UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 3, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to
__________.
Commission file number: 0-15627
SEQUENT COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of 93-0826369
incorporation or organization) (I.R.S. Employer Identification Number)
15450 S.W. Koll Parkway, Beaverton, Oregon 97006-6063
(Address of principal executive offices, including zip code)
Registrant's telephone number, including are code: (503) 626-5700
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
______________________ ______________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at February 28, 1998, based on the closing price on such date on
the NASDAQ National Market System: $915,022,023.
Number of shares of Common Stock outstanding as of February 28, 1998:
43,459,381.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
1997 Annual Report to Shareholders Parts II and IV
Proxy Statement for 1998 Annual
Meeting of Shareholders Part III
TABLE OF CONTENTS
Item of Form 10-K Page
PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 4(a). Executive Officers of the Registrant 16
PART II
Item 5. Market for the Registrant's Common Equity and 17
Related Stockholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants 17
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and 18
Management
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 19
on Form 8-K
SIGNATURES 26
PART I
Item 1. Business.
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. Since December 1996, over 500
NUMA-Q 2000 systems have been installed. During the second half of 1998, the
Company plans to introduce its new NUMA-Q technology which will enable
customers to run UNIX and Windows NT on a single system. Sequent's products
are used primarily as database servers for large commercial applications:
custom on-line transaction processing ("OLTP"); decision support systems
("DSS")/data warehousing; and enterprise resource planning.
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. During 1997, the Company formed a new organization,
Global Business Alliances ("GBA"), with a mission of expanding business into
new markets and new customers through strategic partnerships with specific
system integrators.
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. 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.
The Company was incorporated in Delaware in January 1983 and was
reincorporated in Oregon in December 1988. Unless the context otherwise
requires, references in this Report on Form 10-K to the "Company" or "Sequent"
refer to the prior Delaware corporation, the current Oregon corporation and
its subsidiaries. The Company's principal executive offices are located at
15450 S.W. Koll Parkway, Beaverton, Oregon 97006, and its telephone number at
that location is (503)626-5700.
Market Overview
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:
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 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 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 through 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. The key elements of Sequent's strategy are the
following:
Solve 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.
Provide 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. 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
1997, revenue from NUMA-Q 2000 sales surpassed revenue from Symmetry sales and
accounted for approximately two-thirds 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, including Intel's next-generation IA-64 architecture (code-named
"Merced"), which is expected to be introduced by 2000.
Leverage 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. The Company's
newly announced relationship with Digital Equipment Corporation ("Digital")
includes initiatives for co-developing a standard, scalable 64-bit operating
system, as well as creating a potential new sales channel for future NUMA-Q
products through an Original Equipment Manufacturer (OEM) relationship. In
addition, the Company continues to work closely with Microsoft Corporation
("Microsoft") for ongoing Windows NT software development. Other
relationships include those with major providers of RDBMS software, including
Oracle, Informix and Computer Associates International, Inc., and with leading
suppliers of third-party applications software such as Oracle, PeopleSoft,
Inc. ("PeopleSoft") and Baan Company N.V. ("Baan"). In addition, the Company
works closely with leading suppliers of its storage subsystems, including EMC
Corporation ("EMC2") and Data General's CLARiiON division ("CLARiiON"), and
with suppliers of communications and network software and client/server
application development products.
In addition, the Company continues to focus its efforts on building solid
relationships with system integrators to leverage and expand sales channel
opportunities. During 1997, the Company formed its new GBA organization,
specifically to develop and broaden partnerships with specific system
integrators, such as EDS, CSC, Andersen Consulting, Deloitte & Touche and
Ernst & Young. The Company is collaboratively working with these partners to
penetrate the market using specific program initiatives.
Maintain 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.
Support 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 has
heavily invested in the development of its DYNIX/ptx operating system. In
January of 1998, Sequent and Digital announced their intent to co-develop a
standard, scalable 64-bit UNIX operating system. The development will be
based on Digital UNIX, will add key Sequent technologies and will be augmented
with joint development by the two companies. Key to the success of the
initiative will be the recruitment of additional partners and licenses. The
new IA-64 UNIX operating system will be owned by Digital and is expected to be
released in 2000, which coincides with the introduction of Intel's new IA-64
architecture. In addition, Sequent and Digital will jointly develop a source-
compatible environment on top of DYNIX/ptx, to provide Sequent with forward
compatibility written on its 32-bit DYNIX/ptx operating system.
The Company continues to make substantial investments to assure the
scalability, availability and functionality of Windows NT on its NUMA-Q
architecture. During the second half of 1998, the Company plans to introduce
its next phase in the development of its NUMA-Q technology that will enable
customers to run UNIX and Windows NT applications on the same system with
shared storage, systems management, backup and other resources. 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 differentiating factor for the Company.
Protect 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.
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 NUMA-Q 2000 products provide high performance and
functionality that are designed to scale up as the customer's needs grow.
NUMA-Q 2000 systems are based on industry standards and are designed for easy
interoperability with other computing hardware in an open systems environment.
NUMA-Q 2000 systems can also be clustered to provide high availability for
mission-critical applications.
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 16 gigabytes of memory and 10 terabytes of disk storage per system. 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.
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. NUMA-Q 2000 systems are currently 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. Through its initiative
with Digital, the Company plans to co-develop a standard, scalable 64-bit UNIX
operating system expected to be released in 2000 as well as develop forward
compatibility on its current 32-bit DYNIX/ptx operating system.
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 NUMA-Q 2000 systems are
installed as database servers running DYNIX/ptx. Sequent is currently working
on the development of 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. Sequent believes that Windows NT
could eventually rival UNIX operating systems and even replace UNIX as the
preferred open systems operating environment in large corporate data centers.
Accordingly, the Company plans to introduce in the second half of 1998 its new
NUMA-Q technology 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 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.
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 systems via Systems Network Architecture (SNA).
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.
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. Scheduled
to be introduced during the second half of 1998, the Company's new NUMA-Q
product technology will incorporate 400 MHz Pentium Pro quads in systems that
scale to 64 processors and allow running both Windows NT and DYNIX/ptx, the
Company's own version of UNIX. 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. In addition, the
Company will focus its efforts on co-developing a standard, scalable 64-bit
UNIX operating system with Digital as well as continuing to strengthen its
relationship with Microsoft to attain the scalability and functionality of
Windows NT on its NUMA-Q architecture.
Sequent is committed to making continued substantial investments in
research and development activities to maintain and enhance its competitive
position in a market characterized by rapid technological advances.
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.
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.
However, the Company has not entered into any material joint development
agreements with vendors that involve ownership interests to be retained in
developed technology, nor has it entered into any agreements that involve
revenue sharing arrangements or any funding responsibilities. Amounts related
to joint development relationships included in the Company's research and
development costs and expenses for 1997 were insignificant. 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
upgrades to the Pentium Pro processor and on Intel's next-generation
microprocessor technology.
Storage Subsystems. Sequent systems include storage subsystems supplied
by leading storage vendors including EMC Corporation, Data General's CLARiiON
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.
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, SAP 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, Computer Associates and Forte Software,
Inc., which provide software tools that enable the development of large custom
applications.
Third-Party Applications Programs. Numerous software applications from a
myriad of 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.
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 together 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.
Sequent offers a wide range of professional services designed to support
the customer through every phase of a 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 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. 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.
Customer Services
Sequent Customer Services offers its customers a wide range of services
in the following four areas of expertise: system support services,
environmental support services, business protection support services and
management support services.
System Support Services is a scalable range of traditional hardware,
software and network support services. Sequent provides its customers with
the flexibility to choose levels of support based upon a customer's need for
risk management and system availability. System Support Services can address
support needs for a single system up to those of an entire data center.
Environmental Support Services is a range of services to help minimize
Sequent customers' risk of downtime caused by environmental factors. The
services offered include power audits or surveys, selling uninterrupted power
supply units and the planning, designing and building of a computer room.
Business Protection Support Services is a suite of services focused on
reducing the risk and impact of information technology outages. The services
offered include security assessments, disaster recovery and system replacement
services.
Management Support Services is a flexible set of services that helps
Sequent customers manage disparate information technology processes. The
services offered include technical support, remote system monitoring and
management, and system network administration and management. In addition,
hardware maintenance is offered for many third-party peripheral products
connected to Sequent systems.
As 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 maintains
round-the-clock technical consultation as well as remote log-in capability for
diagnosing customer hardware and software problems. 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. In some cases, in-field hardware service is
contracted to third-party suppliers, who rely on Sequent for customer
interface and diagnostic support.
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 27%, 30% and 28% of total
revenue during 1995, 1996 and 1997, respectively.
Sales and Distribution
Sequent sells its products and services worldwide through its own direct
sales force. In addition, the Company formed a new organization in 1997, the
Global Business Alliances ("GBA") organization, with an objective of
developing and expanding partnerships with specific system integrators. The
Company also continues its partnership relationships with Persetel in South
Africa and Ssangyong in Korea 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.
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.
Sequent currently has 62 sales offices worldwide, including 37 in North
America, 12 in Europe and 13 in Asia Pacific.
As is common in the computer industry, a significant portion of orders is
generally received and shipped in the last month of a fiscal quarter. As a
result, the fact that the Company's product backlog is relatively small is not
necessarily indicative of sales levels for future periods and is not material
to understanding the Company's business.
Approximately 19% of the Company's revenue in 1997 was from one customer.
At January 3, 1998, the outstanding accounts receivable balance from this
customer aggregated approximately $56 million. The Company had no single
customer that represented greater than 10% of total revenue in 1996 or 1995.
International sales represented approximately 46% of the Company's total
revenue in 1997 and 55% in 1996 and 1995.
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, Digital 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 Silicon Graphics, Inc. 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 differentiating factors 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
Eight U.S. and three United Kingdom patents have been issued to the
Company. The Company has pending approximately twenty 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
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 January 3, 1998, the Company employed 2,818 employees of whom 233 were
employed as major account executives, 1,625 in sales support, marketing and
service, 411 in product development, 233 in manufacturing and 316 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.
Trademarks
Sequent, Symmetry, WinServer, Balance, DYNIX, DYNIX/ptx, PTX and
ptx/ADMIN are registered trademarks and NUMA-Q, IQ-Link and NTX2000 are
trademarks of Sequent Computer Systems, Inc. This Report on Form 10-K also
refers to trademarks held by other corporations.
Factors That May Affect Future Results
Information in this Annual Report on Form 10-K that is not historical
information, including information regarding product development schedules and
anticipated benefits from the software development and OEM relationship with
Digital Equipment Corporation constitutes forward-looking statements that
involve a number of risks and uncertainties. Additional forward-looking
statements may be made by the Company from time to time. The following
factors are among the factors that could cause actual results to differ
materially from the forward-looking statements. Any forward-looking
statements should be considered in light of these factors. The Company's
forward-looking statements apply only as of the date made. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements which may be made to reflect events or
circumstances after the date made or to reflect the occurrence of
unanticipated events.
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.
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 ("Digital"), 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.
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. New
product development may be delayed or unsuccessful due to technical
difficulties encountered or resource constraints. 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 completed on schedule or 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.
Software Development and OEM Relationship with Digital Equipment
Corporation. The Company is working with Digital to co-develop a standard,
scalable 64-bit UNIX operating system for Intel's IA-64 architecture. It is
also expected that the Company will become Digital's sole supplier of future
NUMA-Q products through an Original Equipment Manufacturer (OEM) relationship.
The Company and Digital have entered into a Memorandum of Understanding
regarding these relationships. There can be no assurance, however, that the
software development will be timely and successful or that Digital will
purchase Sequent products at significant levels.
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.
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 $66.2 million at
January 3, 1998. If technological developments 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.
Prepaid Licenses. 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 January 3, 1998. 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.
Year 2000 Compliance. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's software programs and microcircuitry
that have date-sensitive features may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000 Issue
affects the Company's internal systems as well as any of the Company's
products that include date-sensitive software. The Company is currently
conducting a comprehensive review of its computer systems and software
products to identify the systems that could be affected by the Year 2000 Issue
and is in the process of implementing processes to become Year 2000 compliant.
Both internal and external resources are being employed to identify, correct,
or reprogram, and test the systems for Year 2000 compliance. The total cost
of the project is currently estimated to be approximately $4 million and is
being funded through operating cash flows. The Company is expensing all costs
associated with identification and resulting changes to these systems, but
does not expect the amounts to have a material effect on its financial
position or results of operations. The amount expensed in 1997 related to
this issue was insignificant. There can be no assurance, however, that the
systems or products of other companies on which the Company's systems also
rely will be timely converted or that any such failure to convert by a vendor,
customer or another company would not have an adverse effect on the Company's
systems. Additionally, we cannot completely ensure that the Company's
software products do not contain undetected problems associated with Year 2000
compliance. Such problems, should they occur, may result in adverse effects
on future operating results.
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.
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 1997, the Company significantly expanded its
sales force, from 174 sales personnel as of December 31, 1995 to 245 sales
personnel as of January 3, 1998. 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.
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 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.
International Operations. The Company derived 46% of its total revenues
from foreign customers in the year ended January 3, 1998, 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.
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.
Item 2. Properties.
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 which expire from 1999 to 2006. On the
expiration dates of these leases, the Company generally has the option of
purchasing the leased facilities at fair market value or renewing the leases
for an additional five years. In addition, the Company owns 38 acres of
undeveloped land in Beaverton held in anticipation of future facility growth
requirements. The Company also leases for sales, marketing and customer
support offices in locations throughout the United States, Europe, Canada and
Asia Pacific. The Company anticipates that it will continue to expand its
corporate and field facilities as business growth warrants.
The Company is currently expanding its headquarters with the construction
of a new building which began in the fall of 1997. The Company is financing
the approximately $18 million of construction costs through an operating lease
transaction. In addition, the Company is in the process of assigning its
existing options to acquire three buildings on its headquarters site at an
aggregate cost of approximately $24 million to a third party. The Company
intends to lease the buildings from the third party.
Item 3. Legal Proceedings.
There are no material pending legal proceedings involving the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4(a). Executive Officers of the Registrant.
Name Age Position
Karl C. Powell, Jr. 54 Chairman and Chief Executive Officer, Director
John McAdam 47 President and Chief Operating Officer, Director
Robert S. Gregg 44 Sr. Vice President of Finance and Legal
and Chief Financial Officer
Steve Chen 54 Executive Vice President and Chief Technology
Officer, Director
Peter O'Neill 43 Sr. Vice President of Worldwide Sales and
Professional Services
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 US Merchant Marine Academy.
Mr. McAdam joined the Company in August 1989 as U.K. Sales Director. He
became U.K. General Manager in January 1991, Vice President and General
Manager of European Operations in October 1992, and Senior Vice President of
European and Asian Operations in January 1994. He was promoted to President
and Chief Operating Officer in 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 of Finance and Chief Financial
Officer in March 1986. He was promoted to Senior Vice President of 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 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. (SSI). Previous to this, 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.
Mr. O'Neill joined the Company in 1990 initially as a District Manager.
He was promoted to Sales Director followed by Managing Director for the UK.
Mr. O'Neill was promoted to Vice President of American Operations in 1997 and
to Sr. Vice President of Worldwide Sales and Professional Services in 1998.
Prior to joining the Company, Mr. O'Neill was a District Manager at Stratus
Computer Systems Ltd. and prior to that he served four years as a Major
Accounts District Manager at Hewlett-Packard Ltd. Mr. O'Neill holds a B.S.
(Hons) degree in physics from the University of Aston in Birmingham.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The information required by this item is included under "Market
Information (unaudited)" in the Company's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
Item 6. Selected Financial Data.
Information with respect to selected financial data is included
under "Selected Financial Data" in the Company's 1997 Annual
Report to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information with respect to management's discussion and analysis of
financial condition and results of operations is included under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Information with respect to selected quarterly financial data is
included under "Quarterly Financial Data (unaudited)" in the
Company's 1997 Annual Report to Shareholders and is incorporated
herein by reference. The other information required by this item
is included under "Consolidated Financial Statements" and "Notes
to Consolidated Financial Statements" as listed in item 14 of this
report and in the Company's 1997 Annual Report to Shareholders
which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to directors of the Company will be
included under "Election of Directors" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference. Information with respect to
executive officers of the Company is included under Item 4(a) of
Part I of this Report.
Item 11. Executive Compensation.
Information with respect to executive compensation will be
included under "Summary Compensation Table", "Stock Option Grants
in Last Fiscal Year", "Stock Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values" and under "Executive
Compensation," and "Certain Transactions" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to security ownership of certain
beneficial owners and management will be included under "Voting
Securities and Principal Shareholders" and "Election of Directors"
in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to transactions with management will be
included under "Certain Transactions" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements.
The following financial statements are included in the Company's
1997 Annual Report to Shareholders:
Sequent Computer Systems, Inc. and Subsidiaries:
Consolidated Statements of Operations - Fiscal Years Ended January 3, 1998,
December 28, 1996 and December 30, 1995
Consolidated Balance Sheets - January 3, 1998 and December 28, 1996
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended January
3, 1998, December 28, 1996 and December 30, 1995
Consolidated Statements of Cash Flows - Fiscal Years Ended January 3, 1998,
December 28, 1996 and December 30, 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules.
The following schedules and report of independent accountants are
filed herewith:
Page in this report
on Form 10-K
Schedule II Valuation and Qualifying Accounts F-1
Report of Independent Accountants on Financial Statement Schedules F-2
All other schedules are omitted as the required information is inapplicable or
is presented in the financial statements or related notes thereto.
(a)(3) Exhibits.
Exhibit
Number Description
3.1 Articles of Incorporation, as amended, and Articles of Merger of
Sequent Computer Systems, Inc. (the "Company"). (Incorporated by
reference to Exhibit 4A to the Company's Registration Statement on
Form S-8 (File no. 33-63972).)
3.2 Bylaws, as amended, of the Company. (Incorporated by reference
to Exhibit 4B to the Company's Registration Statement on Form S-8
(File no. 33-39315).)
4.1 Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company
agrees to furnish any other long term debt agreements to the
Commission upon request.
10.1A Amended and Restated Lease Agreement between KC Woodside and
the Company, as amended, dated May 8, 1987 ("First Building
Lease"), and related agreements. (Incorporated by reference to
Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 4, 1987 (File no. 0-15627).)
10.1B Second Amendment to First Building Lease, dated July 28, 1988.
(Incorporated by reference to Exhibit 10.3B to the Company's
Annual Report on Form 10-K for the fiscal year ended December 30,
1989 (File no. 0-15627).)
10.1C Third Amendment to First Building Lease, dated July 28, 1989.
(Incorporated by reference to Exhibit 10.3C to the Company's
Annual Report on Form 10-K for the fiscal year ended December 30,
1989 (File no. 0-15627).)
10.1D Fourth Amendment to First Building Lease, dated September 20,
1991. (Incorporated by reference to Exhibit 10.1D to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
10.1E Fifth Amendment to First Building Lease, dated December 2,
1992. (Incorporated by reference to Exhibit 10.1E to the
Company's Annual Report on Form 10-K for fiscal year ended January
2, 1993 (File no. 0-15627).)
10.1F Sixth Amendment to First Building Lease, dated April 5, 1993.
(Incorporated by reference to Exhibit 10.1F to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
1994 (File no. 0-15627).)
10.1G Seventh Amendment to First Building Lease, dated September 30,
1997.
10.1H Lease Agreement between KC Woodside and the Company, dated May
8, 1987 ("Second Building Lease"). (Incorporated by reference to
Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 4, 1987 (File no. 0-15627).)
10.1I First Amendment to Second Building Lease, dated July 28, 1988.
(Incorporated by reference to Exhibit 10.3E to the Company's
Annual Report on Form 10-K for the fiscal year ended December 30,
1989 (File no. 0-15627).)
10.1J Second Amendment to Second Building Lease, dated September 13,
1991. (Incorporated by reference to Exhibit 10.1G to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
Exhibit
Number Description
10.1K Third Amendment to Second Building Lease, dated December 2,
1992. (Incorporated by reference to Exhibit 10.1L to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.1L Fourth Amendment to Second Building Lease, dated April 5, 1993.
(Incorporated by reference to Exhibit 10.1K to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
1994 (File no. 0-15627).)
10.1M Fifth Amendment to Second Building Lease, dated September 30,
1997.
10.1N Lease Agreement, dated July 28, 1988 between KC Woodside and
the Company ("Third Building Lease"). (Incorporated by reference
to Exhibit 10.3F to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1989 (File no. 0-15627).)
10.1O First Amendment to Third Building Lease, dated July 28, 1989.
(Incorporated by reference to Exhibit 10.3G to the Company's
Annual Report on Form 10-K for the fiscal year ended December 30,
1989 (File no. 0-15627).)
