<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1997
REGISTRATION NO. 333-31189
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SEQUENT COMPUTER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
OREGON 93-0826369
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTIONOF IDENTIFICATION NUMBER)
INCORPORATION)
15450 S.W. KOLL PARKWAY
BEAVERTON, OREGON 97006-6063
TELEPHONE: (503) 626-5700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT S. GREGG
SR. VICE PRESIDENT--FINANCE AND LEGAL AND CHIEF FINANCIAL OFFICER
SEQUENT COMPUTER SYSTEMS, INC.
15450 S.W. KOLL PARKWAY
BEAVERTON, OREGON 97006-6063
TELEPHONE: (503) 626-5700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
MARGARET HILL NOTO JOHN A. FORE
STOEL RIVES LLP WILSON SONSINI GOODRICH & ROSATI
900 SW FIFTH AVENUE, SUITE 2300 PROFESSIONAL CORPORATION
PORTLAND, OREGON 97204 650 PAGE MILL ROAD
(503) 224-3380 PALO ALTO, CALIFORNIA 94304
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================================================================
PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 6,037,500 shares $21.375 $129,051,562.50 $39,106.53
=============================================================================================
</TABLE>
(1) Includes 787,500 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee based on the average of the high and low prices for the
Common Stock as reported by the Nasdaq National Market on July 7, 1997 in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus"). The U.S. Prospectus and
the International Prospectus are identical in all material respects except for
the cover page. The form of U.S. Prospectus is included in this Registration
Statement and is followed by the alternate page to be used in the
International Prospectus. The alternate page for the International Prospectus
included in this Registration Statement is labeled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with
the Securities and Exchange Commission under Rule 424(b).
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 28, 1997
5,250,000 Shares
[LOGO OF SEQUENT]
COMMON STOCK
-----------
OF THE 5,250,000 SHARES OF COMMON STOCK OFFERED HEREBY, 4,200,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 1,050,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 5,250,000 SHARES OF COMMON STOCK BEING OFFERED,
4,199,439 SHARES ARE BEING SOLD BY THE COMPANY AND 1,050,561 SHARES ARE
BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "SELLING SHAREHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES
BY THE SELLING SHAREHOLDERS. THE COMPANY'S COMMON STOCK IS LISTED ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "SQNT." ON , 1997, THE
LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $ PER SHARE. SEE "PRICE RANGE OF COMMON
STOCK."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
-------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $350,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
787,500 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
the Company will be $ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that the delivery of the Shares will be made on or
about , 1997, at the office of Morgan Stanley & Co. Incorporated, New York,
N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
COWEN & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING
SHAREHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER
OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference.......................... 2
Prospectus Summary....................................................... 3
The Company.............................................................. 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 9
Dividend Policy.......................................................... 9
Price Range of Common Stock.............................................. 9
Capitalization........................................................... 10
Selected Consolidated Financial Data..................................... 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 12
Business................................................................. 19
Management............................................................... 30
Selling Shareholders..................................................... 32
Certain United States Tax Consequences to Non-United States Holders...... 32
Underwriters............................................................. 36
Legal Matters............................................................ 39
Experts.................................................................. 39
Available Information.................................................... 39
</TABLE>
--------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-15627) pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), are incorporated in this Prospectus by reference: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1996; (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997; (iii) the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997; and (iv) the description of the Company's Common
Stock contained in the Company's Registration Statement on Form 8-A filed
under Section 12 of the Exchange Act, including any amendment or report
updating such description.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such document (all such documents, and the documents enumerated above,
being hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, including any beneficial owner, upon the written
or oral request of such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference therein. Requests for such copies
should be directed to Sequent Computer Systems, Inc., 15450 S.W. Koll Parkway,
Beaverton, Oregon 97006, Attention: Robert S. Gregg, Sr. Vice President-
Finance and Legal and Chief Financial Officer (telephone: (503) 626-5700). The
information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the Incorporated Documents.
--------------
Sequent(R), Symmetry(R) and DYNIX/ptx(R) are registered trademarks and
Parallel STREAMS, NUMA-Q, NTX-2000 and IQ-Link are trademarks of Sequent
Computer Systems, Inc. This Prospectus also refers to trademarks held by other
corporations.
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
--------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITERS."
--------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. Except as otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised. See "Underwriters."
THE COMPANY
Sequent is a leading provider of high-end scalable data-center-ready open
systems solutions for large organizations spanning diverse industries. The
Company pioneered the development of large-scale, Intel-based symmetric
multiprocessing ("SMP") systems in the 1980s and has installed over 8,000 SMP
systems worldwide. In 1996, Sequent was first to market with large-scale cache
coherent non-uniform memory access ("CC-NUMA") systems based on Intel's Pentium
Pro architecture and designed to run the UNIX operating system. Beginning in
1998, the Company plans to make the Microsoft Windows NT operating system
available on its NUMA-Q architecture. The Company's products are used primarily
as database servers for large on-line transaction processing ("OLTP") and
decision support systems ("DSS")/data warehousing applications built with
relational database management system ("RDBMS") software.
Sequent's business strategy is to provide enterprise-wide systems that enable
large organizations to manage and use complex information. Sequent leverages
the research and development efforts of industry-standard component suppliers
by using their products and applying Sequent's expertise to design and build
large, scalable data-center-ready open systems. Through technology and
marketing partnerships with industry-leading hardware and software vendors, the
Company develops and sells a broad range of offerings that address the needs of
large organizations for OLTP and DSS. Sequent sells its products and services
worldwide through its direct sales force, through distributors and,
increasingly, through arrangements with systems integrators. The Company's
consulting and professional services organization helps customers diagnose
their information technology problems and develop appropriate solutions based
on the Company's offerings. Sequent consultants and professional services
personnel provide value-added services both directly to customers and in
partnership with systems integrators.
RECENT DEVELOPMENTS
On July 14, 1997, the Company announced the signing of a master contract with
The Boeing Company ("Boeing") for the purchase of systems, primarily NUMA-Q,
from Sequent over a 12-month period. The Company has received initial purchase
orders from Boeing under the contract for $59 million, of which approximately
$36 million was included in revenues for the second quarter of fiscal 1997. The
master contract also provides Boeing with options to purchase an additional $46
million of products through March 1998.
THE OFFERING
<TABLE>
<S> <C>
U.S. Offering............................ 4,200,000 Shares
International Offering................... 1,050,000 Shares
Total................................... 5,250,000 Shares (including 4,199,439
Shares by the Company and
1,050,561 Shares by the Selling
Shareholders)
Common Stock to be outstanding after the
offering................................ 39,401,358 Shares(1)
For repayment of debt and general
Use of proceeds.......................... corporate purposes
Nasdaq National Market symbol............ SQNT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------- -----------------
DEC. 31, DEC. 30, DEC. 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product.......................... $341,504 $395,941 $414,418 $180,658 $259,989
Service.......................... 109,319 144,404 180,944 82,674 108,038
-------- -------- -------- -------- --------
Total revenue.................. 450,823 540,345 595,362 263,332 368,027
Net income........................ 33,134 35,073 7,771 3,904 9,305
Net income per share(2)........... $ 1.03 $ 1.04 $ .23 $ .12 $ .25
Weighted average number of common
and common equivalent shares
outstanding(2)................... 32,028 33,665 34,254 33,891 36,736
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, 1997
-----------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $192,301 $
Total assets........................................... 676,862
Notes payable.......................................... 78,889
Long-term obligations under capital leases and debt.... 13,711
Shareholders' equity................................... 392,315
</TABLE>
- -------
(1) Based on the number of shares outstanding as of June 28, 1997. Assumes the
conversion of $1 million principal amount of the Company's Convertible
Debentures into 63,241 shares of Common Stock by a Selling Shareholder.
Excludes an additional 300,000 shares of Common Stock reserved for issuance
upon exercise of a Warrant to purchase shares of Common Stock of the
Company, 512,190 shares of Common Stock reserved for issuance upon
conversion of the Company's Convertible Debentures, 9,542,060 shares of
Common Stock reserved for issuance under the Company's stock option and
incentive plans (of which options to purchase 8,045,311 shares were
outstanding as of June 28, 1997) and 2,505,810 shares reserved for issuance
under the Company's Employee Stock Purchase Plan. See Note 8 of "Notes to
Consolidated Financial Statements."
(2) For an explanation of the number of shares used to compute net income per
share, see Note 1 of "Notes to Consolidated Financial Statements." In
February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128)
which requires disclosure of basic earnings per share and diluted earnings
per share and is effective for periods ending subsequent to December 15,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Accounting Pronouncements."
(3) As adjusted to reflect the sale of 4,199,439 shares of Common Stock offered
by the Company hereby (at a public offering price of per share and
after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and the application of the net
proceeds therefrom and the conversion of $1 million principal amount of the
Company's Convertible Debentures into 63,241 shares of Common Stock by a
Selling Shareholder prior to the sale of such shares in the offering. See
"Use of Proceeds."
3
<PAGE>
THE COMPANY
Sequent Computer Systems, Inc. ("Sequent" or the "Company") is a leading
provider of high-end scalable data-center-ready open systems solutions for
large organizations spanning diverse industries. The Company pioneered the
development of large-scale, Intel-based symmetric multiprocessing ("SMP")
systems in the 1980s and has installed over 8,000 SMP systems worldwide. In
1996, Sequent was first to market with large-scale cache coherent non-uniform
memory access ("CC-NUMA") systems based on Intel's Pentium Pro architecture
and designed to run the UNIX operating system. Beginning in 1998, the Company
plans to make the Microsoft Windows NT operating system available on its NUMA-
Q architecture. The Company's products are used primarily as database servers
for large on-line transaction processing ("OLTP") and decision support systems
("DSS")/data warehousing applications built with relational database
management system ("RDBMS") software.
The success of large organizations in today's competitive markets is largely
dependent on their ability to identify and respond to changing business
conditions. Such organizations need to rapidly collect, organize, analyze,
process and store data throughout the enterprise to make effective business
decisions. The strategic use of information technology ("IT") is often
critical to creating and maintaining large centers of corporate data and
effectively manipulating it to gain competitive advantage. However, deploying
enterprise-wide data-center systems solutions is complex and often presents a
major challenge to corporate IT organizations, especially because of several
overlapping industry trends that have continually defined the market for such
systems.
Sequent's business strategy is to provide data-center-ready, enterprise-wide
systems that enable large organizations to manage and use complex information.
Sequent leverages the research and development efforts and expenditures of
industry-standard component suppliers by using their products and applying its
own expertise to design and build large, scalable data-center-ready open
systems.
Sequent sells its products and services worldwide through its direct sales
force, through distributors and, increasingly, through arrangements with
systems integrators. Sequent's direct sales efforts are focused on large
organizations with the goal of establishing and maintaining long-term "major
account" relationships. The Company maintains strategic relationships with
leading hardware and software providers that enable it to deliver complete
mission-critical IT solutions to its customers.
Sequent has enhanced its competitive position by providing consulting and
professional services to help large organizations identify complex IT problems
and develop solutions that combine Sequent's products with those of its RDBMS
partners and other open systems hardware and software providers. The Company's
high-end professional services capability has enabled Sequent to shift the
focus of its business from selling systems to offering solutions that combine
systems and services. Sequent's solution-oriented expertise is geared to
RDBMS-based offerings in three basic categories: custom OLTP; packaged
business solutions (financial, manufacturing and human resources
applications); and large DSS/data warehousing applications. Over the past five
years, the knowledge and expertise of Sequent's professional services
organization have become key differentiators for the Company, enabling Sequent
to win a growing number of projects where the sale of large systems follows or
accompanies the sale of significant professional services.
During 1996, Sequent made substantial investments in the continuing
development of its NUMA-Q technology and the expansion of its direct sales and
professional services organizations. From December 1995 to December 1996, the
Company increased the number of major account executives in its direct sales
organization by 54%, and increased the number of consultants in its
professional services organization by 38%. In late 1996, the Company shipped
its first NUMA-Q 2000 systems.
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 Prospectus to the "Company" or "Sequent" refer to
the prior Delaware corporation and 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.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus and in the documents
incorporated by reference herein, the following Risk Factors should be
carefully considered in evaluating the Company and its business before
purchasing the Common Stock offered by this Prospectus. The sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in this Prospectus contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the Risk Factors set forth below and elsewhere in
this Prospectus.
Fluctuations in Quarterly Results. The Company's results of operations have
fluctuated significantly from period to period, including on a quarterly
basis. The Company has historically experienced strong fourth-quarter orders
and revenue and relatively weak first-quarter orders and revenue from
customers. A significant portion of the Company's products are shipped in the
quarter in which the orders are received. The Company's backlog has
historically been relatively small and is not necessarily indicative of future
sales levels. As is the case with many high technology companies, a
disproportionately large percentage of a quarter's total sales occur in the
last month and weeks and days of such quarter. The Company's quarterly sales
and operating results, therefore, depend in large part on the volume and
timing of orders received during the quarter, which are difficult to forecast.
Accordingly, the Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. As a result, any
significant shortfall of demand for the Company's products and services in
relation to the Company's expectations could have an immediate material
adverse effect on the Company's business, operating results and financial
condition. Further, as the Company's sales to major accounts continue to
increase, the Company expects that a limited number of large sales may account
for a more significant portion of revenue in some quarters, creating greater
exposure to possible fluctuations in revenue. In addition, larger orders
typically involve substantially longer selling cycles, which makes quarterly
forecasts of sales more difficult.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company or
its competitors, market acceptance of new products (including its NUMA-Q
products), the timing of sales to large accounts, pricing pressures, the mix
of products sold and the mix between product and service revenue, lengthy
sales cycles, capital spending levels by customers, shipment interruptions due
to quality problems and general economic conditions. Because of all of the
foregoing factors, it is possible that in some future quarters the Company's
operating results will be below the expectations of securities analysts or
investors. In such event, the market price of the Company's Common Stock could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Distribution."
Recent Introduction of NUMA-Q; Product Concentration. During 1996, the
Company made significant investments in the continuing development of its
NUMA-Q products and the expansion of its sales organization to market this new
product line. Shipments of NUMA-Q products began in late 1996, and from late
1996 through the second quarter of 1997 the Company sold approximately 240
NUMA-Q systems. By the second quarter of 1997, a majority of the Company's
sales were from NUMA-Q products, and the Company expects to become
increasingly dependent on revenue from sales of these products. Accordingly,
broad customer acceptance of NUMA-Q products is critical to the Company's
success. NUMA-Q is a new architecture that has not yet been widely implemented
and has not yet gained widespread customer acceptance. Because the Company has
only recently begun shipping NUMA-Q products, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in NUMA-Q products, or, if discovered, such errors will be
successfully corrected in a timely and cost-effective manner. The Company's
business, operating results and financial condition could be materially
adversely affected if NUMA-Q products fail to gain customer acceptance, sales
of these products are lower than anticipated by the Company, competitive
products are introduced or significant hardware or software errors are found
in these systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
5
<PAGE>
Competition. The computer business is intensely competitive. The Company
competes with a number of companies that have considerably greater financial,
marketing, technical and operating resources. The Company competes with, among
others, Hewlett-Packard Company ("Hewlett-Packard"), Digital Equipment
Corporation ("DEC"), International Business Machines Corporation ("IBM") and
Sun Microsystems, Inc. ("Sun"), which have large installed customer bases in
many of the markets addressed by the Company. All of these companies offer
products that compete with Sequent's products. Silicon Graphics, Inc. ("SGI")
and Data General Corporation ("Data General") have already introduced products
based on CC-NUMA technology and other companies are believed to be developing
products based on CC-NUMA technology. Most also have large professional
services organizations and alliances with many hardware and software vendors
with which Sequent has strategic relationships. No assurances can be given
that the Company will have the financial resources, marketing, distribution
and service organizations, technical capabilities or depth of key personnel
necessary to compete successfully in the future. See "Business--Competition."
Product Development. The computer industry is subject to rapid and
significant technological change and frequent introductions of new competitive
products. To remain competitive, the Company will be required to continue to
invest substantially in research and development, enhance its existing
products (including its NUMA-Q products), introduce new competitive products
and maintain price/performance advantages in its selected markets. There can
be no assurance that it will be able to respond adequately to unexpected
technological changes in its markets or that future products will be
successful.
Strategic Relationships. The Company has developed strategic relationships
with leading hardware and software providers and is engaged in joint research
and product development and marketing arrangements with these companies. The
Company's ability to enhance its existing NUMA-Q products and develop new
products is significantly dependent on maintaining and strengthening the
Company's relationships with leading providers, particularly Intel Corporation
("Intel"), Microsoft Corporation ("Microsoft") and Oracle Corporation
("Oracle"). Many of these hardware and software vendors also have significant
development and marketing relationships with the Company's competitors. The
Company plans to continue its strategy of developing technology and marketing
relationships with these and other leading hardware and software vendors.
