UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1994 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________.
Commission file number: 0-15627
SEQUENT COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0826369
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification Number
15450 S.W. Koll Parkway, Beaverton, Oregon 97006-6063
(Address of principal executive offices, including zip code)
Registrant's telephone number, including are code: (503) 626-5700
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
______________________ ______________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No_____
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]
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at February 28, 1995, based on the closing price on such date on
the NASDAQ National Market System: $536,924,680.
Number of shares of Common Stock outstanding as of February 28, 1995:
31,632,853.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
1994 Annual Report to Shareholders Parts II and IV
Proxy Statement for 1995 Annual
Meeting of Shareholders Part III
TABLE OF CONTENTS
Item of Form 10-K
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4(a). Executive Officers of the Registrant
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
SIGNATURES
PART I
Item 1. Business.
Sequent Computer Systems, Inc. ("Sequent" or "the Company") designs,
manufactures and markets high performance symmetric multiprocessing ("SMP")
computer systems and parallel-enabled software for the commercial open
client/server systems marketplace. The Company also provides architectural
consulting and professional services to assist customers their migration from
host-based, proprietary computer environments to open, client/server
architectures. Recognized as one of the industry's leading SMP platforms,
Sequent's UNIX-based Symmetry 5000 system incorporates up to 30 Intel Pentium
microprocessors to provide superior price/performance and scalability for open
systems on-line transaction processing ("OLTP"), decision support, relational
database management software ("RDBMS"), and network and client/server
applications. The Company's family of WinServer SMP computer systems runs the
Microsoft Windows NT operating system and supports multiple Intel Pentium
processors.
The Company was incorporated in Delaware in January 1983 and was
reincorporated in Oregon in December 1988. Unless the context otherwise
requires, references in this Report on Form 10-K to the "Company" or "Sequent"
refer to the prior Delaware corporation, the current Oregon corporation and
its subsidiaries. The Company's principal executive offices are located at
15450 S.W. Koll Parkway, Beaverton, Oregon 97006, and its telephone number at
that location is (503) 626-5700.
Market Overview
Sequent believes that it has positioned itself to benefit from several
major trends that are continuing to emerge in the computer industry. These
trends include the renovation by many companies of their business processes
and information systems, increasing user acceptance of SMP architectures and
open systems, widespread use of RDBMS applications and the substitution of
OLTP for traditional batch processing. In addition, the Company believes that
it is particularly well situated to meet the needs for enterprise-wide system
solutions of large organizations as they move toward open, client/server based
computing.
Information Systems Renovation. Global economies and intense competitive
pressures today prompt many companies to reengineer or redesign their business
processes to increase responsiveness to customer needs. Putting these new
flexible processes into practice often requires overhauling some or all of a
company's proprietary information systems to take advantage of innovative open
client/server architectures, systems and products. Sequent offers a wide
range of consulting, education and implementation services to assess an
organization's current systems, design new systems that support business
objectives, and deliver and implement the new systems.
Acceptance of SMP Architectures. With the dramatic improvement in the
power and price/performance characteristics of microprocessors and the proven
ability of SMP architectures to incorporate multiple microprocessors into a
single large system or group of systems, customers are increasingly employing
SMP systems to meet their commercial computing needs. Sequent was a pioneer
in the SMP market with the introduction of its first SMP-based system in 1984.
The Company's sale of over 6,000 SMP systems to date, combined with the recent
adoption of SMP architectures by other major computer systems providers,
establishes continued acceptance of SMP in the commercial marketplace.
Open Systems. Historically, large organizations have relied upon
computing equipment based upon a single vendor's proprietary technology that
was generally incompatible with that of other vendors. In recent years
proprietary systems have become increasingly unacceptable to companies that
want the flexibility to purchase computing equipment and software best suited
for a specific need without being constrained by the technology employed by a
specific computer vendor. Proprietary systems also make it difficult for the
PC user to access information and applications from the central computer. An
open system, by contrast, incorporates industry standard technology and
permits users to integrate computer equipment offered by different vendors.
An open systems environment also facilitates offloading applications from the
central computer to a less expensive department, desktop or special-purpose
computer. Increasing numbers of companies are replacing some or all of their
proprietary central computing systems, moving to a more open, distributed
system when they upgrade or expand their systems.
Increased Acceptance of RDBMS and OLTP. Relational database management
software is emerging as the preferred vehicle for managing information in
large organizations. RDBMS systems are also used to support OLTP, which is
increasingly replacing traditional batch processing of historical data in
businesses with centralized information needs and distributed operations.
OLTP is characterized by interactive access to a current database, enabling
companies to process business events as they occur. In contrast, in
traditional data processing systems the workload is processed in batches and
scheduled in order to smooth the peaks of user demand. The demand for OLTP
computing systems, particularly those using RDBMS technology, spans a wide
variety of industries and applications and has increased as more businesses
require instantaneous processing of information. Systems used for OLTP
applications require enough computing power to handle the requirements of
multiple users and provide rapid response times during periods of peak demand.
Rapid Growth in Desktop and Network Computing. The dramatic growth of
the number of desktop PCs has been fueled by significant increases in the
power and performance of microprocessors, rapid reduction in computer
technology costs, wide availability of PC applications software and growth in
the computer literacy rate among the workforce. Desktop PCs have become a
pervasive component of today's business environment, and in many cases are
used to run applications which are critical to a company's operations. In
recent years, companies have increasingly sought to improve the efficiency of
their computing systems by integrating PCs with centralized computing
resources to enable enterprise-wide communication, distributed processing and
instantaneous access to enterprise information (database) and computing
services (applications software).
Client/Server Computing. As more computing power shifts to the desktop
from large centralized computers, organizations are recognizing that the
traditional host-terminal model of computing, in which all information is
processed at central locations, is no longer cost effective. These
organizations are increasingly incorporating the client/server model, in which
processing takes place at many sites and computing tasks are shared between
desktop "clients" and remote "servers."
Sequent's Strategy
Sequent's strategy is to provide enterprise-wide systems solutions to
large organizations; to provide consulting services to help customers use
information technology ("IT") architectures to achieve business objectives;
to design, manufacture and partner to deliver SMP computing systems with
leading-edge technologies for RDBMS, OLTP, decision support and other client/
server applications; to pursue its commitment to open systems; and to partner
with the industry's leading suppliers.
Designing Enterprise-Wide System Solutions. The Company concentrates on
understanding the specific business and computing needs of the customer at all
organizational levels (including the individual PC user). The Company then
works closely with the customer and suppliers of key system components to
design an open, integrated solution to meet the customer's computing needs.
The Company seeks to add value for the customer by designing an integrated
system that directly supports its business objectives and conforms to a sound
architectural infrastructure including hardware, system software, networks,
communications and applications. The Company focuses on large organizations
that have centralized information systems with distributed operations and are
committed to transitioning from a proprietary system to an enterprise-wide
solution. Sequent believes this complete solution orientation will allow it
to build long-term relationships with large and strategically important
companies.
Leading-Edge Technologies. Sequent's Symmetry and WinServer systems,
recognized as some of the industry's leading SMP platforms, provide superior
price/performance and scalability for RDBMS, OLTP and client/server
applications. The performance benefits of symmetric multiprocessing compared
to single processor systems are especially pronounced in these transaction-
intensive applications. The systems currently use the Intel Pentium and i486
microprocessors and can incorporate up to 30 processors in a single system.
Sequent intends to maintain its leadership position in symmetric
multiprocessing, including upgrading to new Intel microprocessors as they
become available.
Commitment to Open Systems. Sequent's open system architecture
incorporates industry standards whenever possible, including the use of Intel
microprocessors, the UNIX and Windows NT operating systems, and standard
network and communications interfaces. Sequent systems are designed to
operate in a multi-vendor heterogeneous environment and support a wide variety
of third- party software, including all major RDBMS applications.
"Partnering" with Leading Suppliers. Sequent devotes substantial
resources to strategic marketing and product development relationships with
those companies it believes offer the best open systems technologies. The
Company has relationships with major providers of RDBMS software, including
Oracle Corporation, Sybase, Inc., Informix Software, Inc., Ingres Corporation,
Progress Software Corporation and Unify Corporation. Sequent has also
developed strategic relationships with Intel; with suppliers of major
operating systems, including UNIX and Windows NT; with major suppliers of
communications and network software, including Novell; with emerging suppliers
of client server application products; and with suppliers of third-party
applications software.
Hardware Platform Overview
Business automation and systems integration applications require large
amounts of computing power, memory and disk storage throughput. Sequent
systems provide for these large computing requirements at low cost due to the
price/performance advantages of clustering groups of systems, operating system
expertise and multiprocessor technology. Sequent products are based on
industry standards and are designed to easily combine with other computing
hardware in an open systems environment. Sequent systems allow customers to
implement cost-effective computing, to automate business functions previously
not automated and to integrate enterprise-wide computing operations.
The Company's Symmetry systems, currently based on Intel Pentium
microprocessors, offer high levels of transaction processing and decision-
support performance at list prices ranging from $80,000 for a dual-processor
system to over $2 million for a 30-processor system serving hundreds of active
users in a database environment. A majority of the Symmetry systems sold by
the Company during the year ended December 31, 1994 had selling prices in the
$200,000 to $1 million range per system. Sequent systems have a record of
high reliability due to Sequent's multiprocessing architecture, which enables
its systems to continue performing despite malfunctions in processor or other
replicated boards.
Sequent's processor-independent architecture allows the Company to
incorporate technological advances in its product offerings more quickly and
inexpensively than manufacturers of computer systems with proprietary central
processing units. The Company's ongoing product development efforts leverage
advances in open systems technology, including microprocessor enhancements,
storage technology, cross-systems communications and user-interface
enhancements. These benefits are passed directly to customers who can upgrade
their installed Sequent systems without altering source programs, retraining
users or replacing hardware and software not directly affected by the upgrade.
The Company plans to introduce the 100 megahertz Pentium enhancements in its
Symmetry product line in 1995.
Sequent Symmetry systems are based on an open system architecture that
incorporates industry standards such as the UNIX operating system. DYNIX/ptx,
Sequent's version of UNIX enhanced for symmetric multiprocessing in the
commercial marketplace, allows Sequent systems to provide nearly linear
improvements in incremental performance as microprocessors are added.
DYNIX/ptx gives Sequent customers access to a growing array of UNIX software
applications. Sequent Symmetry systems used in network and client/server
applications link PCs and department- and central-level computers to deliver
applications and information to desktop PCs through standard PC interfaces,
allowing users access to more processing power and information for decision
support applications.
The Company's WinServer systems, which run on the Microsoft Windows NT
operating system, are based on Intel Pentium processors. The systems provide
database and application services for workgroup, departmental and enterprise-
level computing requirements, and the family of systems is designed to support
from one to 30 Intel processors. System prices range from under $20,000 to
over $200,000. Sequent's WinServer systems include products supplied by
Tricord Systems, Inc. and Intel.
Partnering with Leading Suppliers
Operating Systems. The Company has committed significant resources to
supporting both the UNIX operating system and the emerging Windows NT system,
which the Company believes will be the two major operating systems for open,
enterprise-wide computing. The Company's continuing leadership in the
development of UNIX-based SMP systems has been acknowledged by the industry's
two leading developers of commercial UNIX systems software. The Symmetry 2000
was selected by AT&T's UNIX System Laboratories ("USL"), which was acquired by
Novell, as the development and reference platform for its next-generation,
multiprocessing version of UNIX System V with enhanced security (System V.4
ES/MP). In addition, the Symmetry 2000 was selected by Open Software
Foundation (OSF) as the multiprocessing development and reference platform for
its version of UNIX, OSF/1 Release 1.2. The Company continues to enhance the
Dynix/ptx operating system, currently as Dynix/ptx 4.0. The Company has
worked closely with Microsoft to ensure that the Windows NT operating system,
which was released in 1993, is compatible with Sequent's SMP architecture and
continues to work with Microsoft to enhance the scalability and performance of
Windows NT.
Relational Database Management Software. As RDBMS has emerged as the
preferred vehicle for OLTP applications, the Company has formed strategic
marketing and developmental relationships with major independent providers of
relational database software, including: Oracle Corporation, Sybase, Inc.,
Informix Software, Inc., Computer Associates (Ingres), Progress Software
Corporation and Unify Corporation. Sequent's SMP architecture is designed to
provide an effective price/performance solution for the large amount of
computing power needed to process OLTP applications in conjunction with RDBMS
software and to enhance the decision-support performance of emerging
capabilities in parallel query processing. During the year ended December 31,
1994, more than 80% of Sequent's systems were sold for use in conjunction with
RDBMS packages.