10.1P Second Amendment to Third Building Lease, dated September 13,
1991. (Incorporated by reference to Exhibit 10.1J to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
10.1Q Third Amendment to Third Building Lease, dated December 2,
1992. (Incorporated by reference to Exhibit 10.1M to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.1R Fourth Amendment to Third Building Lease, dated April 5, 1993.
(Incorporated by reference to Exhibit 10.1P to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
1994 (File no. 0-15627).)
10.1S Fifth Amendment to Third Building Lease, dated September 30,
1997.
10.1T Lease Agreement, dated July 28, 1989 between KC Woodside and
the Company ("Fourth Building Lease"). (Incorporated by
reference to Exhibit 10.3H to the Company's Annual Report on Form
10-K for the fiscal year ended December 30, 1989 (File no. 0-
15627).)
10.1U First Amendment to Fourth Building Lease, dated September 13,
1991. (Incorporated by reference to Exhibit 10.1P to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
10.1V Second Amendment to Fourth Building Lease, dated August 13,
1992. (Incorporated by reference to Exhibit 10.1P to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.1W Third Amendment to Fourth Building Lease, dated December 2,
1992. (Incorporated by reference to Exhibit 10.1Q to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.1X Fourth Amendment to Fourth Building Lease, dated April 5, 1993.
(Incorporated by reference to Exhibit 10.1U to the Company's
Annual Report on Form 10-K for fiscal year ended January 1, 1994
(File no. 0-15627).)
Exhibit
Number Description
10.1Y Fifth Amendment to Fourth Building Lease, dated September 30,
1997.
10.1Z Triple Net Lease, dated July 9, 1990 between KC Woodside and
the Company ("Fifth Building Lease"). (Incorporated by reference
to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 29, 1990 (File no. 0-15627).)
10.1aa First Amendment to Fifth Building Lease, dated April 29, 1991.
(Incorporated by reference to Exhibit 10.1N to the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1991 (File no. 0-15627).)
10.1bb Second Amendment to Fifth Building Lease, dated April 29, 1991.
(Incorporated by reference to Exhibit 10.1O to the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1991 (File no. 0-15627).)
10.1cc Third Amendment to Fifth Building Lease, dated June 10, 1991.
(Incorporated by reference to Exhibit 10.1P to the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1991 (File no. 0-15627).)
10.1dd Fourth Amendment to the Fifth Building Lease, dated July 3,
1991. (Incorporated by reference to Exhibit 10.1Q to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
10.1ee Fifth Amendment to Fifth Building Lease, dated September 13,
1991. (Incorporated by reference to Exhibit 10.1R to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 (File no. 0-15627).)
10.1ff Sixth Amendment to Fifth Building Lease, dated December 2,
1992. (Incorporated by reference to Exhibit 10.1X to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.1gg Seventh Amendment to Fifth Building Lease, dated April 5,
1993. (Incorporated by reference to Exhibit 10.1cc to the
Company's Annual Report on Form 10-K for fiscal year ended
January 1, 1994 (File no. 0-15627).)
10.1hh Lease Agreement between KC Woodside and the Company, dated
June 10, 1991 (Umpqua). (Incorporated by reference to Exhibit
10.1Y to the Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (File no. 0-15627).)
10.1ii Lease Agreement between KC Woodside and the Company, dated
June 10, 1991 (Charles). (Incorporated by reference to Exhibit
10.1Z to the Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (File no. 0-15627).)
10.1jj First Amendment to Lease, dated October 31, 1991 (Charles).
(Incorporated by reference to Exhibit 10.1aa to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1kk Second Amendment to Lease, dated May 6, 1992 (Charles).
(Incorporated by reference to Exhibit 10.1bb to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1ll Third Amendment to Lease, dated January 8, 1993 (Charles).
(Incorporated by reference to Exhibit 10.1cc to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
Exhibit
Number Description
10.1mm Lease Agreement between KC Woodside and the Company, dated
June 10, 1991 (S. Platte). (Incorporated by reference to Exhibit
10.1dd to the Company's Annual Report on Form 10-K for fiscal
year ended January 2, 1993 (File no. 0-15627).)
10.1nn First Amendment to Lease, dated May 12, 1992 (Guadalupe).
(Incorporated by reference to Exhibit 10.1ff to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1oo Business park Lease between KC Woodside and the Company, dated
June 10, 1991 (Hillsborough). (Incorporated by reference to
Exhibit 10.1gg to the Company's Annual Report on Form 10-K for
fiscal year ended January 2, 1993 (File no. 0-15627).)
10.1pp Fourth Amendment to Lease, dated July 21, 1995 (Charles).
(Incorporated by reference to Exhibit 10.1dd to the Company's
Annual Report on 10-K for fiscal year ended January 2, 1993 (File
no. 0-15627).)
10.1qq First Amendment to Lease, dated July 21, 1995 (South Platte).
(Incorporated by reference to Exhibit 10.1ee to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1rr Second Amendment to Lease, dated March 1, 1997 (South Platte).
10.1ss Second Amendment to Lease, dated July 21, 1995 (Guadalupe).
(Incorporated by reference to Exhibit 10.gg to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1tt Lease Agreement between KC Woodside and the Company, dated
January 15, 1996 (Guadalupe), as amended February 1, 1996 and
October 1, 1996. (Incorporated by reference to Exhibit 10.1pp to
the Company's Annual Report on Form 10-K for fiscal year ended
December 28, 1996 (File no. 0-15627).)
10.2 Master Software License Agreement between Unix System
Laboratories, Inc. (formerly owned by American Telephone &
Telegraph Company) and the Company, dated effective as of April
18, 1985. (Incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.2A Sublicensing Agreement between Unix Systems Laboratories, Inc.
and the Company, dated January 28, 1986, as amended June 22, 1987
and August 10, 1987. (Incorporated by reference to Exhibit 10.2A
to the Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
10.2B Substitution Agreement between Unix System Laboratories, Inc.
and the Company, dated January 28, 1986. (Incorporated by
reference to Exhibit 10.2B to the Company's Annual Report on Form
10-K for fiscal year ended January 2, 1993 (File no. 0-15627).)
10.2C Amendment dated November 13, 1992 to Master Software License
Agreement and Sublicensing Agreement with Unix System
Laboratories, Inc.
10.2D License Agreement, dated July 15, 1983 between The Regents of
University of California and the Company, as amended July 2,
1986. (Incorporated by reference to Exhibit 10.2C to the
Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
Exhibit
Number Description
+ 10.3 Distributorship Agreement between the Company and Oracle
Corporation, dated March 31, 1987, as amended on December 29,
1988, August 30, 1989, May 28, 1990, May 31, 1991 and June 30,
1991. (Incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Company's Annual Report on Form 10-K for fiscal year
ended January 2, 1993 (File no. 0-15627).)
* 10.4 Aircraft Lease Agreement between the Company and CP
Transportation, Inc., dated October 1, 1996. (Incorporated by
reference to Exhibit 10.4A to the Company's Annual Report on Form
10-K for fiscal year ended December 28, 1996 (File no. 0-15627).)
* 10.5 Sequent Computer Systems, Inc. Incentive Stock Option Plan
and Nonstatutory Stock Option Plan, adopted March 20, 1984, as
amended. (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File no. 33-
33444).)
* 10.6 Sequent Computer Systems, Inc. 1987 Employee Stock Option
Plan, as amended. (Incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1 (File no. 33-
33444).)
* 10.7 Sequent Computer Systems, Inc. 1987 Nonstatutory Stock
Option Plan, as amended. (Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 (File
no. 33-33444).)
* 10.8 Sequent Computer Systems, Inc. 1989 Stock Incentive Plan,
as amended. (Incorporated by reference to Appendix A to the
Company's Proxy Statement for its 1994 Annual Meeting of
Shareholders).
* 10.9 Sequent Computer Systems, Inc. 1995 Stock Incentive Plan,
as amended. (Incorporated by reference to Appendix A to the
Company's Proxy Statement dated March 23, 1995).
* 10.10 Sequent Computer Systems, Inc. 1997 Stock Option Plan, as
amended. (Incorporated by reference to Appendix A to the
Company's Proxy Statement dated March 27, 1997).
* 10.11 Agreement between Team Scandia, Inc. and Sequent Computer
Systems, Inc., dated January 23, 1998.
* 10.12 DP Applications, Inc. Restricted Stock Purchase
Agreement, dated December 2, 1996. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for
fiscal year ended December 28, 1996 (File no. 0-15627).)
* 10.13 DP Applications, Inc. and the Robert W. Wilmot and Mary
J. Wilmot, trustees of the Wilmot Living Trust, Restricted Stock
Purchase Agreement, dated November 17, 1997.
11 Statement regarding computation of earnings per share.
13 1997 Annual Report to Shareholders (portions not incorporated by
reference are not deemed filed).
21 Subsidiaries.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
Exhibit
Number Description
27 Financial Data Schedule.
________________________
+ Confidential treatment for portions of this contract has been
previously requested of the Commission.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(a) (3) of this Report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
last quarter of fiscal 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Sequent Computer Systems, Inc.
Date: March 26, 1998 By: /s/Robert S. Gregg
Robert S. Gregg
Sr. Vice President of Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1998.
Signature Title
/s/Karl C. Powell, Jr. Chairman and Chief Executive Officer
(Karl C. Powell, Jr.) and Director (Principal Executive Officer)
/s/Robert S. Gregg Sr. Vice President of Finance and Legal
(Robert S. Gregg) and Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/Steve Chen Director
(Steve Chen)
/s/John McAdam Director
(John McAdam)
MICHAEL S. SCOTT MORTON*
(Michael S. Scott Morton) Director
ROBERT W. WILMOT*
(Robert W. Wilmot) Director
By: /s/Robert S. Gregg*
Robert S. Gregg, Attorney-in-fact
SCHEDULE II
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
Additions Additions
Balance at Charged to Charged to Write-offs Balance at
Beginning of Costs and Other Accts. Net of End of
Period Expenses Describe (1) Recoveries Period
<S> <C> <C> <C> <C> <C>
Year ended Dec. 30, 1995
Allowance for doubtful
accounts $ 2,333 $ 1,089 $ (18) $ 588 $ 2,816
Accumulated amortization
capitalized software $41,690 $16,618 $ 0 $ 0 $58,308
Year ended Dec. 28, 1996
Allowance for doubtful
accounts $ 2,816 $ 317 $(315) $ 12 $ 2,806
Accumulated amortization
capitalized software $58,308 $19,984 $ 0 $39,846 $38,446
Year ended Jan. 3, 1998
Allowance for doubtful
accounts $ 2,806 $ 2,694 $ (8) $ 2,371 $ 3,121
Accumulated amortization
capitalized software $38,446 $27,570 $ 0 $ 0 $66,016
</TABLE>
(1) Foreign currency translation adjustment
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Sequent Computer Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 28, 1998 appearing in the 1997 Annual Report to Shareholders of
Sequent Computer Systems, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Portland, Oregon
January 28, 1998
EXHIBIT 11
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT SHOWING CALCULATION
OF THE BASIC AND DILUTED
EARNINGS PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $38,687 $ 7,771 $35,073 37,899 33,641 32,228 $ 1.02 $ 0.23 $ 1.09
Effect of Dilutive Securities
Stock options 2,653 723 1,408
Employee stock purchase plan 156 55 31
Debentures, if dilutive 116 374 144 447
Diluted EPS
Income available to common
shareholders + assumed
conversions $38,803 $ 7,771 $35,447 40,852 34,419 34,114 $ 0.95 $ 0.23 $ 1.04
</TABLE>
EXHIBIT 13
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
Jan. 3, Dec. 28, Dec. 30, Dec. 31, Jan. 1,
1998 1996 1995 1994 1994
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total revenue $ 833,886 $ 595,362 $ 540,345 $ 450,823 $ 353,806
Income (loss) before income taxes $ 50,512 $ 10,676 $ 47,327 $ 38,800 $ (6,331)
Net income (loss) $ 38,687 $ 7,771 $ 35,073 $ 33,134 $ (7,524)
Net income (loss) per share - basic $ 1.02 $ .23 $ 1.09 $ 1.08 $ (.26)
Net income (loss) per share - diluted $ .95 $ .23 $ 1.04 $ 1.03 $ (.26)
BALANCE SHEET DATA
Working capital $ 399,898 $ 183,428 $ 214,749 $ 168,468 $ 134,156
Total assets $ 890,845 $ 612,009 $ 503,923 $ 435,977 $ 375,424
Long-term obligations $ 9,910 $ 16,503 $ 9,106 $ 10,341 $ 10,906
Shareholders' equity $ 600,784 $ 374,809 $ 353,188 $ 291,195 $ 243,488
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
(dollars in millions)
Fiscal Year Ended
January 3, December 28, December 30,
1998 1996 1995
Total Revenue $ 833.9 $ 595.4 $ 540.3
Product $ 600.5 $ 414.5 $ 395.9
Service 233.4 180.9 144.4
US $ 449.4 $ 270.6 $ 244.0
International 384.5 324.8 296.3
Net Income $ 38.7 $ 7.8 $ 35.1
In 1997, the Company's revenue and net income increased significantly
over 1996 and 1995. Revenue increased approximately 40% and 54% over 1996 and
1995, respectively. 1997 net income increased almost five times over net
income in 1996. In 1996, net income was greatly impacted by the significant
investments made by the Company to develop and market its NUMA-Q product line
and to expand its direct sales force. With initial shipments in December
1996, sales of the Company's NUMA-Q 2000 systems in 1997 represented
approximately 68% of the Company's system sales for the year. In addition,
strong revenue growth in the Company's service organizations, both
professional and customer service, contributed to the overall significant
revenue increase in 1997.
Product revenue increased approximately 45% and 52% in 1997 over 1996 and
1995, respectively. Also contributing to the overall increase in the
Company's total revenue was strong growth in the service organizations,
resulting from increased numbers of project sales with maintenance and
consulting contracts. Service revenue increased approximately 29% and 62% in
1997 over 1996 and 1995, respectively. Revenues from foreign operations
increased approximately 18% and 30% in 1997 over 1996 and 1995, respectively.
However, as a percentage of total revenue, foreign revenue decreased from 55%
in 1995 and 1996 to approximately 46% in 1997, primarily a result of the
substantial growth rate in the Company's domestic operations.
The following table sets forth certain operating data as a percentage of total
revenue:
Fiscal Year Ended
January 3 December 28 December 30,
1998 1996 1995
Revenue:
Product 72.0% 69.6% 73.3%
Service 28.0 30.4 26.7
Total revenue 100.0 100.0 100.0
Cost of product and service 57.6 56.7 54.8
Gross profit 42.4 43.3 45.2
Operating expenses:
Research and development 7.8 9.0 7.5
Selling, general and administrative 28.1 32.1 28.7
Total operating expenses 35.9 41.1 36.2
Operating income 6.5 2.2 9.0
Interest income (expense), net (0.1) 0.0 0.2
Other expense, net (0.3) (0.4) (0.4)
Income before provision
for income taxes 6.1 1.8 8.8
Provision for income taxes 1.5 0.5 2.3
Net income 4.6% 1.3% 6.5%
COST OF SALES/GROSS MARGINS
Fiscal Year Ended
January 3, December 28, December 30,
1998 1996 1995
Cost of product sold as a percentage
of product revenue 51% 48% 48%
Cost of service as a percentage
of service revenue 74 77 75
Total cost of sales as a percentage
of total revenue 58 57 55
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 slightly
in both 1997 and 1996, primarily due to product cost of sales, which increased
as a percentage of product revenue. In 1997, the Company's total product cost
of sales was negatively impacted by an increase in sales of third party
product which yield lower gross margins than Sequent products. In addition,
the Company's margins were affected by sales of Symmetry products which, as
expected, continue to represent a lower percentage of the Company's overall
sales, and which yield lower gross margins than the Company's NUMA-Q products.
Offsetting these lower margins were increased sales of higher margin NUMA-Q
products in 1997, decreases in service cost of sales as a percentage of
service revenue, and a greater percentage of total revenues from products
versus services. The Company's product gross margins were approximately 49%
in 1997 and 52% in 1996 and 1995. Service margins were approximately 26% in
1997 and 23% and 25% in 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
(dollars in millions) Fiscal Year Ended
January 3, December 28, December 30,
1998 1996 1995
Research and development expense $65.4 $53.7 $40.9
As a percentage of total revenue 8% 9% 8%
Software costs capitalized $34.2 $34.2 $23.4
Research and development expense continues to increase in amount;
approximately 22% in 1997 compared to 1996 and 31% in 1996 compared to 1995.
During 1996, the Company made substantial investments in the development of
its new NUMA-Q product line. In 1997, the Company continued to make
enhancements to the NUMA-Q architecture, in addition to ongoing focus on
development of its next-generation products, including the next phase in the
development of the NUMA-Q architecture which is expected to allow running Unix
and Windows NT applications on a single system with shared storage and other
resources.
SELLING, GENERAL AND ADMINISTRATIVE
(dollars in millions) Fiscal Year Ended
January 3, December 28, December 30,
1998 1996 1995
Selling, general and administrative $234.0 $191.1 $155.0
As a percentage of total revenue 28% 32% 29%
Selling, general and administrative expenses increased in amount during
1997 over 1996 primarily due to the increased activity associated with the
growth in overall sales volume. As a percentage of total revenue, however,
these expenses decreased in 1997 compared to 1996. In 1996, the Company was
just beginning a major product transition and was investing heavily in its
sales and professional services infrastructure. Substantial revenue growth of
approximately 40% in 1997, compared to only a 22% growth in selling, general
and administrative expenses, resulted in the decrease in expenses as a
percentage of total revenue.
INTEREST AND OTHER, NET
(dollars in millions) Fiscal Year Ended
January 3, December 28, December 30,
1998 1996 1995
Interest income $ 5.1 $ 3.0 $ 5.3
Interest expense $ 6.1 $ 3.2 $ 4.2
Other expense, net $(2.3) $(2.0) $(2.3)
Interest income is primarily generated from invested cash and cash
equivalents and restricted deposits held at foreign and domestic banks. The
increase in interest income in 1997 is a result of investment of cash proceeds
from the Company's August stock offering. Interest expense includes costs
related to foreign currency hedging loans, interim short-term borrowings,
convertible debentures and capital lease obligations. Throughout 1997, the
Company increased the use of its domestic line of credit for continued
investment in its NUMA-Q product line and development of its next-generation
products. These borrowings contributed to the increase in interest expense in
1997 over 1996. Another factor contributing to the increase in interest
expense was additional borrowings with foreign banks for hedging purposes.
Other expense consists primarily of net realized and unrealized foreign
exchange gains and losses.
INCOME TAXES
The Company provided $11.8 million for income taxes in 1997 on a net
profit before tax of $50.5 million. The difference between the statutory rate
and the effective tax rate is principally due to the benefit from the research
tax credit and the Company's Foreign Sales Corporation. The 1997 effective
tax rate of 23.4% compares to effective rates of 27.2% in 1996 and 25.9% in
1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $399.9 million at January 3, 1998 compared to $183.4
million at December 28, 1996. The Company's current ratio at January 3, 1998
and December 28, 1996 was 2.5:1 and 1.9:1, respectively.
Cash and cash equivalents increased $95.3 million during 1997. The
increase resulted primarily from issuances of common stock of approximately
$185 million and operating cash flow of approximately $24 million offset by
investing activities. Investments in property and equipment and capitalized
software approximated $59 million and $34 million, respectively. Additionally,
the Company's restricted deposits, which represent proceeds from short-term
borrowing arrangements used to hedge foreign currency exposures, increased by
approximately $24 million.
The Company has a $20 million receivable sales facility with a group of
banks. At January 3, 1998, accounts receivable in the accompanying
consolidated balance sheet is net of $20 million received by the Company under
this agreement to sell its domestic accounts receivable. Additionally, the
Company entered into two transactions to factor certain foreign receivables,
without recourse, at an average rate of 7.2%. As of January 3, 1998, $4.7
million relating to these transactions was netted against accounts receivable
in the accompanying consolidated balance sheet.
The Company maintains an $80 million revolving line of credit agreement.
The line is unsecured and extends through May 29, 1998. The line contains
certain financial covenants and prohibits the Company from paying dividends
without the lenders' consent. In August 1997, the Company used approximately
$30 million of the net proceeds from the stock offering to repay the
outstanding balance in full.
The Company maintains a short-term borrowing agreement with a foreign
bank to cover foreign currency exposures. Maximum borrowings allowed under
the foreign bank agreement were $81.8 million, of which $68.8 million was
outstanding at January 3, 1998 (based on currency exchange rates on such
date).
The Company also maintains a miscellaneous borrowing arrangement with a
foreign bank. At January 3, 1998 $1.1 million was outstanding under this
agreement.