There can be no assurance that the Company will be successful in its ongoing
strategic relationships or that the Company will be able to find additional
suitable business relationships as it develops new products. Any failure to
continue or expand such relationships could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company's strategic partners, most of which have
significantly greater financial and marketing resources than the Company, will
not develop and market products in competition with the Company in the future,
discontinue their relationships with the Company or form or strengthen
arrangements with the Company's competitors. See "Business--Platform Overview"
and "--Strategic Relationships with Leading Vendors."
Supply of Components. Certain components used by the Company, including
Intel microprocessors, custom VLSI gate arrays and intelligent high-speed data
switches (IQ-Link), are only available from single sources. The Company
attempts to reduce the risk of supply interruption through greater inventory
positions in sole-source components. Other components, such as memory chips,
have occasionally been in short supply throughout the industry. Failure to
obtain sole-source or other parts and components in adequate quantities on a
timely basis could increase costs or delay shipments and have an adverse
effect on the Company's revenues and net income. The adverse effect of a
supplier's failure to meet Sequent's requirements may be intensified by the
fact that a large portion of orders are received, and the products shipped, at
the end of a quarter. See "Business--Manufacturing."
Capitalization of Software Development Costs. The Company has made and
continues to make significant investments in software development. The amount
of expenditures that qualify for capitalization under Statement of Financial
Accounting Standards No. 86 "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed" may vary from period to period as
software projects progress through the development life-cycle. These
variations could impact the Company's operating results in any given period.
Unamortized software development costs were approximately $63.2 million at
June 28, 1997. If technological developments
6
<PAGE>
or other factors were to jeopardize the realizability of such assets, the
Company could be required to write off all or a substantial portion of such
capitalized values, which could have a material adverse effect on the
Company's results of operations for the period in which the write-off occurs.
See "Management's Discussion of Financial Condition and Results of Operations"
and Note 1 of "Notes to Consolidated Financial Statements."
Inventory Obsolescence; Prepaid Licenses. The Company expects sales of
Symmetry products to continue to decline as NUMA-Q products gain market
acceptance. Symmetry inventory net of reserves was $32.6 million at June 28,
1997. Based upon current sales forecasts, the Company expects that
substantially all of the Symmetry inventory will be sold and that no
significant write-offs in excess of reserves will be required. However, if
Symmetry sales decline more rapidly than expected, write-offs of the Symmetry
inventory could be required, which could have a material adverse effect on the
Company's results of operations. The Company has entered into agreements with
various software vendors under which the Company has prepaid licenses and
royalties for software to be sold by the Company. Prepaid licenses and
royalties were approximately $27 million at June 28, 1997. Such prepaid
amounts are generally realized by charging cost of products sold for software
sales by the Company. The Company's ability to realize these prepaid amounts
is contingent on customer demand for the software and sales of the software to
Sequent's customers. Management presently believes that software sales will be
sufficient to recover the prepaid amount. However, no assurance can be made
that such prepaid amounts will be realized. See "Risk Factors--Recent
Introduction of NUMA-Q; Product Concentration."
Uncertain Protection of Intellectual Property. The Company's success and
ability to compete is dependent in part upon its internally developed
technology. While the Company relies on patent, trademark, trade secret and
copyright law to protect its technology, the Company believes that factors
such as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
The Company generally enters into confidentiality or license agreements with
its employees, consultants and vendors and generally seeks to control access
to and distribution of its proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. There can be no assurance that the steps taken by
the Company will prevent misappropriation of its technology or that such
confidentiality and license agreements will be enforceable.
Periodically, the Company has received, and may receive in the future,
notices of claims of infringement of other parties' proprietary rights.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted or prosecuted against the
Company or that any such assertions or prosecutions (including the costs of
litigation) will not materially adversely affect the Company's business,
operating results and financial condition. If any claims or actions are
asserted against the Company, the Company may seek to license a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available on reasonable terms or at
all. See "Business--Patents and Licenses."
Availability of Key Personnel; Expansion of Sales Force. The Company's
continued growth depends upon its ability to attract, integrate and retain
qualified management, technical and sales and support personnel for its
operations. During 1996 and the first quarter of 1997, the Company
significantly expanded its sales force, from 174 sales personnel as of
December 31, 1995 to 247 sales personnel as of June 28, 1997. Competition for
such personnel is intense, and the Company may find it difficult to attract
such personnel in a timely and efficient manner or to retain and integrate
such personnel. This competition could adversely affect the Company's ability
to expand and manage its sales force to sell its NUMA-Q products and
professional services to large accounts and to develop marketing relationships
with large systems integrators. See "Business--Consulting and Professional
Services" and "--Sales and Distribution."
Manufacturing Risks. The Company's products are designed and manufactured
for high reliability. If flaws in design, production, assembly or testing
occur on the part of Sequent or its suppliers, Sequent may experience
7
<PAGE>
a rate of failure in its products that results in substantial repair or
replacement costs and potential damage to its reputation. There can be no
assurance that Sequent's efforts to monitor, develop and implement appropriate
test and manufacturing processes for its products will be sufficient to permit
Sequent to avoid a rate of failure in its products that results in substantial
delays in shipment, significant repair or replacement costs and potential
damage to Sequent's reputation, any of which could have a material adverse
effect on Sequent's business, operating results and financial condition. See
"Business--Manufacturing."
International Operations. The Company derived 55% of its total revenues from
foreign customers in the year ended December 28, 1996, a substantial portion
of which was denominated in currencies other than U.S. dollars. Most of the
Company's international sales are in Europe. International operations are
subject to various risks, including exposure to currency fluctuations, the
greater difficulty of administering business abroad and the need to comply
with a wide variety of international and United States export laws and
regulatory requirements. See "Business--Sales and Distribution."
Volatility of Stock Prices. There has been a history of significant
volatility in the market prices of the Common Stock of electronics companies,
including that of the Company, and it is likely that the market price of the
Company's Common Stock will continue to be subject to significant
fluctuations. Factors such as the timing and market acceptance of new product
introductions by the Company, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the electronics industry and general economic conditions may
have a significant impact on the market price of the Company's Common Stock.
In addition, the equity markets in recent years have experienced significant
price and volume fluctuations that have affected the market prices of
technology companies and that have often been unrelated to the operating
performance of such companies. See "Price Range of Common Stock."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,199,439 shares of
Common Stock offered by the Company hereby (at a public offering price of $
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company) are estimated to be
approximately $ million ($ million if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any proceeds from
the sale of shares by the Selling Shareholders.
The purpose of the offering by the Company is to obtain additional capital
to fund the growth of the Company. The Company intends to use approximately
$31 million of the net proceeds to repay borrowings under its revolving credit
agreement with a group of banks. Such revolving line of credit is unsecured,
bears interest either (i) at the prime rate or (ii) at the option of the
Company, at one month LIBOR plus (a) 1.25% per annum with respect to
borrowings up to $30.0 million and (b) 1.50% per annum with respect to
borrowings in excess of $30.0 million (7.2% as of June 28, 1997) and extends
through May 29, 1998. At June 28, 1997, $30.8 million was outstanding under
the line of credit. The Company intends to use the balance of the net proceeds
for general corporate purposes, including working capital, product development
and capital expenditures. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. The Company has no current plans,
agreements or commitments with respect to any such acquisition or investment,
and the Company is not currently engaged in any negotiations with respect to
any such transaction. Pending such uses, the net proceeds will be invested in
investment grade, short-term, interest-bearing securities and the Company may
use a portion of the net proceeds from the offering to collateralize its
proposed facilities financing transactions. See "Business--Facilities."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock,
and 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.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SQNT." The following table sets forth, for the periods indicated, the
high and low closing sale prices for the Common Stock as reported by the
Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
Fiscal 1995:
First Quarter............................................... $20 5/8 $15 9/16
Second Quarter.............................................. 18 5/8 14 7/16
Third Quarter............................................... 25 1/4 17 7/8
Fourth Quarter.............................................. 19 1/2 14 3/8
Fiscal 1996:
First Quarter............................................... 14 7/8 10 5/16
Second Quarter.............................................. 14 7/8 11 7/8
Third Quarter............................................... 13 7/8 10 7/8
Fourth Quarter.............................................. 18 1/4 12 1/2
Fiscal 1997:
First Quarter............................................... 20 14 1/2
Second Quarter.............................................. 21 5/8 14 3/4
Third Quarter (through July 29, 1997)....................... 20 7/8
</TABLE>
On July 29, 1997, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $ per share. At June 28, 1997, the
Company had approximately 995 holders of record of the Common Stock.
9
<PAGE>
CAPITALIZATION
The following table sets forth the notes payable and capitalization of the
Company as of June 28, 1997, and as adjusted to reflect the sale of 4,199,439
shares of Common Stock offered by the Company hereby (at a public offering
price of $ per share and after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
application of the net proceeds therefrom, and the conversion of $1 million
principal amount of Convertible Debentures into 63,241 shares of Common Stock
by a Selling Shareholder.
<TABLE>
<CAPTION>
JUNE 28, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Notes payable............................................ $ 78,889 $
======== ====
Current obligations under capital leases and debt........ $ 8,953 $
======== ====
Long-term obligations under capital leases and debt...... $ 13,711 $
-------- ----
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized; 1,500,000
shares of Series A Convertible authorized; no shares
outstanding........................................... -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized; 35,133,000 shares outstanding; 39,401,358
shares outstanding as adjusted(1)..................... 351
Paid-in capital........................................ 326,309
Retained earnings...................................... 70,020
Foreign currency translation adjustment................ (4,365)
-------- ----
Total shareholders' equity........................... 392,315
-------- ----
Total capitalization............................... $406,026 $
======== ====
</TABLE>
- --------
(1) Shares outstanding exclude 300,000 shares of Common Stock reserved for
issuance upon exercise of a Warrant to purchase shares of Common Stock of
the Company, 512,190 shares of Common Stock reserved for issuance upon
conversion of the Company's Convertible Debentures that will not be
converted in connection with the offering, 9,542,060 shares of Common
Stock reserved for issuance under the Company's stock option and incentive
plans (of which options to purchase 8,045,311 shares were outstanding as
of June 28, 1997), and 2,505,810 shares of Common Stock reserved for
future issuance under the Company's Employee Stock Purchase Plan. See Note
8 of "Notes to Consolidated Financial Statements."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations
data and balance sheet data for the Company. The statement of operations data
for each of the five fiscal years ended December 28, 1996, and the related
balance sheet data are derived from the Company's consolidated financial
statements, which have been audited by Price Waterhouse LLP, independent
accountants. The selected consolidated financial data shown below as of and
for the six months ended June 29, 1996 and June 28, 1997 have been derived
from the unaudited consolidated financial statements of the Company which, in
the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of such interim
periods. The selected historical consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company included in this Prospectus. The results for the six months ended June
28, 1997 are not necessarily indicative of results that may be expected for
the full year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------------ ------------------
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28, JUNE 29, JUNE 28,
1993 1994 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Product................ $252,093 $280,579 $341,504 $395,941 $414,418 $180,658 $259,989
Service................ 55,181 73,227 109,319 144,404 180,944 82,674 108,038
-------- -------- -------- -------- -------- -------- --------
Total revenue.......... 307,274 353,806 450,823 540,345 595,362 263,332 368,027
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold.. 109,780 133,294 164,991 188,232 197,702 86,147 129,045
Cost of service
revenue............... 39,845 49,988 77,238 107,721 139,983 64,501 80,997
Research and
development........... 28,125 28,944 35,047 40,923 53,733 24,527 31,918
Selling, general and
administrative........ 108,974 122,537 134,070 154,950 191,069 82,667 109,833
Restructuring charges.. -- 22,307 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses.............. 286,724 357,070 411,346 491,826 582,487 257,842 351,793
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 20,550 (3,264) 39,477 48,519 12,875 5,490 16,234
Interest income
(expense), net......... (3,735) (1,655) (1,172) 1,133 (180) 427 (2,036)
Other income (expense),
net.................... (931) (1,412) 495 (2,325) (2,019) (564) (574)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes.................. 15,884 (6,331) 38,800 47,327 10,676 5,353 13,624
Provision for income
taxes.................. 1,451 1,193 5,666 12,254 2,905 1,449 4,319
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 14,433 $ (7,524) $ 33,134 $ 35,073 $ 7,771 $ 3,904 $ 9,305
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share(1)............... $ .55 $ (.26) $ 1.03 $ 1.04 $ .23 $ 0.12 $ 0.25
======== ======== ======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares
outstanding(1)......... 26,120 29,335 32,028 33,665 34,254 33,891 36,736
</TABLE>
<TABLE>
<CAPTION>
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28, JUNE 28,
1993 1994 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 86,914 $134,156 $168,468 $214,749 $183,428 $192,301
Total assets............ 278,759 375,424 435,977 503,923 612,009 676,862
Notes payable........... 28,645 32,279 59,437 41,146 59,925 78,889
Long-term obligations
under capital leases
and debt............... 24,034 10,906 10,341 9,106 16,503 13,711
Shareholders' equity.... 172,502 243,488 291,195 353,188 374,809 392,315
</TABLE>
- --------
(1) For an explanation of the number of shares used to compute net income per
share, see Note 1 of "Notes to Consolidated Financial Statements." In
February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128)
which requires disclosure of basic earnings per share and diluted earnings
per share and is effective for periods ending subsequent to December 15,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Accounting Pronouncements."
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to the other information in this Prospectus and in the documents
incorporated by reference herein, the following discussion should be carefully
considered in evaluating the Company and its business before purchasing the
Common Stock offered by this Prospectus. The sections entitled "Risk Factors"
and "Business" in this Prospectus contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected in
the forward-looking statements as a result of the factors set forth below,
under "Risk Factors" and elsewhere in this Prospectus.
RECENT DEVELOPMENTS
On July 14, 1997, the Company announced the signing of a master contract
with The Boeing Company ("Boeing") for the purchase of systems, primarily
NUMA-Q, from Sequent over a 12-month period. The Company has received initial
purchase orders from Boeing under the contract for $59 million, of which
approximately $36 million was included in revenues for the second quarter of
fiscal 1997. The master contract also provides Boeing with options to purchase
an additional $46 million of products through March 1998.
RESULTS OF OPERATIONS
YEAR ENDED 1996 COMPARED WITH YEAR ENDED 1995AND YEAR ENDED 1995 COMPARED
WITH YEAR ENDED 1994
Overview. Total revenue was $595.4 million in 1996 compared to $540.3
million in 1995 and $450.8 million in 1994. The Company recorded net income in
1996 of $7.8 million, compared to $35.1 million in 1995 and $33.1 million in
1994. The Company's total revenue for 1996 represented a 10% increase over
1995 and is attributed to significant increases in customer and professional
service revenues in 1996 over 1995. The Company's service revenue increased
25% in 1996 over 1995 as a result of a growing number of customer installation
bases and related service contracts, as well as an increase in the number of
project-based sales. The decrease in net income in 1996 compared to 1995 was
the result of the heavy investment made in 1996 to bring the next-generation
NUMA-Q product to market in December 1996 and expand the sales and
professional services organizations to leverage the capability of the new
technology.
12
<PAGE>
The following table sets forth certain operating data as a percentage of
total revenue:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
DEC. 31, DEC. 30, DEC. 28,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
End-user products.................................. 70.6% 69.4% 68.5%
OEM products....................................... 5.1 3.9 1.1
Service............................................ 24.3 26.7 30.4
----- ----- -----
Total revenue.................................... 100.0 100.0 100.0
Cost of products and service......................... 53.7 54.8 56.7
----- ----- -----
Gross profit......................................... 46.3 45.2 43.3
Operating expenses:
Research and development........................... 7.8 7.5 9.0
Selling, general and administrative................ 29.7 28.7 32.1
----- ----- -----
Total operating expenses......................... 37.5 36.2 41.1
----- ----- -----
Operating income..................................... 8.8 9.0 2.2
Interest income (expense), net....................... (0.3) 0.2 0.0
Other income (expense), net.......................... 0.1 (0.4) (0.4)
----- ----- -----
Income before provision for income taxes............. 8.6 8.8 1.8
Provision for income taxes........................... 1.3 2.3 0.5
----- ----- -----
Net income........................................... 7.3% 6.5% 1.3%
===== ===== =====
</TABLE>
Revenue. End-user product revenue increased $32.8 million, or 9%, from 1995
to 1996 and $56.7 million, or 18%, from 1994 to 1995. These increases were
primarily in the Company's North American and Asia-Pacific geographic regions.
