-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T20zKRdHigIGHMnkn88gjWBsxyLItJfgnKvxRqJiIDpm8GTW0yw8FbZIER5Umlqf vfjtrxyMdkd0h+CmgwDxrw== 0000811716-98-000002.txt : 19980330 0000811716-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000811716-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUENT COMPUTER SYSTEMS INC /OR/ CENTRAL INDEX KEY: 0000811716 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 930826369 STATE OF INCORPORATION: OR FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15627 FILM NUMBER: 98575318 BUSINESS ADDRESS: STREET 1: 15450 SW KOLL PKWY STREET 2: ED02-803 CITY: BEAVERTON STATE: OR ZIP: 97006-6063 BUSINESS PHONE: 5036265700 MAIL ADDRESS: STREET 1: 15450 SW KOLL PKWY STREET 2: ED02 -803 CITY: BEAVERTON STATE: OR ZIP: 97006-6063 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 3, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to __________. Commission file number: 0-15627 SEQUENT COMPUTER SYSTEMS, INC. (Exact name of registrant as specified in its charter) Oregon (State or other jurisdiction of 93-0826369 incorporation or organization) (I.R.S. Employer Identification Number) 15450 S.W. Koll Parkway, Beaverton, Oregon 97006-6063 (Address of principal executive offices, including zip code) Registrant's telephone number, including are code: (503) 626-5700 Securities registered pursuant to Section 12(b) of the Act: None Title of each class Name of each exchange on which registered ______________________ ______________________ Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of Common Stock held by nonaffiliates of the Registrant at February 28, 1998, based on the closing price on such date on the NASDAQ National Market System: $915,022,023. Number of shares of Common Stock outstanding as of February 28, 1998: 43,459,381. Documents Incorporated by Reference Part of Form 10-K into Document which incorporated 1997 Annual Report to Shareholders Parts II and IV Proxy Statement for 1998 Annual Meeting of Shareholders Part III TABLE OF CONTENTS Item of Form 10-K Page PART I Item 1. Business 3 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 4(a). Executive Officers of the Registrant 16 PART II Item 5. Market for the Registrant's Common Equity and 17 Related Stockholder Matters Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial 17 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants 17 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and 18 Management Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports 19 on Form 8-K SIGNATURES 26 PART I Item 1. Business. Sequent Computer Systems, Inc. ("Sequent" or "the Company") is a leading provider of high-end scalable data-center-ready open systems solutions for large organizations spanning diverse industries. The Company pioneered the development of large-scale, Intel-based symmetric multiprocessing ("SMP") systems in the 1980s and has installed over 8,000 SMP systems worldwide. In 1996, Sequent was first to market with large-scale cache coherent non-uniform memory access ("CC-NUMA") systems based on Intel's Pentium Pro architecture and designed to run the UNIX operating system. Since December 1996, over 500 NUMA-Q 2000 systems have been installed. During the second half of 1998, the Company plans to introduce its new NUMA-Q technology which will enable customers to run UNIX and Windows NT on a single system. Sequent's products are used primarily as database servers for large commercial applications: custom on-line transaction processing ("OLTP"); decision support systems ("DSS")/data warehousing; and enterprise resource planning. Sequent sells its products and services worldwide through its direct sales force, through distributors and, increasingly, through arrangements with systems integrators. Sequent's direct sales efforts are focused on large organizations with the goal of establishing and maintaining long-term "major account" relationships. During 1997, the Company formed a new organization, Global Business Alliances ("GBA"), with a mission of expanding business into new markets and new customers through strategic partnerships with specific system integrators. Sequent has enhanced its competitive position by providing consulting and professional services to help large organizations identify complex IT problems and develop solutions that combine its products with those of its RDBMS partners and other open systems hardware and software providers. The Company's high-end professional services capability has enabled Sequent to shift the focus of its business from selling systems to offering solutions that combine systems and services. Sequent's solution-oriented expertise is geared to RDBMS-based offerings in three basic categories: custom OLTP; packaged business solutions (financial, manufacturing and human resources applications); and large DSS/data warehousing applications. Over the past five years, the knowledge and expertise of Sequent's professional services organization have become key differentiators for the Company, enabling Sequent to win a growing number of projects where the sale of large systems follows or accompanies the sale of significant professional services contracts. The Company maintains strategic relationships with leading hardware and software providers that enable it to deliver complete mission-critical information technology ("IT") solutions to its customers. The Company was incorporated in Delaware in January 1983 and was reincorporated in Oregon in December 1988. Unless the context otherwise requires, references in this Report on Form 10-K to the "Company" or "Sequent" refer to the prior Delaware corporation, the current Oregon corporation and its subsidiaries. The Company's principal executive offices are located at 15450 S.W. Koll Parkway, Beaverton, Oregon 97006, and its telephone number at that location is (503)626-5700. Market Overview The success of large organizations in today's competitive markets is largely dependent on the ability of these organizations to identify and respond to changing business conditions. Such organizations need to rapidly collect, organize, analyze, process and store data throughout the enterprise to make effective business decisions. An organization's strategic use of IT is often critical to creating and maintaining large centers of corporate data and effectively manipulating it to gain competitive advantage. However, deploying enterprise-wide data-center systems solutions is complex and often presents a major challenge to corporate IT organizations, especially because of several overlapping industry trends that have continually defined the market for such systems. Following is a discussion of some of these trends: RDBMS and OLTP. In traditional mainframes, data entered into the system was typically stored in highly structured flat files called hierarchical databases. During the 1980s, use of these rigid database structures gave way to RDBMS software whose flexible structure enabled the rapid deployment of large database applications for OLTP. In contrast to the batch data entry and processing characteristic of early mainframe computing, OLTP captures data from transactions as they are executed and adds or updates records in the database in real time. The market demand for OLTP computing systems, particularly those using RDBMS technology, spans a wide variety of industries and applications and has increased dramatically as more businesses require instantaneous processing of information. DSS/Data Warehousing. The wealth of historical data that has been amassed by large organizations over the past several decades has given rise to widespread demand for technology to access that data and convert it into useful information. More recently, the growth of Internet-based technologies and the proliferation of multimedia databases are creating new demand for ways to cull information from multiple types of data. In response to these demands, decision support systems have become one of the fastest growing segments of the high-end, open systems computing market. These systems combine relational database software and large, scalable servers with powerful front-end software tools that enable individual users to comb through very large volumes of data and extract specific information such as market trends and customer buying patterns. Today's data warehouses are large databases constructed specifically to optimize the accessibility of the data for decision support applications. Recently, RDBMS vendors such as Oracle and Informix Corporation ("Informix") have added parallel query capabilities to their software, dramatically enhancing their performance on systems with parallel architectures such as SMP and CC-NUMA. The Internet and Electronic Commerce. Today, virtually every large organization has a corporate intranet of some sort and an emerging presence on the World Wide Web. Over the next several years, the projected growth of web-based infrastructures is expected to be driven by the expansion of messaging and electronic commerce, requiring larger and more scalable servers. Connected to millions of PCs and network computers by one vast network, these servers will manage very large volumes of on-line transactions involving tens of thousands of concurrent users and millions of multi-megabyte-sized chunks of text, voice, video and other complex data types. In an effort to better understand the complexities of their markets, the dynamics of their business and the needs of their customers, Sequent believes that organizations will depend on massively-scalable servers to search through large databases for information and insights that can provide a competitive advantage. Client/Server and Network Computing. The simplest form of client/server architecture is a two-tier configuration consisting of a server that manages data connected to desktop clients (PCs or workstations) that can access the data to run various applications that reside on the desktop. Typically, these servers are inexpensive, low-end (one- to four-processor) systems manufactured in volume by makers of desktop systems. Three-tier client/server architectures typically employ a large, back-end database server connected to one or more application servers connected to multiple desktops. In this arrangement, desktop users have access to both applications and data which do not reside on their system. During the first half of this decade, both configurations were used in the widespread development of distributed client/server architectures where data and applications were distributed across multiple servers connected to desktop users by a single network. Recently, however, the difficulties in implementing and managing distributed client/server environments have slowed this trend and resulted in a renewed emphasis on the development of centralized client/server environments where data resides on a single larger server. Complementing this shift toward centralization is the recent emergence of the "network computer," an inexpensive ("thin") desktop client with no permanent storage capacity that is designed to run applications and access data stored on very large ("fat") servers. The use of such network computing devices is expected to increase demand for larger back-end servers. UNIX and Windows NT. Beginning in the early 1980s, the UNIX operating system, originally developed by AT&T in the 1960s, was adopted by a growing number of computer manufacturers and gradually won recognition as an emerging standard for open systems computing. However, efforts by various vendor consortiums failed to achieve the development of a single standard UNIX to replace the multiple versions of UNIX being developed and marketed by individual companies. In 1993, Microsoft introduced Windows NT as an alternative to UNIX. During the past four years, Windows NT has won widespread acceptance as the preferred operating system for network and applications servers, while UNIX remains the operating system of choice for large data-center applications. Despite its current limitations, many industry experts believe that over time Windows NT will acquire the scalability, robustness and functionality necessary to replace UNIX and become the de facto standard for enterprise-wide computing. As IT directors plan long-term IT strategies for their organizations, they are confronted with the dilemma of which operating systems to employ and how to migrate to those operating systems and interrelate the various operating systems throughout the enterprise. Scalable System Architectures. A scalable computer architecture is one that allows a user to increase the power and performance of a single system by adding more processors, memory and storage. Massively parallel processor systems ("MPP") can scale up to hundreds of processors in a loosely coupled architecture, where each processor has its own memory and I/O. The fact that each processor node has its own copy of the operating system software makes MPP systems difficult to program and limits their use in large commercial applications. In contrast, SMP systems employ a tightly-coupled architecture in which two or more processors are connected by a system "bus" that enables them to share memory and I/O. A single copy of the operating system software assigns the workload across all the processors so that to a user the system appears to contain only one very powerful processor. As a result, SMP systems are much easier to program than MPP systems and have become widely used for large-scale commercial applications. Today, the size and complexity of applications of large organizations have begun to require greater performance than can be achieved by scaling traditional SMP architectures. Existing technologies limit the amount of data that can travel across the system bus in an SMP system. As processors have become more powerful, this physical constraint limits the number of processors the bus can accommodate. The CC-NUMA architecture overcomes this limitation by linking multiple SMP boards together with intelligent, high-speed interconnects that allow processors on one board to access data on other boards. Because each board has its own memory and I/O, CC-NUMA systems share many of the scalability benefits of MPP systems. In CC-NUMA systems, however, the interconnects between the boards are designed to create a single coherent view of one large contiguous memory out of the distributed pieces of physical memory on each board so that to a user the system appears to contain only one very powerful processor. As a result, CC-NUMA systems deliver all the benefits associated with shared memory in traditional SMP systems and represent a powerful extension of SMP architecture. Open Systems. Historically, large organizations relied exclusively on computing equipment based on a single vendor's proprietary technology that was generally incompatible with that of other vendors. In recent years, proprietary systems have become increasingly unacceptable to companies that want the flexibility to purchase computing equipment and software best suited for a specific need without being limited to the choices offered by a specific vendor. "Open systems," by contrast, refers to hardware and software that adheres to industry standard specifications, allowing users to select and integrate the best products from different vendors to create large networks and client/server computing environments, facilitating the flow of information within and between organizations. Many companies are replacing some or all of their proprietary central computing systems, moving to a more open, distributed system when they upgrade or expand their systems. Sequent's Business Strategy Sequent's business strategy is to provide enterprise-wide systems that enable large organizations to manage and use complex information. Sequent leverages the research and development efforts of industry-standard component suppliers by using their products and applying Sequent's expertise to design and build large, scalable data-center-ready open systems. Through technology and marketing partnerships with industry-leading hardware and software vendors, the Company develops and sells a broad range of offerings that address the needs of large organizations for OLTP and DSS. Sequent sells its products and services worldwide through its direct sales force, through distributors and through systems integrators. The Company's consulting and professional services organization helps customers diagnose their information technology problems and develop appropriate solutions based on the Company's offerings. Sequent consultants and professional services personnel provide value-added services both directly to customers and in partnership with systems integrators. The key elements of Sequent's strategy are the following: Solve Complex IT Problems. Sequent concentrates on understanding the business objectives and information technology needs of its customers at all organizational levels. The Company's consultants and professional services personnel work closely with the customer's in-house IT organization, or its designated systems integrator, to diagnose complex IT problems, then design and implement open solutions that support the customer's business objectives and are aligned with the customer's strategic goals. Specific areas of focus include IT strategy and planning, enterprise infrastructure, core business applications, decision support, migration from proprietary to open systems and project management. Provide Scalable Systems Architecture. Sequent invests significant resources in developing scalable systems architecture. Sequent believes its NUMA-Q 2000 systems provide exceptional price/performance and scalability for data-center applications. NUMA-Q 2000 extends the benefits of traditional SMP technology within an architecture that is designed to scale up to 252 microprocessors. Using an SMP "quad" with four Intel Pentium Pro processors as the basic building block, NUMA-Q 2000 uses a proprietary intelligent high-speed switch called IQ-Link that is designed to combine up to 63 quads in a system that, from a user's perspective, looks and behaves like a single SMP system. Compared to standard SMP and mainframe systems, the performance and scalability benefits of the NUMA-Q architecture enhance performance and flexibility of transaction-intensive and decision support applications. Sequent believes that its NUMA-Q architecture has the capability to outperform traditional mainframes. In addition, global shared memory and other SMP-like characteristics of the NUMA-Q architecture enable customers to develop and deploy large, centralized client/server applications that are difficult and costly to implement in a mainframe environment. Sequent was the first to bring Intel-based CC-NUMA systems to market, shipping the first NUMA-Q 2000 systems to customers in late 1996. During 1997, revenue from NUMA-Q 2000 sales surpassed revenue from Symmetry sales and accounted for approximately two-thirds of the Company's total product revenue. Sequent is committed to maintaining its leadership position in CC-NUMA systems, including upgrading to new Intel processor generations as they become available, including Intel's next-generation IA-64 architecture (code-named "Merced"), which is expected to be introduced by 2000. Leverage Strategic Relationships. Sequent devotes substantial resources to strategic marketing and product development relationships with those companies it believes offer the best open systems technologies. These relationships, combined with the open systems knowledge and expertise of the Company's consulting and professional services organization, allow Sequent to deliver complete solutions that combine the best available products and services. Sequent has strategic relationships with Intel for joint research and development of future computer systems building blocks. The Company's newly announced relationship with Digital Equipment Corporation ("Digital") includes initiatives for co-developing a standard, scalable 64-bit operating system, as well as creating a potential new sales channel for future NUMA-Q products through an Original Equipment Manufacturer (OEM) relationship. In addition, the Company continues to work closely with Microsoft Corporation ("Microsoft") for ongoing Windows NT software development. Other relationships include those with major providers of RDBMS software, including Oracle, Informix and Computer Associates International, Inc., and with leading suppliers of third-party applications software such as Oracle, PeopleSoft, Inc. ("PeopleSoft") and Baan Company N.V. ("Baan"). In addition, the Company works closely with leading suppliers of its storage subsystems, including EMC Corporation ("EMC2") and Data General's CLARiiON division ("CLARiiON"), and with suppliers of communications and network software and client/server application development products. In addition, the Company continues to focus its efforts on building solid relationships with system integrators to leverage and expand sales channel opportunities. During 1997, the Company formed its new GBA organization, specifically to develop and broaden partnerships with specific system integrators, such as EDS, CSC, Andersen Consulting, Deloitte & Touche and Ernst & Young. The Company is collaboratively working with these partners to penetrate the market using specific program initiatives. Maintain Commitment to Open Systems. Sequent's open system architecture leverages industry standards whenever possible, including the use of Intel processors, the UNIX and Windows NT operating systems, and standard network and communications interfaces. Sequent systems are designed to operate in a multi-vendor environment and support a wide variety of third-party software, including open RDBMSs, packaged applications and decision support tools and applications. Support Advancement of UNIX and Windows NT. Sequent is committed to the advancement of both UNIX and Windows NT in the data center. As a leading supplier of large UNIX systems for data-center applications, Sequent has heavily invested in the development of its DYNIX/ptx operating system. In January of 1998, Sequent and Digital announced their intent to co-develop a standard, scalable 64-bit UNIX operating system. The development will be based on Digital UNIX, will add key Sequent technologies and will be augmented with joint development by the two companies. Key to the success of the initiative will be the recruitment of additional partners and licenses. The new IA-64 UNIX operating system will be owned by Digital and is expected to be released in 2000, which coincides with the introduction of Intel's new IA-64 architecture. In addition, Sequent and Digital will jointly develop a source- compatible environment on top of DYNIX/ptx, to provide Sequent with forward compatibility written on its 32-bit DYNIX/ptx operating system. The Company continues to make substantial investments to assure the scalability, availability and functionality of Windows NT on its NUMA-Q architecture. During the second half of 1998, the Company plans to introduce its next phase in the development of its NUMA-Q technology that will enable customers to run UNIX and Windows NT applications on the same system with shared storage, systems management, backup and other resources. Sequent believes that the ability to provide customers with a clear interoperability plan or a credible migration path from UNIX to Windows NT in the data center will be an important differentiating factor for the Company. Protect Customers' Investments. Sequent strives to help its customers protect and leverage their investments in open systems technology. The Company's products are designed for interoperability with other vendors' products. Through successive generations of Intel microprocessors, Sequent has maintained backward compatibility of its newest Symmetry products with earlier models incorporating older processors. There are Symmetry systems installed at customer sites that incorporate Intel 386, 486 and Pentium processors in the same system. Although the CC-NUMA architecture is different from the SMP architecture, Sequent designed its NUMA-Q 2000 product to run the same operating system and applications as its Symmetry products, allowing customers to move applications from Symmetry to NUMA-Q 2000. Platform Overview Commercial computing applications in large organizations require massive processing power, memory and disk storage capacity. These requirements often increase exponentially with the number of users and the volume of data associated with the application. In addition, many applications are so critical to an organization's business that any unplanned downtime resulting from hardware or software failures can be extremely costly. Built for customers with large-scale, mission-critical computing requirements, Sequent's NUMA-Q 2000 products provide high performance and functionality that are designed to scale up as the customer's needs grow. NUMA-Q 2000 systems are based on industry standards and are designed for easy interoperability with other computing hardware in an open systems environment. NUMA-Q 2000 systems can also be clustered to provide high availability for mission-critical applications. Based on recent customer and partner benchmarks in which NUMA-Q 2000 systems have been compared to SMP and MPP systems manufactured by the Company's competitors, the Company believes that NUMA-Q 2000 delivers the best performance and scalability for large-scale RDBMS-based applications on open systems available today. Hardware Architecture. The Company's Symmetry line of Intel-based SMP systems, introduced in 1987 and currently based on Intel's Pentium architecture, scales from two to 30 processors, with up to 3.5 gigabytes of shared memory and up to 1.7 terabytes of disk storage. The Company's NUMA-Q 2000 systems are designed to scale up to 63 quads (252 Pentium Pro processors) and currently ship in configurations ranging from one to eight quads, with up to 16 gigabytes of memory and 10 terabytes of disk storage per system. The NUMA-Q architecture overcomes the scalability limitations of Symmetry's single-bus SMP architecture by joining together multiple SMP boards with an intelligent, high-speed interconnect called IQ-Link to create systems with a single, coherent view of memory and a single instance of the operating system running across all the quads in the system. In Sequent's NUMA-Q architecture, a quad is a four-way Pentium Pro processor SMP baseboard with features and enhancements added by Sequent to improve its performance and reliability as a component in large data-center systems. IQ-Link, developed by Sequent in cooperation with Vitesse Semiconductor Corporation ("Vitesse Semiconductor"), uses a gallium arsenide data pump to transfer data between quads at the rate of one gigabyte per second. IQ-Link has the ability to monitor the Pentium Pro processor bus on a specific quad and respond to requests for data contained in memory on a different quad. IQ-Link first examines its own large cache to see if the requested data has been temporarily stored there. If it does not find the data in its own cache, it puts a request out to the memory on other quads. All of this activity happens transparently to the database and application software. To an end user, the system looks and behaves like a large SMP system. Over the years, Sequent's scalable architectures have enabled the Company to incorporate technological advances in its product offerings more quickly and inexpensively than manufacturers of computer systems with proprietary central processing units. The Company's ongoing product development efforts leverage advances in open systems technology, including processor enhancements, storage technology, communications and user-interface enhancements. These enhancements directly benefit customers by enabling them to upgrade their installed Sequent systems without altering source programs, retraining users or replacing hardware and software not directly affected by the upgrade. Operating System Software. NUMA-Q 2000 systems are currently designed to run DYNIX/ptx, Sequent's highly scalable version of the UNIX operating system. Core technology in the kernel of DYNIX/ptx enables Sequent systems to provide highly scalable performance as processors are added. Through its initiative with Digital, the Company plans to co-develop a standard, scalable 64-bit UNIX operating system expected to be released in 2000 as well as develop forward compatibility on its current 32-bit DYNIX/ptx operating system. Sequent has also made a significant commitment to support Microsoft's Windows NT operating system. Sequent currently sells low-end and mid-range Windows NT systems (NTX 2000) manufactured by NCR Corporation, typically as application servers in large applications where NUMA-Q 2000 systems are installed as database servers running DYNIX/ptx. Sequent is currently working on the development of Windows NT-based NUMA-Q 2000 servers designed to optimize the capabilities of Windows NT for scalable applications that use either shared memory or distributed memory. Sequent believes that Windows NT could eventually rival UNIX operating systems and even replace UNIX as the preferred open systems operating environment in large corporate data centers. Accordingly, the Company plans to introduce in the second half of 1998 its new NUMA-Q technology that will enable customers to deploy DYNIX/ptx and Windows NT on the same system and dynamically partition the number of quads allocated to each operating system. Communications Products. The Company's systems support communications products that allow NUMA-Q 2000 systems to interconnect with other systems in multi-vendor system environments. These products include hardware that connects to wide and local area networks (WANs and LANs) and software that supports industry standard protocols. In addition to supporting open systems protocols such as TCP/IP, Open Systems Interconnections (OSI) and X.25, Sequent products can communicate directly with IBM systems via Systems Network Architecture (SNA). Sequent's NUMA-Q 2000 systems employ several high speed communications connections, including 100 Megabit-per-second Ethernet, CDDI (a copper wire version of FDDI), ATM, and high speed Synchronous E1/T1, which offer an order of magnitude increase to the bandwidth of previous offerings. Product Development Sequent's research and development programs are focused on advancing hardware and software technologies that strengthen the Company's core product and service offerings. Sequent