Management expects that current funds from operations and the bank lines
of credit will provide adequate resources to meet the Company's anticipated
operational cash requirements for at least the next twelve months.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's software programs and microcircuitry that have date-sensitive
features may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 Issue affects the Company's internal
systems as well as any of the Company's products that include date-sensitive
software. The Company is currently conducting a comprehensive review of its
computer systems and software products to identify the systems that could be
affected by the Year 2000 Issue and is in the process of implementing
and conducting the required processes to become Year 2000 compliant. Both
internal and external resources are being employed to identify, correct or
reprogram, and test the systems for Year 2000 compliance. The total cost of
the project is currently estimated to be approximately $4 million and is being
funded through operating cash flows. The Company is expensing all costs
associated with identification and resulting changes to these systems, but does
not expect the amounts to have a material effect on its financial position or
results of operations. The amount expensed in 1997 related to this issue was
insignificant. There can be no assurance, however, that the systems or
products of other companies on which the Company's systems also rely will be
timely converted or that any such failure to convert by a vendor, customer or
another company would not have an adverse effect on the Company's systems.
Additionally, we cannot completely ensure that the Company's software products
do not contain undetected problems associated with Year 2000 compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
FORWARD-LOOKING STATEMENTS
The Chairman's Letter, Management's Discussion and Analysis of Financial
Conditions and Results of Operations and "Sequent: The Data Center
Alternative" contain information regarding the Company's expectations or goals
as to: the market for the Company's products; development and release of new
products; anticipated benefits from the software development and OEM
relationship with Digital Equipment Corporation ("Digital"); estimated costs
to achieve Year 2000 compliance; growth, profitability improvements and
increase in shareholder value; and operational cash requirements. These
statements are forward-looking statements that involve a number of risks and
uncertainties, and actual results may differ materially from the forward-
looking statements. Factors that could adversely affect the market for the
Company's products include, but are not limited to, business conditions and
growth in the electronics industry and general economies, both domestic and
international, and lower than expected capital expenditure levels by
customers. Factors that could cause new product development to be delayed or
not successful include, but are not limited to, technological difficulties
encountered in product development and resource constraints. Factors that
could adversely affect the anticipated benefits from the software development
and OEM relationship with Digital include, but are not limited to, the failure
to develop the products to be covered by the OEM relationship and the failure
of Digital to purchase products at the levels anticipated. Factors that could
adversely affect the estimated costs to achieve Year 2000 compliance are set
forth above under "Impact of the Year 2000 Issue." Factors that could
adversely affect the Company's growth, profitability, shareholder value and
operational cash requirements include, but are not limited to, the failure to
timely complete product development and release new products; lower than
expected customer acceptance of NUMA-Q 2000 and future products; significant
fluctuations in quarterly operating results; lower than expected customer
orders; delays in receipt of orders or cancellation of orders; competitive
factors, including increased competition, new product offerings by competitors
and price pressures; the discontinuance of relationships with the Company's
strategic partners; the unavailability of third party parts and supplies at
reasonable prices; changes in product mix and the mix between product and
service revenue; and product shipment interruptions due to manufacturing
problems. The Company's forward-looking statements apply only as of the date
made. The Company undertakes no obligation to publicly release the result of
any revision to these forward-looking statements which may be made to reflect
events or circumstances after the date made or to reflect the occurrence of
unanticipated events.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended
Jan. 3, Dec. 28, Dec. 30,
1998 1996 1995
Revenue:
Product $ 600,496 $ 414,418 $ 395,941
Service 233,390 180,944 144,404
Total revenue 833,886 595,362 540,345
Costs and expenses:
Cost of products sold 309,016 197,702 188,232
Cost of service revenue 171,595 139,983 107,721
Research and development 65,414 53,733 40,923
Selling, general and administrative 234,037 191,069 154,950
Total costs and expenses 780,062 582,487 491,826
Operating income 53,824 12,875 48,519
Interest income 5,096 3,007 5,340
Interest expense (6,086) (3,187) (4,207)
Other expense, net (2,322) (2,019) (2,325)
Income before provision
for income taxes 50,512 10,676 47,327
Provision for income taxes 11,825 2,905 12,254
Net income $ 38,687 $ 7,771 $ 35,073
Net income per share - basic (Note 1) $ 1.02 $ 0.23 $ 1.09
Net income per share - diluted (Note 1) $ 0.95 $ 0.23 $ 1.04
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
Jan. 3, 1998 Dec. 28, 1996
ASSETS
Current assets:
Cash and cash equivalents $ 133,299 $ 37,979
Restricted deposits 68,791 44,655
Receivables, net 328,884 209,752
Inventories 112,228 74,491
Prepaid royalties and other 28,147 30,577
Total current assets 671,349 397,454
Property and equipment, net 134,728 133,838
Capitalized software costs, net 66,244 59,567
Other assets, net 18,524 21,150
Total assets $ 890,845 $ 612,009
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 69,893 $ 59,925
Accounts payable and other 132,325 88,119
Accrued payroll 22,843 24,853
Unearned revenue 40,946 30,787
Income taxes payable 3,134 3,017
Current obligations under capital leases and debt 2,310 7,325
Total current liabilities 271,451 214,026
Other accrued expenses 8,700 6,671
Long-term obligations under capital leases and debt 9,910 16,503
Total liabilities 290,061 237,200
Commitments and contingencies (Notes 5, 6, 10 and 12)
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized, 42,962 and 34,188 shares outstanding 430 342
Paid-in capital 508,858 315,316
Retained earnings 99,402 60,715
Foreign currency translation adjustment (7,906) (1,564)
Total shareholders' equity 600,784 374,809
Total liabilities and shareholders' equity $ 890,845 $ 612,009
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<CAPTION>
Foreign
currency
Common Stock Paid-in Retained translation
Shares Amount capital earnings adjustment Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 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 8,198 82 181,580 - - 181,662
Tax benefit of option exercises - - 3,021 - - 3,021
Conversion of debentures 576 6 8,941 - - 8,947
Net income - - - 38,687 - 38,687
Foreign currency translation
adjustment - - - - (6,342) (6,342)
Balance, January 3, 1998 42,962 $ 430 $ 508,858 $ 99,402 $ (7,906) $ 600,784
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Fiscal Year Ended
Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 38,687 $ 7,771 $ 35,073
Reconciliation of net income
to net cash and cash equivalents provided
by operating activities-
Depreciation and amortization 83,649 65,534 52,094
Changes in assets and liabilities-
Receivables, net (119,132) (31,430) (44,751)
Inventories (37,737) (13,638) (12,155)
Prepaid royalties and other 2,430 (17,113) (652)
Accounts payable and other 44,206 28,024 13,351
Accrued payroll (2,010) 13,130 (71)
Unearned revenue 10,159 9,321 11,750
Income taxes payable 117 (1,964) 1,131
Other, net 3,360 4,513 58
Net cash provided by
operating activities 23,729 64,148 55,828
Cash flow from investing activities:
Restricted deposits (24,136) (5,013) 19,795
Purchases of property and equipment, net (58,698) (80,617) (38,923)
Capitalized software costs (34,247) (34,170) (23,444)
Other assets, net -- (15,600) (4,262)
Net cash used for investing activities (117,081) (135,400) (46,834)
Cash flow from financing activities:
Notes payable, net 9,968 18,779 (18,291)
Proceeds (payments) under capital lease obligations (2,509) 14,662 (719)
Long-term debt payments, net (133) -- (256)
Stock issuance proceeds, net 184,683 10,983 25,216
Net cash provided by financing activities 192,009 44,424 5,950
Effect of exchange rate changes on cash (3,337) 2,868 704
Net increase (decrease) in cash and cash equivalents 95,320 (23,960) 15,648
Cash and cash equivalents at beginning
of period 37,979 61,939 46,291
Cash and cash equivalents at end of period $ 133,299 $ 37,979 $ 61,939
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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 large
scalable computer systems based upon Cache Coherent Non-Uniform Memory Access
(CC-NUMA) architecture 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 strategic alliances with other software, hardware
and services providers to deliver complete solutions to its customers.
Principles of Consolidation. The Company's fiscal year is generally
based on a 52-week year (53 weeks in Fiscal 1997) ending the Saturday closest
to December 31. The consolidated financial statements of the Company include
the 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 net expense in the consolidated
statements of operations. Net losses aggregating $1.6 million, $0.8 million
and $0.3 million for 1997, 1996, and 1995, 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 $3.1
million at January 3, 1998 and $2.8 million at 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 30, 1998. At both January 3, 1998
and December 28, 1996, accounts receivable in the accompanying consolidated
balance sheets is net of $20 million received by the Company under this
agreement. Additionally, the Company entered into two transactions to factor
certain foreign receivables, without recourse, at an average rate of 7.2%. As
of January 3, 1998, $4.7 million relating to these transactions was netted
against accounts receivable in the accompanying consolidated balance sheet.
Approximately 19% of the Company's revenue in 1997 was from one customer.
At January 3, 1998, the outstanding accounts receivable balance from this
customer aggregated approximately $56 million. The Company had no single
customer that represented greater than 10% of total revenue in 1996 and 1995.
International sales represented approximately 46% of the Company's total
revenue in 1997 and 55% in 1996 and 1995.
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/or
royalties based on sales of certain software. Prepaid licenses and royalties
were $26.9 million at January 3, 1998 and $28.4 million at December 28, 1996,
and are stated at the lower of cost or net realizable value. Approximately
$12.5 million and $16.1 million of total prepaid licenses and royalties are
classified as current and are included in prepaid royalties and other current
assets at January 3, 1998 and December 28, 1996, respectively. 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.
Included in total prepaid licenses and royalties are prepaid licenses
acquired from a single vendor totaling $25.3 million and $26.9 million as of
January 3, 1998 and December 28, 1996, respectively. These licenses, which
have no expiration date, represent the right to acquire the most recent
version of the vendor's software for resale to the Company's end-user
customers. The Company estimates that the cost of these licenses will be
realized during the next three fiscal years.
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 $66 million at January
3, 1998 and $38.4 million at December 28, 1996. Amortization, generally based
on a three-year straight-line basis, was $27.6 million in 1997, $20 million in
1996 and $16.6 million in 1995. All other research and development costs are
expensed as incurred. In December 1996, the Company removed from its balance
sheet capitalized software costs which had an original cost of $40 million and
were fully amortized. This did not affect the realizable value of the
Company's software products.
Additionally, the Company maintains strategic relationships with
industry-leading manufacturers of components, systems and software. However,
the Company has not entered into any material joint development agreements
with vendors that involve ownership interests to be retained in developed
technology, nor has it entered into any agreements that involve revenue
sharing arrangements or any funding responsibilities. Amounts related to
joint development relationships included in the Company's research and
development costs and expenses for 1997 were insignificant.
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. In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
128, Earnings Per Share (FAS 128). FAS 128 replaces APB Opinion 15, Earnings
Per Share, and requires current and retroactive presentation of basic earnings
per share and diluted earnings per share. Basic earnings per share is
calculated based on income available to common shareholders and the weighted-
average number of common shares outstanding during the reported period.
Diluted earnings per share includes additional dilution from the effect of
potential common stock issuances, such as stock issuable pursuant to the
exercise of stock options and warrants outstanding and the conversion of debt.
The following table is a reconciliation of the basic and diluted earnings
per share computations:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to common
shareholders $38,687 $7,771 $35,073 37,899 33,641 32,228 $1.02 $0.23 $1.09
Effect of Dilutive Securities
Stock options 2,653 723 1,408
Employee stock purchase plan 156 55 31
Debentures, if dilutive 116 374 144 447
Diluted EPS
Income available to common
shareholders + assumed
conversions $38,803 $7,771 $35,447 40,852 34,419 34,114 $0.95 $0.23 $1.04
</TABLE>
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 $3.7 million, $5.9 million
and $5.3 million during 1997, 1996 and 1995, respectively. Interest paid does
not differ materially from interest expense.
Non-cash investing and financing activities include the following: 1997 -
$9.1 million ($8.9 million, net of related expenses) of Convertible Debentures
were converted into 576,000 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; 1995 - $1 million of
Convertible Debentures were converted into 63,000 shares of common stock.
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. Significant estimates and judgments made by management of the
Company include matters such as collectibility of accounts receivable,
realizability of inventory and recoverability of capitalized software, prepaid
royalties and deferred tax assets.
Reclassifications. Certain prior year amounts have been reclassified to
conform to fiscal 1997 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
New Accounting Pronouncements. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS
130). This Statement requires entities to report changes in equity that
result from transactions and economic events other than those with
shareholders. This Statement is effective for fiscal years beginning after
December 15, 1997, at which time it will be adopted by the Company.
Management expects that the adoption of this pronouncement will have no effect
on reported earnings. It is expected that the Company's comprehensive income
component will consist of the cumulative translation adjustment which is
reflected in the consolidated statement of shareholders' equity.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(FAS 131). The objective of the standard is to provide information about the
different types of business activities in which an enterprise engages and the
different economic environments in which it operates. This pronouncement will
be adopted by the Company for fiscal 1998, as required by the Statement. This
Statement will have no impact on reported earnings and management expects that
it will not have a significant impact on disclosure requirements as the
Company operates in predominantly one business segment.
2. INVENTORIES
(in thousands)
January 3, December 28,
1998 1996
Raw materials $ 16,375 $ 14,205
Work-in-progress 3,155 2,166
Finished goods 92,698 58,120
$ 112,228 $ 74,491
Finished goods inventory includes evaluation systems aggregating $53.7
million and $30.8 million as of January 3, 1998 and December 28, 1996,
respectively. Such systems are located at potential customer sites for
demonstration.
3. PROPERTY AND EQUIPMENT
(in thousands)
January 3, December 28,
1998 1996
Land $ 5,037 $ 5,037
Operational equipment 209,372 174,662
Furniture and office equipment 89,569 89,951
Leasehold improvements 22,889 22,584
326,867 292,234
Less accumulated depreciation
and amortization (192,139) (158,396)
$ 134,728 $ 133,838
Depreciation and amortization charged to expense totaled $55.2 million in
1997, $44.9 million in 1996 and $35.0 million in 1995.
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. 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. Individual borrowings on the credit line have maturities of
three months or less. The line of credit agreement extends through May 29,
1998. There were no borrowings outstanding under the line of credit at
January 3, 1998. At December 28, 1996, $12.2 million was outstanding under
the credit line.
The Company has a short-term borrowing agreement with a foreign bank as a
hedge to cover certain foreign currency exposures. Borrowings under the
agreement are denominated in various foreign currencies with terms of fourteen
days to three months. Proceeds from the borrowings are converted into U.S.
dollars and placed in a term deposit account with the foreign bank. 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 1997, the Company
re-negotiated the agreement and extended it through July 1998. The foreign
bank, without cause, can terminate the agreement at any time. At January 3,
1998, maximum borrowings allowed under the agreement were $81.8 million.
Amounts outstanding were $68.8 million and $44.7 million at January 3, 1998
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
January 3, 1998 was 6.4%.
In addition to the above borrowing agreements, the Company has entered
into certain other miscellaneous borrowing arrangements with a foreign bank.
Amounts outstanding were $1.1 million and $0.9 million at January 3, 1998 and
December 28, 1996, respectively. The interest rate on these borrowings was
1.725% at January 3, 1998.
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 consisted of short-term convertible notes with
an interest rate of 10%. During the second quarter of 1997, the notes were
converted into preferred stock of the subsidiary.
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. The Convertible Debentures were convertible into the Company's
common stock at the option of the holders at an initial conversion price of
$15.81 per share. In conjunction with the Company's equity offering in 1993,
$9.9 million of the Debentures was converted into 626,000 shares of common
stock. In August 1995, an additional $1.0 million of the Debentures was
converted into 63,000 shares of common stock. In August and September 1997,
the remaining $9.1 million of the Debentures was converted into 576,000 shares
of common stock; thus, there was no outstanding long-term debt related to the
Debentures at January 3, 1998. At December 28, 1996, the outstanding balance
on the Debentures was $9.1 million.
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. These
leased assets are pledged as security for capital lease obligations.
In addition to the minor capital leases, the Company entered into a
sales-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:
(in thousands)
1998 $ 3,285
1999 3,960
2000 4.095
2001 2,608
2002 --
Total minimum lease payments 13,948
Less amount representing interest (1,857)
Present value of minimum lease payments $ 12,091
6. OPERATING LEASE COMMITMENTS
Sequent is committed under operating leases for office space, equipment
and manufacturing facilities. Future minimum lease payments are as follows:
(in thousands)
1998 $ 21,486
1999 18,702
2000 13,608
2001 10,965
2002 and thereafter 19,816
$ 84,577
Rent expense for operating leases was $19.1 million, $17.4 million and
$14.9 million in 1997, 1996 and 1995, respectively.
7. INCOME TAXES
The Company provided $11.8 million for income taxes in 1997 on a net
profit before tax of $50.5 million. The difference between the statutory rate
and the effective tax rate is principally due to the benefit from the research
tax credit and the Company's Foreign Sales Corporation. The 1997 effective
tax rate of 23.4% compares to effective rates of 27.2% in 1996 and 25.9% in
1995.
Pre-tax income from continuing operations for the last three fiscal years
was taxed under the following jurisdictions:
(in thousands)
Fiscal Fiscal Fiscal
1997 1996 1995
Domestic $ 39,603 $ 5,593 $ 29,556
Foreign 10,909 5,083 17,771
Total $ 50,512 $ 10,676 $ 47,327
The provision for income taxes was as follows:
(in thousands)
Fiscal Fiscal Fiscal
1997 1996 1995
Current:
Federal $ 6,808 $ 789 $ 5,890
Foreign 4,441 3,109 5,435
State 449 164 355
11,698 4,062 11,680
Deferred:
Federal 317 (900) --
Foreign (211) (257) 574
State 21 -- --
127 (1,157) 574
Total provision $ 11,825 $ 2,905 $ 12,254
Deferred tax liabilities (assets) are comprised of the following
components:
(in thousands)
January 3, 1998 December 28, 1996
Research and development $25,119 $22,998
Other 2,217 1,567
Gross deferred tax liabilities 27,336 24,565
Net operating loss carryforwards:
Domestic (18,921) (24,985)
Foreign (4,897) (7,965)
Credit carryforwards (18,626) (12,741)
Expenses not currently deductible (6,741) (7,971)
Depreciation (1,779) (1,596)
Revenue currently taxable (2,008) (1,399)
Inventory basis differences (2,499) (556)
Restructuring costs -- (71)
Gross deferred tax assets (55,471) (57,284)
Deferred tax asset valuation allowance 27,126 31,583
Net deferred tax asset $ (1,009) $ (1,136)
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate to income from
continuing operations due to the following:
Fiscal Fiscal Fiscal
1997 1996 1995
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 (4.8) (6.8) (1.6)
Research & Experimentation credit (4.6) --- ---
Tax provision on foreign earnings 0.3 (0.9) (2.1)
Realized benefit from net
operating losses (2.2) (1.3) (9.6)
Other, net (4.5) (3.0) ---
23.4% 27.2% 25.9%
The deferred tax asset valuation allowance in fiscal years 1995 - 1997 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 $27.1 million has
been provided at January 3, 1998. When and if these reserved deferred tax
assets are ultimately realized, $12.0 million will reduce the Company's
federal and state tax provision and $15.1 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 Company has net operating losses carried forward both domestically
and in foreign jurisdictions. The domestic net operating losses expire from
2006 - 2011. Certain foreign net operating losses expire in 1998 - 2003,
while others have no expiration date.
The Company has accumulated unused research and experimentation credits
of $7.4 million for income tax purposes. These credits expire from 1998 -
2012. The Company also has Alternative Minimum Tax Credits (AMT) which may be
carried forward indefinitely and certain state tax credits which expire from
1998 - 2002.
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 1997, 1996 and 1995, $3.0 million,
$175,000 and $4.7 million of benefits were credited to paid-in capital,
respectively, with a related reduction in current taxes payable.
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 management expects will continue to be
reinvested in operations outside the United States.
8. SHAREHOLDERS' EQUITY
Common Stock. On July 29, 1997, the Company sold approximately 5.7
million shares of common stock in an equity offering. Net proceeds to the
Company, after deducting the underwriting discount and offering expenses, were
approximately $148.5 million. In August and September 1997, $9.1 million
($8.9 million, net of related expenses) of the Convertible Debentures was
converted into 576,000 shares of common stock.
Stock Compensation Plans. At January 3, 1998, the Company had the
following stock-based compensation plans:
Stock Option Plans
At January 3, 1998, 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, the 1996 Stock Option Plan and the 1997 Stock Option Plan.