The revenue growth rate from 1995 to 1996 was impacted by the Company's
product transition from its Symmetry line to its next-generation NUMA-Q
systems, especially in the second half of 1996. Despite the ongoing demand for
Symmetry systems that are binary compatible with the NUMA-Q technology, the
awareness of the pending release of the new product adversely affected
Symmetry sales during 1996. Volume shipments of NUMA-Q began late in the
fourth quarter of 1996.
As anticipated, total OEM revenue continued to decline in 1996 compared to
1995 and 1994 due to decreases in revenue from Unisys. Total OEM revenue in
1996 and 1995 was $6.5 million and $20.9 million, respectively, compared to
$23.1 million in 1994.
During 1996 and 1995, the Company's customer and professional service
revenue continued to increase in dollar amount and as a percentage of total
revenue primarily due to the growth in customer installation bases and
associated customer service/maintenance contracts, as well as a focus on
selling more solutions.
The Company has continued to benefit from its significant investment in
developing worldwide sales and distribution channels. International revenue as
a percentage of total revenue was 55% in 1996 and 1995, increasing from 48% in
1994. The majority of the international revenue was from Europe (particularly
the United Kingdom), with the balance coming from Asia-Pacific and Canada.
Cost of Sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
DEC. 31, DEC. 30, DEC. 28,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cost of products sold as a percentage of product
revenue........................................ 48% 48% 48%
Cost of service as a percentage of service
revenue........................................ 71 75 77
Total cost of sales as a percentage of total
revenue........................................ 54 55 57
</TABLE>
13
<PAGE>
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 1996
and 1995 primarily due to lower margin service increasing as a percentage of
total revenue. As planned, the Company invested in expanding its professional
service organization, which has contributed to the overall increase of cost of
service as a percentage of service revenue. The Company increased headcount in
its professional service organization by approximately 38% in 1996.
Research and Development.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
DEC. 31, DEC. 30, DEC. 28,
1994 1995 1996
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Research and development expense.................. $35.0 $40.9 $53.7
As a percentage of total revenue.................. 8% 8% 9%
Software costs capitalized........................ $19.1 $23.4 $34.2
</TABLE>
Research and development expense increased 31% in 1996 compared to 1995 and
17% in 1995 compared to 1994. The Company continued to invest significantly in
its new NUMA-Q architecture and software development, in addition to ongoing
enhancements to existing products. Consistent with management's plans, the
NUMA-Q products began shipping in late 1996. Research and development costs as
a percentage of total revenue were approximately 9% in 1996, compared to 8%
for 1995 and 1994. Management intends to make significant investments during
1997 as it continues to enhance its NUMA-Q product line.
Capitalized software amortization was approximately $20.0 million, $16.6
million and $12.8 million in 1996, 1995 and 1994, respectively. The Company
has continued to increase its focus on software design for computing solutions
and its next-generation products, resulting in greater investments in software
development and products.
Selling, General and Administrative.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
DEC. 31, DEC. 30, DEC. 28,
1994 1995 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Selling, general and administrative.................. $134.1 $155.0 $191.1
As a percentage of total revenue..................... 30% 29% 32%
</TABLE>
The Company's selling, general and administrative costs increased both in
dollars and as a percentage of revenue in 1996, as the Company made
significant investments in its worldwide sales force for successful delivery
of NUMA-Q at the end of 1996. During the year, the Company increased the
number of major account executives by 54% worldwide.
Interest and Other, Net.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
DEC. 31, DEC. 30, DEC. 28,
1994 1995 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Interest income...................................... $3.5 $ 5.3 $ 3.0
Interest expense..................................... $4.7 $ 4.2 $ 3.2
Other income (expense), net.......................... $0.5 $(2.3) $(2.0)
</TABLE>
14
<PAGE>
Interest income is primarily generated from restricted deposits held at
foreign and domestic banks, short-term investments and cash and cash
equivalents. Interest expense includes costs related to convertible
debentures, foreign currency hedging loans, interim short-term borrowings and
capital lease obligations.
Other expense consists primarily of net gains and losses on sales of assets
and discount on sale of receivables.
Income Taxes. The Company provided $2.9 million for income taxes in 1996 on
a net profit before tax of $10.7 million. The difference between the statutory
rate and the effective tax rate is principally due to the benefit from the
Company's foreign sales corporation. The 1996 effective tax rate of 27.2%
compares to effective rates of 25.9% in 1995 and 14.6% in 1994.
THREE AND SIX MONTH PERIODS ENDED JUNE 28, 1997 COMPARED WITH THREE AND SIX
MONTH PERIODS ENDED JUNE 29, 1996, RESPECTIVELY
Overview. Total revenue was $210.7 million and $368.0 million for the second
quarter and first six months of 1997, respectively. Total revenue for the same
periods in 1996 was $142.6 million and $263.3 million. Net income was $8.6
million and $9.3 million for the second quarter and first six months of 1997,
respectively, compared to $3.3 million and $3.9 million for the same periods
in 1996. Total revenue increases of 48% and 40% for the second quarter and
first six months of 1997 over the same periods in 1996 included product
revenue increases of 55% and 44%. Product revenue increases were the result of
substantial growth in sales of the Company's NUMA-Q products in 1997, as well
as continued increases in major account project sales to new and existing
customers.
The following table sets forth certain operating data as a percentage of
total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
End-user products..... 73.3% 68.9% 69.5% 66.2%
OEM products.......... -- 1.0 1.1 2.4
Service............... 26.7 30.1 29.4 31.4
----- ----- ----- -----
Total revenue....... 100.0 100.0 100.0 100.0
Cost of products and
service................ 57.3 57.1 57.1 57.2
----- ----- ----- -----
Gross profit............ 42.7 42.9 42.9 42.8
----- ----- ----- -----
Operating expenses:
Research and develop-
ment................. 7.8 8.6 8.7 9.3
Selling, general and
administrative....... 28.3 31.2 29.8 31.4
----- ----- ----- -----
Total operating ex-
penses............. 36.1 39.8 38.5 40.7
----- ----- ----- -----
Operating income........ 6.6 3.1 4.4 2.1
Interest income (ex-
pense), net............ (0.4) 0.2 (0.5) 0.2
Other (expense), net.... (0.2) (0.1) (0.2) (0.2)
----- ----- ----- -----
Income before provision
for income taxes....... 6.0 3.2 3.7 2.1
Provision for income
taxes.................. 1.9 0.9 1.2 0.6
----- ----- ----- -----
Net income.............. 4.1% 2.3% 2.5% 1.5%
===== ===== ===== =====
</TABLE>
Revenue. Strong growth in the Company's total revenue included substantial
increases in product and service revenue. Product revenue increased 55% in the
second quarter of 1997 over the second quarter of 1996, primarily resulting
from strong sales of NUMA-Q products in 1997. The NUMA-Q product line,
formally
introduced into the marketplace in the first quarter of 1997, represented
approximately 67% of product revenue
15
<PAGE>
during the second quarter of 1997. The Company's strong growth in product
sales that included service contracts contributed to significant increases in
total service revenue. Service revenue increased approximately 31% in the
second quarter and first six months of 1997 over the same periods in 1996. As
a percentage of total revenue, however, service revenue decreased, which was
mainly the result of the substantial increases in product revenue. Also
contributing to the Company's overall revenue growth in 1997 over 1996 were
sales from its foreign operations, particularly from the European
subsidiaries. The Company's international operations increased 47% in the
second quarter of 1997 over the second quarter of 1996, with the majority of
the increase coming from operations in the United Kingdom. As expected, OEM
revenue has continued to decline as a percentage of total revenue as the
Company has focused its investment into its direct sales organization and
indirect channels other than OEM partners.
Cost of Sales. The factors influencing gross margins in a given period
generally include unit volumes (which affect economies of scale), product
configuration mix, changes in component and manufacturing costs, product
pricing and the mix between product and service revenue. The Company's overall
product gross margins were approximately 49% and 52% for the three month and
six month periods ended June 28, 1997 and June 29, 1996, respectively. These
decreases in product margins were mainly due to a significant increase in
third party product sales during the second quarter of 1997 which yield lower
gross margins than standard Sequent products. The percentage of sales from the
Company's higher margin NUMA-Q products continued to increase during the
second quarter of 1997, as well as in the first six months of 1997. The
Company's overall gross margins were affected by lower margin sales of the
Company's Symmetry products, which, as expected, are continuing to represent a
lower percentage of the Company's overall sales.
Research and Development. During the first half of 1997, research and
development expenses increased in total as the Company continues to invest
heavily in enhancements to its NUMA-Q product technology. Total research and
development expenses increased 34% and 30% in the second quarter and first six
months of 1997 over the same periods in 1996. As a percentage of revenue,
however, these expenses have decreased slightly due to the Company's
significant revenue growth in 1997 compared to 1996. Research and development
costs capitalized were approximately $16.8 million and $16.2 million in the
first six months of 1997 and 1996, respectively, but decreased slightly in the
second quarter of 1997 over the same period in 1996, mainly as a result of a
major software release in the second quarter of 1997. For the remainder of
1997, the Company plans to continue making significant investments related to
enhancements in its NUMA-Q product line and development of a product offering
featuring the Windows NT operating system.
Selling, General and Administrative. Selling, general and administrative
expenses increased 34% and 33% in the second quarter and first six months of
1997, respectively, over the same periods in 1996. These increases were
primarily due to costs associated with the Company's sales organization,
mainly from commissions on increased revenues in 1997 and from other expenses
resulting from the substantial increase in headcount during 1996. However, as
a percentage of revenue, these expenses have decreased for the same periods in
1997 compared to 1996. In the second quarter and first six months of 1997,
selling, general and administrative expenses were 28% and 30% of total
revenue, respectively. In 1996, selling, general and administrative expenses
were 31% for both the second quarter and first six months.
Interest and Other, Net. Interest income is primarily generated from
restricted deposits held at foreign and domestic banks, short-term investments
and cash and cash equivalents. Interest expense includes costs related to
convertible debentures, foreign currency hedging loans, interim short-term
borrowing and capital lease obligations. Interest income for the second
quarter and first six months of 1997 was $0.8 million and $1.5 million,
respectively, and $0.7 million and $1.6 million for the same periods in 1996.
Interest expense for the same periods in 1997 and 1996 was $1.6 million and
$3.5 million and $0.5 million and $1.2 million, respectively. The Company's
use of funds for its continued investment in its NUMA-Q product line,
expansion of the sales channel and related increase in short-term borrowings
were factors in the increase in interest expense in 1997 over 1996.
Other expense consists primarily of net realized and unrealized foreign
exchange gains and losses and discount on sale of receivables.
16
<PAGE>
Income Taxes. The provision for income taxes includes benefits related to
the Company's foreign sales corporation and the utilization of available
domestic and foreign tax attributes carried forward from prior years. The
effective tax rate for the second quarter and first six months of 1997 was 32%
compared to 27% for the corresponding periods in 1996 and the overall annual
effective tax rate for 1996. The increase in the rate is due mainly to limited
tax attribute carryforwards available in fiscal year 1997 and the dilution of
permanent tax benefits such as the foreign sales corporation due to
differences in pre-tax earnings year over year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $192.3 million at June 28, 1997 compared to $183.4
million at December 28, 1996. The Company's current ratio at June 28, 1997 and
December 28, 1996 was 1.7:1 and 1.9:1, respectively.
Although net cash provided by operating activities for the year ended
December 28, 1996 totaled $64.1 million, cash and cash equivalents decreased
by $24.0 million. The Company continued to make significant investments in
property and equipment ($80.6 million), inventory ($13.6 million) and
capitalized software ($34.2 million), primarily related to product and
software development associated with its new NUMA-Q product line. Other
investments included approximately $27 million in software licenses resulting
from a long-term strategic partner alliance, of which approximately $15
million is included in prepaid royalties and other current assets. Other
sources of funds included net proceeds of stock issuances ($11.0 million),
notes payable ($18.8 million) and capital lease transactions ($14.7 million).
Net cash provided by operating activities during the six months ended June
28, 1997 totaled $40.8 million and cash and cash equivalents increased by
$16.7 million. The Company continued to make significant investments in
property and equipment ($32.1 million), inventories ($7.8 million) and
capitalized software ($16.8 million), primarily related to product and
software development associated with its new NUMA-Q product line. Sources of
funds primarily included net proceeds from notes payable ($19.0 million) and
issuances of stock ($11.0 million).
The Company has a $20 million receivable sales facility with a group of
banks. At June 28, 1997, accounts receivable in the accompanying consolidated
balance sheet is net of $20.0 million received by the Company under this
agreement to sell its domestic accounts receivable.
The Company maintains an $80 million revolving line of credit agreement. The
line is unsecured and extends through May 29, 1998. The line contains certain
financial covenants and prohibits the Company from paying dividends without
the lenders' consent. At June 28, 1997, $30.8 million was outstanding under
the line of credit.
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 $54.2 million, of which $46.3 million was
outstanding at June 28, 1997 (based on currency exchange rates on such date).
The Company also maintains a miscellaneous borrowing arrangement with a
foreign bank. At June 28, 1997, $1.7 million was outstanding under this
agreement.
Management expects that current funds, funds from operations and the bank
lines of credit, together with the net proceeds from the sale of Common Stock
offered hereby, will provide adequate resources to meet the Company's
anticipated operational cash requirements for at least the next 12 months.
17
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128)
which requires disclosure of basic earnings per share and diluted earnings per
share and is effective for periods ending subsequent to December 15, 1997. The
pro forma effect of adoption of SFAS 128 is included in the table below.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
-------------------------- -----------------
DEC. 31, DEC. 30, DEC. 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AS REPORTED:
Net income per share............ $ 1.03 $ 1.04 $ .23 $ .12 $ .25
Weighted average number of
common and common equivalent
shares outstanding............. 32,028 33,665 34,254 33,891 36,736
PRO FORMA:
Basic net income per share...... $ 1.08 $ 1.09 $ .23 $ .12 $ .27
Weighted average number of com-
mon shares outstanding......... 30,783 32,228 33,641 33,405 34,678
Diluted net income per share.... $ 1.03 $ 1.04 $ .23 $ .12 $ .25
Weighted average number of
common and common equivalent
shares outstanding............. 32,349 34,114 34,419 33,906 37,114
</TABLE>
18
<PAGE>
BUSINESS
In addition to the other information in this Prospectus and in the documents
incorporated by reference herein, the following discussion should be carefully
considered in evaluating the Company and its business before purchasing the
Common Stock offered by this Prospectus. The sections entitled "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in this Prospectus contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected in
the forward-looking statements as a result of the factors set forth below,
under "Risk Factors" and elsewhere in this Prospectus.
Sequent is a leading provider of high-end scalable data-center-ready open
systems solutions for large organizations spanning diverse industries. The
Company pioneered the development of large-scale, Intel-based symmetric
multiprocessing ("SMP") systems in the 1980s and has installed over 8,000 SMP
systems worldwide. In 1996, Sequent was first to market with large-scale cache
coherent non-uniform memory access ("CC-NUMA") systems based on Intel's
Pentium Pro architecture and designed to run the UNIX operating system.
Beginning in 1998, the Company plans to make the Microsoft Windows NT
operating system available on its NUMA-Q architecture. The Company's products
are used primarily as database servers for large on-line transaction
processing ("OLTP") and decision support systems ("DSS")/data warehousing
applications built with relational database management system ("RDBMS")
software.
Sequent sells its products and services worldwide through its direct sales
force, through distributors and, increasingly, through arrangements with
systems integrators. Sequent's direct sales efforts are focused on large
organizations with the goal of establishing and maintaining long-term "major
account" relationships. The Company maintains strategic relationships with
leading hardware and software providers that enable it to deliver complete
mission-critical information technology ("IT") solutions to its customers.
Sequent has enhanced its competitive position by providing consulting and
professional services to help large organizations identify complex IT problems
and develop solutions that combine its products with those of its RDBMS
partners and other open systems hardware and software providers. The Company's
high-end professional services capability has enabled Sequent to shift the
focus of its business from selling systems to offering solutions that combine
systems and services. Sequent's solution-oriented expertise is geared to
RDBMS-based offerings in three basic categories: custom OLTP; packaged
business solutions (financial, manufacturing and human resources
applications); and large DSS/data warehousing applications. Over the past five
years, the knowledge and expertise of Sequent's professional services
organization have become key differentiators for the Company, enabling Sequent
to win a growing number of projects where the sale of large systems follows or
accompanies the sale of significant professional services contracts.
