994 acquisition of selected assets and the
ongoing business operations of its Australia joint venture with Tricom Group
Pty. Ltd. During fiscal 1995, this acquisition resulted in $5,798,000 of
Motorola based products and related services revenues, as compared to $1,332,000
when operated as a distributor in fiscal 1994.
During fiscal 1995, the Company received $1,000,000 in software license fees,
recorded in service and other revenues, as the final payment from a development
and distribution agreement. In fiscal 1994, the Company received $1,500,000 in
software license fees as a result of this same agreement.
Sales outside the United States comprised $23,445,000, or 22% of total revenues
for fiscal 1995, as compared to $19,305,000, or 21% of total fiscal 1994
revenues. The increase was primarily attributable to the additional revenues
provided from the Company's Australian subsidiary.
During fiscal 1995, sales to one customer represented 13% of total revenues.
For fiscal 1994, no customer accounted for 10% of total revenues.
GROSS MARGIN
- ------------
Gross margin of 45% for fiscal 1995 declined by 3 percentage points from 48% for
fiscal 1994. The decrease in gross margin was due to decreases both in product
margin to 44% for fiscal 1995 as compared to 46% for fiscal 1994, and decreases
in service and other margin to 49% for fiscal 1995 as compared to 56% for fiscal
1994.
The decrease in product margin was primarily related to a decline in the margin
for Motorola based products due to the introduction of new systems sold at the
low end of the market. Highly reliable product margins held relatively constant
for fiscal 1995 as compared to fiscal 1994. Product margin on sales of
refurbished equipment, acquired through upgrade programs, partially offset other
declines in product gross margin. In addition, sales during fiscal 1994 of
approximately $900,000 of inventory previously written down contributed one
percentage point to fiscal 1994 product gross margin.
The decrease in service and other margin was caused by lower service pricing for
certain Motorola based products, additional costs due to increases in staffing
in the product support and professional services groups and lower license fee
margin in fiscal 1995 as compared to fiscal 1994.
22
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
The Company's research and development expenses of $13,044,000 increased 12% for
fiscal 1995 from $11,621,000 in fiscal 1994. The increase resulted primarily
from efforts made to support a joint development program with an operating
system software company to develop operating software programs for new open
system products, to further expand product offerings for the communications
market and to develop the Hardbody. Research and development expenses as a
percentage of revenues remained relatively unchanged from fiscal 1994 to 1995 at
13%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses of $28,052,000 for fiscal 1995
increased 27% from $22,053,000 for fiscal 1994. The increase primarily resulted
from four factors: (i) expenses related to the acquisition of the TMI Group of
$2,146,000, (ii) increased selling expenses, specifically, commissions and
external Value Added Reseller ("VAR") fees related to the higher revenue volume,
(iii) new corporate advertising and increased marketing programs related to new
products and the expansion of sales channels, and (iv) personnel additions
focused on expanding distribution channels in the United States communications
market and staffing the Australian subsidiary which commenced operation on July
1, 1994.
OPERATING INCOME
- ----------------
The Company reported an operating profit of $5,864,000 during fiscal 1995, as
compared to $11,252,000 during fiscal 1994. The decrease in operating profit
was primarily the result of reduced gross margin, the expenses related to the
completion of the acquisition of the TMI Group and other increases in selling,
general and administrative expenses. In addition, fiscal 1994 operating profit
included a restructuring credit of $1,109,000 and sales of previously written
down inventory of $900,000.
OTHER INCOME (EXPENSE)
- ----------------------
The Company had net other income of $373,000 for fiscal 1995, as compared to net
other expense of $113,000 for fiscal 1994. The increase in net other income
resulted from higher average cash and short-term investment balances which
earned higher interest rates as well as lower capital lease obligations during
fiscal 1995. In addition, decreased interest expense resulted from the June
1994 pay down of a subordinated note with proceeds of bank debt having more
favorable terms which contributed to the change in other income (expense) from
fiscal 1994.
INCOME TAXES
- ------------
The Company recorded provisions for income taxes of $960,000 for fiscal 1995 and
$658,000 for fiscal 1994. The tax provisions reflected the combination of the
Company's pre-merger provisions for income taxes for federal alternative minimum
tax and state tax liabilities, and the pre-merger tax provisions of the TMI
Group.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and cash equivalents of $12,287,000 and
working capital of $26,512,000. This compared to cash and cash equivalents of
$15,317,000 and working capital of $29,884,000 at June 30, 1995.
The reduction in cash was primarily due to capital expenditures of approximately
$2,200,000 during fiscal 1996 and was comprised primarily of computer equipment.
The expenditures included tooling costs for the Hardbody as well as expenditures
related to the release of a new line of enterprise servers using Intel
processors. The Company expects continued capital expenditures, but at a lower
rate than fiscal 1996, related to continued investment in the development of the
Intel based product lines.
During fiscal 1996, the Company maintained a line of credit ("the facility")
with State Street Bank and Trust Company ("SSB") and Texas Commerce Bank,
National Association ("TCB"). At June 30, 1996, due to losses incurred during
the fiscal year, the Company was not in compliance with certain facility
covenants. As a result, the Company requested and received a waiver in
conjunction with an amendment to the facility effective August 1, 1996. The
amended terms included: (i) designating TCB as sole agent, (ii) removing SSB
from all participation, and (iii) reducing the facility to maximum borrowings of
$5,000,000. Substantially all other terms remained unchanged. At the Company's
option, loans may be drawn down subject to two interest rate alternatives: (i)
a prime rate option bearing interest at the then current prime rate or (ii) a
LIBOR option bearing interest at the LIBOR rate plus 2%. The Company is
required to meet specific covenants throughout the duration of the facility
which expires on October 31, 1996. The Company plans to negotiate a new
borrowing facility or further amend the existing facility before it expires.
Borrowings, if any, are subject to a borrowing base formula and are secured by
substantially all assets of the Company. As of August 25, 1996, no amounts were
outstanding under this facility and the Company had $5,000,000 available under
the borrowing base formula.
On September 10, 1996, the Company announced that its Board of Directors had
authorized the repurchase of up to two million shares of the Company's common
stock, on the open market or in negotiated transactions, during the fiscal year
ended June 30, 1997. The Company intends to utilize its cash balances to make
any repurchases pursuant to this announcement. As of September 18, 1996, no
shares had been repurchased.
The Company believes that its present cash flow, cash balances and borrowing
capacity are adequate for its operating needs, capital expenditures and stock
repurchases through fiscal 1997 as well as the expected cash requirement to
settle its remaining severance and related obligations included in other charges
of approximately $1,389,000.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". The Company intends
to adopt this standard in fiscal year 1997. The Company does not expect the
adoption of this standard to have a material effect on its financial position or
results of operations.
24
<PAGE>
In November 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company intends to adopt only
the disclosure requirements of SFAS No. 123 for the year ending June 30, 1997.
Therefore, the adoption will have no impact on the Company's financial position
or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements that involve
a number of risks and uncertainties. There are a number of factors that could
cause the Company's actual results to differ materially from those forecasted or
projected in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or changed circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Annual Report on Form 10-K and presented elsewhere by management from time to
time:
The markets for NEBS compliant products and highly reliable products for
the industrial market are characterized by rapidly changing technology and
user needs, requiring significant investment for product development.
During fiscal 1996, the Company introduced a new product, the Hardbody, a
mobile handheld PC. The Company believes that a large part of its ability
to increase revenue in the future will depend upon its ability to develop,
manufacture and market new and differentiated products such as the
Hardbody, which meet new market requirements and changing user needs in a
cost-effective and timely manner. There can be no assurance that these
efforts will be successful.
The Company competes against a wide range of companies. The Company
believes that it competes effectively based on its engineering
responsiveness to special needs and the price/performance characteristics
and hardware specialization of its products. However, the computer
marketplace is highly competitive. Many of the Company's competitors have
significantly greater financial, marketing and technological resources.
There can be no assurance that the Company will have the resources
necessary to compete successfully in the future.
The Company purchases most of the components of its products and virtually
all of its peripheral devices from a limited number of suppliers. Although
the Company believes that alternate sources of these items could be
developed in a short period of time if required, future shortages of such
components or peripherals could result in production delays. Certain
microprocessors used in the highly reliable product lines are available
only from Intel Corporation and Sun Microsystems, Inc., and changes in the
availability of these components at any time could adversely affect the
Company's operations.
25
<PAGE>
A substantial portion of the Company's revenue in each quarter generally results
from orders received in that quarter. Therefore, differences in the receipt of
customer orders in any quarter may produce significant fluctuations in quarterly
revenue and profits. This pattern is likely to continue and makes the Company's
quarterly financial results difficult to predict.
26
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------
The following statements are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Reports of Independent Accountants F-1 - F-2
Consolidated Balance Sheets at June 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the three years
ended June 30, 1996 F-4
Consolidated Statements of Cash Flows for the three
years ended June 30, 1996 F-5
Consolidated Statements of Stockholders' Equity for the
three years ended June 30, 1996 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- -------
The information required for Part III, Item 10 in this Annual Report on Form 10-
K is incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 1996 Annual Meeting of Stockholders. Such information
will be contained in the sections of the Proxy Statement captioned "Directors"
and "Executive Officers".
ITEM 11 - EXECUTIVE COMPENSATION
- -------
The information required for Part III, Item 11 in this Annual Report on Form 10-
K is incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 1996 Annual Meeting of Stockholders. Such information
will be contained in the sections of the Proxy Statement captioned "Report of
the Compensation Committee", "Director's Compensation", "Named Executive
Officer's Compensation", "Option Grants and Exercises", "Stock Option Repricing"
and "Comparative Stock Performance".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------
The information required for Part III, Item 12 in this Annual Report on Form 10-
K is incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 1996 Annual Meeting of Stockholders. Such information
will be contained in the section of the Proxy Statement captioned "Voting
Securities and Certain Holders Thereof".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
The information required for Part III, Item 13 in this Annual Report on Form 10-
K is incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 1996 Annual Meeting of Stockholders. Such information
will be contained in the section of the Proxy Statement captioned "Certain
Transactions".
28
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------
(a) Exhibits
The exhibits listed in the Exhibit Index are filed as part of this
Annual Report on Form 10-K.
(b) Financial Statement Schedules
The Financial Statement Schedule is listed on page 27 of this Annual
Report on Form 10-K.
(c) Reports on Form 8-K
None.
The following trademarks are mentioned in this Annual Report on Form 10-K:
Sequoia and Topix are registered trademarks of Sequoia Systems, Inc.
SequoiaPro and Sequoia Open Data Architecture are trademarks of Sequoia
Systems, Inc.
Texas Micro Systems is a registered trademark of Texas Microsystems, Inc.
Hardbody is a trademark of Texas Microsystems, Inc.
jBASE is a trademark of James Anthony Computing, Ltd.
Pick is a registered trademark of Pick Systems, Inc.
UNIX and UNIXWARE are registered trademarks of UNIX System Laboratories,
Inc.
Windows is a registered trademark of Microsoft Corporation.
WIN 95 and Windows NT are trademarks of Microsoft Corporation.
Intel is a registered trademark of Intel Corporation.
Motorola is a registered trademark of Motorola, Inc.
SPARC is a registered trademark of Sun Microsystems.
CompactPCI is a registered trademark of PICMG.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEQUOIA SYSTEMS, INC.
By:/s/ J. Michael Stewart
----------------------
J. Michael Stewart
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Michael Stewart President, Chief Executive September 23, 1996
- ----------------------- Officer and Director
J. Michael Stewart (principal executive officer)
/s/ Francis J. Hughes, Jr. Chairman of the Board September 23, 1996
- --------------------------- of Directors
Francis J. Hughes, Jr.
/s/ Kermit R. Sumrall Acting Chief Financial Officer September 23, 1996
- ---------------------- (principal financial and
Kermit R. Sumrall accounting officer)
/s/ Dean C. Campbell Director September 23, 1996
- ---------------------
Dean C. Campbell
/s/ John F. Smith Director September 23, 1996
- -------------------
John F. Smith
/s/ A. Theodore Engkvist Director September 23, 1996
- -------------------------
A. Theodore Engkvist
/s/ Dennis M. Malloy Director September 23, 1996
- ---------------------
Dennis M. Malloy
/s/ Frank B. Ryan Director September 23, 1996
- ------------------
Frank B. Ryan
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sequoia Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Sequoia Systems,
Inc. and subsidiaries as of June 30, 1995 and 1996 and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ending June 30, 1996. These financial statements give
retroactive effect to the merger of Sequoia Systems, Inc. and the TMI Group on
March 31, 1995, which has been accounted for using the pooling of interest
method as described in Note 1 to the consolidated financial statements. These
financial statements are the responsibility of the Company's management. We did
not audit the financial statements of the TMI Group for any year prior to June
30, 1995 which statements reflect total assets constituting 35% of consolidated
total assets as of June 30, 1994, and which reflect total revenues constituting
51% and 19% of the consolidated total revenues for each of the years ending June
30, 1994 and 1993, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for the TMI Group is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sequoia Systems, Inc.
and subsidiaries at June 30, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ending June 30, 1996, in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
July 22, 1996, except for Note 11, as
to which the date is September 10, 1996
F-1
<PAGE>
ARTHUR ANDERSEN L.L.P.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Boards of Directors of the
Texas Microsystems Group:
We have audited the combined balance sheets of the Texas Microsystems Group, as
of June 30, 1994, and the related combined statements of operations,
shareholders' equity and cash flows for the year then ended (not presented
separately herein). These combined financial statements are the responsibility
of the Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Texas
Microsystems Group as of June 30, 1994, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Effective July 1, 1992, the Group adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
Houston, Texas
November 30, 1994
F-2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(in thousands)
ASSETS June 30, June 30,
1996 1995
------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $12,287 $15,317
Accounts receivable, net of allowance for doubtful accounts
of $1,018 at June 30, 1996 and $1,288 at June 30, 1995 13,371 12,739
Inventories 13,491 16,713
Other current assets 1,923 1,974
------------------------------------
Total current assets 41,072 46,743
------------------------------------
Equipment and Improvements, at cost:
Computer equipment 12,473 12,329
Machinery and equipment 5,293 4,687
Equipment under capital lease 2,337 2,666
Furniture and fixtures 1,504 1,306
Leasehold improvements 1,683 1,575
------------------------------------
23,290 22,563
Less - Accumulated depreciation and amortization 18,603 17,828
------------------------------------
4,687 4,735
------------------------------------
Other Assets 592 763
------------------------------------
Total Assets $46,351 $52,241
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $56 $125
Accounts payable 4,743 6,809
Accrued expenses 9,203 9,037
Deferred revenue 558 888
------------------------------------
Total current liabilities 14,560 16,859
------------------------------------
Obligations under capital lease, net of current portion - 56
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500 shares at June 30, 1996 and 1995
Issued--none - -
Common stock, $.40 par value:
Authorized--35,000 shares at June 30, 1996 and 1995
Issued and outstanding--15,579 shares at June 30, 1996,
and 15,165 shares at June 30, 1995 6,232 6,066
Additional paid-in capital 80,207 79,395
Accumulated deficit (54,805) (50,288)
Cumulative translation adjustment 157 153
------------------------------------
Total stockholders' equity 31,791 35,326
------------------------------------
Total Liabilities and Stockholders' Equity $46,351 $52,241
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
For the years ended June 30,
1996 1995 1994
--------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues
Product $87,940 $88,145 $76,525
Service and Other 14,282 15,894 15,301
---------------------------------------------------------------
Total revenues 102,222 104,039 91,826
Cost of Revenues
Product 57,801 48,985 41,345
Service and Other 8,463 8,094 6,664
----------------------------------------------------------------
Total cost of revenues 66,264 57,079 48,009
Gross profit 35,958 46,960 43,817
Research and Development Expenses 12,780 13,044 11,621
Selling, General and Administrative Expenses 25,206 28,052 22,053
Other Charges / Restructuring (Credit) 3,010 - (1,109)
----------------------------------------------------------------
Total operating expenses 40,996 41,096 32,565
Income (loss) from operations (5,038) 5,864 11,252
Interest Income 668 809 345
Interest Expense (17) (290) (561)
Other Income (Expense) 61 (146) 103
----------------------------------------------------------------
Income (loss) before provision for income taxes (4,326) 6,237 11,139
Provision for Income Taxes 191 960 658
----------------------------------------------------------------
Net income (loss) ($4,517) $5,277 $10,481
================================================================
Income (Loss) Per Common and Common Share Equivalent ($0.29) $0.34 $0.69
================================================================
Weighted Average Number of Common and Common Share
Equivalents Outstanding 15,423 15,565 15,103
================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
For the years ended June 30,
1996 1995 1994
-------------------------------------------------------
<S> ( in thousands )
Cash Flows From Operating Activities: <C> <C> <C>
Net income (loss) ($4,517) $ 5,277 $10,481
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities--
Depreciation 2,181 2,553 2,557
Amortization 160 518 761
Write down of equipment 52 - -
Provisions for inventories 5,352 573 1,127
Provisions for bad debts 12 51 416
Other charges 496 - -
Restructuring credit - - (1,109)
Changes in assets and liabilities:
Accounts receivable (644) 19 (1,996)
Accounts receivable, long term - - 50
Accrued interest included in long-term debt - - (251)
Inventories (2,221) (7,588) 1,370
Income taxes 241 423 (390)
Deferred tax asset, net - (491) 13
Other current assets (6) (78) 247
Accounts payable (2,066) 426 1,476
Accrued expenses (146) (373) 661
Deferred revenue (330) 75 (128)
-------------------------------------------------------
Net cash provided by (used in)
operating activities (1,436) 1,385 15,285
-------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of equipment and improvements (2,231) (2,477) (2,254)
Decrease (increase) in other assets (220) (1,042) 218
-------------------------------------------------------
Net cash used in investing activities (2,451) (3,519) (2,036)
-------------------------------------------------------
Cash Flows From Financing Activities:
Repayment of obligations under capital leases (125) (121) (191)
Short-term debt - (2,372) (1,535)
Long-term debt - (1,645) (1,663)
Payment of cash dividend on preferred shares - - (61)
Proceeds from issuance of common stock 978 449 294
-------------------------------------------------------
Net cash provided by (used in)
financing activities 853 (3,689) (3,156)
-------------------------------------------------------
Effect of exchange rates on cash 4 116 52
Net Increase (Decrease) in Cash and Cash Equivalents (3,030) (5,707) 10,145
Cash and Cash Equivalents, beginning of year 15,317 21,024 10,879
-------------------------------------------------------
Cash and Cash Equivalents, end of year $12,287 $15,317 $21,024
=======================================================
Supplemental Disclosures of Noncash Investing and Financing Activities:
Issuance of convertible preferred stock in settlement
of class action lawsuit - - $ 2,875
Release of restricted cash for:
Class action settlement - - 1,000
Repayment of note payable to bank - - 1,950
Repayment of obligations under capital leases - - 1,039
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 16 $ 532 $ 1,261
Income taxes paid (refunds received) (13) 1,090 921
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
For the years ended June 30,
(in thousands)
Common Stock Additional Preferred Stock Additional
Par Paid-in Par Paid-in
Shares Value Capital Shares Value Capital
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 13,688 $5,475 $76,368 - $ - $ -
Issuance of common stock pursuant to stock option
and employee stock purchase plans 164 66 228 - - -
Issuance of convertible preferred stock - - - 1,047 419 2,456
Conversion of preferred stock 1,047 419 2,456 (1,047) (419) (2,456)
Foreign currency translation - - - - - -
Dividends paid on convertible preferred stock - - - - - -
Net income - - - - - -
------------------------------------------------------------------------
Balance, June 30, 1994 14,899 5,960 79,052 - - -
Issuance of common stock pursuant to stock option
and employee stock purchase plans 266 106 343 - - -
Foreign currency translation - - - - - -
Dividends paid on convertible preferred stock - - - - - -
Net income - - - - - -
------------------------------------------------------------------------
Balance, June 30, 1995 15,165 6,066 79,395 - - -
Issuance of common stock pursuant to stock option
and employee stock purchase plans 414 166 812 - - -
Foreign currency translation - - - - - -
Net loss - - - - - -
------------------------------------------------------------------------
Balance, June 30, 1996 15,579 $6,232 $80,207 - $ - $ -
========================================================================
<CAPTION>
Cumulative
Preferred Accumulated Translation
Dividends Deficit Adjustment Total
------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 $ - ($65,985) ($15) $15,843
Issuance of common stock pursuant to stock option
and employee stock purchase plans - - - 294
Issuance of convertible preferred stock - - - 2,875
Conversion of preferred stock - - - -
Foreign currency translation - - 52 52
Dividends paid on convertible preferred stock (61) - - (61)
Net income - 10,481 - 10,481
-------------------------------------------------
Balance, June 30, 1994 (61) (55,504) 37 29,484
Issuance of common stock pursuant to stock option
and employee stock purchase plans - - - 449
Foreign currency translation - - 116 116
Dividends paid on convertible preferred stock 61 (61) - -
Net income - 5,277 - 5,277
-------------------------------------------------
Balance, June 30, 1995 - (50,288) 153 35,326
Issuance of common stock pursuant to stock option
and employee stock purchase plans - - - 978
Foreign currency translation - - 4 4
Net loss - (4,517) - (4,517)
-------------------------------------------------
Balance, June 30, 1996 $ - ($54,805) $157 $31,791
=================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
NOTE 1 - BASIS OF PRESENTATION
- ------
The Company is a provider of specialized microcomputers targeted at specific
vertical markets. Under the Texas Micro brand, the Company provides Intel based
highly reliable (previously referred to as ruggedized) microcomputer systems and
single board computers ("SBCs") for the industrial and communications markets
and highly reliable SPARC based Bellcore Network Equipment Building Systems
("NEBS") compliant products specifically designed for the Central Office
telecommunications market. In addition, under the Sequoia brand, the Company
markets fault tolerant and business critical systems and upgrade products for
on-line transaction processing and other interactive applications, in which
system availability, fast response times and data integrity are critical. The
Company operates in one segment, computer systems, and is a leading supplier of
highly reliable and business critical microcomputers addressing market
requirements for greater system availability from the desktop to the mainframe.