Under agreements with the RDBMS vendors, the Company acquires rights to
software that can be used internally and the software is licensed to the
customer from Sequent or the RDBMS vendor. The agreements with the RDBMS
vendors also generally include certain cooperative marketing and customer
support programs and provisions for the use of Sequent products in-house by
the RDBMS vendors and the use of the RDBMS vendors' products by the Company.
Certain of the agreements also contain joint development programs, including
the exchange of technical personnel. These development programs are designed
to enhance the performance capabilities of the RDBMS vendors' software on the
Company's computing platform.
Client/Server and Network Software. Sequent and Novell, Inc. have jointly
developed a unique version of Novell's Netware that optimizes performance of
Novell's networking software on Sequent Symmetry systems. This combined
hardware and software product allows for the connection of large numbers of PC
clients to a central database server. While most network servers only enable
PC users to share workgroup files and printers, Sequent's parallel-enabled
Netware optimizes the parallel features of Sequent's operating system to link
dozens of Novell networks-and more than 1,000 PC users per enterprise into a
single network connected to a company's critical business information computer
databases.
Sequent has established relationships with independent software vendors
who provide application programs tailored for the client/server environment.
Sequent's SMP architecture generally provides superior performance for these
applications compared to single-processor architectures.
Communications Software. The Company has developed a variety of
communications products that allow Symmetry systems to communicate in multi-
vendor heterogeneous environments. These communications products are built
upon a parallel communications architecture that provides high performance and
scalability.
The Company offers a number of products to connect to existing proprietary
systems, including systems manufactured by IBM and DEC. For IBM connectivity,
the Company offers Systems Network Architecture ("SNA") products for terminal
connectivity, Remote Job Entry ("RJE"), and peer to peer communications. The
older bisynchronous ("BSC") protocols are also supported. DECnet and LAT
products allow connection to DEC hosts and PCs.
Sequent provides a number of communications products based upon industry
standards for open systems connectivity. The Company currently markets an
X.25 product for wide area network environments, TCP/IP over Ethernet, Token
Ring, and FDDI for open systems connectivity and an implementation of Sun
Microsystems Network File System ("NFS") for remote file system access.
Sequent also has a set of products that adhere to the Open Systems
Interconnection ("OSI") standards.
Third-Party Applications Programs. The rapidly expanding universe of
applications software can be easily ported to Sequent's UNIX-based Symmetry
multiprocessing systems. The Company recognizes that applications software is
a critical element in providing solutions to the enterprise and maintains
marketing programs to promote the development and support of third-party
applications software packages for the Company's systems. Currently, over 800
software application modules from approximately 300 vendors are available to
Sequent users. The products offered drive core business applications and
include office, financial accounting, material resource planning ("MRP") and
library automation programs; compilers, cross-compilers and interpreters for a
variety of computer languages; object-oriented development tools and software
application development products. The software packages available address the
needs of many different vertical markets, including manufacturing,
telecommunications, health care services, financial services and state and
local governments. To supplement the marketing efforts of the third-party
suppliers, the Company actively promotes these software partners to end users
through joint sales campaigns, demonstrations at its sales offices and trade
shows, customer success stories, and joint marketing programs.
In addition, Sequent's WinServer systems support the thousands of
software applications developed by third-party companies for the Microsoft
Windows NT operating system.
Sales and Distribution
The Company sells its products and services to end users through its direct
world-wide sales force. The division has 57 sales offices world-wide,
including 36 in North America.
The Company utilizes indirect sales channels including value-added
resellers, original equipment manufacturers ("OEMs"), and several foreign
distributors. The Company currently sells its products to one principal OEM,
Unisys Corporation, who incorporates software and peripheral equipment for
sale to its customers. Under the terms of the agreement, Unisys has no
manufacturing rights related to Sequent products. The agreement has been
extended through October, 1997. Total revenues from Unisys in 1994 and 1993
were $23.1 million (5% of total revenue) and $25.1 million (7% of total
revenue), respectively.
The Company has agreements with value added resellers that integrate
Sequent systems with other hardware and software products for resale into
particular vertical markets, including library automation, credit and
collections and retail distribution.
As is common in the computer industry, a significant portion of orders is
generally received and shipped in the last month of a fiscal quarter. As a
result, the Company's product backlog is relatively small, is not necessarily
indicative of sales levels for future periods and is not material to
understanding the Company's business.
No end user customer accounted for more than 10% of total revenues in
1994, 1993 or 1992. International sales constituted approximately 48%, 44% and
49% of the Company's total revenues in 1994, 1993 and 1992 respectively.
Competition
The computer industry is intensely competitive and characterized by rapid
technological advances resulting in frequent new product introductions and
improvements in relative price/performance. Competitive factors include
product quality and reliability, professional services capability,
architectural fit, relative price/performance, ease of understanding and
operation of the system, capability of the operating system software,
availability of applications software, marketing capability, service and
support, name recognition and corporate reputation.
Sequent's architectural consulting and professional services business is
positioned in the marketplace between traditional management consultants that
perform business process analysis and re-engineering, such as Nola, Norton &
Co., and McKinsey & Co., and technical system integration consultants, such as
Electronic Data Systems Corp. and Perot Systems Corp., that develop solutions
for narrowly defined system projects. Both management consultants and
technical system integration consultants compete with the Company. Some of
these competitors have financial, marketing and technical resources which
significantly exceed those of the Company. The Company believes that it can
compete favorably based on its expertise in tying the business process
analysis and re-engineering outcomes to solutions for specific system projects
on an enterprise-wide basis.
Within the commercial segment of the general purpose computing market,
Sequent competes against, among others, the major computer manufacturers,
including Hewlett-Packard, DEC and IBM. The size, reputation, installed base
and distribution strength of these companies make them significant
competitors. In addition, a number of established or emerging companies, such
as Sun Microsystems and Pyramid Technology Corp., offer, have announced or are
developing general purpose computer product lines incorporating a UNIX-based
operating system and a multiprocessing architecture. Although some of these
competitors have financial, marketing, distribution and technical resources
which significantly exceed those of the Company, the Company believes that it
can compete favorably in the open systems marketplace based on its
architectural focus, professional services focus, price/performance and value
to the customer.
Product Development
The Company's research and development programs are currently focused on
enhancing both the hardware and software components of its product lines. By
incorporating industry standard microprocessors into its systems products, the
Company believes it is better able to take advantage of leading microprocessor
technology in a rapid and cost-effective manner than are other computer
systems manufacturers that design their own proprietary microprocessors. The
Company's software development program is focused on improving the performance
of its parallel enabled operating system and enhancing its suite of
communications, network and client/server and third-party applications
software. The Company intends to continue making substantial investments in
research and development activities to maintain and enhance its competitive
position in a market characterized by rapid technological advances.
Professional Services and Product Support
The Company's professional services offerings include architectural
consulting and enterprise transition services to assist in a customer's move
to open systems; enterprise-wide system analysis and design, network analysis
and design, project management, implementation assistance, system
administration and other technical consulting services. These services play a
key role in the enterprise-wide system solutions that the Company offers. In
addition, Sequent offers customers a comprehensive set of education and
training programs.
The Company also offers an array of customer service and support programs,
including hardware maintenance and service, software service and upgrades and
documentation support. In addition, hardware maintenance is offered for many
third-party peripheral products connected to the Sequent system. The Company
maintains a 24-hour toll-free telephone line for technical consultation as
well as remote log-in capability for diagnosing customer hardware and software
problems. In-field hardware service is contracted to third-party suppliers,
which rely on Sequent for customer interface and diagnostic support. The
Company's standard warranty on its products generally extends 90 days from the
date of customer installation.
The Company believes that the quality and reliability of its computer
systems are important to customer satisfaction. Sequent's systems have proven
their high quality and reliability. High system uptime is a built-in
advantage of Sequent's architecture. Sequent personnel perform all
installations and hardware fault isolation and provide complete software
support for direct customers. Sequent systems are equipped with diagnostic
tools that allow the Company's service engineers to identify and disable a
failed component from remote locations. Replacement modules can be provided
quickly to restore the system to full capacity. The Company also offers
service and support programs in system performance evaluation and disaster
protection. Remote Analysis, Diagnostics and Resolution ("RADAR") provides
the advanced level of support traditionally found in proprietary mainframe
environments. A key element in RADAR is Sequent's software-based service
product, ProScan, which significantly increases system availability by
continuously monitoring Sequent Symmetry systems to detect and resolve
potential failure points.
Revenue generated from service and support was 24%, 21% and 18% of total
revenue during 1994, 1993 and 1992, respectively.
Manufacturing
The Company's manufacturing operations consist of procurement, assembly,
testing and quality control. Subcontractors are often used to assemble and
test subassemblies, such as printed circuit boards. The modular nature of the
Company's products, together with the standards-based open architecture,
permit ease of manufacture and system configuration. Once integrated, all
systems go through a fully operational, continuous burn-in cycle while
executing rigorous system stress and diagnostic tests. Final assembly and
testing occur only when a specific customer order is due for shipment (because
of the broad range of system configurations possible from a relatively few
basic modules and the many choices of peripherals). If a failure occurs or a
problem of unknown origin arises in a single system during work-in-progress
testing, it is the policy of the Company to halt shipment of products which
may be affected while the Company isolates and corrects the problem and
determines whether the problem may extend to other systems in manufacturing or
at customer sites. Such interruptions could cause fluctuations in quarterly
results.
Certain components and parts used in the Company's products are available
from a single source, principally processors from Intel Corporation, Motorola
and LSI Logic Corporation. The Company generally obtains most parts and
components from one vendor, even where multiple sources are available, to
maintain quality control and enhance the working relationship with suppliers.
These relationships include joint engineering programs for new product
development. The Company attempts to reduce the risk of supply interruption
through close supplier relationships and greater inventory positions in sole-
sourced components. The failure of a supplier to deliver on schedule could
delay or interrupt the Company's delivery of products and thereby adversely
affect the Company's revenue and profits.
Patents and Licenses
The Company has filed four U.S. patent applications (and certain related
foreign applications) covering technology incorporated into its products.
Three U.S. patents have been issued. There can be no assurance that any other
patents will be issued. The Company nevertheless believes that the rapid pace
of technological change in the computer industry makes patent protection less
significant than such factors as the innovative skills, technical expertise
and management ability of its personnel.
Employees
At December 31, 1994 the Company employed approximately 1,810 full-time
employees, of whom approximately 1,060 were employed in sales, marketing and
customer service, 310 in product development, 160 in manufacturing and 280 in
administrative and support services. The Company's continued success will
depend in part on its ability to attract and retain highly skilled and
motivated personnel who are in great demand throughout the industry. None of
the Company's employees is represented by a labor union. All full-time
Sequent employees are granted options to acquire Common Stock of the Company.
Sequent believes that its employee relations are excellent and believes that
its stock incentive plans, its challenging work environment and the
opportunities for advancement within the Company are key factors to its
ability to attract and retain qualified personnel.
Trademarks
"Sequent", "Symmetry", "Balance", "DYNIX", "WinServer", "DYNIX/ptx",
"ptx/admin" and Sequent's logo design are registered trademarks of Sequent
Computer Systems, Inc. This Report on Form 10-K also refers to trademarks
held by other corporations.
Item 2. Properties.
The Company's headquarters and its product development and manufacturing
operations are located in facilities totaling approximately 500,000 square
feet in Beaverton, Oregon, 10 miles west of Portland. The Company occupies
these facilities under leases which expire from 2000 to 2006. On the
expiration dates of these leases, the Company generally has the option of
purchasing the leased facilities at fair market value or renewing the leases
for an additional five years. The Company also leases sales, marketing and
customer support offices in locations throughout the United States, Europe,
Canada, Japan, Singapore, Hong Kong, New Zealand and Australia. The Company
believes that its existing facilities and land are adequate for current and
anticipated operations.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4(a). Executive Officers of the Registrant.
Name Age Position
Karl C. Powell, Jr. 51 Chairman and Chief Executive Officer,
Director
John McAdam 44 President and Chief Operating Officer
Robert S. Gregg 41 Sr. Vice President of Finance and
Legal, Treasurer and Chief
Financial Officer
Lary L. Evans 55 Vice President and General Manager,
Platform Division
Paul J. O'Mara 39 Vice President and General Manager,
Enterprise Division
Mr. Powell, a co-founder of the Company, is Chairman and Chief Executive
Officer, and has been a director since 1983. Mr. Powell has served as the
Company's sole Chief Executive Officer or shared the Office of the Chief
Executive with the co-founder of the Company since the Company's inception.