devotes substantial resources to ensure that its evolving technology roadmap is aligned with the technology direction of industry leading vendors, such as Intel, Microsoft and Oracle. Sequent engages in cooperative technology programs with these and other industry leaders, contributing its knowledge and expertise to the development of their products to optimize their performance with its own products. Sequent's hardware development is focused on using industry-standard components to build the industry's fastest, most reliable and most scalable computer systems designed to run both UNIX and Windows NT software. Scheduled to be introduced during the second half of 1998, the Company's new NUMA-Q product technology will incorporate 400 MHz Pentium Pro quads in systems that scale to 64 processors and allow running both Windows NT and DYNIX/ptx, the Company's own version of UNIX. The Company's software development program is focused on continually improving the performance, reliability and scalability of DYNIX/ptx; providing clustering software that enables high availability; and enhancing its suite of communications and networking software, client/server tools and third-party applications software. In addition, the Company will focus its efforts on co-developing a standard, scalable 64-bit UNIX operating system with Digital as well as continuing to strengthen its relationship with Microsoft to attain the scalability and functionality of Windows NT on its NUMA-Q architecture. Sequent is committed to making continued substantial investments in research and development activities to maintain and enhance its competitive position in a market characterized by rapid technological advances. Manufacturing The Company's manufacturing operations consist of procurement, assembly, test and quality control. Subcontractors are often used to assemble and test subassemblies, such as printed circuit boards. The modular nature of the Company's products, together with the standards-based open architecture, permit ease of manufacture and system configuration. Once integrated, all systems go through a fully operational, continuous burn-in cycle while executing rigorous system stress and diagnostic tests. Final assembly and testing occur only when a specific customer order is due for shipment (because of the broad range of system configurations possible from a relatively few basic modules and the many choices of peripherals). If a failure occurs or a problem of unknown origin arises during work-in-progress testing, it is the policy of the Company to halt shipment of products that may be affected while the Company isolates and corrects the problem and determines whether the problem may extend to other systems in manufacturing or at customer sites. The Company generally obtains most parts and components from single sources, even where multiple sources are available, to maintain quality control and enhance its working relationship with suppliers. These relationships include joint engineering programs for new product development. Certain components used by the Company, including Intel microprocessors, custom VLSI gate arrays and intelligent high speed data switches, are only available from a single source. The Company attempts to reduce the risk of supply interruption through close supplier relationships and greater inventory positions in certain sole-sourced components. The failure of a supplier to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's revenue and profits. Strategic Relationships with Leading Vendors Since Sequent was formed in 1983, the Company has built its business around open systems. Consequently, Sequent maintains strategic relationships with industry-leading manufacturers of components, systems and software. However, the Company has not entered into any material joint development agreements with vendors that involve ownership interests to be retained in developed technology, nor has it entered into any agreements that involve revenue sharing arrangements or any funding responsibilities. Amounts related to joint development relationships included in the Company's research and development costs and expenses for 1997 were insignificant. Increasingly, the Company also resells its partners' products in connection with the sale of the Company's products. Components. Since Sequent began building products based on Intel's microprocessor architecture in 1987, the Company has maintained a close working relationship with Intel. This relationship has enabled the Company to leverage Intel's research and development investment by aligning its technology roadmap with Intel's. It has also enabled Sequent engineers to influence certain design features in successive generations of Intel microprocessors to optimize the performance of those components in the Company's systems. Sequent is currently working closely with Intel on upgrades to the Pentium Pro processor and on Intel's next-generation microprocessor technology. Storage Subsystems. Sequent systems include storage subsystems supplied by leading storage vendors including EMC Corporation, Data General's CLARiiON division and Storage Technology Corporation. Sequent works closely with these vendors to deliver optimal performance of the combined products to customers. Relational Database Management Software. Sequent has strategic development and marketing relationships with major providers of RDBMS software, including Oracle and Informix. The Company works closely with these partners to optimize the performance and scalability of their products for large OLTP and DSS/data warehousing applications. Sequent cooperates with these partners in development programs, joint marketing programs and team sales efforts. The Company has from time to time entered into agreements with various vendors that provide for prepayment of future licenses and royalties based on sales of software. Client/Server Applications Software. Sequent maintains strategic relationships with key providers of packaged client/server applications and development tools for custom client/server applications. Packaged client/server applications provide a standard pre-engineered solution for a common set of functional business problems. Packaged applications offer the potential to trim the total cost of a solution, reduce the time required for implementation, and lower overall project risk. Sequent maintains a number of strategic relationships with software partners who provide products in this area including Oracle, PeopleSoft, SAP and Baan. Nearly half of Sequent's large projects involve the development of custom client/server solutions in situations where packaged applications do not meet business requirements or where customers want a solution that will give them a competitive edge. Sequent maintains strategic relationships with software partners such as Oracle, Informix, Computer Associates and Forte Software, Inc., which provide software tools that enable the development of large custom applications. Third-Party Applications Programs. Numerous software applications from a myriad of vendors are available to Sequent customers. These software products include a broad array of core business applications and address the needs of many different vertical markets, including manufacturing, telecommunications, health care, financial services and state and local governments. To supplement the marketing efforts of third-party suppliers, the Company actively promotes its software partners and their products to end users through joint sales campaigns, demonstrations at its sales offices and trade shows, marketing collateral and joint marketing programs. In addition, Sequent's NTX 2000 systems support the thousands of software applications developed by third-party companies for the Microsoft Windows NT operating system. Consulting and Professional Services During the past five years, Sequent has strengthened its ability to compete at the high end of the open systems market by building a consulting and professional services organization with broad-based knowledge of open systems and specific knowledge and expertise in the design, development and implementation of large-scale database applications. Working directly with customers or together with systems integrators, the Company's professional services consultants help organizations diagnose their information technology problems and design solutions that leverage the best open systems technology and are aligned with the customer's business strategy. Sequent offers a wide range of professional services designed to support the customer through every phase of a project, from advance planning and architecture to technology deployment and ongoing systems support. Professional services include: IT architecture and transition planning; DSS design and implementation; implementation of packaged OLTP applications (such as Oracle Financials & Manufacturing, Baan, and PeopleSoft applications); and enterprise management design and systems administration. In addition, Sequent offers customers education and training programs. Sequent's consulting and professional services capability has enabled Sequent to transform itself from a systems vendor into a provider of solution- oriented offerings. Professional services add significant value to the Company's partnerships with systems integrators and are a key factor in Sequent's ability to win new major accounts. The scope of the Company's professional services expertise enables it to compete successfully for large projects. Having professional services personnel on site in customer accounts also enables the Company to build customer relationships that result in a better understanding of the organization's IT needs and frequently lead to follow-on projects. Customer Services Sequent Customer Services offers its customers a wide range of services in the following four areas of expertise: system support services, environmental support services, business protection support services and management support services. System Support Services is a scalable range of traditional hardware, software and network support services. Sequent provides its customers with the flexibility to choose levels of support based upon a customer's need for risk management and system availability. System Support Services can address support needs for a single system up to those of an entire data center. Environmental Support Services is a range of services to help minimize Sequent customers' risk of downtime caused by environmental factors. The services offered include power audits or surveys, selling uninterrupted power supply units and the planning, designing and building of a computer room. Business Protection Support Services is a suite of services focused on reducing the risk and impact of information technology outages. The services offered include security assessments, disaster recovery and system replacement services. Management Support Services is a flexible set of services that helps Sequent customers manage disparate information technology processes. The services offered include technical support, remote system monitoring and management, and system network administration and management. In addition, hardware maintenance is offered for many third-party peripheral products connected to Sequent systems. As Sequent believes that the quality and reliability of its computer systems are essential to customer satisfaction, high system uptime is a built-in advantage of Sequent's architecture. The Company maintains round-the-clock technical consultation as well as remote log-in capability for diagnosing customer hardware and software problems. In the event a hardware malfunction occurs, systems are equipped with diagnostic tools that allow the Company's service engineers to identify, diagnose and repair a failed component from remote locations. In some cases, in-field hardware service is contracted to third-party suppliers, who rely on Sequent for customer interface and diagnostic support. Sequent has consistently been rated among the best providers of customer service in independent customer surveys. Revenue generated from services and support, including professional services, was 27%, 30% and 28% of total revenue during 1995, 1996 and 1997, respectively. Sales and Distribution Sequent sells its products and services worldwide through its own direct sales force. In addition, the Company formed a new organization in 1997, the Global Business Alliances ("GBA") organization, with an objective of developing and expanding partnerships with specific system integrators. The Company also continues its partnership relationships with Persetel in South Africa and Ssangyong in Korea who have established a strong presence in specific geographic regions. In several countries in Asia-Pacific and elsewhere, the Company also relies on distributors with open systems expertise and a strong market presence. The Company's direct sales force is made up of sales teams, generally consisting of a major account executive ("MAE") and a systems analyst ("SA"). MAEs have primary responsibility for managing the team's accounts; SAs provide technical support during the sales cycle. The sales teams work closely with the Company's professional services organization to identify opportunities to leverage the Company's consulting and professional services capability in their accounts. Sequent currently has 62 sales offices worldwide, including 37 in North America, 12 in Europe and 13 in Asia Pacific. As is common in the computer industry, a significant portion of orders is generally received and shipped in the last month of a fiscal quarter. As a result, the fact that the Company's product backlog is relatively small is not necessarily indicative of sales levels for future periods and is not material to understanding the Company's business. Approximately 19% of the Company's revenue in 1997 was from one customer. At January 3, 1998, the outstanding accounts receivable balance from this customer aggregated approximately $56 million. The Company had no single customer that represented greater than 10% of total revenue in 1996 or 1995. International sales represented approximately 46% of the Company's total revenue in 1997 and 55% in 1996 and 1995. Competition The computer industry is intensely competitive and characterized by rapid technological advances resulting in frequent new product introductions and correspondingly frequent improvements in performance and functionality. Competitive factors related specifically to Sequent's business include product quality and reliability, professional services and customer support capability, price/performance and scalability, compatibility with a customer's existing IT infrastructure, availability of applications software and company size and reputation. Within the commercial segment of the computing market, Sequent competes against IBM, Hewlett-Packard, Sun, Digital and others whose size, reputation, installed base, technical expertise, marketing strength, distribution channels and financial resources make them formidable competitors. Most of these companies also have large professional services organizations and alliances with many hardware and software vendors with whom Sequent has strategic relationships. Although Silicon Graphics, Inc. and Data General have already introduced products based on CC-NUMA technology, Sequent has not experienced significant competitive pressure from these companies. Sequent believes that the performance and scalability of its current products, the strength of its partnerships and the caliber and scope of its consulting and professional services represent key differentiating factors that have enabled the Company to compete successfully against these companies in the past and will enable it to compete successfully against them and others in the future. Patents and Licenses Eight U.S. and three United Kingdom patents have been issued to the Company. The Company has pending approximately twenty additional U.S. patent applications and two foreign applications covering technology incorporated into its products. The Company believes that the rapid pace of technological change in the computer industry makes patent protection less significant than factors such as its continued focus and efforts in research and product development, its technical expertise and the management ability of its personnel. The Company has from time to time been made aware of others in the industry who assert exclusive rights to certain technologies, copyrights or trademarks, usually in the form of an offer to license certain rights for a fee or royalties. The Company's policy is to evaluate such claims on a case-by-case basis. The Company may seek to enter into licensing agreements with companies having or asserting rights to technologies if the Company concludes that such licensing arrangements are necessary or desirable. There can be no assurance that the Company will be able to obtain such licenses or, if obtained, that such licenses will be on favorable terms. Employees At January 3, 1998, the Company employed 2,818 employees of whom 233 were employed as major account executives, 1,625 in sales support, marketing and service, 411 in product development, 233 in manufacturing and 316 in administrative and support services. The Company's continued success will depend in part on its ability to attract and retain highly skilled and motivated personnel who are in great demand throughout the industry. None of the Company's employees are represented by a labor union. All full-time Sequent employees are granted options to acquire Common Stock of the Company. Sequent believes that its employee relations are excellent and believes that its stock incentive plans, its challenging work environment and the opportunities for advancement within the Company are key factors to its ability to attract and retain qualified personnel. Trademarks Sequent, Symmetry, WinServer, Balance, DYNIX, DYNIX/ptx, PTX and ptx/ADMIN are registered trademarks and NUMA-Q, IQ-Link and NTX2000 are trademarks of Sequent Computer Systems, Inc. This Report on Form 10-K also refers to trademarks held by other corporations. Factors That May Affect Future Results Information in this Annual Report on Form 10-K that is not historical information, including information regarding product development schedules and anticipated benefits from the software development and OEM relationship with Digital Equipment Corporation constitutes forward-looking statements that involve a number of risks and uncertainties. Additional forward-looking statements may be made by the Company from time to time. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. The Company's forward-looking statements apply only as of the date made. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. Fluctuations in Quarterly Results. The Company's results of operations have fluctuated significantly from period to period, including on a quarterly basis. The Company has historically experienced strong fourth-quarter orders and revenue and relatively weak first-quarter orders and revenue from customers. A significant portion of the Company's products are shipped in the quarter in which the orders are received. The Company's backlog has historically been relatively small and is not necessarily indicative of future sales levels. As is the case with many high technology companies, a disproportionately large percentage of a quarter's total sales occur in the last month and weeks and days of such quarter. The Company's quarterly sales and operating results, therefore, depend in large part on the volume and timing of orders received during the quarter, which are difficult to forecast. Accordingly, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations could have an immediate material adverse effect on the Company's business, operating results and financial condition. Further, as the Company's sales to major accounts continue to increase, the Company expects that a limited number of large sales may account for a more significant portion of revenue in some quarters, creating greater exposure to possible fluctuations in revenue. In addition, larger orders typically involve substantially longer selling cycles, which makes quarterly forecasts of sales more difficult. The Company may experience significant fluctuations in future quarterly operating results that may be caused by many factors, including demand for the Company's products, introduction or enhancement of products by the Company or its competitors, market acceptance of new products (including its NUMA-Q products), the timing of sales to large accounts, pricing pressures, the mix of products sold and the mix between product and service revenue, lengthy sales cycles, capital spending levels by customers, shipment interruptions due to quality problems and general economic conditions. Because of all of the foregoing factors, it is possible that in some future quarters the Company's operating results will be below the expectations of securities analysts or investors. In such event, the market price of the Company's Common Stock could be materially adversely affected. Competition. The computer business is intensely competitive. The Company competes with a number of companies that have considerably greater financial, marketing, technical and operating resources. The Company competes with, among others, Hewlett-Packard Company ("Hewlett-Packard"), Digital Equipment Corporation ("Digital"), International Business Machines Corporation ("IBM") and Sun Microsystems, Inc. ("Sun"), which have large installed customer bases in many of the markets addressed by the Company. All of these companies offer products that compete with Sequent's products. Silicon Graphics, Inc. ("SGI") and Data General corporation ("Data General") have already introduced products based on CC-NUMA technology and other companies are believed to be developing products based on CC-NUMA technology. Most also have large professional services organizations and alliances with many hardware and software vendors with which Sequent has strategic relationships. No assurances can be given that the Company will have the financial resources, marketing, distribution and service organizations, technical capabilities or depth of key personnel necessary to compete successfully in the future. Product Development. The computer industry is subject to rapid and significant technological change and frequent introductions of new competitive products. To remain competitive, the Company will be required to continue to invest substantially in research and development, enhance its existing products (including its NUMA-Q products), introduce new competitive products and maintain price/performance advantages in its selected markets. New product development may be delayed or unsuccessful due to technical difficulties encountered or resource constraints. There can be no assurance that it will be able to respond adequately to unexpected technological changes in its markets or that future products will be completed on schedule or will be successful. Strategic Relationships. The Company has developed strategic relationships with leading hardware and software providers and is engaged in joint research and product development and marketing arrangements with these companies. The Company's ability to enhance its existing NUMA-Q products and develop new products is significantly dependent on maintaining and strengthening the Company's relationships with leading providers, particularly Intel Corporation ("Intel"), Microsoft Corporation ("Microsoft") and Oracle Corporation ("Oracle"). Many of these hardware and software vendors also have significant development and marketing relationships with the Company's competitors. The Company plans to continue its strategy of developing technology and marketing relationships with these and other leading hardware and software vendors. There can be no assurance that the Company will be successful in its ongoing strategic relationships or that the Company will be able to find additional suitable business relationships as it develops new products. Any failure to continue or expand such relationships could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company's strategic partners, most of which have significantly greater financial and marketing resources than the Company, will not develop and market products in competition with the Company in the future, discontinue their relationships with the Company or form or strengthen arrangements with the Company's competitors. Software Development and OEM Relationship with Digital Equipment Corporation. The Company is working with Digital to co-develop a standard, scalable 64-bit UNIX operating system for Intel's IA-64 architecture. It is also expected that the Company will become Digital's sole supplier of future NUMA-Q products through an Original Equipment Manufacturer (OEM) relationship. The Company and Digital have entered into a Memorandum of Understanding regarding these relationships. There can be no assurance, however, that the software development will be timely and successful or that Digital will purchase Sequent products at significant levels. Supply of Components. Certain components used by the Company, including Intel microprocessors, custom VLSI gate arrays and intelligent high-speed data switches (IQ-Link), are only available from single sources. The Company attempts to reduce the risk of supply interruption through greater inventory positions in sole-source components. Other components, such as memory chips, have occasionally been in short supply throughout the industry. Failure to obtain sole-source or other parts and components in adequate quantities on a timely basis could increase costs or delay shipments and have an adverse effect on the Company's revenues and net income. The adverse effect of a supplier's failure to meet Sequent's requirements may be intensified by the fact that a large portion of orders are received, and the products shipped, at the end of a quarter. Capitalization of Software Development Costs. The Company has made and continues to make significant investments in software development. The amount of expenditures that qualify for capitalization under Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" may vary from period to period as software projects progress through the development life-cycle. These variations could impact the Company's operating results in any given period. Unamortized software development costs were approximately $66.2 million at January 3, 1998. If technological developments or other factors were to jeopardize the realizability of such assets, the Company could be required to write off all or a substantial portion of such capitalized values, which could have a material adverse effect on the Company's results of operations for the period in which the write-off occurs. Prepaid Licenses. The Company has entered into agreements with various software vendors under which the Company has prepaid licenses and royalties for software to be sold by the Company. Prepaid licenses and royalties were approximately $27 million at January 3, 1998. Such prepaid amounts are generally realized by charging cost of products sold for software sales by the Company. The Company's ability to realize these prepaid amounts is contingent on customer demand for the software and sales of the software to Sequent's customers. Management presently believes that software sales will be sufficient to recover the prepaid amount. However, no assurance can be made that such prepaid amounts will be realized. Year 2000 Compliance. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's software programs and microcircuitry that have date-sensitive features may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 Issue affects the Company's internal systems as well as any of the Company's products that include date-sensitive software. The Company is currently conducting a comprehensive review of its computer systems and software products to identify the systems that could be affected by the Year 2000 Issue and is in the process of implementing processes to become Year 2000 compliant. Both internal and external resources are being employed to identify, correct, or reprogram, and test the systems for Year 2000 compliance. The total cost of the project is currently estimated to be approximately $4 million and is being funded through operating cash flows. The Company is expensing all costs associated with identification and resulting changes to these systems, but does not expect the amounts to have a material effect on its financial position or results of operations. The amount expensed in 1997 related to this issue was insignificant. There can be no assurance, however, that the systems or products of other companies on which the Company's systems also rely will be timely converted or that any such failure to convert by a vendor, customer or another company would not have an adverse effect on the Company's systems. Additionally, we cannot completely ensure that the Company's software products do not contain undetected problems associated with Year 2000 compliance. Such problems, should they occur, may result in adverse effects on future operating results. Uncertain Protection of Intellectual Property. The Company's success and ability to compete is dependent in part upon its internally developed technology. While the Company relies on patent, trademark, trade secret and copyright law to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The Company generally enters into confidentiality or license agreements with its employees, consultants and vendors and generally seeks to control access to and distribution of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to develop similar technology independently. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology or that such confidentiality and license agreements will be enforceable. Periodically, the Company has received, and may receive in the future, notices of claims of infringement of other parties' proprietary rights. Although the Company does not believe that its products infringe the proprietary rights of any third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against the Company or that any such assertions or prosecutions (including the costs of litigation) will not materially adversely affect the Company's business, operating results and financial condition. If any claims or actions are asserted against the Company, the Company may seek to license a third party's intellectual property rights. There can be no assurance, however, that under such circumstances, a license would be available on reasonable terms or at all. Availability of Key Personnel; Expansion of Sales Force. The Company's continued growth depends upon its ability to attract, integrate and retain qualified management, technical and sales and support personnel for its operations. During 1996 and 1997, the Company significantly expanded its sales force, from 174 sales personnel as of December 31, 1995 to 245 sales personnel as of January 3, 1998. Competition for such personnel is intense, and the Company may find it difficult to attract such personnel in a timely and efficient manner or to retain and integrate such personnel. This competition could adversely affect the Company's ability to expand and manage its sales force to sell its NUMA-Q products and professional services to large accounts and to develop marketing relationships with large systems integrators. Manufacturing Risks. The Company's products are designed and manufactured for high reliability. If flaws in design, production, assembly or testing occur on the part of Sequent or its suppliers, Sequent may experience a rate of failure in its products that results in substantial repair or replacement costs and potential damage to its reputation. There can be no assurance that Sequent's efforts to monitor, develop and implement appropriate test and manufacturing processes for its products will be sufficient to permit Sequent to avoid a rate of failure in its products that results in substantial delays in shipment, significant repair or replacement costs and potential damage to Sequent's reputation, any of which could have a material adverse effect on Sequent's business, operating results and financial condition. International Operations. The Company derived 46% of its total revenues from foreign customers in the year ended January 3, 1998, a substantial portion of which was denominated in currencies other than U.S. dollars. Most of the Company's international sales are in Europe. International operations are subject to various risks, including exposure to currency fluctuations, the greater difficulty of administering business abroad and the need to comply with a wide variety of international and United States export laws and regulatory requirements. Volatility of Stock Prices. There has been a history of significant volatility in the market prices of the Common Stock of electronics companies, including that of the Company, and it is likely that the market price of the Company's Common Stock will continue to be subject to significant fluctuations. Factors such as the timing and market acceptance of new product introductions by the Company, the introduction of new products by the Company's competitors, variations in quarterly operating results, changes in securities analysts' recommendations regarding the Company's Common Stock, developments in the electronics industry and general economic conditions may have a significant impact on the market price of the Company's Common Stock. In addition, the equity markets in recent years have experienced significant price and volume fluctuations that have affected the market prices of technology companies and that have often been unrelated to the operating performance of such companies. Item 2. Properties. The Company's headquarters and its product development and manufacturing operations are located in facilities totaling approximately 560,000 square feet in Beaverton, Oregon, 10 miles west of Portland. The Company occupies these facilities under leases which expire from 1999 to 2006. On the expiration dates of these leases, the Company generally has the option of purchasing the leased facilities at fair market value or renewing the leases for an additional five years. In addition, the Company owns 38 acres of undeveloped land in Beaverton held in anticipation of future facility growth requirements. The Company also leases for sales, marketing and customer support offices in locations throughout the United States, Europe, Canada and Asia Pacific. The Company anticipates that it will continue to expand its corporate and field facilities as business growth warrants. The Company is currently expanding its headquarters with the construction of a new building which began in the fall of 1997. The Company is financing the approximately $18 million of construction costs through an operating lease transaction. In addition, the Company is in the process of assigning its existing options to acquire three buildings on its headquarters site at an aggregate cost of approximately $24 million to a third party. The Company intends to lease the buildings from the third party. Item 3. Legal Proceedings. There are no material pending legal proceedings involving the Company. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 4(a). Executive Officers of the Registrant. Name Age Position Karl C. Powell, Jr. 54 Chairman and Chief Executive Officer, Director John McAdam 47 President and Chief Operating Officer, Director Robert S. Gregg 44 Sr. Vice President of Finance and Legal and Chief Financial Officer Steve Chen 54 Executive Vice President and Chief Technology Officer, Director Peter O'Neill 43 Sr. Vice President of Worldwide Sales and Professional Services Mr. Powell, a co-founder of the Company, is Chairman and Chief Executive Officer, and has been a director since 1983. Mr. Powell has served as the Company's sole Chief Executive Officer or shared the Office of the Chief Executive with the co-founder of the Company since the Company's inception. From 1974 to 1983, Mr. Powell was employed by Intel Corporation, where his most recent position was General Manager for Microprocessor Operations. Mr. Powell served on the National Board of Directors of the American Electronics Association from 1985 to 1986. He holds a B.S. degree in mechanical engineering from the US Merchant Marine Academy. Mr. McAdam joined the Company in August 1989 as U.K. Sales Director. He became U.K. General Manager in January 1991, Vice President and General Manager of European Operations in October 1992, and Senior Vice President of European and Asian Operations in January 1994. He was promoted to President and Chief Operating Officer in February 1995, and was elected to the Board of Directors in November 1995. Prior to joining the Company Mr. McAdam was employed for 10 years by Data General U.K. Ltd., serving most recently as Regional Manager, Public Sector, Finance and Government Market. Mr. McAdam holds a B.Sc. first class honors degree in Computer Sciences from Glasgow University. Mr. Gregg joined the Company in 1983 as its Controller. He became Director of Finance in 1984 and Vice President of Finance and Chief Financial Officer in March 1986. He was promoted to Senior Vice President of Finance and Legal and Chief Financial Officer in February 1995. Prior to joining the Company, Mr. Gregg spent eight years at the public accounting firm of Price Waterhouse LLP. Mr. Gregg holds a B.S. degree in business and accounting from the University of Oregon. Dr. Chen joined the Company in 1996 as its Executive Vice President and Chief Technology Officer and as a member of the Board of Directors. Prior to joining the Company, Dr. Chen was a co-founder of SuperComputer International (SCI), later renamed Chen Systems, which was recently acquired by Sequent. Prior to founding SCI, Dr. Chen was President and CEO of Supercomputer Systems, Inc. (SSI). Previous to this, Dr. Chen was employed for eight years at Cray Research, Inc., serving most recently as Senior Vice President. Dr. Chen holds a Ph.D. in computing science from the University of Illinois, a M.S. degree in electrical engineering from Villanova University and a B.S. degree in electrical engineering from the National Taiwan University. Mr. O'Neill joined the Company in 1990 initially as a District Manager. He was promoted to Sales Director followed by Managing Director for the UK. Mr. O'Neill was promoted to Vice President of American Operations in 1997 and to Sr. Vice President of Worldwide Sales and Professional Services in 1998. Prior to joining the Company, Mr. O'Neill was a District Manager at Stratus Computer Systems Ltd. and prior to that he served four years as a Major Accounts District Manager at Hewlett-Packard Ltd. Mr. O'Neill holds a B.S. (Hons) degree in physics from the University of Aston in Birmingham. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The information required by this item is included under "Market Information (unaudited)" in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data. Information with respect to selected financial data is included under "Selected Financial Data" in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information with respect to management's discussion and analysis of financial condition and results of operations is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. Information with respect to selected quarterly financial data is included under "Quarterly Financial Data (unaudited)" in the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. The other information required by this item is included under "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" as listed in item 14 of this report and in the Company's 1997 Annual Report to Shareholders which is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to directors of the Company will be included under "Election of Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report. Item 11. Executive Compensation. Information with respect to executive compensation will be included under "Summary Compensation Table", "Stock Option Grants in Last Fiscal Year", "Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option Values" and under "Executive Compensation," and "Certain Transactions" in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information with respect to security ownership of certain beneficial owners and management will be included under "Voting Securities and Principal Shareholders" and "Election of Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information with respect to transactions with management will be included under "Certain Transactions" in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial Statements. The following financial statements are included in the Company's 1997 Annual Report to Shareholders: Sequent Computer Systems, Inc. and Subsidiaries: Consolidated Statements of Operations - Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 Consolidated Balance Sheets - January 3, 1998 and December 28, 1996 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 Consolidated Statements of Cash Flows - Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 Notes to Consolidated Financial Statements Report of Independent Accountants (a)(2) Financial Statement Schedules. The following schedules and report of independent accountants are filed herewith: Page in this report on Form 10-K Schedule II Valuation and Qualifying Accounts F-1 Report of Independent Accountants on Financial Statement Schedules F-2 All other schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes thereto. (a)(3) Exhibits. Exhibit Number Description 3.1 Articles of Incorporation, as amended, and Articles of Merger of Sequent Computer Systems, Inc. (the "Company"). (Incorporated by reference to Exhibit 4A to the Company's Registration Statement on Form S-8 (File no. 33-63972).) 3.2 Bylaws, as amended, of the Company. (Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-8 (File no. 33-39315).) 4.1 Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company agrees to furnish any other long term debt agreements to the Commission upon request. 10.1A Amended and Restated Lease Agreement between KC Woodside and the Company, as amended, dated May 8, 1987 ("First Building Lease"), and related agreements. (Incorporated by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1987 (File no. 0-15627).) 10.1B Second Amendment to First Building Lease, dated July 28, 1988. (Incorporated by reference to Exhibit 10.3B to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0-15627).) 10.1C Third Amendment to First Building Lease, dated July 28, 1989. (Incorporated by reference to Exhibit 10.3C to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0-15627).) 10.1D Fourth Amendment to First Building Lease, dated September 20, 1991. (Incorporated by reference to Exhibit 10.1D to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1E Fifth Amendment to First Building Lease, dated December 2, 1992. (Incorporated by reference to Exhibit 10.1E to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1F Sixth Amendment to First Building Lease, dated April 5, 1993. (Incorporated by reference to Exhibit 10.1F to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File no. 0-15627).) 10.1G Seventh Amendment to First Building Lease, dated September 30, 1997. 10.1H Lease Agreement between KC Woodside and the Company, dated May 8, 1987 ("Second Building Lease"). (Incorporated by reference to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1987 (File no. 0-15627).) 10.1I First Amendment to Second Building Lease, dated July 28, 1988. (Incorporated by reference to Exhibit 10.3E to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0-15627).) 10.1J Second Amendment to Second Building Lease, dated September 13, 1991. (Incorporated by reference to Exhibit 10.1G to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) Exhibit Number Description 10.1K Third Amendment to Second Building Lease, dated December 2, 1992. (Incorporated by reference to Exhibit 10.1L to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1L Fourth Amendment to Second Building Lease, dated April 5, 1993. (Incorporated by reference to Exhibit 10.1K to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File no. 0-15627).) 10.1M Fifth Amendment to Second Building Lease, dated September 30, 1997. 10.1N Lease Agreement, dated July 28, 1988 between KC Woodside and the Company ("Third Building Lease"). (Incorporated by reference to Exhibit 10.3F to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0-15627).) 10.1O First Amendment to Third Building Lease, dated July 28, 1989. (Incorporated by reference to Exhibit 10.3G to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0-15627).) 10.1P Second Amendment to Third Building Lease, dated September 13, 1991. (Incorporated by reference to Exhibit 10.1J to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1Q Third Amendment to Third Building Lease, dated December 2, 1992. (Incorporated by reference to Exhibit 10.1M to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1R Fourth Amendment to Third Building Lease, dated April 5, 1993. (Incorporated by reference to Exhibit 10.1P to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File no. 0-15627).) 10.1S Fifth Amendment to Third Building Lease, dated September 30, 1997. 10.1T Lease Agreement, dated July 28, 1989 between KC Woodside and the Company ("Fourth Building Lease"). (Incorporated by reference to Exhibit 10.3H to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (File no. 0- 15627).) 10.1U First Amendment to Fourth Building Lease, dated September 13, 1991. (Incorporated by reference to Exhibit 10.1P to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1V Second Amendment to Fourth Building Lease, dated August 13, 1992. (Incorporated by reference to Exhibit 10.1P to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1W Third Amendment to Fourth Building Lease, dated December 2, 1992. (Incorporated by reference to Exhibit 10.1Q to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1X Fourth Amendment to Fourth Building Lease, dated April 5, 1993. (Incorporated by reference to Exhibit 10.1U to the Company's Annual Report on Form 10-K for fiscal year ended January 1, 1994 (File no. 0-15627).) Exhibit Number Description 10.1Y Fifth Amendment to Fourth Building Lease, dated September 30, 1997. 10.1Z Triple Net Lease, dated July 9, 1990 between KC Woodside and the Company ("Fifth Building Lease"). (Incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1990 (File no. 0-15627).) 10.1aa First Amendment to Fifth Building Lease, dated April 29, 1991. (Incorporated by reference to Exhibit 10.1N to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1bb Second Amendment to Fifth Building Lease, dated April 29, 1991. (Incorporated by reference to Exhibit 10.1O to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1cc Third Amendment to Fifth Building Lease, dated June 10, 1991. (Incorporated by reference to Exhibit 10.1P to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1dd Fourth Amendment to the Fifth Building Lease, dated July 3, 1991. (Incorporated by reference to Exhibit 10.1Q to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1ee Fifth Amendment to Fifth Building Lease, dated September 13, 1991. (Incorporated by reference to Exhibit 10.1R to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (File no. 0-15627).) 10.1ff Sixth Amendment to Fifth Building Lease, dated December 2, 1992. (Incorporated by reference to Exhibit 10.1X to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1gg Seventh Amendment to Fifth Building Lease, dated April 5, 1993. (Incorporated by reference to Exhibit 10.1cc to the Company's Annual Report on Form 10-K for fiscal year ended January 1, 1994 (File no. 0-15627).) 10.1hh Lease Agreement between KC Woodside and the Company, dated June 10, 1991 (Umpqua). (Incorporated by reference to Exhibit 10.1Y to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1ii Lease Agreement between KC Woodside and the Company, dated June 10, 1991 (Charles). (Incorporated by reference to Exhibit 10.1Z to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1jj First Amendment to Lease, dated October 31, 1991 (Charles). (Incorporated by reference to Exhibit 10.1aa to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1kk Second Amendment to Lease, dated May 6, 1992 (Charles). (Incorporated by reference to Exhibit 10.1bb to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1ll Third Amendment to Lease, dated January 8, 1993 (Charles). (Incorporated by reference to Exhibit 10.1cc to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) Exhibit Number Description 10.1mm Lease Agreement between KC Woodside and the Company, dated June 10, 1991 (S. Platte). (Incorporated by reference to Exhibit 10.1dd to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1nn First Amendment to Lease, dated May 12, 1992 (Guadalupe). (Incorporated by reference to Exhibit 10.1ff to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1oo Business park Lease between KC Woodside and the Company, dated June 10, 1991 (Hillsborough). (Incorporated by reference to Exhibit 10.1gg to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1pp Fourth Amendment to Lease, dated July 21, 1995 (Charles). (Incorporated by reference to Exhibit 10.1dd to the Company's Annual Report on 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1qq First Amendment to Lease, dated July 21, 1995 (South Platte). (Incorporated by reference to Exhibit 10.1ee to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1rr Second Amendment to Lease, dated March 1, 1997 (South Platte). 10.1ss Second Amendment to Lease, dated July 21, 1995 (Guadalupe). (Incorporated by reference to Exhibit 10.gg to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.1tt Lease Agreement between KC Woodside and the Company, dated January 15, 1996 (Guadalupe), as amended February 1, 1996 and October 1, 1996. (Incorporated by reference to Exhibit 10.1pp to the Company's Annual Report on Form 10-K for fiscal year ended December 28, 1996 (File no. 0-15627).) 10.2 Master Software License Agreement between Unix System Laboratories, Inc. (formerly owned by American Telephone & Telegraph Company) and the Company, dated effective as of April 18, 1985. (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.2A Sublicensing Agreement between Unix Systems Laboratories, Inc. and the Company, dated January 28, 1986, as amended June 22, 1987 and August 10, 1987. (Incorporated by reference to Exhibit 10.2A to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.2B Substitution Agreement between Unix System Laboratories, Inc. and the Company, dated January 28, 1986. (Incorporated by reference to Exhibit 10.2B to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) 10.2C Amendment dated November 13, 1992 to Master Software License Agreement and Sublicensing Agreement with Unix System Laboratories, Inc. 10.2D License Agreement, dated July 15, 1983 between The Regents of University of California and the Company, as amended July 2, 1986. (Incorporated by reference to Exhibit 10.2C to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) Exhibit Number Description + 10.3 Distributorship Agreement between the Company and Oracle Corporation, dated March 31, 1987, as amended on December 29, 1988, August 30, 1989, May 28, 1990, May 31, 1991 and June 30, 1991. (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Company's Annual Report on Form 10-K for fiscal year ended January 2, 1993 (File no. 0-15627).) * 10.4 Aircraft Lease Agreement between the Company and CP Transportation, Inc., dated October 1, 1996. (Incorporated by reference to Exhibit 10.4A to the Company's Annual Report on Form 10-K for fiscal year ended December 28, 1996 (File no. 0-15627).) * 10.5 Sequent Computer Systems, Inc. Incentive Stock Option Plan and Nonstatutory Stock Option Plan, adopted March 20, 1984, as amended. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File no. 33- 33444).) * 10.6 Sequent Computer Systems, Inc. 1987 Employee Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File no. 33- 33444).) * 10.7 Sequent Computer Systems, Inc. 1987 Nonstatutory Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File no. 33-33444).) * 10.8 Sequent Computer Systems, Inc. 1989 Stock Incentive Plan, as amended. (Incorporated by reference to Appendix A to the Company's Proxy Statement for its 1994 Annual Meeting of Shareholders). * 10.9 Sequent Computer Systems, Inc. 1995 Stock Incentive Plan, as amended. (Incorporated by reference to Appendix A to the Company's Proxy Statement dated March 23, 1995). * 10.10 Sequent Computer Systems, Inc. 1997 Stock Option Plan, as amended. (Incorporated by reference to Appendix A to the Company's Proxy Statement dated March 27, 1997). * 10.11 Agreement between Team Scandia, Inc. and Sequent Computer Systems, Inc., dated January 23, 1998. * 10.12 DP Applications, Inc. Restricted Stock Purchase Agreement, dated December 2, 1996. (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for fiscal year ended December 28, 1996 (File no. 0-15627).) * 10.13 DP Applications, Inc. and the Robert W. Wilmot and Mary J. Wilmot, trustees of the Wilmot Living Trust, Restricted Stock Purchase Agreement, dated November 17, 1997. 11 Statement regarding computation of earnings per share. 13 1997 Annual Report to Shareholders (portions not incorporated by reference are not deemed filed). 21 Subsidiaries. 23 Consent of Independent Public Accountants. 24 Powers of Attorney. Exhibit Number Description 27 Financial Data Schedule. ________________________ + Confidential treatment for portions of this contract has been previously requested of the Commission. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(a) (3) of this Report. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of fiscal 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Sequent Computer Systems, Inc. Date: March 26, 1998 By: /s/Robert S. Gregg Robert S. Gregg Sr. Vice President of Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 1998. Signature Title /s/Karl C. Powell, Jr. Chairman and Chief Executive Officer (Karl C. Powell, Jr.) and Director (Principal Executive Officer) /s/Robert S. Gregg Sr. Vice President of Finance and Legal (Robert S. Gregg) and Chief Financial Officer (Principal Accounting and Financial Officer) /s/Steve Chen Director (Steve Chen) /s/John McAdam Director (John McAdam) MICHAEL S. SCOTT MORTON* (Michael S. Scott Morton) Director ROBERT W. WILMOT* (Robert W. Wilmot) Director By: /s/Robert S. Gregg* Robert S. Gregg, Attorney-in-fact SCHEDULE II SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions Additions Balance at Charged to Charged to Write-offs Balance at Beginning of Costs and Other Accts. Net of End of Period Expenses Describe (1) Recoveries Period Year ended Dec. 30, 1995 Allowance for doubtful accounts $ 2,333 $ 1,089 $ (18) $ 588 $ 2,816 Accumulated amortization capitalized software $41,690 $16,618 $ 0 $ 0 $58,308 Year ended Dec. 28, 1996 Allowance for doubtful accounts $ 2,816 $ 317 $(315) $ 12 $ 2,806 Accumulated amortization capitalized software $58,308 $19,984 $ 0 $39,846 $38,446 Year ended Jan. 3, 1998 Allowance for doubtful accounts $ 2,806 $ 2,694 $ (8) $ 2,371 $ 3,121 Accumulated amortization capitalized software $38,446 $27,570 $ 0 $ 0 $66,016
(1) Foreign currency translation adjustment REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Sequent Computer Systems, Inc. Our audits of the consolidated financial statements referred to in our report dated January 28, 1998 appearing in the 1997 Annual Report to Shareholders of Sequent Computer Systems, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Portland, Oregon January 28, 1998 EXHIBIT 11 SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES STATEMENT SHOWING CALCULATION OF THE BASIC AND DILUTED EARNINGS PER SHARE (In thousands, except per share amounts)
Income Shares Per-Share (Numerator) (Denominator) Amount Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 1997 1996 1995 1997 1996 1995 1997 1996 1995 Basic EPS Income available to common shareholders $38,687 $ 7,771 $35,073 37,899 33,641 32,228 $ 1.02 $ 0.23 $ 1.09 Effect of Dilutive Securities Stock options 2,653 723 1,408 Employee stock purchase plan 156 55 31 Debentures, if dilutive 116 374 144 447 Diluted EPS Income available to common shareholders + assumed conversions $38,803 $ 7,771 $35,447 40,852 34,419 34,114 $ 0.95 $ 0.23 $ 1.04
EXHIBIT 13 SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (In thousands, except per share amounts)
Fiscal Year Ended Jan. 3, Dec. 28, Dec. 30, Dec. 31, Jan. 1, 1998 1996 1995 1994 1994 OPERATIONS DATA Total revenue $ 833,886 $ 595,362 $ 540,345 $ 450,823 $ 353,806 Income (loss) before income taxes $ 50,512 $ 10,676 $ 47,327 $ 38,800 $ (6,331) Net income (loss) $ 38,687 $ 7,771 $ 35,073 $ 33,134 $ (7,524) Net income (loss) per share - basic $ 1.02 $ .23 $ 1.09 $ 1.08 $ (.26) Net income (loss) per share - diluted $ .95 $ .23 $ 1.04 $ 1.03 $ (.26) BALANCE SHEET DATA Working capital $ 399,898 $ 183,428 $ 214,749 $ 168,468 $ 134,156 Total assets $ 890,845 $ 612,009 $ 503,923 $ 435,977 $ 375,424 Long-term obligations $ 9,910 $ 16,503 $ 9,106 $ 10,341 $ 10,906 Shareholders' equity $ 600,784 $ 374,809 $ 353,188 $ 291,195 $ 243,488
SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUE (dollars in millions) Fiscal Year Ended January 3, December 28, December 30, 1998 1996 1995 Total Revenue $ 833.9 $ 595.4 $ 540.3 Product $ 600.5 $ 414.5 $ 395.9 Service 233.4 180.9 144.4 US $ 449.4 $ 270.6 $ 244.0 International 384.5 324.8 296.3 Net Income $ 38.7 $ 7.8 $ 35.1 In 1997, the Company's revenue and net income increased significantly over 1996 and 1995. Revenue increased approximately 40% and 54% over 1996 and 1995, respectively. 1997 net income increased almost five times over net income in 1996. In 1996, net income was greatly impacted by the significant investments made by the Company to develop and market its NUMA-Q product line and to expand its direct sales force. With initial shipments in December 1996, sales of the Company's NUMA-Q 2000 systems in 1997 represented approximately 68% of the Company's system sales for the year. In addition, strong revenue growth in the Company's service organizations, both professional and customer service, contributed to the overall significant revenue increase in 1997. Product revenue increased approximately 45% and 52% in 1997 over 1996 and 1995, respectively. Also contributing to the overall increase in the Company's total revenue was strong growth in the service organizations, resulting from increased numbers of project sales with maintenance and consulting contracts. Service revenue increased approximately 29% and 62% in 1997 over 1996 and 1995, respectively. Revenues from foreign operations increased approximately 18% and 30% in 1997 over 1996 and 1995, respectively. However, as a percentage of total revenue, foreign revenue decreased from 55% in 1995 and 1996 to approximately 46% in 1997, primarily a result of the substantial growth rate in the Company's domestic operations. The following table sets forth certain operating data as a percentage of total revenue: Fiscal Year Ended January 3 December 28 December 30, 1998 1996 1995 Revenue: Product 72.0% 69.6% 73.3% Service 28.0 30.4 26.7 Total revenue 100.0 100.0 100.0 Cost of product and service 57.6 56.7 54.8 Gross profit 42.4 43.3 45.2 Operating expenses: Research and development 7.8 9.0 7.5 Selling, general and administrative 28.1 32.1 28.7 Total operating expenses 35.9 41.1 36.2 Operating income 6.5 2.2 9.0 Interest income (expense), net (0.1) 0.0 0.2 Other expense, net (0.3) (0.4) (0.4) Income before provision for income taxes 6.1 1.8 8.8 Provision for income taxes 1.5 0.5 2.3 Net income 4.6% 1.3% 6.5% COST OF SALES/GROSS MARGINS Fiscal Year Ended January 3, December 28, December 30, 1998 1996 1995 Cost of product sold as a percentage of product revenue 51% 48% 48% Cost of service as a percentage of service revenue 74 77 75 Total cost of sales as a percentage of total revenue 58 57 55 The factors influencing gross margins in a given period include unit volumes (which affect economies of scale), product configuration mix, changes in component and manufacturing costs, product pricing and the mix between product and service revenue. Total cost of sales as a percentage of total revenue increased slightly in both 1997 and 1996, primarily due to product cost of sales, which increased as a percentage of product revenue. In 1997, the Company's total product cost of sales was negatively impacted by an increase in sales of third party product which yield lower gross margins than Sequent products. In addition, the Company's margins were affected by sales of Symmetry products which, as expected, continue to represent a lower percentage of the Company's overall sales, and which yield lower gross margins than the Company's NUMA-Q products. Offsetting these lower margins were increased sales of higher margin NUMA-Q products in 1997, decreases in service cost of sales as a percentage of service revenue, and a greater percentage of total revenues from products versus services. The Company's product gross margins were approximately 49% in 1997 and 52% in 1996 and 1995. Service margins were approximately 26% in 1997 and 23% and 25% in 1996 and 1995, respectively. RESEARCH AND DEVELOPMENT (dollars in millions) Fiscal Year Ended January 3, December 28, December 30, 1998 1996 1995 Research and development expense $65.4 $53.7 $40.9 As a percentage of total revenue 8% 9% 8% Software costs capitalized $34.2 $34.2 $23.4 Research and development expense continues to increase in amount; approximately 22% in 1997 compared to 1996 and 31% in 1996 compared to 1995. During 1996, the Company made substantial investments in the development of its new NUMA-Q product line. In 1997, the Company continued to make enhancements to the NUMA-Q architecture, in addition to ongoing focus on development of its next-generation products, including the next phase in the development of the NUMA-Q architecture which is expected to allow running Unix and Windows NT applications on a single system with shared storage and other resources. SELLING, GENERAL AND ADMINISTRATIVE (dollars in millions) Fiscal Year Ended January 3, December 28, December 30, 1998 1996 1995 Selling, general and administrative $234.0 $191.1 $155.0 As a percentage of total revenue 28% 32% 29% Selling, general and administrative expenses increased in amount during 1997 over 1996 primarily due to the increased activity associated with the growth in overall sales volume. As a percentage of total revenue, however, these expenses decreased in 1997 compared to 1996. In 1996, the Company was just beginning a major product transition and was investing heavily in its sales and professional services infrastructure. Substantial revenue growth of approximately 40% in 1997, compared to only a 22% growth in selling, general and administrative expenses, resulted in the decrease in expenses as a percentage of total revenue. INTEREST AND OTHER, NET (dollars in millions) Fiscal Year Ended January 3, December 28, December 30, 1998 1996 1995 Interest income $ 5.1 $ 3.0 $ 5.3 Interest expense $ 6.1 $ 3.2 $ 4.2 Other expense, net $(2.3) $(2.0) $(2.3) Interest income is primarily generated from invested cash and cash equivalents and restricted deposits held at foreign and domestic banks. The increase in interest income in 1997 is a result of investment of cash proceeds from the Company's August stock offering. Interest expense includes costs related to foreign currency hedging loans, interim short-term borrowings, convertible debentures and capital lease obligations. Throughout 1997, the Company increased the use of its domestic line of credit for continued investment in its NUMA-Q product line and development of its next-generation products. These borrowings contributed to the increase in interest expense in 1997 over 1996. Another factor contributing to the increase in interest expense was additional borrowings with foreign banks for hedging purposes. Other expense consists primarily of net realized and unrealized foreign exchange gains and losses. INCOME TAXES The Company provided $11.8 million for income taxes in 1997 on a net profit before tax of $50.5 million. The difference between the statutory rate and the effective tax rate is principally due to the benefit from the research tax credit and the Company's Foreign Sales Corporation. The 1997 effective tax rate of 23.4% compares to effective rates of 27.2% in 1996 and 25.9% in 1995. LIQUIDITY AND CAPITAL RESOURCES Working capital was $399.9 million at January 3, 1998 compared to $183.4 million at December 28, 1996. The Company's current ratio at January 3, 1998 and December 28, 1996 was 2.5:1 and 1.9:1, respectively. Cash and cash equivalents increased $95.3 million during 1997. The increase resulted primarily from issuances of common stock of approximately $185 million and operating cash flow of approximately $24 million offset by investing activities. Investments in property and equipment and capitalized software approximated $59 million and $34 million, respectively. Additionally, the Company's restricted deposits, which represent proceeds from short-term borrowing arrangements used to hedge foreign currency exposures, increased by approximately $24 million. The Company has a $20 million receivable sales facility with a group of banks. At January 3, 1998, accounts receivable in the accompanying consolidated balance sheet is net of $20 million received by the Company under this agreement to sell its domestic accounts receivable. Additionally, the Company entered into two transactions to factor certain foreign receivables, without recourse, at an average rate of 7.2%. As of January 3, 1998, $4.7 million relating to these transactions was netted against accounts receivable in the accompanying consolidated balance sheet. The Company maintains an $80 million revolving line of credit agreement. The line is unsecured and extends through May 29, 1998. The line contains certain financial covenants and prohibits the Company from paying dividends without the lenders' consent. In August 1997, the Company used approximately $30 million of the net proceeds from the stock offering to repay the outstanding balance in full. The Company maintains a short-term borrowing agreement with a foreign bank to cover foreign currency exposures. Maximum borrowings allowed under the foreign bank agreement were $81.8 million, of which $68.8 million was outstanding at January 3, 1998 (based on currency exchange rates on such date). The Company also maintains a miscellaneous borrowing arrangement with a foreign bank. At January 3, 1998 $1.1 million was outstanding under this agreement. Management expects that current funds from operations and the bank lines of credit will provide adequate resources to meet the Company's anticipated operational cash requirements for at least the next twelve months. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's software programs and microcircuitry that have date-sensitive features may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 Issue affects the Company's internal systems as well as any of the Company's products that include date-sensitive software. The Company is currently conducting a comprehensive review of its computer systems and software products to identify the systems that could be affected by the Year 2000 Issue and is in the process of implementing and conducting the required processes to become Year 2000 compliant. Both internal and external resources are being employed to identify, correct or reprogram, and test the systems for Year 2000 compliance. The total cost of the project is currently estimated to be approximately $4 million and is being funded through operating cash flows. The Company is expensing all costs associated with identification and resulting changes to these systems, but does not expect the amounts to have a material effect on its financial position or results of operations. The amount expensed in 1997 related to this issue was insignificant. There can be no assurance, however, that the systems or products of other companies on which the Company's systems also rely will be timely converted or that any such failure to convert by a vendor, customer or another company would not have an adverse effect on the Company's systems. Additionally, we cannot completely ensure that the Company's software products do not contain undetected problems associated with Year 2000 compliance. Such problems, should they occur, may result in adverse effects on future operating results. FORWARD-LOOKING STATEMENTS The Chairman's Letter, Management's Discussion and Analysis of Financial Conditions and Results of Operations and "Sequent: The Data Center Alternative" contain information regarding the Company's expectations or goals as to: the market for the Company's products; development and release of new products; anticipated benefits from the software development and OEM relationship with Digital Equipment Corporation ("Digital"); estimated costs to achieve Year 2000 compliance; growth, profitability improvements and increase in shareholder value; and operational cash requirements. These statements are forward-looking statements that involve a number of risks and uncertainties, and actual results may differ materially from the forward- looking statements. Factors that could adversely affect the market for the Company's products include, but are not limited to, business conditions and growth in the electronics industry and general economies, both domestic and international, and lower than expected capital expenditure levels by customers. Factors that could cause new product development to be delayed or not successful include, but are not limited to, technological difficulties encountered in product development and resource constraints. Factors that could adversely affect the anticipated benefits from the software development and OEM relationship with Digital include, but are not limited to, the failure to develop the products to be covered by the OEM relationship and the failure of Digital to purchase products at the levels anticipated. Factors that could adversely affect the estimated costs to achieve Year 2000 compliance are set forth above under "Impact of the Year 2000 Issue." Factors that could adversely affect the Company's growth, profitability, shareholder value and operational cash requirements include, but are not limited to, the failure to timely complete product development and release new products; lower than expected customer acceptance of NUMA-Q 2000 and future products; significant fluctuations in quarterly operating results; lower than expected customer orders; delays in receipt of orders or cancellation of orders; competitive factors, including increased competition, new product offerings by competitors and price pressures; the discontinuance of relationships with the Company's strategic partners; the unavailability of third party parts and supplies at reasonable prices; changes in product mix and the mix between product and service revenue; and product shipment interruptions due to manufacturing problems. The Company's forward-looking statements apply only as of the date made. The Company undertakes no obligation to publicly release the result of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal Year Ended Jan. 3, Dec. 28, Dec. 30, 1998 1996 1995 Revenue: Product $ 600,496 $ 414,418 $ 395,941 Service 233,390 180,944 144,404 Total revenue 833,886 595,362 540,345 Costs and expenses: Cost of products sold 309,016 197,702 188,232 Cost of service revenue 171,595 139,983 107,721 Research and development 65,414 53,733 40,923 Selling, general and administrative 234,037 191,069 154,950 Total costs and expenses 780,062 582,487 491,826 Operating income 53,824 12,875 48,519 Interest income 5,096 3,007 5,340 Interest expense (6,086) (3,187) (4,207) Other expense, net (2,322) (2,019) (2,325) Income before provision for income taxes 50,512 10,676 47,327 Provision for income taxes 11,825 2,905 12,254 Net income $ 38,687 $ 7,771 $ 35,073 Net income per share - basic (Note 1) $ 1.02 $ 0.23 $ 1.09 Net income per share - diluted (Note 1) $ 0.95 $ 0.23 $ 1.04 The accompanying notes to consolidated financial statements are an integral part of these statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) Jan. 3, 1998 Dec. 28, 1996 ASSETS Current assets: Cash and cash equivalents $ 133,299 $ 37,979 Restricted deposits 68,791 44,655 Receivables, net 328,884 209,752 Inventories 112,228 74,491 Prepaid royalties and other 28,147 30,577 Total current assets 671,349 397,454 Property and equipment, net 134,728 133,838 Capitalized software costs, net 66,244 59,567 Other assets, net 18,524 21,150 Total assets $ 890,845 $ 612,009 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 69,893 $ 59,925 Accounts payable and other 132,325 88,119 Accrued payroll 22,843 24,853 Unearned revenue 40,946 30,787 Income taxes payable 3,134 3,017 Current obligations under capital leases and debt 2,310 7,325 Total current liabilities 271,451 214,026 Other accrued expenses 8,700 6,671 Long-term obligations under capital leases and debt 9,910 16,503 Total liabilities 290,061 237,200 Commitments and contingencies (Notes 5, 6, 10 and 12) Shareholders' equity: Common stock, $.01 par value, 100,000 shares authorized, 42,962 and 34,188 shares outstanding 430 342 Paid-in capital 508,858 315,316 Retained earnings 99,402 60,715 Foreign currency translation adjustment (7,906) (1,564) Total shareholders' equity 600,784 374,809 Total liabilities and shareholders' equity $ 890,845 $ 612,009 The accompanying notes to consolidated financial statements are an integral part of these statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Foreign currency Common Stock Paid-in Retained translation Shares Amount capital earnings adjustment Total Balance, December 31, 1994 31,360 $ 314 $ 278,145 $ 17,872 $ (5,136) $ 291,195 Common shares issued 1,798 18 20,455 - - 20,473 Tax benefit of option exercises - - 4,743 - - 4,743 Conversion of debentures 63 - 1,000 - - 1,000 Net income - - - 35,073 - 35,073 Foreign currency translation adjustment - - - - 704 704 Balance, December 30, 1995 33,221 332 304,343 52,945 (4,432) 353,188 Common shares issued 967 10 9,622 - - 9,632 Tax benefit of option exercises - - 175 - - 175 Warrants issued - - 1,176 - - 1,176 Net income - - - 7,771 - 7,771 Foreign currency translation adjustment - - - - 2,868 2,868 Rounding - - - (1) - (1) Balance, December 28, 1996 34,188 342 315,316 60,715 (1,564) 374,809 Common shares issued 8,198 82 181,580 - - 181,662 Tax benefit of option exercises - - 3,021 - - 3,021 Conversion of debentures 576 6 8,941 - - 8,947 Net income - - - 38,687 - 38,687 Foreign currency translation adjustment - - - - (6,342) (6,342) Balance, January 3, 1998 42,962 $ 430 $ 508,858 $ 99,402 $ (7,906) $ 600,784
The accompanying notes to consolidated financial statements are an integral part of these statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995 Cash flow from operating activities: Net income $ 38,687 $ 7,771 $ 35,073 Reconciliation of net income to net cash and cash equivalents provided by operating activities- Depreciation and amortization 83,649 65,534 52,094 Changes in assets and liabilities- Receivables, net (119,132) (31,430) (44,751) Inventories (37,737) (13,638) (12,155) Prepaid royalties and other 2,430 (17,113) (652) Accounts payable and other 44,206 28,024 13,351 Accrued payroll (2,010) 13,130 (71) Unearned revenue 10,159 9,321 11,750 Income taxes payable 117 (1,964) 1,131 Other, net 3,360 4,513 58 Net cash provided by operating activities 23,729 64,148 55,828 Cash flow from investing activities: Restricted deposits (24,136) (5,013) 19,795 Purchases of property and equipment, net (58,698) (80,617) (38,923) Capitalized software costs (34,247) (34,170) (23,444) Other assets, net -- (15,600) (4,262) Net cash used for investing activities (117,081) (135,400) (46,834) Cash flow from financing activities: Notes payable, net 9,968 18,779 (18,291) Proceeds (payments) under capital lease obligations (2,509) 14,662 (719) Long-term debt payments, net (133) -- (256) Stock issuance proceeds, net 184,683 10,983 25,216 Net cash provided by financing activities 192,009 44,424 5,950 Effect of exchange rate changes on cash (3,337) 2,868 704 Net increase (decrease) in cash and cash equivalents 95,320 (23,960) 15,648 Cash and cash equivalents at beginning of period 37,979 61,939 46,291 Cash and cash equivalents at end of period $ 133,299 $ 37,979 $ 61,939
The accompanying notes to consolidated financial statements are an integral part of these statements. SEQUENT COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Sequent Computer Systems, Inc. and subsidiaries ("Sequent" or the "Company") was incorporated in January 1983. Sequent is a provider of scalable data center ready open systems solutions for large organizations spanning diverse industries. Sequent designs, manufactures and markets large scalable computer systems based upon Cache Coherent Non-Uniform Memory Access (CC-NUMA) architecture and operating environment software. The Company's systems are widely used for large-scale on-line transaction processing (OLTP), applications in decision support systems (DSS) and data warehouses, for custom applications built upon relational database management systems (RDBMS), and as the central server in client-server architectures. Sequent's project-oriented offerings include a complete portfolio of customer, professional and education services to solve complex information technology (IT) problems. The Company has an established set of strategic alliances with other software, hardware and services providers to deliver complete solutions to its customers. Principles of Consolidation. The Company's fiscal year is generally based on a 52-week year (53 weeks in Fiscal 1997) ending the Saturday closest to December 31. The consolidated financial statements of the Company include the accounts of Sequent Computer Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and profits have been eliminated. The financial statements and transactions of the Company's foreign subsidiaries are maintained in their functional currencies and translated into U.S. dollars for purposes of consolidation. Translation adjustments are accumulated as a separate component of shareholders' equity. Gains and losses resulting from transactions denominated in a currency other than an entity's functional currency are included in other net expense in the consolidated statements of operations. Net losses aggregating $1.6 million, $0.8 million and $0.3 million for 1997, 1996, and 1995, respectively, were realized from such transactions. Revenue Recognition and Receivables. Revenue from product sales is generally recognized upon shipment; however, depending upon contract terms, revenue recognition may be deferred until customer acceptance or clarification of funding. Revenue is recognized as earned on the straight-line basis over the term of customer service/maintenance contracts, and on either the percentage-of-completion or milestone achievement basis for professional service contracts. Receivables are shown net of allowance for doubtful accounts of $3.1 million at January 3, 1998 and $2.8 million at December 28, 1996. The Company has an agreement with a group of banks to sell, without recourse, undivided ownership interests in a revolving pool consisting of substantially all of the Company's domestic accounts receivable for a maximum of $20 million. The agreement expires May 30, 1998. At both January 3, 1998 and December 28, 1996, accounts receivable in the accompanying consolidated balance sheets is net of $20 million received by the Company under this agreement. Additionally, the Company entered into two transactions to factor certain foreign receivables, without recourse, at an average rate of 7.2%. As of January 3, 1998, $4.7 million relating to these transactions was netted against accounts receivable in the accompanying consolidated balance sheet. Approximately 19% of the Company's revenue in 1997 was from one customer. At January 3, 1998, the outstanding accounts receivable balance from this customer aggregated approximately $56 million. The Company had no single customer that represented greater than 10% of total revenue in 1996 and 1995. International sales represented approximately 46% of the Company's total revenue in 1997 and 55% in 1996 and 1995. Inventories. Inventories are stated at the lower of cost or market. Costs are determined using the first-in, first-out (FIFO) method and include material, labor and manufacturing overhead. Prepaid Licenses and Royalties. The Company has entered into agreements with various vendors which provide for prepayment of future licenses and/or royalties based on sales of certain software. Prepaid licenses and royalties were $26.9 million at January 3, 1998 and $28.4 million at December 28, 1996, and are stated at the lower of cost or net realizable value. Approximately $12.5 million and $16.1 million of total prepaid licenses and royalties are classified as current and are included in prepaid royalties and other current assets at January 3, 1998 and December 28, 1996, respectively. Prepaid amounts are realized by receipt of reverse royalties from the vendors based upon software sales by the vendor and/or by charging cost of products sold for certain software sales by the Company. Included in total prepaid licenses and royalties are prepaid licenses acquired from a single vendor totaling $25.3 million and $26.9 million as of January 3, 1998 and December 28, 1996, respectively. These licenses, which have no expiration date, represent the right to acquire the most recent version of the vendor's software for resale to the Company's end-user customers. The Company estimates that the cost of these licenses will be realized during the next three fiscal years. Property and Equipment. Property and equipment are stated at cost and depreciated over their estimated useful lives, ranging from three to five years, on the straight-line method. Leasehold improvements and equipment held under capital leases are amortized on the straight-line basis over the shorter of the asset life or lease term. Maintenance and repairs are expensed as incurred. Research and Development. Software development costs for certain projects are capitalized from the time technological feasibility is established to the time the resulting software product is first shipped. Capitalized software costs are stated at the lower of cost or net realizable value and are shown net of accumulated amortization of $66 million at January 3, 1998 and $38.4 million at December 28, 1996. Amortization, generally based on a three-year straight-line basis, was $27.6 million in 1997, $20 million in 1996 and $16.6 million in 1995. All other research and development costs are expensed as incurred. In December 1996, the Company removed from its balance sheet capitalized software costs which had an original cost of $40 million and were fully amortized. This did not affect the realizable value of the Company's software products. Additionally, the Company maintains strategic relationships with industry-leading manufacturers of components, systems and software. However, the Company has not entered into any material joint development agreements with vendors that involve ownership interests to be retained in developed technology, nor has it entered into any agreements that involve revenue sharing arrangements or any funding responsibilities. Amounts related to joint development relationships included in the Company's research and development costs and expenses for 1997 were insignificant. Income Taxes. The Company's general practice is to reinvest the earnings of its foreign subsidiaries in those operations, unless it would be advantageous to the Company to repatriate the foreign subsidiaries' retained earnings. Per Share Information. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 replaces APB Opinion 15, Earnings Per Share, and requires current and retroactive presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is calculated based on income available to common shareholders and the weighted- average number of common shares outstanding during the reported period. Diluted earnings per share includes additional dilution from the effect of potential common stock issuances, such as stock issuable pursuant to the exercise of stock options and warrants outstanding and the conversion of debt. The following table is a reconciliation of the basic and diluted earnings per share computations: (in thousands, except per share amounts)
Income Shares Per-Share (Numerator) (Denominator) Amount Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 1997 1996 1995 1997 1996 1995 1997 1996 1995 Basic EPS Income available to common shareholders $38,687 $7,771 $35,073 37,899 33,641 32,228 $1.02 $0.23 $1.09 Effect of Dilutive Securities Stock options 2,653 723 1,408 Employee stock purchase plan 156 55 31 Debentures, if dilutive 116 374 144 447 Diluted EPS Income available to common shareholders + assumed conversions $38,803 $7,771 $35,447 40,852 34,419 34,114 $0.95 $0.23 $1.04
Consolidated Statement of Cash Flows. The Company considers short-term investments which are highly liquid, readily convertible into cash and have original maturities of less than three months to be cash equivalents for purposes of the statement of cash flows. Total cash expenditures for income taxes were $3.7 million, $5.9 million and $5.3 million during 1997, 1996 and 1995, respectively. Interest paid does not differ materially from interest expense. Non-cash investing and financing activities include the following: 1997 - $9.1 million ($8.9 million, net of related expenses) of Convertible Debentures were converted into 576,000 shares of common stock; 1996 - 300,000 stock warrants, valued at $1.2 million using the Black-Scholes pricing model, were issued in exchange for other non-current assets; 1995 - $1 million of Convertible Debentures were converted into 63,000 shares of common stock. Management Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates and judgments made by management of the Company include matters such as collectibility of accounts receivable, realizability of inventory and recoverability of capitalized software, prepaid royalties and deferred tax assets. Reclassifications. Certain prior year amounts have been reclassified to conform to fiscal 1997 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. New Accounting Pronouncements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130). This Statement requires entities to report changes in equity that result from transactions and economic events other than those with shareholders. This Statement is effective for fiscal years beginning after December 15, 1997, at which time it will be adopted by the Company. Management expects that the adoption of this pronouncement will have no effect on reported earnings. It is expected that the Company's comprehensive income component will consist of the cumulative translation adjustment which is reflected in the consolidated statement of shareholders' equity. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131). The objective of the standard is to provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates. This pronouncement will be adopted by the Company for fiscal 1998, as required by the Statement. This Statement will have no impact on reported earnings and management expects that it will not have a significant impact on disclosure requirements as the Company operates in predominantly one business segment. 2. INVENTORIES (in thousands) January 3, December 28, 1998 1996 Raw materials $ 16,375 $ 14,205 Work-in-progress 3,155 2,166 Finished goods 92,698 58,120 $ 112,228 $ 74,491 Finished goods inventory includes evaluation systems aggregating $53.7 million and $30.8 million as of January 3, 1998 and December 28, 1996, respectively. Such systems are located at potential customer sites for demonstration. 3. PROPERTY AND EQUIPMENT (in thousands) January 3, December 28, 1998 1996 Land $ 5,037 $ 5,037 Operational equipment 209,372 174,662 Furniture and office equipment 89,569 89,951 Leasehold improvements 22,889 22,584 326,867 292,234 Less accumulated depreciation and amortization (192,139) (158,396) $ 134,728 $ 133,838 Depreciation and amortization charged to expense totaled $55.2 million in 1997, $44.9 million in 1996 and $35.0 million in 1995. 4. NOTES PAYABLE The Company has an unsecured line of credit agreement with a group of banks which provides short-term borrowings up to $80 million. The line of credit agreement contains financial covenants, including covenants relating to net worth, ratio of liabilities to net worth and limitations on net operating losses, and prohibits the Company from paying dividends without the group of banks' consent. Individual borrowings on the credit line have maturities of three months or less. The line of credit agreement extends through May 29, 1998. There were no borrowings outstanding under the line of credit at January 3, 1998. At December 28, 1996, $12.2 million was outstanding under the credit line. The Company has a short-term borrowing agreement with a foreign bank as a hedge to cover certain foreign currency exposures. Borrowings under the agreement are denominated in various foreign currencies with terms of fourteen days to three months. Proceeds from the borrowings are converted into U.S. dollars and placed in a term deposit account with the foreign bank. The deposits, which are classified as restricted deposits in the accompanying consolidated balance sheets, are pledged to the foreign bank so long as borrowings under the agreement are outstanding. During July 1997, the Company re-negotiated the agreement and extended it through July 1998. The foreign bank, without cause, can terminate the agreement at any time. At January 3, 1998, maximum borrowings allowed under the agreement were $81.8 million. Amounts outstanding were $68.8 million and $44.7 million at January 3, 1998 and December 28, 1996, respectively. The maximum borrowing limit is denominated in specified foreign currencies and fluctuates with the change in foreign exchange rates. The average interest rate on these borrowings at January 3, 1998 was 6.4%. In addition to the above borrowing agreements, the Company has entered into certain other miscellaneous borrowing arrangements with a foreign bank. Amounts outstanding were $1.1 million and $0.9 million at January 3, 1998 and December 28, 1996, respectively. The interest rate on these borrowings was 1.725% at January 3, 1998. During 1996, a U.S. subsidiary of the Company entered into a financing arrangement with third parties for $2.2 million, of which $1 million is with a related party. The financing consisted of short-term convertible notes with an interest rate of 10%. During the second quarter of 1997, the notes were converted into preferred stock of the subsidiary. 5. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT In April 1992, the Company issued $20 million of 7.5% Convertible Subordinated Debentures ("Convertible Debentures" or "Debentures") due March 31, 2000. The Convertible Debentures were convertible into the Company's common stock at the option of the holders at an initial conversion price of $15.81 per share. In conjunction with the Company's equity offering in 1993, $9.9 million of the Debentures was converted into 626,000 shares of common stock. In August 1995, an additional $1.0 million of the Debentures was converted into 63,000 shares of common stock. In August and September 1997, the remaining $9.1 million of the Debentures was converted into 576,000 shares of common stock; thus, there was no outstanding long-term debt related to the Debentures at January 3, 1998. At December 28, 1996, the outstanding balance on the Debentures was $9.1 million. Sequent leases certain equipment under five-year capital leases. These lease terms require maintenance of certain financial ratios and generally include a fair market value purchase option at the end of the lease. These leased assets are pledged as security for capital lease obligations. In addition to the minor capital leases, the Company entered into a sales-leaseback transaction in September 1996 under which certain operating equipment with a net book value of $12.2 million was sold for $15.3 million and then leased back under a capital lease. The related lease terms stipulate monthly payments ranging from $274,000 to $341,000 over the five-year lease term beginning September 1996 at an annual interest rate of 7.4%. The resulting gain of $3.1 million has been recorded under "Other Accrued Expenses" and is being amortized in proportion to the related equipment depreciation over three years. The terms of the lease include an asset buy- back provision at the end of the lease for the then fair market value of the assets at the Company's option. Future minimum lease payments are as follows: (in thousands) 1998 $ 3,285 1999 3,960 2000 4.095 2001 2,608 2002 -- Total minimum lease payments 13,948 Less amount representing interest (1,857) Present value of minimum lease payments $ 12,091 6. OPERATING LEASE COMMITMENTS Sequent is committed under operating leases for office space, equipment and manufacturing facilities. Future minimum lease payments are as follows: (in thousands) 1998 $ 21,486 1999 18,702 2000 13,608 2001 10,965 2002 and thereafter 19,816 $ 84,577 Rent expense for operating leases was $19.1 million, $17.4 million and $14.9 million in 1997, 1996 and 1995, respectively. 7. INCOME TAXES The Company provided $11.8 million for income taxes in 1997 on a net profit before tax of $50.5 million. The difference between the statutory rate and the effective tax rate is principally due to the benefit from the research tax credit and the Company's Foreign Sales Corporation. The 1997 effective tax rate of 23.4% compares to effective rates of 27.2% in 1996 and 25.9% in 1995. Pre-tax income from continuing operations for the last three fiscal years was taxed under the following jurisdictions: (in thousands) Fiscal Fiscal Fiscal 1997 1996 1995 Domestic $ 39,603 $ 5,593 $ 29,556 Foreign 10,909 5,083 17,771 Total $ 50,512 $ 10,676 $ 47,327 The provision for income taxes was as follows: (in thousands) Fiscal Fiscal Fiscal 1997 1996 1995 Current: Federal $ 6,808 $ 789 $ 5,890 Foreign 4,441 3,109 5,435 State 449 164 355 11,698 4,062 11,680 Deferred: Federal 317 (900) -- Foreign (211) (257) 574 State 21 -- -- 127 (1,157) 574 Total provision $ 11,825 $ 2,905 $ 12,254 Deferred tax liabilities (assets) are comprised of the following components: (in thousands) January 3, 1998 December 28, 1996 Research and development $25,119 $22,998 Other 2,217 1,567 Gross deferred tax liabilities 27,336 24,565 Net operating loss carryforwards: Domestic (18,921) (24,985) Foreign (4,897) (7,965) Credit carryforwards (18,626) (12,741) Expenses not currently deductible (6,741) (7,971) Depreciation (1,779) (1,596) Revenue currently taxable (2,008) (1,399) Inventory basis differences (2,499) (556) Restructuring costs -- (71) Gross deferred tax assets (55,471) (57,284) Deferred tax asset valuation allowance 27,126 31,583 Net deferred tax asset $ (1,009) $ (1,136) The provision for income taxes differs from the amount of income taxes determined by applying the U.S. statutory federal tax rate to income from continuing operations due to the following: Fiscal Fiscal Fiscal 1997 1996 1995 Statutory federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 4.2 4.2 4.2 Tax benefit from Foreign Sales Corporation (4.8) (6.8) (1.6) Research & Experimentation credit (4.6) --- --- Tax provision on foreign earnings 0.3 (0.9) (2.1) Realized benefit from net operating losses (2.2) (1.3) (9.6) Other, net (4.5) (3.0) --- 23.4% 27.2% 25.9% The deferred tax asset valuation allowance in fiscal years 1995 - 1997 is attributed to U.S. federal, state, and foreign deferred tax assets. Management believes sufficient uncertainty exists with regard to the realizability of such assets that a valuation allowance of $27.1 million has been provided at January 3, 1998. When and if these reserved deferred tax assets are ultimately realized, $12.0 million will reduce the Company's federal and state tax provision and $15.1 million will be credited to paid-in capital (related to stock option deductions). In accordance with FAS 109, the valuation allowance is allocated pro-rata to federal, state, and foreign current and non-current deferred tax assets. The Company has net operating losses carried forward both domestically and in foreign jurisdictions. The domestic net operating losses expire from 2006 - 2011. Certain foreign net operating losses expire in 1998 - 2003, while others have no expiration date. The Company has accumulated unused research and experimentation credits of $7.4 million for income tax purposes. These credits expire from 1998 - 2012. The Company also has Alternative Minimum Tax Credits (AMT) which may be carried forward indefinitely and certain state tax credits which expire from 1998 - 2002. The Company may realize tax benefits as a result of the exercise of certain employee stock options. For financial reporting purposes, any reduction in income tax obligations as a result of these tax benefits is credited to paid-in capital. During 1997, 1996 and 1995, $3.0 million, $175,000 and $4.7 million of benefits were credited to paid-in capital, respectively, with a related reduction in current taxes payable. An income tax provision has not been recorded for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries as the undistributed earnings have been and management expects will continue to be reinvested in operations outside the United States. 8. SHAREHOLDERS' EQUITY Common Stock. On July 29, 1997, the Company sold approximately 5.7 million shares of common stock in an equity offering. Net proceeds to the Company, after deducting the underwriting discount and offering expenses, were approximately $148.5 million. In August and September 1997, $9.1 million ($8.9 million, net of related expenses) of the Convertible Debentures was converted into 576,000 shares of common stock. Stock Compensation Plans. At January 3, 1998, the Company had the following stock-based compensation plans: Stock Option Plans At January 3, 1998, the Company had options outstanding to employees and non-employees under the following Stock Option Plans: 1984 Employee Stock Option Plan and 1984 Nonstatutory Stock Option Plan (the "1984 Plans"), the 1987 Employee Stock Option Plan and 1987 Nonstatutory Stock Option Plan (the "1987 Plans"), the 1989 Stock Incentive Plan (the "1989 Plan"), the 1995 Stock Incentive Plan, the 1996 Stock Option Plan and the 1997 Stock Option Plan. Options granted after May 18, 1995 were made under the 1995 Stock Incentive Plan and the 1996 and 1997 Stock Option Plans. As of January 3, 1998, the Company has reserved a total of 16,727,500 shares of common stock for issuance under these plans, of which 8,276,326 shares were outstanding at January 3, 1998. Employee options vest over varying time periods, generally ranging from one to four years, as long as, in the case of employees, the optionee remains employed by Sequent. Option prices generally have been at 85% or greater of the fair market value of the common stock on the date of grant. Options generally expire ten years from the date of the grant. Employee Stock Purchase Plan In September 1987, Sequent established an Employee Stock Purchase Plan. Under the plan, Sequent is authorized to grant rights to purchase up to 6,950,000 shares of common stock in a series of eighteen-month offerings. At January 3, 1998, there were 1,946,574 shares available for future purchase. Substantially all employees are eligible to receive rights under the plan. The purchase price is the lesser of 85% of the fair market value of the common stock on the date of commencement of the offering or on the date of purchase. During 1997, 1996 and 1995, Sequent issued 1,127,428, 682,864 and 576,423 shares under the plan, respectively. Statement of Financial Accounting Standards No. 123. During 1995, the Financial Accounting Standards Board issued FAS 123, Accounting for Stock Based Compensation, which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost related to stock options issued to employees under these plans using the method of accounting prescribed by the Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in this Statement has been applied. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in APB 25 and related Interpretations. Accordingly, no compensation cost has been recognized in the consolidated statements of operations for its stock-based compensation plans other than for performance-based awards. Had compensation cost for the other stock-based compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of FAS 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: (in thousands, except per share amounts) Fiscal Fiscal Fiscal 1997 1996 1995 Net income (loss): As reported $38,687 $7,771 $35,073 Pro forma 28,981 (709) 30,959 Net income (loss) per share - basic: As reported $1.02 $0.23 $1.09 Pro forma 0.76 (0.02) 0.96 Net income (loss) per share - diluted: As reported $0.95 $0.23 $1.04 Pro forma 0.73 (0.02) 0.95 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for grants in 1997, 1996 and 1995: Fiscal Fiscal Fiscal 1997 1996 1995 Risk-free interest rate 6.15% 6.05% 6.33% Expected dividend yield -- -- -- Expected lives 3 years 3 years 4 years Expected volatility 56% 50% 55% The fair value of the employees' purchase rights was estimated using the Black-Scholes model with the following assumptions for 1997, 1996 and 1995: Fiscal Fiscal Fiscal 1997 1996 1995 Risk-free interest rate 5.74% 5.58% 5.23% Expected dividend yield -- -- -- Expected lives 1 year 1 year 1 year Expected volatility 56% 50% 55% The weighted-average per share fair value of those purchase rights granted in 1997 and 1996 was $15.20 and $13.15, respectively. A summary of the status of the Company's stock option plans as of January 3, 1998, December 28, 1996 and December 30, 1995, and changes during the years ending on those dates is presented below: (in thousands, except per share amounts)
Fiscal Fiscal Fiscal 1997 1996 1995 Weighted-Average Weighted-Average Weighted-Average Shares per share Shares per share Shares per share under option Exercise Price under option Exercise Price under option Exercise Price Outstanding at beginning of year 6,909 $12.27 5,068 $14.26 4,432 $11.63 Granted: Price = Fair Value 2,812 18.39 3,353 12.60 1,716 18.21 Price < Fair Value 829 18.14 1,196 11.12 612 14.90 Exercised (1,209) 12.01 (196) 8.53 (1,056) 9.68 Forfeited (1,065) 13.83 (2,512) 16.55 (636) 14.78 Outstanding at end of year 8,276 14.77 6,909 12.27 5,068 14.26 Options exercisable at year-end 2,370 1,446 1,276 Weighted-average per share fair value of options granted during the year $8.35 $ 3.69 $ 8.46
The following table summarizes information about stock options outstanding at January 3, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual per share Exercisable per share Exercise Prices at 1/3/98 Life Exercise Price at 1/3/98 Exercise Price $0 - $11.25 1,870,157 7.1 years $ 10.29 1,094,915 $ 10.07 $11.26 - $13.88 1,594,561 6.3 years 12.58 601,839 12.86 $13.92 - $14.45 1,416,963 7.0 years 14.04 370,186 14.08 $14.56 - $17.44 1,828,453 8.4 years 16.18 248,352 16.54 $17.50 - $22.42 1,398,792 9.4 years 21.04 55,175 19.17 $22.47 - $28.19 167,400 9.4 years 23.84 17 23.96 $0.00 - $28.19 8,276,326 7.7 years 14.77 2,370,484 12.29
9. GEOGRAPHIC SEGMENT INFORMATION Information about the Company's foreign operations and export sales is provided in the table below. Foreign revenue is that which is produced by identifiable assets located in foreign countries while export revenue is that which is generated by identifiable assets located in the United States. (in thousands) Fiscal Fiscal Fiscal 1997 1996 1995 Revenue: United States $ 449,355 $ 270,571 $ 244,029 Foreign: Europe 315,028 262,396 242,133 Other 47,460 41,443 32,784 Export: Other 22,043 20,952 21,399 $ 833,886 $ 595,362 $ 540,345 Operating income (loss): United States $ 44,691 $ 5,825 $ 27,184 Foreign: Europe 7,629 7,424 18,290 Other 1,504 (374) 3,045 $ 53,824 $ 12,875 $ 48,519 Identifiable assets: United States $ 686,638 $ 448,527 $ 367,196 Foreign: Europe 186,751 148,727 123,614 Other 17,456 14,755 13,113 $ 890,845 $ 612,009 $ 503,923 Intercompany sales between geographic areas, primarily from the United States to Europe, were $195.5 million during 1997, $155.7 million during 1996 and $131.0 million during 1995. 10. FOREIGN CURRENCY EXPOSURE A substantial portion of the Company's business is conducted overseas through its foreign subsidiaries, primarily in Europe. This exposes the Company to risks associated with foreign currency rate fluctuations which can impact the Company's revenue and net income. To mitigate this risk the Company enters into foreign currency transactions with foreign and domestic banks on a continuing basis in amounts and timing consistent with the underlying currency exposure so that gains and losses on these transactions offset gains and losses on the underlying exposure. The Company does not engage in any speculative trading activity. See related discussion in Note 4. In addition to the arrangements described in Note 4, at January 3, 1998, the Company also has a range forward options contract denominated in Japanese yen with a contract amount of approximately $2.3 million. This forward contract is used to hedge certain intercompany payables. Gains and losses on such contracts have not been significant to date. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, restricted deposits, receivables, notes payable, accounts payable and other, and current obligations under capital leases and debt are reflected in the consolidated financial statements at fair value because of the short-term maturity of these instruments. The fair value of long-term obligations under capital leases was estimated by discounting the future cash flows using market interest rates and does not differ significantly from the amount reflected in the consolidated financial statements. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 12. COMMITMENTS AND CONTINGENCIES Lawsuits arise during the normal course of business. In the opinion of management, none of the pending lawsuits will result in a significant impact on the consolidated results of operations or financial position. During 1997, the Company entered into an agreement to finance the construction of a new office building using an operating lease structure. Upon completion and occupancy, the Company will finalize lease payments based on a total cost estimated to be approximately $17.5 million. No estimated lease payments relating to the newly constructed building have been included in the Operating Lease Commitment Schedule at Note 6. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Sequent Computer Systems, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Sequent Computer Systems, Inc. and its subsidiaries at January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Portland, Oregon January 28, 1998 QUARTERLY FINANCIAL DATA (unaudited) (In thousands, except per share amounts)
Basic Diluted Total Gross Net Earnings Earnings Revenue Profit Income Per Share Per Share 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
* The sum of quarterly earnings per share does not equal annual earnings per share as a result of the computation of quarterly versus annual average shares outstanding. MARKET INFORMATION (unaudited) Sequent's Common Stock has been traded on the NASDAQ National Market System since April 1987 under the symbol SQNT. The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for the common stock as reported on the NASDAQ National Market System. High Low 1997: First quarter $ 20.00 $ 14.50 Second quarter $ 21.63 $ 14.38 Third quarter $ 30.63 $ 20.88 Fourth quarter $ 26.88 $ 19.50 1996: First quarter $ 14.88 $ 10.31 Second quarter $ 14.88 $ 11.88 Third quarter $ 13.88 $ 10.88 Fourth quarter $ 18.25 $ 12.50 At January 3, 1998, there were approximately 891 shareholders of record of the Company's common stock and 43.0 million shares outstanding. The Company has never paid cash dividends on its common stock. The Company intends to retain earnings for use in its business and, therefore, does not anticipate paying cash dividends in the foreseeable future. In addition, the Company's bank line of credit agreement prohibits payment of dividends without the lenders' consent. EXHIBIT 21 SEQUENT COMPUTER SYSTEMS, INC. - SUBSIDIARIES ENTERPRISE FINANCE COMPANY (Oregon) SEQUENT EXPORT, INC. (Barbados) DP APPLICATIONS, INC. (Oregon) CANADA: SEQUENT COMPUTER SYSTEMS (CANADA) LIMITED EUROPE: SEQUENT COMPUTER SYSTEMS LIMITED (United Kingdom) SEQUENT COMPUTER SYSTEMS A.B. (Sweden) SEQUENT COMPUTER SYSTEMS GmbH (Germany) SEQUENT COMPUTER SYSTEMS, S.A. (France) SEQUENT COMPUTER SYSTEMS, B.V. (Netherlands) SEQUENT COMPUTER SYSTEMS, spol. s r.o. (Czech Republic) OPEN TOOL INTERNATIONAL, B.V. (Netherlands) SEQUENT COMPUTER SYSTEMS S. r. I. (Italy) SEQUENT COMPUTER SYSTEMS CJSC (Russia) JAPAN: SEQUENT COMPUTERS JAPAN CO., LTD ASIA: SEQUENT COMPUTER SYSTEMS (N.Z.) LIMITED (New Zealand) SEQUENT COMPUTER SYSTEMS AUSTRALIA PTY. LIMITED SEQUENT COMPUTER SYSTEMS ASIA LIMITED (Hong Kong) SEQUENT COMPUTER SYSTEMS (SINGAPORE) PTE. LIMITED EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-16428, 33-16463, 33-33338, 33-36836, 33-39315, 33-39657, 33-40941, 33-40942, 33-63972, 33-63974, 33-59147 and 33-59611) of Sequent Computer Systems, Inc. of our report dated January 28, 1998 appearing in the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule. PRICE WATERHOUSE LLP Portland, Oregon March 25, 1998 EX-10 2 Sequent I SEVENTH AMENDMENT TO LEASE THIS AMENDMENT is made this 30 day of September 1997 by and between the undersigned Landlord and Tenant. RECITALS A. Landlord and Tenant are parties to that certain Lease Agreement dated May 8, 1987 (the "Lease Agreement") and the following documents (the "Amendments") which amend such Lease Agreement (the Lease Agreement and all such Amendments are herein collectively referred to as the "Lease"): (a) First Amendment dated December 29, 1987; (b) Second Amendment dated July 28, 1988; (c) Third Amendment dated July 28, 1989; (d) Fourth Amendment dated September 20, 1991; (e) Fifth Amendment dated December 2, 1992; and (f) Sixth Amendment dated April 5, 1993. B. Landlord and Tenant desire to amend the Lease as set forth herein. NOW, THEREFORE, for good and valuable consideration, it is agreed as follows: 1 Lease Revisions 1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.2.1 LESSEE must give written notice (herein the "Notice") of the exercise of the Option to Purchase, which Notice shall be delivered to LESSOR no earlier than June 30, 1999 nor later than October 31, 1999, and any attempted exercise of the Option to Purchase at any other time shall be null, void and of no legal effect; and 1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or the "Expiration Date" are hereby changed to be references to May 1, 2000. 1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.4.2 Delays in Closing. The Closing shall occur on May 1, 2000. 1.4 Rescission Election. A rescission election given pursuant to Section 6.8.1.2 of the Lease Agreement shall not constitute an election to renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the Lease Agreement is hereby deleted. However, a rescission election given pursuant to Section 6.8.1.2 of the Lease Agreement shall constitute the election by LESSEE and LESSOR to extend the initial term of the Lease for one additional year from September 30, 2000 to September 30, 2001 on the same terms and conditions, including continued payment of Basic Rent at the rate established for Period 6. 1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted and the following is inserted in its place: 6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur costs in connection with the exercise of the Option to Purchase. In the event the Option to Purchase is exercised but LESSEE subsequently rescinds such exercise pursuant to this Section 6.8, then LESSEE shall pay to LESSOR, within five (5) days of written request, an amount equal to (a) all such costs incurred by LESSOR, including, but not limited to, appraisal costs, attorney fees, and title report cancellation fees, (b) interest at the rate set forth in Section 4.5 above from the date of payment of each such cost by LESSOR to the date of full reimbursement of the same by LESSEE, and (c) the sum of $500 per day from the date that the Option to Purchase is exercised to the date that the rescission notice is given. 1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.9 Remedies of Lessor. In the event LESSEE exercises the Option to Purchase, and the transaction of purchase and sale of the Property contemplated hereby does not Close when and as provided herein for any reason attributable to LESSEE or any person or entity in a relationship to LESSEE (except in the case of a rescission allowed pursuant to Section 6.8.1 above), then such event shall be treated as the giving by LESSEE of a rescission notice under Section 6.8.1 above effective as of the later of the date specified for Closing pursuant to Section 6.4.2 above or the date that LESSOR gives to LESSEE written notice of LESSEE's failure to Close. LESSOR shall accept the payment of costs under Section 6.8.2 above as liquidated damages and as its sole remedy for such a failure of LESSEE to Close. 2 Status of Lease. Except as expressly amended hereby, the Lease remains in full force and effect and is hereby ratified and -affirmed. IN WITNESS WHEREOF, this Amendment has been executed as of the date and year indicated above. LANDLORD: PETULA ASSOCIATES, LTD., an Iowa corporation, and KOLL WOODSIDE ASSOCIATES, a California general partnership, tenants-in-common, doing business as KC WOODSIDE PETULA ASSOCIATES, LTD., an Iowa corporation By: /s/Jon Jacobson Its: Vice President By: /s/Anne Graff Brown Its: Counsel TENANT: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation By: /s/Dale Derby for Bob Witt Its: Vice Presidnet of Information Services EX-10.1 3 Sequent II FIFTH AMENDMENT TO LEASE THIS AMENDMENT is made this 30 day of September 1997 by and between the undersigned Landlord and Tenant. RECITALS A. Landlord and Tenant are parties to that certain Lease Agreement dated May 8, 1987 (the "Lease Agreement") and the following documents (the "Amendments") which amend such Lease Agreement (the Lease Agreement and all such Amendments are herein collectively referred to as the "Lease"): (a) Letter dated January 12, 1988; (b) Amended Memorandum of Lease dated July 28, 1988 (c) First Amendment dated July 28, 1988 (d) Second Amendment dated September 13, 1991; (e) Third Amendment dated December 2, 1992; and (f) Fourth Amendment dated April 5, 1993. B. Landlord and Tenant desire to amend the Lease as set forth herein. NOW, THEREFORE, for good and valuable consideration, it is agreed as follows: 1 Lease Revisions. 1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.2.1 LESSEE must give written notice (herein the "Notice") of the exercise of the Option to Purchase, which Notice shall be delivered to LESSOR no earlier than May 31, 1997 nor later than September 30, 1997, and any attempted exercise of the Option to Purchase at any other time shall be null, void and of no legal effect; further, LESSEE must simultaneously give "Notice" of the exercise of the "Option to Purchase" under the Third Lease; and 1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or the "Expiration Date" are hereby changed to be references to April 1, 1998. 1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.4.2 Delays in Closing. The Closing shall occur on April 1, 1998. LESSEE shall have no right to Close the purchase of the Property absent simultaneously closing of the purchase of the land and improvements covered by the third building Lease which was executed by LESSOR and LESSEE and is dated July 28, 1988 (the "Third Lease"). Any failure by LESSEE to close the purchase of the land and improvements covered by the Third Lease on April 1, 1998 shall be deemed a rescission of the exercise of the Option to Purchase the Property pursuant to Section 6.8 below. 1.4 Rescission Election. A rescission election given pursuant to Section 6.8.1.2 of the Lease Agreement shall not constitute an election to renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the Lease Agreement is hereby deleted. No rescission notice shall be valid unless LESSEE simultaneously gives a rescission notice under Section 6.8.2 of the Third Lease. 1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted and the following is inserted in its place: 6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur costs in connection with the exercise of the Option to Purchase. In the event the Option to Purchase is exercised but LESSEE subsequently rescinds such exercise pursuant to this Section 6.8, then LESSEE shall pay to LESSOR, within five (5) days of written request, an amount equal to (a) all such costs incurred by LESSOR, including, but not limited to, appraisal costs, attorney fees, and title report cancellation fees, (b) interest at the rate set forth in Section 4.5 above from the date of payment of each such cost by LESSOR to the date of full reimbursement of the same by LESSEE, and (c) the sum of $500 per day from the date that the Option to Purchase is exercised to the date that the rescission notice is given. 1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.9 Remedies of Lessor. In the event LESSEE exercises the Option to Purchase, and the transaction of purchase and sale of the Property contemplated hereby does not Close when and as provided herein for any reason attributable to LESSEE or any person or entity in a relationship to LESSEE (except in the case of a rescission allowed pursuant to Section 6.8.1 above), then such event shall be treated as the giving by LESSEE of a rescission notice under Section 6.8.1 above effective as of the later of the date specified for Closing pursuant to Section 6.4.2 above or the date that LESSOR gives to LESSEE written notice of LESSEE's failure to Close. LESSOR shall accept the payment of costs under Section 6.8.2 above as liquidated damages and as its sole remedy for such a failure of LESSEE to Close. 2 Status of Lease. Except as expressly amended hereby, the Lease remains in full force and effect and is hereby ratified and affirmed. IN WITNESS WHEREOF, this Amendment has been executed as of the date and year indicated above. LANLORD: PETULA ASSOCIATES, LTD., an Iowa corporation, and KOLL WOODSIDE ASSOCIATES, a California general partnership, tenants-in-common, doing business as KC WOODSIDE PETULA ASSOCIATES, LTD, an Iowa corporation By: /s/Jon Jacobson Its: Vice President of Commerical Real Estate By: /s/Anne Graff Brown Its: Counsel TENANT: SEQUENT COMOUTER SYSTEMS, INC., an Oregon corporation By: /s/Dale Derby for Bob Witt Its: Vice President of Information Services EX-10.2 4 Sequent III FIFTH AMENDMENT TO LEASE THIS AMENDMENT is made this 30 day of September 1997 by and between the undersigned Landlord and Tenant. RECITALS A. Landlord and Tenant are parties to that certain Lease Agreement dated July 28, 1988 (the "Lease Agreement") and the following documents (the "Amendments") which amend such Lease Agreement (the Lease Agreement and all such Amendments are herein collectively referred to as the "Lease"): (a) First Amendment dated July 28, 1989; (b) Second Amendment dated September 13, 1991; (c) Third Amendment dated December 2, 1992; and (d) Fourth Amendment dated April 5, 1993. B. Landlord and Tenant desire to amend the Lease as set forth herein. NOW, THEREFORE, for good and valuable consideration, it is agreed as follows: 1 Lease Revisions. 1.1 Exercise Notice. Section 6.2.1 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.2.1 LESSEE must give written notice (herein the "Notice") of the exercise of the Option to Purchase, which Notice shall be delivered to LESSOR no earlier than May 31, 1997 nor later than September 30, 1997, and any attempted exercise of the Option to Purchase at any other time shall be null, void and of no legal effect; further, LESSEE must simultaneously give "Notice" of the exercise of the "Option to Purchase" under the Second Lease; and 1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or the "Expiration Date" are hereby changed to be references to April 1, 1998. 1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.4.2 Delays in Closing. The Closing shall occur on April 1, 1998. LESSEE shall have no right to Close the purchase of the Property absent simultaneously closing of the purchase of the land and improvements covered by the Second Lease. Any failure by LESSEE to close the purchase of the land and improvements covered by the Second Lease on April 1, 1998 shall be deemed a rescission of the exercise of the Option to Purchase the Property pursuant to Section 6.8 below. 1.4 Rescission Election. A rescission election given pursuant to Section 6.8.1.2 of the Lease Agreement shall not constitute an election to renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the Lease Agreement is hereby deleted. No rescission notice shall be valid unless LESSEE simultaneously gives a rescission notice under Section 6.8.2 of the Second Lease. 1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted and the following is inserted in its place: 6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur costs in connection with the exercise of the Option to Purchase. In the event the Option to Purchase is exercised but LESSEE subsequently rescinds such exercise pursuant to this Section 6.8, then LESSEE shall pay to LESSOR, within five (5) days of written request, an amount equal to (a) all such costs incurred by LESSOR, including, but not limited to, appraisal costs, attorney fees, and title report cancellation fees, (b) interest at the rate set forth in Section 4.5 above from the date of payment of each such cost by LESSOR to the date of full reimbursement of the same by LESSEE, and (c) the sum of $500 per day from the date that the Option to Purchase is exercised to the date that the rescission notice is given. 