A. MERGER AND STOCK PURCHASE
On March 31, 1995, the Company completed a merger and stock purchase pursuant to
which the Company acquired all of the common stock of SPCO, Inc., along with its
subsidiaries Texas Microsystems, Inc. and Texas Micro Electronics, Inc. and
their respective subsidiaries ("the TMI Group") (collectively the
"Transaction"). The Company issued 5,272,944 shares of its common stock in
exchange for all the common stock and securities to acquire the common stock of
each of the members of the TMI Group. The Transaction was accounted for as a
pooling of interests, and accordingly, the consolidated financial statements for
all comparative periods have been restated to include the results of operations,
the financial position and cash flows of the TMI Group.
Total transaction costs of approximately $2,134,000 were expensed as incurred in
the first nine months of fiscal 1995. These transaction costs included fees to
financial advisors and legal, accounting, printing and other related expenses
incurred in connection with the merger.
F-7
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
The following information presents certain statement of operations data of
Sequoia Systems and the TMI Group for the periods prior to the Transaction. The
consummation of the Transaction was substantially coincident with the fiscal
third quarter 1995 closing.
<TABLE>
<CAPTION>
(unaudited)
(in thousands)
Sequoia Systems TMI Group Total
--------------- -------------- -----
<S> <C> <C> <C>
REVENUES FOR:
Nine months ended:
April 2, 1995 $32,850 $44,337 $77,187
April 3, 1994 32,205 34,251 66,456
Year ended June 30, 1994 44,765 47,061 91,826
NET INCOME FOR:
Nine months ended:
April 2, 1995 (1) $2,097 $1,463 $3,560
April 3, 1994 5,073 841 5,914
Year ended June 30, 1994 8,567 1,914 10,481
</TABLE>
(1) includes pre-tax expenses related to the Transaction of $1,236,000 for
Sequoia Systems and $898,000 for the TMI Group for the nine months ended
April 2, 1995.
B. OTHER CHARGES / RESTRUCTURING CREDIT
During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 related to severance costs and other asset
write-downs. These other charges included: $2,401,000 of severance and related
costs, $284,000 to write off other current and long term assets which were no
longer used and $325,000 for other contractual obligations related to these
actions. The workforce reductions comprised approximately 10%, or 43 personnel,
and were made across all functions. Payments of approximately $1,195,000 were
made in connection with these charges during the year ended June 30, 1996.
Remaining liabilities of $1,389,000 at June 30, 1996 predominantly consisted of
severance and related costs which are expected to be paid out during fiscal
1997.
F-8
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
During fiscal 1992, the Company recorded a restructuring charge of $13,990,000
as a result of lower revenues and a downsizing of the operations based on
anticipated future revenue levels. During fiscal 1994, the Company settled its
obligations, and determined that, as of June 30, 1994, $1,109,000 of
restructuring charges was in excess of business requirements and recorded a
restructuring credit. Additionally, the Company realized a benefit in cost of
revenues of $900,000 in fiscal 1994 as a result of the sale of inventory which
had been previously written down as part of the restructuring. As of June 30,
1995 restructuring activities were completed.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------
The consolidated financial statements reflect the application of certain
accounting policies described in this and other notes to consolidated financial
statements.
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost, which approximates market. Cash
equivalents consist of highly liquid investments with original maturities at the
time of purchase of 90 days or less.
C. INVENTORIES
Inventories are stated at the lower of average cost (first-in, first-out) or
market which requires the periodic assessment of net realizable value. The
difference between cost and market is charged to income in the period the
impairment is determined. Inventory including materials, labor and
manufacturing overhead consists of the following at June 30:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
----------------------------
<S> <C> <C>
Raw materials $ 9,884 $ 9,966
Work-in-process 2,057 3,595
Finished goods 1,550 3,152
----------------------------
$13,491 $16,713
----------------------------
</TABLE>
F-9
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
D. DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges to operations
in amounts estimated to allocate the cost of equipment and leasehold
improvements over their estimated useful lives on a straight-line basis.
Computer equipment, machinery and equipment, equipment under capital lease and
furniture and fixtures are depreciated over three to ten years, and leasehold
improvements are amortized over the term of the associated leases.
The cost of improvements is charged to the property accounts, while maintenance
and repairs are charged to income as incurred. The Company periodically
evaluates its fixed assets to determine whether assets are impaired or continue
to be utilized. Upon determination of an impairment, retirement or other
disposition of property and equipment, the cost and related depreciation are
removed from the accounts, and any resulting gain or loss is reflected in the
results of operations.
E. SOFTWARE LICENSE FEES AND ROYALTIES
The Company has entered into license and royalty agreements for software to be
incorporated into certain computer systems held for resale. The initial fees
under such software license arrangements are capitalized in other assets and
amortized over the lesser of the term of the license agreement or on a straight-
line basis over three to five years. Royalty payments are expensed upon the
sale of computer systems that incorporate the licensed software.
F. REVENUE RECOGNITION
Revenues from product sales, which include revenues from software licenses, are
recognized upon shipment unless significant uncertainties exist. Service and
other revenues include maintenance, installation fees, professional services,
rental revenue and license fees. Service and other revenues related to
maintenance agreements are recognized ratably over the period in which the
service is provided. All other service and other revenues are recognized as
earned. License fees are recognized as revenue upon receipt of non-refundable
payments.
During fiscal 1995, the Company received $1,000,000 in software license fees,
included in service and other revenues, as the final payment from a development
and distribution agreement. In fiscal 1994, the Company received $1,500,000 in
software license fees as a result of this same agreement.
G. RESEARCH AND DEVELOPMENT
Costs relating to research and development are expensed as incurred.
F-10
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
H. NET INCOME (LOSS) PER SHARE
Primary and fully diluted earnings per share are not separately stated as they
are substantially the same. For the years ended June 30, 1996, 1995 and 1994,
net income (loss) per share was based on the weighted average number of common
and common share equivalents outstanding during the year, computed in accordance
with the treasury stock method. Under this method, common share equivalents are
not included in the calculation for fiscal 1996, as their impact would be anti-
dilutive. The net income (loss) per share calculations for all years presented
include shares issued to consummate the pooling transaction on March 31, 1995
(see Note 1 A).
I. FOREIGN CURRENCY TRANSLATION
For foreign subsidiaries where the functional currency is the U.S. dollar, the
financial statements of the Company's foreign subsidiaries are translated using
rates of exchange in effect at the end of the fiscal year for monetary assets
and liabilities and historical rates for non-monetary assets and liabilities.
Income and expenses are translated at average exchange rates prevailing during
the fiscal year and the resulting gains or losses are reflected in results of
operations. For foreign subsidiaries where the functional currency is the local
currency, the financial statements are translated as above except that assets
and liabilities are translated at current exchange rates and the resulting gains
or losses are recorded as a separate component of stockholders' equity.
Transaction gains and (losses) recognized by the Company amounted to $26,000,
($82,000), and ($9,000) for the years ended June 30, 1996, 1995 and 1994,
respectively.
J. POSTRETIREMENT BENEFITS
The Company sponsors two defined contribution employee savings and retirement
plans ("the Plans"), which cover only United States employees. Employees
participate in the Plans based on the subsidiary of their employment. The Plans
are contributory for which contributions by the Company are made at the
discretion of management. Employees may contribute up to 15% or 20% of their
annual compensation depending on their respective plan. The Company made
contributions of $190,000, $231,000 and $236,000 in fiscal 1996, 1995 and 1994,
respectively.
K. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents and trade receivables. The
Company's cash equivalents are either placed with high credit quality financial
institutions or invested in government securities. The Company limits the
amount of credit exposure to any one institution.
F-11
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
Concentrations of credit risk with respect to trade receivables are limited due
to the varied customer base, comprised principally of distributors and
resellers, dispersed across various industries and geographic locations. The
Company generally does not require collateral; however, in certain circumstances
the Company may require letters of credit from its customers. The Company may
require deposits to be paid with an order or may negotiate added discounts in
exchange for payment at time of shipment.
L. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under the
liability method specified by SFAS No. 109, deferred tax assets, net of any
valuation allowance, and deferred tax liabilities are determined based on the
temporary differences between the financial statement and tax basis of assets
and liabilities and net operating losses carried forward as measured using the
enacted tax rates which are expected to be in effect when these differences
reverse.
M. WARRANTY OBLIGATIONS
The Company generally provides its products with a 90-day to two year warranty
from the date of installation depending on the product. The cost of warranty
obligations are estimated and provided for at the time of sale.
N. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". The Company intends to adopt this standard in fiscal year 1997.
The Company does not expect the adoption of this standard to have a material
effect on its financial position or results of operations.
O. STOCK BASED COMPENSATION
In November 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company intends to adopt only
the disclosure requirements of SFAS No. 123 for the year ending June 30, 1997.
Therefore, the adoption will have no impact on the Company's financial position
or results of operations.
F-12
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
P. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles require 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.
Q. RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
NOTE 3 - NOTE PAYABLE TO BANK & LONG-TERM DEBT
- ------
During fiscal 1996, the Company maintained a line of credit ("the facility")
with State Street Bank and Trust Company ("SSB") and Texas Commerce Bank,
National Association ("TCB"). At June 30, 1996, due to losses incurred during
the fiscal year, the Company was not in compliance with certain facility
covenants. As a result, the Company requested and received a waiver in
conjunction with an amendment to the facility effective August 1, 1996. The
amended terms included: (i) designating TCB as sole agent, (ii) removing SSB
from all participation, and (iii) reducing the facility to a maximum of
$5,000,000. Substantially all other terms remained unchanged. At the Company's
option, loans may be drawn down subject to two interest rate alternatives: (i)
a prime rate option bearing interest at the then current prime rate or (ii) a
LIBOR option bearing interest at the LIBOR rate plus 2%. The Company is
required to meet specific covenants throughout the duration of the facility
which expires on October 31, 1996, the most restrictive of which is that the
Company shall not have a net loss (i) of greater than $1,000,000 for any fiscal
quarter, or (ii) in any two consecutive fiscal quarters, or (iii) in excess of
$1,800,000 for a full year. The Company was granted waivers by the
participating banks when losses greater than the covenant restrictions were
recorded during the third quarter, fourth quarter and full year for fiscal 1996.
In addition, the Company may not declare cash dividends. The Company plans to
negotiate a new borrowing facility or further amend the existing facility before
it expires. Borrowings, if any, under this agreement are subject to a borrowing
base formula and are secured by substantially all assets of the Company. At
June 30, 1996 and June 30, 1995, no amounts were outstanding under this
agreement. At August 25, 1996, no amounts were outstanding under this agreement
and the Company had $5,000,000 available under the borrowing base formula.
The Company, through its subsidiary Texas Micro, had (i) a $2,000,000 term loan,
payable in equal monthly installments based on a three-year amortization with
the balance due on June 1, 1997, (ii) a $4,000,000 revolving line of bank credit
and (iii) a zero coupon note payable to Keystone International with $415,000
due. Following the Transaction in 1995, the Company paid down all the bank and
long-term debt of Texas Micro totaling $5,229,000 and terminated these
agreements.
F-13
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
NOTE 4 - OTHER ASSETS
- ------
Other assets consist of the following at June 30:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---------------------
<S> <C> <C>
Software license fees net of accumulated
amortization of $683, and $629, in
1996 and 1995, respectively $ 487 $ 663
Other 105 100
---------------------
$ 592 $ 763
---------------------
</TABLE>
NOTE 5 - ACCRUED EXPENSES
- ------
Accrued expenses consist of the following at June 30:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---------------------
<S> <C> <C>
Compensation and benefits $3,023 $4,435
Commissions and royalties 989 715
Warranty expense 673 850
Other charges 1,382 -
Other 3,136 3,037
---------------------
$9,203 $9,037
---------------------
</TABLE>
NOTE 6 - INCOME TAXES
- ------
Effective July 1, 1993, Sequoia Systems, Inc. adopted SFAS No. 109, "Accounting
for Income Taxes". The impact of Sequoia Systems, Inc.'s adoption was
immaterial to the financial statements in fiscal 1994. The TMI Group had
adopted SFAS 109 in fiscal 1993.
The provisions for income taxes in the accompanying statements of operations
consist of the following for the years ended June 30:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Current
Federal income taxes $ - $ 1,260 $ 436
State income taxes 151 91 59
Foreign income taxes 40 100 150
------------------------------------------
Total current 191 1,451 645
------------------------------------------
Deferred
Federal income taxes - (491) 13
State income taxes - - -
------------------------------------------
Total deferred - (491) 13
------------------------------------------
Total provision $ 191 $ 960 $ 658
------------------------------------------
</TABLE>
F-14
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
Due to the uncertainty surrounding realization of the deferred tax assets in
future tax returns, the Company has established a valuation allowance against
substantially all of its otherwise recognizable deferred asset.
The components of the deferred tax asset at June 30, are as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
----------------------------
<S> <C> <C>
NOL carryforward $ 22,448 $ 19,971
Property and equipment 280 1,124
Inventories 3,096 2,451
Bad debt reserve 573 517
Other 1,341 1,327
----------------------------
Total asset 27,738 25,390
Valuation allowance (26,743) (24,395)
----------------------------
Deferred tax asset, net $ 995 $ 995
----------------------------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows for the years ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Net benefit of tax credits and
operating loss carryforwards - (21.0%) (28.5%)
State income taxes, net of federal benefit (3.4%) 1.0% 0.5%
Federal Alternative Minimum Tax - 0.8% 1.3%
Net losses without tax benefit (34.0%) - -
Revenue Agent Review Adjustments - - (2.0%)
Foreign income tax (1.0%) 1.6% 1.4%
Other - (1.0%) (0.7%)
-----------------------------------
Effective tax rate (4.4%) 15.4% 6.0%
-----------------------------------
</TABLE>
The Tax Reform Act of 1986 ("the Act"), enacted in October 1986, limits the
amount of net operating loss carryforwards that companies may utilize in any one
year in the event of cumulative changes in ownership in excess of 50%, as
defined in the Act, which has limited the Company's ability to utilize in any
one year the net operating loss carryforwards incurred prior to the change in
ownership occurring upon the Company's initial public offering. The Company
estimates that the total net operating loss carryforward subject to this
limitation is approximately $23,500,000. The utilization of the available net
operating loss carryforwards and general business credit carryforwards generated
prior to the ownership change is limited to approximately $2,700,000 in each
year subsequent to the change in ownership until fiscal 2002, at which time the
unused net operating loss carryforwards will expire. These carryforwards are
subject to review and possible adjustment by the Internal Revenue Service. The
Company's net operating loss and general business credit carryforwards at June
30, 1996, were approximately $50,000,000 ($26,500,000 unrestricted) and
$3,600,000, respectively.
F-15
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
Included within the net operating losses is approximately $4,600,000 of
Incentive Stock Option deductions. This deduction, when utilized, will be a
direct credit to stockholders' equity and will not benefit the statement of
operations.
NOTE 7 - STOCKHOLDERS' EQUITY
- ------
A. COMMON AND PREFERRED STOCK
The Company had 35,000,000 and 12,500,000 authorized shares of common and
preferred stock, respectively at June 30, 1996 and June 30, 1995. There were
25,000,000 and 12,500,000 authorized shares of common and preferred stock at
June 30, 1994. No shares of preferred stock were issued or outstanding at June
30, 1996, 1995, or 1994. The Company has reserved 3,700,000 authorized shares
of common stock for issuance under the Company's options plans, 750,000
authorized shares of common stock for issuance under the 1993 Employee Stock
Purchase Plan, 131,000 shares for issuance under the 1991 Outside Directors'
Stock Option Plan, 150,000 shares for issuance under the 1995 Outside Directors'
Stock Option Plan and 600,000 shares for issuance under the 1996 Long Term
Incentive Plan.
On October 27, 1993, the Company issued 1,047,418 shares of Series A convertible
preferred stock in settlement of class action litigation. Subsequently, holders
of 264,435 shares of preferred stock converted, at their option, such shares
into the same number of common shares. The remaining 782,983 shares of Series A
convertible preferred stock were automatically converted to the same number of
common shares on March 15, 1994, in accordance with a mandatory conversion
clause in the class action settlement agreement.
B. STOCK OPTION PLANS
During fiscal 1996, the stockholders approved the 1996 Long Term Incentive Plan,
("1996 Plan"). As a result, no further grants were or will be made under the
1986 Incentive Stock Option Plan ("Incentive Plan") and the 1986 Supplemental
Stock Option Plan ("Supplemental Plan"), which were due to expire in October
1996. The 1996 Plan provides for the grant of incentive stock options to
officers and employees of the Company at no less than the fair market value on
the date of grant and non-qualified stock options at no less than 65% of the
fair market value at the date of grant. Options expire 10 years from the date
of grant, or if applicable, three months after termination of the optionee's
employment or other applicable relationship to the Company. Additionally, the
1996 Plan provides for awards of Stock Appreciation Rights ("SARs") to be
granted either in tandem with grants of stock options or separately. The
exercise price of a SAR may not be less than the fair market value of a share on
the date of grant, or in the case of a SAR granted in relation to an option, not
less than the option exercise price. Other awards in shares may be granted by
an appropriate committee of the Board of Directors under the 1996 Plan. A total
of 600,000 shares may be issued under the 1996 Plan, and a maximum of 120,000
stock options or SARs may be granted to any one participant in any one calendar
year. No more than 100,000 shares in other awards may be granted with a maximum
of 25,000 shares to an individual in a calendar year.
F-16
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
The Incentive Plan provided for the grant of incentive stock options to officers
and employees of the Company at a price no less than the fair market value on
the date of the grant. The Supplemental Plan provided for the grant of
nonqualified stock options to employees and consultants at no less than 85% for
the fair market value on the date of grant. Options under these plans expired
ten years from the date of grant or, when applicable, three months after
termination of the optionee's employment or other applicable relationship with
the Company.