From 1974 to 1983, Mr. Powell was employed by Intel Corporation, where his
most recent position was General Manager for Microprocessor Operations. Mr.
Powell served on the National Board of Directors of the American Electronics
Association from 1985 to 1986. He holds a B.S. degree in mechanical
engineeering from the US Merchant Marine Academy.
Mr. McAdam joined the Company in August 1989 as U.K. Sales Director. He
became U.K. General Manager in January 1991, Vice President and General
Manager of European Operations in October 1992, and Senior Vice President of
European and Asian Operations in January 1994. He was promoted to President
and Chief Operating Officer in Feburary 1995. Prior to joining the Company
Mr. McAdam was employed for 10 years by Data General U.K. Ltd., serving most
recently as Regional Manager, Public Sector, Finance and Goverment Market.
Mr. McAdam holds a degree in Computer Sciences from Glasgow University.
Mr. Gregg joined the Company in 1983 as its Controller. He became
Director of Finance in 1984 and Vice President of Finance, Treasurer and Chief
Financial Officer in March 1986. He was promoted to Senior Vice President of
Finance & Legal, Treasurer and Chief Financial Officer in February 1995.
Prior to joining the Company, Mr. Gregg spent eight years at the public
accounting firm of Price Waterhouse. Mr. Gregg holds a B.S. degree in
business and accounting from the University of Oregon.
Mr. Evans joined the Company as Vice President of Manufacturing in
January 1987, became Vice President of Engineering in May 1992, and Vice
President and General Manager of the Platform Division in January of 1994.
From August 1984 until joining Sequent, he was Vice President and General
Manager of Culler Scientific Systems Corporation. His earlier experience
included management positions with Tandem Computers, Xerox Corporation, Data
General Corporation and Digital Equipment Corporation. Mr. Evans holds a
B.S.M.E. degree from General Motors Institute, an M.S.M.E. degree from
Massachusetts Institute of Technology (MIT) and a Ph.D. degree in
electrical/mechanical engineering from MIT.
Mr. O'Mara joined the Company in July 1990 as Director of European
Customer Services and became Vice President of Worldwide Customer Services in
May 1992. In January 1994, Mr. O'Mara's responsibilities were expanded and he
became Vice President of Worldwide Enterprise and Customer Services. In June
1994, Mr. O'Mara was promoted to Vice President and General Manager,
Enterprise Division. Prior to joining the Company, Mr. O'Mara was employed as
Director of Customer Services for Norsk Data Ltd. He has held various
customer service and sales positions during seven years of employment at Prime
Computer and spent five years in various service positions at ICL. Mr. O'Mara
holds a B.Sc. in Electronic Engineering from the University of Sussex,
England.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The information required by this item is included under "Market
Information (unaudited)" in the Company's 1994 Annual Report to
Shareholders and is incorporated herein by reference.
Item 6. Selected Financial Data.
Information with respect to selected financial data is included
under "Selected Financial Data" in the Company's 1994 Annual Report
to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Information with respect to management's discussion and analysis of
financial condition and results of operations is included under
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations" in the Company's 1994 Annual
Report to Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Information with respect to selected quarterly financial data is
included under "Quarterly Financial Data (unaudited)" in the
Company's 1994 Annual Report to Shareholders and incorporated
herein by reference. The other information required by this item is included
under "Consolidated Financial Statements" and "Notes to Consolidated Financial
Statements" as listed in item 14 of this report and in the Company's 1994
Annual Report to Shareholders which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's Proxy Statement for
its 1995 Annual Meeting of Shareholders and is incorporated herein by
reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report.
Item 11. Executive Compensation.
Information with respect to executive compensation will be included
under "Summary Compensation Table", "Stock Option Grants in Last
Fiscal Year", "Stock Option Exercises in Last Fiscal Year and Fiscal
Year End Option Values", and "Certain Transactions" in the Company's
Proxy Statement for its 1995 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to security ownership of certain beneficial
owners and management will be included under "Voting Securities and
Principal Shareholders" and "Election of Directors" in the Company's
Proxy Statement for its 1995 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to transactions with management will be
included under "Certain Transactions" in the Company's Proxy
Statement for its 1995 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements.
The following financial statements are included in the Company's 1994
Annual Report to Shareholders:
Sequent Computer Systems, Inc. and Subsidiaries:
Consolidated Statements of Operations - Fiscal Years Ended
December 31, 1994, Janaury 1, 1994, and January 2, 1993
Consolidated Balance Sheets - December 31, 1994 and January 1, 1994
Consolidated Statements of Shareholderes' Equity - Fiscal Years
Ended December 31, 1994, January 1, 1994, and January 2, 1993
Consolidated Statements of Cash Flows - Fiscal Years Ended
December 31, 1994, January 1, 1994, and January 2, 1993
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules.
The following schedules and report of independent accountants are
filed herewith:
Page in this report
on Form 10-K
Schedule V Property and Equipment F-1
Schedule VI Accumulated Depreciation and Amortization
of Property and Equipment F-2
Schedule VIII Valuation and Qualifying Accounts F-3
Schedule IX Short-term Borrowings F-4
Schedule X Supplementary Income Statement Information F-5
Report of Independent Accountants on Financial Statement Schedules F-6
All other schedules are omitted as the required information is inapplicable or
is presented in the financial statements or related notes thereto.
(a)(3) Exhibits.
Exhibit
Number Description
3.1 Articles of Incorporation, as amended, and Articles of
Merger of Sequent Computer Systems, Inc. (the
"Company"). (Incorporated by reference to Exhibit 4A
to the Company's Registration Statement on Form S-8
(file no. 33-63972).)
3.2 Bylaws, as amended, of the Company. (Incorporated by
reference to Exhibit 4B to the Company's Registration
Statement on Form S-8 (file no. 33-39315).)
4.1 Note Purchase Agreement dated April 10, 1992 regarding
7.5% Convertible Subordinated Notes due March 31,
2000, between the Company and a group of institutional
investors. (Incorporated by reference to Exhibit 19
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 28, 1992).
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the
Company agrees to furnish any other long term debt
agreements to the Commission upon request.
10.1A Amended and Restated Lease Agreement between KC
Woodside and the Company, as amended, dated May 8,
1987 ("First Building Lease"), and related agreements.
(Incorporated by reference to Exhibit 19.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1987 (file no. 0-15627).)
10.1B Second Amendment to First Building Lease, dated July
28, 1988. (Incorporated by reference to Exhibit 10.3B
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 (file no. 0-
15627).)
10.1C Third Amendment to First Building Lease dated July 28,
1989. (Incorporated by reference to Exhibit 10.3C to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 (file no. 0-
15627).)
10.1D Fourth Amendment to First Building Lease dated
September 20, 1991. (Incorporated by reference to
Exhibit 10.1D to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991 (file
no. 0-15627).)
10.1E Fifth Amendment to First Building Lease dated December
2, 1992. (Incorporated by reference to Exhibit 10.1E
to the Company's Annual Report on Form 10-K for fiscal
year ended January 2, 1993 (file no. 0-15627).)
10.1F Sixth Amendment to First Building Lease dated April 5,
1993.
10.1G Lease Agreement between KC Woodside and the Company,
dated May 8, 1987 ("Second Building Lease").
(Incorporated by reference to Exhibit 19.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1987 (file no. 0-15627).)
10.1H First Amendment to Second Building Lease, dated July
28, 1988. (Incorporated by reference to Exhibit 10.3E
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 (file no. 0-
15627).)
10.1I Second Amendment to Second Building Lease dated
September 13, 1991. (Incorporated by reference to
Exhibit 10.1G to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991
(file no. 0-15627).)
10.1J Third Amendment to Second Building Lease, dated
December 2, 1992. (Incorporated by reference to
Exhibit 10.1I to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (file no.
0-15627).)
10.1K Fourth Amendment to Second Building Lease, dated
April 5, 1993.
10.1L Lease Agreement, dated July 28, 1988 between KC
Woodside and the Company ("Third Building Lease").
(Incorporated by reference to Exhibit 10.3F to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1989 (file no. 0-15627).)
10.1M First Amendment to Third Building Lease, dated July
28, 1989. (Incorporated by reference to Exhibit
10.3G to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1989 (file no. 0-
15627).)
10.1N Second Amendment to Third Building Lease dated
September 13, 1991. (Incorporated by reference to
Exhibit 10.1J to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991
(file no. 0-15627).)
10.1O Third Amendment to Third Building Lease, dated
December 2, 1992. (Incorporated by reference to
Exhibit 10.1M to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (file no.
0-15627).)
10.1P Fourth Amendment to Third Building Lease, dated April
5, 1993.
10.1Q Lease Agreement, dated July 28, 1989 between KC
Woodside and the Company ("Fourth Building Lease").
(Incorporated by reference to Exhibit 10.3H to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1989 (file no. 0-15627).)
10.1R First Amendment to Fourth Building Lease dated
September 13, 1991. (Incorporated by reference to
Exhibit 10.1P to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991
(file no. 0-15627).)
10.1S Second Amendment to Fourth Building Lease dated
August 13, 1992. (Incorporated by reference to
Exhibit 10.1P to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (file no.
0-15627).)
10.1T Third Amendment to Fourth Building Lease dated
December 2, 1992. (Incorporated by reference to
Exhibit 10.1Q to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (file no.
0-15627).)
10.1U Fourth Amendment to Fourth Building Lease dated April
5, 1993.
10.1V Triple Net Lease dated July 9, 1990 between KC
Woodside and the Company ("Fifth Building Lease").
(Incorporated by reference to Exhibit 19 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 29, 1990 (file no. 0-15627).)
10.1W First Amendment to Fifth Building Lease dated April
29, 1991. (Incorporated by reference to Exhibit
10.1N to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1991 (file no. 0-
15627).)
10.1X Second Amendment to Fifth Building Lease dated April
29, 1991. (Incorporated by reference to Exhibit
10.1O to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1991 (file no. 0-
15627).)
10.1Y Third Amendment to Fifth Building Lease dated June
10, 1991. (Incorporated by reference to Exhibit
10.1P to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1991 (file no. 0-
15627).)
10.1Z Fourth Amendment to the Fifth Building Lease dated
July 3, 1991. (Incorporated by reference to Exhibit
10.1Q to the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1991 (file no. 0-
15627).)
10.1aa Fifth Amendment to Fifth Building Lease dated
September 13, 1991. (Incorporated by reference to
Exhibit 10.1R to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991
(file no. 0-15627).)
10.1bb Sixth Amendment to Fifth Building Lease dated
December 2, 1992. (Incorporated by reference to
Exhibit 10.1X to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (file no.
0-15627).)
10.1cc Seventh Amendment to Fifth Building Lease dated April
5, 1993.
10.1dd Lease Agreement between KC Woodside and the Company,
dated June 10, 1991 (Umpqua). (Incorporated by
reference to Exhibit 10.1Y to the Company's Annual
Report on Form 10-K for fiscal year ended January 2,
1993 (file no. 0-15627).)
10.1ee Lease Agreement between KC Woodside and the Company,
dated June 10, 1991 (Charles). (Incorporated by
reference to Exhibit 10.1Z to the Company's Annual
Report on Form 10-K for fiscal year ended January 2,
1993 (file no. 0-15627).)
10.1ff First Amendment to Lease, dated October 31, 1991
(Charles). (Incorporated by reference to Exhibit
10.1aa to the Company's Annual Report on Form 10-K
for fiscal year ended January 2, 1993 (file no. 0-
15627).)
10.1gg Second Amendment to Lease, dated May 6, 1992
(Charles). (Incorporated by reference to Exhibit
10.1bb to the Company's Annual Report on Form 10-K
for fiscal year ended January 2, 1993 (file no. 0-
15627).)
10.1hh Third Amendment to Lease, dated January 8, 1993
(Charles). (Incorporated by reference to Exhibit
10.1cc to the Company's Annual Report on Form 10-K
for fiscal year ended January 2, 1993 (file no. 0-
15627).)
10.1jj Lease Agreement between KC Woodside and the Company,
dated June 10, 1991 (S. Platte). (Incorporated by
reference to Exhibit 10.1dd to the Company's Annual
Report on Form 10-K for fiscal year ended January 2,
1993 (file no. 0-15627).)
10.1kk First Amendment to Lease, dated May 12, 1992
(Guadalupe). (Incorporated by reference to Exhibit
10.1ff to the Company's Annual Report on Form 10-K
for fiscal year ended January 2, 1993 (file no. 0-
15627).)
10.1ll Business park Lease between KC Woodside and the
Company, dated June 10, 1991 (Hillsborough).