1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.9 Remedies of Lessor. In the event LESSEE exercises the Option to Purchase, and the action of purchase and sale of the Property contemplated hereby does not Close when and as provided herein for any reason attributable to LESSEE or any person or entity in a relationship to LESSEE (except in the case of a rescission allowed pursuant to Section 6.8.1 above), then such event shall be treated as the giving by LESSEE of a rescission notice under Section 6.8.1 above effective as of the later of the date specified for Closing pursuant to Section 6.4.2 above or the date that LESSOR gives to LESSEE written notice of LESSEE's failure to Close. LESSOR shall accept the payment of costs under Section 6.8.2 above as liquidated damages and as its sole remedy for such a failure of LESSEE to Close. 1.7 Skybridge. The following is added at the end of the second sentence of Section 47.3.4 of the Lease Agreement and is made a part of such sentence: provided, if LESSEE purchases the Property and the Second Building simultaneously, the Skybridge shall be included in the sale of the Property. 2 Status of Lease. Except as expressly amended hereby, the Lease remains in full force and effect and is hereby ratified and affirmed. IN WITNESS WHEREOF, this Amendment has been executed as of the date and year indicated above. LANDLORD: PRINCIPAL MUTUAL LIF INSURANCE COMPANY, an Iowa corporation By: /s/Michael S. Duffy Its: Assistant Director of Commercial Real Estate/Equities By: /s/Scott D. Harris Its: Assistant Director of Commercial Real EState/Equities PETULA ASSOCIATES, LTD., an Iowa corporation By: /s/Jon Jacobson Its: Vice President of Commercial Real Estate By: /s/Madban Rengarajan Its: Vice President TENANT: SEQUENT COMPUTER SYSTEMS, INC., an Oregon Corporation By: /s/Dale Derby for Bob Witt Its: Vice President of Information Services EX-10.3 5 Sequent IV FIFTH AMENDMENT TO LEASE THIS AMENDMENT is made this 30 day of September 1997 by and between the undersigned Landlord and Tenant. RECITALS A. Landlord and Tenant are parties to that certain Lease Agreement dated July 28, 1989 (the "Lease Agreement") and the following documents (the "Amendments") which amend such Lease Agreement (the Lease Agreement and all such Amendments are herein collectively referred to as the "Lease"): (a) First Amendment dated September 13, 1991; (b) Second Amendment dated August 13, 1992; (c) Third Amendment dated December 2, 1992; and (d) Fourth Amendment dated April 5, 1993. B. Landlord and Tenant desire to amend the Lease as set forth herein. NOW, THEREFORE, for good and valuable consideration, it is agreed as follows: 1 Lease Revisions. 1.1 Exercise Notice- Section 6.2.1 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.2.1 LESSEE must give written notice (herein the "Notice") of the exercise of the Option to Purchase, which Notice shall be delivered to LESSOR no earlier than July 31, 1998 nor later than November 30, 1998, and any attempted exercise of the Option to Purchase at any other time shall be null, void and of no legal effect; and 1.2 Defined Term Change. All references in Sections 6.3.2 and 6.4.2 of the Lease Agreement to the "Expiration Date of the Initial Term" or the "Expiration Date" are hereby changed to be references to June 1, 1999. 1.3 Delays in Closing. Section 6.4.2 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.4.2 Delays in Closing. The Closing shall occur on June 1, 1999. 1.4 Rescission Election. A rescission election given pursuant to Section 6.8.1.2 of the Lease Agreement shall not constitute an election to renew the Lease Agreement. Accordingly, item (b) of Section 6.8.1.2 of the Lease Agreement is hereby deleted. 1.5 Rescission Election -- Costs. Section 6.8.2 of the Lease Agreement (including Sections 6.8.2.1, 6.8.2.2 and 6.8.2.3) is hereby deleted and the following is inserted in its place: 6.8.2 Costs. LESSEE acknowledges that LESSOR shall incur costs in connection with the exercise of the Option to Purchase. In the event the Option to Purchase is exercised but LESSEE subsequently rescinds such exercise pursuant to this Section 6.8, then LESSEE shall pay to LESSOR, within five (5) days of written request, an amount equal to (a) all such costs incurred by LESSOR, including, but not limited to, appraisal costs, attorney fees, and title report cancellation fees, (b) interest at the rate set forth in Section 4.5 above from the date of payment of each such cost by LESSOR to the date of full reimbursement of the same by LESSEE, and (c) the sum of $500 per day from the date that the Option to Purchase is exercised to the date that the rescission notice is given. 1.6 Remedies. Section 6.9 of the Lease Agreement is hereby deleted and the following is inserted in its place: 6.9 Remedies of Lessor. In the event LESSEE exercises the Option to Purchase, and the transaction of purchase and sale of the Property contemplated hereby does not Close when and as provided herein for any reason attributable to LESSEE or any person or entity in a relationship to LESSEE (except in the case of a rescission allowed pursuant to Section 6.8.1 above), then such event shall be treated as the giving by LESSEE of a rescission notice under Section 6.8.1 above effective as of the later of the date specified for Closing pursuant to Section 6.4.2 above or the date that LESSOR gives to LESSEE written notice of LESSEE's failure to Close. LESSOR shall accept the payment of costs under Section 6.8.2 above as liquidated damages and as its sole remedy for such a failure of LESSEE to Close. 2 Status of Lease. Except as expressly amended hereby, the Lease remains in full force and effect and is hereby ratified and affirmed. IN WITNESS WHEREOF, this Amendment has been executed as of the date and year indicated above. LANLORD: PETULA ASSOCIATES, LTD., an Iowa corporation, and KOLL WOODSIDE ASSOCIATES, a California general partnership, tenants-in-common, doing business as KC WOODSIDE PETULA ASSOCIATES, LTD., an Iowa corporation By: /s/Jon Jacobson Its: Vice President of Commerical Real Estate By: /s/Anne Graff Brown Its: Counsel TENANT: SEQUENT COMPUTER SYSTEMS, INC., an Oregon corporation By: /s/Dan Derby for Bob Witt Its: Vice President of Information Services EX-10.4 6 Second AMENDMENT TO LEASE EARLY POSSESSION AGREEMENT That certain lease dated June 10, 1991, by and between Petula Associates Ltd., and Koll Woodside Associates, Landlord, and Sequent Computer Systems, Inc., Tenant, for the premises located at 15275 SW Koll Parkway, Beaverton, Oregon, 97006, Building 3, Units A, B, C, D, and E, is amended this 1st day of March, 1997 solely as hereinafter described. Effective the lst day of APRIL, 1997, the portions of the Lease as numbered below shall be amended to read as follows: l.e. PREMISES AREA: Tenant shall occupy the expansion premises, Unit C, consisting of 6,238 square feet, effective April 1, 1997. Total Amended Premises Area shall be 25,653 square feet as of this date. Landlord and Tenant agree that all the terms and conditions of the Lease are to be in full force and effect as of the date of Tenant's possession of the premises. 1.g. PREMISES PERCENT OF PROJECT: 19.58% 1.j. RENT ADJUSTMENT - Effective Date of Rent Increase 04/01/97 - 12/31/97 $ 18,403 01/01/98 - 05/31/98 22,257 06/01/98 - 05/31/01 23,509 06/01/01 - 05/31/03 25,025 All other terms and conditions of the above described Lease shall remain in full force and effect. Landlord: PETULA ASSOCIATES, LTD.,, an Iowa Corporation and KOLL WOODSIDE ASSOCIATES, a California general partnership By: /s/Kurt Schaeffer Date: Tenant: SEQUENT COMPUTER SYSTEMS, INC. By: /s/Bob Witt Date: 3/20/97 EX-10.5 7 SEQUENT COMPUTER SYSTEMS, INC. 1995 STOCK INCENTIVE PLAN 1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to enable Sequent Computer Systems, Inc. (the "Company") to attract and retain the services of (1) selected employees, officers and directors of the Company or of any subsidiary of the Company and (2) selected non-employee agents, consultants, advisors, persons involved in the sale or distribution of the Company's products and independent contractors of the Company or any subsidiary. 2. Shares Subject to the Plan. Subject to adjustment as provided below and in paragraph 14, the shares to be offered under the Plan shall consist of Common Stock of the Company, and the total number of shares of Common Stock that may be issued under the Plan shall not exceed 1,200,000 shares plus any shares that are available for grant under the Company's 1989 Incentive Plan or that may subsequently become available for grant under such plan or the 1987 Nonstatutory Stock Option Plan or the 1987 Employee Stock Option through the expiration, termination, forfeiture or cancellation of awards under such plans. The shares issued under the Plan may be authorized and unissued shares or reacquired shares. If an option, stock appreciation right or performance unit granted under the Plan expires, terminates or is cancelled, the unissued shares subject to such option, stock appreciation right or performance unit shall again be available under the Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the Company or repurchased by the Company, the number of shares forfeited or repurchased shall again be available under the Plan. 3. Effective Date and Duration of Plan. (a) Effective Date. The Plan shall become effective as of January 26, 1995 (the "Effective Date"). No option, stock appreciation right or performance unit granted under the Plan to an officer who is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or a director shall become exercisable, however, until the Plan is approved by shareholders in accordance with Rule 16b-3 as in effect at the time of the Company's 1995 annual meeting of shareholders and any such awards under the Plan prior to such approval shall be conditioned on and subject to such approval. Subject to this limitation, options, stock appreciation rights and performance units may be granted and shares may be awarded as bonuses or sold under the Plan at any time after the effective date and before termination of the Plan. (b) Duration. The Plan shall continue in effect until all shares available for issuance under the Plan have been issued and all restrictions on such shares have lapsed. The Board of Directors may suspend or terminate the Plan at any time except with respect to options, performance units and shares subject to restrictions then outstanding under the Plan. Termination shall not affect any outstanding options, any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan. 4. Administration. (a) Board of Directors. The Plan shall be administered by the Board of Directors of the Company, which shall determine and designate from time to time the individuals to whom awards shall be made, the amount of the awards and the other terms and conditions of the awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt and amend rules and regulations relating to administration of the Plan, advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction applicable to shares (except those restrictions imposed by law) and make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Board of Directors shall be final and conclusive. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. (b) Committee. The Board of Directors may delegate to a committee of the Board of Directors or specified officers of the Company, or both (the "Committee") any or all authority for administration of the Plan. If authority is delegated to a Committee, all references to the Board of Directors in the Plan shall mean and relate to the Committee except (i) as otherwise provided by the Board of Directors, (ii) that only the Board of Directors may amend or terminate the Plan as provided in paragraphs 3 and 17 and (iii) that a Committee including officers of the Company shall not be permitted to grant options to persons who are officers of the Company. 5. Types of Awards; Eligibility; Limitations on Certain Awards. The Board of Directors may, from time to time, take the following action, separately or in combination, under the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii) grant options other than Incentive Stock Options ("Non-Statutory Stock Options") as provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as provided in paragraph 7; (iv) sell shares subject to restrictions as provided in paragraph 8; (v) grant stock appreciation rights as provided in paragraph 9; (vi) grant cash bonus rights as provided in paragraph 10; (vii) grant performance units as provided in paragraph 11 and (viii) grant foreign qualified awards as provided in paragraph 12. Any such awards may be made to employees, including employees who are officers or directors, and to other individuals described in paragraph 1 who the Board of Directors believes have made or will make an important contribution to the Company or its subsidiaries; provided, however, that only employees of the Company shall be eligible to receive Incentive Stock Options under the Plan and directors who are not employees shall receive awards only pursuant to paragraph 13. The Board of Directors shall select the individuals to whom awards shall be made and shall specify the action taken with respect to each individual to whom an award is made. At the discretion of the Board of Directors, an individual may be given an election to surrender an award in exchange for the grant of a new award. No employee may be granted options or stock appreciation rights under the Plan for more than an aggregate of 500,000 shares of Common Stock in any calendar year. 6. Option Grants. (a) General Rules Relating to Options. (i) Terms of Grant. The Board of Directors may grant options under the Plan. With respect to each option grant, the Board of Directors shall determine the number of shares subject to the option, the option price, the period of the option, the time or times at which the option may be exercised and whether the option is an Incentive Stock Option or a Non-Statutory Stock Option. At the time of the grant of an option or at any time thereafter, the Board of Directors may provide that an optionee who exercised an option with Common Stock of the Company shall automatically receive a new option to purchase additional shares equal to the number of shares surrendered and may specify the terms and conditions of such new options. (ii) Exercise of Options. Except as provided in paragraph 6(a)(iv) or as determined by the Board of Directors, no option granted under the Plan may be exercised unless at the time of such exercise the optionee is employed by or in the service of the Company or any subsidiary of the Company and shall have been so employed or provided such service continuously since the date such option was granted. Absence on leave or on account of illness or disability under rules established by the Board of Directors shall not, however, be deemed an interruption of employment or service for this purpose. Unless otherwise determined by the Board of Directors, vesting of options shall not continue during an absence on leave (including an extended illness) or on account of disability. Except as provided in paragraphs 6(a)(iv), 14 and 15, options granted under the Plan may be exercised from time to time over the period stated in each option in such amounts and at such times as shall be prescribed by the Board of Directors, provided that options shall not be exercised for fractional shares. Unless otherwise determined by the Board of Directors, if the optionee does not exercise an option in any one year with respect to the full number of shares to which the optionee is entitled in that year, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent year during the term of the option. (iii) Nontransferability. Each Incentive Stock Option and, unless otherwise determined by the Board of Directors with respect to an option granted to a person who is neither an officer nor a director of the Company, each other option granted under the Plan by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionees domicile at the time of death, and each option by its terms shall be exercisable during the optionees lifetime only by the optionee. (iv) Termination of Employment or Service. (A) General Rule. Unless otherwise determined by the Board of Directors, in the event the employment or service of the optionee with the Company or a subsidiary terminates for any reason other than because of physical disability or death as provided in subparagraphs 6(a)(iv)(B) and (C), the option may be exercised at any time prior to the expiration date of the option or the expiration of 30 days after the date of such termination, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination. (B) Termination Because of Total Disability. Unless otherwise determined by the Board of Directors, in the event of the termination of employment or service because of total disability, the option may be exercised at any time prior to the expiration date of the option or the expiration of 12 months after the date of such termination, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination. The term "total disability" means a mental or physical impairment which is expected to result in death or which has lasted or is expected to last for a continuous period of 12 months or more and which causes the optionee to be unable, in the opinion of the Company and two independent physicians, to perform his or her duties as an employee, director, officer or consultant of the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company and the two independent physicians have furnished their opinion of total disability to the Company. (C) Termination Because of Death. Unless otherwise determined by the Board of Directors, in the event of the death of an optionee while employed by or providing service to the Company or a subsidiary, the option may be exercised at any time prior to the expiration date of the option or the expiration of 12 months after the date of such death, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination and only by the person or persons to whom such optionees rights under the option shall pass by the optionee's will or by the laws of descent and distribution of the state or country of domicile at the time of death. (D) Amendment of Exercise Period Applicable to Termination. The Board of Directors, at the time of grant or at any time thereafter, may extend the 30-day and 12-month exercise periods any length of time not later than the original expiration date of the option, and may increase the portion of an option that is exercisable, subject to such terms and conditions as the Board of Directors may determine. (E) Failure to Exercise Option. To the extent that the option of any deceased optionee or of any optionee whose employment or service terminates is not exercised within the applicable period, all further rights to purchase shares pursuant to such option shall cease and terminate. (v) Purchase of Shares. Unless the Board of Directors determines otherwise, shares may be acquired pursuant to an option granted under the Plan only upon receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares as to which the optionee desires to exercise the option and the date on which the optionee desires to complete the transaction, and if required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the optionee's present intention to acquire the shares for investment and not with a view to distribution. Unless the Board of Directors determines otherwise, on or before the date specified for completion of the purchase of shares pursuant to an option, the optionee must have paid the Company the full purchase price of such shares in cash (including, with the consent of the Board of Directors, cash that may be the proceeds of a loan from the Company) or, with the consent of the Board of Directors, in whole or in part, in Common Stock of the Company valued at fair market value, restricted stock, performance units or other contingent awards denominated in either stock or cash, deferred compensation credits, promissory notes and other forms of consideration. The fair market value of Common Stock provided in payment of the purchase price shall be the closing price of the Common Stock as reported in The Wall Street Journal on the trading day preceding the date the option is exercised, or such other reported value of the Common Stock as shall be specified by the Board of Directors. No shares shall be issued until full payment therefor has been made. With the consent of the Board of Directors, an optionee may request the Company to apply automatically the shares to be received upon the exercise of a portion of a stock option (even though stock certificates have not yet been issued) to satisfy the purchase price for additional portions of the option. Each optionee who has exercised an option shall immediately upon notification of the amount due, if any, pay to the Company in cash amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If additional withholding is or becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to the Company on demand. If the optionee fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the optionee, including salary, subject to applicable law. With the consent of the Board of Directors an optionee may satisfy this obligation, in whole or in part, by having the Company withhold from the shares to be issued upon the exercise that number of shares that would satisfy the withholding amount due or by delivering to the Company Common Stock to satisfy the withholding amount. Upon the exercise of an option, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued upon exercise of the option, less the number of shares surrendered in payment of the option exercise or surrendered or withheld to satisfy withholding obligations. (b) Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions: (i) Limitation on Amount of Grants. No employee may be granted Incentive Stock Options under the Plan if the aggregate fair market value, on the date of grant, of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company exceeds $100,000. (ii) Limitations on Grants to 10 Percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary of the Company only if the option price is at least 110 percent of the fair market value of the Common Stock subject to the option on the date it is granted, as described in paragraph 6(b)(iv), and the option by its terms is not exercisable after the expiration of five years from the date it is granted. (iii) Duration of Options. Subject to paragraphs 6(a)(ii) and 6(b)(ii), Incentive Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. (iv) Option Price. The option price per share shall be determined by the Board of Directors at the time of grant. Except as provided in paragraph 6(b)(ii), the option price shall not be less than 100 percent of the fair market value of the Common Stock covered by the Incentive Stock Option at the date the option is granted. The fair market value shall be deemed to be the closing price of the Common Stock as reported in The Wall Street Journal on the day preceding the date the option is granted, or if there has been no sale on that date, on the last preceding date on which a sale occurred, or such other value of the Common Stock as shall be specified by the Board of Directors. (v) Limitation on Time of Grant. No Incentive Stock Option shall be granted on or after the tenth anniversary of the effective date of the Plan. (vi) Conversion of Incentive Stock Options. The Board of Directors may at any time without the consent of the optionee convert an Incentive Stock Option to a Non-Statutory Stock Option. (vii) Limitation on Number of Shares Issuable Under Incentive Stock Options. Subject to adjustment as provided in paragraph 14, the total number of shares of Common Stock that may be issued under the Plan upon exercise of Incentive Stock Options shall not exceed 1,200,000 shares. (c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following additional terms and conditions: (i) Option Price. The option price for Non-Statutory Stock Options shall be determined by the Board of Directors at the time of grant. The option price may not be less than 50 percent of the fair market value of the shares on the date of grant. The fair market value of shares covered by a Non-Statutory Stock Option shall be determined pursuant to paragraph 6(b)(iv). (ii) Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors. 7. Stock Bonuses. The Board of Directors may award shares under the Plan as stock bonuses. Shares awarded as a bonus shall be subject to the terms, conditions, and restrictions determined by the Board of Directors. The restrictions may include restrictions concerning transferability and forfeiture of the shares awarded, together with such other restrictions as may be determined by the Board of Directors. The Board of Directors may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any monetary consideration other than amounts necessary to satisfy tax withholding requirements. The agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors. The certificates representing the shares awarded shall bear any legends required by the Board of Directors. The Company may require any recipient of a stock bonus to pay to the Company in cash upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the recipient, including salary or fees for services, subject to applicable law. With the consent of the Board of Directors, a recipient may deliver Common Stock to the Company to satisfy this withholding obligation. Upon the issuance of a stock bonus, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued, less the number of shares surrendered or withheld to satisfy withholding obligations. 8. Restricted Stock. The Board of Directors may issue shares under the Plan for such consideration (including promissory notes and services) as determined by the Board of Directors provided that in no event shall the consideration be less than 50 percent of fair market value of the Common Stock at the time of issuance. Shares issued under the Plan shall be subject to the terms, conditions and restrictions determined by the Board of Directors. The restrictions may include restrictions concerning transferability, repurchase by the Company and forfeiture of the shares issued, together with such other restrictions as may be determined by the Board of Directors. All Common Stock issued pursuant to this paragraph 8 shall be subject to a purchase agreement, which shall be executed by the Company and the prospective recipient of the shares prior to the delivery of certificates representing such shares to the recipient. The purchase agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors. The certificates representing the shares shall bear any legends required by the Board of Directors. The Company may require any purchaser of restricted stock to pay to the Company in cash upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the purchaser fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the purchaser, including salary, subject to applicable law. With the consent of the Board of Directors, a purchaser may deliver Common Stock to the Company to satisfy this withholding obligation. Upon the issuance of restricted stock, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued, less the number of shares surrendered in payment of the restricted stock or surrendered or withheld to satisfy withholding obligations. 