During fiscal 1990, the Company established the 1990 Outside Directors' Stock
Option Plan ("the 1990 Directors' Plan") which provides for the issuance of
nonqualified stock options at a price no less than the fair market value on the
date of grant to members of the Company's Board of Directors who are not
employees of the Company. An aggregate of 131,000 shares of common stock was
reserved for issuance under the 1990 Directors' Plan. The options expire upon
the earlier of 10 years from the date of grant or six months after the director
ceases to be a director of the Company. This plan expired on June 7, 1995. The
131,000 shares allocated to the plan are available for allocation to other 1995
plans at the Board of Directors discretion.
During fiscal 1995, the Company established the 1995 Outside Directors' Stock
Option Plan ("the 1995 Directors' Plan"). The terms of the 1995 Plan are
substantially identical to the 1990 Directors' Plan. An aggregate of 150,000
shares of common stock was reserved for issuance under the 1995 Directors' Plan.
This plan expires on July 1, 1999.
During fiscal 1996, the Company allowed holders of 1,143,000 options that were
to acquire an aggregate of 1,143,000 shares of the Company's common stock
previously granted under the Company's Stock Option Plans at exercise prices
ranging from $4.00 to $8.25 to exchange such options through the cancellation of
those options and the reissuance of new options with similar terms but at an
exercise price of $3.875, the fair market value of a share of the Company's
common stock on the date of exchange. The vesting schedules with respect to
611,000 of such options remain unchanged. Vesting schedules for the balance of
the options, which were performance related, commenced on the effective date of
the exchange.
F-17
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
The following table summarizes the option activity under the Company's various
stock option plans for the respective periods.
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
--------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1993 907,006 $ .35 - $ 11.44
1994 Activity:
Options granted 656,020 1.94 - 6.06
Options exercised (137,392) .80 - 2.25
Options terminated (120,802) .80 - 11.44
--------------------------------------------
Outstanding at June 30, 1994 1,304,832 $ .35 - $ 11.44
--------------------------------------------
1995 Activity:
Options granted 523,700 3.25 - 5.13
Options exercised (222,561) .35 - 3.13
Options terminated ( 40,020) 2.06 - 5.44
--------------------------------------------
Outstanding at June 30, 1995 1,565,951 $ .80 - $ 11.44
--------------------------------------------
1996 Activity:
Options granted 2,428,008 3.13 - 8.25
Options exercised (341,337) .80 - 4.69
Options terminated (2,058,887) 2.06 - 11.44
---------------------------------------------
Outstanding at June 30, 1996 1,593,735 .80 - 11.44
---------------------------------------------
Exercisable at June 30, 1996 811,450 $ .80 - $ 11.44
---------------------------------------------
</TABLE>
C. EMPLOYEE STOCK PURCHASE PLANS
In March 1995, the shareholders approved an amendment to the 1993 Employee Stock
Purchase Plan ("the 1993 Plan") to encompass fiscal years 1996 and 1997, as well
as fiscal years 1994 and 1995, and to increase to 750,000 shares of common stock
the number of shares available for issuance. Under the terms of the 1993 Plan,
eligible employees were able to purchase shares of the Company's common stock at
85% of market price, as defined by the 1993 Plan. The term of the 1993 Plan is
four years, divided into eight separate semi-annual offerings commencing on July
1, 1993, and ending on June 30, 1997. The offerings through June 30, 1996 were
as follows:
<TABLE>
<CAPTION>
Offering Shares
Period Issued
----------------------------------------------------
<S> <C>
July 1, 1993 - December 31, 1993 26,957
January 1, 1994 - June 30, 1994 18,621
July 1, 1994 - December 31, 1994 24,346
January 1, 1995 - June 30, 1995 25,969
July 1, 1995 - December 31, 1995 47,022
January 1, 1996 - June 30, 1996 44,354
</TABLE>
F-18
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- ------
A. LEASE COMMITMENTS
The Company leases equipment and office space for its headquarters and sales
offices under various operating arrangements that expire at various dates
through 2000. In addition, the Company leases certain equipment, office
furniture and software licenses under capital leases that mature at various
dates through 1997. At June 30, 1996, minimum payments due under all operating
and capital lease arrangements are as follows:
<TABLE>
<CAPTION>
(in thousands)
Operating Capital
Lease Lease
Fiscal Year Commitments Commitments
---------------------------------
<S> <C> <C>
1997 $2,220 $ 69
1998 1,518 -
1999 877 -
2000 845 -
---------------------------------
Total minimum lease payments $5,460 $ 69
---------------------------------
Less--Amount representing interest on
capital lease - 13
---------------------------------
Present value of minimum lease payments $ - $ 56
---------------------------------
</TABLE>
Approximately $2,613,000, $2,098,000 and $2,272,000 were charged to rent expense
in fiscal 1996, 1995 and 1994, respectively, under operating lease agreements.
Accumulated amortization on equipment under capital lease amounted to $2,338,000
and $2,460,000 at June 30, 1996 and 1995, respectively.
B. LEGAL PROCEEDINGS
In the normal course of business, the Company is, from time to time, subject to
various claims and legal proceedings. The Company believes that the ultimate
outcome of pending matters will not have a material effect on its financial
condition.
F-19
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
NOTE 9 - SIGNIFICANT CUSTOMERS AND DOMESTIC AND EXPORT SALES
- ------
The Company had one customer that represented 13% of revenues for the year ended
June 30, 1995. For the fiscal years ended June 30, 1996 and 1994, there were no
sales to any customer representing greater than 10% of revenue.
The following summarizes domestic and export sales for the years ended June 30:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Domestic $ 78,059 $ 80,594 $ 72,521
Foreign 12,144 10,592 4,010
Export--
Europe 3,799 5,505 5,518
Asia 1,674 3,162 4,745
Australia - (1) - (1) 1,331
All other 6,546 4,186 3,701
----------------------------------
$102,222 $104,039 $ 91,826
----------------------------------
Percent:
Domestic 76% 78% 79%
Foreign 12 10 4
Export--
Europe 4 5 6
Asia 2 3 5
Australia - - 2
All other 6 4 4
----------------------------------
100% 100% 100%
----------------------------------
</TABLE>
(1) (see Note 10)
NOTE 10 - ACQUISITION OF JOINT VENTURE
- -------
During November 1991, the Company entered into a joint venture, Sequoia Systems
Pty. Ltd., with Tricom Group Pty. Ltd. ("Tricom"). The joint venture (owned 15%
by Sequoia), through Tricom, had the right to distribute the Company's products
in Australia and New Zealand.
On July 1, 1994, the Company reached agreement and purchased selected assets and
the ongoing business operations of Sequoia Systems (Australia) Pty. Ltd., its
joint venture with Tricom, for cash totaling $1,100,000. The Company has also
incorporated certain Australian legal entities to operate the business in the
same geographical market area. Tricom also agreed to specific noncompete
arrangements in selected markets with the Company and/or its subsidiary(s) and
further, that the joint venture would be liquidated, as defined in the
agreement.
F-20
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
NOTE 11 - SUBSEQUENT EVENT
- -------
On September 10, 1996, the Company announced that its Board of Directors had
authorized the repurchase of up to two million shares of the Company's common
stock, on the open market or in negotiated transactions, during the fiscal year
ended June 30, 1997. The Company intends to utilize its cash balances to make
any repurchases pursuant to this announcement. As of September 18, 1996, no
shares had been repurchased.
F-21
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1994:
- ---------------------------------
Allowance for Doubtful Accounts $2,246,000 $ 116,000 $ 300,000 $ 963,000 $1,699,000
Inventory Reserve 4,706,000 548,000 579,000 2,692,000 3,141,000
June 30, 1995:
- ---------------------------------
Allowance for Doubtful Accounts 1,699,000 226,000 (175,000) 462,000 1,288,000
Inventory Reserve 3,141,000 573,000 0 1,789,000 1,925,000
June 30, 1996:
- ---------------------------------
Allowance for Doubtful Accounts 1,288,000 105,000 (93,000) 282,000 1,018,000
Inventory Reserve 1,925,000 5,352,000 0 2,469,000 4,808,000
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Sequoia Systems, Inc.:
Our report on the consolidated financial statements of Sequoia Systems, Inc. and
subsidiaries is included on page F-1 of this Annual Report on Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule for each of the three years in the
period ended June 30, 1996 listed in the index of this Annual Report on Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
JULY 22, 1996
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K:
Exhibit
Number Description
- ------ -----------
2.1 Merger and Stock Purchase Agreement dated as of November 9, 1995
by and among the Company, Sequoia Acquisition Corporation, SPCO, Inc.
and Keystone International, Inc., as amended (incorporated by
reference from Exhibit 2.1 to the Company's Registration Statement on
Form S-4 (File No. 33-54777), filed on February 21, 1995).
2.2 Amendment No. 1 to the Merger Agreement, dated as of February 7,
1995 (incorporated by reference from Exhibit 2.2 to the Company's
Registration Statement on Form S-4 (File No. 33-54777), filed on
February 21, 1995).
2.3 Amendment No. 2 to the Merger Agreement, dated as of February 23,
1995 (incorporated by reference from Exhibit 2.3 to the Company's
Registration Statement on Form S-4/A (File No. 33-54777), filed on
February 24, 1995).
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to the Company's Amendment No. 2 to the Annual Report
on Form 10-K filed on February 21, 1995).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company.**
3.3 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (File No. 33-33024)).
10.1 1986 Incentive Stock Option Plan and 1986 Supplemental Incentive
Stock Option Plan (collectively the "Option Plans") and related form
of stock option agreements (incorporated by reference to Exhibit
10.10 and Exhibit 10.11, respectively, to the Company's Registration
Statement on Form S-1 (File No. 33-33024)).+
10.2 Amendment to the Option Plans (incorporated by reference to Exhibit
10.42 to the Company's 1990 Annual Report on Form 10-K (File No.
0-18238)).+
10.3 Amendment to the Option Plans adopted December 13, 1994.**+
10.4 1990 Outside Directors' Stock Option Plan (incorporated by reference
to Exhibit 10.45 to the Company's 1990 Annual Report on Form 10-K
(File No. 0-18238)).
<PAGE>
10.5 1993 Employee Stock Purchase Plan.**+
10.6 Amendment to the 1993 Employee Stock Purchase Plan, adopted December
13, 1994.**+
10.7 1995 Outside Directors' Stock Option Plan.**
10.8 401(k) Plan of the Company (incorporated by reference to Exhibit
10.37 to the Company's Registration Statement on Form S-1 (File No.
33-33024)).+
10.9 Lease dated November 23, 1983 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No. 33-33024)).
10.10 Third Amendment dated April 2, 1990 to Lease of November 23, 1983,
between the Company and Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.38 to the Company's 1990
Annual Report on Form 10-K (File No. 0-18238)).
10.11 Lease dated March 20, 1992 between the Company and Metropolitan Life
Insurance Company (incorporated by reference to Exhibit 10.14 to
the Company's 1992 Annual Report on Form 10-K, Amendment No. 1
(File No. 0-18238)).
10.12 Employment Agreement dated October 20, 1987 between the Company
and Jack J. Stiffler (incorporated by reference to Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (File No. 33-33024)).
10.13 Purchase of Business Agreement dated June 17, 1994 by and among the
Company, SEQ (Aust.) Pty. Ltd., Sequoia Systems (Australia) Pty.
Ltd., Tricom Group Pty. Ltd., Samuel Seabury and William A. Cruthers.
10.14 Credit Agreement dated March 31, 1995 by and between State
Street Bank and Trust Company, Texas Commerce Bank, National
Association and the Company (incorporated by reference to Exhibit
10.31 to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995 (File No. 0-18238)).
10.15 Second Amendment to Credit Agreement dated August 1, 1996
between Texas Commerce Bank National Association and the Company.*
10.16 Asset Sale Agreement by and between Intel Corporation and Texas
Microsystems, Inc. dated November 30, 1994.**
<PAGE>
10.17 Consent and Undertakings of the Company filed February 24, 1995
in Securities and Exchange Commission v. Sequoia Systems, Inc. et al.,
------------------------------------------------------------------
U.S. District Court , District of Columbia (incorporated by reference
to the Company's 1995 Annual Report on Form 10-K filed on September
26, 1995).
10.18 Lease by and between Chevron U.S.A. Inc. and Texas Microsystems, Inc.
dated December 11, 1992, as amended.**
10.19 Letter of Employment between the Company and J. Michael Stewart dated
March 31, 1995.**+
10.20 Separation Agreement dated January 30, 1996 between the Company
and Cornelius P. McMullan (incorporated by reference to Exhibit 10.1
to Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 (File no. 0-18238)).
10.21 Separation Agreement dated March 12, 1996 between the Company
and Richard Goldman.*
10.22 1996 Long-Term Incentive Plan, adopted March 12, 1996.*
10.23 Strategic Partner Agreement with James Anthony Computing, Ltd., dated
July 1, 1996, as amended.*
21 Subsidiaries of the Company.*
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
* Filed herewith
** Incorporated by reference to the Company's 1995 Annual Report
on Form 10-K filed September 26, 1995 (File no. 0-18238).
+ Management Contract or Compensatory Plan or Arrangement required
to be filed by Item 14C of this Annual Report on Form 10-K
<PAGE>
EXHIBIT 10.15
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated
effective as of August 1, 1996 (the "Effective Date"), is by and between SEQUOIA
SYSTEMS, INC. (the "Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a
national banking association whose principal office is located in Houston, Texas
for itself and as agent for the Banks (the "Bank").
PRELIMINARY STATEMENT
---------------------
The Bank and the Borrower have entered into a Agreement dated as of March
31, 1995 as amended by that certain letter agreement dated as of July 31, 1996
(the "First Amendment) by and between State Street Bank and Trust Company (as
"Agent"), Texas Commerce Bank National Association and Borrower, as amended (the
"Agreement"). The "Agreement, as used in the Agreement, shall also refer to the
Agreement as amended by this Amendment. All capitalized terms defined in the
Agreement and not otherwise defined herein shall have the same meanings herein
as in the Agreement. The Bank and the Borrower have agreed to amend the
Agreement to the extent set forth herein, and in order to, among other things,
allow the Borrower to repurchase its own stock.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the Bank and the Borrower hereby agree as follows:
Section 1. The Agreement is amended by adding a new Section 1.15 to read as
---------
follows:
- --------
"Confirmation of Security Interests Section 1.15. Borrower confirms and
ratifies each of the liens, security interests and other interests granted in
each and all security Agreements executed in connection with related to, or
securing the Notes and the Loans including but not limited to each of those
interests and liens described in the Security Documents."
Section 2. Section 4.02(j) of the Agreement is hereby amended to read in
---------
full as follows:
"(j) Dividends. The Borrower will not and will not permit any of its
---------
Subsidiaries to declare, make or pay any dividend or other distribution on
any shares of capital stock of the Borrower or any of its Subsidiaries
(except dividends payable solely in shares of capital stock or rights to
acquire capital stock of the Borrower or any of its Subsidiaries or any
dividends payable by the Borrower's Subsidiaries to the Borrower or any
payment on account of the purchase, redemption, retirement or acquisition
of any shares of capital stock of the Borrower or any option or warrant
therefor), provided however that the Borrower may repurchase or redeem
shares or options therefor:
(i) from employees of the Borrower upon termination of employment as
permitted under its 1986 Employee Stock Option Plans; or
(ii) if such purchase does not violate any other terms of this
agreement and no additional Indebtedness is incurred to finance any stock
repurchase or redemption.
Section 3. Section 4.03(d) of the Agreement is hereby amended to read in
---------
full as follows:
"(d) Cash Balances. (i) The Borrower and each of its Subsidiaries, on a
-------------
consolidated basis, shall maintain at all times aggregate balances of cash and
Cash Equivalent's, not subject to any pledge or other encumbrance, in an amount
of not less than $6,000,000.00; and
(ii) The Borrower and each of its Subsidiaries, on a consolidated basis,
shall be prohibited from repurchasing stock unless the Cash Balance (as
calculated in subsection 4.03(d)(i)) less outstanding Indebtedness under the
Credit Facility would be at least $6,000,000.00 after the completion of the
proposed stock repurchase."
Section 4. The Borrower hereby represent and warrant to the Bank that after
---------
giving effect to the execution and delivery of this Amendment: (a) the
representations and warranties set forth in the Agreement are true and correct
on the date hereof as though made on and as of such date; and (b) no Event of
Default, or event which with passage of time, the giving of notice or both would
become an Event of Default, has occurred and is continuing as of the date
hereof.
Section 5. This Amendment shall become effective as of the Effective Date
---------
upon its execution and delivery by each of the parties named in the signature
lines below, and the "Agreement" as used in the Agreement shall also refer to
the Agreement as amended by this amendment.
PAGE 1 OF 2 PAGES
<PAGE>
Section 6. The Borrower further acknowledges that each of the other Loan
---------
Documents is in all other respects ratified and confirmed, and all of the
rights, powers and privileges created thereby or thereunder are ratified,
extended, carried forward and remain in full force and effect except as the
Agreement is amended by this Amendment.
Section 7. This Amendment may be executed in any number of counterparts and
---------
by different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
Section 8. This Amendment shall be included within the definition of "Loan
---------
Documents" as used in the Agreement.
Section 9. Section 7.09 of the Agreement shall be replaced in its entirety
---------
with the following:
"7.09 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES
OF AMERICA."
SECTION 10. THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS
----------
CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS
BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
BORROWER SEQUOIA SYSTEMS, INC.
By: /s/ KR Sumrall
------------------------------------
Name: KR Sumrall
----------------------------------
Title: Acting C.F.O.
---------------------------------
Address: 5959 Corporate Dr. Houston, TX
-------------------------------
BANK: TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By: /s/ W. Miles Marks
------------------------------------
Name: W. Miles Marks
----------------------------------
Title: Vice President
---------------------------------
PAGE 2 OF 2 PAGES
<PAGE>
EXHIBIT 10.21
-------
SEQUOIA
-------
March 12, 1996
Mr. Richard Goldman
90 Westerly Road
Weston, MA 02193
Dear Dick:
As a result of our ongoing discussions and the changes we will implement in the
business, we have mutually agreed on the following terms of your transition
duties and subsequent departure from the Company:
A severance benefit equal to 12 months' base salary will be offered to you in
recognition of your contribution to the Company and in accordance with Sequoia's
standards for an officer of the Company whose position is terminated under
circumstances such as these. This severance benefit will begin following a
three-month notice period, during which you will continue full-time employment.
During this three-month period, you may also begin career transition planning
and utilize outplacement assistance as described below. Your service date and
vacation accrual continue during this period and stock options will continue on
their regular vesting schedule. Other stock options you hold, that would
normally vest during the severance period will be accelerated to your last day
of active employment. As an accommodation to opportunities you may want to
pursue, you will have the option to initiate the notice period yourself at any
time after May 1, 1996.
As we have discussed, we would like you to continue on with transition duties
over the next several months as follows:
. Continue as Executive Vice President and Chief Financial Officer (the notice
period to be not shorter than three months from date of notice). The
replacement CFO position will be located in Houston. You will assist with
recruiting, transition, etc., as required.
. Assume added responsibility as Chief Operating Officer of Enterprise Systems
Business Unit until its disposition is assured via sale, MBO,
discontinuation, or other plan is in place. You will manage this process.
. Assist me in evaluation, qualification, quantification of business
opportunities for acquisition, internal investment by TMI, etc., and work
with Strategy Committee.
Sequoia Systems Inc.
400 Nickerson Road Marlborough MA. 01752 Tel: (508) 480-0800 Fax: (508) 480-0184
<PAGE>
Mr. Dick Goldman
March 12, 1996
Page 2
. Assist me in transition of HQ operations to Houston, as required, including a
proper infrastructure to support the Company's needs as a public entity.
. Develop and implement appropriate employee retention/protection/succession
program for key Marlborough employees during transition period, to assure as
smooth a transition as possible.
Some specific goals related to these duties are listed below.
Objectives
- ----------
. SES/Corporate PBT for second half FY96 (6/30/96) (excluding charges for cost
reduction) will exceed $750K. (Present 3Q forecast after recent cost
reductions is PBT of $377K, excluding charges.)
. Gross SES inventory, spares, etc., will be reduced in the 2H96 (6/30/96) by
15% to below $9,120K from the 2Q96 ending balance ($10,729K).