(Incorporated by reference to Exhibit 10.1gg to the
Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (file no. 0-15627).)
10.2 Master Software License Agreement between Unix System
Laboratories, Inc. (formerly owned by American
Telephone & Telegraph Company) and the Company, dated
effective as of April 18, 1985. (Incorporated by
reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for fiscal year ended January 2,
1993 (file no. 0-1627).)
10.2A Sublicensing Agreement dated January 28, 1986, as
amended June 22, 1987 and August 10, 1987.
(Incorporated by reference to Exhibit 10.2A to the
Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (file no. 0-15627).)
10.2B Substitution Agreement between Unix System
Laboratories, Inc. and the Company, dated January 28,
1986. (Incorporated by reference to Exhibit 10.2B to
the Company's Annual Report on Form 10-K for fiscal
year ended January 2, 1993 (file no. 0-15627).)
10.2C Amendment dated November 13, 1992 to Master Software
License Agreement and Sublicensing Agreement with
Unix System Laboratories, Inc.
10.2D License Agreement dated July 15, 1983 between The
Regents of University of California and the Company,
as amended July 2, 1986. (Incorporated by reference
to Exhibit 10.2C to the Company's Annual Report on
Form 10-K for fiscal year ended January 2, 1993 (file
no. 0-15627).)
+10.3 Distributorship Agreement between the Company and
Oracle Corporation, dated March 31, 1987, as amended
on December 29, 1988, August 30, 1989, May 28, 1990,
May 31, 1991 and June 30, 1991. (Incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (file no. 0-15627).)
*10.4 Aircraft Lease Agreement between the Company and
B&K Transportation, Inc. dated October 1, 1993 as
amended November 1, 1993 and December 12, 1994.
*10.5 Sequent Computer Systems, Inc. Incentive Stock Option
Plan and Nonstatutory Stock Option Plan adopted March
20, 1984, as amended. (Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement
on Form S-1 (File no. 33-33444).)
*10.6 Sequent Computer Systems, Inc. 1987 Employee Stock
Option Plan, as amended. (Incorporated by reference
to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (file no. 33-33444).)
*10.7 Sequent Computer Systems, Inc. 1987 Nonstatutory
Stock Option Plan, as amended. (Incorporated by
reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (file no. 33-
33444).)
*10.8 Sequent Computer Systems Inc. Restated Employee Stock
Purchase Plan. (Incorporated by reference to Appendix
A to the Company's Proxy Statement dated March 18,
1993).
*10.9 Sequent Computer Systems, Inc. 1989 Stock Incentive
Plan, as amended. (Incorporated by reference to
Appendix A to the Company's Proxy Statement for its
1994 Annual Meeting of Shareholders).
11 Statement regarding computation of earnings per
share.
13 1994 Annual Report to Shareholders (portions not
incorporated by reference are not deemed filed).
21 Subsidiaries.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
________________________
+ Confidential treatment for potions of this contract has been
previously requested of the Commission.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(a)
(3) of this Report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
last quarter of fiscal 1994.
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.
Sequent Computer Systems, Inc.
Date:________________
By:__________________________________
Robert S. Gregg
Sr. Vice President of Finance,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 1994.
Signature Title
KARL C. POWELL, JR. * Chairman and Chief Executive Officer
(Karl C. Powell, Jr.) and Director (Principal Executive
Officer)
________________________________ Sr. Vice President of Finance and
(Robert S. Gregg) Leagl, Treasurer and Chief Financial
Officer (Principal Accounting and
Financial Officer)
DAVID R. HATHAWAY *
(David R. Hathaway) Director
ROBERT C. MATHIS *
(Robert C. Mathis) Director
MICHAEL S. SCOTT MORTON *
(Michael S. Scott Morton) Director
__________________________
(Richard C. Palermo) Director
ROBERT W. WILMOT *
(Robert W. Wilmot) Director
By:_____________________________*
Robert S. Gregg, Attorney-in-fact
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
Dec. 31, Jan. 1, Jan. 2, Dec. 28, Dec. 29,
1994 1994 1993 1991 1990
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total revenue $ 450,823 $ 353,806 $ 307,274 $ 213,272 $ 248,781
Income (loss) before income taxes $ 38,800 $ (6,331) $ 15,884 $ (52,379) $ 26,155
Net income (loss) $ 33,134 $ (7,524) $ 14,433 $ (48,661) $ 18,843
Net income (loss) per share $ 1.03 $ (.26) $ .55 $ (2.10) $ .81
Average shares outstanding 32,028 29,335 26,120 23,188 23,291
BALANCE SHEET DATA
Working capital $ 168,468 $ 134,156 $ 86,914 $ 65,672 $ 124,207
Total assets $ 435,977 $ 375,424 $ 278,759 $ 246,280 $ 250,736
Long-term obligations, less
current maturities $ 10,341 $ 10,906 $ 24,034 $ 7,198 $ 13,576
Shareholders' equity $ 291,195 $ 243,488 $ 172,502 $ 149,461 $ 194,764
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Total revenue was $450.8 million in 1994 compared to $353.8 million in 1993
and $307.3 million in 1992. The Company recorded net income in 1994 of $33.1
million, compared with a net loss in 1993 of $7.5 million, which included a
pretax restructuring charge of $22.3 million, and net income of $14.4 million
in 1992. The Company's total revenue and net income for 1994 have benefited
from its continuing domestic and international success in managing the
transition from platform vendor to provider of open systems, architecture and
professional services, as well as continued success in systems services
business. Despite the increase in total revenue, the Company has held
selling, general and administrative expenses to modest increases over 1993.
The Company's total revenue growth from 1992 to 1993 was primarily
attributable to increased success in the North American sales operation's
penetration of large customer accounts together with modest gains in Europe
which included continued success in large customer accounts, partially offset
by unfavorable 1993 currency rates relative to 1992 rates. In 1993, the
Company recognized a restructuring charge of $22.3 million related to a shift
to open distributed client/server computing solutions, professional service
consulting and architecture-led selling, marketing and engineering.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenue:
Fiscal Year Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Revenue:
End-user products 70.6% 72.0% 68.0%
OEM products 5.1 7.3 14.0
Service and other 24.3 20.7 18.0
Total revenue 100.0 100.0 100.0
Cost of products and service 53.7 51.8 48.7
Gross profit 46.3 48.2 51.3
Operating expenses:
Research and development 7.8 8.2 9.2
Selling, general and admin. 29.7 34.6 35.4
Restructuring charge -- 6.3 --
Total operating expenses 37.5 49.1 44.6
Operating income (loss) 8.8 (0.9) 6.7
Interest expense, net (0.3) (0.5) (1.2)
Other income (expense), net 0.1 (0.4) (0.3)
Income (loss) before provision
for income taxes 8.6 (1.8) 5.2
Provision for income taxes 1.3 0.3 0.5
Net income (loss) 7.3% (2.1)% 4.7%
REVENUE
End-user product revenue increased $63.5 million, or 25% from 1993 to 1994
primarily due to the North American and United Kingdom sales operation's
success in penetrating and leveraging large customer accounts. Germany and
the Asia-Pacific region also showed significant percentage growth although at
lower dollar magnitudes. End-user product revenue increased $58.6 million, or
39% from 1992 to 1993 primarily as a result of growth in European demand and
improved results of the Company's North American sales operations.
As anticipated, total OEM revenue continued to decline in 1994 compared
to 1993 and 1992 due to decreases in revenue from Unisys Corporation. Total
OEM revenue in 1994 and 1993 was $23.1 million and $25.8 million, respectively,
compared to $43 million in 1992.
During 1994 and 1993, the Company's service and other revenue has
continued to increase in dollar amount and as a percentage of total revenue
primarily due to the growing installed customer base and the Company's
emphasis on professional services consulting.
The Company has continued to benefit from its significant investment in
developing worldwide sales and distribution channels. The majority of the
Company's revenue outside the United States is from Europe (particularly the
United Kingdom), with the balance coming from Asia-Pacific and Canada. During
1994, international revenue increased $61.5 million, or 40% over 1993.
European operations showed continued success with large customer accounts and
also professional services. International revenue increased as a percentage
of total revenue from 44% in 1993 to 48% in 1994.
During 1993, international revenue increased 5% over 1992 but decreased as
a percentage of total revenue (from 49% to 44%), primarily due to increased
North American operations and the negative impact of currency rate
fluctuations.
COST OF SALES
Fiscal Year
Dec. 31, Jan. 1 Jan. 2
1994 1994 1993
Cost of products sold as a percentage
of product reven 48% 48% 44%
Cost of service and other as a percentage
of service and other revenue 71 68 72
Total cost of sales as a percentage
of total revenue 54 52 49
The factors influencing gross margins in a given period include unit
volumes (which affect economies of scale), product configuration mix, changes
in component and manufacturing costs, product pricing and the mix between
product and service revenue.
Total cost of sales as a percentage of total revenue increased both in
1994 and 1993 compared to 1992 primarily due to product mix with lower margin
service increasing as a percentage of total revenue and, to a lesser extent,
increased pricing pressure. Additionally in 1993, unfavorable currency rates
negatively impacted cost of sales as compared to 1992.
RESEARCH AND DEVELOPMENT
Research and development costs increased 21% in 1994 compared to 1993 and
3% in 1993 compared to 1992. The Company continued to invest in new product
development and enhancements to existing products internally, together with
leveraging the available technology in the open systems marketplace. Research
and development costs as a percentage of total revenue were 8% in 1994 and
1993. Research and development costs as a percentage of total revenue
decreased in 1993 compared to 1992 from 9% to 8%, primarily due to increased
revenue levels in 1993.
Capitalized software amortization increased in 1992, 1993 and 1994 due to
increased and continued focus on software design for computing solutions,
resulting in greater investments in software dvelopment and products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs increased 9% in 1994 compared
to 1993 and 12% in 1993 compared to 1992 primarily due to costs associated
with increased revenue levels (including commissions and additional sales-
related personnel) and, in 1993, targeted marketing program costs. Selling,
general and administrative costs as a percentage of total revenue were 30% in
1994 compared to 35% in 1993 and 1992. Selling, general and administrative
costs as a percentage of total revenue have decreased due to improved sales
team productivity resulting from obtaining larger orders in large customer
accounts.
RESTRUCTURING CHARGES
During 1993, the Company provided for restructuring charges of $22.3
million in connection with management's decision to realign resources to
provide open distributed client/server computing solutions, professional
service consulting and architecture-led selling, marketing and engineering
strategies. These restructuring steps included a reduction in the Company's
workforce.
INTEREST AND OTHER INCOME (EXPENSE)
Interest expense includes costs related to the Convertible Debentures,
foreign currency hedging loans and capital lease obligations. Interest income
is primarily generated from restricted deposits held at a foreign bank, short
term investments and cash and cash equivalents. Interest expense of $4.7
million and $3.5 million exceeded interest income of $3.5 million and $1.8
million in 1994 and 1993, respectively.
Other income in 1994 of $500,000 includes foreign currency transaction
gains and losses and other non-operating charges. Other expense in 1993 of
$1.4 million reflects losses in the Company's Japanese joint venture, foreign
currency transaction gains and losses and other non-operating charges.
INCOME TAXES
The Company provided $5.7 million for income taxes in 1994 on income
before income taxes of $38.8 million. The Company recognized a benefit in the
current year related to net operating loss carryforwards originating in prior
years which held the income tax provision below statutory income tax rates.
The Company's 1993 income tax provision of $1.2 million on the loss before
income taxes of $6.3 million, relates to export revenue and foreign earnings.
A tax benefit for the loss was not recorded in 1993 as the tax asset was fully
reserved for that year.
The current income tax provision of 15% compares to income tax provisions
at an effective rate of 19% and 9% in 1993 and 1992, respectively. In 1995,
the income tax provision will be significantly higher as a percentage of net
income before income taxes as the Company has utilized a majority of its
remaining net operating loss carryforwards in 1994 except for net operating
loss carryforwards related to stock options. Such carryforwards will be
credited directly to paid in capital when used.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio at December 31, 1994 increased to 2.3:1 from
2.1:1 at January 1, 1994. Cash flow from operations of $46 million and
proceeds from the sale of common stock provided the funds for (i) investments
in property and equipment of $40.3 million primarily related to equipment
requirements for product development, strategic partnerships support, employee
desktop enhancements, and new employees and (ii) capitalized software
expenditures of $19.1 million related to development of new software products
and enhancements to existing software products.
In February 1993, the Company sold 3 million shares of common stock in an
equity offering for working capital and other general coroprate purposes. Net
proceeds to the Company, after deducting the underwriting discount and
offering expenses, were approximately $60 million.
