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 2, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
______________ to ______________.
Commission file number: 0-15627
SEQUENT COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0826369
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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
Rights to purchase Preferred Stock
(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 March 1, 1999, based on the closing price on such date on
the NASDAQ National Market System: $408,419,373.
Number of shares of Common Stock outstanding as of March 1, 1999:
43,608,297.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
1998 Annual Report to Shareholders Parts II and IV
Proxy Statement for 1999 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 16
Item 4. Submission of Matters to a Vote of Security Holders 16
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 7(a). Quantitative and Qualitative Disclosures of Market Risk 17
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 27
PART I
Item 1. Business.
Sequent Computer Systems, Inc. ("Sequent" or "the Company") is a leading
provider of Intel Corporation ("Intel") -based high-end, scalable, data center
systems and solutions for large organizations.
Sequent pioneered the development of large-scale, Intel-based symmetric
multiprocessing ("SMP") systems in the 1980s and early 1990s and, in 1996, was
first to market with large, cache coherent non-uniform memory access ("CC-NUMA")
systems built with Intel Pentium Pro processors. In October 1998, Sequent
launched its second-generation NUMA-Q(TM) 2000 data center servers,
incorporating Intel's Pentium II Xeon processors and designed to scale from 4
to 64 processors in a single system with a single instance of DYNIX/ptx?,
Sequent's scalable UNIX operating system. In December 1998, the Company
introduced a Xeon-based version of NUMACenter(TM), its mixed mode computing
environment enabling rapid deployment, lower cost and central management of
large-scale, mission critical Windows NT Server applications with a large,
back-end UNIX database server. In January 1999, Sequent announced NUMA-Q 1000,
a new line of midrange servers that scale from 4 to 8 Xeon Processors, run
UNIX or Windows NT, and deliver price/performance equivalent to midrange
RISC-based (Reduced Instruction Set Computing) UNIX servers.
Sequent's NUMA-Q 2000 products are used primarily as database servers
for large commercial applications: custom on-line transaction processing
("OLTP"); packaged business (financial, manufacturing and human resources)
solutions, also called enterprise resource planning ("ERP") solutions; and
customer relationship management ("CRM"), a broad solution set that
includes back office decision support systems ("DSS") and data warehouses
supporting front-office marketing, sales and service applications. The
Company's NUMACenter framework is designed to optimize mixed mode
environments where application servers running Windows NT are supported by
a large UNIX database server. The Company's NUMA-Q 1000 systems are
designed, priced and marketed as development systems and application
servers.
Currently, the Company's products run Sequent's DYNIX/ptx UNIX
operating systems and Microsoft Corporation's ("Microsoft") Windows NT.
In October 1998, International Business Machines Corporation ("IBM")
announced "Project Monterey," a cooperative program with Sequent and Santa
Cruz Operation ("SCO") to develop a standard version of IBM's AIX UNIX
operating system for Intel's 64-bit (IA-64) processor architecture, code-
named "Merced." Sequent plans to introduce Merced-based systems running
Project Monterey UNIX shortly after Merced is generally available, which
is expected to be in the second half of 2000. Meanwhile, the Company has
announced plans to align its DYNIX/ptx operating system with SCO UnixWare
and incorporate features of IBM's AIX UNIX operating system. Rebranded as
UnixWare ptx Edition, this enhanced 32-bit operating system will support
selected IBM software and provide a high-end path to IA-64 UNIX being
developed by IBM under Project Monterey. The target date for general
availability of UnixWare ptx Edition is expected to be the fourth quarter
of 1999.
Sequent sells its products and services worldwide through its direct
sales force, through distributors and, increasingly, through arrangements
with systems integrators ("SIs"). Sequent's direct sales efforts are
focused on large organizations with the goal of establishing and
maintaining long-term "major account" relationships. The Company's SI
partners, such as Arthur Andersen Business Consultants ("AABC") and
Electronic Data Systems Corporation ("EDS") generally have greater access
than Sequent to the Company's target accounts and afford opportunities for
the Company to gain access to those accounts by partnering with them to
sell complete solutions. For several years, Sequent has partnered with
South African SI PQA (formerly "Persetel") to sell Sequent products in
South Africa. In January 1999, Sequent announced that it signed a
strategic partnership agreement with Comparex Holdings Limited
("Comparex"), a wholly-owned subsidiary of PQA. The partnership agreement
allows Comparex to take responsibility for Sequent's sales activities in
Austria, Belgium, Germany, The Netherlands, Portugal, Spain and
Switzerland. Sequent's operations in the United Kingdom and France, which
represent the majority of its European business, are not included in the
partnership agreement. Comparex will work with Sequent to market the
Company's products and services in the regions included under the
agreement.
Since the early 1990s, 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 hardware, software and solutions
partners. 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 offerings in three basic categories:
custom OLTP; ERP solutions; 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 participate in a growing number of projects
where the sale of large systems follows or accompanies the sale of
significant professional services contracts.
For existing customers, Sequent provides a broad array of 24-hour
data center services designed to ensure the smooth operation and high
availability of their solutions. These include system support services,
environmental services, management support services and business
protection services.
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 proliferation of new technology, data and information is rapidly
changing the face of business. Within the past few years, standard ERP
applications from software vendors such as Baan Company ("Baan"), Oracle
Corporation ("Oracle"), PeopleSoft, Inc. ("PeopleSoft") and SAP have
transformed the data center, replacing custom OLTP applications and
enabling large organizations to capture large volumes of data about their
businesses. With the rapid expansion of the World-Wide Web, growing
numbers of organizations have established electronic links with customers,
partners and suppliers, giving them access to vast amounts of new data.
These changes have driven demand for sophisticated DSS and data
warehousing applications that allow organizations to analyze that data and
convert it into information that will give them a competitive advantage.
As a result, DSS/data warehousing has become one of the fastest growing
segments of the high-end, open systems computing market.
With the knowledge made possible by the ability to access and analyze
all aspects of their business, organizations have increasingly shifted
their focus from what they produce to what customers buy. In today's
commodity-based markets, companies are discovering that what a customer
does or does not buy often has less to do with the products or services
themselves than with the relationship they have established--or failed to
establish--with the customer. Growing awareness of this fact has given
rise to a new business strategy called CRM. The goal of CRM is to
assemble all of an organization's information about its customers and
leverage that knowledge base during each customer interaction to keep them
as customers and, whenever possible, sell them new products or services.
The overall growth of data center solutions (OLTP, ERP, DSS/DW and
CRM) is driving demand for servers, including application servers that run
the application software and database servers that manage the huge amounts
of data used by the application.
Business Strategy
Sequent's goal is to become the leading provider of Intel-based UNIX
and Windows NT solutions for the data center. The Company's business
strategy is designed to leverage its own resources (leading edge
technology and data center knowledge and expertise) and those of its
business and technology partners to achieve that goal.
Since 1983, Sequent has pioneered the development of scalable
computer architectures for large database applications. With its NUMA
architecture, the Company continues to lead the industry in this area.
Since 1987, Sequent has been the leading provider of large-scale
Intel-based systems and has worked closely with Intel to ensure that its
own product roadmap is aligned with Intel's. As the volume leader in
microprocessors, Intel is the preferred architecture for application
development, and Intel's share of the server market is projected to grow
significantly over the next several years. The Company currently enjoys a
close working relationship with Intel and expects that relationship to
continue.
Sequent's DYNIX/ptx operating system has long been recognized as one
of the industry's most scalable UNIX operating systems. In the server
marketplace, however, volume attracts application software suppliers and
the Company's focus on low-volume, high-complexity projects has limited
the number of applications ported to DYNIX/ptx to date. To address this
issue, Sequent designed its NUMA architecture to run both DYNIX/ptx and
Microsoft Windows NT, giving Sequent customers access to the broad range
of applications being developed for Microsoft's enterprise operating
system. To compensate for the scalability limitations of Windows NT, the
Company developed NUMACenter, a hardware and software environment that
allows customers to run Windows NT applications with a scalable, back-end
UNIX database and single-point monitoring of all resources. Recently, the
Company also entered into agreements with IBM and SCO that will enhance
and eventually replace DYNIX/ptx with versions of the UNIX operating
system that are more broadly supported by third-party software vendors.
During 1999, the company intends to make DYNIX/ptx binary compatible with SCO
UnixWare, enhanced with features from IBM's AIX operating system, and rebranded
as UnixWare ptx Edition. Simultaneously, the Company is collaborating with
IBM to develop a 64-bit version of AIX optimized for NUMA and Intel's IA-
64 processor architecture. Intel and IBM are contributing significant
resources to fund the migration of third-party software to the new
operating system.
In the late 1980s Sequent established close working relationships
with Oracle, Informix Corporation ("Informix") and other vendors of
relational database software, acquiring substantial database knowledge and
expertise that continue to distinguish the Company from its competitors.
Sequent is currently building relationships with Microsoft and IBM that
the Company believes will distinguish it as a provider of solutions based
on SQL Server and the DB2 Universal Database.
Although the number of applications ported to DYNIX/ptx has been
limited, the major ERP applications have been available on Sequent
platforms, and the Company has distinguished itself in the deployment and
support of some of the largest--and in some cases the largest--
implementations of Baan, PeopleSoft and Oracle Applications software in
the world. The Company's NUMACenter offering has also distinguished
Sequent as a leading provider of mixed-mode (UNIX & Windows NT) SAP
solutions, one of only two mixed-mode providers authorized by SAP.
As industry spending on ERP applications has slowed, Sequent has
focused its knowledge of large database applications and architecture on
the growing market for CRM applications supported by large DSS/data
warehousing implementations. During the past three years, the Company has
established a strong track record in DSS/data warehousing, winning first-
place "Best Practices" awards from the Data Warehousing Institute for
three consecutive years and earning the institute's top "Leadership Award"
in 1998. In December 1998, Sequent announced a strategic alliance with
industry leader Siebel Systems, Inc. ("Siebel") to deliver Siebel's
integrated family of front-office (sales, marketing and customer service)
products on NUMACenter. CRM, including back-office DSS/data warehousing,
will be a major focus for the Company in 1999.
Since 1992, the Company's success in the data center has stemmed
increasingly from its ability to provide high-end consulting services
geared toward the design and implementation of large database
applications. The Company plans to continue investing in the growth and
development of its service organizations as an integral part of its data
center strategy.
Because Sequent competes directly with much larger companies, a key
part of the Company's strategy is to sell its products and services
through cooperative relationships with SIs who have broad market presence
globally or in specific geographic regions. The Company currently has
strategic relationships with AABC, EDS and PQA/Comparex (Europe and South
Africa), and is working with certain other integrators to establish
additional marketing opportunities.
Products
Complex data center applications that serve a broad spectrum of end
users--employees, partners, customers--require round-the-clock access,
good response times and flexibility for future growth. In computing
requirements, this translates to reliability, high availability, high
performance and scalability. With the move by many companies toward
"virtual data centers" that extend their computing environments beyond the
perimeters of their own organizations, the number of users and the volume
of data associated with business-critical applications continues to grow
exponentially. As a result, scalable servers, large enterprise storage
systems and systems management solutions have become necessities.
Sequent has historically provided large-scale, business-critical
computing to meet these types of requirements. The Company's current
products based on its NUMA architecture were designed for data-center-
class computing environments, whether they reside in today's equivalent of
The Glass House or span a virtual enterprise.
NUMA Architecture. Sequent's NUMA technology is based on a four-way
SMP Intel baseboard with NUMA features and enhancements added by Sequent
to improve its performance and reliability as a component or building
block for large, scalable servers. In systems with more than 8
processors, these components, called "quads", are connected with a device
called IQ-Link(TM). Developed by Sequent in cooperation with Vitesse
Semiconductor Corporation, IQ-Link is a proprietary, high-performance
interconnect that 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 Intel processor bus on a specific quad and respond
to requests for data contained in memory on a different quad, either by
accessing the data from memory on the other quad or by directing the
request to data stored in its on-board cache (hence the term, "non-
uniform" memory access). Because latency (the time it takes to retrieve
data from memory on another quad) slows system performance, IQ-Link uses
special algorithms to minimize latency by maximizing the "cache hit rate,"
i.e., the number of times requested data is available in its on-board
cache. IQ-Link also ensures the accuracy of data in its cache (cache
coherency) by updating its cache whenever data in the original memory
location is changed.
Based on standard Intel building blocks and other industry-standard
components, Sequent's scalable NUMA architecture enables the Company to
leverage advances in open systems technology--including processor
enhancements, storage technology, communications and user-interface
enhancements--and incorporate these advances in its product offerings
quickly and inexpensively. This aspect of the NUMA architecture directly
benefits 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.
Platforms. Sequent manufactures and sells two server lines under its
trademark NUMA-Q brand: high-end NUMA-Q 2000 and mid-range NUMA-Q 1000.
NUMA-Q 2000 is scalable from 4 to 64 processors and runs Sequent's
DYNIX/ptx UNIX operating system. The second-generation NUMA-Q 2000 with
Intel Pentium II Xeon processors was introduced in October 1998 and
immediately achieved record setting benchmark numbers in the Transaction
Performance Processing Council's TPC-C and TPC-D benchmarks. The TPC-C
benchmark test, which measures OLTP performance, used a 64-processor
system and showed near-linear scalability with another NUMA-Q 2000
benchmark run with 32 processors. The TPC-D benchmark test, which
measures DSS performance, was run at the one terabyte scale and set new
performance and price/performance records at the time it was run.
NUMA-Q 1000 is a 4- or 8- processor server that can run either UNIX
or Windows NT. Designed for price/performance in the midrange, NUMA-Q
1000 uses a DL2 (direct link) interconnect that is specially developed for
a two-quad system. The system delivers performance comparable to that of
a four or eight-processor NUMA-Q 2000 system at a price equivalent to the
most aggressively priced midrange UNIX products from Sequent's
competitors. NUMA-Q 1000 also enables operating system flexibility by
allowing bi-directional migration between UNIX and Windows NT.
In addition to the products the Company manufactures, Sequent OEMs a
midrange Windows NT server from NCR Corporation ("NCR"). Sold under the
brand name NTX 2000, it is a commodity Windows NT server in a pedestal
configuration. Sequent intends to OEM NCR's rackmounted system beginning
in the first half of 1999.
Sequent also offers a multi-tiered, mixed operating system framework
called NUMACenter. NUMACenter is an application deployment platform that
meets the needs of many of today's applications by providing a two-tiered
system with industry-standard servers running Windows NT on the
application tier and NUMA-Q 2000 quads running UNIX on the database tier.
The framework is integrated using Sequent's new ADAM (Advanced Detection
Availability Manager) hardware, which provides the ability to monitor and
control critical baseline functions of all NUMACenter devices. Each
release of NUMACenter is designed to ensure flexibility and minimize risk
in the deployment of large enterprise applications by eliminating the need
for customers to choose between UNIX and Windows NT.
Operating System Software
DYNIX/ptx. DYNIX/ptx, Sequent's data-center-hardened version of the
UNIX operating system, runs on Sequent's NUMACenter, NUMA-Q 2000 and NUMA-
Q 1000 systems. DYNIX/ptx has several leading edge data center
capabilities. Application Region Manager(TM) enables users to partition
systems into application regions, thus enabling workload management and
server consolidation. Multipath/multiport delivers mainframe-level
functionality at the UNIX operating system level by providing up to eight
active paths from a NUMA-Q system to a storage device. Data is accessible
through all paths, enabling high availability of NUMA-Q servers even if
one or more paths fail.
Project Monterey. In an effort to increase the number of software
packages available on its platforms, Sequent has joined IBM, Intel and SCO
in Project Monterey, an IBM initiative to develop an industry standard 64-
bit UNIX for Intel's IA-64 (Merced) microprocessor. Based on IBM's AIX
operating system, the new IA-64 UNIX is scheduled for delivery on Merced
in the second half of 2000. Several other companies, including Acer Inc.,
CETIA, Groupe Bull, ICL, Motorola, Inc. and Unisys Corporation, have
already signed up with IBM as OEM partners of the new operating system.
As a development partner, Sequent will contribute its NUMA technology expertise
and Intel experience in data center implementations to the project.
As part of Project Monterey, the Company also plans to align
DYNIX/ptx with SCO's 32-bit UnixWare and incorporate AIX features that
will enable customers to run selected IBM software, including the
DB2/Universal Database, on its 32-bit NUMA platforms. Rebranded as
UnixWare ptx Edition, this new 32-bit operating system will provide
Sequent customers with a low-risk path to IA-64 UNIX. Following the
launch of Merced and IA-64 UNIX, Sequent plans to continue supporting
UnixWare ptx Edition to leverage Intel's 32-bit processor roadmap.
Windows NT. Sequent has been a strong proponent of Microsoft Windows
NT since it was first introduced in 1993. Since then, Windows NT has
become the platform of choice for thousands of enterprise applications.
However, current versions lack the scalability to support large data
center applications. Sequent is working with Microsoft on Windows NT
scalability and other data center capabilities for Sequent servers. In
1998, the Company opened an engineering center in Bellevue, Washington,
dedicated to Windows NT development. In addition, Sequent developed
NUMACenter specifically to provide a flexible, low-risk data center
platform that enables users to run Windows NT applications in a mixed
environment that includes a large UNIX database. The Company has also
designed its mid-range NUMA-Q 1000 server to run either UNIX or Windows
NT.
FLEX-ES. Sequent offers Fundamental Software Inc.'s FLEX-ES
software, a UNIX application running under DYNIX/ptx that allows the
mounting and execution of all S/390 and S/370 operating systems, data, and
applications without modification. This software enables organizations to
re-host mainframe systems and applications off older hardware that is not
Year 2000 compliant and onto Sequent's UNIX servers.
Communications Products
Sequent 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 IBM, Intel and Microsoft.
Sequent engages in cooperative technology programs with these and other
industry leaders, contributing Sequent's knowledge and expertise to the
development of their products to optimize their performance with Sequent's
own products.
The Company 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.
Strategic Relationships with Leading Vendors
Intel, IBM and Microsoft. Sequent maintains strategic relationships
with Intel for the development of the processor technology used in its
NUMA architecture and with IBM for the development of operating system
software designed to run on future Intel-based products. Since 1987, the
Company's close working relationship with Intel has enabled it to leverage
Intel's research and development investment in the design of its own
technology and to influence certain design features in successive
generations of Intel microprocessors to optimize the performance of those
components in the Company's systems. During the fourth quarter of 1998,
IBM selected Sequent as a co-developer in its Project Monterey initiative
to develop an AIX-based version of UNIX for Intel's IA-64 (Merced)
architecture. Sequent's relationship with Microsoft is built around
cooperative work on the scalability and other data center attributes of
Windows NT, a strategically important component of the Company's
technology roadmap.
Fibre Channel and Storage Subsystems. In 1997, Sequent was the first
server vendor to support fibre channel switched fabric technology in a
Storage Area Network (SAN) configuration. This SAN utilizes Sequent's
multipath/multiport technology within DYNIX/ptx, Brocade Communication
Systems, Inc.'s fibre channel switch and storage devices such as disk
subsystems and tape libraries. Storage subsystems are supplied by leading
storage vendors including EMC Corporation, Data General Corporation's
("Data General") CLARiiON division, Hitachi Data Systems and Storage
Technology Corporation. Sequent works closely with these vendors to
deliver optimal performance of the combined products to customers.
Systems Management Software Products. Sequent is implementing a
standards-based systems management program that offers customers both
flexibility and ease of integration. Consolidation around systems
management frameworks has led to the emergence of three de facto industry
standard frameworks: Computer Associates Unicenter TNG, Tivoli TME 10 and
Hewlett-Packard Company's ("Hewlett-Packard") OpenView. Sequent has
relationships with all leading framework providers, offering native
support for each partner's agent technology and providing a broad range of
integrated products that address specific management disciplines.
Every NUMACenter framework ships with FacetCorp's FacetWin software
which allows users of Windows to access and use UNIX network resources
transparently.
Relational Database Management System (RDBMS) Software. Sequent has
strategic development and marketing relationships with major providers of
RDBMS software, including Oracle, Informix and Microsoft. 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.
Enterprise Resource Planning Applications Software. Sequent maintains
strategic relationships with key providers of packaged ERP 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 ERP 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 strategic
relationships with several vendors of ERP applications, including Oracle,
PeopleSoft, SAP and Baan.