9. Stock Appreciation Rights. (a) Grant. Stock appreciation rights may be granted under the Plan by the Board of Directors, subject to such rules, terms, and conditions as the Board of Directors prescribes. (b) Exercise. (i) Each stock appreciation right shall entitle the holder, upon exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Common Stock of the Company over its fair market value on the date of grant (or, in the case of a stock appreciation right granted in connection with an option, the excess of the fair market value of one share of Common Stock of the Company over the option price per share under the option to which the stock appreciation right relates), multiplied by the number of shares covered by the stock appreciation right or the option, or portion thereof, that is surrendered. No stock appreciation right shall be exercisable at a time that the amount determined under this subparagraph is negative. Payment by the Company upon exercise of a stock appreciation right may be made in Common Stock valued at fair market value, in cash, or partly in Common Stock and partly in cash, all as determined by the Board of Directors. (ii) A stock appreciation right shall be exercisable only at the time or times established by the Board of Directors. If a stock appreciation right is granted in connection with an option, the following rules shall apply: (1) the stock appreciation right shall be exercisable only to the extent and on the same conditions that the related option could be exercised; (2) upon exercise of the stock appreciation right, the option or portion thereof to which the stock appreciation right relates terminates; and (3) upon exercise of the option, the related stock appreciation right or portion thereof terminates. No stock appreciation right granted to an officer or director may be exercised during the first six months following the date it is granted. (iii) The Board of Directors may withdraw any stock appreciation right granted under the Plan at any time and may impose any conditions upon the exercise of a stock appreciation right or adopt rules and regulations from time to time affecting the rights of holders of stock appreciation rights. Such rules and regulations may govern the right to exercise stock appreciation rights granted prior to adoption or amendment of such rules and regulations as well as stock appreciation rights granted thereafter. (iv) For purposes of this paragraph 9, the fair market value of the Common Stock shall be the closing price of the Common Stock as reported in The Wall Street Journal, or such other reported value of the Common Stock as shall be specified by the Board of Directors, on the trading day preceding the date the stock appreciation right is exercised. (v) No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, if the Board of Directors shall determine, the number of shares may be rounded downward to the next whole share. (vi) Each participant who has exercised a stock appreciation right shall, upon notification of the amount due, pay to the Company in cash amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If the participant fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the participant including salary, subject to applicable law. With the consent of the Board of Directors a participant may satisfy this obligation, in whole or in part, by having the Company withhold from any shares to be issued upon the exercise that number of shares that would satisfy the withholding amount due or by delivering Common Stock to the Company to satisfy the withholding amount. (vii) Upon the exercise of a stock appreciation right for shares, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued, less the number of shares surrendered or withheld to satisfy withholding obligations. Cash payments of stock appreciation rights shall not reduce the number of shares of Common Stock reserved for issuance under the Plan. 10. Cash Bonus Rights. (a) Grant. The Board of Directors may grant cash bonus rights under the Plan in connection with (i) options granted or previously granted, (ii) stock appreciation rights granted or previously granted, (iii) stock bonuses awarded or previously awarded and (iv) shares sold or previously sold under the Plan. Cash bonus rights will be subject to rules, terms and conditions as the Board of Directors may prescribe. The payment of a cash bonus shall not reduce the number of shares of Common Stock reserved for issuance under the Plan. (b) Cash Bonus Rights in Connection With Options. A cash bonus right granted in connection with an option will entitle an optionee to a cash bonus when the related option is exercised (or terminates in connection with the exercise of a stock appreciation right related to the option) in whole or in part. No cash bonus right granted to an officer or director in connection with an option may be exercised during the first six months following the date the bonus right is granted. If an optionee purchases shares upon exercise of an option and does not exercise a related stock appreciation right, the amount of the bonus shall be determined by multiplying the excess of the total fair market value of the shares to be acquired upon the exercise over the total option price for the shares by the applicable bonus percentage. If the optionee exercises a related stock appreciation right in connection with the termination of an option, the amount of the bonus shall be determined by multiplying the total fair market value of the shares and cash received pursuant to the exercise of the stock appreciation right by the applicable bonus percentage. The bonus percentage applicable to a bonus right shall be determined from time to time by the Board of Directors but shall in no event exceed 75 percent. (c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus right granted in connection with a stock bonus will entitle the recipient to a cash bonus payable when the stock bonus is awarded or restrictions, if any, to which the stock is subject lapse. If bonus stock awarded is subject to restrictions and is repurchased by the Company or forfeited by the holder, the cash bonus right granted in connection with the stock bonus shall terminate and may not be exercised. The amount and timing of payment of a cash bonus shall be determined by the Board of Directors. (d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus right granted in connection with the purchase of stock pursuant to paragraph 8 will entitle the recipient to a cash bonus when the shares are purchased or restrictions, if any, to which the stock is subject lapse. Any cash bonus right granted in connection with shares purchased pursuant to paragraph 8 shall terminate and may not be exercised in the event the shares are repurchased by the Company or forfeited by the holder pursuant to applicable restrictions. The amount of any cash bonus to be awarded and timing of payment of a cash bonus shall be determined by the Board of Directors. (e) Taxes. The Company shall withhold from any cash bonus paid pursuant to paragraph 10 the amount necessary to satisfy any applicable federal, state and local withholding requirements. 11. Performance Units. The Board of Directors may grant performance units consisting of monetary units which may be earned in whole or in part if the Company achieves certain goals established by the Board of Directors over a designated period of time, but not in any event more than 10 years. The goals established by the Board of Directors may include earnings per share, return on shareholders' equity, return on invested capital, and such other goals as may be established by the Board of Directors. In the event that the minimum performance goal established by the Board of Directors is not achieved at the conclusion of a period, no payment shall be made to the participants. In the event the maximum corporate goal is achieved, 100 percent of the monetary value of the performance units shall be paid to or vested in the participants. Partial achievement of the maximum goal may result in a payment or vesting corresponding to the degree of achievement as determined by the Board of Directors. Payment of an award earned may be in cash or in Common Stock or in a combination of both, and may be made when earned, or vested and deferred, as the Board of Directors determines. Deferred awards shall earn interest on the terms and at a rate determined by the Board of Directors. Each participant who has been awarded a performance unit shall, upon notification of the amount due, pay to the Company in cash amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If the participant fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the participant, including salary or fees for services, subject to applicable law. With the consent of the Board of Directors a participant may satisfy this obligation, in whole or in part, by having the Company withhold from any shares to be issued that number of shares that would satisfy the withholding amount due or by delivering Common Stock to the Company to satisfy the withholding amount. The payment of a performance unit in cash shall not reduce the number of shares of Common Stock reserved for issuance under the Plan. The number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued upon payment of an award, less any shares surrendered or withheld to satisfy withholding obligations. 12. Foreign Qualified Grants. Awards under the Plan may be granted to such officers and employees of the Company and its subsidiaries and such other persons described in paragraph 1 residing in foreign jurisdictions as the Board of Directors may determine from time to time. The Board of Directors may adopt such supplements to the Plan as may be necessary to comply with the applicable laws of such foreign jurisdictions and to afford participants favorable treatment under such laws; provided, however, that no award shall be granted under any such supplement with terms which are more beneficial to the participants than the terms permitted by the Plan. 13. Option Grants to Non-Employee Directors. (a) Initial Board Grants. Each person who becomes a Non-Employee Director after the Effective Date shall be automatically granted an option to purchase 10,000 shares of Common Stock on the date he or she becomes a Non-Employee Director. A "Non-Employee Director" is a director who is not an employee of the Company or any of its subsidiaries and has not been an employee of the Company or any of its subsidiaries within one year of any date as of which a determination of eligibility is made. (b) Additional Board Grants. Each Non-Employee Director shall be automatically granted an option to purchase additional shares of Common Stock in each calendar year subsequent to the year in which such Non-Employee Director became a director, such option to be granted as of the date of the Company's annual meeting of stockholders held in such calendar year, provided that the Non-Employee Director continues to serve in such capacity as of such date. The number of shares subject to each additional grant shall be 5,000 shares. (c) Committee Grants. On the date of each annual meeting of shareholders, each Non-Employee Director who then serves on a committee of the Board of Directors shall be automatically granted an option to purchase 2,000 shares of Common Stock for each committee on which he or she then serves. (d) Exercise Price. The exercise price of the options granted pursuant to this paragraph 13 shall be equal to 85 percent of the fair market value of the Common Stock determined pursuant to paragraph 6(b)(iv). (e) Term of Option. The term of each option granted pursuant to this paragraph 13 shall be 10 years from the date of grant. (f) Exercisability. Until an option expires or is terminated and except as provided in paragraph 13(f), 14 and 15, an option granted under this paragraph 13 shall be exercisable according to the following schedule: Period of Non-Employee Director's Continuous Service as a Director of the Company from the Date Portion of Total Option the Option is Granted Which Is Exercisable Less than 12 months 0% After 12 months 24% plus 2% for each complete month of continuous service in excess of 12 months, until fully vested. For purposes of this paragraph 13(e), a complete month shall be deemed to be the period which starts on the day of grant and ends on the same day of the following calendar month, so that each successive "complete month" ends on the same day of each successive calendar month (or, in respect of any calendar month which does not include such a day, that "complete month" shall end on the first day of the next following calendar month). (g) Termination As a Director. If an optionee ceases to be a director of the Company for any reason, including death, the option may be exercised at any time prior to the expiration date of the option or the expiration of 30 days (or 12 months in the event of death) after the last day the optionee served as a director, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option as of the last day the optionee served as a director. (h) Nontransferability. Each option by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death, and each option by its terms shall be exercisable during the optionee's lifetime only by the optionee. (i) Exercise of Options. Options may be exercised upon payment of cash or shares of Common Stock of the Company in accordance with paragraph 6(a)(v). 14. Changes in Capital Structure. If the outstanding Common Stock of the Company is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split-up, combination of shares or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares available for awards under the Plan. In addition, except with respect to transactions referred to in paragraph 15, the Board of Directors shall make appropriate adjustment in the number and kind of shares as to which outstanding options and stock appreciation rights, or portions thereof then unexercised, shall be exercisable, so that the optionees proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the Board of Directors shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Board of Directors. Any such adjustments made by the Board of Directors shall be conclusive. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger, consolidation or plan of exchange, all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of the last sentence of this paragraph 14. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger. The converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement have been satisfied. In the event of dissolution of the Company or a merger, consolidation or plan of exchange affecting the Company in lieu of providing for options and stock appreciation rights as provided above in this paragraph 14 the Board of Directors may, in its sole discretion, provide a 30-day period prior to such event during which optionees shall have the right to exercise options and stock appreciation rights in whole or in part without any limitation on exercisability and upon the expiration of which 30-day period all unexercised options and stock appreciation rights shall immediately terminate. 15. Special Acceleration in Certain Events. (a) Special Acceleration. Notwithstanding any other provisions of the Plan, a special acceleration ("Special Acceleration") of options and stock appreciation rights outstanding under the Plan shall occur with the effect set forth in paragraph 15(b) at any time when any one of the following events has taken place: (i) The shareholders of the Company approve one of the following ("Approved Transactions"): (A) Any consolidation, merger or plan of exchange involving the Company ("Merger") pursuant to which Common Stock would be converted into cash; or (B) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption of any plan or proposal for the liquidation or dissolution of the Company; or (ii) A tender or exchange offer, other than one made by the Company, is made for Common Stock (or securities convertible into Common Stock) and such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Exchange Act), directly or indirectly, of at least 20 percent of the outstanding Common Stock (an "Offer"); or (iii) The Company receives a report on Schedule 13D of the Exchange Act reporting the beneficial ownership by any person of 20 percent or more of the Company's outstanding Common Stock, except that if such receipt shall occur during a tender offer or exchange offer by any person other than the Company or a wholly owned subsidiary of the Company, Special Acceleration shall not take place until the conclusion of such offer; or (iv) During any period of 12 months or less, individuals who at the beginning of such a period constituted a majority of the Board of Directors cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two thirds of the directors then still in office who were directors at the beginning of such period. The terms used in this paragraph 15 and not defined elsewhere in the Plan shall have the same meanings as such terms have in the Exchange Act and the rules and regulations adopted thereunder. (b) Effect on Outstanding Options and Stock Appreciation Rights. Upon a Special Acceleration pursuant to paragraph 15(a): (i) Exercise or Purchase of Options. All options then outstanding under the Plan shall immediately become exercisable in full for the remainder of their terms, provided that no option may be exercised by an officer or director of the Company within six months of its date of grant; and each optionee shall have the right during a period of 30 days following a Special Acceleration to have the Company purchase any Non-Statutory Stock Options as to which no stock appreciation rights have been granted at a cash purchase price computed in accordance with paragraph 15(b)(iii) below and any Incentive Stock Options as to which no stock appreciation rights have been granted at a cash purchase price equal to the product of (1) the excess, if any, of the fair market value of a share of Common Stock (computed in accordance with procedures for granting Incentive Stock Options) over the option price and (2) the number of shares of Common Stock covered by the Incentive Stock Options or portion thereof surrendered, provided that the Company shall have the right during such period to purchase any Incentive Stock Option as to which no stock appreciation rights have been granted at the purchase price computed in accordance with paragraph 15(b)(iii) below. With respect to an option (as to which no stock appreciation rights have been granted) granted less than six months prior to a Special Acceleration to an officer or director of the Company, the officer or director shall have the right to have the Company purchase such stock option in accordance with this paragraph 14(b)(i) during the 30 days following the expiration of six months after the date of such grant, and this right shall apply even if the option has otherwise terminated pursuant to paragraph 6(a)(iv) after a Special Acceleration. (ii) All stock appreciation rights outstanding under the Plan shall immediately become exercisable in full for a period of 30 days following a Special Acceleration, with payment to be made solely in cash upon any exercise during such period of a stock appreciation right granted with respect to a Non-Statutory Stock Option in an amount computed in accordance with paragraph 15(b)(iii) below, and in cash upon exercise during such period of a stock appreciation right granted with respect to an Incentive Stock Option in an amount equal to the product of (1) the excess, if any, of the fair market value of a Common Share (computed in accordance with procedures for granting Incentive Stock Options) over the exercise price of the related option and (2) the number of shares of Common Stock covered by the related option. Notwithstanding the foregoing, the Company shall have the right during such period to purchase any stock appreciation right granted with respect to an Incentive Stock Option (and cancel the related options) at the purchase price computed in accordance with paragraph 15(b)(iii) below, and no stock appreciation right may be exercised by an officer or director of the Company within six months of its date of grant. With respect to a stock appreciation right granted less than six months prior to a Special Acceleration to an officer or director of the Company, the stock appreciation right shall become exercisable in full for a period of 30 days following the expiration of six months after the date of such grant, and this right shall apply even if the stock appreciation right has otherwise terminated pursuant to paragraph 6(a)(iv) after a Special Acceleration. (iii) Except as otherwise specified in paragraphs 15(b)(i) and 15(b)(ii) above, the purchase price for an option or a stock appreciation right and the amount to be paid upon exercise of a stock appreciation right shall be an amount equal to the product of (1) the excess, if any, of the highest of (A) the highest reported closing sales price of a share of Common Stock as reported in The Wall Street Journal during the 60 days preceding such exercise, (B) the highest purchase price shown in any Schedule 13D referred to in paragraphs 15(a)(ii) or 15(a)(iii) as paid within the 60 days prior to the date of such report, (C) the highest gross price (before brokerage commissions and soliciting dealers' fees) paid or to be paid for a share of Common Stock (whether by way of exchange, conversion, distribution, or liquidation or otherwise) in any Approved Transaction or Offer that is in effect at any time during the 60 days preceding such exercise, over the option price, and (2) the number of shares of Common Stock covered by the stock option or stock appreciation right, or portions thereof surrendered. If the consideration paid or to be paid in any Approved Transaction or offer consists, in whole or part, of consideration other than cash, the Board of Directors shall take action it deems appropriate to establish the cash value of the consideration, but the valuation shall not be less than the value, if any, attributed to the consideration by any other party to the Approved Transaction or Offer. (iv) No options or stock appreciation rights may be exercised upon a Special Acceleration if the amount determined under paragraph 15(b)(iii) is negative. The rights set forth in paragraph 15 shall be transferable only to the extent the related option is transferable in accordance with paragraph 6(a)(iii). 16. Corporate Mergers, Acquisitions, etc. The Board of Directors may also grant options, stock appreciation rights, performance units, stock bonuses and cash bonuses and issue restricted stock under the Plan having terms, conditions and provisions that vary from those specified in this Plan provided that any such awards are granted in substitution for, or in connection with the assumption of, existing options, stock appreciation rights, stock bonuses, cash bonuses, restricted stock and performance units granted, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary is a party. 17. Amendment of Plan. The Board of Directors may at any time, and from time to time, modify or amend the Plan in such respects as it shall deem advisable because of changes in the law while the Plan is in effect or for any other reason. Except as provided in paragraphs 6(a)(iv), 9, 14 and 15, however, no change in an award already granted shall be made without the written consent of the holder of such award. 18. Approvals. The obligations of the Company under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company's shares may then be listed, in connection with the grants under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under the Plan if such issuance or delivery would violate applicable state or federal securities laws. 19. Employment and Service Rights. Nothing in the Plan or any award pursuant to the Plan shall (i) confer upon any employee any right to be continued in the employment of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary by whom such employee is employed to terminate such employee's employment at any time, for any reason, with or without cause, or to decrease such employee's compensation or benefits, or (ii) confer upon any person engaged by the Company any right to be retained or employed by the Company or to the continuation, extension, renewal, or modification of any compensation, contract, or arrangement with or by the Company. 20. Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect to any Common Stock until the date of issue to the recipient of a stock certificate for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. EX-10.6 8 SEQUENT COMPUTER SYSTEMS, INC. 1997 STOCK OPTION PLAN 1. Purpose. The purpose of this Stock Option Plan (the "Plan") is to enable Sequent Computer Systems, Inc. (the "Company") to attract and retain the services of executive officers and directors of the Company or of any subsidiary of the Company. 2. Shares Subject to the Plan. Subject to adjustment as provided below and in paragraph 9, the shares to be offered under the Plan shall consist of Common Stock of the Company, and the total number of shares of Common Stock that may be issued under the Plan shall not exceed 750,000 shares plus any shares that become available for grant under the Plan through the expiration, termination or cancellation of option grants under the Plan. The shares issued under the Plan may be authorized and unissued shares or reacquired shares. If an option granted under the Plan expires, terminates or is canceled, the unissued shares subject to such option shall again be available under the Plan. 3. Effective Date and Duration of the Plan. (a) Effective Date. The Plan shall become effective as of March 11, 1997 (the "Effective Date"). Options may be granted under the Plan at any time after the Effective Date and before termination of the Plan. (b) Duration. The Plan shall continue in effect until all shares available for issuance under the Plan have been issued. The Board of Directors may suspend or terminate the Plan at any time except with respect to options then outstanding under the Plan. Termination shall not affect any outstanding options under the Plan. 4. Administration. (a) Board of Directors. The Plan shall be administered by the Board of Directors of the Company, which shall determine and designate from time to time the executive officers and directors to whom option grants shall be made, the amount of the grants and the other terms and conditions of the awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt and amend rules and regulations relating to administration of the Plan, advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction applicable to shares (except those restrictions imposed by law) and make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Board of Directors shall be final and conclusive. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. (b) Committee. The Board of Directors may delegate to a committee of the Board of Directors (the "Committee") any or all authority for administration of the Plan. If authority is delegated to a Committee, all references to the Board of Directors in the Plan shall mean and relate to the Committee except (i) as otherwise provided by the Board of Directors and (ii) that only the Board of Directors may amend or terminate the Plan as provided in paragraphs 3 and 12. 5. Types of Awards; Eligibility; Limitations on Certain Awards. The Board of Directors may, from time to time, take the following action, separately or in combination, under the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii) grant options other than Incentive Stock Options ("Non-Statutory Stock Options") as provided in paragraphs 6(a) and 6(c); and (iii) grant foreign qualified awards as provided in paragraph 7. Option grants may be made to executive officers of the Company and to non-employee directors providing consulting services to the Company selected by the Board of Directors. The Board of Directors shall select the executive officers and directors to whom grants shall be made and shall specify the action taken with respect to each individual to whom a grant is made. The Board of Directors shall determine which employees or officers are executive officers for purposes of the Plan. At the discretion of the Board of Directors, an individual may be given an election to surrender an award in exchange for the grant of a new award. No employee may be granted options under the Plan for more than an aggregate of 300,000 shares of Common Stock in any calendar year. 6. Option Grants. (a) General Rules Relating to Options. (i) Terms of Grant. With respect to each option grant, the Board of Directors shall determine the number of shares subject to the option, the option price, the period of the option, the time or times at which the option may be exercised and whether the option is an Incentive Stock Option or a Nonstatutory Stock Option. (ii) Exercise of Options. Except as provided in paragraph 6(a)(iv) or as determined by the Board of Directors, no option granted under the Plan may be exercised unless at the time of such exercise the optionee is employed by or performing services for the Company or any subsidiary of the Company and shall have been so employed continuously since the date such option was granted. Absence on leave or on account of illness or disability under rules established by the Board of Directors shall not, however, be deemed an interruption of employment or service for this purpose. Unless otherwise determined by the Board of Directors, vesting of options shall not continue during an absence on leave (including an extended illness) or on account of disability. Except as provided in paragraphs 6(a)(iv), 9 and 10, options granted under the Plan may be exercised from time to time over the period stated in each option in such amounts and at such times as shall be prescribed by the Board of Directors, provided that options shall not be exercised for fractional shares. Unless otherwise determined by the Board of Directors, if the optionee does not exercise an option in any one year with respect to the full number of shares to which the optionee is entitled in that year, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent year during the term of the option. (iii) Nontransferability. Each Incentive Stock Option and, unless otherwise determined by the Board of Directors, each other option granted under the Plan by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionees domicile at the time of death, and each option by its terms shall be exercisable during the optionees lifetime only by the optionee. (iv) Termination of Employment or Service. (A) General Rule. Unless otherwise determined by the Board of Directors, in the event the employment or service of the optionee with the Company or a subsidiary terminates for any reason other than because of physical disability or death as provided in subparagraphs 6(a)(iv)(B) and (C), the option may be exercised at any time prior to the expiration date of the option or the expiration of 30 days after the date of such termination, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination. (B) Termination Because of Total Disability. Unless otherwise determined by the Board of Directors, in the event of the termination of employment or service because of total disability, the option may be exercised at any time prior to the expiration date of the option or the expiration of 12 months after the date of such termination, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination. The term "total disability" means a mental or physical impairment which is expected to result in death or which has lasted or is expected to last for a continuous period of 12 months or more and which causes the optionee to be unable, in the opinion of the Company and two independent physicians, to perform his or her duties as an employee, director, officer or consultant of the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company and the two independent physicians have furnished their opinion of total disability to the Company. (C) Termination Because of Death. Unless otherwise determined by the Board of Directors, in the event of the death of an optionee while employed by or providing service to the Company or a subsidiary, the option may be exercised at any time prior to the expiration date of the option or the expiration of 12 months after the date of such death, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of such termination and only by the person or persons to whom such optionees rights under the option shall pass by the optionee's will or by the laws of descent and distribution of the state or country of domicile at the time of death. (D) Amendment of Exercise Period Applicable to Termination. The Board of Directors, at the time of grant or at any time thereafter, may extend the 30-day and 12-month exercise periods any length of time not later than the original expiration date of the option, and may increase the portion of an option that is exercisable, subject to such terms and conditions as the Board of Directors may determine. (E) Failure to Exercise Option. To the extent that the option of any deceased