During 1996, Sequent made substantial investments in the continuing
development of its NUMA-Q technology and the expansion of its direct sales and
professional services organizations. From December 1995 to December 1996, the
Company increased the number of major account executives in its direct sales
organization by 54%, and increased the number of consultants in its
professional services organization by 38%. In late 1996, the Company shipped
its first NUMA-Q 2000 systems.
MARKET OVERVIEW
The success of large organizations in today's competitive markets is largely
dependent on the ability of these organizations to identify and respond to
changing business conditions. Such organizations need to rapidly collect,
organize, analyze, process and store data throughout the enterprise to make
effective business decisions. An organization's strategic use of IT is often
critical to creating and maintaining large centers of corporate data and
effectively manipulating it to gain competitive advantage. However, deploying
enterprise-wide data-center systems solutions is complex and often presents a
major challenge to corporate IT organizations, especially because of several
overlapping industry trends that have continually defined the market for such
systems. Following is a discussion of some of these trends:
19
<PAGE>
RDBMS and OLTP. In traditional mainframes, data entered into the system was
typically stored in highly structured flat files called hierarchical
databases. During the 1980s, use of these rigid database structures gave way
to RDBMS software whose flexible structure enabled the rapid deployment of
large database applications for OLTP. In contrast to the batch data entry and
processing characteristic of early mainframe computing, OLTP captures data
from transactions as they are executed and adds or updates records in the
database in real time. The market demand for OLTP computing systems,
particularly those using RDBMS technology, spans a wide variety of industries
and applications and has increased dramatically as more businesses require
instantaneous processing of information.
DSS/Data Warehousing. The wealth of historical data that has been amassed by
large organizations over the past several decades has given rise to widespread
demand for technology to access that data and convert it into useful
information. More recently, the growth of the Internet-based technologies and
the proliferation of multimedia databases are creating new demand for ways to
cull information from multiple types of data. In response to these demands,
decision support systems have become one of the fastest growing segments of
the high-end, open systems computing market. These systems combine relational
database software and large, scalable servers with powerful front-end software
tools that enable individual users to comb through very large volumes of data
and extract specific information such as market trends and customer buying
patterns. Today's data warehouses are large databases constructed specifically
to optimize the accessibility of the data for decision support applications.
Recently, RDBMS vendors such as Oracle and Informix Corporation ("Informix")
have added parallel query capabilities to their software, dramatically
enhancing their performance on systems with parallel architectures such as SMP
and CC-NUMA.
The Internet and Electronic Commerce. Today, virtually every large
organization has a corporate intranet of some sort and an emerging presence on
the World Wide Web. Over the next several years, the projected growth of web-
based infrastructures is expected to be driven by the expansion of messaging
and electronic commerce, requiring larger and more scalable servers. Connected
to millions of PCs and network computers by one vast network, these servers
will manage very large volumes of on-line transactions involving tens of
thousands of concurrent users and millions of multi-megabyte-sized chunks of
text, voice, video and other complex data types. In an effort to better
understand the complexities of their markets, the dynamics of their business
and the needs of their customers, Sequent believes that organizations will
depend on massively-scalable servers to search through large databases for
information and insights that can provide a competitive advantage.
Client/Server and Network Computing. The simplest form of client/server
architecture is a two-tier configuration consisting of a server that manages
data connected to desktop clients (PCs or workstations) that can access the
data to run various applications that reside on the desktop. Typically, these
servers are inexpensive, low-end (one- to four-processor) systems manufactured
in volume by makers of desktop systems. Three-tier client/server architectures
typically employ a large, back-end database server connected to one or more
application servers connected to multiple desktops. In this arrangement,
desktop users have access to both applications and data which do not reside on
their system. During the first half of this decade, both configurations were
used in the widespread development of distributed client/server architectures
where data and applications were distributed across multiple servers connected
to desktop users by a single network. Recently, however, the difficulties in
implementing and managing distributed client/server environments have slowed
this trend and resulted in a renewed emphasis on the development of
centralized client/server environments where data resides on a single larger
server. Complementing this shift toward centralization is the recent emergence
of the "network computer," an inexpensive ("thin") desktop client with no
permanent storage capacity that is designed to run applications and access
data stored on very large ("fat") servers. The use of such network computing
devices is expected to increase demand for larger back-end servers.
UNIX and Windows NT. Beginning in the early 1980s, the UNIX operating
system, originally developed by AT&T in the 1960s, was adopted by a growing
number of computer manufacturers and gradually won recognition as an emerging
standard for open systems computing. However, efforts by various vendor
consortiums failed to achieve the development of a single standard UNIX to
replace the multiple versions of
20
<PAGE>
UNIX being developed and marketed by individual companies. In 1993, Microsoft
introduced Windows NT as an alternative to UNIX. During the past four years,
Windows NT has won widespread acceptance as the preferred operating system for
network and applications servers, while UNIX remains the operating system of
choice for large data-center applications. Despite its current limitations,
many industry experts believe that over time Windows NT will acquire the
scalability, robustness and functionality necessary to replace UNIX and become
the de facto standard for enterprise-wide computing. As IT directors plan
long-term IT strategies for their organizations, they are confronted with the
dilemma of which operating systems to employ and how to migrate to those
operating systems and interrelate the various operating systems throughout the
enterprise.
Scalable System Architectures. A scalable computer architecture is one that
allows a user to increase the power and performance of a single system by
adding more processors, memory and storage. Massively parallel processor
systems ("MPP") can scale up to hundreds of processors in a loosely coupled
architecture, where each processor has its own memory and I/O. The fact that
each processor node has its own copy of the operating system software makes
MPP systems difficult to program and limits their use in large commercial
applications. In contrast, SMP systems employ a tightly-coupled architecture
in which two or more processors are connected by a system "bus" that enables
them to share memory and I/O. A single copy of the operating system software
assigns the workload across all the processors so that to a user the system
appears to contain only one very powerful processor. As a result, SMP systems
are much easier to program than MPP systems and have become widely used for
large-scale commercial applications. Today, the size and complexity of
applications of large organizations have begun to require greater performance
than can be achieved by scaling traditional SMP architectures.
Existing technologies limit the amount of data that can travel across the
system bus in an SMP system. As processors have become more powerful, this
physical constraint limits the number of processors the bus can accommodate.
The CC-NUMA architecture overcomes this limitation by linking multiple SMP
boards together with intelligent, high-speed interconnects that allow
processors on one board to access data on other boards. Because each board has
its own memory and I/O, CC-NUMA systems share many of the scalability benefits
of MPP systems. In CC-NUMA systems, however, the interconnects between the
boards are designed to create a single coherent view of one large contiguous
memory out of the distributed pieces of physical memory on each board so that
to a user the system appears to contain only one very powerful processor. As a
result, CC-NUMA systems deliver all the benefits associated with shared memory
in traditional SMP systems and represent a powerful extension of SMP
architecture.
Open Systems. Historically, large organizations relied exclusively on
computing equipment based on 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 limited to the choices offered by a specific
vendor. "Open systems," by contrast, refers to hardware and software that
adheres to industry standard specifications, allowing users to select and
integrate the best products from different vendors to create large networks
and client/server computing environments, facilitating the flow of information
within and between organizations. Many 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.
SEQUENT'S BUSINESS STRATEGY
Sequent's business strategy is to provide enterprise-wide systems that
enable large organizations to manage and use complex information. Sequent
leverages the research and development efforts of industry-standard component
suppliers by using their products and applying Sequent's expertise to design
and build large, scalable data-center-ready open systems. Through technology
and marketing partnerships with industry-leading hardware and software
vendors, the Company develops and sells a broad range of offerings that
address the needs of large organizations for OLTP and DSS. Sequent sells its
products and services worldwide through its direct sales force, through
distributors and, increasingly, through arrangements with systems integrators.
The Company's consulting
21
<PAGE>
and professional services organization helps customers diagnose their
information technology problems and develop appropriate solutions based on the
Company's offerings. Sequent consultants and professional services personnel
provide value-added services both directly to customers and in partnership
with systems integrators. The key elements of Sequent's strategy are the
following:
Solving Complex IT Problems. Sequent concentrates on understanding the
business objectives and information technology needs of its customers at all
organizational levels. The Company's consultants and professional services
personnel work closely with the customer's in-house IT organization, or its
designated systems integrator, to diagnose complex IT problems, then design
and implement open solutions that support the customer's business objectives
and are aligned with the customer's strategic goals. Specific areas of focus
include IT strategy and planning, enterprise infrastructure, core business
applications, decision support, migration from proprietary to open systems and
project management.
Providing Scalable Systems Architecture. Sequent invests significant
resources in developing scalable systems architecture. Sequent believes its
NUMA-Q 2000 systems provide exceptional price/performance and scalability for
data-center applications. Designed to run the same operating system and
applications as the Company's Symmetry products, NUMA-Q 2000 extends the
benefits of traditional SMP technology within an architecture that is designed
to scale up to 252 microprocessors. Using an SMP "quad" with four Intel
Pentium Pro processors as the basic building block, NUMA-Q 2000 uses a
proprietary intelligent high-speed switch called IQ-Link that is designed to
combine up to 63 quads in a system that, from a user's perspective, looks and
behaves like a single SMP system.
Compared to standard SMP and mainframe systems, the performance and
scalability benefits of the NUMA-Q architecture enhance performance and
flexibility of transaction-intensive and decision support applications.
Sequent believes that its NUMA-Q architecture has the capability to outperform
traditional mainframes. In addition, global shared memory and other SMP-like
characteristics of the NUMA-Q architecture enable customers to develop and
deploy large, centralized client/server applications that are difficult and
costly to implement in a mainframe environment.
Sequent was the first to bring Intel-based CC-NUMA systems to market,
shipping the first NUMA-Q 2000 systems to customers in late 1996. During
Sequent's second quarter of fiscal 1997, ended on June 28, 1997, revenue from
NUMA-Q 2000 sales surpassed revenue from Symmetry sales and accounted for a
majority of the Company's total product revenue.
Sequent is committed to maintaining its leadership position in CC-NUMA
systems, including upgrading to new Intel processor generations as they become
available.
Leveraging Strategic Relationships. Sequent devotes substantial resources to
strategic marketing and product development relationships with those companies
it believes offer the best open systems technologies. These relationships,
combined with the open systems knowledge and expertise of the Company's
consulting and professional services organization, allow Sequent to deliver
complete solutions that combine the best available products and services.
Sequent has strategic relationships with Intel for joint research and
development of future computer systems building blocks; with major providers
of RDBMS software, including Oracle, Informix and Computer Associates
International, Inc.; with leading suppliers of third-party applications
software such as Oracle, PeopleSoft, Inc. ("PeopleSoft") and Baan Company N.V.
("Baan"); with Microsoft for the development of future platforms running the
Windows NT operating system; with suppliers of communications and network
software; with emerging suppliers of client/server application development
products; and with industry-leading systems management and tools vendors.
Maintaining Commitment to Open Systems. Sequent's open system architecture
leverages industry standards whenever possible, including the use of Intel
processors, the UNIX and Windows NT operating systems, and standard network
and communications interfaces. Sequent systems are designed to operate in a
multi-vendor environment and support a wide variety of third-party software,
including open RDBMSs, packaged applications and decision support tools and
applications.
22
<PAGE>
Supporting Advancement of UNIX and Windows NT. Sequent is committed to the
advancement of both UNIX and Windows NT in the data center. As a leading
supplier of large UNIX systems for data-center applications, Sequent continues
to invest in the development of its DYNIX/ptx operating system, which the
Company believes is superior in many respects--including scalability and
availability--to other competing versions of UNIX. In addition, the Company is
making substantial investments to assure the scalability, availability and
functionality of Windows NT on NUMA-Q systems. The Company is also working on
future data-center products with dynamic partitioning that will enable
customers to deploy UNIX and Windows NT applications on the same system.
Sequent believes that the ability to provide customers with a clear
interoperability plan or a credible migration path from UNIX to Windows NT in
the data center will be an important differentiator for the Company.
Protecting Customers' Investments. Sequent strives to help its customers
protect and leverage their investments in open systems technology. The
Company's products are designed for interoperability with other vendors'
products. Through successive generations of Intel microprocessors, Sequent has
maintained backward compatibility of its newest Symmetry products with earlier
models incorporating older processors. There are Symmetry systems installed at
customer sites that incorporate Intel 386, 486 and Pentium processors in the
same system. Although the CC-NUMA architecture is different from the SMP
architecture, Sequent designed its NUMA-Q 2000 product to run the same
operating system and applications as its Symmetry products, allowing customers
to move applications from Symmetry to NUMA-Q 2000. During the second quarter
of 1997, the Company introduced technology that enables customers to combine
NUMA-Q 2000 systems with their existing Symmetry systems in a high-
availability cluster.
PLATFORM OVERVIEW
Commercial computing applications in large organizations require massive
processing power, memory and disk storage capacity. These requirements often
increase exponentially with the number of users and the volume of data
associated with the application. In addition, many applications are so
critical to an organization's business that any unplanned downtime resulting
from hardware or software failures can be extremely costly.
Built for customers with large-scale, mission-critical computing
requirements, Sequent's Symmetry and NUMA-Q 2000 products provide high
performance and functionality that are designed to scale up as the customer's
needs grow. Both Symmetry and NUMA-Q 2000 are based on industry standards and
are designed for easy interoperability with other computing hardware in an
open systems environment. Both systems can also be clustered to provide high
availability for mission-critical applications.
In Company comparisons, NUMA-Q 2000 systems have demonstrated performance up
to ten times as fast as Symmetry systems with the same number of processors.
Based on recent customer and partner benchmarks in which NUMA-Q 2000 systems
have been compared to SMP and MPP systems manufactured by the Company's
competitors, the Company believes that NUMA-Q 2000 delivers the best
performance and scalability for large-scale RDBMS-based applications on open
systems available today.
Hardware Architecture. The Company's Symmetry line of Intel-based SMP
systems, introduced in 1987 and currently based on Intel's Pentium
architecture, scales from two to 30 processors, with up to 3.5 gigabytes of
shared memory and up to 1.7 terabytes of disk storage. The Company's NUMA-Q
2000 systems are designed to scale up to 63 quads (252 Pentium Pro processors)
and currently ship in configurations ranging from one to eight quads, with up
to four gigabytes of memory and one terabyte of disk storage per quad. The
NUMA-Q architecture overcomes the scalability limitations of Symmetry's
single-bus SMP architecture by joining together multiple SMP boards with an
intelligent, high-speed interconnect called IQ-Link to create systems with a
single, coherent view of memory and a single instance of the operating system
running across all the quads in the system.
23
<PAGE>
In Sequent's NUMA-Q architecture, a quad is a four-way Pentium Pro processor
SMP baseboard with features and enhancements added by Sequent to improve its
performance and reliability as a component in large data-center systems. IQ-
Link, developed by Sequent in cooperation with Vitesse Semiconductor
Corporation ("Vitesse Semiconductor"), uses a gallium arsenide data pump to
transfer data between quads at the rate of one gigabyte per second. IQ-Link
has the ability to monitor the Pentium Pro processor bus on a specific quad
and respond to requests for data contained in memory on a different quad. IQ-
Link first examines its own large cache to see if the requested data has been
temporarily stored there. If it does not find the data in its own cache, it
puts a request out to the memory on other quads. All of this activity happens
transparently to the database and application software. To an end user, the
system looks and behaves like a large SMP system.
Over the years, Sequent's scalable architectures have enabled 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 processor enhancements, storage
technology, communications and user-interface enhancements. These enhancements
directly benefit customers by enabling them to upgrade their installed Sequent
systems without altering source programs, retraining users or replacing
hardware and software not directly affected by the upgrade.
Operating System Software. Both Symmetry and NUMA-Q 2000 systems are
designed to run DYNIX/ptx, Sequent's highly scalable version of the UNIX
operating system. Core technology in the kernel of DYNIX/ptx enables Sequent
systems to provide highly scalable performance as processors are added.
Sequent has also made a significant commitment to support Microsoft's
Windows NT operating system. Sequent currently sells low-end and mid-range
Windows NT systems (NTX 2000) manufactured by NCR Corporation, typically as
application servers in large applications where Symmetry or NUMA-Q 2000
systems are installed as database servers running DYNIX/ptx. Sequent is
currently working closely with Microsoft to develop Windows NT-based NUMA-Q
2000 servers designed to optimize the capabilities of Windows NT for scalable
applications that use either shared memory or distributed memory. The Company
plans to introduce its first Windows NT-based NUMA-Q 2000 systems in 1998.