Decision Support System (DSS) Software and Tools. Sequent maintains
strategic relationships with the leading providers of OLAP (on-line analytical
processing), database, query and reporting, campaign management, segmentation
and modeling tools and applications. These applications and tools support
the decision-making process through analysis of information stored in
relational databases.
Packaged DSS applications provide a standard solution that supports the
decision-making process by allowing organizations to organize data from a
variety of sources and analyze it to measure the impact of business decisions
and strategy. Well-designed DSS applications use a data warehouse
infrastructure that ensures cost-effective deployment and a single view of
data across the enterprise. Sequent maintains a number of strategic
relationships with software partners providing DSS products, including
Microstrategy, Prime Response, Exchange Applications, Unica, SAS and Siebel.
In addition, Sequent has an interest in DP Applications ("DPA"), a
packaged data warehouse application company. DPA specializes in turnkey
data warehouses running in concert with packaged ERP systems, specifically
Oracle financials, PeopleSoft financials and HR and SAP.
Sales, Marketing and Service Applications. Sequent is aligned with the key
providers of packaged enterprise sales, marketing and service applications.
Combined with large back-office DSS/data warehousing solutions, these
applications deliver a cross-enterprise solution for improved customer
relationship management. Integrated sales, marketing and service applications
reduce the total cost of a solution and the time required for implementation
and leverage a single customer database for more targeted sales and service.
Sequent maintains strategic relationships with Siebel and Point Information
Systems. A large implementation of Sequent's NUMACenter framework also
provides the Unix and Windows NT hardware infrastructure for SiebelNet, a new
application outsourcing service from Siebel aimed at helping organizations
accelerate the deployment of their sales, marketing and customer service
applications and reduce and manage overall costs.
Professional Services
During the past six years, Sequent has strengthened its ability to compete
at the high end of the open systems market by building a 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 SIs,
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
architectural services to technology deployment and ongoing systems support.
Professional services include: IT architecture and transition planning; CRM
solutions, including call center and DSS/data warehousing design and
implementation; implementation of ERP applications (such as Oracle Financials
& Manufacturing, Baan and PeopleSoft applications); and enterprise
infrastructure 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 SIs and are a key factor in Sequent's
ability to win new major accounts and 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's customer service organization offers customers an industry-
leading portfolio of data center support services that, when customized to
customers' business and IT requirements, create total service solutions
for business-critical computing. These solutions were designed around a
set of necessary core components: system support services, environmental
services, management support services and business protection services.
System Support Services. System support services form the cornerstone of
Sequent's customer services and provide a high level of traditional hardware,
software and network support. These support services are available in a
scalable range, which provides customers with the flexibility to choose levels
of support based upon their need for risk management and system availability.
In addition, hardware maintenance is offered for many third-party peripheral
products connected to Sequent systems. System support services can address
support needs for installations ranging from a single system to an entire
data center.
Environmental Services. Environmental services provide the first
step in keeping systems on-line and users productive by making sure that
data centers and office spaces are properly prepared to support sensitive
electronic equipment. Sequent's environmental services range from power
audits and reviews to uninterruptible power systems, and even planning,
designing and building a computer room. Sequent delivers cost-effective
solutions that optimize the reliability of a customer's IT infrastructure
and help minimize the risks associated with environmental incidents.
Management Support Services. Management support services provide the
foundation for ensuring maximum productivity. This flexible set of
services helps customers manage disparate information technology processes
and more effectively manage the day-to-day aspects of their IT operations.
The services offered include help desk/call management, vendor management,
remote system administration and flexible levels of account management.
These services can be used to augment current resources or as a total
service solution to support customer's IT operations.
Business Protection Services. Business protection services provide
critical components for keeping customers operational in the event of any
unexpected outage or disaster. Sequent's business protection services are
designed to help plan and implement processes for protecting a customer's
business investment. The solutions include business continuity planning,
disaster recovery services, security assessments, backup data verification
and system replacement services.
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.
Sales and Distribution
Sequent sells its products and services worldwide through its own
direct sales force and through SIs. In several countries in Europe,
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 has cooperative relationships with a number of SIs to sell
its products and services into accounts where the Company does not have a
strong market presence. In the fourth quarter of 1998, the Company
entered into a relationship with Siebel to deliver CRM solutions that
integrate Siebel's front-office solutions with large back-office decision
support solutions running on Sequent platforms. The Company has a similar
relationship with AABC and Oracle to develop and sell SolutionNOW, a set
of rapid deployment packages for Oracle financials and manufacturing
applications on Sequent platforms.
For the past three years, Sequent has worked closely with EDS on a
growing number of data center projects and outsourcing opportunities. In
January 1999, the Company transferred management of its internal IT
infrastructure and operations to EDS, laying the groundwork for future
joint marketing and sales efforts.
In January 1999, the Company signed an agreement with Comparex, the
parent company of SI PQA and Comparex International, one of Europe's
fastest growing independent integrators. The Company has had a successful
working relationship with PQA in South Africa for many years and intends
to apply the same selling model in those regions of Europe where it has
been slow to replicate the success of its direct sales force in France and
the United Kingdom.
As of March 15, 1999, the Company has 56 sales offices worldwide,
including 28 in North America, 15 in Europe and 13 in Asia Pacific.
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 Microsystems, Inc. ("Sun"),
Compaq Computer Corporation 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 of the same hardware and software vendors with whom
Sequent has strategic relationships.
Sequent believes that the completeness of its technology roadmap, the
performance and scalability of its products, the character and strength of
its strategic relationships, and the caliber and scope of its consulting
and professional services represent key differentiating factors that will
enable it to compete successfully with these companies in the market for
data center solutions.
Patents and Licenses
The Company has fourteen U.S., one German, and three United Kingdom
patents either issued or allowed. The Company has twenty additional U.S.
patent applications pending and one foreign application 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 2, 1999, the Company employed 2,646 employees of whom 216
were employed as major account executives, 1,601 in sales support,
marketing and service, 423 in product development, 219 in manufacturing
and 187 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. 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(R), Symmetry(R), WinServer(R), Balance(R), DYNIX(R), DYNIX/ptx(R),
PTX(R)and ptx/ADMIN(R) are registered trademarks and NUMA-Q(TM),
NUMACenter(TM), IQ-Link(TM), NTX2000(TM), Decision Advantage(TM), Contact
Advantage(TM), Application Advantage(TM) and Application Region Manager(TM)
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 new products and from the Project Monterey
relationship with IBM 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. A significant portion of the Company's products are shipped in the
quarter in which the orders are received. Order backlog as of any quarter-end
is normally shipped within the first few weeks of the succeeding quarter. As
a result, order backlog as of the end of February for both 1999 and 1998 was
relatively small. 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 in 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, 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, Digital, IBM and 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. and 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, 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, Microsoft, Oracle and IBM. Many of these
hardware and software vendors also have significant development and
marketing relationships with the Company's competitors. In addition, the
Company's relationships with systems integrators, including EDS and AABC
and Comparex, are increasingly important to the Company's business
strategy. The Company plans to continue its strategy of developing
technology and marketing relationships with these and other leading
hardware and software vendors and systems integrators. 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 IBM Corporation. The
Company has joined IBM, Intel and SCO in Project Monterey, an IBM
initiative to develop an industry standard 64-bit UNIX for Intel's IA-64
(Merced) microprocessor. Several other companies, including Acer Inc.,
CETIA, Groupe Bull, ICL, Motorola, Inc. and Unysis Corporation, have
already signed up with IBM as OEM partners of the new operating system.
There can be no assurance, however, that the software development will be
timely and successful or that the companies mentioned above will
successfully OEM the product.
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 $72.5 million at January 2, 1999. 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.
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 executing a
company-wide Year 2000 Readiness Program for the Company's products, on-going
operations, mission-critical information systems and key suppliers. 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 $10 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. 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. Competition for sales 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 SIs.
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 52% of its total
revenues from foreign customers in the year ended January 2, 1999, 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 670,000 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 31 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.
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.
Executive Officers of the Company as of March 15, 1999 are as follows:
Name Age Position
Karl C. Powell, Jr. 55 Chairman and Chief Executive Officer, Director
John McAdam 48 President and Chief Operating Officer, Director
Robert S. Gregg 45 Sr. Vice President of Finance and Legal
and Chief Financial Officer
Barbara L. Gaffney 49 Sr. Vice President of Business Programs
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.
Ms. Gaffney joined the Company in 1983 as Vice President of Human
Resources. She then took on the role of Vice President of Quality in 1992
and in 1996 she was promoted to Senior Vice President of Customer Services
and Quality. Early in 1999, she was promoted to Senior Vice President of
Business Programs. Prior to joining the Company, Ms. Gaffney spent eleven
years with Intel Corporation in various Human Resources management
positions in both California and Oregon. Ms. Gaffney holds a B.S. degree
from the University of Santa Clara. She is also a member of the Malcolm
Baldridge National Quality Award (MBNQA) Board of Examiners.
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 1998 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 1998 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 1998 Annual Report to
Shareholders and is incorporated herein by reference.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
Information with respect to quantitative and qualitative disclosures
about market risk is included under "Derivatives and Other
Financial Instruments" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in
the Company's 1998 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 1998 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 1998 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 1999 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
1999 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 1999 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 1999 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
1998 Annual Report to Shareholders:
Sequent Computer Systems, Inc. and Subsidiaries:
Consolidated Statements of Operations - Fiscal Years Ended January 2,
1999, January 3, 1998 and December 28, 1996
Consolidated Balance Sheets - January 2, 1999 and January 3, 1998
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
January 2, 1999, January 3, 1998 and December 28, 1996
Consolidated Statements of Cash Flows - Fiscal Years Ended January 2,
1999, January 3, 1998 and December 28, 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules.
The following schedule 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.
(Incorporated by reference to Exhibit 10.1G to the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998
(File no. 0-15627).)
10.1H Eighth Amendment to First Building Lease, dated March 26, 1998.
10.1I 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).)
10.1J 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).)
Exhibit
Number Description
10.1K Second Amendment to Second Building Lease, dated September 13, 1991.
(Incorporated by reference to Exhibit 10.1G to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1991
(File no. 0-15627).)
10.1L 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).)
10.1M 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).)
10.1N Fifth Amendment to Second Building Lease, dated September 30, 1997.
(Incorporated by reference to Exhibit 10.1M to the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998 (File
no. 0-15627).)
10.1O Sixth Amendment to Second Building Lease, dated March 26, 1998.
10.1P Seventh Amendment to Second Building Lease, dated April 2, 1998.
10.1Q 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).)
10.1R 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).)
10.1S 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).)
10.1T 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).)
10.1U 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).)
10.1V Fifth Amendment to Third Building Lease, dated September 30, 1997.
(Incorporated by reference to Exhibit 10.1S to the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998 (File
no. 0-15627).
10.1W Sixth Amendment to Third Building Lease, dated March 26, 1998.
10.1X 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).)
Exhibit
Number Description
10.1Y 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).)
10.1Z 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).)
10.1aa 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).)
10.1bb 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).)
10.1cc Fifth Amendment to Fourth Building Lease, dated September 30, 1997.
(Incorporated by reference to Exhibit 10.1Y to the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998 (File
no. 0-15627).)
10.1dd Sixth Amendment to Fourth Building Lease, dated March 26, 1998.
10.1ee 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).)
10.1ff 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).)
10.1gg 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).)
10.1hh 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).)
10.1ii 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).)
10.1jj 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).)
10.1kk 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).)
Exhibit
Number Description
10.1ll 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).)
10.1mm Eighth Amendment to Fifth Building Lease, dated March 26, 1998.
10.1nn 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).)
10.1oo First Amendment to Lease, dated March 26, 1998 (Umpqua).
10.1pp 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).)
10.1qq 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).)
10.1rr 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).)
10.1ss Third Amendment to Lease, dated January 8, 1993 (Charles).
(Incorporated by reference to Exhibit 10.1cc to the Company's
Annual Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
10.1tt 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).)
10.1uu Fifth Amendment to Lease, dated March 26, 1998 (Charles).
10.1vv Lease Agreement between KC Woodside and the Company, dated June 10,
1991 (South 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).)
10.1ww 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).)
10.1xx Second Amendment to Lease, dated March 1, 1997 (South Platte).
(Incorporated by reference to Exhibit 10.1rr to the Company's
Annual Report on Form 10-K for fiscal year ended January 3, 1998
(File no. 0-15627).)
10.1yy Third Amendment to Lease, dated March 26, 1998 (South Platte).
10.1zz 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 18, 1996 (File no. 0-15627).)
Exhibit
Number Description
10.1aaa 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).)
10.1bbb 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).)
10.1ccc Third Amendment to Lease, dated March 26, 1998 (Guadalupe).
10.1ddd 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).)
10.1eee First Amendment to Lease, dated March 26, 1998 (Hillsborough).
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. (Incorporated by reference to Exhibit 10.2C to the Company's
Annual Report on Form 10-K for fiscal year ended January 3, 1998
(File no. 0-15627).)
10.2D License Agreement, dated July 15, 1983 between The Regents of
University of California and the Company, as amended July 2, 1986.
(Incorporated by reference to Exhibit 10.2C to the Company's Annual
Report on Form 10-K for fiscal year ended January 2, 1993
(File no. 0-15627).)
+10.3 Distributorship Agreement between the Company and Oracle
Corporation, dated March 31, 1987, as amended on December 29, 1988,
August 30, 1989, May 28, 1990, May 31, 1991 and June 30, 1991.
(Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to
the Company's Annual Report on Form 10-K for fiscal year ended
January 2, 1993 (File no. 0-15627).)
*10.4 Aircraft Lease Agreement between the Company and 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).)
Exhibit
Number Description
*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).
*10.12 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. (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for
fiscal year ended January 3, 1998 (File no. 0-15627).)
11 Statement regarding computation of earnings per share.
13 1998 Annual Report to Shareholders (portions not incorporated
by reference are not deemed filed).
21 Subsidiaries.
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
________________________
+ Confidential treatment for 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 1998.
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 15, 1999 /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 15, 1999.
Signature Title
/s/ Karl C. Powell, Jr. Chairman and Chief Executive Officer
(Karl C. Powell, Jr.) and Director (Principal Executive Officer)
/s/ John McAdam President and Chief Operating Officer
(John McAdam) and Director
/s/ Robert S. Gregg Sr. Vice President of Finance and Legal
(Robert S. Gregg) and Chief Financial Officer
(Principal Accounting and Financial
Officer)
FRANK C. GILL *
(Frank C. Gill) Director
LARRY R. LEVITAN *
(Larry R. Levitan) Director
MICHAEL S. SCOTT MORTON *
(Michael S. Scott Morton) Director
MARTY STEIN *
(Marty Stein) 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. 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
Year ended Jan. 2, 1999
Allowance for doubtful
accounts $ 3,121 $ 3,161 $ (134) $ 2,279 $ 3,869
Accumulated amortization
capitalized software $ 66,016 $ 31,365 $ 0 $ 30,584 $ 66,797
</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, 1999 appearing in the 1998 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
January 28, 1999
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 (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to
common shareholders $ (52,519) $ 38,687 $ 7,771 43,561 37,899 33,641 $ (1.21) $ 1.02 $ 0.23
Effect of Dilutive Securities
Stock options 2,653 723
Employee stock purchase plan 156 55
Debentures, if dilutive 116 144
Diluted EPS
Income (loss) available to
common shareholders +
assumed conversions $ (52,519) $ 38,803 $ 7,771 43,561 40,852 34,419 $ (1.21) $ 0.95 $ 0.23
</TABLE>
EXHIBIT 13
<TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
Jan. 2, Jan. 3, Dec. 28, Dec. 30, Dec. 31,
1999 1998 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total revenue $ 784,156 $ 833,886 $ 595,362 $ 540,345 $ 450,823
Income (loss) before income taxes $ (76,071) $ 50,512 $ 10,676 $ 47,327 $ 38,800
Net income (loss) $ (52,519) $ 38,687 $ 7,771 $ 35,073 $ 33,134
Net income (loss) per share - basic $ (1.21) $ 1.02 $ .23 $ 1.09 $ 1.08
Net income (loss) per share - diluted $ (1.21) $ .95 $ .23 $ 1.04 $ 1.03
BALANCE SHEET DATA
Working capital $ 324,674 $ 404,066 $ 191,810 $ 214,749 $ 168,468
Total assets $ 796,115 $ 886,677 $ 603,627 $ 503,923 $ 435,977
Long-term obligations $ 7,480 $ 9,910 $ 16,503 $ 9,106 $ 10,341
Shareholders' equity $ 552,854 $ 600,784 $ 374,809 $ 353,188 $ 291,195
</TABLE>
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $52.5 million in 1998 on a total revenue
volume of $784.2 million. The Company's results in 1998 were significantly
impacted by a pretax net restructuring charge of $61.4 million ($62.9 million
was recorded in the second quarter of 1998 and was reduced by third and fourth
quarter estimate revisions of $1.5 million). Since the restructure, the
Company has focused on revamping its business strategy and broadening its
product line while continuing its cost reduction efforts.
Revenue:
(dollars in millions)
Fiscal Year Ended
January 2, % January 3, % December 28,
1999 change 1998 change 1996
Total Revenue $ 784.2 (6%) $ 833.9 40% $ 595.4
Product $ 509.9 (15%) $ 600.5 45% $ 414.5
Professional Service 97.4 29% 75.7 34% 56.5
Customer Service 176.9 12% 157.7 27% 124.4
US $ 372.6 (17%) $ 449.4 66% $ 270.6
United Kingdom 300.9 12% 268.8 31% 205.5
Other International 110.7 (4%) 115.7 (3%) 119.3
Net Income (Loss) $ (52.5) $ 38.7 $ 7.8
Product:
Product revenue was significantly impacted by a substantial decrease in
product sales to the Company's largest domestic customer during the third
quarter of 1998. Also adversely impacting the Company's product revenue in
1998 was the transition from its Pentium Pro-based NUMA-Q products to its new
Pentium II Xeon-based NUMA-Q product line. The Company did not begin shipment
of its new product line until late in the third quarter of 1998.
In contrast, revenues in 1997 were up 40% over 1996. The decrease in total
revenue from 1997 to 1998 was due to a substantial decline in product revenue of
approximately 15%. Contributing to the substantial increase in 1997 revenues
was a significant increase in product revenue generated from sales of the
Company's NUMA-Q 2000 systems which were new to the marketplace in 1997 and
which represented approximately 68% of the Company's system sales for that year.
Service:
The Company's service organizations continue to represent an increased
percentage of total revenue, approximately 35% in 1998 compared to 28% and 30%
in 1997 and 1996, respectively. Revenue increases from professional services
were approximately 29% and 34% in 1998 and 1997, respectively. Customer service
revenue increased approximately 12% and 27% in 1998 and 1997, respectively.
Continued growth in the number and size of new projects, with both new and
existing customers, contributed to the overall increases in revenue within the
Company's professional service organization. Customer service revenue continues
to increase from growth in the number of systems under maintenance contracts.
Foreign revenue has continued to increase, primarily from increased volume
in the Company's European operations, specifically in the United Kingdom.
The following table sets forth certain operating data as a percentage of
total revenue:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 2, January 3, December 28,
1999 1998 1996
<S> <C> <C> <C>
Revenue:
Product 65% 72% 70%
Service 35 28 30
Total revenue 100 100 100
Cost of product and service 65 58 57
Gross profit 35 42 43
Operating expenses:
Research and development 9 8 9
Selling, general and administrative 28 28 32
Restructuring charges 8 - -
Total operating expenses 45 36 41
Operating income (loss) (10) 6 2
Interest income (expense), net 1 - -
Other expense, net (1) - -
Income (loss) before provision for
(benefit from) income taxes (10) 6 2
Provision for (benefit from) income taxes (3) 1 1
Net income (loss) (7)% 5% 1%
</TABLE>
GROSS MARGINS
Fiscal Year Ended
January 2, January 3, December 28,
1999 1998 1996
Product 39% 49% 52%
Service 28% 26% 23%
The factors influencing gross margins in a given period generally include
overall pricing trends in our products' markets, unit volumes (which affect
economies of scale), product configuration mix, the impact of existing product
lifecycles, changes in component and manufacturing costs and the mix between
product and service revenue.