. Effect a transaction to assure the disposition of the SES Business via
definitive agreement or re-shape the economic model to a cash positive deeper
harvest plan with headcount reduction to bring 6/30/96 permanent headcount of
SES plus Corporate to below 140 (179 @ 2Q96).
. As an alternative to the above disposition/harvest strategy, develop a viable
plan to operate the business as an ongoing, profitable business focused on
the PICK or Server marketplace.
. Effect one or more added transactions to augment the existing businesses via
acquisition, J.V., OR OTHER ARRANGEMENT (DEFINITIVE AGREEMENT).
Your active employment will close with the completion of this transition
assignment and the referenced notice period. You will receive your salary during
the next twelve month period on the regular payroll cycle. Taxes, medical and
insurance benefit copayments will be deducted according to your current
withholding limits. You will be eligible to elect COBRA coverage at that time.
Per the 1986 stock option plan agreement, you will have 90 days from the end of
active employment to exercise such options. Should you choose, Sequoia will
offer you services provided by the outplacement firm, New Directions, the cost
of which will be borne by Sequoia. Such a program, if needed, would be extended
for the separation period.
In consideration of the above additional benefits, you will be asked to execute
a release of any claims or potential claims against the Company, relative to
your employment or termination.
<PAGE>
Mr. Dick Goldman
March 12 1996
Page 3
Human Resources will have further information concerning your overall benefits
status. Contact Don Colanton for more information. On behalf of Sequoia, I thank
you for your past contributions and wish you well with this career transition.
Sincerely,
/s/ Michael Stewart
Michael Stewart
President and CEO
JMS:dbc
<PAGE>
Author: Richard Goldman at Sequoia
Date: 4/12/96 1:25 PM
Priority: Normal
To: Michael Stewart <[email protected]> at ccsmtp
BCC: Don Colanton
Subject: Re: Separation from Sequoia
- --------------------------------- Message Contents------------------------------
I concur. Thank you for your consideration.
_______________________________Reply Separator__________________________________
Subject: Separation from Sequoia
Author: Michael Stewart <[email protected]> at ccsmtp
Date: 4/12/96 10:36 AM
Dick-
It is my understanding that you have received a job offer from another company,
and that you would like to terminate your employment earlier than the projected
date of August 1, 1996. You and I have agreed that your early departure will
benefit you greatly and has the potential to save Sequoia money as well. To
that end, we have agreed that you may accept the job offer, with a start date of
no later than June 1, and no earlier than May 15. Your severance package will
reduced to pay continuance of ten (10) months rather than the 12 months
specified in your letter, and of course there will be no out placement service.
All other terms of the separation letter remain in effect.
Please indicate your concurrence by return Email.
Michael
<PAGE>
EXHIBIT 10.22
SEQUOIA SYSTEMS, INC.
1996 LONG-TERM INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE
(a) Sequoia Systems, Inc. hereby establishes this 1996 Long-Term Incentive
Plan.
(b) The purposes of the Plan are: (i) to further the long-term growth in
earnings of the Company by providing incentives and rewards to those employees
of the Company and its Subsidiaries who directly contribute to the achievement
of such earnings growth; (ii) to encourage such employees to obtain
proprietary interests in the Company and to remain in the employ of the
Company and its Subsidiaries; (iii) thereby to promote a closer identity of
interests between management and shareholders; and (iv) to assist the Company
and its Subsidiaries in recruiting outstanding management personnel.
2. DEFINITIONS
In this Plan document, unless the context clearly indicates otherwise, any
term used in the singular also shall refer to the plural, and the following
capitalized terms shall have the following meanings set forth in this Section
2:
(a) "Award" means any award described in Section 7 hereof.
(b) "Award Agreement" means an agreement entered into between the Company
and a Grantee, setting forth the terms and conditions applicable to the Award
granted to the Grantee.
(c) "Beneficiary" means the person or persons designated in writing by the
Grantee as his beneficiary in respect of an Award; or, in the absence of an
effective designation, or if the designated person or persons predecease the
Grantee, the Grantee's Beneficiary shall be the person or persons who acquire
by bequest or inheritance the Grantee's rights in respect of an Award. In
order to be effective, a Grantee's designation of a Beneficiary must be on
file with the Company before the Grantee's death. Any such designation may be
revoked and a new designation substituted therefor at any time before the
Grantee's death.
(d) "Board of Directors" or "Board" means the Board of Directors of the
Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, including regulations and other administrative guidance thereunder.
(f) "Committee" means the Compensation Committee of the Board or any other
committee appointed by the Board that satisfies such legal requirements as may
be imposed by Rule 16b-3 and all other applicable laws. Each member of the
Committee shall be an "outside director" within the meaning of Section 162(m)
of the Code and the regulations promulgated thereunder.
(g) "Common Stock" means the common stock, par value $.40, of the Company.
(h) "Company" means Sequoia Systems, Inc.
(i) "Covered Employee" means an employee of the Company or its Subsidiaries
who is a "Covered Employee" within the meaning of Section 162(m) of the Code.
(j) "Fair Market Value" means, when used in connection with the Shares on a
certain date, the fair market value of a Share by reference to the closing
price quotation, or, if none, the mean of the bid and asked prices, reported
as of the most recent available date with respect to the Shares on any stock
exchange on which the Company's Common Stock is then listed or any quotation
system approved by the National Association of Securities Dealers then
reporting such information.
<PAGE>
(k) "Grantee" means a person to whom an Award has been granted under the
Plan.
(l) "Incentive Stock Option" means an option that complies with the terms
and conditions set forth in Section 422(b) of the Code and is designated by
the Committee as an Incentive Stock Option.
(m) "Minimum Price" means sixty-five percent (65%) of the Fair Market Value
of the Shares covered by the Award, determined on the date as of which the
Award is granted.
(n) "Non-qualified Stock Option" means an Option granted under the Plan that
is not an Incentive Stock Option and that is not intended to satisfy any
requirements for other statutory-qualified stock options that may be provided
for by law from time to time.
(o) "Option" means any option to purchase Shares pursuant to the provisions
of the Plan. Unless the context clearly indicates otherwise, the term "Option"
shall include all types of options that may be granted under the Plan,
including both Incentive Stock Options and Non-qualified Stock Options.
(p) "1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor thereto.
(q) "Right" means a Stock Appreciation Right, as described in Section 7(b).
(r) "Plan" means the 1996 Long-Term Incentive Plan, as set forth herein and
as it may be amended from time to time.
(s) "Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations under
the 1934 Act, as amended from time to time, or any successor thereto (or rule
of similar import), including any official Securities and Exchange Commission
staff interpretations thereunder.
(t) "Section 16 Person" means an officer or director of the Company within
the meaning of Section 16(a) or (b) of the 1934 Act.
(u) "Shares" means shares of Common Stock.
(v) "Stock Appreciation Right" or "Right" means a right that provides for
payment in accordance with Section 7(b) hereof.
(w) "Subsidiary" means a corporation or other entity of which the Company
owns, at any time while the Plan is in effect, directly or indirectly, at
least 50% of the voting power of the voting equity securities or voting
interests.
3. ADOPTION AND DURATION OF THE PLAN
(a) The Plan shall become effective upon its approval by the holders of a
majority of the outstanding Shares present in person, or represented by proxy,
and entitled to vote, at a meeting of the shareholders of the Company duly
called and held in accordance with applicable law prior to June 30, 1996 and
shall terminate ten years after such effective date, unless it is sooner
terminated in accordance with Section 14 hereof.
(b) Awards may be granted at any time prior to the earlier of the expiration
of the ten-year term of the Plan, as described in subsection 3(a) above, or
the termination of the Plan pursuant to Section 14 below. An Award outstanding
at the time the Plan expires or is otherwise terminated shall not cease to be
or cease to become exercisable pursuant to its terms merely because of the
expiration or other termination of the Plan.
4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN
(a) The Company may grant Awards (including, without limitation, Incentive
Stock Options) under the Plan with respect to not more than 600,000 Shares,
subject, however, to the limitations provided in Section 7(a) and
<PAGE>
(c) and adjustment as provided in Section 12 hereof. Shares shall be provided
from Shares in the Company's treasury, by the issuance of Shares authorized
but unissued, or from outstanding Shares purchased in the open market or in
private transactions.
(b) If and to the extent that all or part of an Award previously granted is
surrendered, lapses, expires, is forfeited, or is terminated, in whole or in
part, without being exercised, for any reason other than the exercise of a
related Award or of another portion of the Award, in such manner that all or
some of the Shares that are the subject of the Award are not issued to a
Grantee (and cash, Shares, or any other form of payment is not paid in lieu
thereof), then such Shares shall immediately be restored to the aggregate
maximum number of Shares (specified in subsection 4(a) above) with respect to
which Awards may be granted under the Plan and thus shall become again
available for the granting of Awards under the Plan.
(c) If a Grantee exercises a Stock Appreciation Right, any Shares covered by
the Stock Appreciation Right in excess of the number of Shares issued (or, in
the case of a settlement in cash or any other form of property, in excess of
the number of Shares equal in value to the amount of such settlement, based on
the Fair Market Value of such Shares on the date of such exercise) shall
immediately be restored to the aggregate maximum number of Shares (specified
in subsection 4(a) above) with respect to which Awards may be granted under
the Plan and thus shall become again available for the granting of Awards
under the Plan.
5. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee.
(b) The Committee may adopt, amend and rescind rules and regulations
relating to the Plan as it may deem proper, shall make all other
determinations necessary or advisable for the administration of the Plan, and
may provide for conditions and assurances deemed necessary or advisable to
protect the interests of the Company, to the extent not contrary to the
express provisions of the Plan; provided, however, that the Committee may take
action only upon the agreement of a majority of its members then in office.
Notwithstanding the provisions of the preceding sentence, no action or
determination by the Committee may adversely affect any right acquired by any
Grantee or Beneficiary under the terms of any Award granted before the date
such action or determination is taken or made, unless the affected Grantee or
Beneficiary shall expressly consent; but it shall be conclusively presumed
that any adjustment pursuant to Section 12 does not adversely affect any such
right. Any action that the Committee may take through a written instrument
signed by all of its members then in office shall be as effective as though
taken at a meeting duly called and held. All actions, determinations,
interpretations, and decisions of the Committee pursuant to the provisions of
the Plan shall be final, conclusive, and binding for all purposes and upon all
persons, unless (in the case where the parties concerned are not Section 16
Persons) otherwise determined by the Board.
(c) The powers of the Committee shall include plenary authority to interpret
the Plan. Subject to the provisions of the Plan, the Committee shall have the
authority, in its sole discretion, from time to time to select the employees
to whom Awards shall be granted; to determine the frequency with which Awards
shall be granted and the date on which each Award shall be granted; to
prescribe the number of Shares subject to each Award; to determine the type of
each Award; to determine the exercise price (if any) or purchase price (if
any) of each Award; to determine the term of each Award; to determine the
periods during which Awards may be exercised, the restrictions and limitations
upon exercise of Awards or receipt of Shares, other property, or cash
thereunder; to accelerate the exercisability of outstanding Awards; to
prescribe any performance criteria pursuant to which Awards may be granted or
may become exercisable or payable; to impose any restriction or condition or
take any action that it deems advisable or necessary to comply with the 1934
Act or Rule 16b-3; and to determine the other terms and conditions applicable
to each Award and the provisions of each Award Agreement, including any
amendments thereto.
(d) The Committee may delegate its authority, as described in subsections
5(b) and 5(c), above, to persons other than its members to exercise such
authority, except that (i) the authority to administer Awards with respect
<PAGE>
to Grantees who are Section 16 Persons shall not be delegated by the
Committee, and (ii) any such delegation shall satisfy any other applicable
requirements of Rule 16b-3 or applicable law.
(e) The Company shall indemnify the Committee and each member thereof
against any and all liabilities occasioned by any act or omission in good
faith, but such indemnification shall not be in any way inconsistent with or
in conflict with the Restated Certificate of Incorporation or bylaws of the
Company or the laws of the State of Delaware. No bond or other security shall
be required of the Committee, or any member thereof, for the performance of
their respective duties hereunder.
6. INDIVIDUALS ELIGIBLE TO RECEIVE AWARDS
Awards (including, without limitation, Incentive Stock Options) may be
granted under the Plan to employees of the Company or Subsidiaries (including
Covered Employees, executive officers and employees who are also directors).
All determinations by the Committee as to the identity of the employees to
whom Awards shall be granted hereunder shall be conclusive. A Grantee may
receive more than one Award.
7. AWARDS
Awards may be granted under the Plan singly or in combination or in tandem
with other Awards (or with awards under other plans of the Company or a
Subsidiary), and may be exercisable independently of, jointly with, or in the
alternative with respect to, other Awards, all as the Committee may determine.
All Awards shall be in a form determined by the Committee, provided that the
Award may not be inconsistent with the terms of the Plan or applicable law.
The following types of Awards may be granted, as the Committee may determine:
(a) Options
An Option is a right to purchase a specified number of Shares at a fixed
option exercise price equal to not less than the Minimum Price, during a
specified term as the Committee may determine. Options that may be granted
under the Plan include Incentive Stock Options and Non-qualified Stock
Options. The grant of an Incentive Stock Option and the terms and
conditions set forth in an Award Agreement with respect to an Incentive
Stock Option shall comply with the requirements of Section 422(b) of the
Code. Options with respect to no more than 120,000 Shares may be granted to
any individual participant during any one calendar year period, subject,
however, to adjustment as provided in Section 12 hereof.
(b) Stock Appreciation Rights
A Stock Appreciation Right is a right, denominated in Shares, to receive,
upon surrender of the Stock Appreciation Right (or of both the Stock
Appreciation Right and a related Option in the case of a tandem Stock
Appreciation Right that is related to an Option) in whole or in part, but
without payment, an amount (payable in Shares, in cash, or a combination
thereof as the Committee shall determine) that does not exceed the excess
of the value (as determined by the Committee) on the exercise date (or on
another date or dates specified by the Committee) of the number of Shares
for which the Stock Appreciation Right is exercised over the exercise price
of such Right; provided that the exercise price shall not be less than the
Minimum Price for such Shares on the date the Right was granted. Any Stock
Appreciation Right that is granted in connection with an Incentive Stock
Option shall satisfy any requirements that must be satisfied in order to
maintain the qualified status of the Incentive Stock Option. Stock
Appreciation Rights with respect to no more than 120,000 Shares may be
granted to any individual participant during any one calendar year period,
subject, however, to adjustment as provided in Section 12 hereof.
(c) Other Stock-Based Awards
The Committee may, from time to time, grant Awards (other than the Awards
described above) under the Plan that consist of or are denominated in or
payable in, valued in whole or in part by reference to, or otherwise based
on or related to, Shares, provided that such grants comply with applicable
law. The Committee may subject such Awards to such vesting or earnout
provisions, restrictions on transfer, and
<PAGE>
other restrictions on incidence of ownership as the Committee may
determine, provided that such restrictions are not inconsistent with the
terms of the Plan. For example, the Committee may grant restricted shares
that are temporarily nontransferable and forfeitable upon failure to
achieve specified performance goals, upon termination of employment or in
other circumstances. However, no more than 100,000 restricted shares may be
granted hereunder, and grants of restricted shares to any one individual
may not exceed 25,000 in any calendar year. The Committee may provide that
the Grantee shall have the right to beneficial ownership of Shares that are
subject to restrictions, including the right to vote such Shares. The
Committee may grant Awards under this subsection 7(c) that require no
payment of consideration by the Grantee (other than services previously
rendered or, as may be permitted by applicable law, services to be
rendered), either on the date of grant or the date any restrictions thereon
are removed. In addition, the Committee may, from time to time, grant
Awards under this subsection 7(c) that provide to the Grantee the right to
purchase Shares, provided that the purchase price or exercise price shall
in no event be less than the Minimum Price for such Shares on the date of
grant (or, if greater, the consideration required to be received by the
Company in order to comply with applicable law). Awards granted under this
Section 7(c) may also include, by way of example, phantom Shares,
performance bonus awards, and other Awards that are payable in cash, or
that are payable in cash or Shares (at the election of the Committee or, if
the Committee so provides, at the election of the Grantee), provided that
such Awards are denominated in Shares, valued in whole or in part by
reference to Shares, or otherwise based on or related to Shares.
Performance-based Awards may be determined in accordance with, for example,
the achievement of long-term performance criteria applicable to the Company
or any Subsidiary, a division, an operating unit, or an individual Grantee,
as determined by the Committee.
8. AWARD AGREEMENTS
(a) Each Award shall be evidenced by an Award Agreement setting forth the
number of Shares (if any) subject to the Award and the terms, conditions and
restrictions applicable to the Award. Award Agreements may include some or all
of the following provisions:
(i) Exercisability
A provision that prescribes the terms upon which the Award becomes
nonforfeitable or exercisable and the terms upon which the Award remains
exercisable (or is otherwise disposed of) after termination of employment.
Such provision may include (without limitation) the following: acceleration
of vesting (or exercisability or earnout) upon specified events, such as
retirement, disability, death, or change in control of the Company; the
forfeiture of the Award upon termination for cause or involvement in
competition with the Company; authorization to the Committee to accelerate
the time periods for purposes of exercising, vesting in, or realizing gains
from, any Award.
(ii) Procedures for Exercising an Award
A provision that establishes procedure for exercising or purchasing an
Award or realizing gains with respect thereto. Such provision may include
(without limitation) the method of payment of the exercise price, purchase
price, or the amount to satisfy any tax withholding.
(iii) Legal Requirements
Any provision that the Committee, in its sole discretion, determines is
necessary or advisable to comply with Rule 16b-3, the Code, the 1934 Act,
or other Federal, state or local law or regulation or interpretation
thereunder.
(iv) Other Provisions
Such other terms and conditions as are consistent with the terms of the
Plan and necessary or, in the view of the Committee, appropriate to grant
the Award.
<PAGE>
(b) Any Award Agreement applicable to one or more Incentive Stock Options
shall contain any other provisions that are required in order to comply with
the requirements of Section 422 of the Code, or any successor section, as it
may be amended from time to time, including without limitation, if required at
the time of grant, that the Option is intended to be an Incentive Stock
Option, that the Option shall not be exercisable after the expiration of ten
years from the date it is granted, that the Option exercise price is 100
percent of the Fair Market Value of the Shares at the time the Option is
granted (or a higher price specified by the Committee); and that Awards shall
be nontransferable except as provided in Section 16 hereof.
(c) Appropriate officers of the Company are hereby authorized to execute and
deliver Award Agreements in the name of the Company as directed from time to
time by the Committee.
9. PAYMENT FOR AWARD
The exercise price (if any) or purchase price (if any) of an Award may be
payable, and any tax withholding obligation may be satisfied, at the
discretion of the Committee, by any one or a combination of the following
methods:
(a) in U.S. dollars by personal check, bank draft or money order payable
to the order of the Company or by money transfer or direct account debit;
(b) through the delivery (or attestation to the ownership) of Shares with
a Fair Market Value equal to all or a portion of the price of the Award or
amount to be withheld for taxes; provided that, in the case of attestation,
the Shares transferred to the Grantee upon the exercise of the Award shall
be net of the number of Shares attested to;
(c) through authorization to the Company to withhold Shares, otherwise
deliverable to the Grantee pursuant to an Award, that have a Fair Market
Value equal to all or a portion of the price of the Award or the amount to
be withheld for taxes;
(d) by payment made by the Grantee's broker pursuant to the Grantee's
instructions (which may be, for example, in connection with a simultaneous
broker-assisted exercise and sale transaction or in connection with broker-
assisted financing of the exercise, and may be accompanied by the Grantee's
instructions to the Company to deliver Shares issuable upon exercise of the
Award to the broker for the Grantee's account); or
(e) by other means that the Committee determines to be consistent with
the Plan's purposes and applicable law.
10. DISTRIBUTION OF AWARDS
Subject to the provisions of Section 7 hereof, payments of Awards shall be
wholly in cash or wholly in Shares or partly in cash and partly in Shares, as
determined in the sole discretion of the Committee, including, in the case of
Shares, any restrictions on transfer and forfeiture provisions. All payments
of Awards shall be made as soon as practicable in accordance with the terms of
the Plan and the Award.