Sequent believes that Windows NT will eventually rival UNIX operating
systems and may even replace UNIX as the preferred open systems operating
environment in large corporate data centers. Accordingly, the Company is
working with Microsoft on the development of NUMA-Q products that will enable
customers to deploy DYNIX/ptx and Windows NT on the same system and
dynamically partition the number of quads allocated to each operating system.
Communications Products. The Company's systems support communications
products that allow Symmetry and NUMA-Q 2000 systems to interconnect with
other systems in multi-vendor system environments. These products include
hardware that connects to wide and local area networks (WANs and LANs) and
software that supports industry standard protocols.
Sequent's communications products are differentiated by Parallel STREAMS, a
feature of the Company's DYNIX/ptx operating system which significantly
enhances their performance and scalability for standard high-level protocols
and low-level communications media, including Ethernet, Token Ring, fiber
distributed data interface (FDDI) and synchronous lines.
In addition to supporting open systems protocols such as TCP/IP, Open
Systems Interconnections (OSI) and X.25, Sequent products can communicate
directly with IBM and DEC systems via Systems Network Architecture (SNA) or
DECnet/LAT protocols, respectively.
Sequent's NUMA-Q 2000 systems employ several high speed communications
connections, including 100 Megabit-per-second Ethernet, CDDI (a copper wire
version of FDDI), ATM, and high speed Synchronous E1/T1, which offer an order
of magnitude increase to the bandwidth of previous offerings.
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<PAGE>
STRATEGIC RELATIONSHIPS WITH LEADING VENDORS
Since Sequent was formed in 1983, the Company has built its business around
open systems. Consequently, Sequent maintains strategic relationships with
industry-leading manufacturers of components, systems and software.
Increasingly, the Company also resells its partners' products in connection
with the sale of the Company's products.
Components. Since Sequent began building products based on Intel's
microprocessor architecture in 1987, the Company has maintained a close
working relationship with Intel. This relationship has enabled the Company to
leverage Intel's research and development investment by aligning its
technology roadmap with Intel's. It has also enabled Sequent engineers to
influence certain design features in successive generations of Intel
microprocessors to optimize the performance of those components in the
Company's systems. Sequent is currently working closely with Intel on the
upgrades to the Pentium Pro processor and on Intel's next-generation
microprocessor technology. During the development of its NUMA-Q technology,
Sequent also established a close working relationship with Vitesse
Semiconductor, a manufacturer of the intelligent high speed data switches used
to connect NUMA-Q quads.
Storage Subsystems. Sequent systems include storage subsystems supplied by
leading storage vendors including EMC Corporation, Data General's Clarion
division and Storage Technology Corporation. Sequent works closely with these
vendors to deliver optimal performance of the combined products to customers.
Relational Database Management Software. Sequent has strategic development
and marketing relationships with major providers of RDBMS software, including
Oracle and Informix. The Company works closely with these partners to optimize
the performance and scalability of their products for large OLTP and DSS/data
warehousing applications. Sequent cooperates with these partners in
development programs, joint marketing programs and team sales efforts. The
Company has from time to time entered into agreements with various vendors
that provide for prepayment of future licenses and royalties based on sales of
software. See Note 1 of "Notes to Consolidated Financial Statements."
Client/Server Applications Software. Sequent maintains strategic
relationships with key providers of packaged client/server applications and
development tools for custom client/server applications.
Packaged client/server applications provide a standard pre-engineered
solution for a common set of functional business problems. Packaged
applications offer the potential to trim the total cost of a solution, reduce
the time required for implementation, and lower overall project risk. Sequent
maintains a number of strategic relationships with software partners who
provide products in this area including Oracle, PeopleSoft and Baan.
Nearly half of Sequent's large projects involve the development of custom
client/server solutions in situations where packaged applications do not meet
business requirements or where customers want a solution that will give them a
competitive edge. Sequent maintains strategic relationships with software
partners such as Oracle, Informix and Forte Software, Inc., which provide
software tools that enable the development of large custom applications.
Third-Party Applications Programs. Over 650 UNIX software applications from
approximately 300 vendors are available to Sequent customers. These software
products include a broad array of core business applications and address the
needs of many different vertical markets, including manufacturing,
telecommunications, health care, financial services and state and local
governments. To supplement the marketing efforts of third-party suppliers, the
Company actively promotes its software partners and their products to end
users through joint sales campaigns, demonstrations at its sales offices and
trade shows, marketing collateral and joint marketing programs. In addition,
Sequent's NTX 2000 systems support the thousands of software applications
developed by third-party companies for the Microsoft Windows NT operating
system.
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<PAGE>
PRODUCT DEVELOPMENT
Sequent's research and development programs are focused on advancing
hardware and software technologies that strengthen the Company's core product
and service offerings. Sequent devotes substantial resources to ensure that
its evolving technology roadmap is aligned with the technology direction of
industry leading vendors, such as Intel, Microsoft and Oracle. Sequent engages
in cooperative technology programs with these and other industry leaders,
contributing its knowledge and expertise to the development of their products
to optimize their performance with its own products.
Sequent's hardware development is focused on using industry-standard
components to build the industry's fastest, most reliable and most scalable
computer systems designed to run both UNIX and Windows NT software. The
Company's software development program is focused on continually improving the
performance, reliability and scalability of DYNIX/ptx; providing clustering
software that enables high availability; and enhancing its suite of
communications and networking software, client/server tools and third-party
applications software.
Sequent is committed to continuing to make substantial investments in
research and development activities to maintain and enhance its competitive
position in a market characterized by rapid technological advances.
CONSULTING AND PROFESSIONAL SERVICES
During the past five years, Sequent has strengthened its ability to compete
at the high end of the open systems market by building a consulting and
professional services organization with broad-based knowledge of open systems
and specific knowledge and expertise in the design, development and
implementation of large-scale database applications. Working directly with
customers or in partnership with systems integrators, the Company's
professional services consultants help organizations diagnose their
information technology problems and design solutions that leverage the best
open systems technology and are aligned with the customer's business strategy.
The sale of IT architectural consulting and professional services frequently
results in the sale of systems in large projects.
Sequent offers a wide range of professional services designed to assure the
success of every phase of a customer's project, from advance planning and
architecture to technology deployment and ongoing systems support.
Professional services include: IT architecture and transition planning; DSS
design and implementation; implementation of packaged OLTP applications (such
as Oracle Financials & Manufacturing, Baan, and PeopleSoft applications); and
enterprise management design and systems administration. In addition, Sequent
offers customers a broad array of education and training programs.
Sequent's consulting and professional services capability has enabled
Sequent to transform itself from a systems vendor into a provider of solution-
oriented offerings. Professional services add significant value to the
Company's partnerships with systems integrators and are a key factor in
Sequent's ability to win new major accounts. The scope of the Company's
professional services expertise enables it to compete successfully for large
projects, where the size of the average system sale is significantly greater
than the average size of systems sold without professional services. Having
professional services personnel on site in customer accounts also enables the
Company to build customer relationships that result in a better understanding
of the organization's IT needs and frequently lead to follow-on projects.
Sequent's professional services represent one of the fastest growing
segments of its business and accounted for just under 10% of revenue during
1996. Professional services revenue from large projects is typically booked
over several quarters, resulting in a revenue stream that is more predictable
than revenue from systems sales.
Because of the strategic importance of professional services, Sequent
increased the number of professional services consultants by 38% in 1996 and
is continuing to expand the organization during 1997.
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<PAGE>
SALES AND DISTRIBUTION
Sequent sells its products and services worldwide through its own direct
sales force. In addition, the Company partners with major systems integrators,
such as EDS, and with integrators such as Persetel in South Africa, Ssangyong
in Korea, and Unisys in Latin America, who have established a strong presence
in specific geographic regions. In several countries in Asia-Pacific and
elsewhere, the Company also relies on distributors with open systems expertise
and a strong market presence. Sequent's direct sales efforts are focused on
large organizations with the goal of establishing and maintaining long-term
"major account" relationships.
The Company's direct sales force is made up of sales teams, generally
consisting of a major account executive ("MAE") and a systems analyst ("SA").
MAEs have primary responsibility for managing the team's accounts; SAs provide
technical support during the sales cycle. The sales teams work closely with
the Company's professional services organization to identify opportunities to
leverage the Company's consulting and professional services capability in
their accounts. In 1996, the Company invested heavily in the expansion of its
direct sales force, increasing the number of major account executives by 54%.
During 1997, the Company is investing in the continued growth of its direct
sales force and the expansion of its partnerships with systems integrators.
Sequent currently has 62 sales offices worldwide, including 31 in North
America, 15 in Europe, and 16 in Asia-Pacific.
Like many other companies in the computer industry, Sequent receives and
ships a significant portion of orders in the last month of each fiscal
quarter. As a result, the Company's product backlog is generally relatively
small, is not necessarily indicative of sales levels for future periods and is
not material to understanding the Company's business.
The Company had no single customer that represented greater than 10% of
total revenues in 1994, 1995 or 1996. International sales were approximately
48% of the Company's total revenues in 1994 and approximately 55% in 1995 and
1996.
CUSTOMER SERVICES
Sequent offers a growing 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 Sequent systems. The Company
maintains round-the-clock technical consultation as well as remote log-in
capability for diagnosing customer hardware and software problems. In some
cases, in-field hardware service is contracted to third-party suppliers, who
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.
Because Sequent believes that the quality and reliability of its computer
systems are essential to customer satisfaction, high system uptime is a built-
in advantage of Sequent's architecture. The Company's commitment to quality
and reliability is emphasized in its service programs. Sequent personnel
perform all installations and hardware fault isolation and provide complete
software support for direct customers. In the event a hardware malfunction
occurs, systems are equipped with diagnostic tools that allow the Company's
service engineers to identify, diagnose and repair a failed component from
remote locations. The Company also offers service and support programs in
system performance evaluation and disaster protection.
Sequent has consistently been rated among the best providers of customer
service in independent customer surveys. Revenue generated from services and
support, including professional services, was 24%, 27% and 30% of total
revenue during 1994, 1995 and 1996, respectively.
27
<PAGE>
MANUFACTURING
The Company's manufacturing operations consist of procurement, assembly,
test 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 during work-in-progress testing, it is the
policy of the Company to halt shipment of products that 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.
The Company generally obtains most parts and components from single sources,
even where multiple sources are available, to maintain quality control and
enhance its working relationship with suppliers. These relationships include
joint engineering programs for new product development. Certain components
used by the Company, including Intel microprocessors, custom VLSI gate arrays
and intelligent high speed data switches, are only available from a single
source. The Company attempts to reduce the risk of supply interruption through
close supplier relationships and greater inventory positions in certain 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.
COMPETITION
The computer industry is intensely competitive and characterized by rapid
technological advances resulting in frequent new product introductions and
correspondingly frequent improvements in performance and functionality.
Competitive factors related specifically to Sequent's business include product
quality and reliability, professional services and customer support
capability, price/performance and scalability, compatibility with a customer's
existing IT infrastructure, availability of applications software and company
size and reputation.
Within the commercial segment of the computing market, Sequent competes
against IBM, Hewlett-Packard, Sun, DEC and others whose size, reputation,
installed base, technical expertise, marketing strength, distribution channels
and financial resources make them formidable competitors. Most of these
companies also have large professional services organizations and alliances
with many hardware and software vendors with whom Sequent has strategic
relationships. Although SGI and Data General have already introduced products
based on CC-NUMA technology, Sequent has not experienced significant
competitive pressure from these companies. Sequent believes that the
performance and scalability of its current products, the strength of its
partnerships and the caliber and scope of its consulting and professional
services represent key differentiators that have enabled the Company to
compete successfully against these companies in the past and will enable it to
compete successfully against them and others in the future.
PATENTS AND LICENSES
Six U.S. and three United Kingdom patents have been issued to the Company.
The Company has pending 10 additional U.S. patent applications and two foreign
applications covering technology incorporated into its products. The Company
believes that the rapid pace of technological change in the computer industry
makes patent protection less significant than factors such as its continued
focus and efforts in research and product development, its technical expertise
and the management ability of its personnel. The Company has from time to time
been made aware of others in the industry who assert exclusive rights to
certain technologies, copyrights or trademarks, usually in the form of an
offer to license certain rights for a fee or royalties. The Company's policy
is to evaluate such claims on a case-by-case basis. The Company may seek to
enter into licensing agreements
28
<PAGE>
with companies having or asserting rights to technologies if the Company
concludes that such licensing arrangements are necessary or desirable. There
can be no assurance that the Company will be able to obtain such licenses or,
if obtained, that such licenses will be on favorable terms.
EMPLOYEES
At June 28, 1997 the Company employed 2,643 employees of whom 247 were
employed as major account executives, 1,504 in sales support, marketing and
service, 398 in product development, 202 in manufacturing and 292 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 are 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.
FACILITIES
The Company's headquarters and its product development and manufacturing
operations are located in facilities totaling approximately 560,000 square
feet in Beaverton, Oregon, 10 miles west of Portland. The Company occupies
these facilities under leases that expire between 1999 and 2006. On the
expiration dates of these leases, the Company generally has the option to
purchase the leased facilities or to renew the leases for an additional five
years. In addition, the Company owns 38 acres of undeveloped land in Beaverton
held in anticipation of future facility growth requirements. The Company also
has leases for sales, marketing and customer support offices in locations
throughout the world. The Company anticipates that it will continue to expand
its corporate and field facilities as business growth warrants.
The Company intends to expand its headquarters facilities with the
construction of a new building commencing in the fall of 1997. The Company
plans to finance the approximately $17.5 million of construction costs through
a synthetic lease transaction. The Company also plans to exercise, in the
spring of 1998, its existing options to acquire two buildings on its
headquarters site at an aggregate cost of approximately $23.0 million. The
Company intends to finance this purchase through a synthetic lease
transaction. See "Use of Proceeds."
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<PAGE>
MANAGEMENT
The executive officers and directors of the Company, and their ages and
positions as of June 28, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chairman, Chief Executive Officer and
Karl C. Powell, Jr............... 54 Director
President, Chief Operating Officer and
John McAdam...................... 46 Director
Robert S. Gregg.................. 44 Sr. Vice President-Finance and Legal
and Chief Financial Officer
Steve Chen....................... 53 Executive Vice President of Product
Group, Chief Technology Officer and
Director
Robert C. Mathis................. 69 Director
Richard C. Palermo............... 59 Director
Michael S. Scott Morton.......... 59 Director
Robert W. Wilmot................. 52 Director
</TABLE>
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
Engineering from the U.S. 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 February 1995 and was elected to the Board of
Directors in November 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 Government Market. Mr. McAdam
holds a B.Sc. first-class honors 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-Finance and Chief Financial Officer in
March 1986. He was promoted to Senior Vice President-Finance and Legal 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 LLP.
Mr. Gregg holds a B.S. degree in Business and Accounting from the University
of Oregon.
Dr. Chen joined the Company in 1996 as its Executive Vice President of
Product Group and Chief Technology Officer and as a member of the Board of
Directors. Prior to joining the Company, Dr. Chen was a co-founder of
SuperComputer International (SCI), later renamed Chen Systems, which was
recently acquired by Sequent. Prior to founding SCI, Dr. Chen was President
and CEO of SuperComputer Systems, Inc. Before that, Dr. Chen was employed for
eight years at Cray Research, Inc., serving most recently as Senior Vice
President. Dr. Chen holds a Ph.D. in Computing Science from the University of
Illinois, a M.S. degree in Electrical Engineering from Villanova University
and a B.S. degree in Electrical Engineering from the National Taiwan
University.
Dr. Mathis has been a director of the Company since 1985. Dr. Mathis was a
General in the U.S. Air Force and served as Vice Chief of Staff from 1980 to
1982. He retired from the Air Force in 1982. Dr. Mathis is Chairman of the I
Am Third Foundation, a non-profit organization serving the disabled, which he
and his wife founded in 1982. He has also served on a number of boards and is
currently Chairman of Eagle Pass Engineering, a consulting firm, and Chairman
of the Eagle Mountain Group, an international business brokering firm.
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<PAGE>
Mr. Palermo has been a director of the Company since March 1993. Mr. Palermo
was employed by Xerox Corporation from 1965 until his retirement in March
1993, serving most recently as Senior Vice President, U.S. Quality and
Customer Satisfaction and Vice President of Marketing. He currently serves as
a quality consultant to Xerox Corporation and other companies.
Dr. Scott Morton has been a director of the Company since 1991. Dr. Scott
Morton is the Jay W. Forrester Professor of Management at the Sloan School of
Management and was Chairman of the Faculty for the Senior Executive Program at
M.I.T. He has also served as Program Director of the Management in the 1990s
Research Program and as Associate Dean of the Sloan School of Management at
M.I.T. Dr. Scott Morton is a Trustee of the State Street Research Funds and
the Metropolitan Life Series Funds.