Product:
During 1998, product margins continued to be negatively impacted by
competitive pricing pressures and the impact of the product transition during
the latter part of 1998. The Company's Pentium Pro-based product line was
nearing the end of its product life cycle, which resulted in heavier discounting
of the products sold during 1998. The Company's new Pentium II Xeon-based
NUMA-Q products were announced to the marketplace near the end of the third
quarter; however, formal introduction and shipment of the products did not begin
until the fourth quarter of 1998. Product margins were also impacted by certain
non-recurring charges for inventory obsolescence provisions made during the
second quarter of 1998. Additionally, an increased product mix of third-party
products, which generally yield lower margins than the Company's products,
contributed to the overall decline in product margins in both 1998 and 1997.
Service:
Partially offsetting decreases in product margins were slight increases in
service margins which were primarily realized from the Company's professional
service organization. Sequent has enhanced its focus on the business strategy
within this segment of the Company which has resulted in significant
improvementsin the profitability of this organization, particularly in 1998.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ended
(dollars in millions) January 2, % January 3, % December 28,
1999 change 1998 change 1996
<S> <C> <C> <C> <C> <C>
Research and development expense $74.8 14% $65.4 22% $53.7
As a percentage of total revenue 10% 8% 9%
Software costs capitalized $40.2 17% $34.2 -- $34.2
</TABLE>
Research and development expense continued to increase in amount.
During 1998 and 1997, the Company made substantial investments in the
development of its new NUMA-Q product lines. Specifically, significant
investments were made in the hardware and software development of its new
Pentium II Xeon-based NUMA-Q product and in the technology of the
Company's first generation NUMACenter which allows running Unix and
Windows NT applications on a single system. Both of these new products
were formally introduced into the marketplace during the latter part of
1998.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
(dollars in millions) Fiscal Year Ended
January 2, % January 3, % December 28,
1999 change 1998 change 1996
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $215.3 (8%) $234.0 22% $191.1
As a percentage of total revenue 27% 28% 32%
</TABLE>
Selling, general and administrative expenses decreased both in amount
and as a percentage of revenue in 1998 over 1997. Savings were realized
primarily from the effects of aggressive cost reduction measures
implemented during 1998 and as a result of the Company's restructure which
took place in the second quarter of 1998. The overall decrease in
selling, general and administrative expenses resulted primarily from
reductions in payroll, employee training and travel expenses. While these
dollar decreases approximated 8%, the impact of these expenses as a
percentage of revenue was tempered due to the decline in total revenue in
1998 over 1997. The increase in selling, general and administrative
expenses in 1997 over 1996 was primarily due to the increased activity
associated with the overall sales volume generated that year.
RESTRUCTURING CHARGES
During the second quarter of 1998, the Company recorded restructuring
charges of $62.9 million in connection with management's decision to
accelerate changes in its business model to leverage the strength of its
technology roadmap and market position. The restructuring charge was
reduced during the third and fourth quarters by estimate revisions
totalling $1.5 million. The majority of these revisions were adjustments
to prepaid software licenses and facilities. As part of the restructuring
process, which was substantially completed during the second quarter of
1998, the Company reorganized its operations to revise the focus of its
business strategy and broaden its line of Intel-based servers. As part of
the restructuring efforts, the Company expanded its product offerings,
including its new Xeon-based NUMA product and also NUMACenter, both of
which were formally introduced into the marketplace in the latter part of
1998. The restructuring charges of $62.9 million included employee
termination and other related costs ($7.2 million); facilities and office
space costs ($13.7 million); write-offs of non-strategic assets,
principally prepaid software licenses ($27.2 million), capital assets
($7.9 million), capitalized software ($2.5 million), goodwill ($2.5
million), and other assets, principally prepaid expenses ($1.9 million).
The employee termination costs resulted from the elimination of 265
positions worldwide. The employee groups impacted by the eliminations
encompassed all functions within the Company. All termination costs
pertaining to the eliminated positions are included as restructuring costs
in the accompanying Statements of Operations. Approximately 74% of the
employee termination costs accrued during the second quarter of 1998 were
paid as of January 2, 1999. Approximately 24% of the accrued costs were
written off by the Company during 1998 and the remainder will be paid in
1999.
Facilities costs represent expenses associated with excess office
space and related fixed costs for the Company's headquarter and field
office locations. The amount written off was determined using an analysis
of individual specific lease terms, estimated sub-lease income to be
realized and office headcount for unutilized facilities.
The majority of capital asset write-offs represent retirements of
hardware and software no longer being used for customer demonstrations and
showcases due to the strategic product shift associated with the
restructure. The method of determining fair value of costs written off
was the net book value recorded at the time of the restructuring.
Remaining cash outlays expected from the restructuring consist of $16
million relating to ongoing facilities costs and $500,000 relating to
employee termination and prepaid software licenses. It is anticipated
that the restructuring actions taken in the second quarter will yield
operating cost reductions of approximately $25 million during 1999.
<TABLE>
The following table presents a summary of the restructuring charges recorded during 1998 and the resulting net balance sheet
amounts recorded as of January 2, 1999. The balance of accrued restructuring costs of $16.5 million at January 2, 1999 is
included in Accounts Payable and Other in the accompanying balance sheet.
<CAPTION>
(dollars in millions)
Second Third
Restructuring Quarter Write-offs/ Balance at Quarter Write-offs/ Balance at
Costs Expenditures Adjustments July 4, 1998 Expenditures Adjustments October 3, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Employee termination and
related costs $ 7.2 $ (2.5) $ (0.3) $ 4.4 $ (2.5) $ (0.2) $ 1.7
Prepaid software licenses 27.2 - (24.9) 2.3 - (0.6) 1.7
Facilities 13.7 (0.1) - 13.6 (0.7) 0.1 13.0
Capital assets 7.9 - (7.9) - - 0.1 0.1
Capitalized software 2.5 - (2.5) - - - -
Goodwill 2.5 - (2.5) - - - -
Other assets 1.9 - (1.9) - - - -
$ 62.9 $ (2.6) $ (40.0) $ 20.3 $ (3.2) $ (0.6) $ 16.5
</TABLE>
<TABLE>
<CAPTION>
Fourth
Quarter Write-offs/ Balance at
Expenditures Adjustments January 2, 1999
<S> <C> <C> <C>
Employee termination and
related costs $ (0.3) $ (1.2) $ 0.2
Prepaid software licenses - (1.4) 0.3
Facilities (0.7) 3.7 16.0
Capital assets - (0.1) -
Capitalized software - - -
Goodwill (0.1) 0.1 -
Other assets - - -
$ (1.1) $ 1.1 $ 16.5
</TABLE>
INTEREST AND OTHER, NET
(dollars in millions)
Fiscal Year Ended
January 2, % January 3, % December 28,
1999 change 1998 change 1996
Interest income $ 9.2 80% $ 5.1 70% $ 3.0
Interest expense $ 4.1 (33%) $ 6.1 91% $ 3.2
Other expense, net $ 3.4 48% $ 2.3 15% $ 2.0
Interest income is primarily generated from invested cash and cash
equivalents and restricted deposits held at foreign and domestic banks.
The significant increase in interest income in 1998 and 1997 is the result
of investment of cash received from the Company's stock offering in August
of 1997 and, in 1998, from investment of cash proceeds generated from
improved collection of accounts receivable during the year. Interest
expense includes costs related to foreign currency hedging loans, interim
short-term borrowings and capital lease obligations and, in 1997 and 1996,
convertible debentures. The decrease in interest expense in 1998 over
1997 is attributed to the decline in the use of the Company's line of
credit and hedge loans during 1998. In 1997, the Company increased the
use of its domestic line of credit for investments in its NUMA-Q and next-
generation product lines, which resulted in an increase in interest
expense. Other expense consists of discounts on the sale of accounts
receivable and net realized and unrealized foreign exchange gains and
losses. The increases in 1998 and 1997 are primarily from fluctuations in
foreign exchange rates and from increased activity in factoring the
Company's accounts receivable, specifically in 1998.
INCOME TAXES
The Company recorded a $23.6 million benefit from income taxes in
1998 on a net loss before tax of $76.1 million. The difference between
the statutory rate and the effective tax rate is principally due to a
valuation allowance established for the potential expiration of certain
tax attributes carried forward from prior years, offset by the benefit
from the research tax credit and the Company's Foreign Sales Corporation.
The 1998 effective tax rate benefit of 31.0% compares to an effective tax
rate of 23.4% in 1997 and 27.2% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $324.7 million at January 2, 1999 compared to
$404.1 million at January 3, 1998. The Company's current ratio at January
2, 1999 and January 3, 1998 was 2.4:1 and 2.5:1, respectively.
Cash and cash equivalents increased $59.6 million during 1998. The
Company's cash and cash equivalents were primarily impacted by the $107
million net decrease in accounts receivable. During 1998, the Company
focused resources on collection efforts and credit terms, substantially
decreasing the number and size of outstanding accounts. Offsetting the
impact of the net decrease in accounts receivable were investing
activities of $58.6 million and financing activities of $40.1 million.
The Company has a $40 million receivable sales facility with a group
of banks. At January 2, 1999, accounts receivable in the accompanying
consolidated balance sheet is net of $24 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 6.6%. As of
January 2, 1999, $10 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 April 1, 2001. The
line contains certain financial covenants and prohibits the Company from
paying dividends without the lenders' consent. At January 2, 1999, there
was no outstanding balance under the line of credit.
The Company maintains a short-term borrowing agreement with a foreign
bank to cover foreign currency exposures. Maximum borrowings allowed
under the foreign bank agreement were $85.1 million, of which $28.3
million was outstanding at January 2, 1999 (based on currency exchange
rates on such date).
The Company also maintains a miscellaneous borrowing arrangement with
a foreign bank. At January 2, 1999, $1.6 million was outstanding under
this agreement.
Management expects that its current available cash balances and funds
generated from operations 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.
Sequent is executing a company-wide Year 2000 Readiness Program
(Program) for the Company's products, on-going operations (operations),
mission-critical information systems (IS), and key suppliers (suppliers).
The Program's goal was to identify and conduct remediation of critical
century date change issues by the end of 1998. Ongoing remediation,
testing, and contingency planning are expected to continue throughout
1999. The Year 2000 Readiness Program is organized into six major phases:
1) exposure inventory, 2) risk assessment, 3) prioritization, 4)
remediation (either by repair or replacement), 5) contingency planning,
and 6) testing/verification. These stages have been largely completed for
the Company's standard products and are in progress for ongoing
operational issues as well as critical suppliers. The Program
organization consists of a Steering Committee made up of Company
executives, a Year 2000 taskforce representing each of the Company's major
departments, and a Year 2000 Project Management Office. In addition,
several Focus Teams have been set up to deal with cross-functional issues
related to customers, partners, and suppliers. Operational program work
is being done by each of the Company's departments with oversight by the
Year 2000 Program Office. Operational program work includes the Company's
critical business computer applications, data, and infrastructure.
Mission-critical third party service and equipment suppliers are being
contacted via written inquiry, as well as direct discussion, to understand
and mitigate potential risks.
The current status of the Company's Year 2000 Readiness Program is as
follows:
The Company's current line of hardware products, which are designed
and manufactured to the Company's specifications, are Year 2000 ready if
utilized with the appropriate version of the operating system software.
The Company cannot ensure that its software products do not contain
undetected problems associated with Year 2000 compliance. Such problems,
should they occur, may result in material adverse effects on future
operating results. Of the Company's eight Operations remediation
programs, five have completed the remediation phase and three are still in
process. Among the latter, remediation status ranges from 40% to 90%
complete. Identified business critical exposures are expected to be
resolved by the second quarter of 1999. The Company's Supplier readiness
program is managed through its Strategic Sourcing group. Of those
suppliers identified as business critical, all have remediation plans in
place and completion is planned on or before end of the second quarter of
1999. The Company's Information Systems group is remediating both
critical IS applications and IT infrastructure. Of the identified
enterprise level business critical applications, over 90% have now been
remediated. All IS-managed applications, regardless of business
criticality, will be remediated, replaced or retired, worldwide.
Remediation of the Company's worldwide IT infrastructure (networks,
servers & PCs) is 90% complete. Any other IT exposures, such as workgroup
level software applications, are being identified and dealt with as part
of individual department Y2K programs.
The total cost of the Program is currently estimated to be
approximately $10 million and is being funded through operating cash
flows. The Company is expensing 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.
These costs are not incremental as the Company's internal IS development
resources were re-directed solely to the Year 2000 remediation effort in
1998. As of January 2, 1999, the total amount expended on the Program was
approximately $6 million, with the majority of the costs representing
hardware and labor expenditures.
The Company has classified potential worst case scenarios as either
1) Year 2000 related failures in internal business critical information
system applications or 2) the development of service or product supply
difficulties by business critical suppliers. These circumstances are not
considered probable, but have been reviewed as part of the Company's due
diligence efforts. For Year 2000 type failures in internal applications
(scenario 1), business critical applications have been identified,
assessed as to possible business impact of their failure and are being
repaired, upgraded or replaced based on the severity of potential impact.
For each of these applications, a business continuity contingency plan is
expected to be in place by the end of the first half of 1999. For service
and product supplier type failures, an inventory has been completed and
the business critical suppliers have been identified. A variety of risk
reduction strategies have commenced, including but not limited to,
developing possible alternative suppliers, acquiring safety stock and
establishing enhanced testing programs and process audits. For the
identified business critical suppliers, the Company expects to establish a
contingency plan by mid 1999.
There can be no assurance, however, that the systems or products of
other companies on which the Company's systems also rely will be converted
timely 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
or results of operations.
EURO CONVERSION
The European Economic and Monetary Union (EMU) and a new currency,
the "Euro", went into effect in Europe on January 1, 1999. This is a
significant and critical element in the European Union's (EU) plan to
blend the economies of the EU's member states into one integrated market,
with unrestricted and unencumbered trade and commerce across borders.
Eleven European countries (the "participating countries") of the fifteen
member EU countries will initially participate (Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain). Other member states (Denmark, Greece, the United Kingdom and
Sweden) may join in the years to come. The Euro will trade on currency
exchanges and the legacy currencies will remain legal tender for a
transition period between January 1, 1999 and January 1, 2002. During the
transition period, public and private companies may pay for goods and
services using either the Euro or the participating country's legacy
currency.
The Company is currently determining the necessary modifications to
its internal systems to accommodate Euro-denominated transactions and is
assessing the business implications of the conversion to the Euro,
including long-term competitive implications and the effect of market risk
with respect to financial instruments. The Company does not believe the
financial impact of these matters, if any, will be material to its results
of operations, financial condition or cash flows. However, the Company
will continue to assess the impact of Euro conversion issues as the
applicable accounting, tax, legal and regulatory guidance evolves.
DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
Risk Management Strategy
In the normal course of business, Sequent enters into various
financial instruments, including derivative financial instruments, for
purposes other than trading. Derivative financial instruments are not
entered into for speculative purposes. These instruments primarily
consist of accounts receivable, short term investments, short-term debt,
forward exchange contracts and option contracts which are used to reduce
Sequent's exposure to currency exchange rates. At inception, foreign
exchange contracts are designated as hedges of firmly committed or
forecasted transactions. These transactions are generally expected to be
completed in less than one year. The forward contracts and options
generally mature within twelve months. The majority of Sequent's foreign
exchange forward contracts are to exchange Japanese Yen, Australian
Dollars and New Zealand Dollars. The option contracts are no-cost collars
and exchange British Pounds.
Exposure to credit risk is managed through credit approvals and
monitoring procedures, and management believes that the reserves for
losses are adequate.
The counterparties to these financial instruments are substantial and
creditworthy corporations, state agencies and multinational commercial
banks. In management's opinion the risk of counterparty nonperformance
associated with these instruments is not considered to be significant.
Interest Rate Risk
The Company routinely invests in short-term financial instruments
within the parameters of its investment policy with maturities of less
than three months. The instruments pay a fixed rate of return. These
instruments are subject to overall market interest rate sensitivity upon
maturity.
As part of the Company's foreign currency hedging activities, the
Company maintains short-term loans with a multinational commercial bank.
These loans are for durations ranging from fifteen days to three months
and carry a fixed interest rate. Upon maturity, these instruments are
subject to overall market interest rate sensitivity.
The Company also maintains two long-term leases with variable
interest rates based on LIBOR (London Inter Bank Offer Rate). The table
below illustrates the effect on lease payments of a +/-10% change in the
underlying base rate:
1999 Forecast Rental Payments
Base Rate $1,957K
Base Rate plus 10% $2,072K
Base Rate less 10% $1,748K
Foreign Exchange Risk
The table below presents foreign exchange contracts, options and debt
at January 2, 1999 and January 3, 1998 (in thousands). The notional
amounts represent agreed upon amounts on which calculations of dollars to
be exchanged are based, and are an indication of the extent of Sequent's
involvement in such instruments. They do not represent amounts exchanged
by the parties and, therefore, are not a measure of the instruments.
Contract Carrying Amount Fair Value
(in thousands) Amount Asset Liability Asset Liability
1998
FX Forward Contracts $ 8,086 $ - $ - $ 8,086 $ 8,086
FX Options (net) 129,100 - - 135 123
Debt 28,244 - 28,244 - 28,244
1997
FX Forward Contracts $ 14,636 $ - $ - $ 14,781 $14,781
Debt 68,791 - 68,791 - 68,791
Fair values of financial instruments represent estimates of possible
value that may not be realized in the future.
EUROPEAN SALES OPERATIONS
In January 1999, the Company announced that it signed a strategic
partnership agreement with Comparex, one of Europe's leading suppliers of
complete solutions for IT infrastructures. The partnership allows
Comparex to take responsibility for Sequent's sales activities in Austria,
Belgium, Germany, the Netherlands, Portugal, Spain and Switzerland. The
Company's operations in the United Kingdom and France geographies, which
represent the majority of the Company's European business, are not
included in the partnership agreement. The majority of the Company's
personnel in the countries included under the agreement will become
employees of Comparex and the remainder will stay with Sequent to manage
and support the relationship with Comparex, continuing to provide
specialist skills and expertise. The agreement also provides for the sale
of certain assets to Comparex at recorded book value. Management
anticipates that the new relationship with Comparex will positively impact
both revenues and operating income in 1999 and 2000 in these geographies.