Options granted after May 18, 1995 were made under the 1995 Stock Incentive
Plan and the 1996 and 1997 Stock Option Plans. As of January 3, 1998, the
Company has reserved a total of 16,727,500 shares of common stock for issuance
under these plans, of which 8,276,326 shares were outstanding at January 3,
1998. 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
6,950,000 shares of common stock in a series of eighteen-month offerings. At
January 3, 1998, there were 1,946,574 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 1997, 1996 and 1995, Sequent issued 1,127,428, 682,864 and 576,423
shares under the plan, respectively.
Statement of Financial Accounting Standards No. 123. During 1995, the
Financial Accounting Standards Board issued FAS 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 FAS 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:
(in thousands, except per share amounts)
Fiscal Fiscal Fiscal
1997 1996 1995
Net income (loss): As reported $38,687 $7,771 $35,073
Pro forma 28,981 (709) 30,959
Net income (loss)
per share - basic: As reported $1.02 $0.23 $1.09
Pro forma 0.76 (0.02) 0.96
Net income (loss)
per share - diluted: As reported $0.95 $0.23 $1.04
Pro forma 0.73 (0.02) 0.95
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 1997, 1996 and 1995:
Fiscal Fiscal Fiscal
1997 1996 1995
Risk-free interest rate 6.15% 6.05% 6.33%
Expected dividend yield -- -- --
Expected lives 3 years 3 years 4 years
Expected volatility 56% 50% 55%
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1997, 1996 and 1995:
Fiscal Fiscal Fiscal
1997 1996 1995
Risk-free interest rate 5.74% 5.58% 5.23%
Expected dividend yield -- -- --
Expected lives 1 year 1 year 1 year
Expected volatility 56% 50% 55%
The weighted-average per share fair value of those purchase rights
granted in 1997 and 1996 was $15.20 and $13.15, respectively.
A summary of the status of the Company's stock option plans as of January
3, 1998, December 28, 1996 and December 30, 1995, and changes during the years
ending on those dates is presented below:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
Weighted-Average Weighted-Average Weighted-Average
Shares per share Shares per share Shares per share
under option Exercise Price under option Exercise Price under option Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 6,909 $12.27 5,068 $14.26 4,432 $11.63
Granted:
Price = Fair Value 2,812 18.39 3,353 12.60 1,716 18.21
Price < Fair Value 829 18.14 1,196 11.12 612 14.90
Exercised (1,209) 12.01 (196) 8.53 (1,056) 9.68
Forfeited (1,065) 13.83 (2,512) 16.55 (636) 14.78
Outstanding at
end of year 8,276 14.77 6,909 12.27 5,068 14.26
Options exercisable
at year-end 2,370 1,446 1,276
Weighted-average per share fair value
of options granted during the year $8.35 $ 3.69 $ 8.46
</TABLE>
The following table summarizes information about stock options outstanding at
January 3, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual per share Exercisable per share
Exercise Prices at 1/3/98 Life Exercise Price at 1/3/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$0 - $11.25 1,870,157 7.1 years $ 10.29 1,094,915 $ 10.07
$11.26 - $13.88 1,594,561 6.3 years 12.58 601,839 12.86
$13.92 - $14.45 1,416,963 7.0 years 14.04 370,186 14.08
$14.56 - $17.44 1,828,453 8.4 years 16.18 248,352 16.54
$17.50 - $22.42 1,398,792 9.4 years 21.04 55,175 19.17
$22.47 - $28.19 167,400 9.4 years 23.84 17 23.96
$0.00 - $28.19 8,276,326 7.7 years 14.77 2,370,484 12.29
</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.
(in thousands)
Fiscal Fiscal Fiscal
1997 1996 1995
Revenue:
United States $ 449,355 $ 270,571 $ 244,029
Foreign:
Europe 315,028 262,396 242,133
Other 47,460 41,443 32,784
Export:
Other 22,043 20,952 21,399
$ 833,886 $ 595,362 $ 540,345
Operating income (loss):
United States $ 44,691 $ 5,825 $ 27,184
Foreign:
Europe 7,629 7,424 18,290
Other 1,504 (374) 3,045
$ 53,824 $ 12,875 $ 48,519
Identifiable assets:
United States $ 686,638 $ 448,527 $ 367,196
Foreign:
Europe 186,751 148,727 123,614
Other 17,456 14,755 13,113
$ 890,845 $ 612,009 $ 503,923
Intercompany sales between geographic areas, primarily from the United
States to Europe, were $195.5 million during 1997, $155.7 million during 1996
and $131.0 million during 1995.
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 January 3, 1998,
the Company also has a range forward options contract denominated in Japanese
yen with a contract amount of approximately $2.3 million. This forward
contract is used to hedge certain intercompany payables. 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.
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.
During 1997, the Company entered into an agreement to finance the
construction of a new office building using an operating lease structure. Upon
completion and occupancy, the Company will finalize lease payments based on a
total cost estimated to be approximately $17.5 million. No estimated lease
payments relating to the newly constructed building have been included in the
Operating Lease Commitment Schedule at Note 6.
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 January 3, 1998 and
December 28, 1996, and the results of their operations and their cash flows
for each of the three years in the period ended January 3, 1998, 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 28, 1998
<TABLE>
QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share amounts)
<CAPTION>
Basic Diluted
Total Gross Net Earnings Earnings
Revenue Profit Income Per Share Per Share
<S> <C> <C> <C> <C> <C>
Fiscal 1997
First quarter $ 157,374 $ 68,120 $ 708 $ 0.02 $ 0.02
Second quarter 210,653 89,865 8,597 0.25 0.23
Third quarter 207,320 87,026 10,298 0.26 0.24
Fourth quarter 258,539 108,264 19,084 0.45 0.42
Year $ 833,886 $ 353,275 $ 38,687 $ 1.02* $ 0.95*
Fiscal 1996
First quarter $ 120,745 $ 51,481 $ 598 $ 0.02 $ 0.02
Second quarter 142,587 61,203 3,306 0.10 0.10
Third quarter 148,785 66,132 1,355 0.04 0.04
Fourth quarter 183,245 78,861 2,512 0.07 0.07
Year $ 595,362 $ 257,677 $ 7,771 $ 0.23 $ 0.23
</TABLE>
* The sum of quarterly earnings per share does not equal annual earnings
per share as a result of the computation of quarterly versus annual average
shares outstanding.
MARKET INFORMATION (unaudited)
Sequent's Common Stock has been traded on the NASDAQ National Market
System since April 1987 under the symbol SQNT. The following table sets
forth, for the fiscal quarters indicated, the high and low sales prices for
the common stock as reported on the NASDAQ National Market System.
High Low
1997:
First quarter $ 20.00 $ 14.50
Second quarter $ 21.63 $ 14.38
Third quarter $ 30.63 $ 20.88
Fourth quarter $ 26.88 $ 19.50
1996:
First quarter $ 14.88 $ 10.31
Second quarter $ 14.88 $ 11.88
Third quarter $ 13.88 $ 10.88
Fourth quarter $ 18.25 $ 12.50
At January 3, 1998, there were approximately 891 shareholders of record
of the Company's common stock and 43.0 million shares outstanding. The
Company has never paid cash dividends on its common stock. The Company
intends to retain earnings for use in its business and, therefore, does not
anticipate paying cash dividends in the foreseeable future. In addition, the
Company's bank line of credit agreement prohibits payment of dividends without
the lenders' consent.
EXHIBIT 21
SEQUENT COMPUTER SYSTEMS, INC. - SUBSIDIARIES
ENTERPRISE FINANCE COMPANY (Oregon)
SEQUENT EXPORT, INC. (Barbados)
DP APPLICATIONS, INC. (Oregon)
CANADA:
SEQUENT COMPUTER SYSTEMS (CANADA) LIMITED
EUROPE:
SEQUENT COMPUTER SYSTEMS LIMITED (United Kingdom)
SEQUENT COMPUTER SYSTEMS A.B. (Sweden)
SEQUENT COMPUTER SYSTEMS GmbH (Germany)
SEQUENT COMPUTER SYSTEMS, S.A. (France)
SEQUENT COMPUTER SYSTEMS, B.V. (Netherlands)
SEQUENT COMPUTER SYSTEMS, spol. s r.o. (Czech Republic)
OPEN TOOL INTERNATIONAL, B.V. (Netherlands)
SEQUENT COMPUTER SYSTEMS S. r. I. (Italy)
SEQUENT COMPUTER SYSTEMS CJSC (Russia)
JAPAN:
SEQUENT COMPUTERS JAPAN CO., LTD
ASIA:
SEQUENT COMPUTER SYSTEMS (N.Z.) LIMITED (New Zealand)
SEQUENT COMPUTER SYSTEMS AUSTRALIA PTY. LIMITED
SEQUENT COMPUTER SYSTEMS ASIA LIMITED (Hong Kong)
SEQUENT COMPUTER SYSTEMS (SINGAPORE) PTE. LIMITED
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-16428, 33-16463, 33-33338, 33-36836, 33-39315,
33-39657, 33-40941, 33-40942, 33-63972, 33-63974, 33-59147 and 33-59611) of
Sequent Computer Systems, Inc. of our report dated January 28, 1998 appearing
in the Annual Report to Shareholders which is incorporated in this Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule.
PRICE WATERHOUSE LLP
Portland, Oregon
March 25, 1998
Sequent I
SEVENTH AMENDMENT TO LEASE
THIS AMENDMENT is made this 30 day of September 1997 by and between the
undersigned Landlord and Tenant.
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement
dated May 8, 1987 (the "Lease Agreement") and the following documents (the
"Amendments") which amend such Lease Agreement (the Lease Agreement and all
such Amendments are herein collectively referred to as the "Lease"):
(a) First Amendment dated December 29, 1987;
(b) Second Amendment dated July 28, 1988;
(c) Third Amendment dated July 28, 1989;
(d) Fourth Amendment dated September 20, 1991;
(e) Fifth Amendment dated December 2, 1992; and
(f) Sixth Amendment dated April 5, 1993.
B. Landlord and Tenant desire to amend the Lease as set forth herein.
NOW, THEREFORE, for good and valuable consideration, it is agreed as
follows:
1 Lease Revisions
1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement is
hereby deleted and the following is inserted in its place:
6.2.1 LESSEE must give written notice (herein the "Notice") of
the exercise of the Option to Purchase, which Notice shall be
delivered to LESSOR no earlier than June 30, 1999 nor later
than October 31, 1999, and any attempted exercise of the Option
to Purchase at any other time shall be null, void and of no
legal effect; and
1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2
of the Lease Agreement to the "Expiration Date of the Initial Term" or the
"Expiration Date" are hereby changed to be references to May 1, 2000.
1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is
hereby deleted and the following is inserted in its place:
6.4.2 Delays in Closing. The Closing shall occur on May 1, 2000.
1.4 Rescission Election. A rescission election given pursuant to
Section 6.8.1.2 of the Lease Agreement shall not constitute an election to
renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the
Lease Agreement is hereby deleted. However, a rescission election given
pursuant to Section 6.8.1.2 of the Lease Agreement shall constitute the
election by LESSEE and LESSOR to extend the initial term of the Lease for one
additional year from September 30, 2000 to September 30, 2001 on the same
terms and conditions, including continued payment of Basic Rent at the rate
established for Period 6.
1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease
Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted
and the following is inserted in its place:
6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur
costs in connection with the exercise of the Option to Purchase.
In the event the Option to Purchase is exercised but LESSEE
subsequently rescinds such exercise pursuant to this Section 6.8,
then LESSEE shall pay to LESSOR, within five (5) days of written
request, an amount equal to (a) all such costs incurred by LESSOR,
including, but not limited to, appraisal costs, attorney fees, and
title report cancellation fees, (b) interest at the rate set forth
in Section 4.5 above from the date of payment of each such cost by
LESSOR to the date of full reimbursement of the same by LESSEE,
and (c) the sum of $500 per day from the date that the Option to
Purchase is exercised to the date that the rescission notice is
given.
1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted
and the following is inserted in its place:
6.9 Remedies of Lessor. In the event LESSEE exercises the
Option to Purchase, and the transaction of purchase and sale of
the Property contemplated hereby does not Close when and as
provided herein for any reason attributable to LESSEE or any
person or entity in a relationship to LESSEE (except in the case
of a rescission allowed pursuant to Section 6.8.1 above), then
such event shall be treated as the giving by LESSEE of a
rescission notice under Section 6.8.1 above effective as of the
later of the date specified for Closing pursuant to Section 6.4.2
above or the date that LESSOR gives to LESSEE written notice of
LESSEE's failure to Close. LESSOR shall accept the payment of
costs under Section 6.8.2 above as liquidated damages and as its
sole remedy for such a failure of LESSEE to Close.
2 Status of Lease. Except as expressly amended hereby, the Lease
remains in full force and effect and is hereby ratified and -affirmed.
IN WITNESS WHEREOF, this Amendment has been executed as of the date and
year indicated above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa
corporation, and KOLL WOODSIDE
ASSOCIATES, a California general
partnership, tenants-in-common,
doing business as KC WOODSIDE
PETULA ASSOCIATES, LTD., an Iowa
corporation
By: /s/Jon Jacobson
Its: Vice President
By: /s/Anne Graff Brown
Its: Counsel
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/Dale Derby for Bob Witt
Its: Vice Presidnet of Information
Services
Sequent II
FIFTH AMENDMENT TO LEASE
THIS AMENDMENT is made this 30 day of September 1997 by and between
the undersigned Landlord and Tenant.
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement
dated May 8, 1987 (the "Lease Agreement") and the following documents (the
"Amendments") which amend such Lease Agreement (the Lease Agreement and all
such Amendments are herein collectively referred to as the "Lease"):
(a) Letter dated January 12, 1988;
(b) Amended Memorandum of Lease dated July 28, 1988
(c) First Amendment dated July 28, 1988
(d) Second Amendment dated September 13, 1991;
(e) Third Amendment dated December 2, 1992; and
(f) Fourth Amendment dated April 5, 1993.
B. Landlord and Tenant desire to amend the Lease as set forth
herein.
NOW, THEREFORE, for good and valuable consideration, it is agreed as
follows:
1 Lease Revisions.
1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement
is hereby deleted and the following is inserted in its place:
6.2.1 LESSEE must give written notice (herein the
"Notice") of the exercise of the Option to Purchase, which
Notice shall be delivered to LESSOR no earlier than May 31,
1997 nor later than September 30, 1997, and any attempted
exercise of the Option to Purchase at any other time shall
be null, void and of no legal effect; further, LESSEE must
simultaneously give "Notice" of the exercise of the "Option
to Purchase" under the Third Lease; and
1.2 Defined Term Change. All references in Sections 6.3.2 and
6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or
the "Expiration Date" are hereby changed to be references to April 1, 1998.
1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is hereby
deleted and the following is inserted in its place:
6.4.2 Delays in Closing. The Closing shall occur on April 1,
1998. LESSEE shall have no right to Close the purchase of the
Property absent simultaneously closing of the purchase of the
land and improvements covered by the third building Lease which
was executed by LESSOR and LESSEE and is dated July 28, 1988
(the "Third Lease"). Any failure by LESSEE to close the
purchase of the land and improvements covered by the Third
Lease on April 1, 1998 shall be deemed a rescission of the
exercise of the Option to Purchase the Property pursuant to
Section 6.8 below.
1.4 Rescission Election. A rescission election given pursuant to
Section 6.8.1.2 of the Lease Agreement shall not constitute an election to
renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the
Lease Agreement is hereby deleted. No rescission notice shall be valid
unless LESSEE simultaneously gives a rescission notice under Section 6.8.2
of the Third Lease.
1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease
Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby
deleted and the following is inserted in its place:
6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur
costs in connection with the exercise of the Option to Purchase.
In the event the Option to Purchase is exercised but LESSEE
subsequently rescinds such exercise pursuant to this
Section 6.8, then LESSEE shall pay to LESSOR, within five (5)
days of written request, an amount equal to (a) all such costs
incurred by LESSOR, including, but not limited to, appraisal
costs, attorney fees, and title report cancellation fees,
(b) interest at the rate set forth in Section 4.5 above from
the date of payment of each such cost by LESSOR to the date of
full reimbursement of the same by LESSEE, and (c) the sum of
$500 per day from the date that the Option to Purchase is
exercised to the date that the rescission notice is given.
1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted
and the following is inserted in its place:
6.9 Remedies of Lessor. In the event LESSEE exercises the
Option to Purchase, and the transaction of purchase and sale of
the Property contemplated hereby does not Close when and as
provided herein for any reason attributable to LESSEE or any
person or entity in a relationship to LESSEE (except in the
case of a rescission allowed pursuant to Section 6.8.1 above),
then such event shall be treated as the giving by LESSEE of a
rescission notice under Section 6.8.1 above effective as of the
later of the date specified for Closing pursuant to Section
6.4.2 above or the date that LESSOR gives to LESSEE written
notice of LESSEE's failure to Close. LESSOR shall accept the
payment of costs under Section 6.8.2 above as liquidated damages
and as its sole remedy for such a failure of LESSEE to Close.
2 Status of Lease. Except as expressly amended hereby, the Lease
remains in full force and effect and is hereby ratified and affirmed.
IN WITNESS WHEREOF, this Amendment has been executed as of the date and
year indicated above.
LANLORD: PETULA ASSOCIATES, LTD., an Iowa
corporation, and KOLL WOODSIDE
ASSOCIATES, a California general
partnership, tenants-in-common, doing
business as KC WOODSIDE
PETULA ASSOCIATES, LTD, an Iowa
corporation
By: /s/Jon Jacobson
Its: Vice President of Commerical
Real Estate
By: /s/Anne Graff Brown
Its: Counsel
TENANT: SEQUENT COMOUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/Dale Derby for Bob Witt
Its: Vice President of Information
Services
Sequent III
FIFTH AMENDMENT TO LEASE
THIS AMENDMENT is made this 30 day of September 1997 by and between the
undersigned Landlord and Tenant.
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement
dated July 28, 1988 (the "Lease Agreement") and the following documents (the
"Amendments") which amend such Lease Agreement (the Lease Agreement and all
such Amendments are herein collectively referred to as the "Lease"):
(a) First Amendment dated July 28, 1989;
(b) Second Amendment dated September 13, 1991;
(c) Third Amendment dated December 2, 1992; and
(d) Fourth Amendment dated April 5, 1993.
B. Landlord and Tenant desire to amend the Lease as set forth
herein.
NOW, THEREFORE, for good and valuable consideration, it is agreed as
follows:
1 Lease Revisions.
1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement
is hereby deleted and the following is inserted in its place:
6.2.1 LESSEE must give written notice (herein the
"Notice") of the exercise of the Option to Purchase, which
Notice shall be delivered to LESSOR no earlier than May 31,
1997 nor later than September 30, 1997, and any attempted
exercise of the Option to Purchase at any other time shall
be null, void and of no legal effect; further, LESSEE must
simultaneously give "Notice" of the exercise of the "Option
to Purchase" under the Second Lease; and
1.2 Defined Term Change. All references in Sections 6.3.2 and
6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or
the "Expiration Date" are hereby changed to be references to April 1, 1998.
1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is
hereby deleted and the following is inserted in its place:
6.4.2 Delays in Closing. The Closing shall occur on April 1,
1998. LESSEE shall have no right to Close the purchase of the
Property absent simultaneously closing of the purchase of the
land and improvements covered by the Second Lease. Any
failure by LESSEE to close the purchase of the land and
improvements covered by the Second Lease on April 1, 1998 shall
be deemed a rescission of the exercise of the Option to Purchase
the Property pursuant to Section 6.8 below.
1.4 Rescission Election. A rescission election given pursuant to
Section 6.8.1.2 of the Lease Agreement shall not constitute an election to
renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the
Lease Agreement is hereby deleted. No rescission notice shall be valid
unless LESSEE simultaneously gives a rescission notice under Section 6.8.2
of the Second Lease.
1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease
Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted
and the following is inserted in its place:
6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur
costs in connection with the exercise of the Option to Purchase.
In the event the Option to Purchase is exercised but LESSEE
subsequently rescinds such exercise pursuant to this Section 6.8,
then LESSEE shall pay to LESSOR, within five (5) days of written
request, an amount equal to (a) all such costs incurred by
LESSOR, including, but not limited to, appraisal costs, attorney
fees, and title report cancellation fees, (b) interest at the
rate set forth in Section 4.5 above from the date of payment of
each such cost by LESSOR to the date of full reimbursement of the
same by LESSEE, and (c) the sum of $500 per day from the date
that the Option to Purchase is exercised to the date that the
rescission notice is given.