The Company renegotiated its $30 million line of credit agreement during
1994, reduced from $50 million. The line is unsecured and extends through May
31, 1995. The line contains certain financial covenants and prohibits the
Company from paying dividends without the lenders' consent. No borrowings
were outstanding under the line of credit as of December 31, 1994.
The Company maintains a short-term borrowing agreement with a foreign
bank to cover foreign currency exposures. Maximum borrowings allowed under
the foreign bank agreement were $54.6 million, of which $49.0 million was
outstanding at December 31, 1994 (based on currency exchange rates on such
date).
The Company maintains a short-term borrowing agreement with a domestic
bank as an additional hedging facility to cover certain foreign currency
exposures. At December 31, 1994, borrowings of $10.4 million were outstanding
under this agreement.
Management expects that existing funds, funds generated from operations
and the bank line of credit will provide adequate resources to meet the
Company's anticipated cash requirements during 1995.
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
<S> <C> <C> <C>
Revenue:
Product revenue $ 341,504 $ 280,579 $ 252,093
Service and other revenue 109,319 73,227 55,181
Total revenue 450,823 353,806 307,274
Costs and expenses:
Cost of products sold 164,991 133,294 109,780
Cost of service and other revenue 77,238 49,988 39,845
Research and development 35,047 28,944 28,125
Selling, general and administrative 134,070 122,537 108,974
Restructuring charge -- 22,307 --
Total costs and expenses 411,346 357,070 286,724
Operating income (loss) 39,477 (3,264) 20,550
Interest income 3,515 1,819 1,186
Interest expense (4,687) (3,474) (4,921)
Other income (expense), net 495 (1,412) (931)
Income (loss) before provision
for income taxes 38,800 (6,331) 15,884
Provision for income taxes 5,666 1,193 1,451
Net income (loss) $ 33,134 $ (7,524) $ 14,433
Net income (loss) per share $ 1.03 $ (.26) $ .55
Weighted average number of common
and common equivalent shares
outstanding 32,028 29,335 26,120
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
Dec. 31, 1994 Jan. 1, 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,291 $ 42,986
Restricted deposits 59,437 32,279
Investments -- 5,000
Receivables, net 133,571 115,561
Inventories 48,698 48,865
Prepaid royalties and other 12,812 11,587
Total current assets 300,809 253,278
Property and equipment, net 94,214 86,309
Capitalized software costs, net 38,555 32,217
Intangible assets and other, net 2,399 3,620
Total assets $ 435,977 $ 375,424
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 59,437 $ 32,279
Accounts payable and other 46,744 64,223
Accrued payroll 11,794 10,903
Unearned revenue 9,716 7,123
Income taxes payable 3,850 1,015
Current obligations under
capital leases and debt 800 3,579
Total current liabilities 132,341 119,122
Other accrued expenses 2,100 1,908
Long-term obligations under capital
leases and debt 10,341 10,906
Total liabilities 144,782 131,936
Shareholders' equity:
Preferred stock, $.01 par value,
5,000 shares authorized,
none outstanding -- --
Common stock, $.01 par value,
100,000 shares authorized,
31,360 and 30,245 shares outstanding 314 302
Paid-in capital 278,145 265,910
Retained earnings (accumulated deficit) 17,872 (15,262)
Foreign currency translation adjustment (5,136) (7,462)
Total shareholders' equity 291,195 243,488
Total liabilities and
shareholders' equity $ 435,977 $ 375,424
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Retained Foreign
earnings currency
Preferred Stock Common Stock Paid-in (accumulated translation
Shares Amt Shares Amt capital deficit) adjustment Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 28, 1991 1,500 $15 20,603 $206 $172,204 $(22,171) $ (793) $ 149,461
Common shares issued,
net of repurchases -- -- 1,847 19 13,823 -- -- 13,842
Net income -- -- -- -- -- 14,433 -- 14,433
Foreign currency translation
adjustment -- -- -- -- -- -- (5,234) (5,234)
Balance, Jan. 2, 1993 1,500 15 22,450 225 186,027 (7,738) (6,027) 172,502
Common shares issued,
net of repurchases -- -- 4,795 47 79,883 -- -- 79,930
Conversion of preferred stock (1,500) (15) 3,000 30 -- -- -- 15
Net loss -- -- -- -- -- (7,524) -- (7,524)
Foreign currency translation
adjustment -- -- -- -- -- -- (1,435) (1,435)
Balance, Jan. 1, 1994 -- -- 30,245 302 265,910 (15,262) (7,462) 243,488
Common shares issued -- -- 1,115 12 12,235 -- -- 12,247
Net income -- -- -- -- -- 33,134 -- 33,134
Foreign currency translation
adjustment -- -- -- -- -- -- 2,326 2,326
Balance, December 31, 1994 -- $ -- 31,360 $ 314 $278,145 $ 17,872 $ (5,136) $ 291,195
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
Dec. 31, 1994 Jan. 1, 1994 Jan. 2, 1993
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 33,134 $ (7,524) $ 14,433
Reconciliation of net income (loss)
to net cash provided by
operating activities-
Depreciation and amortization 44,600 39,490 33,870
Restructuring charges not affecting cash -- 14,286 --
Changes in assets and liabilities-
Receivables, net (18,010) (32,055) (14,179)
Inventories (2,833) (18,208) 8,480
Prepaid royalties and other (403) (3,033) (3,119)
Accounts payable and other (17,072) 32,714 577
Accrued payroll 891 339 1,977
Unearned revenue 2,593 2,025 3,042
Income taxes payable/receivable 2,835 (226) 3,377
Other accrued expenses 314 267 (2,250)
Net cash provided by
operating activities 46,049 28,075 46,208
Cash flow from investing activities:
Restricted deposits (27,158) (2,283) (8,811)
Investments, net 5,000 (5,000) --
Proceeds from sales of property
and equipment -- -- 1,021
Purchases of property and equipment, net (40,256) (40,032) (35,328)
Capitalized software costs (19,116) (21,012) (15,996)
Foreign currency translation adjustment 2,326 (1,435) (5,234)
Other, net 399 454 619
Net cash used for investing activities (78,805) (69,308) (63,729)
Cash flow from financing activities:
Notes payable, net 27,158 3,634 (11,367)
Payments under capital lease obligations (3,293) (2,635) (2,672)
Long-term debt (payments) proceeds, net (51) (1,190) 17,243
Stock issuance proceeds, net 12,247 70,045 13,842
Net cash provided by financing activities 36,061 69,854 17,046
Net increase (decrease) in cash and cash
equivalents 3,305 28,621 (475)
Cash and cash equivalents at beginning
of period 42,986 14,365 14,840
Cash and cash equivalents at end of period $ 46,291 $ 42,986 $ 14,365
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sequent Computer Systems, Inc. and subsidiaries ("Sequent" or the
"Company") was incorporated in January 1983 and was in the development stage
until product shipments began in December 1984. Sequent designs, manufactures
and markets high performance symmetric multiprocessing computer systems and
parallel-enabled software for the commercial open systems marketplace and
provides professional consulting and education services to ensure customers'
effective implementation of client/server system solutions and information
technology transitions.
Principles of Consolidation. The Company's fiscal year is based on a 52-
53 week year ending the Saturday closest to December 31. The consolidated
financial statements of the Company include accounts of Sequent Computer
Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and profits have been eliminated.
The financial statements and transactions of the Company's foreign
subsidiaries are maintained in their functional currencies and translated into
U.S. dollars for purposes of consolidation. Translation adjustments are
accumulated as a separate component of shareholders' equity. Gains and losses
resulting from transactions denominated in a currency other than an entity's
functional currency are included in other income (expense) in the consolidated
statements of operations. During 1994 and 1992, the Company realized net
pretax gains of $1.1 million and $960,000, respectively, resulting from such
transactions. The net loss in 1993 was not significant.
Revenue Recognition and Receivables. Revenue from product sales is
generally recognized upon shipment; however, depending upon contract terms,
revenue recognition may be deferred until customer acceptance or clarification
of funding. Service revenue is recognized as earned on the straight-line
basis over the term of the contract.
Receivables are shown net of allowance for doubtful accounts of $2.3
million at December 31, 1994 and $1.8 million at January 1, 1994.
In July 1994, the Company entered into a two year agreement with a group of
banks to sell, without recourse, undivided ownership interests in a revolving
pool consisting of substantially all of the Company's domestic accounts
receivable for a maximum of $20 million. At December 31, 1994, accounts
receivable in the accompanying consolidated balance sheets is net of $8
million received by the Company under this agreement.
The Company had no single customer that represented greater than 10% of
total revenue in 1994 and 1993. Revenue from one customer, Unisys, was $36.6
million in 1992.
Inventories. Inventories are stated at the lower of cost or market.
Costs are determined using the first-in, first-out (FIFO) method and include
material, labor and manufacturing overhead.
Prepaid Royalties. The Company has entered into agreements with various
vendors which provide for prepayment of future royalties based on sales of
certain software. Prepaid royalties were $4.2 million at December 31, 1994
and $4.5 million at January 1, 1994, and are stated at the lower of cost or
net realizable value. Such prepaid amounts are realized by receipt of reverse
royalties from the vendors based upon software sales by the vendor, and by
charging cost of products sold for certain software sales by the Company.
Property and Equipment. Property and equipment are stated at cost and
depreciated over their estimated useful lives, ranging from three to five
years, on the straight-line method. Leasehold improvements and equipment held
under capital leases are amortized on a straight-line basis over the shorter
of the asset life or lease term. Maintenance and repairs are expensed as
incurred.
Research and Development. Software development costs for certain projects
are capitalized from the time technological feasibility is established to the
time the resulting software product is first shipped. Capitalized software
costs are stated at the lower of cost or net realizable value and are shown
net of accumulated amortization of $41.7 million at December 31, 1994 and
$28.9 million at January 1, 1994. Amortization, generally based on a three-
year straight-line basis, was $12.8 million in 1994, $11.7 million in 1993,
and $8.7 million in 1992. All other research and development costs are
expensed as incurred.
Income Taxes. Effective the beginning of fiscal year 1992, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting For
Income Taxes". The Company elected not to retroactively apply the new
standard to prior years, but instead to show the entire effect of the
accounting change, which was insignificant, in the current year.
The Company's general practice is to reinvest the earnings of its foreign
subsidiaries in those operations, unless it would be advantageous to the
Company to repatriate the foreign subsidiaries' retained earnings.
Per Share Information. Primary earnings per share is computed based on
the weighted average number of common and dilutive common equivalent shares
outstanding. Outstanding stock options, net of assumed buy-back, and
preferred stock are common stock equivalents.
The computation of fully dilutive earnings per share also assumes
conversion of the remaining 7.5% Convertible Subordinated Debentures issued
April 1992 when it would be dilutive. A fully diluted earnings per share
amount is not shown as the effect of the debentures would be antidilutive.
Consolidated Statement of Cash Flows. The Company considers short-term
investments which are highly liquid, readily convertible into cash and having
original maturities less than three months to be cash equivalents for purposes
of the statement of cash flows.
Total cash expenditures for income taxes were $2.3 million , $799,000, and
$568,000 during 1994, 1993 and 1992, respectively. Interest paid does not
differ materially from interest expense.
Non-cash investing and financing activities include the following: 1993 -
In connection with the equity offering, all outstanding shares of preferred
stock were converted into 3 million shares of common stock and $9.9 million of
the Convertible Debentures were converted into 626,000 shares of common stock.
1992 - The Company entered into a capital lease for property and equipment
totalling $1 million.
2. INVENTORIES
(in thousands)
December 31, January 1,
1994 1994
Raw materials $ 5,377 $ 5,011
Work-in-progress 2,065 7,743
Finished good 41,256 33,111
$ 48,698 $ 45,865
Finished goods inventory includes evaluation systems aggregating
$10.4 million and $16.9 million as of December 31, 1994 and January 1, 1994,
respectively. Such systems are located at potential customer sites for
demonstration and garner of sales.
3. PROPERTY AND EQUIPMENT
(in thousands)
December 31, January 1,
1994 1994
Land $ 5,037 $ 5,037
Operational equipment 119,535 95,895
Furniture and office equipment 53,872 46,643
Leasehold improvements 12,341 11,193
190,785 158,768
Less accumulated depreciation
and amortization 96,571 72,459
$ 94,214 $ 86,309
Depreciation and amortization charged to expense totaled $31.8 million in
1994, $27.3 million in 1993, and $24.6 million in 1992.