11. TAX WITHHOLDING
(a) The Company shall have the right to collect an amount sufficient to
satisfy any Federal, state or local withholding tax requirements that might
apply, in the reasonable opinion of the Company, with respect to any
<PAGE>
Award to a Grantee (including, without limitation, the exercise of an Option
or Right, or the grant, distribution or disposition of Shares) in the manner
specified in subsection 11(b) or 11(c) below.
(b) The Company shall have the right to require a Grantee (or, if permitted
by the Committee in its discretion, the Grantee's broker) to remit to the
Company (including remittance before or simultaneously with the Grantee's
receipt of payment or transfer of Shares under an Award) an amount sufficient
to satisfy any such withholding tax requirements. If the Committee permits, in
its discretion, such amount may be payable in the form of Shares that have a
sufficient Fair Market Value.
(c) The Company and its Subsidiaries also shall, to the extent permitted by
law, have the right to deduct from any payment or transfer of any kind
(whether of cash, Shares, or other property, and whether or not related to the
Plan) otherwise due to a Grantee any such taxes required to be withheld.
12. ADJUSTMENT FOR CHANGES IN CAPITALIZATION
Subject to the provisions of Section 13 hereof, in the event that there is
any change in the Shares through merger, consolidation, reorganization,
recapitalization, or otherwise; or if there shall be any dividend on the
Shares, payable in Shares, or an extraordinary cash dividend or other
extraordinary distribution; or if there shall be a stock split, reverse stock
split, combination of Shares, or other similar corporate transaction or event
that affects the Shares, such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
rights of the Grantees or of the potential benefits intended to be made
available under the Plan, then the aggregate number and type of Shares
available for Awards, the number and type of Shares subject to outstanding
Awards, the purchase or exercise price per Share of each outstanding Award,
and the other amounts authorized by Section 7 above, shall be adjusted by the
Committee in such manner as it may deem equitable in its absolute discretion;
provided that any fractional Shares resulting from such adjustments may be
eliminated on a uniform basis in the Committee's discretion; and provided
further that with respect to Incentive Stock Options, no such adjustment shall
be required to the extent that such adjustment would cause such Options to
violate Section 422(b) of the Code. The Committee's determination with respect
to any such adjustments shall be conclusive.
13. EFFECTS OF MERGER OR OTHER REORGANIZATION
(a) In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which Shares are exchanged
for securities, cash or other property of any other corporation or business
entity or in the event of a liquidation of the Company (the "Transaction"),
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions: (i) provide that Options and
Rights shall be assumed, or equivalent Options and Rights shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof) in connection with such Transaction, provided that any such options
substituted for Incentive Stock Options shall meet the requirements of Section
422(b) of the Code, (ii) provide that all or any outstanding options shall
become exercisable in full immediately prior to such Transaction or (iii) in
the event of a merger under the terms of which holders of Shares will receive
upon consummation thereof a cash payment for each Share surrendered in the
merger (the "Merger Price"), make or provide for a cash payment to the
Grantees equal to the difference between (a) the Merger Price times the number
of Shares subject to such outstanding Options (to the extent then exercisable
at prices not in excess of the Merger Price) and (b) the aggregate exercise
price of all such outstanding Options in exchange for the termination of such
Options. In the event of the substitution of equivalent Options or Rights by
an acquiring or succeeding corporation, as provided for in clause (i) above,
such substitute Options or Rights shall become immediately exercisable in full
if, within one year after completion of the Transaction, the employment of a
Grantee of such substitute Options or Rights terminates involuntarily (other
than for cause) or if such Grantee resigns his or her employment for any of
the following reasons: (v) a change is made in the Grantee's responsibilities
or status or position with the Company that, in the Grantee's reasonable
judgment, represents an adverse change from the Grantee's responsibilities or
status or position in effect immediately before the Transaction; (w) a
reduction is made by the Company in the Grantee's total compensation
<PAGE>
as in effect at the time of the Transaction; (x) the Grantee's place of
employment is relocated to a site more than thirty miles from the place of his
residence at the time of the Transaction; (y) in the event of any action or
inaction by the Company that would adversely affect the Grantee's continued
participation in any benefit or compensation plan on at least as favorable a
basis as was the case at the time of the Transaction, or that would materially
reduce the Grantee's benefits in the future under such plan or deprive him of
any material benefits that he enjoyed at the time of the Transaction (other
than as a result of the normal expiration of any such plan in accordance with
its terms as in effect at the time of the Transaction), except to the extent
that such action or inaction by the Company is required by the terms of the
plan as in effect immediately before the Transaction, or is necessary to
comply with applicable law or to preserve the qualification of the plan under
section 401(a) of the Internal Revenue Code, and except to the extent that the
Company provides the Grantee with substantially equivalent benefits; or (z)
the Company materially violates any agreement between it and the Grantee.
(b) The Company may grant Options under the Plan in substitution for options
held by employees of another corporation who become employees of the Company,
or a subsidiary of the Company, as the result of a merger or consolidation of
the employing corporation with the Company or a subsidiary of the Company, or
as a result of the acquisition by the Company, or one of its subsidiaries, of
property or stock of the employing corporation. The Company may direct that
substitute Options be granted on such terms and conditions as the Board of
Directors considers appropriate in the circumstances.
14. TERMINATION, SUSPENSION, OR MODIFICATION OF PLAN
The Board of Directors may at any time terminate, suspend, or modify the
Plan, except that the Board shall not, without the approval of the holders of
a majority of the Company's outstanding Shares present in person or
represented by proxy at a meeting of the shareholders of the Company duly
called for such purpose, materially increase the benefits accruing to
participants under the Plan or change (other than through adjustment for
changes in capitalization as provided in Section 12 hereof) (a) the aggregate
number of Shares with respect to which Awards may be granted; or (b) the class
of persons eligible for Awards. No termination, suspension, or modification of
the Plan shall adversely affect any right acquired by any Grantee, under the
terms of any Award granted before the date of such termination, suspension, or
modification, unless such Grantee shall consent; but it shall be conclusively
presumed that any adjustment for changes in capitalization in accordance with
Section 12 hereof does not adversely affect any such right.
15. SHAREHOLDER RIGHTS
No person shall have any rights of a shareholder by virtue of an Award
except with respect to Shares actually issued to him.
16. NON-TRANSFERABILITY
All Awards granted under the Plan shall be nontransferable other than by
will or by the laws of descent and distribution, and an Award may be exercised
during the lifetime of the Grantee only by him.
17. NO FRACTIONAL SHARES
No fractional Shares shall be issued pursuant to the Plan or any Award. The
Committee shall determine whether cash, other securities, or other property
shall be paid or transferred in lieu of fractional Shares, or whether
fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.
18. RIGHT OF DISCHARGE RESERVED
Nothing in the Plan or any Award Agreement shall confer upon any employee or
other individual the right to continue in the employment or service of the
Company or any Subsidiary or affect any right that the Company or any
Subsidiary may have to terminate the employment or service of (or to demote or
to exclude from future Awards under the Plan) any such employee or other
individual at any time for any reason.
<PAGE>
19. APPLICATION OF PROCEEDS
The proceeds received by the Company from the sale of Shares under the Plan
shall be used for general corporate purposes.
20. UNFUNDED PLAN
The Plan shall be unfunded. Neither the Company nor any Subsidiary nor the
Board shall be required to segregate any assets that may be represented by any
Award, and neither the Company nor any Subsidiary nor the Board shall be
deemed to be a trustee of any amounts to be paid under any Award. Any
liability of the Company or any Subsidiary to any Grantee with respect to an
Award shall be based solely upon any contractual obligations created pursuant
to the provisions of the Plan and Award Agreement; no such obligation shall be
deemed to be secured by any pledge of or encumbrance on any property of the
Company or a Subsidiary.
21. GENERAL PROVISIONS
The grant of an Award in any year shall not give the Grantee any right to
similar grants in future years. References in Sections 4, 5, 9, 11, 12, 14,
16, 20 and 21 hereof to the Grantee shall be deemed to refer, in the event
that the Grantee is deceased, to the Grantee's Beneficiary.
22. GOVERNING LAW
The Plan shall be governed and its provisions construed, enforced and
administered in accordance with the laws of the State of Delaware, except to
the extent that such laws may be superseded by any Federal law.
23. NATURE OF PAYMENTS
All Awards made pursuant to the Plan are in consideration of services
performed for the Company or a Subsidiary.
24. SEVERABILITY
If any provision of the Plan shall be held unlawful or otherwise invalid or
unenforceable in whole or in part, such unlawfulness, invalidity or
unenforceability shall not affect any other provision of the Plan or part
thereof, each of which shall remain in full force and effect. If the making of
any payment or the provision of any other benefit required under the Plan
shall be held unlawful or otherwise invalid or unenforceable, such
unlawfulness, invalidity or unenforceability shall not prevent any other
payment or benefit from being made or provided under the Plan, and if the
making of any payment in full or the provision of any other benefit required
under the Plan in full would be unlawful or otherwise invalid or
unenforceable, then such unlawfulness, invalidity or unenforceability shall
not prevent such payment or benefit from being made or provided in part, to
the extent that it would not be unlawful, invalid or unenforceable, and the
maximum payment or benefit that would not be unlawful, invalid or
unenforceable shall be made or provided under the Plan.
<PAGE>
EXHIBIT 10.23
STRATEGIC PARTNER AGREEMENT
1. PARTIES
- ------------
James Anthony Computing Ltd., of 599 Maxted Road, Hemel Hempstead, Rerts, HP2
7DX, England ("JAC") hereby agrees with Sequoia Systems, Inc., with its main
office address at 400 Nickerson Road, Marlborough, MA 01752, hereafter called
"STRATEGIC PARTNER", as follows:
2. DEFINITIONS
- ----------------
(a) BUSINESS PLAN OR PLAN. A plan setting forth the sales forecasts and agreed
upon marketing expenditure of STRATEGIC PARTNER for the thirty-six (36) months
following the execution of this Agreement and attached hereto as part of
Attachment Two (2).
(b) DELIVERY DATE. The date the Authorisation Key(s) are provided to STRATEGIC
PARTNER.
(c) DELIVERY PERIOD. The period beginning on the Effective Date and ending on
the ninetieth day following the last day of the Ordering Period.
(d) DISCOUNT. The percentage(s) set forth in Schedule A that STRATEGIC PARTNER
may earn for Orders submitted during the Ordering Period for Delivery before the
end of the Delivery Period.
(e) DOLLAR VOLUME. The cumulative US dollar amount ordered under this
Agreement. Such amount will be the accumulative total of discounted Orders based
upon JAC's then current published commercial list prices at the time JAC accepts
the Order therefor.
(f) EFFECTIVE DATE. The date this Agreement is accepted by an authorised
official of JAC and shall be the date set forth following the signature of such
official in clause 23 hereof.
(g) LICENSED SOFTWARE. JAC's family of proprietary computer programs known as
jBASE, which are licensed to STRATEGIC PARTNER pursuant to the terms and
conditions of this Agreement as it may be amended by other agreements between
the parties. Unless otherwise specifically stated, no Licensed Software shall be
furnished to STRATEGIC PARTNER except in machine readable form (i.e., Object
Code). Licensed Software may either be of operating systems or applications
programs.
(h) ORDER. The Order is a purchase order that sets out the Products being
ordered by STRATEGIC PARTNER, the list price thereof and the Discount that
STRATEGIC PARTNER believes applicable thereto. Each Order form shall
specifically incorporate this Agreement by reference.
(i) ORDERING PERIOD. The Ordering Period begins on the Effective Date of this
Agreement and terminates on June 30, 1999.
(j) PRODUCT. Products include Licensed Software offered for sub-license
hereunder by JAC.
(k) STRATEGIC PARTNER Qualification. The minimum requirements to be met in
order to retain STRATEGIC PARTNER status and Discounts mentioned in this
Agreement as detailed under Schedule A and Attachment Two (2).
(I) AUTHORISATION KEY(S). This is the sequence of numbers and letters issued by
JAC in order to authorise and validate the licensing of JAC Licensed Software.
JAC Licensed Software is considered unlicensed until the Authorisation Key is
installed on the end-user's computer.
(m) SYSTEM. Combination of JAC's Licensed Software, hardware, software and/or
services developed or supplied by STRATEGIC PARTNER or VAR as required by this
Agreement for the use of a third party.
(n) VAR. An organisation appointed by STRATEGIC PARTNER to add substantial
software, hardware or service value and distribute JAC Products delivered by
STRATEGIC PARTNER.
(o) LICENSE FEES. The license fees specified in Schedule A.
3. WARRANTIES AND RESPONSIBILITIES
-------------------------------
(a) EXPERIENCE. STRATEGIC PARTNER hereby certifies that it is an experienced
user of computer products, will become fully familiar with JAC's Products, and
shall assume full responsibility for the marketing of these Products,
PAGE 1 of 22
<PAGE>
will provide support for JAC Products sub-licensed by STRATEGIC PARTNER and
shall require no substantial assistance from JAC in conducting business other
than providing bug fixes, new product revisions and the like. JAC hereby
certifies that it is an experienced user of computer products and is able to
support and assist STRATEGIC PARTNER with regard to marketing and supporting JAC
Products.
(b) THIRD PARTY CUSTOMERS. STRATEGIC PARTNER agrees that it shall purchase the
Products under this Agreement for incorporation into Systems that STRATEGIC
PARTNER, in the regular course of business, will either
(i) re-market to an unaffiliated third party end user or
(ii) re-market to the VAR's of STRATEGIC PARTNER who will further re-
market such systems to unaffiliated third party users.
(c) VALUE TO HE ADDED. STRATEGIC PARTNER will ensure that VAR's to whom JAC
Licensed Software is provided shall incorporate such Licensed Software into
Systems consisting of a substantial amount of other software, hardware or
service that VAR manufactures, develops or provides ("Added Value") and which
VAR sells or leases to an end-user in the regular course of business. This Added
Value must represent a significant functional and value enhancement to the JAC
Products that VAR furnishes to end users. If VAR's Added Value consists of
software, it must be intended to solve the end user's major application need for
the System being purchased.
(d) STRATEGIC PARTNER Use. STRATEGIC PARTNER may use an incidental quantity of
its purchased Products for STRATEGIC PARTNER'S own internal purposes.
(e) INDEPENDENT CONTRACTOR. STRATEGIC PARTNER hereby certifies that it is an
independent contractor and not the agent or legal representative of JAC, and
that any representation made or agreement executed by STRATEGIC PARTNER shall be
STRATEGIC PARTNER'S sole responsibility.
(f) INFORMATION FOR JAC. STRATEGIC PARTNER shall promptly provide such written
information as JAC may from time to time request relating to;
(i) the functional and value enhancements to the Systems marketed by
STRATEGIC PARTNER and/or its VAR's and/or;
(ii) STRATEGIC PARTNER's commercial best efforts to perform its Business
Plan. STRATEGIC PARTNER shall also require its VAR's to provide such
information to STRATEGIC PARTNER to assure compliance with this Clause
3(f).
(g) FIRST TIME USER COMMITMENT. JAC is providing STRATEGIC PARTNER with a
financial incentive in the form of a Discount.
(i) in order to develop a market for its Products in areas where JAC is
not selling directly on any large scale; and
(ii) in reliance on the ability of STRATEGIC PARTNER and its VAR's to
sell and support Systems in accordance with STRATEGIC PARTNER'S Business
Plan set forth in Attachment Two (2), for use by new end users.
Therefore STRATEGIC PARTNER warrants as follows:
(iii) STRATEGIC PARTNER shall perform its primary sales responsibility,
which is to promote and license the Licensed Software covered by this
Agreement to first time end users and to end users who have not obtained
JAC Products directly from JAC and shall require its VAR's to do likewise.
Additional licenses and products sold pursuant to this Agreement by
STRATEGIC PARTNER or its VAR's to such end users shall also qualify for the
Discount.
(iv) All other Orders shall be discounted on a single transaction (non-
cumulative) basis in accordance with JAC's end user discount schedule
current at the time of order acceptance, except as may otherwise be
authorised by JAC in writing. JAC will adjust any Discount necessary to
insure conformity with this Clause 3(g)(iv), and STRATEGIC PARTNER shall
pay any resulting adjustment promptly upon receipt of the invoice therefor;
(v) STRATEGIC PARTNER and/or its VAR's shall
(A) employ, train, and maintain sufficient personnel with technical
and sales experience to demonstrate, sell, and support the Systems
and those JAC Products purchased or licensed under this Agreement;
and
PAGE 2 of 22
<PAGE>
(B) maintain commercial best efforts to perform in accordance with
STRATEGIC PARTNER'S Business Plan.
(h) APPOINTMENT. STRATEGIC PARTNER'S Non-exclusive Area of Responsibility
within which it sales efforts should be directed shall be set forth in schedule
A of this Agreement. JAC reserves the right to market and solicit sales
directly, through other distributors, and through any other channel of
distribution at any time and from time to time inside and outside STRATEGIC
PARTNER'S Area of Non-exclusive Responsibility or otherwise, as in JAC's sole
judgement JAC deems desirable.
(i) BEST EFFORTS. Each of JAC and STRATEGIC PARTNER shall at all times during
the term of this Agreement use its commercial best efforts in the promotion and
licensing of JAC's Licensed Software consistent with good business practices and
ethics, and in a manner that will reflect favourably on JAC Products and on the
good will and reputation of JAC and STRATEGIC PARTNER
(j) CONDUCT. Both STRATEGIC PARTNER and JAC hereby shall at all times refrain
from engaging in any illegal, unfair or deceptive trade practices or unethical
business practices whatsoever, whether in respect of JAC products or otherwise.
(k) MARKETING AND DESCRIPTION OF JAC LICENSED SOFTWARE. STRATEGIC PARTNER and
STRATEGIC PARTNER'S VAR's agree to describe JAC's Licensed Software as described
by JAC and not to represent that JAC Licensed Software is other than as
described in JAC's published specifications. JAC take no responsibility or
liability whatsoever for actions resulting from such misrepresentation. Prior to
distribution to other parties, STRATEGIC PARTNER will provide JAC with a copy of
any marketing or sales brochure or other literature intended to enhance sales or
market coverage of JAC Licensed Software.
(l) WARRANTY AND LIMITATION OF WARRANTY. JAC warrants to STRATEGIC PARTNER that
it is free to enter into this Agreement and has unencumbered title to the
Licensed Software and that the Licensed Software when installed will conform to
its then current published specification for the computer systems to be sold by
STRATEGIC PARTNER in conjunction with this Agreement. In the event that the
Licensed Software does not so conform and STRATEGIC PARTNER notifies JAC within
ninety (90) days from the date of delivery of such computer system to an end-
user, JAC shall at its option, with reasonable promptness either correct the
defect or replace the Licensed Software with a conforming copy without charge
provided, however, that:
i) STRATEGIC PARTNER shall identify and notify JAC of any errors
discovered during such ninety (90) day period;
ii) STRATEGIC PARTNER must provide JAC access to the system, such as via
a dial-up modem, as may reasonably be required;
iii) The error so identified can be reproduced on properly functioning
equipment at STRATEGIC PARTNER'S and JAC's principal place of business;
iv) The error is not due to a modification and/or combination of the
Licensed Software with programs not supplied hereunder; and
v) STRATEGIC PARTNER will install the latest release of the Licensed
Software on its computer system within ninety (90) days of issuance and the
written notification to STRATEGIC PARTNER of its availability.
m) THE WARRANTIES CONTAINED HEREIN ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS AND IMPLIED, AS TO THE LICENSED SOFTWARE OR ITS USE OR PERFORMANCE
INCLUDING BUT NOT LIMITED TO ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR USE
AND FITNESS FOR A PARTICULAR PURPOSE SAVE FOR ANY PURPOSE OUTLINED IN THE JAC
PRODUCT SPECIFICATIONS OR TECHNICAL MANUALS. EXCEPT AS PROVIDED BY CLAUSE 13
REGARDING INFRINGEMENTS, STRATEGIC PARTNER HEREBY WAIVES ANY CLAIM IT MAY HAVE
AGAINST JAC FOR ANY LOSS, DAMAGE, OR EXPENSE OF ANY KIND WHATSOEVER CAUSED BY
THE LICENSED SOFTWARE OR BY ANY DEFECT THEREIN, THE USE OR MAINTENANCE THEREOF,
OR ANY SERVICING OR ADJUSTMENT THERETO, NOT EXPRESSLY COVERED BY THE WARRANTIES
CONTAINED HEREIN.