FORWARD-LOOKING STATEMENTS
The Chairman's Letter, Management's Discussion and Analysis of
Financial Conditions and Results of Operations and "Products,"
"Services," and "Solutions" 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 new
arrangements with IBM and Comparex; estimated costs to achieve Year 2000
compliance; growth, profitability and backlog improvements and increase in
shareholder value; and expense reductions. 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 IBM
relationship include, but are not limited to, the failure to develop and
sell in significant quantities the products to be covered by the
relationship. Anticipated benefits from the arrangement with Comparex
could be adversely affected if Comparex does not sell Sequent products at
the expected levels. 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, backlog and expense
levels 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 1000, NUMA-Q 2000 and NUMACenter 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. 2, Jan. 3, Dec. 28,
1999 1998 1996
Revenue:
Product $ 509,830 $ 600,496 $ 414,418
Service 274,326 233,390 180,944
Total revenue 784,156 833,886 595,362
Costs and expenses:
Cost of products sold 311,705 309,016 197,702
Cost of service revenue 198,793 171,595 139,983
Research and development 74,808 65,414 53,733
Selling, general and administrative 215,336 234,037 191,069
Restructuring charges (Note 11) 61,372 - -
Total costs and expenses 862,014 780,062 582,487
Operating income (loss) (77,858) 53,824 12,875
Interest income 9,202 5,096 3,007
Interest expense (4,059) (6,086) (3,187)
Other expense, net (3,356) (2,322) (2,019)
Income (loss) before provision for
(benefit from) income taxes (76,071) 50,512 10,676
Provision for (benefit from) income taxes (23,552) 11,825 2,905
Net income (loss) $ (52,519) $ 38,687 $ 7,771
Net income (loss) per share -
basic (Note 1) $ (1.21) $ 1.02 $ 0.23
Net income (loss) per share -
diluted (Note 1) $ (1.21) $ 0.95 $ 0.23
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. 2, 1999 Jan. 3, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 192,876 $ 133,299
Restricted deposits 28,280 68,791
Receivables, net 221,611 328,884
Inventories 86,333 112,228
Prepaid royalties and other 23,282 28,147
Total current assets 552,382 671,349
Property and equipment, net 133,831 134,728
Capitalized software costs, net 72,469 66,244
Other assets, net 37,433 14,356
Total assets $ 796,115 $ 886,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 29,908 $ 69,893
Accounts payable and other 124,099 128,157
Accrued payroll 19,070 22,843
Unearned revenue 47,446 40,946
Income taxes payable 4,865 3,134
Current obligations under capital leases 2,320 2,310
Total current liabilities 227,708 267,283
Other accrued expenses 8,073 8,700
Long-term obligations under capital leases 7,480 9,910
Total liabilities 243,261 285,893
Commitments and contingencies (Notes 5, 6, 10 and 12)
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized, 43,471 and 42,962 shares outstanding 435 430
Paid-in capital 511,169 508,858
Retained earnings 46,883 99,402
Accumulated other comprehensive income:
Foreign currency translation adjustment (5,633) (7,906)
Total shareholders' equity 552,854 600,784
Total liabilities and shareholders' equity $ 796,115 $ 886,677
The accompanying notes to consolidated financial statements are an
integral part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Foreign
currency Total annual
Common Stock Paid-in Retained translation comprehensive
Shares Amount capital earnings adjustment Total income
<S> <C> <C> <C> <C> <C> <C> <C>
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 7,771
Foreign currency translation
adjustment - - - - 2,868 2,868 2,868
Rounding - - - (1) - (1)
Balances, December 28, 1996 34,188 342 315,316 60,715 (1,564) 374,809 $ 10,639
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 38,687
Foreign currency translation
adjustment - - - - (6,342) (6,342) (6,342)
Balances, January 3, 1998 42,962 430 508,858 99,402 (7,906) 600,784 $ 32,345
Common shares issued 2,243 22 21,165 - - 21,187
Common shares repurchased (1,734) (17) (19,466) - - (19,483)
Tax benefit of option exercises - - 612 - - 612
Net loss - - - (52,519) - (52,519) (52,519)
Foreign currency translation
adjustment - - - - 2,273 2,273 2,273
Balances, January 2, 1999 43,471 $435 $ 511,169 $ 46,883 $ (5,633) $ 552,854 $(50,246)
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
Jan 2, 1999 Jan. 3, 1998 Dec. 28, 1996
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (52,519) $ 38,687 $ 7,771
Reconciliation of net income (loss)
to net cash and cash equivalents provided
by operating activities-
Depreciation and amortization 88,374 83,649 65,534
Restructuring charges not affecting cash 55,950 -- --
Deferred income taxes (25,405) (535) 800
Changes in assets and liabilities-
Receivables, net 107,273 (119,132) (31,430
Inventories 25,895 (37,737) (13,638)
Prepaid royalties and other (11,755) 2,430 (17,113)
Accounts payable and other (11,280) 40,683 31,282
Accrued payroll (5,433) (2,010) 13,130
Unearned revenue 6,500 10,159 9,321
Income taxes payable 1,731 117 (1,964)
Other, net (22,339) 7,418 455
Net cash provided by
operating activities 156,992 23,729 64,148
Cash flow from investing activities:
Restricted deposits 40,511 (24,136) (5,013)
Purchases of property and equipment, net (58,860) (58,698) (80,617)
Capitalized software costs (40,217) (34,247) (34,170)
Other assets, net -- -- (15,600)
Net cash used for investing activities (58,566) (117,081) (135,400)
Cash flow from financing activities:
Notes payable, net (39,985) 9,968 18,779
Proceeds (payments) under capital lease obligations (2,410) (2,509) 14,662
Long-term debt payments -- (133) --
Stock issuance proceeds, net 21,799 184,683 10,983
Stock repurchases (19,483) -- --
Net cash (used) provided by financing activities (40,079) 192,009 44,424
Effect of exchange rate changes on cash 1,230 (3,337) 2,868
Net increase (decrease) in cash and cash equivalents 59,577 95,320 (23,960)
Cash and cash equivalents at beginning
of period 133,299 37,979 61,939
Cash and cash equivalents at end of period $ 192,876 $ 133,299 $ 37,979
</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 leading
provider of scalable, Intel-based, UNIX and Windows NT solutions for the
data center. Sequent designs, manufactures and markets systems based on
Cache Coherent Non-Uniform Memory Access (CC-NUMA) architecture and used
primarily as application and database servers for large commercial
applications. These applications include: OLTP, packaged business
(financial, manufacturing and human resources) solutions, also called ERP;
and CRM, a broad solution set that includes back office DSS and data
warehouses supporting front-office marketing, sales and service
applications. Sequent provides consulting and professional services to
help large organizations identify complex information technology (IT)
problems and develop solutions that combine its products with those of its
hardware, software and solutions partners. The Company's customer service
organization offers an industry-leading portfolio of data center support
services that, when customized to customers' business and IT requirements,
create total service solutions for business-critical computing.
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.
Cash and Cash Equivalents. 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.
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 $3.9
million at January 2, 1999 and $3.1 million at January 3, 1998.
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 $40 million. The agreement expires April 1, 2001. At January
2, 1999 and January 3, 1998, accounts receivable in the accompanying
consolidated balance sheets is net of $24 million and $20 million,
respectively, 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 6.6%. As of January
2, 1999, $10 million relating to these transactions was netted against
accounts receivable in the accompanying consolidated balance sheet.
The Company had no single customer that represented greater than 10%
of total revenue in 1998 or 1996. Approximately 19% of the Company's
revenue in 1997 was from one customer. International sales represented
approximately 53% of the Company's total revenue in 1998, 46% in 1997 and
55% in 1996.
Inventories. Inventories are stated at the lower of cost or market.
Costs are determined using the first-in, first-out (FIFO) method and
include material, labor and manufacturing overhead.
Prepaid Licenses and Royalties. The Company has entered into
agreements with various vendors who provide for prepayment for future
licenses and/or royalties related to sales of certain software. Prepaid
amounts are realized upon receipt of reverse royalties from the vendors
generated from software sales by the Company.
Included in prepaid licenses and other assets as of January 3, 1998
were prepaid licenses acquired from a single vendor totaling $25.3
million. As of January 2, 1999, the majority of these licenses have been
written off as part of the Company's 1998 restructuring.
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 $66.8
million at January 2, 1999 and $66 million at January 3, 1998.
Amortization, generally based on a three-year straight-line basis, was
$31.4 million in 1998, $27.6 million in 1997 and $20 million in 1996. All
other research and development costs are expensed as incurred. In 1998
and 1996, the Company removed from its balance sheet capitalized software
costs which had an original cost of $26 million and $40 million,
respectively, and were fully amortized. In addition, the Company wrote
off capitalized software with a net book value of approximately $2.5
million as part of the restructuring in the second quarter of 1998. This
did not affect the realizable value of the Company's remaining software
products.
Additionally, the Company maintains strategic relationships with
industry-leading manufacturers of components, systems and software. In
1998 and 1997, the Company did not enter 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 1998 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.
Foreign Currency Translation. 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 $1.2 million, $1.6 million and $0.8
million for 1998, 1997 and 1996, respectively, were realized from such
transactions.
Hedging of Foreign Currency Transactions. 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 2,
1999, the Company also has forward contracts denominated in Japanese Yen,
Australian Dollars and New Zealand Dollars with a contract amount of
approximately $2.2 million, $4.1 million and $1.9 million, respectively.
These forward contracts are used to hedge certain intercompany payables.
Gains and losses on such contracts have not been significant to date. The
Company also has range forward option contracts denominated in British
Pounds with a contract amount of approximately $129.1 million. These
option contracts are used to hedge the cost of goods sold for the
Company's United Kingdom operations. There have been no gains or losses
on these contracts to date.
Per Share Information. 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.
<TABLE>
The following table is a reconciliation of the basic and diluted
earnings per share computations:
(in thousands, except per share amounts)
<CAPTION>
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to
common shareholders $(52,519) $ 38,687 $ 7,771 43,561 37,899 33,641 $(1.21) $1.02 $0.23
Effect of Dilutive Securities
Stock options 2,653 723
Employee stock purchase plan 156 55
Debentures, if dilutive 116 144
Diluted EPS
Income (loss) available to
common shareholders +
assumed conversions $(52,519) $ 38,803 $ 7,771 43,561 40,852 34,419 $(1.21) $0.95 $0.23
</TABLE>
Consolidated Statement of Cash Flows. Total cash expenditures for
income taxes were $5.2 million, $3.7 million and $5.9 million during 1998,
1997 and 1996, 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.
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 1998 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
New Accounting Pronouncements. During the first quarter of the year
ended January 2, 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130) as
issued by the Financial Accounting Standards Board (FASB). Comprehensive
income is defined by FAS 130 as the changes in equity of a business
enterprise during a period that result from transactions and other
economic events and circumstances from non-shareholder sources. It
includes all changes in equity during a period except those resulting from
investments by shareholders. Consequently, the Company has reported its
Foreign Currency Translation Adjustment, as required by FAS 130, as
comprehensive income in the appropriate consolidated financial statements
presented herein.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). This
Statement provides authoritative guidance on when internal-use software
costs should be capitalized and when these costs should be expensed as
incurred. The Company adopted SOP 98-1 in 1998. During the year ended
January 2, 1999, the Company capitalized $9.9 million of such costs in
accordance with this guidance.
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (FAS 131). This Statement supersedes FAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management
for making operating decisions and assessing performance as the source for
the Company's reportable segments. This Statement also requires
disclosures about products and services, geographic areas and major
customers. The adoption of FAS 131 did not affect results of operations
or financial position but did affect the disclosure of segment information
(see Footnote 9 on "Segment Reporting").
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
This statement is effective for fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). The Company is currently assessing the
impact that the adoption of FAS 133 will have on its consolidated
financial statements.
2. INVENTORIES
(in thousands)
January 2, January 3,
1999 1998
Raw materials $ 14,996 $ 16,375
Work-in-progress 1,403 3,155
Finished goods 69,934 92,698
$ 86,333 $ 112,228
Finished goods inventory includes evaluation systems aggregating
$25.8 million and $53.7 million as of January 2, 1999 and January 3, 1998,
respectively. Such systems are located at potential customer sites for
demonstration.
3. PROPERTY AND EQUIPMENT
(in thousands)
January 2, January 3,
1999 1998
Land $ 6,307 $ 5,037
Operational equipment 230,449 209,372
Furniture and office equipment 86,069 89,569
Leasehold improvements 27,498 22,889
350,323 326,867
Less accumulated depreciation
and amortization (216,492) (192,139)
$ 133,831 $ 134,728
Depreciation and amortization of intangibles charged to expense
totaled $56.9 million in 1998, $55.2 million in 1997 and $44.9 million in
1996.
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 April 1, 2001. There were no borrowings
outstanding under the line of credit at January 2, 1999 or January 3,
1998.
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
1998, the Company re-negotiated the agreement to renew automatically on an
annual basis, unless specifically cancelled. The foreign bank, without
cause, can terminate the agreement at any time. At January 2, 1999,
maximum borrowings allowed under the agreement were $85.1 million.
Amounts outstanding were $28.3 million and $68.8 million at January 2,
1999 and January 3, 1998, 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 2, 1999 was 4.7%.
In addition to the above borrowing agreements, the Company has
entered into certain other miscellaneous borrowing arrangements with a
foreign bank. Amounts outstanding were $1.6 million and $1.1 million at
January 2, 1999 and January 3, 1998, respectively. The interest rate on
these borrowings was 1.725% at January 2, 1999.
5. OBLIGATIONS UNDER CAPITAL LEASES
The Company 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, 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)
1999 $ 4,029
2000 4,107
2001 2,702
2002 --
2003 --
Total minimum lease payments 10,838
Less amount representing interest (1,038)
Present value of minimum lease payments $ 9,800
6. OPERATING LEASE COMMITMENTS
The Company entered into two operating lease transactions during
fiscal years 1997 and 1998 for certain buildings on the Beaverton campus.
These two lease transactions involve a newly constructed facility to be
completed and occupied during 1999 as well as three buildings previously
occupied by the Company under operating leases. According to the terms of
the agreements, the buildings were purchased by a third party from the
previous lessor and then leased back to the Company. Both leases give the
Company the option to extend the lease terms for one-year periods or
purchase the buildings at the end of the lease term at fair market value.
In addition, both leases provide Sequent the option to terminate the lease
in order to purchase the buildings at any time.
The first operating lease transaction was entered into on September
4, 1997 under a five-year agreement ending August 1, 2002 for the
construction, sale and lease of a new building. Interest on the
construction of the building is capitalized into the financing instrument
throughout construction until completion. The lease payments commence
upon completion and occupation of the building, currently estimated at
August, 1999. The cost of the property to be financed is estimated to be
$17.5 million. Lease payments are due monthly at a rate of 25 basis
points above LIBOR. Future payments included in the table below are
calculated through August 1, 2002 with an assumed weighted average
interest rate of 6% for 1999 and 6.5% for 2000 through 2002, resulting in
monthly payments ranging from $87,500 to $96,250. Actual operating lease
payments are variable based on LIBOR and will fluctuate with actual market
rates.
On April 5, 1998, the Company entered into a second operating lease
transaction to lease three currently occupied buildings based on a total
cost of $25 million with lease terms extending through April 1, 2003. The
resulting operating lease payments are payable monthly at interest rates
ranging from 25 to 200 basis points above LIBOR. At January 2, 1999, the
effective rates ranged from 5.80% to 7.55%. Total operating lease
expenses for the year ended January 2, 1999 were $1.1 million. Future
payments included in the table below are calculated through April 1, 2003
with an assumed weighted average interest rate of 6% for 1999 and 6.5% for
2000 through 2003. The resulting monthly payments range from $102,239 to
$135,850 over the lease term. Future operating lease payments are
variable based on LIBOR and will fluctuate with actual market rates.
Future minimum lease payments under operating leases which include
office space, equipment and manufacturing facilities are as follows:
(in thousands)
1999 $ 20,686
2000 17,231
2001 13,547
2002 9,050
2003 and thereafter 13,554
$ 74,068
Total rent expense for operating leases was $20.0 million, $19.1
million and $17.4 million in 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The Company recorded a $23.6 million benefit for income taxes in 1998 on a
net loss before tax of $76.1 million. The difference between the statutory rate
and the effective tax rate is principally due to a valuation allowance for the
potential expiration of certain tax attributes carried forward from prior years
offset by the benefit from the research tax credit and the Company's Foreign
Sales Corporation. The 1998 effective tax rate benefit of 31.0% compares to
effective tax rate expense of 23.4% in 1997 and 27.2% in 1996.
Pre-tax income (loss) from continuing operations for the last three fiscal
years was taxed under the following jurisdictions:
(in thousands)
Fiscal Fiscal Fiscal
1998 1997 1996
Domestic ($88,822) $39,603 $5,593
Foreign 12,751 10,909 5,083
Total ($76,071) $50,512 $10,676
The provision (benefit) for income taxes was as
follows:
Fiscal Fiscal Fiscal
1998 1997 1996
Current:
Federal ($3,899) $6,808 $ 789
Foreign 5,602 4,441 3,109
State 150 449 164
1,853 11,698 4,062
Deferred:
Federal (25,582) 317 (900)
Foreign 177 (211) (257)
State -- 21 --
(25,405) 127 (1,157)
Total provision
(benefit) ($23,552) $11,825 $2,905
Deferred tax liabilities (assets) are recorded within Accounts Payable and
Other and Other Assets, respectively in the accompanying consolidated balance
sheets. They are comprised of the following components:
(in thousands)
Fiscal Fiscal
1998 1997
Capitalized software $ 29,145 $ 25,119
Other 1,649 2,217
Gross deferred tax liabilities 30,794 27,336
Net operating loss carryforwards:
Domestic (47,646) (18,921)
Foreign (4,522) (4,897)
Credit carryforwards (22,433) (18,626)
Expenses not currently deductible (7,346) (6,741)
Depreciation (2,442) (1,779)
Revenue currently taxable (2,008) (2,008)
Inventory basis differences (4,750) (2,499)
Restructuring costs (9,982) --
Gross deferred tax assets (101,129) (55,471)
Deferred tax asset valuation allowance 43,921 27,126
Net deferred tax asset ($ 26,414) ($ 1,009)
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate to income (loss)
from continuing operations due to the following:
Fiscal Fiscal Fiscal
1998 1997 1996
Statutory federal tax rate (35.0)% 35.0% 35.0%
State taxes, net of federal benefit (4.2) 4.2 4.2
Tax provision (benefit) from Foreign
Sales Corporation (2.2) (4.8) (6.8)
R&D Credit (4.3) (4.6) -
Tax provision on foreign earnings 1.7 0.3 (0.9)
Realized benefit from net
operating losses - (2.2) (1.3)
Deferred tax asset valuation allowance 10.2 - -
Other, net 2.8 (4.5) (3.0)
(31.0)% 23.4% 27.2%
The deferred tax asset valuation allowance in fiscal years 1996 - 1998 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 $43.9 million has been provided at January
2, 1999. When and if these reserved deferred tax assets are ultimately
realized, $22.6 million will reduce the Company's federal and state tax
provision and $21.3 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 certain foreign jurisdictions. The domestic net operating losses expire from
2006 to 2018. Certain foreign net operating losses expire in 2002 through 2004
while others have no expiration date.
The Company has accumulated unused research and experimentation credits of
$11.2 million for income tax purposes. These credits expire from 1999-2013.
The Company also has Alternative Minimum Tax Credits (AMT) which may be carried
forward indefinitely and certain state tax credits which expire from 1999-2003.
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 1998, 1997 and 1996, $612,000, $3.0 million and $175,000 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 will continue to be reinvested in
operations outside the United States.
8. SHAREHOLDERS' EQUITY
Common Stock. During 1998, the Company announced a plan to
repurchase up to 4,000,000 shares of its outstanding common stock. As of
January 2, 1999, 1,733,500 shares were actually repurchased. In 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. Also
in 1997, $9.1 million ($8.9 million, net of related expenses) of
Convertible Debentures was converted into 576,000 shares of common stock.
Stock Compensation Plans. At January 2, 1999, the Company had the
following stock-based compensation plans:
Stock Option Plans
At January 2, 1999, 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 2, 1999, the Company has reserved a total of
19,830,606 shares of common stock for issuance under these plans, of which
10,440,336 shares were outstanding at January 2, 1999. 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 8,700,000 shares of common stock in a series of eighteen-month
offerings. At January 2, 1999, there were 1,825,698 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 1998, 1997 and 1996, Sequent
issued 1,870,876, 1,127,428 and 682,864 shares under the plan,
respectively.
Statement of Financial Accounting Standards No. 123. During 1995,
the FASB 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
1998 1997 1996
Net income (loss): As reported $ (52,519) $ 38,687 $ 7,771
Pro forma (71,000) 28,981 (709)
Net income (loss)
per share - basic: As reported $ (1.21) $ 1.02 $ 0.23
Pro forma (1.63) 0.76 (0.02)
Net income (loss)
per share - diluted: As reported $ (1.21) $ 0.95 $ 0.23
Pro forma (1.63) 0.73 (0.02)
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 1998, 1997 and 1996:
Fiscal Fiscal Fiscal
1998 1997 1996
Risk-free interest rate 4.84% 6.15% 6.05%
Expected dividend yield -- -- --
Expected lives 3 years 3 years 3 years
Expected volatility 81% 56% 50%
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for 1998, 1997 and
1996:
Fiscal Fiscal Fiscal
1998 1997 1996
Risk-free interest rate 5.08% 5.74% 5.58%
Expected dividend yield -- -- --
Expected lives 1 year 1 year 1 year
Expected volatility 81% 56% 50%
The weighted-average per share fair value of those purchase rights
granted in 1998, 1997 and 1996 was $11.33, $15.20 and $13.15,
respectively.