4. NOTES PAYABLE
The Company has an unsecured line of credit agreement with a group of banks
which provides short-term borrowings up to $30 million (reduced in the second
quarter of 1994 from $50 million). The line of credit agreement contains
financial covenants, including covenants relating to net worth, ratio of
liabilities to net worth and limitations on net operating losses, and
prohibits the Company from paying dividends without the group of banks'
consent. The line of credit agreement extends through May 31, 1995. At
December 31, 1994, there were no borrowings outstanding under this line of
credit agreement.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge to cover certain foreign currency exposures. Borrowings under the
agreement are denominated in various foreign currencies. Proceeds from the
borrowings are converted into U.S. dollars and placed in a term deposit
account with the foreign bank. The deposits, which are classified as
restricted deposits in the accompanying consolidated balance sheets, are
pledged to the foreign bank so long as borrowings under the agreement are
outstanding. During July 1994, the Company re-negotiated the agreement and
extended it through July 1995. The foreign bank, without cause, can terminate
the agreement at any time. At December 31, 1994, maximum borrowings allowed
under the agreement were $54.6 million. Amounts outstanding were $49 million
and $32.3 million at December 31, 1994 and January 1, 1994, respectively. The
maximum borrowing limit is denominated in specified foreign currencies and
fluctuates with the change in foreign exchange rates. The average interest
rate on these borrowings at December 31, 1994 was 5.5%.
In July 1994, the Company entered into an agreement with a domestic bank
for an additional hedging facility to cover certain foreign currency
exposures. Borrowings under this agreement are denominated in foreign
currencies. Proceeds from the borrowings are converted into U.S. dollars and
placed in a term deposit account. The deposits are classified as restricted
deposits in the accompanying consolidated balance sheets and are pledged to
the bank so long as borrowings under the agreement are outstanding. The
agreement is for a maximum of $10 million, excluding foreign currency gain or
loss fluctuations, and expires May 31, 1995. At December 31, 1994, borrowings
of $10.4 million, after translation, were outstanding under this agreement.
The interest rate on these borrowings was 6% at December 31, 1994.
5. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT
In April 1992, the Company issued $20 million of 7.5% Convertible
Subordinated Debentures ("Convertible Debentures" or "Debentures") due March
31, 2000. In conjunction with the Company's equity offering in 1993 (see
Shareholders' Equity footnote), $9.9 million of the Debentures were converted
into 626,000 shares of common stock and are no longer classified as long-term
debt. The Convertible Debentures are convertible into the Company's common
stock at the option of the holders at an initial conversion price of $15.81
per share. Beginning on June 30, 1997, the Company is required to make
quarterly principal payments of $1.7 million through 1998 to retire the
outstanding Debentures. The Convertible Debentures are callable at the option
of the Company after five years (in certain circumstances, after three years).
The Debentures contain certain financial covenants, including restrictions on
additional debt, minimum net worth levels and a prohibition on the payment of
dividends.
Sequent leases certain equipment under five-year capital leases. These
lease terms require maintenance of certain financial ratios and generally
include a fair market value purchase option at the end of the lease. The cost
of equipment under capital leases was $4.1 million and $12.8 million at the
end of 1994 and 1993, respectively. Accumulated amortization was $3.8 million
and $10.3 million, respectively. These leased assets are pledged as security
for capital lease obligations.
Included in the above are capital leases arising from sale-leaseback
transactions whereby the Company has sold certain equipment to leasing
companies and then leased back the same equipment under capital leases. Such
transactions have resulted in gains which have been deferred. The Company
amortizes these gains over terms of the respective leases. Total deferred
gains at December 31, 1994 and January 1, 1994 were $122,000 and $651,000,
respectively. The short-term portion of these gains is reflected in the
balance sheets as accounts payable and other, while the long-term portion is
included in other accrued expenses.
Aggregate payments due on capital lease obligations, debentures and other
long-term debt subsequent to 1994 are: 1995 - $800,000, 1996 - $141,000, 1997
- - $5.1 million , and 1998 - $5.1 million.
6. OPERATING LEASE COMMITMENTS
Sequent is committed under operating leases for office space and
manufacturing facilities. Future minimum lease payments are as follows:
(In thousands)
1995 $ 14,771
1996 12,554
1997 10,903
1998 9,233
1999 8,731
2000 and thereafter $ 27,958
Rent expense for operating leases was $15.1 million, $14.7 million, and
$12.3 million in 1994, 1993, and 1992, respectively.
7. INCOME TAXES
Effective fiscal 1992 the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109").
Pre-tax income (loss) from continuing operations for the last three fiscal
years was taxed under the following jurisdictions:
(in thousands)
Fiscal Fiscal Fiscal
1994 1993 1992
Domestic $ 27,332 $ (3,989) $ 14,139
Foreign 11,468 (2,342) 1,745
Total $ 38,800 $ (6,331) $ 15,884
The provision (benefit) for income taxes was as follows:
Fiscal Fiscal Fiscal
1994 1993 1992
Current:
Federal $ 1,420 $ 611 $ 730
Foreign 3,769 697 1,002
State 96 -- 30
5,285 1,308 1,762
Deferred:
Federal -- -- --
Foreign 381 (115) (311)
State -- -- --
381 (115) (311)
Total provision $ 5,666 $ 1,193 $ 1,451
Deferred tax liabilities (assets) are comprised of the following components:
(in thousands)
Dec. 31, Jan. 1
1994 1994
Research and development $ 14,830 $ 15,509
Depreciation (112) 1,012
Other 1,408 543
Gross deferred tax liabilities 16,126 17,064
Net operating loss carryforwards:
Domestic (26,416) (31,894)
Foreign (9,051) (4,924)
Credit carryforwards (5,873) (4,612)
Expenses not currently deductible (4,735) (3,700)
Revenue currently taxable (746) (1,177)
Inventory basis differences (1,563) (1,499)
Restructuring costs (786) (2,608)
Accrued interest -- (373)
Gross deferred tax assets (49,170) (50,787)
Deferred tax asset valuation
allowance 32,999 33,297
Net deferred tax asset $ (45) $ (426)
The net deferred tax asset for all years is reflected in the consolidated
balance sheets as Intangible assets and other, net.
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate to income (loss)
from continuing operations due to the following:
Fiscal Fiscal Fiscal
1994 1993 1992
Statutory federal tax rate 35.0% (34.0)% 34.0%
State taxes, net of federal benefit 4.2 (4.3) 4.5
Tax provision (benefit) from Foreign
Sales Corporation (3.9) 9.6 (8.3)
Tax provision on foreign earnings (0.1) 9.2 --
Tax effect of fully reserving
changes in net deferred tax asset -- 38.3 --
Realized benefit from net
operating losses (20.9) -- (21.1)
Other, net 0.3 -- --
14.6% 18.8% 9.1%
The Company has recorded a deferred tax asset valuation allowance of $33
million and $33.3 million as of December 31, 1994 and January 1, 1994,
respectively. The net decrease in the valuation allowance for deferred tax
assets in 1994 by $298,000 relates to the utilization of domestic net
operating loss carryforwards during the year. This decrease was partially
offset by the acquisition of foreign net operating loss carryforwards in Japan
of approximately $7.2 million. The losses were acquired as a result of the
acquisition by Sequent of the remaining 51 percent interest in Panasequent in
April 1994. The benefit of the acquired net operating loss has been fully
reserved as of December 31, 1994.
As of December 31, 1994, Sequent has domestic net operating loss
carryforwards of $67.3 million for income tax reporting purposes, including
$37 million related to employee stock options as explained in the following
paragraph. The net operating loss carryforwards are available to offset
future taxable income and expire from 2000 to 2008. In addition, Sequent has
accumulated unused research and development credits of $3.9 million for income
tax purposes. These credits expire from 1998 to 2005. The Company also has
Alternative Minimum Tax Credits (AMT) which may be carried forward
indefinitely and certain state tax credits which expire from 1995-1999.
The Company may realize tax benefits as a result of the exercise of certain
employee stock options. For financial reporting purposes, any reduction in
income tax obligations as a result of these tax benefits is credited to paid-
in-capital. No benefits were recognized in 1994, 1993 or 1992.
An income tax provision has not been recorded for U.S. or additional
foreign taxes on undistributed earnings of foreign subsidiaries as the Company
has net operating loss carryforwards originating in many of these foreign
countries which are available to offset furture foreign income. In those
foreign subsidiaries without net operating loss carryforwards, the
undistributed earnings have been and will continue to be reinvested. The
Company believes that U.S. foreign tax credits would largely eliminate any
U.S. tax and offset any foreign tax if the undistributed earnings at some
future time become taxable in the U.S.
8. RESTRUCTURING CHARGES
During 1993, the Company provided for restructuring charges of $22.3
million in connection with management's decision to realign resources to
provide open distributed client/server computing solutions, professional
service consulting and architecture-led selling, marketing and engineering
strategies. These restructuring steps included a reduction in the Company's
workforce of approximately 5%. The realignment of resources is progressing
according to plan. The $2.0 million remaining accrual is primarily related to
obligations associated with closed facility leases and future extended
employee benefit costs. Management expects that the remaining accrual is
adequate and will be fully utilized according to the realignment plan.
9. SHAREHOLDERS' EQUITY
Common and Preferred Stock. In February 1993, the Company sold 3 million
shares of common stock in an equity offering. Net proceeds to the Company,
after deducting the underwriting discount and offering expenses, were
approximately $60 million. In connection with such offering, all outstanding
shares of preferred stock were converted into 3 million shares of common stock
and $9.9 million of the Debentures were converted into 626,000 shares of
common stock.
Stock Option Plans. Sequent grants options under compensatory and
noncompensatory plans to employees and nonemployees. Option prices generally
have been at 85% or greater of the fair market value of the common stock on
the date of grant. Employee and nonemployee options vest over varying time
periods as long as, in the case of employees, the optionee remains employed by
Sequent. Options generally expire ten years from the date of the grant.
The following table summarizes the stock option transactions:
(In thousands, except per share)
Shares Under
Option Price Range
Balance, December 28, 1991 4,610 $1.20 - $22.31
Options granted 1,687 $9.78 - $18.06
Options cancelled (429) $1.20 - $22.31
Options exercised (1,304) $1.20 - $15.51
Balance at January 2, 1993 4,564 $1.20 - $22.31
Options granted 968 $10.31 - $21.13
Options cancelled (454) $5.05 - $20.63
Options exercised (609) $1.20 - $15.41
Balance at January 1, 1994 4,469 $1.20 - $22.31
Options granted 1,214 $10.47 - $19.63
Options cancelled (603) $6.32 - $20.50
Options exercised (648) $1.20 - $17.85
Balance at December 31, 1994 4,432 $1.20 - $22.31
Exercisable at Dec. 31, 1994 1,523 $1.20 - $22.31
Available for grant at
Dec. 31, 1994 486
Employee Stock Purchase Plan. In September 1987, Sequent established an
Employee Stock Purchase Plan. Under the plan, Sequent is authorized to grant
rights to purchase up to 2,950,000 shares of common stock in a series of
eighteen-month offerings. At December 31, 1994, there were 333,000 shares
available for future purchase. Substantially all employees are eligible to
receive rights under the plan. The purchase price is the lesser of 85% of the
fair market value of the common stock on the date of grant or on the date of
purchase. During 1994, 1993 and 1992, Sequent issued 467,000, 535,000, and
544,000 shares under the plan, respectively.
10. GEOGRAPHIC SEGMENT INFORMATION
Information about the Company's foreign operations and export sales is
provided in the table below. Foreign revenue is that which is produced by
identifiable assets located in foreign countries while export revenue is that
which is generated by identifiable assets located in the United States.
(in thousands)
Fiscal Fiscal Fiscal
1994 1993 1992
Revenue:
United States $ 233,246 $ 197,724 $ 158,197
Foreign:
Europe 177,320 127,595 121,382
Other 24,624 19,953 16,138
Export:
Europe -- -- 5,599
Other 15,633 8,534 5,958
$ 450,823 $ 353,806 $ 307,274
Operating income (loss):
United States $ 27,773 $ 304 $ 20,440
Foreign:
Europe 9,444 (4,249) 833
Other 2,260 681 (723)
$ 39,477 $ (3,264) $ 20,550
Identifiable assets:
United States $ 321,857 $ 308,651 $ 228,056
Foreign:
Europe 105,232 61,963 46,459
Other 8,888 4,810 4,244
$ 435,977 $ 375,424 $ 278,759
Intercompany sales between geographic areas, primarily from the United
States to Europe, were $111.1 million during 1994, $81.6 million during 1993,
and $83.3 million during 1992.