1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted
and the following is inserted in its place:
6.9 Remedies of Lessor. In the event LESSEE exercises the
Option to Purchase, and the action of purchase and sale of the
Property contemplated hereby does not Close when and as provided
herein for any reason attributable to LESSEE or any person or
entity in a relationship to LESSEE (except in the case of a
rescission allowed pursuant to Section 6.8.1 above), then such
event shall be treated as the giving by LESSEE of a rescission
notice under Section 6.8.1 above effective as of the later of
the date specified for Closing pursuant to Section 6.4.2 above
or the date that LESSOR gives to LESSEE written notice of
LESSEE's failure to Close. LESSOR shall accept the payment of
costs under Section 6.8.2 above as liquidated damages and as
its sole remedy for such a failure of LESSEE to Close.
1.7 Skybridge. The following is added at the end of the second
sentence of Section 47.3.4 of the Lease Agreement and is made a part of such
sentence:
provided, if LESSEE purchases the Property and the Second
Building simultaneously, the Skybridge shall be included in the
sale of the Property.
2 Status of Lease. Except as expressly amended hereby, the
Lease remains in full force and effect and is hereby ratified and affirmed.
IN WITNESS WHEREOF, this Amendment has been executed as of the date and
year indicated above.
LANDLORD: PRINCIPAL MUTUAL LIF INSURANCE
COMPANY, an Iowa corporation
By: /s/Michael S. Duffy
Its: Assistant Director of
Commercial Real Estate/Equities
By: /s/Scott D. Harris
Its: Assistant Director of
Commercial Real EState/Equities
PETULA ASSOCIATES, LTD., an Iowa
corporation
By: /s/Jon Jacobson
Its: Vice President of Commercial
Real Estate
By: /s/Madban Rengarajan
Its: Vice President
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon Corporation
By: /s/Dale Derby for Bob Witt
Its: Vice President of Information
Services
Sequent IV
FIFTH AMENDMENT TO LEASE
THIS AMENDMENT is made this 30 day of September 1997 by and between the
undersigned Landlord and Tenant.
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement
dated July 28, 1989 (the "Lease Agreement") and the following documents (the
"Amendments") which amend such Lease Agreement (the Lease Agreement and all
such Amendments are herein collectively referred to as the "Lease"):
(a) First Amendment dated September 13, 1991;
(b) Second Amendment dated August 13, 1992;
(c) Third Amendment dated December 2, 1992; and
(d) Fourth Amendment dated April 5, 1993.
B. Landlord and Tenant desire to amend the Lease as set forth
herein.
NOW, THEREFORE, for good and valuable consideration, it is agreed as
follows:
1 Lease Revisions.
1.1 Exercise Notice- Section 6.2.1 of the Lease Agreement is
hereby deleted and the following is inserted in its place:
6.2.1 LESSEE must give written notice (herein the
"Notice") of the exercise of the Option to Purchase, which
Notice shall be delivered to LESSOR no earlier than July 31,
1998 nor later than November 30, 1998, and any attempted
exercise of the Option to Purchase at any other time shall
be null, void and of no legal effect; and
1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2
of the Lease Agreement to the "Expiration Date of the Initial Term" or the
"Expiration Date" are hereby changed to be references to June 1, 1999.
1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is
hereby deleted and the following is inserted in its place:
6.4.2 Delays in Closing. The Closing shall occur on June 1,
1999.
1.4 Rescission Election. A rescission election given pursuant to
Section 6.8.1.2 of the Lease Agreement shall not constitute an election to
renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the
Lease Agreement is hereby deleted.
1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease
Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted
and the following is inserted in its place:
6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur
costs in connection with the exercise of the Option to Purchase.
In the event the Option to Purchase is exercised but LESSEE
subsequently rescinds such exercise pursuant to this Section 6.8,
then LESSEE shall pay to LESSOR, within five (5) days of written
request, an amount equal to (a) all such costs incurred by LESSOR,
including, but not limited to, appraisal costs, attorney fees,
and title report cancellation fees, (b) interest at the rate set
forth in Section 4.5 above from the date of payment of each such
cost by LESSOR to the date of full reimbursement of the same by
LESSEE, and (c) the sum of $500 per day from the date that the
Option to Purchase is exercised to the date that the rescission
notice is given.
1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted
and the following is inserted in its place:
6.9 Remedies of Lessor. In the event LESSEE exercises the
Option to Purchase, and the transaction of purchase and sale of
the Property contemplated hereby does not Close when and as
provided herein for any reason attributable to LESSEE or any
person or entity in a relationship to LESSEE (except in the case
of a rescission allowed pursuant to Section 6.8.1 above), then
such event shall be treated as the giving by LESSEE of a
rescission notice under Section 6.8.1 above effective as of the
later of the date specified for Closing pursuant to Section 6.4.2
above or the date that LESSOR gives to LESSEE written notice of
LESSEE's failure to Close. LESSOR shall accept the payment of
costs under Section 6.8.2 above as liquidated damages and as its
sole remedy for such a failure of LESSEE to Close.
2 Status of Lease. Except as expressly amended hereby, the Lease
remains in full force and effect and is hereby ratified and affirmed.
IN WITNESS WHEREOF, this Amendment has been executed as of the date and
year indicated above.
LANLORD: PETULA ASSOCIATES, LTD., an Iowa
corporation, and KOLL WOODSIDE
ASSOCIATES, a California general
partnership, tenants-in-common,
doing business as KC WOODSIDE
PETULA ASSOCIATES, LTD., an Iowa
corporation
By: /s/Jon Jacobson
Its: Vice President of Commerical
Real Estate
By: /s/Anne Graff Brown
Its: Counsel
TENANT: SEQUENT COMPUTER SYSTEMS, INC., an
Oregon corporation
By: /s/Dan Derby for Bob Witt
Its: Vice President of Information
Services
Second AMENDMENT TO LEASE
EARLY POSSESSION AGREEMENT
That certain lease dated June 10, 1991, by and between Petula Associates Ltd.,
and Koll Woodside Associates, Landlord, and Sequent Computer Systems, Inc.,
Tenant, for the premises located at 15275 SW Koll Parkway, Beaverton, Oregon,
97006, Building 3, Units A, B, C, D, and E, is amended this 1st day of March,
1997 solely as hereinafter described.
Effective the lst day of APRIL, 1997, the portions of the Lease as
numbered below shall be amended to read as follows:
l.e. PREMISES AREA:
Tenant shall occupy the expansion premises, Unit C, consisting of
6,238 square feet, effective April 1, 1997. Total Amended Premises
Area shall be 25,653 square feet as of this date. Landlord and Tenant
agree that all the terms and conditions of the Lease are to be in full
force and effect as of the date of Tenant's possession of the
premises.
1.g. PREMISES PERCENT OF PROJECT: 19.58%
1.j. RENT ADJUSTMENT - Effective Date of Rent Increase
04/01/97 - 12/31/97 $ 18,403
01/01/98 - 05/31/98 22,257
06/01/98 - 05/31/01 23,509
06/01/01 - 05/31/03 25,025
All other terms and conditions of the above described Lease shall remain in
full force and effect.
Landlord: PETULA ASSOCIATES, LTD.,, an Iowa Corporation and
KOLL WOODSIDE ASSOCIATES, a California general partnership
By: /s/Kurt Schaeffer
Date:
Tenant: SEQUENT COMPUTER SYSTEMS, INC.
By: /s/Bob Witt
Date: 3/20/97
SEQUENT COMPUTER SYSTEMS, INC.
1995 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the
"Plan") is to enable Sequent Computer Systems, Inc. (the "Company") to
attract and retain the services of (1) selected employees, officers and
directors of the Company or of any subsidiary of the Company and
(2) selected non-employee agents, consultants, advisors, persons involved
in the sale or distribution of the Company's products and independent
contractors of the Company or any subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as
provided below and in paragraph 14, the shares to be offered under the Plan
shall consist of Common Stock of the Company, and the total number of
shares of Common Stock that may be issued under the Plan shall not exceed
1,200,000 shares plus any shares that are available for grant under the
Company's 1989 Incentive Plan or that may subsequently become available for
grant under such plan or the 1987 Nonstatutory Stock Option Plan or the
1987 Employee Stock Option through the expiration, termination, forfeiture
or cancellation of awards under such plans. The shares issued under the
Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such
option, stock appreciation right or performance unit shall again be
available under the Plan. If shares sold or awarded as a bonus under the
Plan are forfeited to the Company or repurchased by the Company, the number
of shares forfeited or repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of
January 26, 1995 (the "Effective Date"). No option, stock appreciation
right or performance unit granted under the Plan to an officer who is
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or a director shall become exercisable, however, until
the Plan is approved by shareholders in accordance with Rule 16b-3 as in
effect at the time of the Company's 1995 annual meeting of shareholders and
any such awards under the Plan prior to such approval shall be conditioned
on and subject to such approval. Subject to this limitation, options,
stock appreciation rights and performance units may be granted and shares
may be awarded as bonuses or sold under the Plan at any time after the
effective date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until all
shares available for issuance under the Plan have been issued and all
restrictions on such shares have lapsed. The Board of Directors may
suspend or terminate the Plan at any time except with respect to options,
performance units and shares subject to restrictions then outstanding under
the Plan. Termination shall not affect any outstanding options, any right
of the Company to repurchase shares or the forfeitability of shares issued
under the Plan.
4. Administration.
(a) Board of Directors. The Plan shall be administered by
the Board of Directors of the Company, which shall determine and designate
from time to time the individuals to whom awards shall be made, the amount
of the awards and the other terms and conditions of the awards. Subject to
the provisions of the Plan, the Board of Directors may from time to time
adopt and amend rules and regulations relating to administration of the
Plan, advance the lapse of any waiting period, accelerate any exercise
date, waive or modify any restriction applicable to shares (except those
restrictions imposed by law) and make all other determinations in the
judgment of the Board of Directors necessary or desirable for the
administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Board of Directors
shall be final and conclusive. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect, and it shall be the sole and final
judge of such expediency.
(b) Committee. The Board of Directors may delegate to a
committee of the Board of Directors or specified officers of the Company,
or both (the "Committee") any or all authority for administration of the
Plan. If authority is delegated to a Committee, all references to the
Board of Directors in the Plan shall mean and relate to the Committee
except (i) as otherwise provided by the Board of Directors, (ii) that only
the Board of Directors may amend or terminate the Plan as provided in
paragraphs 3 and 17 and (iii) that a Committee including officers of the
Company shall not be permitted to grant options to persons who are officers
of the Company.
5. Types of Awards; Eligibility; Limitations on Certain Awards.
The Board of Directors may, from time to time, take the following action,
separately or in combination, under the Plan: (i) grant Incentive Stock
Options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii) grant
options other than Incentive Stock Options ("Non-Statutory Stock Options")
as provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as
provided in paragraph 7; (iv) sell shares subject to restrictions as
provided in paragraph 8; (v) grant stock appreciation rights as provided in
paragraph 9; (vi) grant cash bonus rights as provided in paragraph 10;
(vii) grant performance units as provided in paragraph 11 and (viii) grant
foreign qualified awards as provided in paragraph 12. Any such awards may
be made to employees, including employees who are officers or directors,
and to other individuals described in paragraph 1 who the Board of
Directors believes have made or will make an important contribution to the
Company or its subsidiaries; provided, however, that only employees of the
Company shall be eligible to receive Incentive Stock Options under the Plan
and directors who are not employees shall receive awards only pursuant to
paragraph 13. The Board of Directors shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to
each individual to whom an award is made. At the discretion of the Board
of Directors, an individual may be given an election to surrender an award
in exchange for the grant of a new award. No employee may be granted
options or stock appreciation rights under the Plan for more than an
aggregate of 500,000 shares of Common Stock in any calendar year.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may
grant options under the Plan. With respect to each option grant,
the Board of Directors shall determine the number of shares subject to
the option, the option price, the period of the option, the time or
times at which the option may be exercised and whether the option is an
Incentive Stock Option or a Non-Statutory Stock Option. At the time of
the grant of an option or at any time thereafter, the Board of Directors
may provide that an optionee who exercised an option with Common Stock
of the Company shall automatically receive a new option to purchase
additional shares equal to the number of shares surrendered and
may specify the terms and conditions of such new options.
(ii) Exercise of Options. Except as provided in
paragraph 6(a)(iv) or as determined by the Board of Directors, no
option granted under the Plan may be exercised unless at the time
of such exercise the optionee is employed by or in the service of
the Company or any subsidiary of the Company and shall have been
so employed or provided such service continuously since the date
such option was granted. Absence on leave or on account of
illness or disability under rules established by the Board of
Directors shall not, however, be deemed an interruption of
employment or service for this purpose. Unless otherwise
determined by the Board of Directors, vesting of options shall not
continue during an absence on leave (including an extended
illness) or on account of disability. Except as provided in
paragraphs 6(a)(iv), 14 and 15, options granted under the Plan may
be exercised from time to time over the period stated in each
option in such amounts and at such times as shall be prescribed by
the Board of Directors, provided that options shall not be
exercised for fractional shares. Unless otherwise determined by
the Board of Directors, if the optionee does not exercise an
option in any one year with respect to the full number of shares
to which the optionee is entitled in that year, the optionee's
rights shall be cumulative and the optionee may purchase those
shares in any subsequent year during the term of the option.
(iii) Nontransferability. Each Incentive Stock
Option and, unless otherwise determined by the Board of Directors
with respect to an option granted to a person who is neither an
officer nor a director of the Company, each other option granted
under the Plan by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and
distribution of the state or country of the optionees domicile at
the time of death, and each option by its terms shall be
exercisable during the optionees lifetime only by the optionee.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined
by the Board of Directors, in the event the employment or
service of the optionee with the Company or a subsidiary
terminates for any reason other than because of physical
disability or death as provided in subparagraphs 6(a)(iv)(B)
and (C), the option may be exercised at any time prior to the
expiration date of the option or the expiration of 30 days
after the date of such termination, whichever is the shorter
period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such
termination.
(B) Termination Because of Total Disability.
Unless otherwise determined by the Board of Directors, in the
event of the termination of employment or service because of
total disability, the option may be exercised at any time
prior to the expiration date of the option or the expiration
of 12 months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee
was entitled to exercise the option at the date of such
termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or
which has lasted or is expected to last for a continuous
period of 12 months or more and which causes the optionee to
be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties as an employee,
director, officer or consultant of the Company and to be
engaged in any substantial gainful activity. Total disability
shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished
their opinion of total disability to the Company.
(C) Termination Because of Death. Unless
otherwise determined by the Board of Directors, in the event
of the death of an optionee while employed by or providing
service to the Company or a subsidiary, the option may be
exercised at any time prior to the expiration date of the
option or the expiration of 12 months after the date of such
death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the
date of such termination and only by the person or persons to
whom such optionees rights under the option shall pass by the
optionee's will or by the laws of descent and distribution of
the state or country of domicile at the time of death.
(D) Amendment of Exercise Period Applicable to
Termination. The Board of Directors, at the time of grant or
at any time thereafter, may extend the 30-day and 12-month
exercise periods any length of time not later than the
original expiration date of the option, and may increase the
portion of an option that is exercisable, subject to such
terms and conditions as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent
that the option of any deceased optionee or of any optionee
whose employment or service terminates is not exercised within
the applicable period, all further rights to purchase shares
pursuant to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Board of
Directors determines otherwise, shares may be acquired pursuant to
an option granted under the Plan only upon receipt by the Company
of notice in writing from the optionee of the optionee's intention
to exercise, specifying the number of shares as to which the
optionee desires to exercise the option and the date on which the
optionee desires to complete the transaction, and if required in
order to comply with the Securities Act of 1933, as amended,
containing a representation that it is the optionee's present
intention to acquire the shares for investment and not with a view
to distribution. Unless the Board of Directors determines
otherwise, on or before the date specified for completion of the
purchase of shares pursuant to an option, the optionee must have
paid the Company the full purchase price of such shares in cash
(including, with the consent of the Board of Directors, cash that
may be the proceeds of a loan from the Company) or, with the
consent of the Board of Directors, in whole or in part, in Common
Stock of the Company valued at fair market value, restricted
stock, performance units or other contingent awards denominated in
either stock or cash, deferred compensation credits, promissory
notes and other forms of consideration. The fair market value of
Common Stock provided in payment of the purchase price shall be
the closing price of the Common Stock as reported in The Wall
Street Journal on the trading day preceding the date the option is
exercised, or such other reported value of the Common Stock as
shall be specified by the Board of Directors. No shares shall be
issued until full payment therefor has been made. With the
consent of the Board of Directors, an optionee may request the
Company to apply automatically the shares to be received upon the
exercise of a portion of a stock option (even though stock
certificates have not yet been issued) to satisfy the purchase
price for additional portions of the option. Each optionee who
has exercised an option shall immediately upon notification of the
amount due, if any, pay to the Company in cash amounts necessary
to satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required
beyond any amount deposited before delivery of the certificates,
the optionee shall pay such amount to the Company on demand. If
the optionee fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to
the optionee, including salary, subject to applicable law. With
the consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold
from the shares to be issued upon the exercise that number of
shares that would satisfy the withholding amount due or by
delivering to the Company Common Stock to satisfy the withholding
amount. Upon the exercise of an option, the number of shares
reserved for issuance under the Plan shall be reduced by the
number of shares issued upon exercise of the option, less the
number of shares surrendered in payment of the option exercise or
surrendered or withheld to satisfy withholding obligations.
(b) Incentive Stock Options. Incentive Stock Options
shall be subject to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may
be granted Incentive Stock Options under the Plan if the aggregate
fair market value, on the date of grant, of the Common Stock with
respect to which Incentive Stock Options are exercisable for the
first time by that employee during any calendar year under the
Plan and under any other incentive stock option plan (within the
meaning of Section 422 of the Code) of the Company or any parent
or subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent
Shareholders. An Incentive Stock Option may be granted under the
Plan to an employee possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of
any parent or subsidiary of the Company only if the option price
is at least 110 percent of the fair market value of the Common
Stock subject to the option on the date it is granted, as
described in paragraph 6(b)(iv), and the option by its terms is
not exercisable after the expiration of five years from the date
it is granted.
(iii) Duration of Options. Subject to paragraphs
6(a)(ii) and 6(b)(ii), Incentive Stock Options granted under the
Plan shall continue in effect for the period fixed by the Board of
Directors, except that no Incentive Stock Option shall be
exercisable after the expiration of 10 years from the date it is
granted.
(iv) Option Price. The option price per share shall
be determined by the Board of Directors at the time of grant.
Except as provided in paragraph 6(b)(ii), the option price shall
not be less than 100 percent of the fair market value of the
Common Stock covered by the Incentive Stock Option at the date the
option is granted. The fair market value shall be deemed to be
the closing price of the Common Stock as reported in The Wall
Street Journal on the day preceding the date the option is
granted, or if there has been no sale on that date, on the last
preceding date on which a sale occurred, or such other value of
the Common Stock as shall be specified by the Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock
Option shall be granted on or after the tenth anniversary of the
effective date of the Plan.
(vi) Conversion of Incentive Stock Options. The
Board of Directors may at any time without the consent of the
optionee convert an Incentive Stock Option to a Non-Statutory
Stock Option.
(vii) Limitation on Number of Shares Issuable Under
Incentive Stock Options. Subject to adjustment as provided in
paragraph 14, the total number of shares of Common Stock that may
be issued under the Plan upon exercise of Incentive Stock Options
shall not exceed 1,200,000 shares.
(c) Non-Statutory Stock Options. Non-Statutory Stock
Options shall be subject to the following additional terms and conditions:
(i) Option Price. The option price for
Non-Statutory Stock Options shall be determined by the Board of
Directors at the time of grant. The option price may not be less
than 50 percent of the fair market value of the shares on the date
of grant. The fair market value of shares covered by a
Non-Statutory Stock Option shall be determined pursuant to
paragraph 6(b)(iv).
(ii) Duration of Options. Non-Statutory Stock
Options granted under the Plan shall continue in effect for the
period fixed by the Board of Directors.
7. Stock Bonuses. The Board of Directors may award shares under
the Plan as stock bonuses. Shares awarded as a bonus shall be subject to
the terms, conditions, and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning
transferability and forfeiture of the shares awarded, together with such
other restrictions as may be determined by the Board of Directors. The
Board of Directors may require the recipient to sign an agreement as a
condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax
withholding requirements. The agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of
Directors. The certificates representing the shares awarded shall bear any
legends required by the Board of Directors. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the recipient fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the recipient, including salary or fees for services,
subject to applicable law. With the consent of the Board of Directors, a
recipient may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance of a stock bonus, the number of
shares reserved for issuance under the Plan shall be reduced by the number
of shares issued, less the number of shares surrendered or withheld to
satisfy withholding obligations.