A summary of the status of the Company's stock option plans as of
January 2, 1999, January 3, 1998 and December 28, 1996, and changes during
the years ending on those dates is presented below:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
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 8,276 $14.77 6,909 $12.27 5,068 $14.26
Granted:
Price = Fair Value 2,562 13.02 2,812 18.39 3,353 12.60
Price < Fair Value 802 12.51 829 18.14 1,196 11.12
Price > Fair Value 2,604 13.00 -- -- -- --
Exercised (274) 11.21 (1,209) 12.01 (196) 8.53
Forfeited (3,530) 16.82 (1,065) 13.83 (2,512) 16.55
Outstanding at
end of year 10,440 13.12 8,276 14.77 6,909 12.27
Options exercisable
at year-end 3,721 2,370 1,446
Weighted-average per share fair value
of options granted during the year $4.82 $ 8.35 $ 3.69
</TABLE>
The following table summarizes information about stock options outstanding
at January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted-
Number Weighted-Average Weighted-Average Number Average
Range of Outstanding Remaining per share Exercisable per share
Exercise Prices at 1/2/99 Contractual Life Exercise Price at 1/2/99 Exercise Price
<S> <C> <C> <C> <C> <C>
$0 - $ 9.00 1,507,229 8.6 years $ 8.68 197,882 $ 8.73
$9.09 - $11.25 1,631,244 7.4 years 10.44 953,892 10.62
$11.26 - $12.31 938,168 5.1 years 11.99 536,625 12.11
$12.33 - $13.00 2,652,942 8.3 years 12.98 133,853 12.68
$13.07 - $14.88 1,623,345 6.0 years 13.99 1,066,432 13.98
$14.93 - $21.38 2,020,170 8.1 years 18.33 817,759 18.84
$21.41 - $24.81 67,238 7.4 years 21.88 14,700 22.42
$0.00 - $24.81 10,440,336 7.5 years $ 13.12 3,721,143 $ 13.62
</TABLE>
9. SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (FAS 131). This Statement supersedes FAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management
for making operating decisions and assessing performance as the source for
the Company's reportable segments.
The Company has determined that its reportable segments are those
that are based on the Company's primary basis of organization and method
of internal reporting - (1) Product, (2) Customer Services (CS), (3)
Professional Services (PS) and (4) Research and Development (R&D).
The Company is organized primarily on the basis of products and
services. Its product segment offers large scalable computer systems,
which are marketed to organizations spanning diverse industries. Customer
Services offers customers a wide range of support services, including
system, environmental, business protection and management. The Company's
Professional Services segment offers services designed to support the
customer through every phase of a project, from planning and architecture
to technology deployment and ongoing consulting and support. Research and
Development has been considered a reportable segment because its
activities are an integral component of the Company's business and its
operations are material to consolidated financial results.
The accounting policies of the segments are the same as those
described in the "Summary of Significant Accounting Policies." The
Company's management evaluates the performance of its segments and
allocates resources to them based on revenue and margin. There are no
intersegment revenues. Asset information by reportable segment is not
reported, since the Company does not produce such information internally.
Capitalized software amortization is not included in research and
development expenses as it is included in cost of products sold which is
used for evaluating the Company's product segment margin.
The tables below present information about reported segments for the
three years ended January 2, 1999, January 3, 1998 and December 28, 1996
and include a reconciliation of segment activity to consolidated net
income before the provision for income taxes.
Fiscal year ended January 2, 1999:
<TABLE>
<CAPTION>
Product PS CS R&D Consolidated
<S> <C> <C> <C> <C> <C>
Revenue $ 509,830 $ 97,422 $ 176,904 $ 784,156
Cost of products sold 311,705 311,705
Cost of service revenue 92,065 106,728 198,793
Gross margin 198,125 5,357 70,176 273,658
R&D expenses 74,808 74,808
Selling, general & administrative 215,336
Restructuring charges 61,372
Operating loss (77,858)
Interest income 9,202
Interest expense (4,059)
Other expense, net (3,356)
Loss before benefit from
income taxes $ (76,071)
</TABLE>
Fiscal year ended January 3, 1998:
<TABLE>
<CAPTION>
Product PS CS R&D Consolidated
<S> <C> <C> <C> <C> <C>
Revenue $ 600,496 $ 75,695 $ 157,695 $ 833,886
Cost of products sold 309,016 309,016
Cost of service revenue 77,246 94,349 171,595
Gross margin 291,480 (1,551) 63,346 353,275
R&D expenses 65,414 65,414
Selling, general & administrative 234,037
Operating income 53,824
Interest income 5,096
Interest expense (6,086)
Other expense, net (2,322)
Income before provision for
income taxes $ 50,512
</TABLE>
Fiscal year ended December 28, 1996:
<TABLE>
<CAPTION>
Product PS CS R&D Consolidated
<S> <C> <C> <C> <C> <C>
Revenue $ 414,418 $ 56,488 $ 124,456 $ 595,362
Cost of products sold 197,702 197,702
Cost of service revenue 62,824 77,159 139,983
Gross margin 216,716 (6,336) 47,297 257,677
R&D expenses 53,733 53,733
Selling, general & administrative 191,069
Operating income 12,875
Interest income 3,007
Interest expense (3,187)
Other expense, net (2,019)
Income before provision for $ 10,676
income taxes
</TABLE>
Information concerning principal geographic areas is as follows:
Fiscal Fiscal Fiscal
1998 1997 1996
Revenue from external customers:
United States $ 372,627 $ 449,355 $ 270,571
United Kingdom 300,851 268,832 205,481
Other foreign 94,725 93,656 98,358
Export 15,953 22,043 20,952
Total $ 784,156 $ 833,886 $ 595,362
Identifiable assets:
United States $ 594,715 $ 682,470 $ 440,145
United Kingdom 123,346 144,019 100,476
Other foreign 78,054 60,188 63,006
Total $ 796,115 $ 886,677 $ 603,627
Revenues are attributed to geographic areas based on the location of
the identifiable assets producing the revenues. 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. Intercompany sales between geographic
areas, primarily from the United States to Europe, were $157.5 million
during 1998, $195.5 million during 1997 and $155.7 million during 1996.
10. 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 are reflected in the consolidated financial statements at book
value, which approximates 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.
11. RESTRUCTURING
During the second quarter of 1998, the Company recorded restructuring
charges of $62.9 million in connection with management's decision to
accelerate changes in its business model to leverage the strength of its
technology roadmap and market position. The restructuring charge was
reduced during the third and fourth quarters by estimate revisions
totalling $1.5 million. The majority of these revisions were adjustments
to prepaid software licenses and facilities. As part of the restructuring
process, which was substantially completed during the second quarter of
1998, the Company reorganized its operations to revise the focus of its
business strategy and broaden its line of Intel-based servers. As part of
the restructuring efforts, the Company expanded its product offerings,
including its new Xeon-based NUMA product and also NUMACenter, both of
which were formally introduced into the marketplace in the latter part of
1998. The restructuring charges of $62.9 million included employee
termination and other related costs ($7.2 million); facilities and office
space costs ($13.7 million); write-offs of non-strategic assets,
principally prepaid software licenses ($27.2 million), capital assets
($7.9 million), capitalized software ($2.5 million), goodwill ($2.5
million), and other assets, principally prepaid expenses ($1.9 million).
The employee termination costs resulted from the elimination of 265
positions worldwide. The employee groups impacted by the eliminations
encompassed all functions within the Company. All termination costs
pertaining to the eliminated positions are included as restructuring costs
in the accompanying Statements of Operations. Approximately 74% of the
employee termination costs accrued during the second quarter of 1998 were
paid as of January 2, 1999. Approximately 24% of the accrued costs were
written off by the Company during 1998 and the remainder will be paid in
1999.
Facilities costs represent expenses associated with excess office
space and related fixed costs for the Company's headquarter and field
office locations. The amount written off was determined using an analysis
of individual specific lease terms, estimated sub-lease income to be
realized and office headcount for unutilized facilities.
The majority of capital asset write-offs represent retirements of
hardware and software no longer being used for customer demonstrations and
showcases due to the strategic product shift associated with the
restructure. The method of determining fair value of costs written off
was the net book value recorded at the time of the restructuring.
<TABLE>
The following table presents a summary of the restructuring charges recorded during 1998 and the
resulting net balance sheet amounts recorded as of January 2, 1999. The balance of accrued restructuring
costs of $16.5 million at January 2, 1999 is included in Accounts Payable and Other in the accompanying
balance sheet.
<CAPTION>
(dollars in millions)
Second Third
Restructuring Quarter Write-offs/ Balance at Quarter Write-offs/ Balance at
Costs Expenditures Adjustments July 4, 1998 Expenditures Adjustments October 3, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Employee termination and
related costs $ 7.2 $ (2.5) $ (0.3) $ 4.4 $ (2.5) $ (0.2) $ 1.7
Prepaid software licenses 27.2 - (24.9) 2.3 - (0.6) 1.7
Facilities 13.7 (0.1) - 13.6 (0.7) 0.1 13.0
Capital assets 7.9 - (7.9) - - 0.1 0.1
Capitalized software 2.5 - (2.5) - - - -
Goodwill 2.5 - (2.5) - - - -
Other assets 1.9 - (1.9) - - - -
$ 62.9 $ (2.6) $ (40.0) $ 20.3 $ (3.2) $ (0.6) $ 16.5
</TABLE>
<TABLE>
<CAPTION>
Fourth
Quarter Write-offs/ Balance at
Expenditures Adjustments January 2, 1999
<S> <C> <C> <C>
Employee termination and
related costs $ (0.3) $ (1.2) $ 0.2
Prepaid software licenses - (1.4) 0.3
Facilities (0.7) 3.7 16.0
Capital assets - (0.1) -
Capitalized software - - -
Goodwill (0.1) 0.1 -
Other assets - - -
$ (1.1) $ 1.1 $ 16.5
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
On January 11, 1999, the Company announced that it selected EDS to be
its North American information technology (IT) provider. Under the terms
of the agreement, EDS will manage all IT infrastructure and operations
support for Sequent's North American facilities, serving more than 1,800
users. The Company has also appointed EDS to manage a full spectrum of IT
customer support services, including data center, applications, network
and desktop infrastructure management. The majority of Sequent's IT
employees will become employees of EDS. Under the 10-year agreement,
which is effective January 1, 1999, Sequent is committed to purchase
services from EDS for approximately $13 million per year. Management
anticipates that with the services provided by EDS, its IT operations will
be optimized and will result in reductions in future operating expenses.
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.
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
2, 1999 and January 3, 1998, and the results of their operations and their
cash flows for each of the three years in the period ended January 2,
1999, 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
January 28, 1999
<TABLE>
QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share amounts)
<CAPTION>
Basic Diluted
Total Gross Net Earnings (Loss) Earnings (Loss
Revenue Profit Income (Loss) Per Share Per Share
<S> <C> <C> <C> <C> <C>
Fiscal 1998
First quarter $ 183,068 $ 72,826 $ 4,022 $ 0.09 $ 0.09
Second quarter 185,677 54,977 (58,752) (1.34) (1.34)
Third quarter 201,398 67,882 38 0.00 0.00
Fourth quarter 214,013 77,973 2,173 0.05 0.05
Year $ 784,156 $ 273,658 $(52,519) $(1.21)* $(1.21)*
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
1998:
First quarter $ 22.00 $ 16.00
Second quarter $ 19.81 $ 11.88
Third quarter $ 12.19 $ 6.44
Fourth quarter $ 12.88 $ 5.75
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 2, 1999, there were approximately 861 shareholders of
record of the Company's common stock and 43.5 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
SEQUENT COMPUTER SYSTEMS KOREA 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, 33-59611, 333-53571
and 333-53573) of Sequent Computer Systems, Inc. of our report dated January 28,
1999 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 12, 1999
EIGHTH AMENDMENT TO LEASE
THIS EIGHTH AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation and EQUITY FC, LTD., an Iowa
corporation (collectively, "Lessor"), and SEQUENT COMPUTER SYSTEMS, INC., an
Oregon corporation ("Lessee").
RECITALS
A. Lessor and Lessee 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"):
1. First Amendment dated December 29, 1987;
2. Second Amendment dated July 28, 1988;
3. Third Amendment dated July 28, 1989;
4. Fourth Amendment dated September 20, 1991;
5. Fifth Amendment dated December 2, 1992;
6. Sixth Amendment dated April 5, 1993; and
7. Seventh Amendment dated September 30, 1997
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. LEASE REVISIONS.
1.1 Closing Costs and Title Insurance. The following is added after the
last sentence of Section 6.4.3 of the Lease and is hereby made a part
of Section 6.4.3:
"If available from Escrow Agent and if requested by Lessor, Escrow
Agent shall issue to Lessor at its expense a "simultaneous issue"
seller's policy of title insurance."
1.2 Conveyance. The following shall be added after the last sentence of
Section 6.4.4 of the Lease and is hereby made a part of Section 6.4.4:
"At Lessee's request, Lessor shall convey title to the Property to
an institutional lender or trustee providing synthetic lease financing
or other institutional financing to Lessee in connection with its
acquisition of the Property; provided, however, use of such designee
will not affect (or operate as a release of) Lessee's obligations or
liability under the Lease, including the Option to Purchase
provisions of the Lease."
1.3 Lease Termination. The following is added as a new Section 6.4.7 to
the Lease:
"6.4.7 Termination of Lease. This Lease shall automatically
terminate effective upon the Closing of the sale of the Property from
Lessor to Lessee pursuant to this Section 6; provided, however, the
Survival Provisions of Section 51 shall apply in connection with any
such termination. If requested by Lessee, Lessor shall enter into a
lease termination agreement with Lessee to evidence the agreement of
the parties in this Section 6.4.7, and Lessee shall have the right to
record such lease termination agreement in the records of Washington
County, Oregon at any time following the recording of the statutory
special warranty deed referenced in Section 6.4.4."
1.4 Skybridge. Lessor and Lessee acknowledge that Lessee has exercised its
option to purchase the Section Building (as defined in Section 47.3.4
of the Lease) which includes the skybridge connecting the Premises to
the improvements which are the subject of the Second Lease. And that
upon closing of such purchase Lessor shall not be responsible for any
obligations of Lessor under the Lease with respect to such skybridge
that accrue after the closing of such purchase. In connection with the
closing of such purchase, Lessor, Lessee and, if applicable, Lessee's
designee shall enter into a skybridge easement agreement with respect
to such skybridge in form and content mutually agreeable to Lessor and
Lessee.
1.5 Traffic Signal. The following is added as a new Section 52 to the
Lease:
"52 Traffic Signal. Lessor and Lessee agree that the cost to
install a traffic signal (the "Signal") at the intersection of Koll
Parkway, Walker Road and SW 150th Avenue shall be treated as a Special
Common Area Assessment pursuant to the Declaration of Covenants,
Conditions and Restrictions dated March 12, 1986, as amended by First
Amendment thereto dated October 28, 1996 and Section Amendment thereto
dated March 13, 1998 (collectively, the "Declaration"), which
Declaration encumbers the Property and other property. Once the Signal
has been installed and is operational (the "Signal Completion Date"),
Lessor shall furnish to Lessee a statement in commercially reasonable
detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common
Area Assessment pursuant to the Declaration and, upon request from
Lessee, shall furnish copies of invoices received and paid by Lessor in
connection with the installation of the Signal. Lessee agrees to
reimburse Lessor for the portion of the Signal Cost allocated to the
Property, provided, however, that, except as provided herein, Lessee
shall not be required to pay such cost in a lump sum, but rather such
cost, together with a financing charge of ten percent (10%) per annum,
shall be amortized over an estimated useful life of ten (10) years and
Lessee shall reimburse Lessor for such cost by paying Lessor in equal
monthly installments beginning on the first day of the second calendar
month following the Signal Completion Date (or on the first day of the
next calendar month if the Signal Completion Date is the first day of a
calendar month) and on the first day of each month thereafter during the
remaining term of this Lease that portion of such cost attributable to
the month preceding such payment based on such amortization plan. If
the Signal Completion Date is a day other than the first day of a
calendar month, then on the first day of the calendar month following
the Signal Completion Date, Lessee shall pay to Lessor interest at the
rate provided herein from the Signal Completion Date through the last
day of the month in which the Signal Completion Date occurs. In the
alternative, Lessee shall have the right to prepay all or any portion of
the outstanding balance of such cost at any time without any prepayment
charge. If Lessee purchases the Property pursuant to the Option to
Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Lessee shall pay to
Lessor the outstanding balance of the Signal Cost allocated to the
Property. If Lessee does not purchase the Property pursuant to the
Option to Purchase in this Lease and this Lease expires or otherwise
terminates, the (i) Lessee shall pay to Lessor within ten (10) days of
such expiration or termination that portion of the Signal Cost
allocated to the Property that is attributable to the period
commencing with the first day of the month in which this Lease expires
or otherwise terminates, and (ii) Lessee's obligation to reimburse
Lessor for the remaining balance of the Signal Cost allocated to the
Property shall cease upon such expiration or termination of this Lease,
provided, however, that if this Lease terminates due to the default of
Lessee, Lessor may recover from Lessee the unpaid portion of the Signal
Cost allocated to the Property, if any, in addition to other amounts
allowed under Section 20.2 of this Lease. Nothing herein shall be
deemed an agreement by Lessee that the cost of any other traffic
signal(s) installed near the Property in the future should be passed
through to Lessee under this Lease."
1.6 Monument Sign. Notwithstanding that the monument sign used by Lessee
in connection with its use of the Premises is located within an area
designated as common area under the Declaration, during the term of
this Lease the expense of maintaining the sign shall not be treated as
a common area expense, but rather shall be the responsibility of
Lessee. Upon termination of this Lease, the expense of maintaining the
sign shall be treated as a common area expense under the Declaration
unless the sign is used exclusively by the owner of the Premises or any
new tenant of such owner, in which case such expense shall be the
responsibility of such owner or such tenant.
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission,
shall be the same as delivery of an original. At the request of either
party, the parties shall confirm facsimile trasmitted signatures by
signing an original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of
the date set forth above.
LESSOR: PETULA ASSOCIATES, LTD., an Iowa corporation
By: /s/ MICHAEL S. DUFFY
Name: MICHAEL S. DUFFY
Title: VICE PRESIDENT
By: /s/ GREGORY C. HAUSER
Name: GREGORY C. HAUSER
Title: VICE PRESIDENT
EQUITY FC, LTD., an Iowa corporation
By: /s/ L.S. VALENTINE
Name: L.S. VALENTINE
Title: COUNSEL
By: /s/ RONALD B. FRANKLIN
Name: RONALD B. FRANKLIN
Title: VICE PRESIDENT
LESSEE: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
SIXTH AMENDMENT TO LEASE
THIS SIXTH AMENDMENT TO LEASE is made as of March 26, 1998 between
PETULA ASSOCIATES, LTD., an Iowa corporation, and EQUITY FC, LTD., an
Iowa corporation, (collectively, "Lessor"), and SEQUENT COMPUTER
SYSTEMS, INC, an Oregon corporation ("Lessee").
RECITALS
A. Lessor and Lessee 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"):
1. Letter dated January 12, 1988;
2. Addendum to Triple Net Lease of 1987 (an undated copy of which is
attached as Exhibit A) (referred to in past lease amendments as an
amended memorandum of lease);
3. First Amendment dated July 28, 1988;
4. Second Amendment dated September 13, 1991;
5. Third Amendment dated December 2, 1992;
6. Fourth Amendment dated April 5, 1993; and
7. Fifth Amendment dated September 30, 1997.
B. Capitalized terms not defined in this Amendment have the meanings
set forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. Lease Revisions
1.1 Delays in Closing. Section 6.4.2 of the Lease is hereby
deleted and the following is inserted in its place:
"6.4.2 Delays in Closing. The Closing shall occur on
April1, 1998. Lessee shall have no right to close the purchase
of the Property absent simultaneously closing the purchase of (I)
the land and improvements covered by the third building lease
between Principal Mutual Life Insurance Company and Petula
Associates, Ltd., together as lessor, and Lessee, as lessee,
dated July 28, 1998, as amended by amendments dated July 28,
1989, September 13, 1991, December 2, 1992, April 5, 1993,
September 30, 1997 and of even date with this Amendment
(collectively, the "Third Lease") and (ii) the land and
improvements covered by the fourth building lease between Lessor
and Lessee dated July 28, 1989, as amended by amendments dated
September 13, 1991, August 13, 1992, December 2, 1992, April 5,
1993, September 30, 1997 and of even date with this Amendment
(collectively, the "Fourth Lease"). Any failure by Lessee to
close the purchase of the land and improvements covered by the
Third Lease and Fourth Lease on April 1, 1998 shall be deemed a
rescission of the exercise of the Option to Purchase the Property
pursuant to Section 6."