11. FOREIGN CURRENCY EXPOSURE
A substantial portion of the Company's business is conducted overseas
through its foreign subsidiaries, primarily in Europe. This exposes the
Company to risks associated with foreign currency rate fluctuations which can
impact the Company's revenue and net income. To mitigate this risk the
Company enters into foreign currency transactions with foreign and domestic
banks on a continuing basis in amounts and timing consistent with the
underlying currency exposure so that gains and losses on these transactions
offset gains and losses on the underlying exposure. The Company does not
engage in any speculative trading activity. See Related Discussions in Notes
1 and 4.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments.
Cash and cash equivalents, restricted deposits, investments, receivables,
notes payable, accounts payable and other, current obligations under capital
leases and debt are reflected in the consolidated financial statements at fair
value because of the short-term maturity of these instruments.
The fair value of long-term obligations under capital leases was
estimated by discounting the future cash flows using market interest rates and
does not differ significantly from that reflected in the consolidated
financial statements.
Due to the private nature of the Company's Convertible Debentures and the
subjectivity of assessing the impact of the Company's future common stock
price, the fair value of long-term debt is judged to be materially the same as
that reflected in the financial statements.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Sequent Computer Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Sequent Computer Systems, Inc. and its subsidiaries at December 31, 1994 and
January 1, 1994, and the results of their operations and their cash flows for
each of the years ended December 31, 1994, January 1, 1994 and January 2,
1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
January 25, 1995
QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share amounts)
Total Gross Net Earnings (Loss)
Revenue Profit Income (Loss) Per Share
Fiscal 1994
First quarter $ 93,871 $ 45,017 $ 4,720 $ .15
Second quarter 108,797 48,579 7,155 .23
Third quarter 121,247 54,321 8,874 .28
Fourth quarter 126,908 60,677 12,385 .38
Year $ 450,823 $ 208,594 $ 33,134 $ 1.03*
Fiscal 1993
First quarter $ 77,574 $ 40,282 $ 3,405 $ .12
Second quarter 80,792 38,984 262 .01
Third quarter 91,139 43,451 3,939 .13
Fourth quarter 104,301 47,807 (15,130) (.50)
Year $ 353,806 $ 170,524 $ (7,524) $ (.26)*
*The sum of quarterly earnings per share does not equal annual earnings per
share as a result of the computation of quarterly versus annual average
shares outstanding.
MARKET INFORMATION (unaudited)
Sequent's Common Stock has been traded on the NASDAQ National Market
System since April 1987 under the symbol SQNT. The following table sets
forth, for the fiscal quarters indicated, the high and low sales prices for
the common stock as reported on the NASDAQ National Market System.
High Low
1994:
First quarter $ 16.13 $ 12.88
Second quarter $ 15.25 $ 11.25
Third quarter $ 18.00 $ 12.00
Fourth quarter $ 20.38 $ 16.75
1993:
First quarter $ 23.50 $ 17.00
Second quarter $ 23.13 $ 16.63
Third quarter $ 16.75 $ 11.75
Fourth quarter $ 19.75 $ 13.25
At December 31, 1994, there were approximately 1.2 million shareholders of
record of the Company's common stock and 31.4 million shares outstanding. The
Company has never paid cash dividends on its common stock. The Company
intends to retain earnings for use in its business and, therefore, does not
anticipate paying cash dividends in the foreseeable future. In addition, the
Company's bank line of credit agreement and the agreements relating to the
Company's Convertible Debentures prohibit payment of dividends without the
lenders' consent.
<TABLE>
SCHEDULE V
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
PROPERTY AND EQUIPMENT (1)
(In thousands)
<CAPTION>
Balance at Other Charges
Beginning of Additions Add (Deducts) End of
Period at Cost Retirements Describe Describe
<S> <C> <C> <C> <C> <C>
Year ended Jan. 2, 1993
Land $ 5,037 $ 0 $ 0 $ 0 $ 5,037
Operational equipment 52,738 39,417 17,043 0 75,112
Furniture and equipment 41,025 4,351 2,181 0 43,195
Leasehold improvements 4,892 3,750 132 0 8,510
$ 103,692 $ 47,518 $ 19,356 $ 0 $ 131,854
Year ended Jan. 1, 1994
Land $ 5,037 $ 0 $ 0 $ 0 $ 5,037
Operational equipment 75,112 36,471 15,688 0 95,895
Furniture and equipment
Leasehold improvements 8,510 2,951 268 0 11,193
$ 131,854 $ 44,412 $ 17,498 $ 0 158,768
Year ended Dec. 31, 1994
Land $ 5,037 $ 0 $ 0 $ 0 $ 5,037
Operational equipment 95,895 38,053 14,414 0 119,535
Furniture and equipment 46,643 14,875 7,646 0 53,872
Leasehold improvements 11,193 1,707 559 0 12,341
$ 158,768 $ 54,635 $ 22,619 $ 0 $190,785
(1) Depreciation and amortization is provided on a straight-line basis over
the estimated life as follows:
Operational equipment 3 to 5 years
Furniture and equipment 3 to 5 years
Leasehold improvements 5 to 10 years
SCHEDULE VI
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY AND EQUIPMENT
(In thousands)
Additions Retirements Other
Balance at Charged to Charged to Charges
Beginning of Costs and Other Accts. Add (Deducts) End of
Period Expenses Describe Describe Describe
Year ended Jan. 2, 1993
Operational equipment $ 24,464 $ 14,927 $ 7,072 $ 0 $ 32,319
Furniture and equipment 13,757 8,185 620 0 21,322
Leasehold improvements 1,349 1,476 100 0 2,725
$ 39,570 $ 24,588 $ 7,792 $ 0 $ 56,366
Year ended Jan. 1, 1994
Operational equipment $ 32,319 $ 18,501 $ 9,499 0 41,321
Furniture and equipment 21,322 6,777 643 0 27,456
Leasehold improvements 2,725 1,100 143 0 3,682
$ 56,366 $ 26,378 $ 10,285 $ 0 $ 72,459
Year ended Dec. 31, 1994
Operational equipment $ 41,321 $ 19,370 $ 5,060 0 55,631
Furniture and equipment 27,456 13,810 5,524 0 35,742
Leasehold improvements 3,682 1,613 97 0 5,198
$ 72,459 $ 34,793 $ 10,681 $ 0 $ 96,571
SCHEDULE VIII
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Additions
Balance at Charged to Charged to Write-offs Balance at
Beginning of Costs and Other Accts. Net of End of
Period Expenses Describe (1) Recoveries Describe
Year ended Jan. 2, 1993
Allowance for doubtful
accounts $ 1,320 $ 1,084 $ (34) $ 534 $ 1,836
Accumulated amortization
capitalized software $ 12,067 $ 8,736 $ 0 $1,612 $19,191
Year ended Jan. 1, 1994
Allowance for doubtful
accounts $ 1,836 $ 468 $ (10) $ 513 $ 1,781
Accumulated amortization
capitalized software $ 19,191 $ 11,714 $ 0 $ 1,993 $28,912
Year ended Dec. 31, 1994
Allowance for doubtful
accounts $ 1,781 $ 898 $ 9 $ 355 $ 2,333
Accumulated amortization
capitalized software $ 28,912 $ 12,778 $ 0 $ 0 $41,690
(1) Foreign currency translation adjustment
SCHEDULE IX
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SHORT-TERM BORROGINS
(In thousands)
Maximum Average Weighted
Weighted Amount Amount Average
Balance at Average Outstanding Outstanding Interest Rate
End of Interest During the During the During the
Period Rate Period Period Period (1)
Year ended Jan. 2, 1993
Notes payable to bank $ 28,645 7.9% $ 38,040 $ 28,712 9.6%
Year ended Jan. 1, 1994
Notes payable to bank $ 32,279 6.0% $ 32,279 $ 27,247 6.8%
Year ended Dec. 31, 1994
Notes payable to bank $ 59,437 5.5% $ 59,437 $ 44,772 5.6%
(1) The weighted average interest rate during the period is calculated
using monthly weighted averages.
SCHEDULE X
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In thousands)
Fiscal Year Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Depreciation and amortization:
Depreciation $ 31,822 $ 27,259 $ 24,588
Capitalized software amortization 12,778 11,714 8,736
Goodwill amortization 536 517 546
Total $ 45,136 $ 39,490 $ 33,870
Royalties 6,374 4,380 3,995
Advertising $ 11,674 $ 9,803 $ 6,964
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Sequent Computer Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 25, 1995 appearing on page 42 of the 1994 Annual Report to
Shareholders of Sequent Computer Systems, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of Financial Statement Schedules listed in
Item 14(a)(2) of this Form 10-K. In our opinion, these Financial Statement
Schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
(Price Waterhouse LLP)
Portland, Oregon
January 25, 1995
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT SHOWING CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING AND EARNINGS
PER AVERAGE COMMON SHARE
(in thousands, except per share amounts)
Three Months Ended Year Ended
Dec. 31, 1994 Dec. 31, 1994
Weighted average number
of common shares outstanding 31,211 30,784
Application of the "treasury
stock" method to the stock option
and employee stock purchase plans 1,916 1,344
Weighted average of common stock
equivalent shares attributable
to convertible debentures 639 639
Total common and common
equivalent shares, assuming
full dilution 33,766 32,767
Net income 12,385 33,134
Add:
Interest on convertible debentures,
net of applicable income taxes 189 758
Net income, assuming full dilution 12,574 33,892
Net income per common share,
assuming full dilution (A) $ 0.38 $ 1.03
(A) In accordance with generally accepted accounting principles, fully-
diluted earnings per share may not exceed primary earnings per share.
The difference between primary and fully-diluted earnings
due to rounding.
The computation of primary net income per common share is not included as
the computation can be clearly determined from the material contained in
this report.
SEQUENT COMPUTER SYSTEMS, INC. - SUBSIDIARIES
ENTERPRISE FINANCE COMPANY (Oregon)
SEQUENT EXPORT, INC. (Barbados)
CANADA:
SEQUENT COMPUTER SYSTEMS (CANADA) LIMITED
EUROPE:
SEQUENT COMPUTER SYSTEMS LIMITED (United Kingdom)
SEQUENT COMPUTER SYSTEMS A.B.(Sweden)
SEQUENT COMPUTER SYSTEMS GmbH (Germany)
SEQUENT COMPUTER SYSTEMS, S.A. (France)
SEQUENT COMPUTER SYSTEMS, B.V.(Netherlands)
SEQUENT COMPUTER SYSTEMS, spol. s r.o. (Czechoslavkia)
JAPAN:
SEQUENT COMPUTERS JAPAN CO., LTD.
ASIA:
SEQUENT COMPUTER SYSTEMS (N.Z.) LIMITED (New Zealand)
SEQUENT COMPUTER SYSTEMS AUSTRALIA PTY. LIMITED
SEQUENT COMPUTER SYSTEMS ASIA LIMITED (Hong Kong)
SEQUENT COMPUTER SYSTEMS (SINGAPORE) PTE. LIMITED
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-16428, 33-16463, 33-33338, 33-36836,
33-39315, 33-39657, 33-40941, 33-40942, 33-63972 and 33-63974) of
Sequent Computer Systems, Inc. of our report dated January 25, 1995
appearing on page 42 of the Annual Report to Shareholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedules,
which appears on page F-6 of this Form 10-K.
PRICE WATERHOUSE LLP
(Price Waterhouse LLP)
Portland, Oregon
March 22, 1995
POWER OF ATTORNEY
(Annual Report on Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer
and/or director of SEQUENT COMPUTER SYSTEMS, INC. (the "Company),
does hereby constitute and appointKARL C. POWELL, JR., JOHN McADAM
and ROBERT S. GREGG, and each of them, his or her true and lawful attorney
and agent to execute in his or her name (whether on behalf of the Company
or as an officer or director of the Company) the Company's Annual Report on
Form 10-K for year ended December 31, 1994 and any amendment thereto and
to file the same with the Securities and Exchange Commission; and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
DATED: March 15, 1995
KARL C. POWELL, JR.
DAVID R. HATHAWAY
ROBERT C. MATHIS
MICHAEL S. SCOTT MORTON
ROBERT W. WILMOT
ROBERT S. GREGG
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 105,728
<SECURITIES> 0
<RECEIVABLES> 135,904
<ALLOWANCES> 2,333
<INVENTORY> 48,698
<CURRENT-ASSETS> 300,809
<PP&E> 190,785
<DEPRECIATION> 96,571
<TOTAL-ASSETS> 435,977
<CURRENT-LIABILITIES> 132,341
<BONDS> 10,341
<COMMON> 0
0
314
<OTHER-SE> 290,881
<TOTAL-LIABILITY-AND-EQUITY> 435,977
<SALES> 341,504
<TOTAL-REVENUES> 450,823
<CGS> 164,991
<TOTAL-COSTS> 242,229
<OTHER-EXPENSES> 169,117
<LOSS-PROVISION> 898
<INTEREST-EXPENSE> 4,674
<INCOME-PRETAX> 5,666
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,134
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
AIRCRAFT LEASE
AGREEMENT
between
B & K TRANSPORTATION, INC.
and
SEQUENT COMPUTER SYSTEMS, INC.