Dr. Wilmot has been a director of the Company since 1992. Dr. Wilmot is
Chairman of Wilmot Consulting Inc., a consulting firm, and has been a
consultant to the Company since January 1987. He has also been an advisor to
the Board of Directors since November 1988. Dr. Wilmot was a managing director
of Texas Instruments, Ltd. from 1978 to 1981. From 1981 to 1985 he was Chief
Executive and then Chairman of I.C.L., a major U.K. computer company. He has
founded several companies in Europe and the United States, including
Organization and System Innovations, The OASIS Group (a leading European
company engaged in reengineering management consultancy, now a wholly owned
subsidiary of Sybase Inc.) and Poqet Computers Corporation (a palm top
computer manufacturer in California, now a wholly owned subsidiary of Fujitsu
Ltd.). He is a director of several privately-held, high-technology companies
in Europe and the United States.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 15, 1997 by each Selling
Shareholder and as adjusted to reflect the sale of shares of Common Stock
offered hereby.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING
-----------------------SHARES BEING ----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ------------ ---------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
State Farm Mutual Auto-
mobile Insurance Compa-
ny..................... 1,230,950 3.5% 981,700 249,250 *
Froley, Revy Investment
Co., Inc. Account:
State of Oregon Equity
Fund (2)............. 189,733 * 63,241 126,493 *
Robert C. Mathis (3).... 30,020 * 5,620 24,400 *
</TABLE>
- --------
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares issuable upon
conversion of Convertible Debentures are considered outstanding for the
purpose of calculating the percentage of Common Stock owned by the holder
of such Convertible Debentures but not for the purpose of calculating the
percentage of Common Stock owned by any other person. Each Selling
Shareholder has sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by him or it, unless
otherwise indicated.
(2) Represents shares of Common Stock issuable on conversion of Convertible
Debentures. Convertible Debentures in the principal amount of $1 million
will be converted into 63,241 shares of Common Stock by this Selling
Shareholder and sold in the offering.
(3) Represents shares subject to options that are currently exercisable or
become exercisable within 60 days of the date of this table. Options to
purchase 5,620 shares of Common Stock will be exercised and the shares
sold in the offering. Mr. Mathis, a director of the Company, holds options
to purchase an additional 26,180 shares under the Company's stock
incentive plans.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person or entity (a "Non-U.S.
Holder"). For purposes of this discussion, a "Non-U.S. Holder" is any person
or entity that is, as to the United States, a foreign corporation, a non-
resident alien individual, a foreign estate or trust, or a foreign
partnership. An alien individual is treated as a resident of the United States
during a calendar year if the individual (i) is a lawful permanent resident of
the United States at any time during the calendar year, (ii) meets the
substantial presence test, or (iii), if certain conditions are satisfied,
elects to be treated as a resident. The substantial presence test is met if an
individual is present in the United States on at least 31 days in the calendar
year and for an aggregate of at least 183 days during the current calendar
year and the two preceding calendar years (counting for such purposes all of
the days present in the United States during the current year, one-third of
the days present in the United States during the immediately preceding year,
and one-sixth of the days present in the United States during the second
preceding year). Resident aliens are subject to United States federal tax as
if they were United States citizens.
This discussion does not address all aspects of United States federal income
and estate taxes or consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder. This discussion does not take into
account provisions of income tax treaties that may be applicable in certain
circumstances, nor does it
32
<PAGE>
deal with foreign, state and local consequences that may be relevant to Non-
U.S. Holders. Furthermore, this discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended ("IRC"), existing and proposed
regulations promulgated thereunder, and public administrative and judicial
interpretations thereof, all of which are subject to changes, which could be
applied retroactively. Each prospective purchaser of Common Stock is advised
to consult a tax advisor with respect to current and possible future tax
consequences of acquiring, holding and disposing of Common Stock.
DIVIDENDS
Except as described below, dividends paid to a Non-U.S. Holder of Common
Stock will be subject to withholding of United States federal income tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty, unless the dividends are effectively connected with the conduct of a
trade or business by the Non-U.S. Holder within the United States. If the
dividend is effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States, the dividend generally will be
subject to United States federal income tax on a net income basis at
applicable graduated individual or corporate rates and will be exempt from the
30% withholding tax described above (assuming the necessary certification and
disclosure requirements are met). Any such effectively connected dividends
received by a foreign corporation may, in certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. If a dividend is effectively
connected with conduct of a trade or business by a nonpublicly traded
partnership, and any portion of the dividend is allocable under IRC (S) 704 to
a foreign partner, United States federal income tax is withheld at the highest
individual rate (if the foreign partner is not a corporation) and at the
highest corporate rate (if the foreign partner is a corporation), regardless
of whether the dividend is distributed to the foreign partner. A publicly
traded partnership is required to withhold tax on such a dividend only upon
actual distribution to a foreign partner, unless it elects to be subject to
the withholding rules applicable to nonpublicly traded partnerships.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country (i) for purposes of the withholding discussed above (unless the
payor has knowledge to the contrary), and (ii), under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under proposed United
States Treasury regulations not currently in effect, however, a Non-U.S.
Holder of Common Stock who wishes to claim the benefit of an applicable treaty
rate would be required to file certain forms and meet other certification
requirements.
A Non-U.S. Holder of Common Stock who is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate, timely claim
for refund with the United States Internal Revenue Service ("Service").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on a disposition of a share of Common Stock
unless (i) subject to the exception discussed below, the Company is or has
been a "United States real property holding corporation" (a "USRPHC") within
the meaning of IRC (S) 897(c)(2) at any time within the shorter of the five
year period preceding such disposition or the period during which such Non-
U.S. Holder held the Common Stock (the "Required Holding Period"); (ii) the
gain is effectively connected with the conduct of a trade or business within
the United States of the Non-U.S. Holder and, if a tax treaty applies,
attributable to a permanent establishment maintained by the Non-U.S. Holder;
(iii) the Non-U.S. Holder is an individual who holds the share of Common Stock
as a capital asset and is present in the United States for 183 days or more in
the taxable year of the disposition and either (a) such individual has a "tax
home" (as defined for United States federal income tax purposes) in the United
States or (b) the gain is attributable to an office or other fixed place of
business maintained in the United States by such individual; or (iv) the Non-
U.S. Holder is subject to tax pursuant to the IRC provisions applicable to
certain United States expatriates. If an individual Non-U.S. Holder falls
under clause (ii) or (iv) above, he or she will be taxed on his
33
<PAGE>
or her net gain derived from the sale under regular United States federal
income tax rates. If the individual Non-U.S. Holder falls only under clause
(iii) above, he or she will be subject to a flat 30% tax on the gain derived
from the sale which may be offset by losses, allocable to sources within the
United States, from sale or exchange of capital assets at any time during the
year (notwithstanding the fact that he or she is not considered a resident of
the United States). If a Non-U.S. Holder that is a foreign corporation falls
under clause (ii) above, it will be taxed on its gain under regular graduated
United States federal income tax rates and, in addition, will under certain
circumstances be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits" within the meaning of the IRC for
the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable income tax treaty.
A corporation is generally a USRPHC if the fair market value of its United
States real property interest equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interest plus its other assets
used or held for use in a trade or business. The Company believes that it is
not currently a USRPHC; however, even if the Company met the test for a
USRPHC, a Non-U.S. Holder would generally not be subject to tax, or
withholding in respect of such tax, on gain from a sale or other disposition
of Common Stock solely by reason of the Company's USRPHC status if the Common
Stock is regularly traded on an established securities market ("regularly
traded") during the calendar year in which such sale or disposition occurs,
provided that such holder does not own, actually or constructively, Common
Stock with a fair market value in excess of 5% of the fair market value of all
Common Stock outstanding at any time during the Required Holding Period. The
Company believes that the Common Stock will be treated as regularly traded.
If the Company is or has been a USRPHC within the required Holding Period,
and if a Non-U.S. Holder owns or, at any time during the Required Holding
Period, owned in excess of 5% of the fair market value of Common Stock (as
described in the preceding paragraph), such Non-U.S. Holder of Common Stock
would be subject to United States federal income tax at regular graduated
rates under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such Common Stock. In addition, if the Company is or has been a
USRPHC within the Required Holding Period and if the Common Stock is not
treated as regularly traded, a Non-U.S. Holder (without regard to its
ownership percentage) would be subject to withholding in respect to FIRPTA tax
at a rate of 10% of the amount realized on a sale or other disposition of
Common Stock and would be further subject to FIRPTA tax in excess of the
amounts withheld. Any amount withheld pursuant to such withholding tax would
be creditable against such Non-U.S. Holder's United States federal income tax
liability. Non-U.S. Holders are urged to consult their tax advisors concerning
the potential applicability of these provisions.
FEDERAL ESTATE TAXES
Common Stock owned, or treated as owned, by an individual Non-U.S. Holder at
the time of his or her death will be included in such holder's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld with respect
to such dividends. These information reporting requirements apply regardless
of whether withholding is required. Copies of the information returns
reporting such dividends and the withholding may also be made available to the
tax authorities in the country in which the Non-U.S. Holder resides under the
provisions of an applicable income tax treaty or other agreement with the tax
authorities in that country.
Backup withholding of United States federal income tax (which, in general,
is a withholding tax imposed at the rate of 31% on certain payments to persons
that fail to furnish certain information under the United States information
requirements) generally will not apply to (i) the payment of dividends paid on
Common Stock to a Non-U.S. Holder at an address outside the United States or
(ii) the payment of the proceeds of the sale of
34
<PAGE>
Common Stock to or through the foreign office of a broker. Under temporary
regulations, backup withholding is not required with respect to payment of
proceeds from a sale of Common Stock by a Non-U.S. Holder through a foreign
office of a broker that is a United States person or a "U.S. related person."
In the case of the payment of proceeds from a sale of Common Stock through a
foreign office of a broker that is a United States person or a "U.S. related
person," information reporting is required with respect to the payment unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and has no actual knowledge to the contrary) and certain other
requirements are met or the holder otherwise establishes an exemption. As used
above, a "U.S. related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes, or (ii) a foreign person 50% or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment (or for such part of
the period that the broker has been in existence) is derived from activities
that are effectively connected with the conduct of a United States trade or
business. The payment of the proceeds of a sale of shares of Common Stock to
or through a United States office of a broker is subject to information
reporting and possible backup withholding unless the owner certifies its Non-
U.S. Holder status under penalties of perjury or otherwise establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a Non-U.S. Holder will be allowed a refund or a credit against such
Non-U.S. Holder's United States federal income tax liability, provided that
the required information is furnished to the Service.
These information reporting and backup withholding rules are under review by
the United States Treasury, and their application to the Common Stock could be
changed prospectively by future regulations.
35
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement") the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Cowen &
Company and SoundView Financial Group, Inc. are acting as U.S.
Representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, and the International Underwriters named below, for whom
Morgan Stanley & Co. International Limited, Cowen & Company and SoundView
Financial Group, Inc. are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of shares of the Company's Common Stock set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated...................................
Cowen & Company.....................................................
SoundView Financial Group, Inc......................................
---------
Subtotal.......................................................... 4,200,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited..........................
Cowen & Company.....................................................
SoundView Financial Group, Inc......................................
---------
Subtotal.......................................................... 1,050,000
---------
Total........................................................... 5,250,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters and the U.S.
Representatives and International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and
pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions (a)
it is not purchasing any Shares (as defined below) for the account of anyone
other than a United States or Canadian Person (as defined below) and (b) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that with certain
exceptions (a) it is not purchasing any Shares for the account of any United
States or Canadian Person and (b) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or
36
<PAGE>
distribute any prospectus relating to the Shares within the United States or
Canada or to any United States or Canadian Person. The foregoing limitations
do not apply to stabilization transactions or to certain other transactions
specified in the Agreement Between U.S. and International Underwriters. With
respect to any Underwriter that is a U.S. Underwriter and an International
Underwriter, the foregoing representations and agreements (a) made by it in
its capacity as a U.S. Underwriter shall apply only to it in its capacity as a
U.S. Underwriter, (b) made by it in its capacity as an International
Underwriter shall apply only to it in its capacity as an International
Underwriter and (c) shall not restrict its ability to distribute any
prospectus relating to the shares of Common Stock to any person. As used
herein, "United States or Canadian Person" means any national or resident of
the United States or Canada or any corporation, pension, profit-sharing or
other trust or other entity organized under the laws of the United States or
Canada or of any political subdivision thereof (other than a branch located
outside of the United States and Canada of any United States or Canadian
Person) and includes any United States or Canadian branch of a person who is
not otherwise a United States or Canadian Person, and "United States" means
the United States of America, its territories, its possessions and all areas
subject to its jurisdiction. All shares of Common Stock to be purchased by the
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares".
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that is has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada, in contravention of the securities laws
thereof and has represented that any offer or sale of such Shares in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, directly or indirectly, any of such Shares in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof, that any offer of shares of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made and that
such dealer will deliver to any other dealer to whom it sells any of such
shares a notice containing substantially the same statement as is contained in
this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (a) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 (the "Regulations"); (b) it has complied
and will comply with all applicable provisions of the Financial Services Act
1986 with respect to anything done by it in relation to such Shares in, from
or otherwise involving the United Kingdom; and (c) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the offering of the Shares, to
a person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented that it has not offered or sold, and
has agreed not to offer or sell, directly or indirectly, in Japan or to
37
<PAGE>
or for the account of any resident thereof, any shares of Common Stock
acquired in connection with the distribution contemplated hereby except for
offers or sales to Japanese International Underwriters or dealers and except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of such Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold and will not offer or sell any of such Shares, directly or
indirectly, in Japan or to or for the account of any resident thereof, except
for offers or sales to Japanese International Underwriters or dealers and
except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of $ per share under the public
offering price. Any Underwriter may allow, and such dealers may re-allow, a
concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial offering of the shares of Common Stock, the
offering price and other selling terms may from time to time be varied by the
Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
787,500 additional shares of Common Stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions.
The U.S. Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as the number set forth next to such U.S. Underwriters' name in the
preceding table bears to the total number of shares of Common Stock set forth
next to the names of all U.S. Underwriters in the preceding table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company, directors and executive officers of the Company and the Selling
Shareholders have agreed in the Underwriting Agreement, with certain
exceptions, not to (i) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of Common Stock or other securities, in
cash or otherwise, for a period of at least 90 days after the date of this
Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover overallotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Common Stock in the offering if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
38
<PAGE>
The Underwriters and dealers may engage in passive market marking
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission (the "Commission"). In
general, a passive market maker may not bid for, or purchase, the Common Stock
at a price that exceeds the highest independent bid. In addition, the net
daily purchases made by any passive market maker generally may not exceed 30%
of its average daily trading volume in the Common Stock during a specified two
month prior period, or 200,000 shares, whichever is greater. A passive market
maker must indemnify passive market making bids as such on the Nasdaq
electronic inter-dealer reporting system. Passive market making may stabilize
or maintain the market price of the Common Stock above independent market
levels. Underwriters and dealers are not required to engage in passive market
making and may end passive market making activities at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Stoel Rives LLP,
Portland, Oregon, and for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements as of December 30, 1995 and December
28, 1996 and for each of the three years in the period ended December 28, 1996
included in this Prospectus have been so included, in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
Sequent is subject to the informational requirements of the Exchange Act and
in accordance therewith files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the public reference facilities in the Regional Offices of
the Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Centers, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Certain of such reports, proxy statements and other
information are also available from the Commission on the Internet at
http://www.sec.gov. The Company's Common Stock is quoted for trading in the
Nasdaq National Market and reports, proxy statements and other information
concerning the Company may be inspected at the offices of the National
Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville,
Maryland 20850.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to the Registration
Statement, copies of which are available from the Public Reference Section of
the Commission at prescribed rates, as discussed above. Statements contained
in this Prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete, and in each instance in which
a copy of such contract or document is filed as an exhibit to the Registration
Statement or another document filed by the Company with the Commission,
reference is made to such copy and each such statement shall be deemed
qualified in all respects by such reference. The Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section, Securities and Exchange Commission, Washington, D.C. 20549,
upon payment of the prescribed fees.