(n) ONLY TO STRATEGIC PARTNER Except as contemplated by Clause 3(o), infra, the
foregoing warranties are for the benefit and apply only to STRATEGIC PARTNER.
These warranties do not apply to the extent that the defect arises out of
accident, neglect, misuse, failure of electric power, or other causes beyond
JAC's control, or results from use other than in accordance with the Products'
published specifications.
PAGE 3 of 22
<PAGE>
(o) STRATEGIC PARTNER agrees to include the following statement in each
agreement by which it licenses JAC Products to VAR's or end users and to require
its VAR's to do the same in a conspicuous manner:
"JAC WARRANTS THAT UNMODIFIED JAC LICENSED SOFTWARE WILL CONFORM TO ITS THEN
PUBLISHED SPECIFICATION FOR 90 DAYS FROM DATE OF INSTALLATION OF SUCH SOFTWARE.
ALL WARRANTY CLAIMS MUST BE SUBMITTED TO [insert name of STRATEGIC PARTNER or
VAR]. JAC MAKES NO OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AND
SPECIFICALLY EXCLUDES THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE. NO STRATEGIC PARTNER, VAR, OR ANY OTHER PARTY HAS ANY
AUTHORITY TO MAKE ANY OTHER REPRESENTATION ON BEHALF OF JAC OR OTHERWISE TO BIND
JAC. IN NO EVENT SHALL JAC BE LIABLE TO ANYONE FOR ANY INDIRECT, SPECIAL, OR
CONSEQUENTIAL DAMAGES, WHETHER RELATED TO WARRANTY OR ANY OTHER CLAIM."
4. DISCOUNTS
- --------------
STRATEGIC PARTNER will receive the applicable Discount, as specified in Schedule
A, for all Products licensed and accepted by STRATEGIC PARTNER pursuant to the
terms and conditions of this Agreement.
5. ORDERS
- -----------
In addition to the requirements set forth in Clause 2(k) supra defining the word
"Order," each Order is subject to the following additional conditions:
(a) PERMITTED DATES. It must specify delivery dates within the Delivery Period.
(b) MINIMUM ORDER. JAC reserve the right to charge a nominal administrative fee
for orders of less than $1,000 (One Thousand US Dollars).
(c) ELECTRONIC ORDERS. Facsimile and/or direct electronic orders may, upon
mutual agreement, be placed under this Agreement. Such Orders must contain
information in a suitable format, as well as an authorised electronic
"signature" and password in accordance with the currently prevailing applicable
JAC policy for Electronic Orders. All Orders received electronically that meet
the currently prevailing criteria at the time of receipt will be considered
valid Orders and subject to all the terms and conditions of this Agreement.
(d) CHANGES TO PRODUCTS. JAC shall have the right to change the design and/or
specifications of JAC Licensed Software at any time upon at least sixty (60)
days prior written notice to STRATEGIC PARTNER. JAC shall have the right to
decrease the number of JAC Licensed Software available for purchase or license
hereunder or to discontinue the sale or availability of any or all such JAC
Products without liability to STRATEGIC PARTNER upon one hundred twenty (120)
days prior written notice to STRATEGIC PARTNER.
6. DELIVERIES
- ---------------
Deliveries are subject to the following conditions:
The parties agree that JAC will forward magnetic media and or documentation over
and above the Authorisation Key(s) required to legalise the licensing of JAC
Licensed Software; in which case and where relevant the following will apply:
(a) WHERE AND WHEN. JAC will deliver Authorisation Keys by facsimile,
electronically, orally or by air-mail at JAC's expense in accordance with a
mutually agreeable delivery schedule.
(b) DATE NOT CONTRACT COMMITMENT. JAC will make every reasonable effort to meet
the Delivery Date quoted in the acceptance. However, JAC will not be liable for
its failure to meet any such Date(s).
(c) TEMPORARY SUBSTITUTION. Where JAC is unable to provide a written
Authorisation Key on the Scheduled Delivery Date, JAC may, at its option,
provide an oral Authorisation Key where a delay of an on-order Authorisation
Key(s) occurs.
(d) TITLE AND RISK OF LOSS. Title to the Products and risk of loss or damage
thereto pass to STRATEGIC PARTNER at the point of shipment.
PAGE 4 of 22
<PAGE>
(e) SHIPPING & MEDIA COSTS. Shipping and Media costs are for the account of
STRATEGIC PARTNER. Where an express delivery company is utilised, STRATEGIC
PARTNER will provide JAC with STRATEGIC PARTNER'S account number with such
company to allow direct billing from the delivery company to STRATEGIC PARTNER.
7. CHARGES AND PAYMENT
- ------------------------
JAC's charges for Products and services are those in effect on the date JAC
accepts STRATEGIC PARTNER'S Order. Such charges and related Discount will be in
the then current JAC price catalogue for the applicable Products. JAC will serve
sixty (60) days notice of any price changes. Payment of JAC invoices will be due
net twenty (20) days from receipt of invoice.
(a) BILLING AND INVOICES. If STRATEGIC PARTNER becomes delinquent in payment of
any sum due JAC, JAC may, sixty (60) days after giving written notice to
STRATEGIC PARTNER, decline to continue the performance of this Agreement with
STRATEGIC PARTNER, and such action by JAC shall not give rise to any cause or
claim of breach of contract or other liability on behalf of JAC.
(b) LATE CHARGES. If STRATEGIC PARTNER fails to pay the License fee when due,
STRATEGIC PARTNER shall pay a late payment charge on the past due balance equal
to two (2) percent above the then prevailing Barclays Bank plc base rate, but
not in excess of the lawful maximum.
(c) END USER PRICES. STRATEGIC PARTNER shall be free to determine its own
resale prices and license fees for JAC Licensed Software. Although JAC's
STRATEGIC PARTNER Price List may show suggested VAR and End User prices, they
are suggestions only, and STRATEGIC PARTNER and its VAR's may charge different
prices without any liability or obligation to JAC. STRATEGIC PARTNER understands
that neither JAC nor any employee or representative of JAC may give any special
treatment (favourable or unfavourable) to STRATEGIC PARTNER as a result of
STRATEGIC PARTNER'S selection of resale prices, unless such prices are in
response to an illegal contract prohibited by Clause 3(k) hereof. No employee or
representative of JAC has any authority to dictate to STRATEGIC PARTNER or its
VAR's what their respective resale prices for JAC Licensed Software must be or
to inhibit in any way their pricing discretion with respect to such JAC
Products. Should anyone attempt to do so, STRATEGIC PARTNER hereby agrees to
report the matter promptly to JAC in writing.
8. ACCEPTANCE
- ---------------
In order that STRATEGIC PARTNER be able to duplicate and distribute commercial
quality copies of JAC Licensed Software, JAC's Licensed Software must pass
certain quality control tests:
(a) JAC'S TESTS. Prior to Delivery Date, JAC personnel will conduct quality
control tests at a location designated by JAC and upon at least five (5)
business days notice to STRATEGIC PARTNER.
(b) STRATEGIC PARTNER'S RIGHT TO ATTEND. STRATEGIC PARTNER may witness such
tests by providing JAC with reasonable notice of attendance. If STRATEGIC
PARTNER fails to witness such test, the performance of the test will not be
delayed.
(c) TEST COMPLETION. JAC Licensed Software shall be deemed accepted by
STRATEGIC PARTNER upon the successful operation of said JAC Licensed Software
using JAC's then standard procedures and diagnostic test programs furnished by
JAC, regardless of whether or not STRATEGIC PARTNER has witnessed such tests.
(d) STRATEGIC PARTNER will be permitted to participate fully in the Quality
Assurance process but will have no right to introduce new criteria into JAC's
standard procedures and JAC diagnostic test programs.
9. INSTALLATION
- -----------------
STRATEGIC PARTNER will be responsible for installation, support, and temporary
workaround of all JAC Licensed Software purchased. At STRATEGIC PARTNER'S
request and subject to availability of personnel, JAC will provide installation
services in accordance with JAC's then current terms, conditions, and charges.
In such an event, STRATEGIC PARTNER shall notify JAC prior to any planned
installation.
10. LICENSE FOR SOFTWARE PRODUCTS AND DIAGNOSTIC MATERIALS
- -----------------------------------------------------------
(a) GRANT. JAC hereby grants STRATEGIC PARTNER a non-exclusive, non-
transferable license to use Licensed Software, including documentation thereof;
for STRATEGIC PARTNER'S own use on that platform, identified by number, on which
the Licensed Program runs.
PAGE 5 of 22
<PAGE>
(b) COPIES AND ADAPTATIONS. STRATEGIC PARTNER is hereby granted a non-
exclusive, non-transferable license to duplicate JAC License Software in machine
readable form and to deliver such JAC Licensed Software to authorised VAR's of
STRATEGIC PARTNER and end users who will thereby become licensed users of the
JAC Licensed Software provided that:
i) The Licensed Software is only sub-licensed to VAR's and end users in
accordance with the terms and conditions of this Agreement.
ii) STRATEGIC PARTNER agrees and accepts that title to all rights and
interest in Licensed Software, wherever resident and in whatever media,
remains with JAC at all times.
iii) STRATEGIC PARTNER may not export or transmit Licensed Software in
any manner whatsoever outside STRATEGIC PARTNER'S Non-exclusive Area of
Responsibility as defined herein, except when sold to an entity in such
Area for installation outside such Area.
iv) STRATEGIC PARTNER may not make any copies of any JAC Licensed
Software except in connection with the rights granted hereunder, and
STRATEGIC PARTNER shall reproduce and include JAC's copyright and/or trade
secret notices on all copies and adaptations in any form of the Licensed
Software. Except as provided herein, no copyright license of the exclusive
rights of copyright owners in any portion of the Licensed Software or
diagnostic materials provided by JAC is granted to STRATEGIC PARTNER.
v) STRATEGIC PARTNER, its staff, agents and representatives will not
attempt to reverse compile or disassemble the Licensed Software or
encourage others to do so. Further, upon the knowledge of such infringement
by any party, STRATEGIC PARTNER will promptly inform JAC of the event.
vi) STRATEGIC PARTNER will take appropriate action, by instruction,
agreement or otherwise regarding all persons permitted access to the
Licensed Software so to as enable authorised STRATEGIC PARTNER'S VAR's and
end users to satisfy its obligations under the license granted hereunder.
vii) STRATEGIC PARTNER will at all times treat Licensed Software as
confidential information that is proprietary to JAC by not making any part
thereof available to others except in accordance with this Agreement.
viii) STRATEGIC PARTNER shall only distribute and use the Licensed Software
on the computer systems defined herein under Schedule A.
ix) Except as required for providing support to its VAR's and end-users
who are licensed to use the Licensed Software, STRATEGIC PARTNER shall
promptly return to JAC the Licensed Software, including documentation, then
in its possession upon termination of this Agreement.
x) Within ninety (90) days after receipt of the latest release of the
Licensed Software, STRATEGIC PARTNER will install such release or make it
available to its VAR's and end-users and will cease duplication of any
previous release of the Licensed Software within sixty (60) days after
delivery to Strategic Partner of the latest release passing acceptance
tests.
JAC is not responsible for any adaptations made by STRATEGIC PARTNER or any
third party, or the compatibility of any software or service with such
adaptations. STRATEGIC PARTNER shall pay JAC for services required by STRATEGIC
PARTNER as a result of adaptations of any Licensed Software made by STRATEGIC
PARTNER or by STRATEGIC PARTNER'S failure to use current Licensed Software and
releases provided by JAC. JAC guarantee compatibility with and support of the
Licensed Software for those hardware platforms and operating systems specified
under Schedule A.
This license further includes STRATEGIC PARTNER'S right to merge any portion of
the JAC Licensed Software provided by JAC in machine readable form and any
adaptations thereof with other software to provide an updated work. However,
upon termination of this license, such portion must be completely removed and
treated as if permission to merge or adapt had never been granted.
(c) SUB-LICENSE
(i) Right to Sub-license. STRATEGIC PARTNER may sub-license Licensed
Software for use on a designated central processing unit and distribute
such Licensed Software for use on a sub-licensed system. Each sub-licensed
program copy may be distributed and must be sub-licensed as set forth in
this Clause 10(c) and at the license fee set forth in JAC's then current
license fee listing.
PAGE 6 of 22
<PAGE>
(ii) Permitted Sub-license. STRATEGIC PARTNER may sub-license solely to
its VAR's and end user buyers or lessees the JAC Licensed Software licensed
to STRATEGIC PARTNER hereunder. If such end user buyers or lessees are
VAR's of STRATEGIC PARTNER, then such VAR's may also sub-license to their
VAR's and end user buyers or lessees who must be end users of the JAC
Licensed Software licensed to STRATEGIC PARTNER hereunder. No further sub-
license by STRATEGIC PARTNER or by those who buy or lease from STRATEGIC
PARTNER or its VAR's shall be permitted.
(iii) Sub-license Form. Such sub-license is to be in writing and subject to
and include all terms and conditions of this Clause 10(c). STRATEGIC
PARTNER shall provide a copy of each sub-license to JAC promptly upon
request.
(iv) Breach of Sub-license. If breach of such sub-license occurs, then
STRATEGIC PARTNER shall take prompt corrective action to remedy the breach
and shall, in addition, notify JAC of the breach and the corrective action
taken. STRATEGIC PARTNER shall not be liable to JAC for any breach of the
terms of any sub-license by a third party unless STRATEGIC PARTNER has
willfully or negligently contributed to or co-operated in the breach.
(v) Survival. Sub-licenses granted by STRATEGIC PARTNER and its VAR's
under this Agreement shall survive termination of this Agreement by either
party for any reason.
(d) Termination for Failure to Comply with Requirements of Software License. If
STRATEGIC PARTNER or any STRATEGIC PARTNER VAR materially fails to comply with
its license obligations hereunder and does not cure such default within thirty
(30) days after receipt of written notice from JAC, then JAC may terminate
STRATEGIC PARTNER'S OR VAR'S license, as the case may be, and require the
immediate return to JAC of all affected Licensed Software and diagnostic
material and all copies thereof in any form, except as provided in Clause
l0(b)(ix).
Within ninety (90) days after (A) installation of a JAC program that comprises
Licensed Software and that replaces another or (B) termination of the license to
such a program or diagnostic material, STRATEGIC PARTNER shall destroy the
original and all copies thereof in any form. Upon request by JAC, STRATEGIC
PARTNER shall certify such destruction in writing.
11. Confidentiality and Proprietary Rights
- -------------------------------------------
(a) Confidentiality. In the performance of this Agreement or in contemplation
thereof, both STRATEGIC PARTNER and JAC and their respective employees and
agents may have access to private or confidential information owned or
controlled by either party relating to Licensed Software, specifications,
drawings and other data, ("Confidential lnformation"). All Confidential
Information acquired by either party or its employees or agents under this
Agreement or in contemplation thereof shall be and shall remain the exclusive
property of its respective owner. STRATEGIC PARTNER and JAC shall each keep, and
require their respective employees to keep, any and all such Confidential
Information confidential, and shall not copy or publish or disclose it to
others, or authorise its employees, agents, or anyone else to copy, publish, or
disclose it to others except in accordance with this Agreement, without the
prior written approval of the other party, and shall return such information and
data to such other party at the other party's request. The foregoing obligations
shall not apply to any Confidential Information which: a) becomes lawfully known
or available to the receiving party from a source other than the disclosing
party without breach of this Agreement by the receiving party; b) is developed
independently by the receiving party; c) is within or later becomes part of the
public domain without breach of this Agreement by the receiving party; or d) is
provided by the disclosing party to others on an unrestricted basis.
(b) Proprietary Rights and Security. All copies of Licensed Software in any
form provided by JAC or made by STRATEGIC PARTNER including translations or
compilations or partial copies within adaptations and updated works, together
with all diagnostic materials, are the sole property of JAC. Neither STRATEGIC
PARTNER nor any sublicensee of STRATEGIC PARTNER shall have any right, title, or
interest to any such Licensed Software or diagnostic material except as stated
herein, and shall not sell, transfer, or otherwise make available the Licensed
Software or any diagnostic material or copies thereof to others except as
provided in this Agreement, and further shall secure and protect all Licensed
Software or diagnostic materials, including erasure thereof prior to disposing
of media, consistent with the maintenance of rights therein and take each such
action as may be necessary with its employees who are permitted access to each
such Licensed Software or diagnostic material to satisfy its obligations
hereunder.
12. Assistance bv JAC
- ----------------------
(a) LITERATURE AND MATERIALS. JAC will furnish STRATEGIC PARTNER with necessary
quantities of non-proprietary sales aids, product briefs, brochures and similar
literature and other materials with respect to JAC Products. STRATEGIC PARTNER
shall reimburse JAC for JAC's full cost for such materials. JAC manuals will be
available to
PAGE 7 of 22
<PAGE>
STRATEGIC PARTNER at charges as listed in JAC's STRATEGIC PARTNER Price List or
such other applicable Price List as may be in effect at the time JAC accepts
STRATEGIC PARTNER'S order.
(b) CO-OPERATE ADVERTISING. If requested to do so by STRATEGIC PARTNER, JAC
will participate in a cc-operative advertising program with STRATEGIC PARTNER
and will co-operate with STRATEGIC PARTNER in preparing suitable advertisements
and related advertising materials. All advertising programmes run by STRATEGIC
PARTNER must first be approved in writing by JAC, which approval shall not be
unreasonably withheld.
(c) TRAINING. JAC will provide STRATEGIC PARTNER with initial familiarisation
and sales training, at no charge, for a reasonable number of STRATEGIC PARTNER'S
employees at a mutually agreed upon location. Such training shall not exceed
three (3) working days. All expenses of STRATEGIC PARTNER'S employees associated
with such training, such as transportation, meals and lodging, are the
responsibility of STRATEGIC PARTNER. Additional standard technical training
courses from JAC's Customer Education Department are available to STRATEGIC
PARTNER at standard locations, rates and terms. At JAC's option and STRATEGIC
PARTNER'S request, JAC may perform the training at the STRATEGIC PARTNER'S
location but all expenses for JAC's staff are the responsibility of STRATEGIC
PARTNER.
13. Infringements of Patents, Trademarks, and Copyrights.
- ----------------------------------------------------------
(a) JAC will indemnify and hold harmless STRATEGIC PARTNER against any damages
(including reasonable attorney's fees and costs) that may be awarded to or
agreed to be paid to any third party in respect of any claim or action that the
normal operation, possession, or use of JAC Products by STRATEGIC PARTNER
infringes the patent, copyright, registered design, trade secret, or trade mark
rights of said third party (an 'Intellectual Property Infringement') provided
that DISTRIBUTOR:
(i) gives notice to JAC of any Intellectual Property Infringement
promptly upon becoming aware of the same;
(ii) gives JAC the sole conduct of the defence to any claim or action in
respect of an Intellectual Property Infringement and does not at any time
admit liability or otherwise attempt to settle or compromise the said claim
or action except upon the express instructions of JAC and;
(iii) acts in accordance with the reasonable instructions of JAC and gives
JAC such assistance as it shall reasonably require in respect of the
conduct of the said defence, including, without prejudice to the generality
of the foregoing, the filing of all pleadings and other court process and
the provision of all relevant documents.
(b) JAC shall reimburse STRATEGIC PARTNER its reasonable costs incurred in
complying with the provisions of clause 13(a)(i), 13(a)(ii) or 13(a)(iii) above.
(c) JAC shall have no liability to STRATEGIC PARTNER in respect of an
Intellectual Property Infringement if the same results from a material breach of
STRATEGIC PARTNER'S obligations under this agreement.
(d) In the event of an Intellectual Property Infringement JAC shall be entitled
at its own expense and option either to:
(i) procure the right for the STRATEGIC PARTNER to continue using the JAC
Products; or
(ii) make such alterations modifications or adjustments to the JAC
Products that they become non-infringing without incurring a material
diminution in performance or function; or
(iii) replace the JAC Products with non-infringing substitutes provided
that such substitutes do not entail a material diminution in performance or
function.