8. Restricted Stock. The Board of Directors may issue shares
under the Plan for such consideration (including promissory notes and
services) as determined by the Board of Directors provided that in no event
shall the consideration be less than 50 percent of fair market value of the
Common Stock at the time of issuance. Shares issued under the Plan shall
be subject to the terms, conditions and restrictions determined by the
Board of Directors. The restrictions may include restrictions concerning
transferability, repurchase by the Company and forfeiture of the shares
issued, together with such other restrictions as may be determined by the
Board of Directors. All Common Stock issued pursuant to this paragraph 8
shall be subject to a purchase agreement, which shall be executed by the
Company and the prospective recipient of the shares prior to the delivery
of certificates representing such shares to the recipient. The purchase
agreement may contain any terms, conditions, restrictions, representations
and warranties required by the Board of Directors. The certificates
representing the shares shall bear any legends required by the Board of
Directors. The Company may require any purchaser of restricted stock to
pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
purchaser fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the purchaser,
including salary, subject to applicable law. With the consent of the Board
of Directors, a purchaser may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of restricted
stock, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued, less the number of shares
surrendered in payment of the restricted stock or surrendered or withheld
to satisfy withholding obligations.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under
the Plan by the Board of Directors, subject to such rules, terms, and
conditions as the Board of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the
holder, upon exercise, to receive from the Company in exchange
therefor an amount equal in value to the excess of the fair market
value on the date of exercise of one share of Common Stock of the
Company over its fair market value on the date of grant (or, in
the case of a stock appreciation right granted in connection with
an option, the excess of the fair market value of one share of
Common Stock of the Company over the option price per share under
the option to which the stock appreciation right relates),
multiplied by the number of shares covered by the stock
appreciation right or the option, or portion thereof, that is
surrendered. No stock appreciation right shall be exercisable at
a time that the amount determined under this subparagraph is
negative. Payment by the Company upon exercise of a stock
appreciation right may be made in Common Stock valued at fair
market value, in cash, or partly in Common Stock and partly in
cash, all as determined by the Board of Directors.
(ii) A stock appreciation right shall be exercisable
only at the time or times established by the Board of Directors.
If a stock appreciation right is granted in connection with an
option, the following rules shall apply: (1) the stock
appreciation right shall be exercisable only to the extent and on
the same conditions that the related option could be exercised;
(2) upon exercise of the stock appreciation right, the option or
portion thereof to which the stock appreciation right relates
terminates; and (3) upon exercise of the option, the related stock
appreciation right or portion thereof terminates. No stock
appreciation right granted to an officer or director may be
exercised during the first six months following the date it is
granted.
(iii) The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may
impose any conditions upon the exercise of a stock appreciation
right or adopt rules and regulations from time to time affecting
the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock
appreciation rights granted prior to adoption or amendment of such
rules and regulations as well as stock appreciation rights granted
thereafter.
(iv) For purposes of this paragraph 9, the fair
market value of the Common Stock shall be the closing price of the
Common Stock as reported in The Wall Street Journal, or such other
reported value of the Common Stock as shall be specified by the
Board of Directors, on the trading day preceding the date the
stock appreciation right is exercised.
(v) No fractional shares shall be issued upon
exercise of a stock appreciation right. In lieu thereof, cash may
be paid in an amount equal to the value of the fraction or, if the
Board of Directors shall determine, the number of shares may be
rounded downward to the next whole share.
(vi) Each participant who has exercised a stock
appreciation right shall, upon notification of the amount due, pay
to the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the
participant fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to
the participant including salary, subject to applicable law. With
the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company
withhold from any shares to be issued upon the exercise that
number of shares that would satisfy the withholding amount due or
by delivering Common Stock to the Company to satisfy the
withholding amount.
(vii) Upon the exercise of a stock appreciation
right for shares, the number of shares reserved for issuance under
the Plan shall be reduced by the number of shares issued, less the
number of shares surrendered or withheld to satisfy withholding
obligations. Cash payments of stock appreciation rights shall not
reduce the number of shares of Common Stock reserved for issuance
under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus
rights under the Plan in connection with (i) options granted or previously
granted, (ii) stock appreciation rights granted or previously granted,
(iii) stock bonuses awarded or previously awarded and (iv) shares sold or
previously sold under the Plan. Cash bonus rights will be subject to
rules, terms and conditions as the Board of Directors may prescribe. The
payment of a cash bonus shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash
bonus right granted in connection with an option will entitle an optionee
to a cash bonus when the related option is exercised (or terminates in
connection with the exercise of a stock appreciation right related to the
option) in whole or in part. No cash bonus right granted to an officer or
director in connection with an option may be exercised during the first six
months following the date the bonus right is granted. If an optionee
purchases shares upon exercise of an option and does not exercise a related
stock appreciation right, the amount of the bonus shall be determined by
multiplying the excess of the total fair market value of the shares to be
acquired upon the exercise over the total option price for the shares by
the applicable bonus percentage. If the optionee exercises a related stock
appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair
market value of the shares and cash received pursuant to the exercise of
the stock appreciation right by the applicable bonus percentage. The bonus
percentage applicable to a bonus right shall be determined from time to
time by the Board of Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A
cash bonus right granted in connection with a stock bonus will entitle the
recipient to a cash bonus payable when the stock bonus is awarded or
restrictions, if any, to which the stock is subject lapse. If bonus stock
awarded is subject to restrictions and is repurchased by the Company or
forfeited by the holder, the cash bonus right granted in connection with
the stock bonus shall terminate and may not be exercised. The amount and
timing of payment of a cash bonus shall be determined by the Board of
Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases.
A cash bonus right granted in connection with the purchase of stock
pursuant to paragraph 8 will entitle the recipient to a cash bonus when the
shares are purchased or restrictions, if any, to which the stock is subject
lapse. Any cash bonus right granted in connection with shares purchased
pursuant to paragraph 8 shall terminate and may not be exercised in the
event the shares are repurchased by the Company or forfeited by the holder
pursuant to applicable restrictions. The amount of any cash bonus to be
awarded and timing of payment of a cash bonus shall be determined by the
Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus
paid pursuant to paragraph 10 the amount necessary to satisfy any
applicable federal, state and local withholding requirements.
11. Performance Units. The Board of Directors may grant
performance units consisting of monetary units which may be earned in whole
or in part if the Company achieves certain goals established by the Board
of Directors over a designated period of time, but not in any event more
than 10 years. The goals established by the Board of Directors may include
earnings per share, return on shareholders' equity, return on invested
capital, and such other goals as may be established by the Board of
Directors. In the event that the minimum performance goal established by
the Board of Directors is not achieved at the conclusion of a period, no
payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the
performance units shall be paid to or vested in the participants. Partial
achievement of the maximum goal may result in a payment or vesting
corresponding to the degree of achievement as determined by the Board of
Directors. Payment of an award earned may be in cash or in Common Stock or
in a combination of both, and may be made when earned, or vested and
deferred, as the Board of Directors determines. Deferred awards shall earn
interest on the terms and at a rate determined by the Board of Directors.
Each participant who has been awarded a performance unit shall, upon
notification of the amount due, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant, including salary or fees for services,
subject to applicable law. With the consent of the Board of Directors a
participant may satisfy this obligation, in whole or in part, by having the
Company withhold from any shares to be issued that number of shares that
would satisfy the withholding amount due or by delivering Common Stock to
the Company to satisfy the withholding amount. The payment of a
performance unit in cash shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan. The number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued
upon payment of an award, less any shares surrendered or withheld to
satisfy withholding obligations.
12. Foreign Qualified Grants. Awards under the Plan may be
granted to such officers and employees of the Company and its subsidiaries
and such other persons described in paragraph 1 residing in foreign
jurisdictions as the Board of Directors may determine from time to time.
The Board of Directors may adopt such supplements to the Plan as may be
necessary to comply with the applicable laws of such foreign jurisdictions
and to afford participants favorable treatment under such laws; provided,
however, that no award shall be granted under any such supplement with
terms which are more beneficial to the participants than the terms
permitted by the Plan.
13. Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who becomes a
Non-Employee Director after the Effective Date shall be automatically
granted an option to purchase 10,000 shares of Common Stock on the date he
or she becomes a Non-Employee Director. A "Non-Employee Director" is a
director who is not an employee of the Company or any of its subsidiaries
and has not been an employee of the Company or any of its subsidiaries
within one year of any date as of which a determination of eligibility is
made.
(b) Additional Board Grants. Each Non-Employee Director
shall be automatically granted an option to purchase additional shares of
Common Stock in each calendar year subsequent to the year in which such
Non-Employee Director became a director, such option to be granted as of
the date of the Company's annual meeting of stockholders held in such
calendar year, provided that the Non-Employee Director continues to serve
in such capacity as of such date. The number of shares subject to each
additional grant shall be 5,000 shares.
(c) Committee Grants. On the date of each annual meeting
of shareholders, each Non-Employee Director who then serves on a committee
of the Board of Directors shall be automatically granted an option to
purchase 2,000 shares of Common Stock for each committee on which he or she
then serves.
(d) Exercise Price. The exercise price of the options
granted pursuant to this paragraph 13 shall be equal to 85 percent of the
fair market value of the Common Stock determined pursuant to paragraph
6(b)(iv).
(e) Term of Option. The term of each option granted
pursuant to this paragraph 13 shall be 10 years from the date of grant.
(f) Exercisability. Until an option expires or is
terminated and except as provided in paragraph 13(f), 14 and 15, an option
granted under this paragraph 13 shall be exercisable according to the
following schedule:
Period of Non-Employee
Director's Continuous
Service as a Director of
the Company from the Date Portion of Total Option
the Option is Granted Which Is Exercisable
Less than 12 months 0%
After 12 months 24% plus 2% for each
complete month of
continuous service in
excess of 12 months,
until fully vested.
For purposes of this paragraph 13(e), a complete month shall be
deemed to be the period which starts on the day of grant and ends on the
same day of the following calendar month, so that each successive "complete
month" ends on the same day of each successive calendar month (or, in
respect of any calendar month which does not include such a day, that
"complete month" shall end on the first day of the next following calendar
month).
(g) Termination As a Director. If an optionee ceases to
be a director of the Company for any reason, including death, the option
may be exercised at any time prior to the expiration date of the option or
the expiration of 30 days (or 12 months in the event of death) after the
last day the optionee served as a director, whichever is the shorter
period, but only if and to the extent the optionee was entitled to exercise
the option as of the last day the optionee served as a director.
(h) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the optionee's domicile at the time of death,
and each option by its terms shall be exercisable during the optionee's
lifetime only by the optionee.
(i) Exercise of Options. Options may be exercised upon
payment of cash or shares of Common Stock of the Company in accordance with
paragraph 6(a)(v).
14. Changes in Capital Structure. If the outstanding Common
Stock of the Company is hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Company or of another corporation by reason of any reorganization,
merger, consolidation, plan of exchange, recapitalization,
reclassification, stock split-up, combination of shares or dividend payable
in shares, appropriate adjustment shall be made by the Board of Directors
in the number and kind of shares available for awards under the Plan. In
addition, except with respect to transactions referred to in paragraph 15,
the Board of Directors shall make appropriate adjustment in the number and
kind of shares as to which outstanding options and stock appreciation
rights, or portions thereof then unexercised, shall be exercisable, so that
the optionees proportionate interest before and after the occurrence of the
event is maintained. Notwithstanding the foregoing, the Board of Directors
shall have no obligation to effect any adjustment that would or might
result in the issuance of fractional shares, and any fractional shares
resulting from any adjustment may be disregarded or provided for in any
manner determined by the Board of Directors. Any such adjustments made by
the Board of Directors shall be conclusive. If the stockholders of the
Company receive capital stock of another corporation ("Exchange Stock") in
exchange for their shares of Common Stock in any transaction involving a
merger, consolidation or plan of exchange, all options granted hereunder
shall be converted into options to purchase shares of Exchange Stock unless
the Company and the corporation issuing the Exchange Stock, in their sole
discretion, determine that any or all such options granted hereunder shall
be converted into options to purchase shares of Exchange Stock but instead
shall terminate in accordance with the provisions of the last sentence of
this paragraph 14. The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted
hereunder in the same proportion as used for determining the number of
shares of Exchange Stock the holders of the Common Stock receive in such
merger. The converted options shall be fully vested whether or not the
vesting requirements set forth in the option agreement have been satisfied.
In the event of dissolution of the Company or a merger, consolidation or
plan of exchange affecting the Company in lieu of providing for options and
stock appreciation rights as provided above in this paragraph 14 the Board
of Directors may, in its sole discretion, provide a 30-day period prior to
such event during which optionees shall have the right to exercise options
and stock appreciation rights in whole or in part without any limitation on
exercisability and upon the expiration of which 30-day period all
unexercised options and stock appreciation rights shall immediately
terminate.
15. Special Acceleration in Certain Events.
(a) Special Acceleration. Notwithstanding any other
provisions of the Plan, a special acceleration ("Special Acceleration") of
options and stock appreciation rights outstanding under the Plan shall
occur with the effect set forth in paragraph 15(b) at any time when any one
of the following events has taken place:
(i) The shareholders of the Company approve one of
the following ("Approved Transactions"):
(A) Any consolidation, merger or plan of
exchange involving the Company ("Merger") pursuant to
which Common Stock would be converted into cash; or
(B) Any sale, lease, exchange, or other
transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets
of the Company or the adoption of any plan or proposal
for the liquidation or dissolution of the Company; or
(ii) A tender or exchange offer, other than one made
by the Company, is made for Common Stock (or securities
convertible into Common Stock) and such offer results in a
portion of those securities being purchased and the offeror
after the consummation of the offer is the beneficial owner (as
determined pursuant to Section 13(d) of the Exchange Act),
directly or indirectly, of at least 20 percent of the
outstanding Common Stock (an "Offer"); or
(iii) The Company receives a report on Schedule 13D
of the Exchange Act reporting the beneficial ownership by any
person of 20 percent or more of the Company's outstanding
Common Stock, except that if such receipt shall occur during a
tender offer or exchange offer by any person other than the
Company or a wholly owned subsidiary of the Company, Special
Acceleration shall not take place until the conclusion of such
offer; or
(iv) During any period of 12 months or less,
individuals who at the beginning of such a period constituted a
majority of the Board of Directors cease for any reason to
constitute a majority thereof unless the nomination or election
of such new directors was approved by a vote of at least two
thirds of the directors then still in office who were directors
at the beginning of such period.
The terms used in this paragraph 15 and not defined elsewhere in the
Plan shall have the same meanings as such terms have in the Exchange Act
and the rules and regulations adopted thereunder.
(b) Effect on Outstanding Options and Stock Appreciation
Rights. Upon a Special Acceleration pursuant to paragraph 15(a):
(i) Exercise or Purchase of Options. All options
then outstanding under the Plan shall immediately become
exercisable in full for the remainder of their terms, provided
that no option may be exercised by an officer or director of
the Company within six months of its date of grant; and each
optionee shall have the right during a period of 30 days
following a Special Acceleration to have the Company purchase
any Non-Statutory Stock Options as to which no stock
appreciation rights have been granted at a cash purchase price
computed in accordance with paragraph 15(b)(iii) below and any
Incentive Stock Options as to which no stock appreciation
rights have been granted at a cash purchase price equal to the
product of (1) the excess, if any, of the fair market value of
a share of Common Stock (computed in accordance with procedures
for granting Incentive Stock Options) over the option price and
(2) the number of shares of Common Stock covered by the
Incentive Stock Options or portion thereof surrendered,
provided that the Company shall have the right during such
period to purchase any Incentive Stock Option as to which no
stock appreciation rights have been granted at the purchase
price computed in accordance with paragraph 15(b)(iii) below.
With respect to an option (as to which no stock appreciation
rights have been granted) granted less than six months prior to
a Special Acceleration to an officer or director of the
Company, the officer or director shall have the right to have
the Company purchase such stock option in accordance with this
paragraph 14(b)(i) during the 30 days following the expiration
of six months after the date of such grant, and this right
shall apply even if the option has otherwise terminated
pursuant to paragraph 6(a)(iv) after a Special Acceleration.
(ii) All stock appreciation rights outstanding
under the Plan shall immediately become exercisable in full for
a period of 30 days following a Special Acceleration, with
payment to be made solely in cash upon any exercise during such
period of a stock appreciation right granted with respect to a
Non-Statutory Stock Option in an amount computed in accordance
with paragraph 15(b)(iii) below, and in cash upon exercise
during such period of a stock appreciation right granted with
respect to an Incentive Stock Option in an amount equal to the
product of (1) the excess, if any, of the fair market value of
a Common Share (computed in accordance with procedures for
granting Incentive Stock Options) over the exercise price of
the related option and (2) the number of shares of Common Stock
covered by the related option. Notwithstanding the foregoing,
the Company shall have the right during such period to purchase
any stock appreciation right granted with respect to an
Incentive Stock Option (and cancel the related options) at the
purchase price computed in accordance with paragraph 15(b)(iii)
below, and no stock appreciation right may be exercised by an
officer or director of the Company within six months of its
date of grant. With respect to a stock appreciation right
granted less than six months prior to a Special Acceleration to
an officer or director of the Company, the stock appreciation
right shall become exercisable in full for a period of 30 days
following the expiration of six months after the date of such
grant, and this right shall apply even if the stock
appreciation right has otherwise terminated pursuant to
paragraph 6(a)(iv) after a Special Acceleration.
(iii) Except as otherwise specified in paragraphs
15(b)(i) and 15(b)(ii) above, the purchase price for an option
or a stock appreciation right and the amount to be paid upon
exercise of a stock appreciation right shall be an amount equal
to the product of (1) the excess, if any, of the highest of
(A) the highest reported closing sales price of a share of
Common Stock as reported in The Wall Street Journal during the
60 days preceding such exercise, (B) the highest purchase price
shown in any Schedule 13D referred to in paragraphs 15(a)(ii)
or 15(a)(iii) as paid within the 60 days prior to the date of
such report, (C) the highest gross price (before brokerage
commissions and soliciting dealers' fees) paid or to be paid
for a share of Common Stock (whether by way of exchange,
conversion, distribution, or liquidation or otherwise) in any
Approved Transaction or Offer that is in effect at any time
during the 60 days preceding such exercise, over the option
price, and (2) the number of shares of Common Stock covered by
the stock option or stock appreciation right, or portions
thereof surrendered. If the consideration paid or to be paid
in any Approved Transaction or offer consists, in whole or
part, of consideration other than cash, the Board of Directors
shall take action it deems appropriate to establish the cash
value of the consideration, but the valuation shall not be less
than the value, if any, attributed to the consideration by any
other party to the Approved Transaction or Offer.
(iv) No options or stock appreciation rights may be
exercised upon a Special Acceleration if the amount determined
under paragraph 15(b)(iii) is negative. The rights set forth
in paragraph 15 shall be transferable only to the extent the
related option is transferable in accordance with paragraph
6(a)(iii).
16. Corporate Mergers, Acquisitions, etc. The Board of
Directors may also grant options, stock appreciation rights, performance
units, stock bonuses and cash bonuses and issue restricted stock under the
Plan having terms, conditions and provisions that vary from those specified
in this Plan provided that any such awards are granted in substitution for,
or in connection with the assumption of, existing options, stock
appreciation rights, stock bonuses, cash bonuses, restricted stock and
performance units granted, awarded or issued by another corporation and
assumed or otherwise agreed to be provided for by the Company pursuant to
or by reason of a transaction involving a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation
to which the Company or a subsidiary is a party.
17. Amendment of Plan. The Board of Directors may at any time,
and from time to time, modify or amend the Plan in such respects as it
shall deem advisable because of changes in the law while the Plan is in
effect or for any other reason. Except as provided in paragraphs 6(a)(iv),
9, 14 and 15, however, no change in an award already granted shall be made
without the written consent of the holder of such award.
18. Approvals. The obligations of the Company under the Plan
are subject to the approval of state and federal authorities or agencies
with jurisdiction in the matter. The Company will use its best efforts to
take steps required by state or federal law or applicable regulations,
including rules and regulations of the Securities and Exchange Commission
and any stock exchange on which the Company's shares may then be listed, in
connection with the grants under the Plan. The foregoing notwithstanding,
the Company shall not be obligated to issue or deliver Common Stock under
the Plan if such issuance or delivery would violate applicable state or
federal securities laws.
19. Employment and Service Rights. Nothing in the Plan or any
award pursuant to the Plan shall (i) confer upon any employee any right to
be continued in the employment of the Company or any subsidiary or
interfere in any way with the right of the Company or any subsidiary by
whom such employee is employed to terminate such employee's employment at
any time, for any reason, with or without cause, or to decrease such
employee's compensation or benefits, or (ii) confer upon any person engaged
by the Company any right to be retained or employed by the Company or to
the continuation, extension, renewal, or modification of any compensation,
contract, or arrangement with or by the Company.