"In the event the Closing does not occur on April 1, 1998,
then (I) Lessor shall continue to lease to Lessee and Lessee
shall continue to lease from Lessor the Premises at the rental
and upon all of the terms and conditions set forth in this Lease
until the Closing occurs as provided herein or until the
expiration or termination of this Lease, whichever occurs first,
and (ii) if the Closing does not occur on April 1, 1998 for any
reason attributable to Lessee, Lessee shall have an additional
fifteen (15-) day period during which Lessee shall exert best
efforts to close the purchase of the Property. If the closing
does not occur within such fifteen- (15-) day period for any
reason attributable to Lessee, the Option to Purchase shall
terminate, Lessor shall not have any obligation to convey the
Property to Lessee and Lessor shall have all remedies available
to Lessor under Section 6.9 of the Lease. If the delay in
Closing is attributable to Lessor or to a third party not in
relationship with Lessee, then the fifteen- (15-) day period
shall be extended, on the same terms until a Closing can be
accomplished and Lessee shall have all remedies available to it
under this Lease."
1.2 Closing Costs and Title Insurance. The following is added after the
last sentence of Section 6.4.3 of the Lease and is hereby made a part of
Section 6.4.3:
"If available from Escrow Agent and if requested by Lessor,
Escrow Agent shall issue to Lessor at its expense a 'simultaneous
issue' seller's policy of title insurance.
1.3 Conveyance. Section 6.4.4 of the Lease is hereby deleted and the
following is inserted in its place:
"The Property and the skybridge (described in Section 47.3.4) shall
be conveyed by Lessor to Lessee by Statutory Special Warranty Deed,
subject to the Permitted Exceptions. The trust deeds in favor of
Principal Mutual Life Insurance Company listed as exceptions 50, 51 and
52 in the 6th Supplemental Preliminary Title Report dated March 18,
1998, Title Number W186736H issued by Transnation Title Insurance
Company shall not be Permitted Exceptions as to the conveyance of the
Property or the skybridge but shall be permitted exceptions as to the
appurtenant rights acquired by Lessee under a separate skybridge
easement agreement to be entered into between Lessor, Lessee and, if
applicable, Lessee's designee. The conveyance shall allow Lessee and
its successors to continue to enjoy rights and obligations with respect
to the common areas (as set forth in the Covenants, Conditions, and
Restrictions then encumbering the Property) after the Closing,
equivalent to those prevailing before the Closing, provided Lessee and
its successors pay all common area assessments and abide by all
Conditions, Covenants, and Restrictions in force from time to time
with respect to such common areas. At Lessee's request, Lessor shall
convey title to the Property to an institutional lender or trustee
providing synthetic lease financing or other institutional financing
to Lessee in connection with its acquisition of the Property; provided,
however, use of such designee will not affect (or operate as a release
of) Lessee's obligations or liability under the Lease, including the
Option to Purchase provisions of the Lease."
1.4 Lease Termination. The following is added as a new Section
6.4.7 to the Lease:
"6.4.7 Termination of Lease. This Lease shall automatically
terminate effective upon the Closing of the sale of the Property from
Lessor to Lessee pursuant to this Section 6; provided, however, the
Survival Provision of Section 50 shall apply in connection with any
such termination. If requested by Lessee, Lessor shall enter into a
lease termination agreement with Lessee to evidence the agreement of
the parties in this Section 6.4.7, an Lessee shall have the right to
record such lease termination agreement in the records of Washington
County, Oregon at any time following the recording of the statutory
special warranty deed referenced in Section 6.4.4."
1.5 Traffic Signal. The following is added as a new Section 51
to the Lease:
"51 Traffic Signal. Lessor and Lessee agree that the cost to
install a traffic signal (the "Signal") at the intersection of Koll
Parkway, Walker Road and SW 150th Avenue shall be treated as a Special
Common Area Assessment pursuant to the Declaration of Covenants,
Conditions and Restrictions dated March 12, 1986, as amended by First
Amendment thereto dated October 28, 1996 and Second Amendment thereto
dated March 13, 1998 (collectively, the "Declaration"), which
Declaration encumbers the Property and other property. Once the Signal
has been installed and is operational (the "Signal Completion Date"),
Lessor shall furnish to Lessee a statement in commercially reasonable
detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common
Area Assessment pursuant to the Declaration, and, upon request from
Lessee, shall furnish copies of invoices received and paid by Lessor in
connection with the installation of the Signal. Lessee agrees to
reimburse Lessor for the portion of the Signal Cost allocated to the
Property, provided, however, that, except as provided herein, Lessee
shall not be required to pay such cost in a lump sum, but rather such
cost, together with a financing charge of ten percent (10%) per annum,
shall be amortized over an estimated useful life of ten (10) years and
Lessee shall reimburse Lessor for such cost by paying Lessor in equal
monthly installments beginning on the first day of the second calendar
month following the Signal Completion Date (or on the first day of the
next calendar month if the Signal Completion Date is the first day of a
calendar month) and on the first day of each month thereafter during
the remaining term of this Lease that portion of such cost attributable
to the month preceding such payment based on such amortization plan.
If the Signal Completion Date is a day other than the first day of a
calendar month, then on the first day of the calendar month following
the Signal Completion Date, Lessee shall pay to Lessor interest at the
rate provided herein from the Signal Completion Date through the last
day of the month in which the Signal Completion Date occurs. In the
alternative, Lessee shall have the right to prepay all or any portion
of the outstanding balance of such cost at any time without any
prepayment charge. If Lessee purchases the Property pursuant to the
Option to Purchase in this Lease and the Signal has been installed and
is operational, upon the Closing of such purchase Lessee shall pay to
Lessor the outstanding balance of the Signal Cost allocated to the
Property. If Lessee does not purchase the Property pursuant to the
Option to Purchase in this Lease and this Lease expires or otherwise
terminates, then (I) Lessee shall pay to Lessor within ten (10) days of
such expiration or termination that portion of the Signal Cost
allocated to the Property that is attributable to the period commencing
with the first day of the month in which this Lease expires or
otherwise terminates through the date the Lease expires or otherwise
terminates, and (ii) Lessee's obligation to reimburse Lessor for the
remaining balance of the Signal Cost allocated to the Property shall
cease upon such expiration or termination of this Lease with respect to
any portion of the Signal Cost that is attributable to any period from
and after the expiration or termination of this Lease, provided,
however, that if this Lease terminates due to the default of Lessee,
Lessor may recover from Lessee the unpaid portion of the Signal Cost
allocated to the Property, if any, in addition to other amounts allowed
under Section 20.2 of this Lease. Nothing herein shall be deemed an
agreement by Lessee that the cost of any other traffic signal()s)
installed near the Property in the future should be passed through to
Lessee under this Lease."
1.6 The following is added at the end of Section 6.8.1.2 of the
Lease and is made a part of such Section:
"No rescission notice given by Lessee to Lessor pursuant to this
Section 6.8.1.2 will be valid unless Lessee simultaneously gives to
Lessor a rescission notice to rescind its exercise of the Option to
Purchase under the Third Lease and the Fourth Lease."
1.7 The last sentence of Section 6.9 of the Lease is hereby
deleted and the following is inserted in its place:
"In such event, 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, and Lessor shall continue to lease
to Lessee and Lessee shall continue to lease from Lessor the Premises
for the term, at the rental, and upon all of the terms and conditions
set forth in this Lease, except that the Option to Purchase in Section
6 shall terminate and Lessor shall not have any obligation to convey
the Property to Lessee."
1.8 Lessor and Lessee agree that all amounts referenced in the Addendum to
Triple Net Lease attached as Exhibit A have been paid in full.
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains in
full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of and signed original
document, and retransmission of any signed facsimile transmission, shall be
the same as delivery of an original. At the request of either party, the
parties shall confirm facsimile transmitted signatures by signing an original
document.
IN WITNESS WHEREOF, this Sixth Amendment to Lease has been executed
as of the date set forth above.
LESSOR: PETULA ASSOCIATES, LTD., an Iowa corporation
By: /s/ Michael S. Duffy
Name: Michael S. Duffy
Title: Vice President
By: /s/ Gregory C. Hauser
Name: Gregory C. Hauser
Title: Vice President
EQUITY FC, LTD., an Iowa corporation
By: /s/ L. S. Valentine
Name: L. S Valentine
Title: Counsel
By: /s/ Ronald B. Franklin
Name: Ronald B. Franklin
Title: Vice President
LESSEE: SEQUENT COMPUTER SYSTEMS, INC., An Oregon corporation
By: /s/ Robert B. Witt
Name: Robert B. Witt
Title: Vice President & CIO
EXHIBIT A
ADDENDUM TO TRIPLE NET LEASE
THIS ADDENDUM is made and entered into this ___ day of __________________,
1987 by and between KOLL WOODSIDE ASSOCIATES, a California general partnership,
and PETULA ASSOCIATES, LTD., an Iowa corporation, tenants-in-common, doing
business as KC WOODSIDE, a joint venture (herein collectively "LESSOR"), and
SEQUENT COMPUTER SYSTEMS, INC., a Delaware corporation (herein "LESSEE").
RECITALS
A. This Addendum relates to that certain Triple Net Lease dated May 8, 1987
by and between Lessor and Lessee (herein the "Lease"). The capitalized,
defined terms used in the Lease shall have the same meanings when used herein.
B. The parties desire to add the following material to the Lease and to
amend the Lease as follows.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Adjustment to Basic Rent.
The parties acknowledge that the Cost of reusable Tenant Improvements has
now exceeded $1,722,072.00, being the total amount of the reusable Tenant
Improvements allowance described in Sections 3.6.1 and 3.6.2 of the Lease.
The parties have agreed, pursuant to Section 3.6.2 of the Lease, that the
first $156,552.00 of the excess Cost of reusable Tenant Improvements over the
basic reusable Tenant Improvements allowance of $1,565,520.00 is payable from
LESSEE to LESSOR by means of adjustment to the Basic Rent for Period 1 set
forth in Section 4.1 of the Lease, such adjustment being contemplated by
Section 3.6.3 of the Lease. The total adjustment is $1,565.52 per month,
meaning that the Basic Rent for Period 1 shall be increased from $47,356.98
to $48,922.50.
2. Cash Payments.
The parties further agree that the Cost of reusable Tenant Improvements
over and above the Cost reflected in the increase of Basic Rent for Period 1
as set forth in Section 1 above, together with the cost of non-reusable Tenant
Improvement, is the sum of $177,482.88. Pursuant to the terms of the Lease,
such excess amount is payable, in cash, by LESSEE to LESSOR. The parties agree
that such amount shall be paid in two equal installments of $88,741.44 each,
the first such installment to be due and payable on October 30, 1987, and
the second such installment to be due and payable on November 30, 1987.
3. Status of Lease.
Except as expressly supplemented and amended hereby, the Lease remains in
full force and effect and the same is hereby ratified and confirmed.
IN WITNESS WHEREOF, LESSOR and LESSEE have executed this Addendum as of the
day and year first above written.
LESSOR: LESSEE:
KOLL WOODSIDE ASSOCIATES, SEQUENT COMPUTER SYSTEMS, INC.
a California general partnership a Delaware corporation
By: The Koll Company, a By:
California Corporation, Its:
a general partner of Koll
Woodside Associates
By:
Its: Division President
PETULA ASSOCIATES, LTD.,
an Iowa corporation
By:
Its:
By:
Its:
As Tenants-in-Common doing
business as KC WOODSIDE, a joint
venture
SEVENTH AMENDMENT TO LEASE
THIS SEVENTH AMENDMENT TO LEASE is made as of April 2, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation and EQUITY FC, LTD., an Iowa corporation
(collectively, "Lessor"), and SEQUENT COMPUTER SYSTEMS, INC., an
Oregon corporation ("Lessee").
RECITALS
A. Lessor and Lessee 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"):
1. Letter dated January 12, 1988;
2. Addendum to Triple Net Lease of 1987 (an undated copy of which is
attached as Exhibit A to the Sixth Amendment referenced below)
(referred to in the Fifth Amendment referenced below as an amended
memorandum of lease);
3. First Amendment dated July 28, 1988;
4. Second Amendment dated September 13, 1991;
5. Third Amendment dated December 2, 1992;
6. Fourth Amendment dated April 5, 1993;
7. Fifth Amendment dated September 30, 1997; and
8. Sixth Amendment dated March 26, 1998.
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. LEASE REVISIONS.
1.1 Section 1.8 of the Sixth Amendment to Lease provides that Lessor and
Lessee agree that all amounts referenced in the Addendum to Triple Net Lease
(the "Addendum") attached as Exhibit A to the Sixth Amendment have been paid
in full. Lessor and Lessee now wish to acknowledge that as of the date of
this Amendment they have been unable to determine whether one of the
installments referenced in the Addendum in the amount of $88,741.44 was paid.
Lessor and Lessee reserve all rights and defenses they may have with respect
to the payment of such amount. Nothing in this Amendment shall be construed
as an acknowledgment by Lessee that any amounts remain due and owing or
construed as extending the statute of limitations with respect to such
payment.
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission,
shall be the same as delivery of an original. At the request of either
party, the parties shall confirm facsimile transmitted signatures by
signing an original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of
the date set forth above.
LESSOR: PETULA ASSOCIATES, LTD., an Iowa corporation
By: /s/ MICHAEL S. DUFFY
Name: MICHAEL S. DUFFY
Title: VICE PRESIDENT
By: /s/ GREGORY C. HAUSER
Name: GREGORY C. HAUSER
Title: VICE PRESIDENT
EQUITY FC, LTD., an Iowa corporation
By: /s/ L.S. VALENTINE
Name: L.S. VALENTINE
Title: COUNSEL
By: /s/ RONALD B. FRANKLIN
Name: RONALD B. FRANKLIN
Title: VICE PRESIDENT
LESSEE: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation
By: /s/ DANIEL C. WOO
Name: DANIEL C. WOO
Title: TREASURER
SIXTH AMENDMENT TO LEASE
THIS SIXTH AMENDMENT TO LEASE is made as of March 26, 1998 between
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa corporation, and PETULA
ASSOCIATES, LTD., an Iowa corporation, and EQUITY FC, LTD., an Iowa
corporation, (collectively, "Lessor"), and SEQUENT COMPUTER SYSTEMS, INC., an
Oregon corporation ("Lessee").
RECITALS
A. Lessor and Lessee 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"):
1. First Amendment dated July 28, 1989;
2. Second Amendment dated September 13, 1991;
3. Third Amendment dated December 2, 1992;
4. Fourth Amendment dated April 5, 1993; and
5. Fifth Amendment dated September 30, 1997.
B. Capitalized terms not defined in this Amendment have the meanings
set forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. Lease Revisions
1.1 Delays in Closing. Section 6.4.2 of the Lease is hereby deleted and
the following is inserted in its place:
"6.4.2 Delays in Closing. The Closing shall occur on April1, 1998.
Lessee shall have no right to close the purchase of the Property absent
simultaneously closing the purchase of (I) the land and improvements
covered by the second building lease between Petula Associates, Ltd. and
Koll Woodside Associates, tenants-in-common, doing business as KC
Woodside ("Woodside"), as lessor, and Lessee, as lessee, dated May 8,
1987, as amended by letter dated January 12, 1988, Addendum of 1987
(undated) and amendments dated July 28, 1988, September 13, 1991,
December 2, 1992, April 5, 1993, September 30, 1997 and of even date
with this Amendment (collectively, the "Second Lease") and (ii) the
land and improvements covered by the fourth building lease between
Woodside, as lessor, and Lessee dated July 28, 1989, as amended by
amendments dated September 13, 1991, August 13, 1992, December 2, 1992,
April 5, 1993, September 30, 1997 and of even date with this Amendment
(collectively, the "Fourth Lease"). Any failure by Lessee to close the
purchase of the land and improvements covered by the second Lease and
Fourth Lease on April 1, 1998 shall be deemed a rescission of the
exercise of the Option to Purchase the Property pursuant to Section 6."
"In the event the Closing does not occur on April 1, 1998, then (I)
Lessor shall continue to lease to Lessee and Lessee shall continue to
lease from Lessor the Premises at the rental and upon all of the terms
and conditions set forth in this Lease until the Closing occurs as
provided herein or until the expiration or termination of this Lease,
whichever occurs first, and (ii) if the Closing does not occur on
April 1, 1998 for any reason attributable to Lessee, Lessee shall have
an additional fifteen (15-) day period during which Lessee shall exert
best efforts to close the purchase of the Property. If the closing does
not occur within such fifteen- (15-) day period for any reason
attributable to Lessee, the Option to Purchase shall terminate, Lessor
shall not have any obligation to convey the Property to Lessee and Lessor
shall have all remedies available to Lessor under Section 6.9 of the
Lease. If the delay in Closing is attributable to Lessor or to a third
party not in relationship with Lessee, then the fifteen- (15-) day
period shall be extended, on the same terms until a Closing can be
accomplished and Lessee shall have all remedies available to it under
this Lease."
1.2 Closing Costs and Title Insurance. The following is added after the
last sentence of Section 6.4.3 of the Lease and is hereby made a part of
Section 6.4.3:
"If available from Escrow Agent and if requested by Lessor, Escrow
Agent shall issue to Lessor at its expense a 'simultaneous issue'
seller's policy of title insurance.
1.3 Conveyance. The following shall be added after the last sentence of
Section 6.4.4 of the Lease and is hereby made a part of Section 6.4.4:
"At Lessee's request, Lessor shall convey title to the Property to an
institutional lender or trustee providing synthetic lease financing or
other institutional financing to Lessee in connection with its
acquisition of the Property; provided, however, use of such designee will
not affect (or operate as a release of) Lessee's obligations or liability
under the Lease, including the Option to Purchase provisions of the
Lease."
1.4 Lease Termination. The following is added as a new Section 6.4.7 to
the Lease:
"6.4.7 Termination of Lease. This Lease shall automatically terminate
effective upon the Closing of the sale of the Property from Lessor to
Lessee pursuant to this Section 6; provided, however, the Survival
Provision of Section 50 shall apply in connection with any such
termination. If requested by Lessee, Lessor shall enter into a lease
termination agreement with Lessee to evidence the agreement of the
parties in this Section 6.4.7, and Lessee shall have the right to
record such lease termination agreement in the records of Washington
County, Oregon at any time following the recording of the statutory
special warranty deed referenced in Section 6.4.4."