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at December 30, 1995, December 28, 1996 and
June 28, 1997............................................................ F-3
For the Fiscal Years Ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the six months ended June 29, 1996 and June 28,
1997:
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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, of 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 28, 1996 and
December 30, 1995, and the results of their operations and their cash flows
for each of the three years in the period ended December 28, 1996, 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 23, 1997
F-2
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEC. 30, DEC. 28, JUNE 28,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................... $ 61,939 $ 37,979 $ 54,688
Restricted deposits.......................... 39,642 44,655 46,349
Receivables, net............................. 178,322 209,752 237,239
Inventories.................................. 60,853 74,491 82,262
Prepaid royalties and other.................. 13,464 30,577 33,741
-------- -------- --------
Total current assets....................... 354,220 397,454 454,279
Property and equipment, net.................... 98,165 133,838 139,162
Capitalized software costs, net................ 45,381 59,567 63,232
Other assets, net.............................. 6,157 21,150 20,189
-------- -------- --------
Total assets............................... $503,923 $612,009 $676,862
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable................................ $ 41,146 $ 59,925 $ 78,889
Accounts payable and other................... 60,095 88,119 96,408
Accrued payroll.............................. 11,723 24,853 23,115
Unearned revenue............................. 21,466 30,787 51,388
Income taxes payable......................... 4,981 3,017 3,225
Current obligations under capital leases and
debt........................................ 60 7,325 8,953
-------- -------- --------
Total current liabilities.................. 139,471 214,026 261,978
Other accrued expenses......................... 2,158 6,671 8,858
Long-term obligations under capital leases and
debt.......................................... 9,106 16,503 13,711
-------- -------- --------
Total liabilities.......................... 150,735 237,200 284,547
-------- -------- --------
Commitments and contingencies (Notes 6, 10 and
12)
Shareholders' equity:
Common stock $.01 par value, 100,000 shares
authorized, 33,221, 34,188 and 35,133 shares
outstanding................................. 332 342 351
Paid-in capital.............................. 304,343 315,316 326,309
Retained earnings............................ 52,945 60,715 70,020
Foreign currency translation adjustment...... (4,432) (1,564) (4,365)
-------- -------- --------
Total shareholders' equity................. 353,188 374,809 392,315
-------- -------- --------
Total liabilities and shareholders'
equity.................................... $503,923 $612,009 $676,862
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements
F-3
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------- ------------------
DEC. 31, DEC. 30, DEC. 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product.................... $341,504 $395,941 $414,418 $180,658 $259,989
Service.................... 109,319 144,404 180,944 82,674 108,038
-------- -------- -------- -------- --------
Total revenue............ 450,823 540,345 595,362 263,332 368,027
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold...... 164,991 188,232 197,702 86,147 129,045
Cost of service revenue.... 77,238 107,721 139,983 64,501 80,997
Research and development... 35,047 40,923 53,733 24,527 31,918
Selling, general and
administrative............ 134,070 154,950 191,069 82,667 109,833
-------- -------- -------- -------- --------
Total costs and
expenses................ 411,346 491,826 582,487 257,842 351,793
-------- -------- -------- -------- --------
Operating income............. 39,477 48,519 12,875 5,490 16,234
Interest income.............. 3,515 5,340 3,007 1,636 1,517
Interest expense............. (4,687) (4,207) (3,187) (1,209) (3,553)
Other income (expense), net.. 495 (2,325) (2,019) (564) (574)
-------- -------- -------- -------- --------
Income before provision for
income taxes................ 38,800 47,327 10,676 5,353 13,624
Provision for income taxes... 5,666 12,254 2,905 1,449 4,319
-------- -------- -------- -------- --------
Net income................... $ 33,134 $ 35,073 $ 7,771 $ 3,904 $ 9,305
======== ======== ======== ======== ========
Net income per share......... $ 1.03 $ 1.04 $ 0.23 $ .12 $ .25
======== ======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding.......... 32,028 33,665 34,254 33,891 36,736
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED FOREIGN
COMMON STOCK EARNINGS CURRENCY
------------- PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
------ ------ -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1994................... 30,245 $302 $265,910 $(15,262) $(7,462) $243,488
Common shares issued.... 1,115 12 12,235 -- -- 12,247
Net income.............. -- -- -- 33,134 -- 33,134
Foreign currency
translation
adjustment............. -- -- -- -- 2,326 2,326
------ ---- -------- -------- ------- --------
Balance, December 31,
1994................... 31,360 314 278,145 17,872 (5,136) 291,195
Common shares issued.... 1,798 18 20,455 -- -- 20,473
Tax benefit of option
exercises.............. -- -- 4,743 -- -- 4,743
Conversion of
debentures............. 63 -- 1,000 -- -- 1,000
Net income.............. -- -- -- 35,073 -- 35,073
Foreign currency
translation
adjustment............. -- -- -- -- 704 704
------ ---- -------- -------- ------- --------
Balance, December 30,
1995................... 33,221 332 304,343 52,945 (4,432) 353,188
Common shares issued.... 967 10 9,622 -- -- 9,632
Tax benefit of option
exercises.............. -- -- 175 -- -- 175
Warrants issued......... -- -- 1,176 -- -- 1,176
Net income.............. -- -- -- 7,771 -- 7,771
Foreign currency
translation
adjustment............. -- -- -- -- 2,868 2,868
Rounding................ -- -- -- (1) -- (1)
------ ---- -------- -------- ------- --------
Balance, December 28,
1996................... 34,188 342 315,316 60,715 (1,564) 374,809
Common shares issued.... 652 6 6,879 -- -- 6,885
Tax benefit of option
exercises.............. -- -- 263 -- -- 263
Net income.............. -- -- -- 708 -- 708
Foreign currency
translation
adjustment............. -- -- -- -- (3,070) (3,070)
------ ---- -------- -------- ------- --------
Balance, March 29, 1997
(unaudited)............ 34,840 348 322,458 61,423 (4,634) 379,595
Common shares issued.... 293 3 3,763 -- -- 3,766
Tax benefit of option
exercises.............. -- -- 88 -- -- 88
Net income.............. -- -- -- 8,597 -- 8,597
Foreign currency
translation
adjustment............. -- -- -- -- 269 269
------ ---- -------- -------- ------- --------
Balance, June 28, 1997
(unaudited)............ 35,133 $351 $326,309 $ 70,020 $(4,365) $392,315
====== ==== ======== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements
F-5
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
----------------------------- ------------------
DEC. 31, DEC. 30, DEC. 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating ac-
tivities:
Net income................ $ 33,134 $ 35,073 $ 7,771 $ 3,904 $ 9,305
Reconciliation of net
income to net cash and
cash equivalents provided
by operating activities--
Depreciation and
amortization........... 44,600 52,094 65,534 30,108 40,342
Changes in assets and
liabilities--
Receivables, net...... (18,010) (44,751) (31,430) 43,047 (27,487)
Inventories........... (2,833) (12,155) (13,638) (13,762) (7,771)
Prepaid royalties and
other................ (403) (652) (17,113) (11,840) (3,164)
Accounts payable and
other................ (17,072) 13,351 28,024 (323) 8,289
Accrued payroll....... 891 (71) 13,130 4,866 (1,738)
Unearned revenue...... 2,593 11,750 9,321 5,202 20,601
Income taxes payable.. 2,835 1,131 (1,964) 277 208
Other accrued
expenses............. 314 58 4,513 4,256 2,184
-------- -------- --------- -------- --------
Net cash provided by
operating
activities......... 46,049 55,828 64,148 65,735 40,769
-------- -------- --------- -------- --------
Cash flow from investing
activities:
Restricted deposits....... (27,158) 19,795 (5,013) 11,408 (1,694)
Investments............... 5,000 -- -- -- --
Purchases of property and
equipment, net........... (40,256) (38,923) (80,617) (36,309) (32,114)
Capitalized software
costs.................... (19,116) (23,444) (34,170) (16,178) (16,762)
Foreign currency
translation adjustment... 2,326 2,861 2,868 (1,197) (2,801)
Other assets, net......... 399 (4,262) (15,600) (13,479) 509
-------- -------- --------- -------- --------
Net cash used for
investing
activities......... (78,805) (43,973) (132,532) (55,755) (52,862)
-------- -------- --------- -------- --------
Cash flow from financing ac-
tivities:
Notes payable, net........ 27,158 (18,291) 18,779 (12,912) 18,964
Proceeds (payments) under
capital lease
obligations.............. (3,293) (719) 14,662 216 (1,164)
Long-term debt (payments)
proceeds, net............ (51) (256) -- -- --
Stock issuance proceeds,
net...................... 12,247 23,059 10,983 3,066 11,002
-------- -------- --------- -------- --------
Net cash provided
(used) by financing
activities......... 36,061 3,793 44,424 (9,630) 28,802
-------- -------- --------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. 3,305 15,648 (23,960) 350 16,709
Cash and cash equivalents at
beginning of period........ 42,986 46,291 61,939 61,939 37,979
-------- -------- --------- -------- --------
Cash and cash equivalents at
end of period.............. $ 46,291 $ 61,939 $ 37,979 $ 62,289 $ 54,688
======== ======== ========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements
F-6
<PAGE>
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. Sequent is a provider of scalable data-
center-ready open systems solutions for large organizations spanning diverse
industries. Sequent designs, manufactures and markets high-performance
symmetric multiprocessing ("SMP") and cache coherent non-uniform memory access
("CC-NUMA") computer systems and operating environment software. The Company's
systems are widely used for large-scale on-line transaction processing
("OLTP"), applications in decision support systems ("DSS") and data
warehouses, for custom applications built upon relational database management
systems ("RDBMS"), and as the central server in client-server architectures.
Sequent's project-oriented offerings include a complete portfolio of customer,
professional and education services to solve complex information technology
("IT") problems. The Company has an established set of partnerships with other
software, hardware and services providers to deliver complete solutions to its
customers.
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 the Company realized a net pretax gain
of $1.1 million as a result of positive impact of changes in exchange rates,
primarily in the United Kingdom. Net losses aggregating $0.3 million and $0.8
million, for 1995 and 1996 respectively, were realized from such transactions.
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. Revenue is recognized as earned on the straight-line basis over the
term of customer service/maintenance contracts, and on either the percentage-
of-completion or milestone achievement basis for professional service
contracts.
Receivables are shown net of allowance for doubtful accounts of $2.8 million
at both December 30, 1995 and December 28, 1996.
The Company has an 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. The agreement expires May 29, 1998. At December 30, 1995 and
December 28, 1996, accounts receivable in the accompanying consolidated
balance sheets is net of $14 million and $20 million, respectively, received
by the Company under this agreement.
The Company had no single customer that represented greater than 10% of
total revenue in 1994, 1995 and 1996.
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 Licenses and Royalties. The Company has entered into agreements with
various vendors which provide for prepayment of future licenses and royalties
based on sales of certain software. Prepaid licenses and royalties were $3.6
million at December 30, 1995 and $28.4 million at December 28, 1996 and are
stated at the
F-7
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lower of cost or net realizable value. Approximately $1.2 million and $16.1
million were included in prepaid royalties and other current assets at
December 30, 1995 and December 28, 1996, respectively. Such prepaid amounts
are realized by receipt of reverse royalties from the vendors based upon
software sales by the vendor, and/or 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 the 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 $58.3 million at December 30, 1995 and
$38.4 million at December 28, 1996. Amortization, generally based on a three-
year straight-line basis, was $12.8 million in 1994, $16.6 million in 1995 and
$20 million in 1996. All other research and development costs are expensed as
incurred.
Income Taxes. 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, 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 have
original maturities of 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, $5.3 million and
$5.9 million during 1994, 1995 and 1996, respectively. Interest paid does not
differ materially from interest expense.
Non-cash investing and financing activities include the following: 1995--$1
million of Convertible Debentures were converted into 63,000 shares of common
stock; 1996--300,000 stock warrants, valued at $1.2 million using the Black-
Scholes pricing model, were issued in exchange for other non-current assets.
Management Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Reclassifications. Certain prior year amounts have been reclassified to
conform to fiscal 1996 presentation. These changes had no impact on previously
reported results of operations or shareholders' equity.
New Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board issued the Statement of Financial Accounting Standards No. 121
(FAS 121), Accounting for the Impairment of Long-Lived
F-8
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assets and For Long-Lived Assets to Be Disposed Of. FAS 121 requires that
long-lived assets and certain identifiable intangible assets held and used by
a company be reviewed for impairment whenever events or changes in
circumstances indicate that expected future cash flows (undiscounted and
without interest charges) may not be sufficient to support the recorded
assets. If undiscounted cash flows are not sufficient to support the recorded
assets, an impairment is recognized to reduce the carrying value of the assets
based on the expected discounted cash flows. The Company adopted the statement
in 1996; however, the adoption did not have a material impact on the Company's
financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 allows
companies to choose whether to account for stock-based compensation on a fair
value method or to continue to account for stock-based compensation under the
current intrinsic value method as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company adopted SFAS 123
during 1996, and has elected to continue to follow the provisions of APB
Opinion No. 25. (Note 8)
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 28,
1995 1996 1997
------------ -------------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................... $ 9,385 $ 14,205 $ 16,971
Work-in-progress.................... 1,736 2,166 2,823
Finished goods...................... 49,732 58,120 62,468
-------- -------- --------
$ 60,853 $ 74,491 $ 82,262
======== ======== ========
</TABLE>
Finished goods inventory includes evaluation systems aggregating $15.7
million and $30.8 million as of December 30, 1995 and December 28, 1996,
respectively. Such systems are located at potential customer sites for
demonstration.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 28,
1995 1996 1997
------------ -------------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Land............................... $ 5,037 $ 5,037 $ 5,037
Operational equipment.............. 134,897 174,662 196,142
Furniture and office equipment..... 67,010 89,951 93,554
Leasehold improvements............. 15,974 22,584 24,630
--------- --------- ---------
222,918 292,234 319,363
Less accumulated depreciation and
amortization...................... (124,753) (158,396) (180,201)
--------- --------- ---------
$ 98,165 $ 133,838 $ 139,162
========= ========= =========
</TABLE>
Depreciation and amortization charged to expense totaled $31.8 million in
1994, $35.0 million in 1995 and $44.9 million in 1996.
F-9
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE
The Company has an unsecured line of credit agreement with a group of banks
which provides short-term borrowings up to $80 million (increased in the
second quarter of 1997 from $70 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 29, 1998. At
December 30, 1995, there were no borrowings outstanding under the line of
credit. At December 28, 1996, $12.2 million was outstanding under this line of
credit agreement, and at June 28, 1997, $30.8 million was outstanding. The
interest rate on this borrowing at December 28, 1996 was 8.25%.
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 1996, the Company re-negotiated the agreement and
extended it through July 1997. The foreign bank, without cause, can terminate
the agreement at any time. At December 28, 1996, maximum borrowings allowed
under the agreement were $57.2 million. Amounts outstanding were $39.6 million
and $44.7 million at December 30, 1995 and December 28, 1996, 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 28, 1996 was 4.8%.
In addition to the above borrowing agreements, the Company has entered into
certain other miscellaneous borrowing arrangements with a foreign bank.
Amounts outstanding were $1.5 million and $0.9 million at December 30, 1995
and December 28, 1996, respectively. The interest rate on these borrowings was
1.5% at December 28, 1996.
During 1996 a U.S. subsidiary of the Company entered into a financing
arrangement with third parties for $2.2 million, of which $1 million is with a
related party. The financing consists of short-term convertible notes with an
interest rate of 10% due February 23, 1997. At the option of the holders, the
notes may be converted into capital stock of the subsidiary. The notes were
converted into Preferred Stock of the subsidiary on June 1, 1997.
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, $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. Under this provision, in August
1995, an additional $1.0 million of the debentures were converted into 63,000
shares of common stock, further reducing long-term debt. Beginning on June 30,
1997, the Company is required to make quarterly principal payments of $1.7
million, unless waived by the noteholder, through 1998 to retire the
outstanding Debentures. All noteholders have waived this requirement. The
balance outstanding on the Debentures was $9.1 million at December 30, 1995,
December 28, 1996 and June 28, 1997. At December 28, 1996, $5.0 million is
classified as current obligations. The Convertible Debentures are callable at
the option of the Company after five years. The Debentures contain certain
financial covenants, including restrictions on additional debt, minimum net
worth levels and a prohibition on the payment of dividends.
F-10
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $0.4 million and $0.3 million at the end of
1995 and 1996, respectively. Accumulated amortization was $0.3 million and
$0.1 million, respectively. These leased assets are pledged as security for
capital lease obligations.