20. Rights as a Shareholder. The recipient of any award under
the Plan shall have no rights as a shareholder with respect to any Common
Stock until the date of issue to the recipient of a stock certificate for
such shares. Except as otherwise expressly provided in the Plan, no
adjustment shall be made for dividends or other rights for which the record
date occurs prior to the date such stock certificate is issued.
SEQUENT COMPUTER SYSTEMS, INC.
1997 STOCK OPTION PLAN
1. Purpose. The purpose of this Stock Option Plan (the "Plan") is
to enable Sequent Computer Systems, Inc. (the "Company") to attract and retain
the services of executive officers and directors of the Company or of any
subsidiary of the Company.
2. Shares Subject to the Plan. Subject to adjustment as provided
below and in paragraph 9, the shares to be offered under the Plan shall consist
of Common Stock of the Company, and the total number of shares of Common Stock
that may be issued under the Plan shall not exceed 750,000 shares plus any
shares that become available for grant under the Plan through the expiration,
termination or cancellation of option grants under the Plan. The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If
an option granted under the Plan expires, terminates or is canceled, the
unissued shares subject to such option shall again be available under the Plan.
3. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective as of
March 11, 1997 (the "Effective Date"). Options may be granted under the
Plan at any time after the Effective Date and before termination of the
Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued. The Board of
Directors may suspend or terminate the Plan at any time except with
respect to options then outstanding under the Plan. Termination shall not
affect any outstanding options under the Plan.
4. Administration.
(a) Board of Directors. The Plan shall be administered by the
Board of Directors of the Company, which shall determine and designate
from time to time the executive officers and directors to whom option
grants shall be made, the amount of the grants and the other terms and
conditions of the awards. Subject to the provisions of the Plan, the
Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of
any waiting period, accelerate any exercise date, waive or modify any
restriction applicable to shares (except those restrictions imposed by
law) and make all other determinations in the judgment of the Board of
Directors necessary or desirable for the administration of the Plan. The
interpretation and construction of the provisions of the Plan and related
agreements by the Board of Directors shall be final and conclusive. The
Board of Directors may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement
in the manner and to the extent it shall deem expedient to carry the Plan
into effect, and it shall be the sole and final judge of such expediency.
(b) Committee. The Board of Directors may delegate to a committee
of the Board of Directors (the "Committee") any or all authority for
administration of the Plan. If authority is delegated to a Committee, all
references to the Board of Directors in the Plan shall mean and relate to
the Committee except (i) as otherwise provided by the Board of Directors
and (ii) that only the Board of Directors may amend or terminate the Plan
as provided in paragraphs 3 and 12.
5. Types of Awards; Eligibility; Limitations on Certain Awards. The
Board of Directors may, from time to time, take the following action,
separately or in combination, under the Plan: (i) grant Incentive Stock
Options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii) grant
options other than Incentive Stock Options ("Non-Statutory Stock Options") as
provided in paragraphs 6(a) and 6(c); and (iii) grant foreign qualified awards
as provided in paragraph 7. Option grants may be made to executive officers of
the Company and to non-employee directors providing consulting services to the
Company selected by the Board of Directors. The Board of Directors shall
select the executive officers and directors to whom grants shall be made and
shall specify the action taken with respect to each individual to whom a grant
is made. The Board of Directors shall determine which employees or officers
are executive officers for purposes of the Plan. At the discretion of the
Board of Directors, an individual may be given an election to surrender an
award in exchange for the grant of a new award. No employee may be granted
options under the Plan for more than an aggregate of 300,000 shares of
Common Stock in any calendar year.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. With respect to each option grant, the
Board of Directors shall determine the number of shares subject to
the option, the option price, the period of the option, the time or
times at which the option may be exercised and whether the option is
an Incentive Stock Option or a Nonstatutory Stock Option.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Board of Directors, no option
granted under the Plan may be exercised unless at the time of such
exercise the optionee is employed by or performing services for the
Company or any subsidiary of the Company and shall have been so
employed continuously since the date such option was granted.
Absence on leave or on account of illness or disability under rules
established by the Board of Directors shall not, however, be deemed
an interruption of employment or service for this purpose. Unless
otherwise determined by the Board of Directors, vesting of options
shall not continue during an absence on leave (including an extended
illness) or on account of disability. Except as provided in
paragraphs 6(a)(iv), 9 and 10, options granted under the Plan may be
exercised from time to time over the period stated in each option in
such amounts and at such times as shall be prescribed by the Board
of Directors, provided that options shall not be exercised for
fractional shares. Unless otherwise determined by the Board of
Directors, if the optionee does not exercise an option in any one
year with respect to the full number of shares to which the optionee
is entitled in that year, the optionee's rights shall be cumulative
and the optionee may purchase those shares in any subsequent year
during the term of the option.
(iii) Nontransferability. Each Incentive Stock Option and,
unless otherwise determined by the Board of Directors, each other
option granted under the Plan by its terms shall be nonassignable
and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and
distribution of the state or country of the optionees domicile at
the time of death, and each option by its terms shall be exercisable
during the optionees lifetime only by the optionee.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the
Board of Directors, in the event the employment or service of
the optionee with the Company or a subsidiary terminates for
any reason other than because of physical disability or death
as provided in subparagraphs 6(a)(iv)(B) and (C), the option
may be exercised at any time prior to the expiration date of
the option or the expiration of 30 days after the date of such
termination, whichever is the shorter period, but only if and
to the extent the optionee was entitled to exercise the option
at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event
of the termination of employment or service because of total
disability, the option may be exercised at any time prior to
the expiration date of the option or the expiration of
12 months after the date of such termination, whichever is the
shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such
termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or
which has lasted or is expected to last for a continuous
period of 12 months or more and which causes the optionee to
be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties as an employee,
director, officer or consultant of the Company and to be
engaged in any substantial gainful activity. Total disability
shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished
their opinion of total disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of the
death of an optionee while employed by or providing service to
the Company or a subsidiary, the option may be exercised at
any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death,
whichever is the shorter period, but only if and to the extent
the optionee was entitled to exercise the option at the date
of such termination and only by the person or persons to whom
such optionees rights under the option shall pass by the
optionee's will or by the laws of descent and distribution of
the state or country of domicile at the time of death.
(D) Amendment of Exercise Period Applicable to
Termination. The Board of Directors, at the time of grant or
at any time thereafter, may extend the 30-day and 12-month
exercise periods any length of time not later than the
original expiration date of the option, and may increase the
portion of an option that is exercisable, subject to such
terms and conditions as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose
employment or service terminates is not exercised within the
applicable period, all further rights to purchase shares
pursuant to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Board of Directors
determines otherwise, shares may be acquired pursuant to an option
granted under the Plan only upon receipt by the Company of notice in
writing from the optionee of the optionee's intention to exercise,
specifying the number of shares as to which the optionee desires to
exercise the option and the date on which the optionee desires to
complete the transaction, and if required in order to comply with
the Securities Act of 1933, as amended, containing a representation
that it is the optionee's present intention to acquire the shares
for investment and not with a view to distribution. Unless the
Board of Directors determines otherwise, on or before the date
specified for completion of the purchase of shares pursuant to an
option, the optionee must have paid the Company the full purchase
price of such shares in cash (including, with the consent of the
Board of Directors, cash that may be the proceeds of a loan from the
Company) or, with the consent of the Board of Directors, in whole or
in part, in Common Stock of the Company valued at fair market value.
The fair market value of Common Stock provided in payment of the
purchase price shall be the closing price of the Common Stock as
reported in The Wall Street Journal on the trading day preceding the
date the option is exercised, or such other reported value of the
Common Stock as shall be specified by the Board of Directors. No
shares shall be issued until full payment therefor has been made.
With the consent of the Board of Directors, an optionee may request
the Company to apply automatically the shares to be received upon
the exercise of a portion of a stock option (even though stock
certificates have not yet been issued) to satisfy the purchase price
for additional portions of the option. Each optionee who has
exercised an option shall immediately upon notification of the
amount due, if any, pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required
beyond any amount deposited before delivery of the certificates, the
optionee shall pay such amount to the Company on demand. If the
optionee fails to pay the amount demanded, the Company may withhold
that amount from other amounts payable by the Company to the
optionee, including salary, subject to applicable law. With the
consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from
the shares to be issued upon the exercise that number of shares that
would satisfy the withholding amount due or by delivering to the
Company Common Stock to satisfy the withholding amount. Upon the
exercise of an option, the number of shares reserved for issuance
under the Plan shall be reduced by the number of shares issued upon
exercise of the option, less the number of shares surrendered in
payment of the option exercise or surrendered or withheld to satisfy
withholding obligations.
(b) Incentive Stock Options. Incentive Stock Options shall be
subject to the following additional terms and conditions:
(i) Limitation on Amount of Grants. Incentive Stock Options
may be granted only to employees of the Company or its subsidiaries.
No employee may be granted Incentive Stock Options under the Plan if
the aggregate fair market value, on the date of grant, of the Common
Stock with respect to which Incentive Stock Options are exercisable
for the first time by that employee during any calendar year under
the Plan and under any other incentive stock option plan (within the
meaning of Section 422 of the Code) of the Company or any parent or
subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power
of all classes of stock of the Company or of any parent or sub-
sidiary of the Company only if the option price is at least 110
percent of the fair market value of the Common Stock subject to the
option on the date it is granted, as described in paragraph
6(b)(iv), and the option by its terms is not exercisable after the
expiration of five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii)
and 6(b)(ii), Incentive Stock Options granted under the Plan shall
continue in effect for the period fixed by the Board of Directors,
except that no Incentive Stock Option shall be exercisable after the
expiration of 10 years from the date it is granted.
(iv) Option Price. The option price per share shall be
determined by the Board of Directors at the time of grant. Except
as provided in paragraph 6(b)(ii), the option price shall not be
less than 100 percent of the fair market value of the Common Stock
covered by the Incentive Stock Option at the date the option is
granted. The fair market value shall be deemed to be the closing
price of the Common Stock as reported in The Wall Street Journal on
the day preceding the date the option is granted, or if there has
been no sale on that date, on the last preceding date on which a
sale occurred, or such other value of the Common Stock as shall be
specified by the Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option
shall be granted on or after the tenth anniversary of the effective
date of the Plan.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time without the consent of the optionee
convert an Incentive Stock Option to a Non-Statutory Stock Option.
(vii) Limitation on Number of Shares Issuable Under Incentive
Stock Options. Subject to adjustment as provided in paragraph 9,
the total number of shares of Common Stock that may be issued under
the Plan upon exercise of Incentive Stock Options shall not exceed
750,000 shares.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall
be subject to the following additional terms and conditions:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Board of Directors at the time of
grant. The option price may not be less than 85 percent of the fair
market value of the shares on the date of grant. The fair market
value of shares covered by a Non-Statutory Stock Option shall be
determined pursuant to paragraph 6(b)(iv).
(ii) Duration of Options. Non-Statutory Stock Options
granted under the Plan shall continue in effect for the period fixed
by the Board of Directors.
7. Foreign Qualified Grants. Options may be granted under the Plan
to such executive officers of the Company and its subsidiaries residing in
foreign jurisdictions as the Board of Directors may determine from time to
time. The Board of Directors may adopt such supplements to the Plan as may be
necessary to comply with the applicable laws of such foreign jurisdictions and
to afford participants favorable treatment under such laws; provided, however,
that no award shall be granted under any such supplement with terms which are
more beneficial to the participants than the terms permitted by the Plan.
8. Automatic Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who becomes a Non-Employee
Director after the Effective Date shall be automatically granted an
option to purchase 10,000 shares of Common Stock on the date he or she
becomes a Non-Employee Director. A "Non-Employee Director" is a director
who is not an employee of the Company or any of its subsidiaries.
(b) Additional Board Grants. Each Non-Employee Director shall be
automatically granted an option to purchase additional shares of Common
Stock in each calendar year subsequent to the year in which such Non-
Employee Director became a director, such option to be granted as of the
date of the Company's annual meeting of stockholders held in such calendar
year, provided that the Non-Employee Director continues to serve in such
capacity as of such date. The number of shares subject to each additional
grant shall be 5,000 shares.
(c) Committee Grants. On the date of each annual meeting of
shareholders, each Non-Employee Director who then serves on a committee of
the Board of Directors shall be automatically granted an option to
purchase 2,000 shares of Common Stock for each committee on which he or
she then serves.
(d) Exercise Price. The exercise price of the options granted
pursuant to this paragraph 8 shall be equal to 85 percent of the fair
market value of the Common Stock determined pursuant to paragraph
6(b)(iv).
(e) Term of Option. The term of each option granted pursuant to
this paragraph 8 shall be 10 years from the date of grant.
(f) Exercisability. Until an option expires or is terminated and
except as provided in paragraph 8(g), 9 and 10, an option granted under
this paragraph 8 shall be exercisable according to the following schedule:
Period of Non-Employee Director's
Continuous Service as a Director of the Portion of Total Option
Company from the Date the Option is Granted Which is Exercisable
Less than 12 months 0%
After 12 months 24% plus 2% for each
complete month of continuous
service in excess of 12 months,
until fully vested.
For purposes of this paragraph 8(f), a complete month shall be
deemed to be the period which starts on the day of grant and ends on the
same day of the following calendar month, so that each successive
"complete month" ends on the same day of each successive calendar month
(or, in respect of any calendar month which does not include such a day,
that "complete month" shall end on the first day of the next following
calendar month).
(g) Termination As a Director. Unless otherwise determined by the
Board of Directors, if an optionee ceases to be a director of the Company
for any reason, including death, the option may be exercised at any time
prior to the expiration date of the option or the expiration of 30 days
(or 12 months in the event of death) after the last day the optionee
served as a director, whichever is the shorter period, but only if and to
the extent the optionee was entitled to exercise the option as of the last
day the optionee served as a director.
(h) Nontransferability. Unless otherwise determined by the Board
of Directors, each option by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of
law, except by will or by the laws of descent and distribution of the
state or country of the optionee's domicile at the time of death, and each
option by its terms shall be exercisable during the optionee's lifetime
only by the optionee.
(i) Exercise of Options. Options may be exercised upon payment of
cash or shares of Common Stock of the Company in accordance with paragraph
6(a)(v).
9. Changes in Capital Structure. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company
or of another corporation by reason of any reorganization, merger,
consolidation, plan of exchange, recapitalization, reclassification, stock
splitup, combination of shares or dividend payable in shares, appropriate
adjustment shall be made by the Board of Directors in the number and kind of
shares available for awards under the Plan. In addition, the Board of
Directors shall make appropriate adjustment in the number and kind of shares as
to which outstanding options, or portions thereof then unexercised, shall be
exercisable, so that the optionee's proportionate interest before and after the
occurrence of the event is maintained. Notwithstanding the foregoing, the Board
of Directors shall have no obligation to effect any adjustment that would or
might result in the issuance of fractional shares, and any fractional shares
resulting from any adjustment may be disregarded or provided for in any manner
determined by the Board of Directors. Any such adjustments made by the Board
of Directors shall be conclusive. If the stockholders of the Company receive
capital stock of another corporation ("Exchange Stock") in exchange for their
shares of Common Stock in any transaction involving a merger, consolidation or
plan of exchange, all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and the corporation
issuing the Exchange Stock, in their sole discretion, determine that any or all
such options granted hereunder shall not be converted into options to purchase
shares of Exchange Stock but instead shall terminate in accordance with the
provisions of the last sentence of this paragraph 9. The amount and price of
converted options shall be determined by adjusting the amount and price of the
options granted hereunder in the same proportion as used for determining the
number of shares of Exchange Stock the holders of the Common Stock receive in
such merger. The converted options shall be fully vested whether or not the
vesting requirements set forth in the option agreement have been satisfied.
In the event of dissolution of the Company or a merger, consolidation or plan
of exchange affecting the Company in lieu of providing for options as provided
above in this paragraph 9 the Board of Directors may, in its sole discretion,
provide a 30-day period prior to such event during which optionees shall have
the right to exercise options in whole or in part without any limitation on
exercisability and upon the expiration of such 30-day period, all unexercised
options shall immediately terminate.
10. Special Acceleration in Certain Events.
(a) Special Acceleration. Notwithstanding any other provisions of
the Plan, a special acceleration ("Special Acceleration") of options
outstanding under the Plan shall occur with the effect set forth in
paragraph 10(b) at any time when any one of the following events has taken
place:
(i) The shareholders of the Company approve one of the
following ("Approved Transactions"):
(A) Any consolidation, merger or plan of exchange
involving the Company ("Merger") pursuant to which Common
Stock would be converted into cash; or
(B) Any sale, lease, exchange, or other transfer (in
one transaction or a series of related transactions) of all or
substantially all of the assets of the Company or the adoption
of any plan or proposal for the liquidation or dissolution of
the Company; or
(ii) A tender or exchange offer, other than one made by the
Company, is made for Common Stock (or securities convertible into
Common Stock) and such offer results in a portion of those
securities being purchased and the offeror after the consummation of
the offer is the beneficial owner (as determined pursuant to Section
13(d) of the Exchange Act), directly or indirectly, of at least 20
percent of the outstanding Common Stock (an "Offer"); or
(iii) The Company receives a report on Schedule 13D of the
Exchange Act reporting the beneficial ownership by any person of 20
percent or more of the Company's outstanding Common Stock, except
that if such receipt shall occur during a tender offer or exchange
offer by any person other than the Company or a wholly owned
subsidiary of the Company, Special Acceleration shall not take place
until the conclusion of such offer; or
(iv) During any period of 12 months or less, individuals who
at the beginning of such period constituted a majority of the Board
of Directors cease for any reason to constitute a majority thereof
unless the nomination or election of such new directors was approved
by a vote of at least two thirds of the directors then still in
office who were directors at the beginning of such period.
The terms used in this paragraph 10 and not defined elsewhere in the Plan
shall have the same meanings as such terms have in the Exchange Act and the
rules and regulations adopted thereunder.
(b) Effect on Outstanding Options and Stock Appreciation Rights.
Upon a Special Acceleration pursuant to paragraph 10(a), all options then
outstanding under the Plan shall immediately become exercisable in full
for the remainder of their terms or until terminated pursuant to
paragraph 9.
11. Corporate Mergers, Acquisitions, etc. The Board of Directors
may also grant options under the Plan having terms, conditions and provisions
that vary from those specified in this Plan provided that any such options are
granted in substitution for, or in connection with the assumption of, existing
options, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of
property or stock, reorganization or liquidation to which the Company or a
subsidiary is a party.
12. Amendment of Plan. The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6, 9 and 10, however, no change
in an award already granted shall be made without the written consent of the
holder of such award.
13. Approvals. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take
steps required by state or federal law or applicable regulations, including
rules and regulations of the Securities and Exchange Commission and any stock
exchange on which the Company's shares may then be listed, in connection with
the grants under the Plan. The foregoing notwithstanding, the Company shall
not be obligated to issue or deliver Common Stock under the Plan if such
issuance or delivery would violate applicable state or federal securities laws.
14. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in
any way with the right of the Company or any subsidiary by whom such employee
is employed to terminate such employee's employment at any time, for any
reason, with or without cause, or to decrease such employee's compensation or
benefits, or (ii) confer upon any person engaged by the Company any right to be
retained or employed by the Company or to the continuation, extension, renewal,
or modification of any compensation, contract, or arrangement with or by the
Company.
15. Rights as a Shareholder. The recipient of any award under the
Plan shall have no rights as a shareholder with respect to any Common Stock
until the date of issue to the recipient of a stock certificate for such
shares. Except as otherwise expressly provided in the Plan, no adjustment
shall be made for dividends or other rights for which the record date occurs
prior to the date such stock certificate is issued.
SPONSORSHIP AGREEMENT
This agreement ("Agreement") is entered into this 23rd day of January
1998, by and between Team Scandia, Inc. (hereinafter "Scandia"), a
Delaware corporation, with its principal place of business at 701 S.
Girls School Road, Indianapolis, IN 46231 and Sequent Computer Systems,
Inc. (hereinafter "Sequent"), an Oregon corporation, with its principal
place of business at 15450 SW Koll Parkway, Beaverton, OR 97006-6063.
Recitals
WHEREAS, Scandia has a present right to use, for promotional purposes, a top
fuel dragster owned by Scandia. Further, Scandia shall employ a professional
race car driver ("Driver"), to be mutually agreed upon by the parties, to
drive Scandia's top fuel dragster on the National Hot Rod Association ("NHRA")
top fuel dragster circuit.