14. LIMITATION OF LIABILITY. DAMAGES AND ACTIONS
- -------------------------------------------------
(a) The following provisions set out JAC's entire liability (including any
liability for the acts and omissions of its employees agents and sub-
contractors) to STRATEGIC PARTNER in respect of:
(i) any breach of its contractual obligations arising under this
Agreement; and
(ii) any representation, statement or tortious act or omission, including
negligence, arising under or in connection with this Agreement.
(b) Any act or omission on the part of JAC or its employees, agents or sub-
contractors falling within clause 14(a) above shall for the purposes of this
clause 14 be known as an 'Event of Default'.
PAGE 8 of 22
<PAGE>
(c) JAC's liability to STRATEGIC PARTNER for death or injury resulting from its
own or that of its employees', agents' or sub-contractors' negligence shall not
be limited.
(d) Subject to the limits set out in clause 14(e)(i) below JAC shall accept
liability to STRATEGIC PARTNER in respect of damage to the tangible property of
STRATEGIC PARTNER resulting from the negligence of JAC or its employees, agents
or sub-contractors.
(e) Subject to the limits set out in clause 14(e)(i) below, JAC shall accept
liability to STRATEGIC PARTNER in respect of any Event of Default, limited to
damages equal to:
(i) US Dollars $250,000 in the case of an Event of Default falling within
clause 14(d) above; and
(ii) in the case of any other Event of Default, the aggregate of the
license fees paid in the immediately preceding period of twelve (12)
months.
(f) Subject to clause 14(e) above, JAC shall not be liable to STRATEGIC PARTNER
in respect of any Event of Default for loss of profits, goodwill or any type of
special, indirect or consequential loss even if such loss was reasonably
foreseeable or JAC had been advised of the possibility of STRATEGIC PARTNER
incurring the same.
(g) STRATEGIC PARTNER agrees to afford to JAC not less than sixty (60)days
(following notification thereof by STRATEGIC PARTNER) in which to remedy any
Event of Default hereunder.
15. TERMINATION
- ----------------
In addition to JAC's rights to terminate this Agreement for violation of its
proprietary rights set forth in clause 10(d) supra, either party may terminate
this Agreement and all licences hereunder (except sub-licenses for licensed
programs that continue as provided in Clause 10(c) supra relating to sub-
licenses to end users) upon the occurrence of any of the following events:
(a) INSOLVENCY. Except as may be prohibited by the bankruptcy laws of England
or The United States of America or Canada, in the event of STRATEGIC
PARTNER'S or JAC's insolvency or its inability to pay debts as they become
due, or the filing of a voluntary bankruptcy proceeding by or against
either party, or the appointment of a receiver or assignee for the benefit
of the other party's creditors, such other party may elect to terminate
this Agreement.
(b) BREACH BY EITHER PARTY. Either party's failures to perform any substantial
obligation herein on its part to be performed, unless such breach shall be
cured within thirty (30) days following written notice of such default from
the other party. Upon default, either party may pursue any and all of its
rights and remedies hereunder at law and at equity.
(c) ASSIGNMENT. Neither party may assign this Agreement in whole or in part, or
any interest hereunder, without the other party's prior written consent,
and such consent shall not be unreasonably withheld, provided, however,
that either party may assign this Agreement to any of its subsidiary
companies.
16. PURCHASE OF JAC SHARES
- ---------------------------
If during the term of this Agreement any third-party makes an offer, acceptable
to JAC, to purchase a controlling equity interest in JAC or a substantial
portion of its assets, JAC hereby agree to notify STRATEGIC PARTNER in writing
of the terms of such offer. This notice will be subject to any confidentiality
provisions reasonably agreed to with the proposed purchaser.
Following receipt of the aforementioned notice STRATEGIC PARTNER shall have
fourteen (14) days to make a counter offer to purchase on terms materially no
less favourable to JAC such interest or assets. Such counter offer shall bind
STRATEGIC PARTNER to complete such purchase in a timely manner (including
reasonable time for due diligence review), subject only to a further offer by
the third-party. In such event, STRATEGIC PARTNER shall be given the opportunity
to make further counter bids on the same terms as stated above.
This right shall not limit or prohibit JAC's rights to raise finance via the
offer for sale of any minority shareholding.
In the event that the aforementioned rights are not exercised by STRATEGIC
PARTNER in writing thirty (30) days from receipt of notice by JAC, such rights
shall be deemed waived by STRATEGIC PARTNER and shall only be reinstated (on the
same terms) in the event that the third-party offer is not accepted by JAC.
PAGE 9 of 22
<PAGE>
17. TERM
- ---------
(a) COMMENCEMENT. The term of this Agreement shall commence upon the Effective
Date set forth in Clause 2(f) and shall continue until June 30, 1999.
(b) TERMINATION. STRATEGIC PARTNER'S right to order pursuant to this Agreement
terminates on the expiration of the Ordering Period as defined in Clause
2(i).
(c) RENEWAL. This Agreement may be terminated by JAC at the end of any year in
which STRATEGIC PARTNER fails to meet its revenue target, as specified in
Attachment Two.
18. TRADEMARKS AND TRADE-NAMES
- -------------------------------
(a) JAC'S RIGHTS. STRATEGIC PARTNER concedes and recognises the right of JAC
to, and will have no right or license in, the JAC trademarks and trade-names
used with or affixed to any of JAC's equipment, or Licensed Software.
(b) USE OF MARKS. During the term of this Agreement STRATEGIC PARTNER is hereby
authorised by JAC to use the trademarks listed in Attachment One (1) B hereof
and to use the phrase "STRATEGIC PARTNER of JAC" and authorised VAR's of
STRATEGIC PARTNER may use the phrase "Authorized Value Added Re-seller of jBASE"
in connection with STRATEGIC PARTNER'S or VAR's sale, advertisement, and
promotion of JAC Licensed Software, but not in connection with any other aspect
of STRATEGIC PARTNER'S or VAR's business. STRATEGIC PARTNER'S use of such
trademarks and trade-names shall be only in accordance with JAC's established
usage and practices, including, but not limited to, JAC's trademark usage and
co-operative advertising policies.
Nothing herein shall give STRATEGIC PARTNER any interest or license in such
trademarks or trade-names and STRATEGIC PARTNER'S right to use such trademarks
and trade-names shall cease immediately upon termination or cancellation of this
Agreement except that STRATEGIC PARTNER may use such trademarks and trade-names
to dispose of its inventory of JAC Products at the time of termination,
cancellation or expiration, to the extent that such Products are not repurchased
by JAC.
STRATEGIC PARTNER shall conduct its business solely under STRATEGIC PARTNER'S
own name or the name of any majority owned subsidiary(s).STRATEGIC PARTNER
agrees not to attach any additional trademarks or trade designations to any JAC
Products and specifically agrees to refrain from using JAC's trade-name or
trademarks as part of STRATEGIC PARTNER'S name or mark or in any other manner
that would cause a reasonable person to infer that STRATEGIC PARTNER has an
affiliation with JAC other than the rights given under this Agreement to
distribute JAC Products. STRATEGIC PARTNER further agrees not to fix any JAC
trademarks or trade-names to any product other than Products manufactured or
distributed by JAC.
(c) NEW AND SUPERSEDED MARKS. JAC may from time to time use other or additional
trademarks or trade-names with respect to JAC Products. In such an event, upon
written notice to STRATEGIC PARTNER from JAC, this Section shall apply to such
trademarks or trade-names as specified herein.
The authorisation contained herein to use and authorise the use of any
trademarks or trade-names shall cease immediately when such trade-name or
trademark has been superseded or replaced by a new trademark or trade-name.
(d) LABELS. STRATEGIC PARTNER agrees to affix to any hardware supplied in
association with the Licensed Software such labels as JAC may reasonably
designate indicating the presence of the Licensed Software. Same will be used by
STRATEGIC PARTNER in all advertising and marketing literature.
19. ESCROW
- -----------
At STRATEGIC PARTNER'S express written request and cost, JAC shall enter into a
mutually agreeable source code escrow agreement with STRATEGIC PARTNER and The
National Computing Centre, England and shall place source code versions of the
Licensed Software together with any updates thereto in escrow therewith,
together with agreed upon instructions to release the same to STRATEGIC PARTNER
in the event of the bankruptcy or proven insolvency of JAC or fundamental breach
of this Agreement by JAC as defined in clause 15(b) following reasonable notice
and opportunity being afforded to remedy such breach. STRATEGIC PARTNER will
cover JAC's administrative costs for the escrow placement.
20. GENERAL
- ------------
(a) ENTIRE CONTRACT. Neither party shall be liable to the other for loss
arising from or in connection with any representations, agreements, statements
or undertakings made prior to the date of execution of this Agreement.
PAGE 10 of 22
<PAGE>
(b) TITLES. Titles used in this Agreement are for descriptive purposes only and
shall not be construed for interpretation purposes.
(c) SEVERABILITY. In the event that any clause herein shall be deemed invalid
by operation of law it shall not affect or prejudice the validity of the
remaining clauses.
(d) NON WAIVER. No failure or delay by either party in enforcing its rights
hereunder shall be deemed a waiver.
(e) GOVERNING LAW. This Agreement shall be governed by the laws of England and
subject to the jurisdiction of the English courts.
(f) NON-EXCLUSIVITY. JAC reserves the right, at its sole option, to enter
negotiations with, and to sell, to lease, and/or to license the Products to
other VAR's, OEM's, STRATEGIC PARTNER's, systems integrators, and end users
inside and outside of STRATEGIC PARTNER'S Non-exclusive Area of Responsibility.
(g) RELATIONSHIP. This Agreement creates no relationship in the nature of joint
venture, partnership, limited partnership, or agency between the parties, and
the parties hereby acknowledge that no other facts or relations exist that would
create any such relationship between them. Neither party has the right or
authority to assume or to create any obligation or responsibility on behalf of
the other except as may, from time to time, be provided by written instruments
signed by both parties.
(h) COMPLIANCE WITH LAW. JAC and STRATEGIC PARTNER shall comply with all
applicable laws, ordinances, rules and regulations, and STRATEGIC PARTNER shall
obtain any and all permits, licenses, authorisations, and/or certifications that
may be required in any jurisdiction or by any regulatory or administrative
agency in connection with the use and/or operation of the Products.
(i) NON GOVERNMENTAL. No government procurement regulations or Federal
Acquisition Regulations shall be included hereunder or be binding on either
party unless specifically agreed to in writing prior to incorporation herein.
(j) NOTICES. Notices hereunder will be in writing and sent via recorded
delivery or by courier to the address of the respective party as above written.
(k) FORCE MAJEURE. Neither party shall be liable for a delay or failure to
perform its obligation hereunder to the extent that such a failure results from
causes beyond its reasonable control.
(l) ATTORNEYS' FEES - Each party shall bear its own attorney fees and
associated costs with regard to the negotiation and execution of this Agreement.
(m) SPECIAL INSTALLATIONS. JAC Products are not intended to be sold or licensed
for direct control of nuclear facilities. JAC may require additional contractual
safeguards for either nuclear or air traffic control application. This notice
shall become part of the terms and conditions of the sale whenever JAC Products
are sold.
(n) TAXES, DUTIES AND FEES - Any Taxes, Duties and Fees relating to the import,
supply or use of JAC Products shall be for STRATEGIC PARTNER'S account.
(o) GEOGRAPHIC RESTRICTIONS AND EXPORT REGULATIONS. Regardless of any
disclosure made by STRATEGIC PARTNER to JAC of an ultimate destination of
the Products, STRATEGIC PARTNER, its VAR's, and its customers agree not to
export either directly or in-directly, any Product or System incorporating
such Product without first obtaining a license to export or re-export from
the appropriate Government, as may be required and to comply with the
applicable Government Export Regulations.
21. JAC VAR
- ------------
a) VAR. A Value Added Reseller ("VAR") is an entity that purchases JAC
Licensed Software from STRATEGIC PARTNER and resells it to end users or sub-
VAR's having added significant value by compiling its own software products
using JAC's Licensed Software or by the addition of hardware or service. A VAR
is neither a subsidiary nor a part of either JAC or STRATEGIC PARTNER but is a
separate and independent entity with respect to either party;
(b) VAR NETWORK. STRATEGIC PARTNER shall use its reasonable best efforts to
establish, develop, maintain, and expand a network of VAR's adequate to maximise
the exposure, marketability and licensing of JAC Licensed Software;
PAGE 11 of 22
<PAGE>
(c) VAR AND SELECTION. STRATEGIC PARTNER shall select VAR's that:
(i) possess sufficient capital and facilities to support obligations to
demonstrate, sell and provide necessary pre-sale and post-sale support for
JAC Products and;
(ii) employ (or commit to employ) sufficient personnel of appropriate
technical and sales experience to market and support Products;
(iii) have the capability to provide adequate and satisfactory programming
and software support to customers.
(d) VAR COMMITMENTS. STRATEGIC PARTNER shall require each VAR to which it
licenses JAC Licensed Software to:
(i) refrain from engaging in any illegal, unfair or deceptive
trade practices, or unethical business practice whatsoever wjth
respect to the promotion or sale of JAC Products and the promotion of
JAC Licensed Software;
(ii) purchase and install a minimum of one (1) JAC Product
demonstration system for each of the VAR's sales locations;
(iii) hold itself out as an independent contractor with respect to
JAC and STRATEGIC PARTNER and not represent itself as either an
agent, representative, franchisee or employee of JAC or STRATEGIC
PARTNER.
(e) REPORTS. STRATEGIC PARTNER shall promptly provide to JAC:
(i) the name and address of each VAR upon selection;
(ii) upon request, a copy of each agreement relating to JAC Licensed
Software entered into between STRATEGIC PARTNER and its VAR's;
(iii) such additional information as may be reasonably requested by JAC.
(iv) quarterly sales reports to JAC within thirty (30) days following the
end of each month. The reports shall include, as a minimum, the names and
addresses of each VAR purchasing JAC products during the reporting period
together with a list of JAC Products sold by model number and quantity sold
and the number of copies of each kind of JAC Licensed Software distributed
by such VAR. STRATEGIC PARTNER shall also obtain and submit to JAC, upon
request, reports showing VAR inventory levels.
(f) TRAINING AND SUPPORT. STRATEGIC PARTNER shall provide its VAR's with
adequate training, technical and marketing support, sales and technical
literature, including such materials as may be provided to STRATEGIC PARTNER by
JAC and such other assistance as may be necessary or appropriate in promoting
the sale of JAC supported Licensed Software.
(g) AUDIT. Upon five (5) business days prior notice, and no more than once per
year, STRATEGIC PARTNER shall permit JAC and its accountants and attorneys to
conduct periodic audits of records related to performance by STRATEGIC PARTNER
under this Agreement and to the sale and/or the licensing of JAC Licensed
Software.
(h) VAR NOT BENEFICIARY. Nothing contained in this Agreement shall be constmed
as evidencing an intention by either STRATEGIC PARTNER or JAC that any of
STRATEGIC PARTNER'S VAR's shall be a direct or indirect beneficiary of this
Agreement or any performance by JAC or STRATEGIC PARTNER hereunder, and no such
VAR shall have the right to enforce this Agreement, or any provision hereof,
against JAC or STRATEGIC PARTNER, save that JAC will honour any warranty claim
made by an end user provided that the warranty extended by STRATEGIC PARTNER or
its VAR is expressed in the same terms as that granted by JAC herein to
STRATEGIC PARTNER.
22. ATTACHMENTS
- ----------------
Schedule A and Attachments One, Two, Three and Four are incorporated herein as
though fully set forth in the body of this Agreement.
PAGE 12 of 22
<PAGE>
23. EXECUTION
- -------------
IN WITNESS WHEREOF the parties hereto have set their hands and seals as of the
Day of, May 1996
For and on behalf of
James Anthony Computing Limited For and on behalf of Sequoia Systems, Inc.
by: Clive A Ketteridge by: William C Gould
/s/ Clive A Ketteridge /s/ William C Gould
-------------------------------- -----------------------------------
Title: Managing Director Title: Vice President & General Manager
Sequoia Enterprise Systems
Effective Date: 24 May, 1996
----
PAGE 13 of 22
<PAGE>
Schedule A
----------
(a) LIST PRICE OF PRODUCTS
----------------------
The suggested list price and the discounts available to STRATEGIC PARTNER
of the Licensed Software known as jBASE for the Non-exclusive Area of
Responsibility are as follows:
All prices in United States Dollars US$ are solely applicable to transactions in
the United States of America, Canada and Puerto Rico. Pricing in all other
geographic areas where STRATEGIC PARTNER has rights to sell JAC Licensed
Software will be in accordance with JAC's local prices.
JAC will, for all software support issues, only support the current release and
two (2) prior revisions.
UNIX SERVERS
- ------------
All Servers running JAC supported versions of UNIX on JAC supported Processors
as detailed in Attachment four (4) hereof.
<TABLE>
<CAPTION>
No. of Users Initial Licence Optional Annual Maintenance Optional Upgrade Only
Per User Upgrade Fee
<S> <C> <C> <C>
1-300 399.oo 15% of full Initial licence fee 99.oo + Shipping and Handling
301-600 385.oo 15% of full Initial licence fee 99.oo + Shipping and Handling
601+ 350.oo 15% of full Initial licence fee 99.oo + Shipping and Handling
</TABLE>
TIME & MATERIALS: A VAR without a Maintenance and Support Agreement that
contacts JAC directly will be charged US$180 (one hundred and eighty US dollars)
per hour or part thereof with a minimum charge of two hours.
WINDOWS NT SERVERS
All Servers running JAC supported versions of WINDOWS NT
<TABLE>
<CAPTION>
No. of Users Initial Licence Optional Annual Maintenance Optional Upgrade Only
Per User Upgrade Fee
<S> <C> <C> <C>
1+ 299.oo 15% of full Initial licence fee 89.oo+ Shipping and Handling
</TABLE>
TIME & MATERIALS: A VAR without a Maintenance and Support Agreement that
contacts JAC directly will be charged US$19 (nineteen US Dollars) for the first
ten (10) minutes or part thereof and thereafter at a rate of US$2 (two US
Dollars) for every minute or part thereof.
Optional jBASE NT Clients
-----
<TABLE>
<CAPTION>
No. of Users Initial Licence Optional Annual Maintenance Optional Upgrade Only
Per User Upgrade Fee
<S> <C> <C> <C>
each 149.oo 15% of full Initial Licence 49.oo + Shipping and Handling
</TABLE>
WINDOWS 95 CLIENTS (STANDALONE PC SITES)
- ----------------------------------------
All Clients running JAC supported versions of WINDOWS 95
<TABLE>
<CAPTION>
No. of Users Initial Licence Optional Annual Maintenance Optional Upgrade Only
<S> <C> <C> <C>
Unlimited 149.oo NOT Available 69.oo + Shipping and Handling
</TABLE>
TIME & MATERIALS: A VAR without a Maintenance and Support Agreement that
contacts JAC directly will be charged US$19 (nineteen US Dollars) for the first
ten (10) minutes or part thereof and thereafter at a rate of US$2 (two US
Dollars) for every minute or part thereof.
PAGE 14 of 22
<PAGE>
<TABLE>
<CAPTION>
No. of Users Initial Licence Optional Annual Maintenance Optional Upgrade Only
<S> <C> <C> <C>
1+ 99.oo 20.oo per annum 49.oo + Shipping and Handling
</TABLE>
JEDI'S FOR NAMED DATABASE'S
- ---------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1+ 199.oo 15% of full Initial License 79.oo + Shipping and Handling
OR
10.oo/month 15% of full Initial License Not available
</TABLE>
(b) INITIAL LICENCE FEE DISCOUNTS JAC, STRATEGIC PARTNER, VAR
Subject to meeting the minimum purchasing criteria detailed in Attachment Two
(2), STRATEGIC PARTNER will receive a seventy-five percent (75%) discount off
the Initial License fees, a percentage of which is passed on to VAR.