AIRCRAFT LEASE AGREEMENT
This lease agreement ("Agreement") is entered into as of the 1st day of
October, 1993 (Effective Date), by and between B&K Transportation, Inc.
("Lessor") and Sequent Computer Systems, Inc. ("Lessee").
RECITALS
WHEREAS, Lessor and Lessee desire that Lessee lease a certain 1970
Gulfstream GII, N99ST, Serial No. 091 equipped with two (2) Royal Royce
model Spey MK511-8 engines Serial No.'s 8633 and 8644 ("Aircraft"),
pursuant to the terms of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. TERM AND TERMINATION
The term of this Agreement shall be three (3) years. This Agreement
shall also terminate upon any sale or transfer of ownership of the
Aircraft by Lessor. Any such sale or transfer of ownership shall be
upon mutual agreement of the parties.
2. LEASE OF AIRCRAFT
Lessor hereby leases the Aircraft to Lessee on an exclusive basis,
however Lessor may use the Aircraft at such times as are agreeable to
Lessee. Lessor agrees to pay for any operating costs associated with
Lessor's use of the Aircraft, including pilot fees, fuel and incidental
fees and shall also pay a fee of $650 per flight hour for any
unallocated tax, insurance and maintenance reserve.
Lessee may sublease the Aircraft on such terms as it shall determine,
provided, however, that Lessee shall remain primarily liable to Lessor
upon any such sublease.
3. LESSOR REPRESENTATION
Lessor represents and warrants that is has the requisite authority to
act as Lessor of the Aircraft and to enter into this Agreement. Lessor
further warrants that the Aircraft is currently registered, certificated
and airworthy under and in accordance with requirements of the Federal
Aviation Administration (FAA) and has been maintained in accordance with
the FAA Regulations found in 14 CFR, Part 91.
4. AIRCRAFT MAINTENANCE
During the term of this Agreement Lessee agrees, at its cost, to keep
the Aircraft in good and efficient working order, condition and repair,
to maintain the Aircraft in compliance with the manufacturer's
recommended service and maintenance specifications and with the
requirements of FAR Part 91, and to keep the Aircraft currently
registered, certificated and airworthy under and in accordance with
requirements of the FAA.
During the term of this Agreement Lessee agrees, at its cost, to keep
the Aircraft engines covered under a Engine Maintenance Systems Program
(EMS). Upon termination of this lease any rights and/or residuals
associated with such EMS shall pass to Lessor.
5. AIRCRAFT CHARGES
As rental for Lessee's use of the Aircraft, Lessee agrees to pay Lessor
as follows:
(a) $50,000 per month due and payable on the 1st day of each month
commencing October, 1993.
(b) Incidental expenses including, but not limited to, landing
charges, airport fees and customs charges incurred during the Lessee's
operation of the Aircraft when charged to Lessor and not paid
directly by Lessee.
(c) Any and all property taxes assessed with respect to the
Aircraft.
This is an irrevocable lease, and any present or future law to the
contrary notwithstanding, Lessee's obligation to pay Lessor or its
assigns all amounts due hereunder is absolutely unconditional and this
Lease shall not terminate by operation of law or otherwise, except as
set forth in Paragraph 1, nor shall Lessee be entitled to any abatement,
reduction, setoff, counterclaim, defense or deduction with respect to
any of the aircraft charges described herein, or any other amounts
payable by the Lessee hereunder, nor shall any obligations of Lessee
hereunder be affected for any reason whatsoever, no matter how, when, or
against whom asserted, arising or claimed; provided, however, that
Lessee may institute an independent action or claim against Lessor (but
not against any collateral assignee of Lessor) for any alleged breach
hereof. No collateral assignee of Lessor shall be liable to perform any
covenant of Lessor. The provisions of this paragraph are made expressly
for the benefit of Lessor and any assignee of Lessor.
6. INSURANCE
(a) During the term of this Agreement Lessee shall, at Lessee's
expense, maintain hull insurance on the Aircraft for the value
stated in Subparagraph (c), below, and comprehensive liability
coverage which shall name Lessor, MetLife Capital Corporation and
any pilot operating the Aircraft on behalf of Lessor as an
additional insured, including Lessor's use of the Aircraft, in an
amount of not less than $200,000,000 without right of subrogation
against Lessor. Certificates of the insurance will be furnished to
the Lessor upon request. The policy shall require the carrier to
provide to the insured, and Lessee, in turn, shall provide to
Lessor, not less than thirty (30) days written notice prior to any
cancellation or reduction in coverage.
(b) The Aircraft shall at all times be in the care, custody and control
of Lessor or Lessee.
(c) Lessor states the maximum replacement value of the Aircraft for
hull coverage purposes is $3,400,000. Hull insurance furnished as
provided in this Paragraph 6 shall be for the Aircraft's
replacement value at time of loss. Lessor agrees to make no
further claim against Lessee in excess of the maximum of
replacement value against Lessee for loss or damage to the Aircraft
arising out of any occurrence. Lessor will bear any insurance
deductible applicable to any loss.
7. INDEMNIFICATION
Lessee shall indemnify Lessor, including any of its assignees and
creditors and specifically including MetLife Capital Corporation
(collectively, the "Indemnitees") and shall hold such Indemnitees
harmless from and against all loss, liability, damages, costs and
expense (including without limitation attorneys' fees) incurred or
suffered by such Indemnitees as a result of or arising out of any and
all claims and demands relating in any way to Lessee's possession or use
of the Aircraft; provided that such indemnification shall not cover any
such loss, liability , damages, costs or expense attributable to
possession or use of the Aircraft by Lessor or any failure by it to
perform any of its obligations under this Agreement.
8. NOTICES
All notices hereunder shall be sent to the following addresses, via
U.S., First Class mail:
If to Lessor: B&K Transportation, Inc.
4311 SW Greenleaf Drive
Portland, OR 97221
If to Lessee: Sequent Computer Systems, Inc.
Attn: Ross Summers
15450 SW Koll Parkway
Beaverton, OR 97006
9. GOVERNING LAW AND ATTORNEYS FEES
This Agreement shall be governed by the laws of the state of Oregon.
Should a dispute arise with respect to any portion of this Agreement,
the prevailing party shall be entitled to its reasonable attorneys fees
and costs in any litigation.
10. TRUTH IN LEASING CLAUSE
LESSOR AND LESSEE UNDERSTAND THAT THE AIRCRAFT HAS BEEN MAINTAINED AND
INSPECTED DURING THE PERIOD PRECEDING THE EXECUTION OF THIS AGREEMENT,
COMMENCING UPON THE EFFECTIVENESS OF THE REGISTRATION OF THE AIRCRAFT
WITH THE FAA,
UNDER FEDERAL AVIATION REGULATIONS PART 91. LESSEE CERTIFIES THAT THE
AIRCRAFT WILL BE MAINTAINED AND INSPECTED WITH THE APPLICABLE
MAINTENANCE AND INSPECTION REQUIREMENTS OF THE FEDERAL AVIATION
REGULATIONS PART 91 AT ALL TIMES DURING THE TERM OF THIS AGREEMENT.
LESSOR AND LESSEE UNDERSTAND THAT LESSEE IS THE PARTY RESPONSIBLE FOR
THE OPERATIONAL CONTROL OF THE AIRCRAFT DURING THE PERIODS IN WHICH
LESSEE HAS POSSESSION OF THE AIRCRAFT UNDER THIS AGREEMENT. LESSEE
CERTIFIES THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH
APPLICABLE FEDERAL AVIATION REGULATIONS. LESSEE'S CORRECT NAME AND
ADDRESS APPEAR IN SECTION 8 ABOVE. AN EXPLANATION OF FACTORS BEARING ON
THE OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN
BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.
IN WITNESS WHEREOF, the parties have executed this Agreement as follows:
B&K TRANSPORTATION, INC. SEQUENT COMPUTER SYSTEMS, INC.
By:____________________________ By:________________________________
Title:___________________________ Title_______________________________
Date:___________________________ Date:_______________________________
AMENDMENT ONE
TO
AIRCRAFT LEASE AGREEMENT
BETWEEN
SEQUENT COMPUTER SYSTEMS, INC.
AND
B & K TRANSPORTATION, INC.
This Amendment One to the Aircraft Lease Agreement dated October 1, 1993
("Agreement") is entered into this ______ day of November, 1993, by and
between B & K Transportation, Inc. ("Lessor") and Sequent Computer Systems,
Inc. ("Lessee").
The parties agree as follows:
1. Paragraph 4 of the Agreement is deleted and replaced with the following:
"4. During the term of this Agreement Lessee agrees, at its cost, to
keep the Aircraft in good and efficient working order, condition
and repair, to maintain the Aircraft in compliance with the
manufacturer's recommended service and maintenance specifications
and with the requirements of FAR Part 91, and to keep the Aircraft
currently registered, certificated and airworthy under and in
accordance with the requirements of the FAA.
During the term of this Agreement Lessee agrees to pay $175.00 per
flight hour flown into an interest bearing Engine Restoration
Reserve (ERR). Payment into the ERR shall be made monthly on the
first day of the month following the calendar month in which the
hours are accrued. The ERR is to be used to defray any costs
associated with engine mid-life inspections, engine overhauls, and
thrust reverser overhauls. In the event that the ERR is
insufficient to cover any said costs incurred during the term of
this Agreement, Lessee agrees to pay the deficit. Upon termination
of this lease any residual associated with such ERR shall pass to
Lessor."
Except as expressly modified in this Amendment One, all terms and conditions
of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as follows:
B & K TRANSPORTATION, INC. SEQUENT COMPUTER SYSTEMS, INC.
By:_______________________________ By:______________________________
Title:______________________________ Title:___________________________
METLIFE CAPITAL CORPORATION
By:_______________________________
Title:______________________________
AMENDMENT TWO
TO
AIRCRAFT LEAST AGREEMENT
DATED OCTOBER 1, 1993
This Amendment Two to the Aircraft Lease Agreement dated October 1, 1993, is
entered into this _____ day of December, 1994, by and between B & K
Transportation, Inc. ("Lessor") and Sequent Computer Systems, Inc.
("Lessee").
The parties mutually agree as follows:
1. Performance Enhancement System
Lessee desires to purchase for Lessee's account a Performance
Enhancement System (the "System") for the Aircraft. The System is more
particularly described in the sales agreement attached hereto as Exhibit
1. Lessor hereby consents to the installation of the System on the
Aircraft, which shall completed in Q1, 1995.
2. Early Termination
Lessor agrees that should the Lease Agreement be terminated early for
any reason other than for Lessee's default, Lessor shall pay Lessee the
undepreciated value of the System within thirty (30) days of Lessee's
notification to Lessor of such value. Upon receipt of payment of the
undepreciated value, Lessor shall have the option of either purchasing
the System for cash at its then current fair market value or removing
the System from the Aircraft at Lessor's expense. In the event of a
termination of this Lease Agreement due to Lessee's default, Lessee
shall either remove the System from the Aircraft at Lessee's expense or
Lessor may elect to purchase the System from Lessee for cash at the
System's then current fair market value.
3. End of Lease Option
On the last day of the Term of this Lease Agreement, Lessor shall have
the option to purchase the System from Lessor for cash at the System's
then current fair market value or require Lessee to remove the System
from the Aircraft at Lessee's expense.
4. System Transfer
Upon Lessor's election to purchase the System under the terms of
paragraphs 2 or 3 above, and receipt of payment of the purchase price,
Lessee shall transfer to Lessor all right, title and interest of Lessee
in the System to Lessor in its then condition, without any
representations or warranty other than the warranty that the System is
not subject to any liens resulting from Lessee's acts.
5. Integration
Except as expressly modified herein, all other terms and conditions of
the Lease Agreement as amended remain in full force and effect, and this
Amendment Two is incorporated therein by reference.
IN WITNESS WHEREOF, each of the parties hereto have executed this Amendment
as follows:
B & K TRANSPORTATION, INC. SEQUENT COMPUTER SYSTEMS, INC.
By:______________________________ By:________________________________
Title:_____________________________ Title:_____________________________
Date:_____________________________ Date:_______________________________