WHEREAS, Sequent is engaged in the business of manufacturing a family of
high performance, multiprocessing computer systems.
WHERAS, Sequent desires to sponsor Scandia in order to assist in the
promotion, marketing and advertising of its computer systems.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto agree as follows:
1) Display of Corporate Name and Logo: Subject to the conditions and
upon the terms set forth herein, Scandia hereby allows Sequent to
promote its computer systems business by causing placement of the
corporate name and logo (collectively "Logo") used by Sequent in its
promotional efforts on Scandia's competition top fuel dragster
("Competition Dragster") driven by Driver, for promotional purposes.
In addition to placing the Logo on the Competition Dragster, the Logo
shall appear on the trailer used by Scandia to transport the
Competition Dragster and on patches/embroidery attached to the
firesuit of the driver, as per the art work attached as Exhibit A and
incorporated herein.
2) Term: The initial term of this Agreement shall be for the period
beginning January 8, 1998, and ending November 10, 1998. Sequent
must give Scandia written notice, via certified mail, no less than
thirty (30) days prior to the end of the initial term of its intent
to renew this Agreement. Thereafter, the parties agree to negotiate
in good faith for the renewal of this Agreement. If the parties are
unable to reach a mutual agreement for the renewal of this Agreement
prior to November 10, 1998, then this Agreement shall terminate and
neither party shall have any further obligations hereunder except as
to those obligations that may have accrued prior to such termination.
3) Payment Schedule: Sequent will pay Scandia the sum of $450,000.00
for the 1998 race season. All funds will be dedicated specifically
to the NHRA dragster program. Payment schedule is as follows:
Upon Signing: $ 112,500.00
April 1st $ 112,500.00
July 1st $ 112,500.00
October 1st $ 112,500.00
4) The Dragster:
(a) During the term of this Agreement, Scandia hereby agrees to
cause the Logo to be prominently displayed on the Competition
Dragster as provided in Paragraph 1 herein. Sequent will have
the sole responsibility to supply the artwork for placement of
the Logo on the Competition Dragster and on all other display
areas referred to in Paragraph 1 herein. Scandia shall pay all
costs associated therewith, including expenses associated with
the placement of the Logo on the Competition Dragster or other
areas referred to herein.
(b) Sequent acknowledges that this is a non-exclusive agreement
and that associated sponsors may display their corporate names
and logos on the Competition Dragster. Sequent will receive
logos measuring 9" x 36" on the Dragster and 1' x 7' on both
sides of the trailer and on the rear door of the trailer.
Sequent will be listed on all entries as being a sponsor for
the team.
(c) All sponsors will share costs for producing team hats and T-
shirts. Sequent will be included in all team merchandise by
Scandia.
5) Racing Schedules: The parties agree that the Competition Dragster
will be present and compete at the 1998 NHRA events listed in Exhibit
B subsequent to the Effective Date of this Agreement.
6) Hospitality Truck and Trailer: Sequent will allow Scandia to use
Sequent's Hospitality Truck and Trailer and Scandia will be providing
all inclusive hospitality for Sequent and its guests at each NHRA
event. Saturdays will be exclusive to Sequent's use and Sundays will
be open to all. (Sequent has a 100-person cap per event).
7) Use of Name and Accomplishment: Scandia agrees to allow Sequent to
use Scandia's name and Scandia's racing accomplishments from past
years, and any of Driver's accomplishments that may occur during the
term of this Agreement, in order to further advertise and promote
Sequent's products. Upon the termination of this Agreement, all
rights to the use by Sequent of Scandia's name shall lapse and
terminate. Sequent wishes to have Driver meet its guests and sign
autographs each day during race weekends.
8) Parking: Sequent, and its guests, shall park side by side in the
pit area with Scandia subject to approval of track owner and NHRA for
each race.
Hospitality: All races that Sequent participates in hospitality
there will be a $221.00 parking fee to be paid to Scandia. Total
for 11 races will be $2,431.00. Fifty percent upon signing and fifty
percent due July 1, 1998.
9) Insurance: Scandia agrees that it will at all relevant times during
the term of this Agreement, and at no cost and expense to Sequent,
maintain or cause to be maintained, public liability insurance upon
Scandia, its agents and representatives, against claims for bodily
injury, death or property damage resulting from the negligent acts or
omissions of Scandia, its agents and representatives in the
performance of their duties under the terms of this Agreement. Such
insurance shall afford protection, with respect to the business
premises used by Scandia, to a combined single limit of $10,000,000,
with respect to bodily injury and property damage for a single
occurrence. Such insurance will also afford protection, with respect
to the truck and trailer used by Scandia, in the transportation of
the Competition Dragster in a combined single policy limit of not
less than $325,000 per occurrence. Additionally, Scandia shall
maintain, or cause to be maintained, a $1,000,000 combined single
limit liability policy to cover bodily injury or property damage to
third parties while using the truck and trailer. All insurance
policies required to be maintained by Scandia under the terms of this
Agreement shall name Sequent as an additional insured.
Notwithstanding the foregoing, Sequent understands that during the
term of this Agreement, Scandia will maintain public liability
insurance during those times when it is competing with the
Competition Dragster. During such times of competition, Scandia
represents and warrants that such insurance is provided by NHRA and
will be maintained and provided for sponsors such as Sequent.
Accordingly, Sequent's sponsorship shall extend only to: (a) top
fuel dragster events, including those described on Exhibit B, held
during the term of this Agreement, sanctioned by the NHRA and covered
by public liability insurance no less in amount and coverage than
that shown on Exhibit C, attached hereto, and provided by an
insurance company with at least a Best Insurance Guide A rating; and
(b) top fuel dragster practice runs at tracks which are covered by
public liability insurance no less in amount and coverage as set out
in (a) above.
10) No Agency, Partnership or Joint Venture: Each party hereto
acknowledges and represents to the other that this Agreement provides
merely for the sponsorship, through rights which Sequent acquires in
Scandia, and is procured and administered by Scandia, with regard to
the Competition Dragster. Nothing contained herein shall be deemed
to create an agency, joint venture, or partnership between the
parties. Except as specifically provided in this Agreement, each
party is prohibited from acting for or on behalf of the other party.
11) Driver's Obligation: Scandia acknowledges that Driver is Scandia's
professional driver for its top fuel Competition Dragster in the top
fuel competition dragster circuit. Accordingly, Scandia agrees that
it will do all things reasonable and necessary to fulfill the terms
and conditions of this Agreement. If for any reason, whether through
the fault of Scandia or otherwise, Scandia is in any way prohibited
from carrying out its obligations under the terms and conditions of
this Agreement, then, in such event, Sequent shall be entitled at its
sole discretion, to cease making any further payments of the fee as
may then be owing under Paragraph 3 herein, in addition to any other
rights that Sequent has herein, or at law or in equity.
12) Assignment: Each party to this Agreement shall be restricted from
assigning, conveying or transferring its rights and obligations,
except as between a party and its affiliates, under this Agreement
without the express written consent of the other party hereto, which
consent shall not be unreasonably withheld.
13) Indemnification:
(a) Scandia agrees to indemnify and hold harmless Sequent against
any costs (including reasonable attorney fees), losses, claims,
damages or liabilities, joint and/or several, to which Sequent,
or its subsidiaries, may become subject, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon Scandia's racing
activities and performance of its respective obligations
hereunder.
(b) Sequent agrees to indemnify and hold Scandia harmless against
any costs (including reasonable attorney fees), losses, claims,
damages or liabilities, joint and/or several, to which Scandia
may be subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon Sequent's wrongful use of Scandia's name.
14) Termination:
(a) Either party may terminate this Agreement upon thirty- (30)
days prior written notice to the other party if the other party
is in default of any provision of this Agreement and such
default is not cured within the thirty- (30) day period.
(b) Either party may terminate this Agreement by written notice
to the other party upon (i) the other party becoming insolvent;
(ii) any proceeding under the bankruptcy or insolvency laws is
brought by or against the other party which is not dismissed
within thirty (30) days; (iii) the appointment of a receiver or
a similar officer for the other party or for a substantial part
of the other party's property; (iv) the other party making an
assignment for the benefit of creditors or otherwise being
reorganized for the benefit of creditors.
15) Limitation of Liability: EXCEPT FOR DAMAGES DESCRIBED IN SECTION 13
HEREIN, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY DAMAGES
RESULTING FROM A LOSS OF PROFITS OR USE, OR FOR ANY INCIDENTAL,
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, EVEN IF ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
16) Notices: Notices under this Agreement shall be in writing and
delivered to the following person at the following addresses:
In the case of Sequent:
Sequent Computer Systems, Inc.
15450 SW Koll Parkway
Beaverton, Oregon 97006-6063
Attn: Lynn Sunahara
Manager, Contracts
In the case of Scandia:
Team Scandia, Inc.
701 S. Girls School Road
Indianapolis, IN 46231
Attn: Tom Leix
Dir. Of Public Relations & Marketing
The effective date for notices under this Agreement shall be the date
of delivery and not the date of mailing.
17) Governing Law: This Agreement will be construed in accordance with
the laws of the State of Oregon, without regard to the choice of law
principles.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
TEAM SCANDIA, INC. SEQUENT COMPUTER SYSTEMS, INC.
By: /s/Andrew L. Evans By: /s/Stephen F. Loughlin
Name: Andrew L. Evans Name: Stephen F. Loughlin
Title: President Title: Corporate Controller
EXHIBIT B
1998 RACING SCHEDULE
DATE EVENT LOCATION
January 30- Feb 1 Pomona, CA
March 5-8 Gainesville, FL
March 20-22 Houston, TX
April 24-26 Richmond,VA
May 15-17 Englishtown, PA
May 23 Match Race (2runs) Norwalk, OH
May 29-31 Joliet, IL
June 12-14 Columbus,OH
June 26-28 St. Louis, MO
July 17-19 Denver, CO
July 24-26 Sonoma, CA
July 31-Aug 2 Seattle, WA
September 3-6 Indianapolis, IN
September 17-20 Reading, PA
October 2-4 Topeka, KS
October 23-25 Dallas, TX
November 12-15 Winston Select Finals Pomona, CA
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement ("Agreement") is entered
into as of November 18, 1997 between DP Applications, Inc., an Oregon
corporation (the "Company"), and The Robert W. Wilmot and Mary J.
Wilmot, trustees of the Wilmot Living Trust U/D/T dated April 18th 1995
("Purchaser"), in connection with the performance of consulting services
to the Company by Robert W. Wilmot ("Wilmot").
In consideration of the mutual promises set forth in this
Agreement, the parties agree as follows:
1. Sale of Shares. Purchaser agrees to purchase from the
Company, and the Company agrees to sell to Purchaser, 180,000 shares of
common stock of the Company (the "Shares") at a price of $0.15 per
share, for a total purchase price of $27,000, payable in cash. In
addition to terms and conditions set forth in this Agreement, the Shares
shall be subject to the restrictions on transfer contained in Article
VII of the Company's Bylaws. To secure its rights under the Repurchase
Option described in Section 2, the Company will retain the certificate
or certificates representing the Shares. Purchaser will deliver to the
Company executed blank stock powers covering the Shares subject to the
Repurchase Option. The closing of this sale shall occur upon receipt by
the Company from Purchaser of an executed copy of this Agreement, full
payment of the purchase price for the Shares, and executed blank stock
powers covering the Shares.
2. Repurchase Option.
2.1 Termination of Consulting Services. If Wilmot
ceases to be a consultant to DP for any reason other than death, then
the Company shall have an irrevocable, exclusive option (the "Repurchase
Option") for a period of 60 days from the date the consulting services
ended (the "Termination Date") to repurchase at the original price per
Share set forth in Section 1 all of the Shares held by Purchaser on such
date that have not been released from the Repurchase Option as provided
in Section 2.4. If Wilmot ceases to be a consultant to DP by reason of
death, the Repurchase Option shall not apply to the Shares, but shall
terminate as to all of the Shares as of the date of death. It is
understood that termination of consulting services may be effected by
either party for any reason with or without cause upon 30 days written
notice.
2.2 Exercise of Option. The Repurchase Option shall be
exercised by the Company within 60 days of the Termination Date (such
60-day period, the "Exercise Period") by delivering to Purchaser a
written notice of exercise of the Repurchase Option and a check in the
amount of the purchase price. Upon delivery of such notice and payment
of the purchase price, the Company shall become the legal and beneficial
owner of the Shares being repurchased and all rights and interest
therein or related thereto, and the Company shall have the right to
transfer to its own name the number of Shares being repurchased without
further action by Purchaser.
2.3 Termination of Repurchase Option. If the Company
does not exercise the Repurchase Option before the end of the Exercise
Period, the Repurchase Option shall terminate.
2.4 Release from Repurchase Option. Twenty-five
percent (25%) of the Shares shall be immediately released from the
Repurchase Option on the date of this Agreement. The balance of the
Shares shall be released from the Repurchase Option over a period of
three years, subject to continuous consulting service to the Company by
Wilmot. For each month of service beginning on August 1, 1997, 3,750
shares shall be released from the Repurchase Option on the last day of
the month. If Wilmot performs continuous consulting services for the
Company through July 31, 2000, all Shares shall have been released from
the Repurchase Option by such date. At the request of Purchaser, the
Company will deliver to Purchaser a certificate or certificates
representing the Shares released from the Repurchase Option.
2.4.1 Accelerated Release From Repurchase Option
Upon Sequent Change of Control. If at any time before all of the Shares
have been released from the Repurchase Option, there is a Change of
Control of the Company, all Shares then subject to the Repurchase Option
shall immediately be released from the Repurchase Option, and the
Repurchase Option shall terminate as of the date of the Change of
Control.
As used in this Agreement, the term "Change of Control
of the Company" means the occurrence either of the following events:
(a) Any "person" (as such term is defined in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
other than Sequent or its subsidiaries is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act ), directly or indirectly, of
securities of the Company representing more than fifty percent (50%) of the
total voting power represented by the Company's then outstanding voting
securities; or
(b) A merger or consolidation of the Company with
any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity)
the majority of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
3. Limitations on Transfer. Without the written consent of
the Company, Purchaser shall not sell, assign, encumber, dispose of or
transfer (including transfer by operation of law) any interest in any
Shares that have not been released from the Repurchase Option. The
Company shall hold in escrow all Shares subject to the Repurchase
Option.
4. Lock-up Period. Purchaser hereby agrees that if so
requested by the Company or any representative of the underwriters (the
"Managing Underwriter") in connection with any registration of the
offering of any securities of the Company under the Securities Act of
1933, as amended (the "Securities Act"), Purchaser shall not sell, make
short sale of, loan, grant any option for the purchase of, or otherwise
transfer any Shares or other securities of the Company during the 180-
day period (or such longer period as may be requested in writing by the
Managing Underwriter and agreed to in writing by the Company) (the
"Market Standoff Period") following the effective date of a registration
statement of the Company filed under the Securities Act; provided,
however, that such restriction shall apply only to the first
registration statement of the Company to become effective under the
Securities Act that includes securities to be sold on behalf of the
Company to the public in an underwritten public offering under the
Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions until the
end of such Market Standoff Period.
5. Stock Certificate Legends. All certificates representing
any of the Shares shall contain the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH
IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE CORPORATION."
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
"THE CORPORATION IS AUTHORIZED TO ISSUE DIFFERENT CLASSES OF
SHARES OR DIFFERENT SERIES WITHIN A CLASS. THE CORPORATION WILL FURNISH
TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF
THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF EACH
CLASS OF SHARES AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN THE
RIGHTS, PREFERENCES AND LIMITATIONS BETWEEN THE SHARES OF EACH SERIES SO
FAR AS THEY HAVE BEEN DETERMINED. THE BOARD OF DIRECTORS IS AUTHORIZED
TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF A SERIES BEFORE THE
ISSUANCE OF ANY SHARES OF THAT SERIES."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND
TRANSFERABLE ONLY UPON COMPLIANCE WITH THE TERMS AND CONDITIONS
CONTAINED IN ARTICLE VII OF THE COMPANY'S BYLAWS, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."
6. Assignment by the Company. The right of the Company under
the Repurchase Option to purchase any part of the Shares may be assigned
in whole or in part to any person or persons designated by the Board of
Directors of the Company.
7. Transfer on Books of Company. The Company shall not be
required (a) to transfer on its books any of the Shares which have been
sold or transferred in violation of any of the provisions set forth in
this Agreement or the Company's Bylaws, or (b) to treat as owner of such
Shares or to accord the right to vote as such owner or to pay dividends
to any transferee to whom such Shares shall have been so transferred.
8. Restricted Securities. Purchaser understands and
acknowledges that the sale of the Shares has not been registered under
the Securities Act, or applicable state securities laws, that the Shares
must be held indefinitely unless subsequently registered under the
Securities Act and applicable state securities laws or unless an
exemption from such registration requirement is available, that the
Company is under no obligation to register the Shares, and that the
certificate representing the Shares will be stamped with the legends
specified in Section 5 of this Agreement. The Purchaser agrees to
comply with the transfer restrictions specified in the legends set forth
in Section 5.
9. Investment Representations and Warranties. Purchaser
warrants and represents to the Company as follows:
9.1 Purchase Entirely for Own Account. The Shares will
be acquired for investment for Purchaser's own account and not with a
view to the resale or distribution of any part thereof, and Purchaser
has no intention of selling, granting any participation in, or otherwise
distributing the same.
9.2 Investment Experience. Purchaser is experienced in
evaluating and investing in companies in the development stage, can bear
the economic risk of an investment in the Shares, and has enough
knowledge and experience in financial and business matters to evaluate
the merits and risks of the investment in the Shares.
9.3 Qualifications as an Accredited Investor.
Purchaser is an accredited investor, as that term is defined in Rule
501(a) under the Securities Act.
9.4 Opportunity to Review Documents and Ask Questions.
The Company has made available to Purchaser all documents and
information requested by Purchaser relating to an investment in the
Company. In addition, Purchaser has had adequate opportunity to ask
questions and to receive answers from the management of the Company
covering the terms and conditions of the purchase and sale of the Shares
and the Company's business, management, and financial affairs.
10. Miscellaneous.
10.1 Entire Agreement; Amendment. This Agreement
constitutes the entire agreement of the parties with regard to the
subjects hereof and may be amended only by written agreement between the
Company and the Purchaser.
10.2 Notices. Any notice required or permitted under
this Agreement shall be in writing and shall be deemed sufficient when
delivered personally to the party to whom it is addressed or when
deposited into the United States Mail as registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company at
its address shown below its signature or to the Purchaser at the address
shown below the Purchaser's signature, or at such other address as such
party may designate by ten (10) days' advance written notice to the
other party.
10.3 Rights and Benefits. The rights and benefits of
this Agreement shall inure to the benefit of and be enforceable by the
Company's successors and assigns and, subject to the restrictions on
transfer of this Agreement, be binding upon the Purchaser's heirs,
executors, administrators, beneficiaries, successors and assigns.
10.4 Further Action. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.
10.5 Applicable Law; Attorneys' Fees. The terms and
conditions of this Agreement shall be governed by the laws of the State
of Oregon. In the event either party institutes litigation hereunder,
the prevailing party shall be entitled to reasonable attorneys' fees to
be set by the trial court and, upon any appeal, the appellate court.
10.6 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
THE COMPANY: DP APPLICATIONS, INC.
By: /s/Robert S. Gregg
Title: President
PURCHASER: THE ROBERT W. WILMOT AND MARY J.
WILMOT, TRUSTEES OF THE WILMOT
LIVING TRUST U/D/T DATED APRIL 18TH
1995
By: /s/Robert W. Wilmot, Trustee
By: /s/Mary J. Wilmot, Trustee
Address:
13333 La Cresta Drive
Los Altos, CA 94022
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 133,299,000
<SECURITIES> 0
<RECEIVABLES> 332,005,000
<ALLOWANCES> 3,121,000
<INVENTORY> 28,147,000
<CURRENT-ASSETS> 671,349,000
<PP&E> 329,668,000
<DEPRECIATION> 194,938,000
<TOTAL-ASSETS> 890,845,000
<CURRENT-LIABILITIES> 271,451,000
<BONDS> 9,910,000
0
0
<COMMON> 430,000
<OTHER-SE> 508,858,000
<TOTAL-LIABILITY-AND-EQUITY> 890,845,000
<SALES> 600,496,000
<TOTAL-REVENUES> 833,886,000
<CGS> 309,016,000
<TOTAL-COSTS> 480,611,000
<OTHER-EXPENSES> 299,451,000
<LOSS-PROVISION> 2,694,000
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<INCOME-PRETAX> 50,512,000
<INCOME-TAX> 11,825,000
<INCOME-CONTINUING> 38,687,000
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