The overall share being:
JAC STRATEGIC PARTNER & VAR
25% 75%
(c) ANNUAL USAGE, SUPPORT AND MAINTENANCE DISCOUNTS JAC, STRATEGIC PARTNER, VAR
Subject to meeting the minimum purchasing criteria detailed in Attachment Two
(2), STRATEGIC PARTNER will receive a sixty-six percent (66%) discount off the
Support and Maintenance fees, a percentage of which is passed on to VAR.
The overall share being:
JAC STRATEGIC PARTNER & VAR
34% 66%
(d) DISCOUNTS TO VAR FOR OWN USE
In order to encourage the use and acceptance of JAC Licensed Software, a special
price will be made available to VAR's for their own internal use and
demonstration purposes. These special prices will be recommended by JAC in view
of the commercial circumstances prevailing at any given situation and will be
split fifty/fifty (50/510) between JAC and STRATEGIC PARTNER.
(e) NON-EXCLUSIVE AREA OF RESPONSIBILITY: STRATEGIC PARTNER'S Non-exclusive
Area of Responsibility is the United States of America, Canada, Puerto Rico and
EC and EFTA countries, excluding the UK). This Non-exclusive Area of
Responsibility can be extended following written approval from JAC and subject
to the terms of attachment three (3) hereof.
PAGE 15 of 22
<PAGE>
[LOGO OF JBASE APPEARS HERE] TOTAL FREEDOM AND FLEXIBILITY
Attachment One (1-a) - JAC Trade Marks
The symbols on this page are trade marks of JAC, as are the following words and
names of products:
<TABLE>
<CAPTION>
Trade Mark Meaning
<S> <C>
JAC - Company Name - logo in specified format
jBASE - Overall product - logo in specified format as per page header
- -----
jBASE 4 UNIX - Overall product, UNIX Version
- -----
jBASE 4 Windows NT/Server - Overall product, Windows NT Version
- -----
jBASE 4 Windows 95 - Overall product, Windows 95 Version
- -----
jEDI - jBASE External Device Interface
- ----
jBC - a programming language
--
jbc - jBASE compiler
j1 - a file system
-
j2 - a file system (memory mapped)
-
j3 - a file system (Network Support)
-
jQL - an inquiry language
--
jCL - a job control language
--
jLP - a built-in Spooler
--
</TABLE>
PAGE 16 of 22
<PAGE>
[JAC LOGO APPEARS HERE]
ATTACHMENT ONE (1-B) - JAC TRADE MARKS
The symbols on this page are trade marks of JAC, as are the following words and
names of products:
<TABLE>
<CAPTION>
Trade Mark Meaning
<S> <C>
JAC - Company Name - logo in specified format as per page header
jBASE - Overall product - logo in specified format
----
jBASE 4 UNIX - Overall product, UNIX Version
----
jBASE 4 Windows NT/Server - Overall product, Windows NT Version
----
jBASE 4 Windows 95 - Overall product, Windows 95 Version
----
jEDI - jBASE External Device Interface
--- ----
jBC - a programming language
--
jbc - jBASE compiler
----
j1 - a file system
-
j2 - a file system (memory mapped)
-
j3 - a file system (Network Support)
-
jQL - an inquiry language
--
jCL - a job control language
--
jLP - a built-in Spooler
--
</TABLE>
PAGE 17 of 22
<PAGE>
1. THE STRATEGIC PARTNER BUSINESS PLAN AS ATTACHED AS EXHIBIT A
2. STRATEGIC PARTNER QUALIFICATION
STRATEGIC PARTNER Agrees to meet the following minimum requirements
(a) Employ Two Qualified UNIX support personnel if reselling the jBASE 4 UNIX
Product.
(b) Employ Two Microsoft Certified NT Administration if reselling any jBASE 4
Windows Product.
(c) Employ Two Microsoft Certified NT Networks personnel if reselling any jBASE
4 Windows Product.
3. STRATEGIC PARTNER'S OPTIONS
James Anthony Computing Ltd. acknowledges payment and receipt of the non-
refundable sum of US Dollars One hundred thousand ($100,000.oo) paid by
STRATEGIC PARTNER, in consideration of which STRATEGIC PARTNER shall be
permitted in its sole discretion to choose one of the following options (a), (b)
or (c). In each case, STRATEGIC PARTNER shall make the payment(s) required to
JAC by such election within five (5) business days of the date specified.
OPTION (a) On July 1st 1996, STRATEGIC PARTNER shall elect to pay JAC US Dollars
One-hundred and seventy-five thousand ($175,000.oo) and terminate this Agreement
without further obligation or liability to JAC hereunder save for any on-going
support and maintenance fees that have been accrued by this date. Should
STRATEGIC PARTNER elect this option STRATEGIC PARTNER shall return all copies of
JAC Licensed Software and any other property of JAC. Clause 11, Confidentiality
and Proprietary Rights, shall survive termination of this Agreement.
OPTION (b) On July 1st 1996, STRATEGIC PARTNER shall elect to pay JAC US Dollars
five-hundred thousand ($500,000.oo) in advance Initial License Fees for
STRATEGIC PARTNER'S fiscal year 1997. Thereafter, this Agreement shall continue
in effect during the balance of its term provided that STRATEGIC PARTNER has
attained sales by July 1, 1997 that, but for the advance payment referred to
above, would have obligated STRATEGIC PARTNER to pay JAC a minimum of US Dollars
five-hundred thousand ($500,000.oo) in Initial License Fees for its fiscal year
1997. If that level of sales has not been reached by July 1, 1997, JAC may
terminate this Agreement by written notice. If JAC does not so terminate this
Agreement, STRATEGIC PARTNER'S minimum annual Initial License Fee payments due
July 11997 required to keep this Agreement in force will be US Dollars Eight-
hundred thousand ($800,000.oo) for STRATEGIC PARTNER'S fiscal year 1998 and US
Dollars Eight-hundred and eighty thousand ($880,000.oo) due July 11998 for
STRATEGIC PARTNER'S fiscal year 1999. In any event, on any anniversary of July
1, 1996, STRATEGIC PARTNER may terminate this Agreement without further
obligation or liability hereunder save for any on-going support and maintenance
fees that have been accrued by this date. Should this option be elected,
STRATEGIC PARTNER agrees to return all copies of JAC Licensed Software and any
other property of JAC. Clause 11, Confidentiality and Proprietary Rights, shall
survive termination of this Agreement.
OPTION (c) STRATEGIC PARTNER shall elect to pay JAC advance Initial License Fees
for STRATEGIC PARTNER'S fiscal years 1997 and 1998 of US Dollars Five-hundred
thousand ($500,000.oo) on July 1, 1996 and US Dollars Eight-hundred thousand
($800,000.oo) on October 11996. Should STRATEGIC PARTNER elect this option 4(c),
it may on or before January 1 1997, enter into an agreement with JAC and each of
the beneficial owners of its
PAGE 18 of 22
<PAGE>
issued and outstanding capital stock and other equity securities, by which
STRATEGIC PARTNER would acquire fifty-one percent (51%) of all issued and
outstanding capital stock and other equity securities of JAC in consideration of
the payment to the owners thereof of US Dollars Five-Million ($5,000,000.00).
The parties shall endeavour in good faith to reach agreement on a term sheet for
such transaction, including those terms that would govern the relationship
between and amongst the post-acquisition stockholders, within ten (10) days
after the execution of this Agreement. The parties agree, however, that such
agreement, and any separate stockholders' agreement that may be entered into,
will contain terms and conditions, representations, warranties and
indemnification's customary in such transactions.
4. OTHER CONDITIONS
JAC agrees that the payments totalling US Dollars One-Million three-hundred
thousand ($1,300,000.00), to be paid under option (c) on July 1, 1996 and
October 1, 1996 will be invested in the JAC jBASE business and not distributed
to JAC's stockholders as dividends or otherwise. Furthermore, if such option is
elected, JAC will maintain its entry criteria and minimum sales commitments for
other potential 'strategic partners', Master VAR's, Direct VARs and Distributors
as outlined in the following table for a period of 24 months:
<TABLE>
<CAPTION>
Re-Seller Status Annual Royalty Commitment ($k) Discount Schedule
<S> <C> <C>
Strategic partner 1,000 70%
Master VAR 625 60%
Distributor 250 50%
Direct VAR 100 40%
</TABLE>
In addition if STRATEGIC PARTNER ELECTS option 3(1,) or 3(c), STRATEGIC PARTNER:
(i) Will be guaranteed a seventy-five percent (75%) discount on all Initial
Licence Fees within each year's minimum commitment and sixty-six percent
(66%) discount on all Support and Maintenance contracts. Discounts for
Initial License Fees in excess of the minimum commitment dollar values
shall be seventy-five percent (75%) off List Price. Such further Initial
Licenses must be purchased in lots of no less than five hundred (5100)
Initial Licenses at a time. By the first day of each STRATEGIC PARTNER
fiscal quarter, a minimum equal to a quarter of target revenues for that
fiscal year shall be paid. Target revenues are those sums actually paid
to JAC for Initial Licence fees, that is, they are not based on
suggested list price of Initial License fee but are net amounts paid to
JAC AFTER discounts are applied to the suggested list prices. Target
revenues are to be paid in respect of a mix of those JAC Products that
STRATEGIC PARTNER is authorised to sub-license and that carry an Initial
License Fee. Other revenue due to JAC is to be paid over and above the
target revenues referred to herein
(ii) In addition to STRATEGIC PARTNER'S rights under Clause 16, above,
STRATEGIC PARTNER will have the right to match any offer to acquire any
minority interest in JAC that may be made to JAC for twelve (12) months
after the signing of this Agreement.
(iii) The Agreement will initially apply to North America (including USA,
Canada and Puerto Rico) and the EEC/EFTA countries of Europe, excluding
the United Kingdom, and will cover all products currently offered by
JAC. It may be extended to cover other regions as deemed desirable by
STRATEGIC PARTNER on payment of the then agreed entry cost.
(iv) JAC will use its commercial best-efforts to ensure that sales to
existing STRATEGIC PARTNER customers will be made only by STRATEGIC
PARTNER.
Further if STRATEGIC PARTNER elects option 3(c), JAC will use its commercial
best efforts to ensure that all Distributors and Direct VARs will obtain
licenses to the JAC Licensed Software from STRATEGIC PARTNER. JAC
PAGE 19 of 22
<PAGE>
will also inform STRATEGIC PARTNER of any STRATEGIC PARTNER or MASTER VAR
negotiations as they occur.
5. SALES AND TRAINING SERVICES
At a mutually agreeable time JAC will provide STRATEGIC PARTNER with the
following Sales and Training Services pursuant to clause 12 (a) and 12(c) and
NOT FOR RE-SALE development copies of jBASE:
----
a) Machine Readable Sales Information Inserts and from time to time updates
thereof.
b) Machine Readable Technical White Papers and from time to time updates
thereof.
c) Machine Readable Sales Product Information Slides and from time to time
updates thereof.
d) Existing Sales Brochure Packs
e) Technical Training
f) Sales Training
g) Ten User jBASE Development License for in-house use only
----
6. Marketing Expenditure
STRATEGIC PARTNER agrees to expend not less than US$100,000 One hundred Thousand
US dollars per annum for its marketing of JAC Products.
PAGE 20 of 22
<PAGE>
NON-EXCLUSIVE AREA OF RESPONSIBILITY - EXTENSION BEYOND UNITED STATES AND
CANADIAN TERRITORY.
STRATEGIC PARTNER is hereby granted the Non-exclusive Area of Responsibility
indicated below. Additional Non-exclusive Areas of Responsibility are available
on payment of the entry fees stated below.
<TABLE>
<CAPTION>
NON EXCLUSIVE AREA
OF RESPONSIBILITY ENTRY FEE INITIAL IF REQUIRED
<S> <C> <C>
- --------------------------------------------------------------------------------
United States of America/Puerto Rica USD $ 100,000 GRANTED
Canada
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
South America USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
United Kingdom USD $ 50,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EEC/EFTA European Countries USD $ 50,000 GRANTED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The CIS European Countries USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Central European Countries USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Australia/New Zealand USD $ 50,0100 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pacific Rim (exc. China) USD $ 100,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
China USD $ 50,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASIA USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Middle East USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
North Africa USD $ 50,000 --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
South Africa USD $ 50,000 --
- --------------------------------------------------------------------------------
</TABLE>
PAGE 21 of 22
<PAGE>
Attachment Four (4)
JAC Supported Platforms
UNIX SERVERS
a) STRATEGIC PARTNER may request JAC to support more than one version of UNIX
on more than one supported hardware platform and for 15% of suggested List
Price less sixty-six (66%) discount granted under the terms of this
Agreement. STRATEGIC PARTNER may request further platforms to be supported
provided that:-
i) JAC is provided with or has all the necessary hardware and
required release of UNIX software, relevant compilers and vendor
support, ("Support Tools"), as deemed necessary by JAC to provide
full professional support. If JAC does not already have such
Support Tools, JAC will advise STRATEGIC PARTNER of the extra
costs involved to provide the Support Tools and STRATEGIC PARTNER
may, at its option, elect to require JAC to port the JAC Licensed
Software to such platform for a fee of two hundred and fifty
thousand US dollars ($250,000) plus such Support Tool costs.
STRATEGIC PARTNER and JAC will work together to negotiate the
best price for such Support Tools as and when required. JAC will
carry out work at its prevailing rate if agreed by STRATEGIC
PARTNER.
(b) Listed below are currently supported platforms; as new platforms become
supported, they will be added to the table below and subject to a(i) above
will be made available to STRATEGIC PARTNER:
<TABLE>
<CAPTION>
-------------------------------------------------
Version of UNIX Hardware Chip-
and .x releases Set/Model and upward
compatible models
-------------------------------------------------
<S> <C>
-------------------------------------------------
Motorola SVR4.x 8810100 & 81100
-------------------------------------------------
AIX 3.2.5 R56000 RISC
-------------------------------------------------
AIX 4.1.x Power-PC
-------------------------------------------------
DC-UX 3.x Aviion 88000 & 81100
-------------------------------------------------
HP-UX 9.x E,D,K range HP-RISC
-------------------------------------------------
HP-UX10.x E,D,K range HP RISC
-------------------------------------------------
Unix Ware 2.x Intel 486, Pentium
-------------------------------------------------
SCO OpenServers.x Intel 486, Pentium
-------------------------------------------------
Solaris 2.5 Sun SPAC
-------------------------------------------------
</TABLE>
Windows NT Servers
Version of Windows NT Hardware Chip-Set/Model and upward
compatible models
3.51 Intel Pentium + successors
3.51 Motorola PowerPC
PAGE 22 of 22
<PAGE>
AMENDMENT NO.1 TO STRATEGIC PARTNER AGREEMENT
BETWEEN
JAMES ANTHONY COMPUTING LTD.
AND
SEQUOIA SYSTEMS, INC.
The Strategic Partner Agreement between James Anthony Computing Ltd. and Sequoia
Systems, Inc. dated May 24, 1996 (the "Agreement") is, for valuable
consideration, hereby amended as set forth herein.
1. Option (a), as specified in Clause 3 of Attachment Two to the Agreement, is
deleted.
2. Option (b), as specified in Clause 3 of Attachment Two to the Agreement, is
amended by deleting the first three sentences thereof and replacing them
with the following: "On July 1, 1996, STRATEGIC PARTNER shall elect to pay
JAC US dOLLARS One-hundred and seventy-five thousand ($175,000.oo) in
advance Initial License Fees. Upon the execution of a binding agreement to
sell the assets of its Sequoia Enterprise Systems business unit, STRATEGIC
PARTNER shall either (i) pay JAC US Dollars Three-hundred and twenty-five
thousand ($325,000.oo), as the balance of US Dollars Five-hundred thousand
($500,000.oo) in advance Initial License Fees for its fiscal year 1997 or
(ii) terminate this Agreement without further obligation or liability to
JAC hereunder save for any on-going support and maintenance fees that have
accrued by the date of such termination. The validity of any remaining
advance Initial Licenses then in STRATEGIC PARTNER'S possession shall not
be affected by such termination. Upon the payment of the US Dollars Three-
hundred and twenty-five thousand ($325,000.oo) referred to above, this
Agreement shall continue in effect during the balance of its term provided
that STRATEGIC PARTNER has attained sales by July 1, 1997 that, but for the
advance payment referred to above, would have obligated STRATEGIC PARTNER
to pay JAC a minimum of US Dollars Five-hundred thousand ($500,000) in
advance Initial License Fees for its fiscal year 1997. if that level of
sales has not been reached by July 1, 1997, JAC may terminate this
<PAGE>
Agreement by written notice; however, the validity of any remaining advance
Initial Licenses then in STRATEGIC PARTNER'S possession shall not be
affected by such termination.
3. JAC agrees that should STRATEGIC PARTNER sell or transfer, as a going
business, those assets that comprise its Sequoia Enterprise Systems
business unit, STRATEGIC PARTNER may in connection therewith assign its
rights and obligations under this Agreement in their entirety to the buyer
of such assets. The entity taking over such assets is subject to approval
by JAC, which approval shall not be unreasonably withheld. Should JAC
reasonably withhold such approval, STRATEGIC PARTNER may return any unsold
Licenses and JAC will refund amounts paid for those Licenses.
4. Terms used in this Amendment shall be given the same meaning given them in
the Agreement unless otherwise specified.
5. Except as expressly set forth herein, the terms and conditions of the
Agreement and its Attachments remain unmodified and in full force and
effect.
IN WITNESS WHEREOF the parties hereto have set their hands and seals as of the
_________ day of _______1996
For and on BEHALF of JAC For and on behalf of STRATEGIC PARTNER
by:____________________________ by: /s/ J. Michael Stewart
-----------------------------------
Clive A- Ketteridge J. Michael Stewart
Title Managing Director Title President and CEO
-------------------------- ----------------------------------
-2-
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Jurisdiction of
Subsidiary Incorporation
- ---------- -------------
Texas Microsystems, Inc. Delaware
Sequoia Systems (UK) Limited United Kingdom
Sequoia Systems (Australia) Pty. Ltd. Australia
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sequoia Systems, Inc. on Form S-8 (File Nos. 33-35362, 33-40339, 33-64690,
33-63403, 33-63405 and 33-63407) of our reports dated July 22, 1996, except for
Note 11, as to which the date is September 10, 1996, on our audits of the
consolidated financial statement and financial statement schedule of Sequoia
Systems, Inc. as of June 30, 1996 and 1995 and for each of the three years in
the period ended June 30, 1996 which reports are included in this Annual Report
on Form 10-K.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
September 24, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 30, 1994, on the combined financial statement of the Texas
Microsystems Group (the Company) as of and for the year ended June 30, 1994 (and
to all references to our firm), included in this Form 10-K into Sequoia Systems,
Inc.'s Form S-8 registration statements for its 1993 Employee Stock Purchase
Plan (Registration Nos. 33-64690 and 33-63407), its 1990 Outside Director's
Stock Option Plan (Registration No. 33-40339), its 1986 Incentive Stock Option
Plan and 1986 Supplemental Stock Option Plan (Registration Nos. 33-35362 and
33-63403), and its 1995 Outside Directors' Stock Option Plan (Registration No.
33-63405). It should be noted that we have not audited any financial statements
of the Company subsequent to June 30, 1994, or performed any audit procedures
subsequent to the date of our report.
Houston, Texas
September 24, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,287
<SECURITIES> 0
<RECEIVABLES> 14,389
<ALLOWANCES> 1,018
<INVENTORY> 13,491
<CURRENT-ASSETS> 41,072
<PP&E> 23,290
<DEPRECIATION> 18,603
<TOTAL-ASSETS> 46,351
<CURRENT-LIABILITIES> 14,560
<BONDS> 0
<COMMON> 6,232
0
0
<OTHER-SE> 25,559
<TOTAL-LIABILITY-AND-EQUITY> 46,351
<SALES> 87,940
<TOTAL-REVENUES> 102,222
<CGS> 57,801
<TOTAL-COSTS> 66,264
<OTHER-EXPENSES> 3,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (4,326)
<INCOME-TAX> 191
<INCOME-CONTINUING> (4,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,517)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