1.5 Traffic Signal. The following is added as a new Section 51 to the Lease:
"51 Traffic Signal. Lessor and Lessee agree that the cost to install
a traffic signal (the "Signal") at the intersection of Koll Parkway,
Walker Road and SW 150th Avenue shall be treated as a Special Common Area
Assessment pursuant to the Declaration of Covenants, Conditions and
Restrictions dated March 12, 1986, as amended by First Amendment thereto
dated October 28, 1996 and Second Amendment thereto dated March 13, 1998
(collectively, the "Declaration"), which Declaration encumbers the
Property and other property. Once the Signal has been installed and is
operational (the "Signal Completion Date"), Lessor shall furnish to
Lessee a statement in commercially reasonable detail showing the portion
of the cost to install such Signal (the "Signal Cost") that is allocated
to the Property as a Special Common Area Assessment pursuant to the
Declaration, and, upon request from Lessee, shall furnish copies of
invoices received and paid by Lessor in connection with the
installation of the Signal. Lessee agrees to reimburse Lessor for the
portion of the Signal Cost allocated to the Property, provided, however,
that, except as provided herein, Lessee shall not be required to pay
such cost in a lump sum, but rather such cost, together with a financing
charge of ten percent (10%) per annum, shall be amortized over an
estimated useful life of ten (10) years and Lessee shall reimburse
Lessor for such cost by paying Lessor in equal monthly installments
beginning on the first day of the second calendar month following the
Signal Completion Date (or on the first day of the next calendar month
if the Signal Completion Date is the first day of a calendar month) and
on the first day of each month thereafter during the remaining term of
this Lease that portion of such cost attributable to the month preceding
such payment based on such amortization plan. If the Signal Completion
Date is a day other than the first day of a calendar month, then on the
first day of the calendar month following the Signal Completion Date,
Lessee shall pay to Lessor interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the
Signal Completion Date occurs. In the alternative, Lessee shall have the
right to prepay all or any portion of the outstanding balance of such
cost at any time without any prepayment charge. If Lessee purchases the
Property pursuant to the Option to Purchase in this Lease and the Signal
has been installed and is operational, upon the Closing of such purchase
Lessee shall pay to Lessor the outstanding balance of the Signal Cost
allocated to the Property. If Lessee does not purchase the Property
pursuant to the Option to Purchase in this Lease and this Lease expires
or otherwise terminates, then (I) Lessee shall pay to Lessor within ten
(10) days of such expiration or termination that portion of the Signal
Cost allocated to the Property that is attributable to the period
commencing with the first day of the month in which this Lease expires or
otherwise terminates through the date the Lease expires or otherwise
terminates, and (ii) Lessee's obligation to reimburse Lessor for the
remaining balance of the Signal Cost allocated to the Property shall
cease upon such expiration or termination of this Lease with respect to
any portion of the Signal Cost that is attributable to any period from
and after the expiration or termination of this Lease, provided, however,
that if this Lease terminates due to the default of Lessee, Lessor may
recover from Lessee the unpaid portion of the Signal Cost allocated to
the Property, if any, in addition to other amounts allowed under
Section 20.2 of this Lease. Nothing herein shall be deemed an agreement
by Lessee that the cost of any other traffic signal(s) installed near
the Property in the future should be passed through to Lessee under this
Lease."
1.6 The following is added at the end of Section 6.8.1.2 of the Lease and
is made a part of such Section:
"No rescission notice given by Lessee to Lessor pursuant to this
Section 6.8.1.2 will be valid unless Lessee simultaneously gives to
Lessor a rescission notice to rescind its exercise of the Option to
Purchase under the Third Lease and the Fourth Lease."
1.7 The last sentence of Section 6.9 of the Lease is hereby deleted and the
following is inserted in its place:
"In such event, 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, and Lessor shall continue to lease
to Lessee and Lessee shall continue to lease from Lessor the Premises
for the term, at the rental, and upon all of the terms and conditions
set forth in this Lease, except that the Option to Purchase in Section
6 shall terminate and Lessor shall not have any obligation to convey
the Property to Lessee."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains in
full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of and signed original
document, and retransmission of any signed facsimile transmission, shall be
the same as delivery of an original. At the request of either party, the
parties shall confirm facsimile transmitted signatures by signing an original
document.
IN WITNESS WHEREOF, this Sixth Amendment to Lease has been executed as of
the date set forth above.
LESSOR: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,
an Iowa corporation
By: /s/ Donna Lutcavish
Name: Donna Lutcavish
Title: Assistant Director, Commercial Real Estate
By: /s/ Ken Dubas
Name: Ken Dubas
Title: Director, Commercial Real Estate
PETULA ASSOCIATES, LTD.,
an Iowa corporation
By: /s/ Michael S. Duffy
Name: Michael S. Duffy
Title: Vice President
By: /s/ Gregory S. Hauser
Name: Gregory S. Hauser
Title: Vice President
LESSEE: SEQUENT COMPUTER SYSTEMS, INC.,
An Oregon corporation
By: /s/ Robert B. Witt
Name: Robert B. Witt
Title: Vice President & CIO
SIXTH AMENDMENT TO LEASE
THIS SIXTH AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation and EQUITY FC, LTD., an Iowa corporation
(collectively, "Lessor"), and SEQUENT COMPUTER SYSTEMS, INC., an Oregon
corporation ("Lessee").
RECITALS
A. Lessor and Lessee 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"):
1. First Amendment dated September 13, 1991;
2. Second Amendment dated August 13, 1992;
3. Third Amendment dated December 2, 1992;
4. Fourth Amendment dated April 5, 1993; and
5. Fifth Amendment dated September 30, 1997.
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. LEASE REVISIONS.
1.1 Exercise Notice. Section 6.2.1 of the Lease 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 February 1, 1998 and no later than April 1, 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 Section 6.3.2 and 6.4.2 of the
Lease to the "Expiration Date of the Initial Term" or the "Expiration
Date" are hereby changed to references to April 1, 1998.
1.3 Title. Section 6.4.1 of the Lease is hereby deleted and the following
is inserted in its place:
"6.4.1 Title. The closing of the purchase and sale of the Property
(herein the "Closing") shall take place in escrow at a title company
selected by Lessor (herein the "Escrow Agent"). The date that the
Statutory Special Warranty Deed referenced in Section 6.4.4 is recorded
and the Escrow Agent is in a position to disburse all funds to Lessor is
herein referred to as the "Date of Closing" or the "Closing Date."
Lessor has furnished to Lessee and Lessee has reviewed that 6th
Supplemental Preliminary Title Report dated March 18, 1998, Title Number
W186736H, issued by Transnation Title Insurance Company (the "Title
Report") which Title Report describes the condition of title to the
Property and other property. Lessor and Lessee agree that the following
exceptions in the Title Report are herein referred to as "Permitted
Exceptions:" 7 and 8 (provided the reference to each exception in the
Statutory Special Warranty Deed described in Section 6.4.4 and the
Owner's Policy of Title Insurance described in Section 6.4.3 states that
all assessments have been paid in full as of Closing), 54, 55, 56, 58,
59, 60, 61, 62, 66 and 67. Notwithstanding anything to the contrary
herein set forth, the following are and shall be deemed to be Permitted
Exceptions: reservations in Federal patents; Conditions, Covenants and
Restrictions; beneficial easements; easements that serve real property
in the general vicinity of the Property and that do not unreasonably
interfere with the use and enjoyment of the Premises; and, if the
purchase price is the Set Option Price, all local improvement district
assessments levied against the Property or any portion thereof.
Lessor agrees not to place any mortgage or trust deed upon the Property
to secure payment of a sum in excess of the Set Option Price unless the
same contains a covenant that the Property will be released or reconveyed
upon payment to the holder thereof of an amount equal to or less than
the Set Option Price."
1.4 Delays in Closing. Section 6.4.2 of the Lease 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 the purchase of (i) the land and improvements
covered by the second building lease between Lessor and Lessee dated
May 8, 1987, as amended by letter dated January 12, 1988, Addendum of
1987 (undated) and amendments dated July 28, 1988, September 13, 1991,
December 2, 1992, April 5, 1993, September 30, 1997 and of even date with
this Amendment (collectively, the "Second Lease") and (ii) the land and
improvements covered by the third building lease between Principal
Mutual Life Insurance Company and Petula Associates, Ltd., together as
lessor, and Lessee, as lessee, dated July 28, 1988, as amended by
amendments dated July 28, 1989, September 13, 1991, December 2, 1992,
April 5, 1993, September 30, 1997 and of even date with this Amendment
(collectively, the "Third Lease"). Any failure by Lessee to close the
purchase of the land and improvements covered by the Second Lease and
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.
"In the event the Closing does not occur on April 1, 1998, then
(i) Lessor shall continue to lease to Lessee and Lessee shall continue
to lease from Lessor the Premises at the rental and upon all of the
terms and conditions set forth in this Lease until the Closing occurs
as provided herein or until the expiration or termination of this Lease,
whichever occurs first, and (ii) if the Closing does not occur on
April 1, 1998 for any reason attributable to Lessee, Lessee shall have
an additional fifteen- (15-) day period during which Lessee shall
exert best efforts to close the purchase of the Property. If the
Closing does not occur within such fifteen- (15-) day period for any
reason attributable to Lessee, the Option to Purchase shall terminate,
Lessor shall not have any obligation to convey the Property to Lessee
and Lessor shall have all remedies available to Lessor under Section 6.9
of the Lease. If the delay in Closing is attributable to Lessor or to
a third party not in relationship with Lessee, then the fifteen- (15-)
day period shall be extended, on the same terms until a Closing can be
accomplished and Lessee shall have all remedies available to it under
this Lease."
1.5 Closing Costs and Title Insurance. The following is added after the
last sentence of Section 6.4.3 of the Lease and is hereby made a part
of Section 6.4.3:
"If available from Escrow Agent and if requested by Lessor, Escrow
Agent shall issue to Lessor at its expense a 'simultaneous issue'
seller's policy of title insurance."
1.6 Conveyance. The following shall be added after the last sentence of
Section 6.4.4 of the Lease and is hereby made a part of Section 6.4.4:
"At Lessee's request, Lessor shall convey title to the Property to
an institutional lender or trustee providing synthetic lease financing
or other institutional financing to Lessee in connection with its
acquisition of the Property; provided, however, use of such designee
will not affect (or operate as a release of) Lessee's obligations or
liability under the Lease, including the Option to Purchase provisions
of the Lease."
1.7 Lease Termination. The following is added as a new Section 6.4.7 to the
Lease:
"6.4.7 Termination of Lease. This Lease shall automatically
terminate effective upon the Closing of the sale of the Property from
Lessor to Lessee pursuant to this Section 6; provided, however, the
Survival Provisions of Section 50 shall apply in connection with any
such termination. If requested by Lessee, Lessor shall enter into a
lease termination agreement with Lessee to evidence the agreement of
the parties in this Section 6.4.7, and Lessee shall have the right to
record such lease termination agreement in the records of Washington
County, Oregon at any time following the recording of the statutory
special warranty deed referenced in Section 6.4.4."
1.8 Committee Approval. The following is added as new Section 6.4.8 to the
Lease:
"6.4.8 Committee Approval. Lessor shall not have any obligation
to close the purchase and sale of the Property unless, as of the
Closing Date, Lessor has obtained approval of the Investment Committee
of Petula Associates, Ltd. to such purchase and sale, provided,
however, that if Lessor is unable to obtain such Committee approval,
(i) such failure to obtain approval shall not affect Lessee's right to
purchase the land and improvements covered by the Second Lease and
Third Lease pursuant to the terms thereof; (ii) Lessee shall not be
responsible for the costs described in Section 6.8.2 and (iii) Lessee
shall continue to lease the property pursuant to the terms of the
Lease. If Lessee closes the purchase of the land and improvements
covered by the Second Lease and Third Lease but not the Property
covered by this Lease, the parties shall enter into (i) a skybridge
easement agreement with respect to the bridge connecting the
improvements covered by the Third Lease and this Lease in form mutually
agreeable to the parties and (ii) an easement agreement with respect
to a trench across the Property covered by this Lease in form mutually
agreeable to the parties."
1.9 The following is added at the end of Section 6.8.1.2 of the Lease and
is made a part of such Section:
"No rescission notice given by Lessee to Lessor pursuant to this
Section 6.8.1.2 will be valid unless Lessee simultaneously gives to
Lessor a rescission notice to rescind its exercise of the Option to
Purchase under the Second Lease and the Third Lease."
1.10 The last sentence of Section 6.9 of the Lease is hereby deleted and the
following is inserted in its place:
"In such event, 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, and Lessor shall continue to lease
to Lessee and Lessee shall continue to lease from Lessor the Premises
for the term, at the rental, and upon all of the terms and conditions
set forth in this Lease, except that the Option to Purchase in
Section 6 shall terminate and Lessor shall not have any obligation to
convey the Property to Lessee."
1.11 Skybridge. The following is added at the end of the second sentence of
Section 47.3.4 of the Lease and is made a part of such sentence:
"provided, if Lessee purchases the Property and the Third Building
simultaneously, the Skybridge shall be included in the sale of the
Property."
1.12 Traffic Signal. The following is added as a new Section 51 to the
Lease:
"51 Traffic Signal. Lessor and Lessee agree that the cost to
install a traffic signal (the "Signal") at the intersection of Koll
Parkway, Walker Road and SW 150th Avenue shall be treated as a Special
Common Area Assessment pursuant to the Declaration of Covenants,
Conditions and Restrictions dated March 12, 1986, as amended by First
Amendment thereto dated October 28, 1996 and Section Amendment thereto
dated March 13, 1998 (collectively, the "Declaration"), which
Declaration encumbers the Property and other property. Once the
Signal has been installed and is operational (the "Signal Completion
Date"), Lessor shall furnish to Lessee a statement in commercially
reasonable detail showing the portion of the cost to install such
Signal (the "Signal Cost") that is allocated to the Property as a
Special Common Area Assessment pursuant to the Declaration and, upon
request from Lessee, shall furnish copies of invoices received and
paid by Lessor in connection with the installation of the Signal.
Lessee agrees to reimburse Lessor for the portion of the Signal Cost
allocated to the Property, provided, however, that, except as
provided herein, Lessee shall not be required to pay such cost in a
lump sum, but rather such cost, together with a financing charge of
ten percent (10%) per annum, shall be amortized over an estimated useful
life of ten (10) years and Lessee shall reimburse Lessor for such cost
by paying Lessor in equal monthly installments beginning on the first
day of the second calendar month following the Signal Completion Date
(or on the first day of the next calendar month if the Signal Completion
Date is the first day of a calendar month) and on the first day of each
month thereafter during the remaining term of this Lease that portion of
such cost attributable to the month preceding such payment based on
such amortization plan. If the Signal Completion Date is a day other
than the first day of a calendar month, then on the first day of the
calendar month following the Signal Completion Date, Lessee shall pay
to Lessor interest at the rate provided herein from the Signal
Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Lessee shall have the right
to prepay all or any portion of the outstanding balance of such cost at
any time without any prepayment charge. If Lessee purchases the
Property pursuant to the Option to Purchase in this Lease and the
Signal has been installed and is operational, upon the closing of
such purchase Lessee shall pay to Lessor the outstanding balance of
the Signal Cost allocated to the Property. If Lessee does not
purchase the Property pursuant to the Option to Purchase in this Lease
and this Lease expires or otherwise terminates, the (i) Lessee shall
pay to Lessor within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is
attributable to the period commencing with the first day of the month
in which this Lease expires or otherwise terminates, and (ii) Lessee's
obligation to reimburse Lessor for the remaining balance of the Signal
Cost allocated to the Property shall cease upon such expiration or
termination of this Lease, provided, however, that if this Lease
terminates due to the default of Lessee, Lessor may recover from Lessee
the unpaid portion of the Signal Cost allocated to the Property, if
any, in addition to other amounts allowed under Section 20.2 of this
Lease. Nothing herein shall be deemed an agreement by Lessee that the
cost of any other traffic signal(s) installed near the Property in the
future should be passed through to Lessee under this Lease."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains in
full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of
the date set forth above.
LESSOR: PETULA ASSOCIATES, LTD., an Iowa corporation
By: /s/ MICHAEL S. DUFFY
Name: MICHAEL S. DUFFY
Title: VICE PRESIDENT
By: /s/ GREGORY C. HAUSER
Name: GREGORY C. HAUSER
Title: VICE PRESIDENT
EQUITY FC, LTD., an Iowa corporation
By: /s/ L.S. VALENTINO
Name: L.S. VALENTINO
Title: COUNSEL
By: /s/ RONALD B. FRANKLIN
Name: RONALD B. FRANKLIN
Title: VICE PRESIDENT
LESSEE: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
EIGHTH AMENDMENT TO LEASE
THIS EIGHTH AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation and EQUITY FC, LTD., an Iowa corporation
(collectively, "Lessor"), and SEQUENT COMPUTER SYSTEMS, INC., an Oregon
corporation ("Lessee").
RECITALS
A. Lessor and Lessee are parties to that certain Lease Agreement dated July
9, 1990 (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"):
1. First Amendment dated April 29, 1990;
2. Second Amendment dated April 29, 1991;
3. Third Amendment dated June 10, 1991;
4. Fourth Amendment dated July 3, 1991;
5. Fifth Amendment dated August __, 1991;
6. Sixth Amendment dated December 2, 1992; and
7. Seventh Amendment dated April 5, 1993
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Lessor and Lessee desire to amend the Lease as set forth herein.
AGREEMENT
1. LEASE REVISIONS.
1.1 Closing Costs and Title Insurance. The following is added after the
last sentence of Section 6.4.3 of the Lease and is hereby made a part of
Section 6.4.3:
"If available from Escrow Agent and if requested by Lessor, Escrow
Agent shall issue to Lessor at its expense a 'simultaneous issue'
seller's policy of title insurance."
1.2 Conveyance. The following shall be added after the last sentence of
Section 6.4.4 of the Lease and is hereby made a part of Section 6.4.4:
"At Lessee's request, Lessor shall convey title to the Property
to an institutional lender or trustee providing synthetic
lease financing or other institutional financing to Lessee
in connection with its acquisition of the Property; provided,
however, use of such designee will not affect (or operate
as a release of) Lessee's obligations or liability under
the Lease, including the Option to Purchase provisions
of the Lease."
1.3 Lease Termination. The following is added as a new Section 6.4.8 to the
Lease:
"6.4.8 Termination of Lease. This Lease shall automatically
terminate effective upon the Closing of the sale of the
Property from Lessor to Lessee pursuant to this Section 6;
provided, however, the Survival Provisions of Section 50 shall
apply in connection with any such termination. If requested
by Lessee, Lessor shall enter into a lease termination agreement
with Lessee to evidence the agreement of the parties in this
Section 6.4.8, and Lessee shall have the right to record such
lease termination agreement in the records of Washington County,
Oregon at any time following the recording of the statutory
special warranty deed referenced in Section 6.4.4."
1.4 Traffic Signal. The following is added as a new Section 52 to the Lease:
"52 Traffic Signal. Lessor and Lessee agree that the cost to
install a traffic signal (the "Signal") at the intersection of
Koll Parkway, Walker Road and SW 150th Avenue shall be treated
as a Special Common Area Assessment pursuant to the Declaration
of Covenants, Conditions and Restrictions dated March 12, 1986,
as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively,
the "Declaration"), which Declaration encumbers the Property and
other property. Once the Signal has been installed and is
operational (the "Signal Completion Date"), Lessor shall furnish
to Lessee a statement in commercially reasonable detail showing
the portion of the cost to install such Signal (the "Signal
Cost") that is allocated to the Property as a Special Common
Area Assessment pursuant to the Declaration and, upon request
from Lessee, shall furnish copies of invoices received and paid
by Lessor in connection with the installation of the Signal.
Lessee agrees to reimburse Lessor for the portion of the Signal
Cost allocated to the Property, provided, however, that, except
as provided herein, Lessee shall not be required to pay such cost
in a lump sum, but rather such cost, together with a financing
charge of ten percent (10%) per annum, shall be amortized over an
estimated useful life of ten (10) years and Lessee shall reimburse
Lessor for such cost by paying Lessor in equal monthly installments
beginning on the first day of the second calendar month following
the Signal Completion Date (or on the first day of the next
calendar month if the Signal Completion Date is the first day of
a calendar month) and on the first day of each month thereafter
during the remaining term of this Lease that portion of such cost
attributable to the month preceding such payment based on such
amortization plan. If the Signal Completion Date is a day other
than the first day of a calendar month, then on the first day
of the calendar month following the Signal Completion Date, Lessee
shall pay to Lessor interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which
the Signal Completion Date occurs. In the alternative, Lessee
shall have the right to prepay all or any portion of the outstanding
balance of such cost at any time without any prepayment charge. If
Lessee purchases the Property pursuant to the Option to Purchase
in this Lease and the Signal has been installed and is operational,
upon the closing of such purchase Lessee shall pay to Lessor the
outstanding balance of the Signal Cost allocated to the Property. If
Lessee does not purchase the Property pursuant to the Option to
Purchase in this Lease and this Lease expires or otherwise
terminates, the (i) Lessee shall pay to Lessor within ten (10) days
of such expiration or termination that portion of the Signal Cost
allocated to the Property that is attributable to the period
commencing with the first day of the month in which this Lease
expires or otherwise terminates, and (ii) Lessee's obligation to
reimburse Lessor for the remaining balance of the Signal Cost
allocated to the Property shall cease upon such expiration or
termination of this Lease, provided, however, that if this Lease
terminates due to the default of Lessee, Lessor may recover from
Lessee the unpaid portion of the Signal Cost allocated to the
Property, if any, in addition to other amounts allowed under Section
20.2 of this Lease. Nothing herein shall be deemed an agreement by
Lessee that the cost of any other traffic signal(s) installed near
the Property in the future should be passed through to Lessee under
this Lease."