In addition to the above capital leases, the Company entered into a sale-
leaseback transaction in September 1996 under which certain operating
equipment with a net book value of $12.2 million was sold for $15.3 million
and then leased back under a capital lease. The related lease terms stipulate
monthly payments ranging from $274,000 to $341,000 over the five-year lease
term beginning September 1996 at an annual interest rate of 7.4%. The
resulting gain of $3.1 million has been recorded under "Other Accrued
Expenses" and is being amortized in proportion to the related equipment
depreciation over three years. The terms of the lease include an asset buy-
back provision at the end of the lease for the then fair market value of the
assets at the Company's option. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997............................................................ $ 3,285
1998............................................................ 3,285
1999............................................................ 3,960
2000............................................................ 4,095
2001............................................................ 2,730
-------
Total minimum lease payments...................................... 17,355
Less amount representing interest................................. (2,849)
-------
Present value of minimum lease payments........................... $14,506
=======
</TABLE>
6. OPERATING LEASE COMMITMENTS
Sequent is committed under operating leases for office space and
manufacturing facilities. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997.............................................................. $19,052
1998.............................................................. 16,468
1999.............................................................. 13,051
2000.............................................................. 10,558
2001 and thereafter............................................... 22,390
-------
$81,519
=======
</TABLE>
Rent expense for operating leases was $15.1 million, $14.9 million and $17.4
million in 1994, 1995, and 1996, respectively.
F-11
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Pre-tax income from continuing operations for the last three fiscal years was
taxed under the following jurisdictions:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $ 27,332 $ 29,556 $ 5,593
Foreign........................................... 11,468 17,771 5,083
-------- -------- --------
Total........................................... $ 38,800 $ 47,327 $ 10,676
======== ======== ========
</TABLE>
The provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 1,420 $ 5,890 $ 789
Foreign.......................................... 3,769 5,435 3,109
State............................................ 96 355 164
------- -------- -------
5,285 11,680 4,062
------- -------- -------
Deferred:
Federal.......................................... -- -- (900)
Foreign.......................................... 381 574 (257)
------- -------- -------
381 574 (1,157)
------- -------- -------
Total provision.................................... $ 5,666 $ 12,254 $ 2,905
======= ======== =======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following components:
<TABLE>
<CAPTION>
DEC. 30, 1995 DEC. 28, 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Research and development......................... $ 17,534 $ 22,998
Other............................................ 2,929 1,567
-------- --------
Gross deferred tax liabilities................... 20,463 24,565
-------- --------
Net operating loss carryforwards:
Domestic....................................... (21,677) (24,985)
Foreign........................................ (8,733) (7,965)
Credit carryforwards............................. (10,720) (12,741)
Expenses not currently deductible................ (7,586) (7,971)
Depreciation..................................... (798) (1,596)
Revenue currently taxable........................ (945) (1,399)
Inventory basis differences...................... (1,337) (556)
Restructuring costs.............................. (188) (71)
-------- --------
Gross deferred tax assets........................ (51,984) (57,284)
-------- --------
Deferred tax asset valuation allowance........... 31,542 31,583
-------- --------
Net deferred tax liability (asset)............... $ 21 $ (1,136)
======== ========
</TABLE>
F-12
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate to pre-tax income
due to the following:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal tax rate............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit.................... 4.2 4.2 4.2
Tax benefit from Foreign Sales Corporation............. (3.9) (1.6) (6.8)
Tax provision on foreign earnings...................... (0.1) (2.1) (0.9)
Realized benefit from net operating losses............. (20.9) (9.6) (1.3)
Other, net............................................. 0.3 -- (3.0)
----- ---- ----
14.6% 25.9% 27.2%
===== ==== ====
</TABLE>
The deferred tax asset valuation allowance in fiscal years 1994-1996 is
attributed to U.S. federal, state, and foreign deferred tax assets. Management
believes sufficient uncertainty exists with regard to the realizability of
such assets that a valuation allowance of $31.6 million has been provided at
December 28, 1996. When and if these reserved deferred tax assets are
ultimately realized, $15.5 million will reduce the Company's federal and state
tax provision and $16.1 million will be credited to paid-in capital (related
to stock option deductions).
In accordance with FAS 109, the valuation allowance is allocated pro-rata to
federal, state, and foreign current and non-current deferred tax assets. The
net deferred tax liability at December 30, 1995 and the net deferred tax asset
at December 28, 1996 reflect foreign liabilities offset by U.S. assets.
The Company has accumulated unused research and development credits of $5.0
million for income tax purposes. These credits expire from 1998-2011. The
Company also has Alternative Minimum Tax Credits (AMT) which may be carried
forward indefinitely and certain state tax credits which expire from 1997-
2001.
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. During 1995 and 1996, $4.7 million and $175,000 of benefits were
credited to paid-in capital, respectively, with a related reduction in current
taxes payable. No benefits were recognized in 1994.
An income tax provision has not been recorded for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries as the undistributed
earnings have been and will continue to be reinvested in operations outside
the United States.
8. SHAREHOLDERS' EQUITY
Common Stock. In 1995, $1.0 million of convertible debentures were converted
into 63,000 shares of common stock (Note 5).
Stock Compensation Plans. At December 28, 1996, the Company had the
following stock-based compensation plans:
Stock Option Plans
At December 28, 1996 the Company had options outstanding to employees and
non-employees under the following Stock Option Plans: 1984 Employee Stock
Option Plan and 1984 Nonstatutory Stock Option Plan (the "1984 Plans"), the
1987 Employee Stock Option Plan and 1987 Nonstatutory Stock Option Plan (the
"1987 Plans"), the 1989 Stock Incentive Plan (the "1989 Plan"), the 1995 Stock
Incentive Plan and the 1996 Stock
F-13
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option Plan. Options granted after May 18, 1995 were made under the 1995 Stock
Incentive Plan and the 1996 Stock Option Plan. As of December 28, 1996, the
Company has reserved a total of 12,365,000 shares of common stock for issuance
under these Plans, of which 6,909,440 options were outstanding at December 28,
1996. Employee and non-employee options vest over varying time periods,
generally ranging from one to four years, as long as, in the case of
employees, the optionee remains employed by Sequent. Option prices generally
have been at 85% or greater of the fair market value of the common stock on
the date of grant. Options generally expire ten years from the date of the
grant.
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
5,550,000 shares of common stock in a series of eighteen-month offerings. At
December 28, 1996, there were 1,674,002 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 commencement of the offering or on the date of purchase.
During 1994, 1995 and 1996, Sequent issued 467,479, 576,423 and 682,864 shares
under the plan, respectively.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost related to stock options issued to
employees under these plans using the method of accounting prescribed by the
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB
25 must make pro forma disclosures of net income and earnings per share, as if
the fair value based method of accounting defined in this Statement has been
applied.
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method prescribed in APB 25 and related
Interpretations. Accordingly, no compensation cost has been recognized in the
consolidated statements of operations for its stock-based compensation plans
other than for performance-based awards.
Had compensation cost for the other stock-based compensation plans been
determined based on the fair value at the grant dates for awards under these
plans consistent with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation", the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------- ------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income (loss)
As reported................................................ $35,073 $7,771
Pro forma.................................................. 30,959 (709)
Primary earnings (loss) per share
As reported................................................ $ 1.04 $ 0.23
Pro forma.................................................. 0.91 (0.02)
</TABLE>
F-14
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 6.33% 6.05%
Expected dividend yield.................................... -- --
Expected lives............................................. 4 years 3 years
Expected volatility........................................ 55% 50%
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1995 and 1996:
<CAPTION>
FISCAL FISCAL
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 5.23% 5.58%
Expected dividend yield.................................... -- --
Expected lives............................................. 1 year 1 year
Expected volatility........................................ 55% 50%
</TABLE>
The weighted-average per share fair value of those purchase rights granted in
1995 and 1996 was $15.51 and $13.15, respectively.
A summary of the status of the Company's stock option plans as of December
30, 1995 and December 28, 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES PER SHARE SHARES PER SHARE
UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE
------------ -------------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 4,432 $ 11.63 5,068 $ 14.26
Granted:
Price equal to Fair
Value................ 1,716 18.21 3,353 12.60
Price less than Fair
Value................ 612 14.90 1,196 11.12
Exercised............... (1,056) 9.68 (196) 8.53
Forfeited............... (636) 14.78 (2,512) 16.55
------ ------
Outstanding at end of
year................... 5,068 14.26 6,909 12.27
====== ======
Options exercisable at
year-end............... 1,276 1,446
====== ======
Weighted-average per
share fair value of
options granted during
the year............... $ 8.46 $ 3.69
====== ======
</TABLE>
F-15
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
NUMBER WEIGHTED-AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING PER SHARE EXERCISABLE PER SHARE
EXERCISE PRICES AT 12/28/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/28/96 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.00-
$10.50.. 1,573,560 7.0 years $ 9.55 553,826 $ 8.61
$10.63-
$11.88.. 1,700,109 8.1 11.38 264,476 11.59
$11.90-
$13.88.. 1,435,227 7.7 12.86 272,295 13.28
$13.92-
$14.00.. 1,502,886 8.0 14.00 -- --
$14.03-
$22.31.. 697,658 7.3 15.62 355,511 15.77
--------- ---------
$ 0.00-
$22.31.. 6,909,440 7.7 12.27 1,446,108 11.79
========= =========
</TABLE>
9. 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.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
United States.................................. $233,246 $244,029 $270,571
Foreign:
Europe....................................... 177,320 242,133 262,396
Other........................................ 24,624 32,784 41,443
Export:
Other........................................ 15,633 21,399 20,952
-------- -------- --------
$450,823 $540,345 $595,362
======== ======== ========
Operating income (loss):
United States.................................. $ 27,773 $ 27,184 $ 5,825
Foreign:
Europe....................................... 9,444 18,290 7,424
Other........................................ 2,260 3,045 (374)
-------- -------- --------
$ 39,477 $ 48,519 $ 12,875
======== ======== ========
Identifiable assets:
United States.................................. $321,857 $367,196 $448,527
Foreign:
Europe....................................... 105,232 123,614 148,727
Other........................................ 8,888 13,113 14,755
-------- -------- --------
$435,977 $503,923 $612,009
======== ======== ========
</TABLE>
Intercompany sales between geographic areas, primarily from the United
States to Europe, were $111.1 million during 1994, $131.0 million during 1995
and $155.7 million during 1996.
F-16
<PAGE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. 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 discussion in Note 4.
In addition to the arrangements described in Note 4, at December 28, 1996,
the Company also has a forward exchange contract denominated in Japanese yen
with a contract amount of approximately $2.8 million. This forward contract is
used to hedge certain intercompany payables. The Company has also purchased
off-setting currency options and calls used to hedge certain anticipated but
not yet firmly committed transactions expected to be recognized within one
year. Gains and losses on such contracts have not been significant to date.
11. 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, receivables, notes payable,
accounts payable and other and 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 the amount 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.
12. COMMITMENTS AND CONTINGENCIES
Lawsuits arise during the normal course of business. In the opinion of
management, none of the pending lawsuits will result in a significant impact
on the consolidated results of operations or financial position.
F-17
<PAGE>
[LOGO OF SEQUENT]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
PROSPECTUS (Subject to Completion)
Issued July 28, 1997
5,250,000 Shares
LOGO
COMMON STOCK
-----------
OF THE 5,250,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,050,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 4,200,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 5,250,000 SHARES OF COMMON STOCK BEING OFFERED,
4,199,439 SHARES ARE BEING SOLD BY THE COMPANY AND 1,050,561 SHARES ARE
BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "SELLING SHAREHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES
BY THE SELLING SHAREHOLDERS. THE COMPANY'S COMMON STOCK IS LISTED ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "SQNT." ON , 1997,
THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $ PER SHARE. SEE "PRICE RANGE OF COMMON
STOCK."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
-------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $350,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
787,500 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
the Company will be $ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that the delivery of the Shares will be made on or
about , 1997, at the office of Morgan Stanley & Co. Incorporated, New York,
N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
COWEN & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimated
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 39,107
NASD Filing Fee.................................................. 20,000
Printing and Engraving........................................... 60,000
Legal Fees and Expenses.......................................... 150,000
Accounting Fees and Expenses..................................... 60,000
Transfer Agent and Registrar..................................... 2,000
Blue Sky Fees and Expenses....................................... 3,000
Miscellaneous.................................................... 15,893
--------
Total.......................................................... $350,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of the Company's Articles of Incorporation provides for
indemnification of directors to the fullest extent not prohibited by the
Oregon Business Corporation Act (the "Act"). The Bylaws also contain
indemnification provisions. The effects of the Articles, Bylaws and the Act
(the "Indemnification Provisions") are summarized as follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any action, suit or proceeding (other than an action by or in
the right of the Company) against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred, if the person concerned acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
the Company, was not adjudged liable on the basis of receipt of an improper
personal benefit and, with respect to any criminal action or proceeding,
had not reasonable cause to believe the conduct was unlawful. The
termination of an action, suit, or proceeding by judgment, order,
settlement, conviction, or plea of nolo contendere does not, of itself,
create a presumption that the person did not meet the required standards of
conduct.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any action or suit by or in the right of the Company against the
expenses (including attorneys' fees) actually and reasonably incurred if
the person concerned acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Company, except that no right of indemnification will be granted if the
person is adjudged to be liable to the Company.
(c) Every person who has been wholly successful on the merits of a
controversy described in (a) or (b) above is entitled to indemnification as
a matter of right.
(d) Because the limits of permissible indemnification under Oregon law
are not clearly defined, the Indemnification Provisions may provide
indemnification broader than that described in (a) and (b).
Section 10.6 of the Company's Bylaws provides that the Company will advance
to a director the expenses incurred in defending any action, suit or
proceeding in advance of its final disposition if the director or officer
affirms in good faith that he or she has met the standard of conduct to be
entitled to indemnification as described in (a) or (b) above and undertakes to
repay any amount advanced if it is determined that the person did not meet the
required standard of conduct.
The Company's Articles and Bylaws provide that the Company may, in the
discretion of the Board of Directors, indemnify and advance expenses to
officers and employees to the same extent that directors are entitled to
indemnification and advancement of expenses.
II-1
<PAGE>
The rights of indemnification described above are not exclusive of any other
rights of indemnification to which the person indemnified may be entitled
under any bylaw, agreement, vote of shareholders or directors, or otherwise.
The U.S. and International Underwriting Agreements provide for
indemnification by the Underwriters of officers and directors of the Company
under certain circumstances.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement. (Incorporated by reference to Exhibit
10.13 to the Quarterly Report on Form 10-Q for the Quarter ended June
28, 1997 (File No. 0-15627).)
4A Articles of Incorporation, as amended, of the Company. (Incorporated
by reference to Exhibit 4A to the Company's Registration Statement on
Form S-8 (File No. 33-63972).)
4B* Bylaws, as amended, of the Company.
5* Opinion of Counsel
12 Statement Regarding Computation of Earnings per Share. (Incorporated
by reference to Exhibit 11 to the Quarterly Report on Form 10-Q for
the Quarter ended March 29, 1997 (File No. 0-15627).)
24A Consent of Price Waterhouse LLP (See page II-4).
24B* Consent of Stoel Rives LLP (See Exhibit 5).
25* Powers of Attorney.
</TABLE>
- --------
* Previously Filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or
497(h) under the Securities Act and shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF BEAVERTON, STATE OF
OREGON, ON THE 28TH DAY OF JULY, 1997.
Sequent Computer Systems, Inc.
Robert S. Gregg
By: _________________________________
(ROBERT S. GREGG, SR. VICE
PRESIDENT-FINANCE AND LEGAL AND
CHIEF FINANCIAL OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JULY 28, 1997, BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
Karl C. Powell, Jr.* Chairman of the Board,
- ------------------------------------- President, Chief
(KARL C. POWELL, JR.) Executive Officer and
Director (Principal
Executive Officer)
Robert S. Gregg Sr. Vice President-
- ------------------------------------- Finance and Legal and
(ROBERT S. GREGG) Chief Financial Officer
(Principal Accounting
and Financial Officer)
Steve Chen* Director
- -------------------------------------
(STEVE CHEN)
John Mcadam* Director
- -------------------------------------
(JOHN MCADAM)
Robert C. Mathis* Director
- -------------------------------------
(ROBERT C. MATHIS)
Michael S. Scott Morton* Director
- -------------------------------------
(MICHAEL S. SCOTT MORTON)
Richard C. Palermo* Director
- -------------------------------------
(RICHARD C. PALERMO)
Robert W. Wilmot* Director
- -------------------------------------
(ROBERT W. WILMOT)
Robert S. Gregg
*By: ________________________________
ROBERT S. GREGG, ATTORNEY-IN-FACT
II-3
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated January 23, 1997
relating to the financial statements of Sequent Computer Systems, Inc., which
appear in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
Price Waterhouse LLP
Portland, Oregon
July 28, 1997
II-4