1.5 Monument Sign/Landscape Strip. Notwithstanding that the monument sign
used by Lessee in connection with its use of the Premises is located within
an area designated as common area under the Declaration, during the term of
this Lease the expense of maintaining the sign shall not be treated as a
common area expense, but rather shall be the responsibility of Lessee.
Upon termination of this Lease, the expense of maintaining the sign shall
be treated as a common area expense under the Declaration unless the sign
is used exclusively by the owner of the Premises or any new tenant of such
owner, in which case such expense shall be the responsibility of such owner
or such tenant.
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of
the date set forth above.
LESSOR: PETULA ASSOCIATES, LTD., an Iowa corporation
By: /s/ MICHAEL S. DUFFY
Name: MICHAEL S. DUFFY
Title: VICE PRESIDENT
By: /s/ GREGORY C. HAUSER
Name: GREGORY C. HAUSER
Title: VICE PRESIDENT
EQUITY FC, LTD., an Iowa corporation
By: /s/ LS VALENTINO
Name: LS VALENTINO
Title: COUNSEL
By: /s/ RONALD B. FRANKLIN
Name: RONALD B. FRANKLIN
Title: VICE PRESIDENT
LESSEE: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation and EQUITY FC, LTD., an Iowa
corporation, tenants-in-common (collectively, "Landlord"), and SEQUENT
COMPUTER SYSTEMS, INC., an Oregon corporation ("Tenant").
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement dated
June 10, 1991 (the "Lease").
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Landlord and Tenant desire to amend the Lease as set forth herein.
AGREEMENT
In consideration of the mutual covenants contained in this Amendment, Landlord
and Tenant agree to amend the Lease as follows:
1. Traffic Signal. Landlord and Tenant agree that the cost to install a
traffic signal (the "Signal") at the intersection of Koll Parkway, Walker Road
and SW 150th Avenue shall be treated as a Special Common Area Assessment
pursuant to the Declaration of Covenants, Conditions and Restrictions dated
March 12, 1986, as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively, the
"Declaration"), which Declaration encumbers the Property and other property.
Once the Signal has been installed and is operational (the "Signal Completion
Date"), Landlord shall furnish to Tenant a statement in commercially
reasonable detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common Area
Assessment pursuant to the Declaration and, upon request from Tenant, shall
furnish copies of invoices received and paid by Landlord in connection with
the installation of the Signal. Tenant agrees to reimburse Landlord for the
portion of the Signal Cost allocated to the Property, provided, however, that,
except as provided herein, Tenant shall not be required to pay such cost in a
lump sum, but rather such cost, together with a financing charge of ten
percent (10%) per annum, shall be amortized over an estimated useful life of
ten (10) years and Tenant shall reimburse Landlord for such cost by paying
Landlord in equal monthly installments beginning on the first day of the
second calendar month following the Signal Completion Date (or on the first
day of the next calendar month if the Signal Completion Date is the first day
of a calendar month) and on the first day of each month thereafter during the
remaining term of this Lease that portion of such cost attributable to the
month preceding such payment based on such amortization plan. If the Signal
Completion Date is a day other than the first day of a calendar month, then on
the first day of the calendar month following the Signal Completion Date,
Tenant shall pay to Landlord interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Tenant shall have the right to
prepay all or any portion of the outstanding balance of such cost at any time
without any prepayment charge. If Tenant purchases the Property pursuant to
the Option to Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Tenant shall pay to Landlord
the outstanding balance of the Signal Cost allocated to the Property. If
Tenant does not purchase the Property pursuant to the Option to Purchase in
this Lease and this Lease expires or otherwise terminates, the (i) Tenant
shall pay to Landlord within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is attributable
to the period commencing with the first day of the month in which this Lease
expires or otherwise terminates, and (ii) Tenant's obligation to reimburse
Landlord for the remaining balance of the Signal Cost allocated to the
Property shall cease upon such expiration or termination of this Lease,
provided, however, that if this Lease terminates due to the default of Tenant,
Landlord may recover from Tenant the unpaid portion of the Signal Cost
allocated to the Property, if any, in addition to other amounts allowed under
Section 20.2 of this Lease. Nothing herein shall be deemed an agreement by
Tenant that the cost of any other traffic signal(s) installed near the
Property in the future should be passed through to Tenant under this Lease."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of the
date set forth above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
EQUITY FC, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation, EQUITY FC, LTD., an Iowa corporation,
tenants-in-common (collectively, "Landlord"), and SEQUENT COMPUTER SYSTEMS,
INC., an Oregon corporation ("Tenant").
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement dated
June 10, 1991 (the "Lease Agreement") and the following documents (the
"Amendment"), which amend such Lease Agreement (the Lease Agreement
and all such Amendments are herein collectively referred to as the
"Lease"):
1. First Amendment dated October 31, 1991;
2. Second Amendment dated May 6, 1992;
3. Third Amendment dated January 8, 1993; and
4. Fourth Amendment dated July 21, 1995.
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Landlord and Tenant desire to amend the Lease as set forth herein.
AGREEMENT
In consideration of the mutual covenants contained in this Amendment,
Landlord and Tenant agree to amend the Lease as follows:
1. Traffic Signal. Landlord and Tenant agree that the cost to install a
traffic signal (the "Signal") at the intersection of Koll Parkway, Walker
Road and SW 150th Avenue shall be treated as a Special Common Area Assessment
pursuant to the Declaration of Covenants, Conditions and Restrictions dated
March 12, 1986, as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively, the
"Declaration"), which Declaration encumbers the Property and other property.
Once the Signal has been installed and is operational (the "Signal
Completion Date"), Landlord shall furnish to Tenant a statement in
commercially reasonable detail showing the portion of the cost to install
such Signal (the "Signal Cost") that is allocated to the Property as a
Special Common Area Assessment pursuant to the Declaration and, upon request
from Tenant, shall furnish copies of invoices received and paid by Landlord
in connection with the installation of the Signal. Tenant agrees to
reimburse Landlord for the portion of the Signal Cost allocated to the
Property, provided, however, that, except as provided herein, Tenant shall
not be required to pay such cost in a lump sum, but rather such cost,
together with a financing charge of ten percent (10%) per annum, shall be
amortized over an estimated useful life of ten (10) years and Tenant shall
reimburse Landlord for such cost by paying Landlord in equal monthly
installments beginning on the first day of the second calendar month
following the Signal Completion Date (or on the first day of the next
calendar month if the Signal Completion Date is the first day of a calendar
month) and on the first day of each month thereafter during the remaining
term of this Lease that portion of such cost attributable to the month
preceding such payment based on such amortization plan. If the Signal
Completion Date is a day other than the first day of a calendar month, then
on the first day of the calendar month following the Signal Completion Date,
Tenant shall pay to Landlord interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Tenant shall have the right to
prepay all or any portion of the outstanding balance of such cost at any time
without any prepayment charge. If Tenant purchases the Property pursuant to
the Option to Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Tenant shall pay to Landlord
the outstanding balance of the Signal Cost allocated to the Property. If
Tenant does not purchase the Property pursuant to the Option to Purchase in
this Lease and this Lease expires or otherwise terminates, the (i) Tenant
shall pay to Landlord within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is
attributable to the period commencing with the first day of the month in
which this Lease expires or otherwise terminates, and (ii) Tenant's
obligation to reimburse Landlord for the remaining balance of the Signal Cost
allocated to the Property shall cease upon such expiration or termination of
this Lease, provided, however, that if this Lease terminates due to the
default of Tenant, Landlord may recover from Tenant the unpaid portion of the
Signal Cost allocated to the Property, if any, in addition to other amounts
allowed under Section 20.2 of this Lease. Nothing herein shall be deemed an
agreement by Tenant that the cost of any other traffic signal(s) installed
near the Property in the future should be passed through to Tenant under this
Lease.
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission,
shall be the same as delivery of an original. At the request of either
party, the parties shall confirm facsimile transmitted signatures by
signing an original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of
the date set forth above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
EQUITY FC, LTD., an Iowa corporation
By:
Name:
Title:
TENANT: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation, EQUITY FC, LTD., an Iowa corporation,
tenants-in-common (collectively, "Landlord"), and SEQUENT COMPUTER SYSTEMS,
INC., an Oregon corporation ("Tenant").
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement dated
June 10, 1991 (the "Lease Agreement") and the following documents (the
"Amendment"), which amend such Lease Agreement (the Lease Agreement and
all such Amendments are herein collectively referred to as the "Lease"):
1. First Amendment dated July 21, 1995; and
2. Second Amendment dated March 1, 1997, effective April 1, 1997.
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Landlord and Tenant desire to amend the Lease as set forth herein.
AGREEMENT
In consideration of the mutual covenants contained in this Amendment, Landlord
and Tenant agree to amend the Lease as follows:
1. Traffic Signal. Landlord and Tenant agree that the cost to install a
traffic signal (the "Signal") at the intersection of Koll Parkway, Walker Road
and SW 150th Avenue shall be treated as a Special Common Area Assessment
pursuant to the Declaration of Covenants, Conditions and Restrictions dated
March 12, 1986, as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively, the
"Declaration"), which Declaration encumbers the Property and other property.
Once the Signal has been installed and is operational (the "Signal Completion
Date"), Landlord shall furnish to Tenant a statement in commercially
reasonable detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common Area
Assessment pursuant to the Declaration and, upon request from Tenant, shall
furnish copies of invoices received and paid by Landlord in connection with
the installation of the Signal. Tenant agrees to reimburse Landlord for the
portion of the Signal Cost allocated to the Property, provided, however, that,
except as provided herein, Tenant shall not be required to pay such cost in a
lump sum, but rather such cost, together with a financing charge of ten
percent (10%) per annum, shall be amortized over an estimated useful life of
ten (10) years and Tenant shall reimburse Landlord for such cost by paying
Landlord in equal monthly installments beginning on the first day of the
second calendar month following the Signal Completion Date (or on the first
day of the next calendar month if the Signal Completion Date is the first day
of a calendar month) and on the first day of each month thereafter during the
remaining term of this Lease that portion of such cost attributable to the
month preceding such payment based on such amortization plan. If the Signal
Completion Date is a day other than the first day of a calendar month, then on
the first day of the calendar month following the Signal Completion Date,
Tenant shall pay to Landlord interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Tenant shall have the right to
prepay all or any portion of the outstanding balance of such cost at any time
without any prepayment charge. If Tenant purchases the Property pursuant to
the Option to Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Tenant shall pay to Landlord
the outstanding balance of the Signal Cost allocated to the Property. If
Tenant does not purchase the Property pursuant to the Option to Purchase in
this Lease and this Lease expires or otherwise terminates, the (i) Tenant
shall pay to Landlord within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is attributable
to the period commencing with the first day of the month in which this Lease
expires or otherwise terminates, and (ii) Tenant's obligation to reimburse
Landlord for the remaining balance of the Signal Cost allocated to the
Property shall cease upon such expiration or termination of this Lease,
provided, however, that if this Lease terminates due to the default of Tenant,
Landlord may recover from Tenant the unpaid portion of the Signal Cost
allocated to the Property, if any, in addition to other amounts allowed under
Section 20.2 of this Lease. Nothing herein shall be deemed an agreement by
Tenant that the cost of any other traffic signal(s) installed near the
Property in the future should be passed through to Tenant under this Lease."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of the
date set forth above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
EQUITY FC, LTD., an Iowa corporation
By:
Name:
Title:
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation, EQUITY FC, LTD., an Iowa corporation,
tenants-in-common (collectively, "Landlord"), and SEQUENT COMPUTER SYSTEMS,
INC., an Oregon corporation ("Tenant").
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement dated
June 10, 1991 (the "Lease Agreement") and the following documents (the
"Amendment"), which amend such Lease Agreement (the Lease Agreement and
all such Amendments are herein collectively referred to as the "Lease"):
1. First Amendment dated March 1, 1996, effective February 1, 1996;
and
2. Second Amendment dated October 1, 1996.
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Landlord and Tenant desire to amend the Lease as set forth herein.
AGREEMENT
In consideration of the mutual covenants contained in this Amendment, Landlord
and Tenant agree to amend the Lease as follows:
1. Traffic Signal. Landlord and Tenant agree that the cost to install a
traffic signal (the "Signal") at the intersection of Koll Parkway, Walker Road
and SW 150th Avenue shall be treated as a Special Common Area Assessment
pursuant to the Declaration of Covenants, Conditions and Restrictions dated
March 12, 1986, as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively, the
"Declaration"), which Declaration encumbers the Property and other property.
Once the Signal has been installed and is operational (the "Signal Completion
Date"), Landlord shall furnish to Tenant a statement in commercially
reasonable detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common Area
Assessment pursuant to the Declaration and, upon request from Tenant, shall
furnish copies of invoices received and paid by Landlord in connection with
the installation of the Signal. Tenant agrees to reimburse Landlord for the
portion of the Signal Cost allocated to the Property, provided, however, that,
except as provided herein, Tenant shall not be required to pay such cost in a
lump sum, but rather such cost, together with a financing charge of ten
percent (10%) per annum, shall be amortized over an estimated useful life of
ten (10) years and Tenant shall reimburse Landlord for such cost by paying
Landlord in equal monthly installments beginning on the first day of the
second calendar month following the Signal Completion Date (or on the first
day of the next calendar month if the Signal Completion Date is the first day
of a calendar month) and on the first day of each month thereafter during the
remaining term of this Lease that portion of such cost attributable to the
month preceding such payment based on such amortization plan. If the Signal
Completion Date is a day other than the first day of a calendar month, then on
the first day of the calendar month following the Signal Completion Date,
Tenant shall pay to Landlord interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Tenant shall have the right to
prepay all or any portion of the outstanding balance of such cost at any time
without any prepayment charge. If Tenant purchases the Property pursuant to
the Option to Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Tenant shall pay to Landlord
the outstanding balance of the Signal Cost allocated to the Property. If
Tenant does not purchase the Property pursuant to the Option to Purchase in
this Lease and this Lease expires or otherwise terminates, the (i) Tenant
shall pay to Landlord within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is attributable
to the period commencing with the first day of the month in which this Lease
expires or otherwise terminates, and (ii) Tenant's obligation to reimburse
Landlord for the remaining balance of the Signal Cost allocated to the
Property shall cease upon such expiration or termination of this Lease,
provided, however, that if this Lease terminates due to the default of Tenant,
Landlord may recover from Tenant the unpaid portion of the Signal Cost
allocated to the Property, if any, in addition to other amounts allowed under
Section 20.2 of this Lease. Nothing herein shall be deemed an agreement by
Tenant that the cost of any other traffic signal(s) installed near the
Property in the future should be passed through to Tenant under this Lease."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of the
date set forth above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
EQUITY FC, LTD., an Iowa corporation
By:
Name:
Title:
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is made as of March 26, 1998 between PETULA
ASSOCIATES, LTD., an Iowa corporation, EQUITY FC, LTD., an Iowa corporation,
and DK NORTHWEST HOLDINGS, L.P., a California limited partnership
(collectively, "Landlord"), and SEQUENT COMPUTER SYSTEMS, INC., an Oregon
corporation ("Tenant").
RECITALS
A. Landlord and Tenant are parties to that certain Lease Agreement dated
June 10, 1991 (the "Lease").
B. Capitalized terms not defined in this Amendment have the meanings set
forth in the Lease.
C. Landlord and Tenant desire to amend the Lease as set forth herein.
AGREEMENT
In consideration of the mutual covenants contained in this Amendment, Landlord
and Tenant agree to amend the Lease as follows:
1. Traffic Signal. Landlord and Tenant agree that the cost to install a
traffic signal (the "Signal") at the intersection of Koll Parkway, Walker Road
and SW 150th Avenue shall be treated as a Special Common Area Assessment
pursuant to the Declaration of Covenants, Conditions and Restrictions dated
March 12, 1986, as amended by First Amendment thereto dated October 28, 1996
and Section Amendment thereto dated March 13, 1998 (collectively, the
"Declaration"), which Declaration encumbers the Property and other property.
Once the Signal has been installed and is operational (the "Signal Completion
Date"), Landlord shall furnish to Tenant a statement in commercially
reasonable detail showing the portion of the cost to install such Signal (the
"Signal Cost") that is allocated to the Property as a Special Common Area
Assessment pursuant to the Declaration and, upon request from Tenant, shall
furnish copies of invoices received and paid by Landlord in connection with
the installation of the Signal. Tenant agrees to reimburse Landlord for the
portion of the Signal Cost allocated to the Property, provided, however, that,
except as provided herein, Tenant shall not be required to pay such cost in a
lump sum, but rather such cost, together with a financing charge of ten
percent (10%) per annum, shall be amortized over an estimated useful life of
ten (10) years and Tenant shall reimburse Landlord for such cost by paying
Landlord in equal monthly installments beginning on the first day of the
second calendar month following the Signal Completion Date (or on the first
day of the next calendar month if the Signal Completion Date is the first day
of a calendar month) and on the first day of each month thereafter during the
remaining term of this Lease that portion of such cost attributable to the
month preceding such payment based on such amortization plan. If the Signal
Completion Date is a day other than the first day of a calendar month, then on
the first day of the calendar month following the Signal Completion Date,
Tenant shall pay to Landlord interest at the rate provided herein from the
Signal Completion Date through the last day of the month in which the Signal
Completion Date occurs. In the alternative, Tenant shall have the right to
prepay all or any portion of the outstanding balance of such cost at any time
without any prepayment charge. If Tenant purchases the Property pursuant to
the Option to Purchase in this Lease and the Signal has been installed and is
operational, upon the closing of such purchase Tenant shall pay to Landlord
the outstanding balance of the Signal Cost allocated to the Property. If
Tenant does not purchase the Property pursuant to the Option to Purchase in
this Lease and this Lease expires or otherwise terminates, the (i) Tenant
shall pay to Landlord within ten (10) days of such expiration or termination
that portion of the Signal Cost allocated to the Property that is attributable
to the period commencing with the first day of the month in which this Lease
expires or otherwise terminates, and (ii) Tenant's obligation to reimburse
Landlord for the remaining balance of the Signal Cost allocated to the
Property shall cease upon such expiration or termination of this Lease,
provided, however, that if this Lease terminates due to the default of Tenant,
Landlord may recover from Tenant the unpaid portion of the Signal Cost
allocated to the Property, if any, in addition to other amounts allowed under
Section 20.2 of this Lease. Nothing herein shall be deemed an agreement by
Tenant that the cost of any other traffic signal(s) installed near the
Property in the future should be passed through to Tenant under this Lease."
2. STATUS OF LEASE. Except as expressly amended hereby, the Lease remains
in full force and effect and is hereby ratified and affirmed.
3. COUNTERPARTS. This Amendment may be executed simultaneously or in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Amendment.
4. FACSIMILE TRANSMISSION. Facsimile transmission of any signed original
document, and retransmission of any signed facsimile transmission, shall
be the same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by signing an
original document.
IN WITNESS WHEREOF, this Eighth Amendment to Lease has been executed as of the
date set forth above.
LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation
By:
Name:
Title:
By:
Name:
Title:
EQUITY FC, LTD., an Iowa corporation
By:
Name:
Title:
DK NORTHWEST HOLDINGS, L.P.,
a California limited partnership
By: PETULA ASSOCIATES, LTD.,
an Iowa corporation,
Attorney-in-Fact for DK Northwest Holdings, L.P.
By:
Name:
Title:
TENANT: SEQUENT COMPUTER SYSTEMS, INC.,
an Oregon corporation
By: /s/ ROBERT B. WITT
Name: ROBERT B. WITT
Title: VICE PRESIDENT & CIO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 192,876,000
<SECURITIES> 0
<RECEIVABLES> 225,480,000
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0
0
<COMMON> 435,000
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<TOTAL-LIABILITY-AND-EQUITY> 796,115,000
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<INCOME-PRETAX> (76,071,000)
<INCOME-TAX> (23,552,000)
<INCOME-CONTINUING> (52,519,000)
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<CHANGES> 0
<NET-INCOME> (52,519,000)
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