optionee or of any optionee whose employment or service terminates is not exercised within the applicable period, all further rights to purchase shares pursuant to such option shall cease and terminate. (v) Purchase of Shares. Unless the Board of Directors determines otherwise, shares may be acquired pursuant to an option granted under the Plan only upon receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares as to which the optionee desires to exercise the option and the date on which the optionee desires to complete the transaction, and if required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the optionee's present intention to acquire the shares for investment and not with a view to distribution. Unless the Board of Directors determines otherwise, on or before the date specified for completion of the purchase of shares pursuant to an option, the optionee must have paid the Company the full purchase price of such shares in cash (including, with the consent of the Board of Directors, cash that may be the proceeds of a loan from the Company) or, with the consent of the Board of Directors, in whole or in part, in Common Stock of the Company valued at fair market value. The fair market value of Common Stock provided in payment of the purchase price shall be the closing price of the Common Stock as reported in The Wall Street Journal on the trading day preceding the date the option is exercised, or such other reported value of the Common Stock as shall be specified by the Board of Directors. No shares shall be issued until full payment therefor has been made. With the consent of the Board of Directors, an optionee may request the Company to apply automatically the shares to be received upon the exercise of a portion of a stock option (even though stock certificates have not yet been issued) to satisfy the purchase price for additional portions of the option. Each optionee who has exercised an option shall immediately upon notification of the amount due, if any, pay to the Company in cash amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If additional withholding is or becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to the Company on demand. If the optionee fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the optionee, including salary, subject to applicable law. With the consent of the Board of Directors an optionee may satisfy this obligation, in whole or in part, by having the Company withhold from the shares to be issued upon the exercise that number of shares that would satisfy the withholding amount due or by delivering to the Company Common Stock to satisfy the withholding amount. Upon the exercise of an option, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued upon exercise of the option, less the number of shares surrendered in payment of the option exercise or surrendered or withheld to satisfy withholding obligations. (b) Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions: (i) Limitation on Amount of Grants. Incentive Stock Options may be granted only to employees of the Company or its subsidiaries. No employee may be granted Incentive Stock Options under the Plan if the aggregate fair market value, on the date of grant, of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company exceeds $100,000. (ii) Limitations on Grants to 10 Percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or sub- sidiary of the Company only if the option price is at least 110 percent of the fair market value of the Common Stock subject to the option on the date it is granted, as described in paragraph 6(b)(iv), and the option by its terms is not exercisable after the expiration of five years from the date it is granted. (iii) Duration of Options. Subject to paragraphs 6(a)(ii) and 6(b)(ii), Incentive Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. (iv) Option Price. The option price per share shall be determined by the Board of Directors at the time of grant. Except as provided in paragraph 6(b)(ii), the option price shall not be less than 100 percent of the fair market value of the Common Stock covered by the Incentive Stock Option at the date the option is granted. The fair market value shall be deemed to be the closing price of the Common Stock as reported in The Wall Street Journal on the day preceding the date the option is granted, or if there has been no sale on that date, on the last preceding date on which a sale occurred, or such other value of the Common Stock as shall be specified by the Board of Directors. (v) Limitation on Time of Grant. No Incentive Stock Option shall be granted on or after the tenth anniversary of the effective date of the Plan. (vi) Conversion of Incentive Stock Options. The Board of Directors may at any time without the consent of the optionee convert an Incentive Stock Option to a Non-Statutory Stock Option. (vii) Limitation on Number of Shares Issuable Under Incentive Stock Options. Subject to adjustment as provided in paragraph 9, the total number of shares of Common Stock that may be issued under the Plan upon exercise of Incentive Stock Options shall not exceed 750,000 shares. (c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following additional terms and conditions: (i) Option Price. The option price for Non-Statutory Stock Options shall be determined by the Board of Directors at the time of grant. The option price may not be less than 85 percent of the fair market value of the shares on the date of grant. The fair market value of shares covered by a Non-Statutory Stock Option shall be determined pursuant to paragraph 6(b)(iv). (ii) Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors. 7. Foreign Qualified Grants. Options may be granted under the Plan to such executive officers of the Company and its subsidiaries residing in foreign jurisdictions as the Board of Directors may determine from time to time. The Board of Directors may adopt such supplements to the Plan as may be necessary to comply with the applicable laws of such foreign jurisdictions and to afford participants favorable treatment under such laws; provided, however, that no award shall be granted under any such supplement with terms which are more beneficial to the participants than the terms permitted by the Plan. 8. Automatic Option Grants to Non-Employee Directors. (a) Initial Board Grants. Each person who becomes a Non-Employee Director after the Effective Date shall be automatically granted an option to purchase 10,000 shares of Common Stock on the date he or she becomes a Non-Employee Director. A "Non-Employee Director" is a director who is not an employee of the Company or any of its subsidiaries. (b) Additional Board Grants. Each Non-Employee Director shall be automatically granted an option to purchase additional shares of Common Stock in each calendar year subsequent to the year in which such Non- Employee Director became a director, such option to be granted as of the date of the Company's annual meeting of stockholders held in such calendar year, provided that the Non-Employee Director continues to serve in such capacity as of such date. The number of shares subject to each additional grant shall be 5,000 shares. (c) Committee Grants. On the date of each annual meeting of shareholders, each Non-Employee Director who then serves on a committee of the Board of Directors shall be automatically granted an option to purchase 2,000 shares of Common Stock for each committee on which he or she then serves. (d) Exercise Price. The exercise price of the options granted pursuant to this paragraph 8 shall be equal to 85 percent of the fair market value of the Common Stock determined pursuant to paragraph 6(b)(iv). (e) Term of Option. The term of each option granted pursuant to this paragraph 8 shall be 10 years from the date of grant. (f) Exercisability. Until an option expires or is terminated and except as provided in paragraph 8(g), 9 and 10, an option granted under this paragraph 8 shall be exercisable according to the following schedule: Period of Non-Employee Director's Continuous Service as a Director of the Portion of Total Option Company from the Date the Option is Granted Which is Exercisable Less than 12 months 0% After 12 months 24% plus 2% for each complete month of continuous service in excess of 12 months, until fully vested. For purposes of this paragraph 8(f), a complete month shall be deemed to be the period which starts on the day of grant and ends on the same day of the following calendar month, so that each successive "complete month" ends on the same day of each successive calendar month (or, in respect of any calendar month which does not include such a day, that "complete month" shall end on the first day of the next following calendar month). (g) Termination As a Director. Unless otherwise determined by the Board of Directors, if an optionee ceases to be a director of the Company for any reason, including death, the option may be exercised at any time prior to the expiration date of the option or the expiration of 30 days (or 12 months in the event of death) after the last day the optionee served as a director, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option as of the last day the optionee served as a director. (h) Nontransferability. Unless otherwise determined by the Board of Directors, each option by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death, and each option by its terms shall be exercisable during the optionee's lifetime only by the optionee. (i) Exercise of Options. Options may be exercised upon payment of cash or shares of Common Stock of the Company in accordance with paragraph 6(a)(v). 9. Changes in Capital Structure. If the outstanding Common Stock of the Company is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock splitup, combination of shares or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares available for awards under the Plan. In addition, the Board of Directors shall make appropriate adjustment in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, so that the optionee's proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the Board of Directors shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Board of Directors. Any such adjustments made by the Board of Directors shall be conclusive. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger, consolidation or plan of exchange, all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of the last sentence of this paragraph 9. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger. The converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement have been satisfied. In the event of dissolution of the Company or a merger, consolidation or plan of exchange affecting the Company in lieu of providing for options as provided above in this paragraph 9 the Board of Directors may, in its sole discretion, provide a 30-day period prior to such event during which optionees shall have the right to exercise options in whole or in part without any limitation on exercisability and upon the expiration of such 30-day period, all unexercised options shall immediately terminate. 10. Special Acceleration in Certain Events. (a) Special Acceleration. Notwithstanding any other provisions of the Plan, a special acceleration ("Special Acceleration") of options outstanding under the Plan shall occur with the effect set forth in paragraph 10(b) at any time when any one of the following events has taken place: (i) The shareholders of the Company approve one of the following ("Approved Transactions"): (A) Any consolidation, merger or plan of exchange involving the Company ("Merger") pursuant to which Common Stock would be converted into cash; or (B) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption of any plan or proposal for the liquidation or dissolution of the Company; or (ii) A tender or exchange offer, other than one made by the Company, is made for Common Stock (or securities convertible into Common Stock) and such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Exchange Act), directly or indirectly, of at least 20 percent of the outstanding Common Stock (an "Offer"); or (iii) The Company receives a report on Schedule 13D of the Exchange Act reporting the beneficial ownership by any person of 20 percent or more of the Company's outstanding Common Stock, except that if such receipt shall occur during a tender offer or exchange offer by any person other than the Company or a wholly owned subsidiary of the Company, Special Acceleration shall not take place until the conclusion of such offer; or (iv) During any period of 12 months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two thirds of the directors then still in office who were directors at the beginning of such period. The terms used in this paragraph 10 and not defined elsewhere in the Plan shall have the same meanings as such terms have in the Exchange Act and the rules and regulations adopted thereunder. (b) Effect on Outstanding Options and Stock Appreciation Rights. Upon a Special Acceleration pursuant to paragraph 10(a), all options then outstanding under the Plan shall immediately become exercisable in full for the remainder of their terms or until terminated pursuant to paragraph 9. 11. Corporate Mergers, Acquisitions, etc. The Board of Directors may also grant options under the Plan having terms, conditions and provisions that vary from those specified in this Plan provided that any such options are granted in substitution for, or in connection with the assumption of, existing options, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, reorganization or liquidation to which the Company or a subsidiary is a party. 12. Amendment of Plan. The Board of Directors may at any time, and from time to time, modify or amend the Plan in such respects as it shall deem advisable because of changes in the law while the Plan is in effect or for any other reason. Except as provided in paragraphs 6, 9 and 10, however, no change in an award already granted shall be made without the written consent of the holder of such award. 13. Approvals. The obligations of the Company under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company's shares may then be listed, in connection with the grants under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under the Plan if such issuance or delivery would violate applicable state or federal securities laws. 14. Employment and Service Rights. Nothing in the Plan or any award pursuant to the Plan shall (i) confer upon any employee any right to be continued in the employment of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary by whom such employee is employed to terminate such employee's employment at any time, for any reason, with or without cause, or to decrease such employee's compensation or benefits, or (ii) confer upon any person engaged by the Company any right to be retained or employed by the Company or to the continuation, extension, renewal, or modification of any compensation, contract, or arrangement with or by the Company. 15. Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect to any Common Stock until the date of issue to the recipient of a stock certificate for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. EX-10.7 9 SPONSORSHIP AGREEMENT This agreement ("Agreement") is entered into this 23rd day of January 1998, by and between Team Scandia, Inc. (hereinafter "Scandia"), a Delaware corporation, with its principal place of business at 701 S. Girls School Road, Indianapolis, IN 46231 and Sequent Computer Systems, Inc. (hereinafter "Sequent"), an Oregon corporation, with its principal place of business at 15450 SW Koll Parkway, Beaverton, OR 97006-6063. Recitals WHEREAS, Scandia has a present right to use, for promotional purposes, a top fuel dragster owned by Scandia. Further, Scandia shall employ a professional race car driver ("Driver"), to be mutually agreed upon by the parties, to drive Scandia's top fuel dragster on the National Hot Rod Association ("NHRA") top fuel dragster circuit. WHEREAS, Sequent is engaged in the business of manufacturing a family of high performance, multiprocessing computer systems. WHERAS, Sequent desires to sponsor Scandia in order to assist in the promotion, marketing and advertising of its computer systems. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1) Display of Corporate Name and Logo: Subject to the conditions and upon the terms set forth herein, Scandia hereby allows Sequent to promote its computer systems business by causing placement of the corporate name and logo (collectively "Logo") used by Sequent in its promotional efforts on Scandia's competition top fuel dragster ("Competition Dragster") driven by Driver, for promotional purposes. In addition to placing the Logo on the Competition Dragster, the Logo shall appear on the trailer used by Scandia to transport the Competition Dragster and on patches/embroidery attached to the firesuit of the driver, as per the art work attached as Exhibit A and incorporated herein. 2) Term: The initial term of this Agreement shall be for the period beginning January 8, 1998, and ending November 10, 1998. Sequent must give Scandia written notice, via certified mail, no less than thirty (30) days prior to the end of the initial term of its intent to renew this Agreement. Thereafter, the parties agree to negotiate in good faith for the renewal of this Agreement. If the parties are unable to reach a mutual agreement for the renewal of this Agreement prior to November 10, 1998, then this Agreement shall terminate and neither party shall have any further obligations hereunder except as to those obligations that may have accrued prior to such termination. 3) Payment Schedule: Sequent will pay Scandia the sum of $450,000.00 for the 1998 race season. All funds will be dedicated specifically to the NHRA dragster program. Payment schedule is as follows: Upon Signing: $ 112,500.00 April 1st $ 112,500.00 July 1st $ 112,500.00 October 1st $ 112,500.00 4) The Dragster: (a) During the term of this Agreement, Scandia hereby agrees to cause the Logo to be prominently displayed on the Competition Dragster as provided in Paragraph 1 herein. Sequent will have the sole responsibility to supply the artwork for placement of the Logo on the Competition Dragster and on all other display areas referred to in Paragraph 1 herein. Scandia shall pay all costs associated therewith, including expenses associated with the placement of the Logo on the Competition Dragster or other areas referred to herein. (b) Sequent acknowledges that this is a non-exclusive agreement and that associated sponsors may display their corporate names and logos on the Competition Dragster. Sequent will receive logos measuring 9" x 36" on the Dragster and 1' x 7' on both sides of the trailer and on the rear door of the trailer. Sequent will be listed on all entries as being a sponsor for the team. (c) All sponsors will share costs for producing team hats and T- shirts. Sequent will be included in all team merchandise by Scandia. 5) Racing Schedules: The parties agree that the Competition Dragster will be present and compete at the 1998 NHRA events listed in Exhibit B subsequent to the Effective Date of this Agreement. 6) Hospitality Truck and Trailer: Sequent will allow Scandia to use Sequent's Hospitality Truck and Trailer and Scandia will be providing all inclusive hospitality for Sequent and its guests at each NHRA event. Saturdays will be exclusive to Sequent's use and Sundays will be open to all. (Sequent has a 100-person cap per event). 7) Use of Name and Accomplishment: Scandia agrees to allow Sequent to use Scandia's name and Scandia's racing accomplishments from past years, and any of Driver's accomplishments that may occur during the term of this Agreement, in order to further advertise and promote Sequent's products. Upon the termination of this Agreement, all rights to the use by Sequent of Scandia's name shall lapse and terminate. Sequent wishes to have Driver meet its guests and sign autographs each day during race weekends. 8) Parking: Sequent, and its guests, shall park side by side in the pit area with Scandia subject to approval of track owner and NHRA for each race. Hospitality: All races that Sequent participates in hospitality there will be a $221.00 parking fee to be paid to Scandia. Total for 11 races will be $2,431.00. Fifty percent upon signing and fifty percent due July 1, 1998. 9) Insurance: Scandia agrees that it will at all relevant times during the term of this Agreement, and at no cost and expense to Sequent, maintain or cause to be maintained, public liability insurance upon Scandia, its agents and representatives, against claims for bodily injury, death or property damage resulting from the negligent acts or omissions of Scandia, its agents and representatives in the performance of their duties under the terms of this Agreement. Such insurance shall afford protection, with respect to the business premises used by Scandia, to a combined single limit of $10,000,000, with respect to bodily injury and property damage for a single occurrence. Such insurance will also afford protection, with respect to the truck and trailer used by Scandia, in the transportation of the Competition Dragster in a combined single policy limit of not less than $325,000 per occurrence. Additionally, Scandia shall maintain, or cause to be maintained, a $1,000,000 combined single limit liability policy to cover bodily injury or property damage to third parties while using the truck and trailer. All insurance policies required to be maintained by Scandia under the terms of this Agreement shall name Sequent as an additional insured. Notwithstanding the foregoing, Sequent understands that during the term of this Agreement, Scandia will maintain public liability insurance during those times when it is competing with the Competition Dragster. During such times of competition, Scandia represents and warrants that such insurance is provided by NHRA and will be maintained and provided for sponsors such as Sequent. Accordingly, Sequent's sponsorship shall extend only to: (a) top fuel dragster events, including those described on Exhibit B, held during the term of this Agreement, sanctioned by the NHRA and covered by public liability insurance no less in amount and coverage than that shown on Exhibit C, attached hereto, and provided by an insurance company with at least a Best Insurance Guide A rating; and (b) top fuel dragster practice runs at tracks which are covered by public liability insurance no less in amount and coverage as set out in (a) above. 10) No Agency, Partnership or Joint Venture: Each party hereto acknowledges and represents to the other that this Agreement provides merely for the sponsorship, through rights which Sequent acquires in Scandia, and is procured and administered by Scandia, with regard to the Competition Dragster. Nothing contained herein shall be deemed to create an agency, joint venture, or partnership between the parties. Except as specifically provided in this Agreement, each party is prohibited from acting for or on behalf of the other party. 11) Driver's Obligation: Scandia acknowledges that Driver is Scandia's professional driver for its top fuel Competition Dragster in the top fuel competition dragster circuit. Accordingly, Scandia agrees that it will do all things reasonable and necessary to fulfill the terms and conditions of this Agreement. If for any reason, whether through the fault of Scandia or otherwise, Scandia is in any way prohibited from carrying out its obligations under the terms and conditions of this Agreement, then, in such event, Sequent shall be entitled at its sole discretion, to cease making any further payments of the fee as may then be owing under Paragraph 3 herein, in addition to any other rights that Sequent has herein, or at law or in equity. 12) Assignment: Each party to this Agreement shall be restricted from assigning, conveying or transferring its rights and obligations, except as between a party and its affiliates, under this Agreement without the express written consent of the other party hereto, which consent shall not be unreasonably withheld. 13) Indemnification: (a) Scandia agrees to indemnify and hold harmless Sequent against any costs (including reasonable attorney fees), losses, claims, damages or liabilities, joint and/or several, to which Sequent, or its subsidiaries, may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon Scandia's racing activities and performance of its respective obligations hereunder. (b) Sequent agrees to indemnify and hold Scandia harmless against any costs (including reasonable attorney fees), losses, claims, damages or liabilities, joint and/or several, to which Scandia may be subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon Sequent's wrongful use of Scandia's name. 14) Termination: (a) Either party may terminate this Agreement upon thirty- (30) days prior written notice to the other party if the other party is in default of any provision of this Agreement and such default is not cured within the thirty- (30) day period. (b) Either party may terminate this Agreement by written notice to the other party upon (i) the other party becoming insolvent; (ii) any proceeding under the bankruptcy or insolvency laws is brought by or against the other party which is not dismissed within thirty (30) days; (iii) the appointment of a receiver or a similar officer for the other party or for a substantial part of the other party's property; (iv) the other party making an assignment for the benefit of creditors or otherwise being reorganized for the benefit of creditors. 15) Limitation of Liability: EXCEPT FOR DAMAGES DESCRIBED IN SECTION 13 HEREIN, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY DAMAGES RESULTING FROM A LOSS OF PROFITS OR USE, OR FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 16) Notices: Notices under this Agreement shall be in writing and delivered to the following person at the following addresses: In the case of Sequent: Sequent Computer Systems, Inc. 15450 SW Koll Parkway Beaverton, Oregon 97006-6063 Attn: Lynn Sunahara Manager, Contracts In the case of Scandia: Team Scandia, Inc. 701 S. Girls School Road Indianapolis, IN 46231 Attn: Tom Leix Dir. Of Public Relations & Marketing The effective date for notices under this Agreement shall be the date of delivery and not the date of mailing. 17) Governing Law: This Agreement will be construed in accordance with the laws of the State of Oregon, without regard to the choice of law principles. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. TEAM SCANDIA, INC. SEQUENT COMPUTER SYSTEMS, INC. By: /s/Andrew L. Evans By: /s/Stephen F. Loughlin Name: Andrew L. Evans Name: Stephen F. Loughlin Title: President Title: Corporate Controller EXHIBIT B 1998 RACING SCHEDULE DATE EVENT LOCATION January 30- Feb 1 Pomona, CA March 5-8 Gainesville, FL March 20-22 Houston, TX April 24-26 Richmond,VA May 15-17 Englishtown, PA May 23 Match Race (2runs) Norwalk, OH May 29-31 Joliet, IL June 12-14 Columbus,OH June 26-28 St. Louis, MO July 17-19 Denver, CO July 24-26 Sonoma, CA July 31-Aug 2 Seattle, WA September 3-6 Indianapolis, IN September 17-20 Reading, PA October 2-4 Topeka, KS October 23-25 Dallas, TX November 12-15 Winston Select Finals Pomona, CA EX-10.8 10 RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement ("Agreement") is entered into as of November 18, 1997 between DP Applications, Inc., an Oregon corporation (the "Company"), and The Robert W. Wilmot and Mary J. Wilmot, trustees of the Wilmot Living Trust U/D/T dated April 18th 1995 ("Purchaser"), in connection with the performance of consulting services to the Company by Robert W. Wilmot ("Wilmot"). In consideration of the mutual promises set forth in this Agreement, the parties agree as follows: 1. Sale of Shares. Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser, 180,000 shares of common stock of the Company (the "Shares") at a price of $0.15 per share, for a total purchase price of $27,000, payable in cash. In addition to terms and conditions set forth in this Agreement, the Shares shall be subject to the restrictions on transfer contained in Article VII of the Company's Bylaws. To secure its rights under the Repurchase Option described in Section 2, the Company will retain the certificate or certificates representing the Shares. Purchaser will deliver to the Company executed blank stock powers covering the Shares subject to the Repurchase Option. The closing of this sale shall occur upon receipt by the Company from Purchaser of an executed copy of this Agreement, full payment of the purchase price for the Shares, and executed blank stock powers covering the Shares. 2. Repurchase Option. 2.1 Termination of Consulting Services. If Wilmot ceases to be a consultant to DP for any reason other than death, then the Company shall have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from the date the consulting services ended (the "Termination Date") to repurchase at the original price per Share set forth in Section 1 all of the Shares held by Purchaser on such date that have not been released from the Repurchase Option as provided in Section 2.4. If Wilmot ceases to be a consultant to DP by reason of death, the Repurchase Option shall not apply to the Shares, but shall terminate as to all of the Shares as of the date of death. It is understood that termination of consulting services may be effected by either party for any reason with or without cause upon 30 days written notice. 2.2 Exercise of Option. The Repurchase Option shall be exercised by the Company within 60 days of the Termination Date (such 60-day period, the "Exercise Period") by delivering to Purchaser a written notice of exercise of the Repurchase Option and a check in the amount of the purchase price. Upon delivery of such notice and payment of the purchase price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased without further action by Purchaser. 2.3 Termination of Repurchase Option. If the Company does not exercise the Repurchase Option before the end of the Exercise Period, the Repurchase Option shall terminate. 2.4 Release from Repurchase Option. Twenty-five percent (25%) of the Shares shall be immediately released from the Repurchase Option on the date of this Agreement. The balance of the Shares shall be released from the Repurchase Option over a period of three years, subject to continuous consulting service to the Company by Wilmot. For each month of service beginning on August 1, 1997, 3,750 shares shall be released from the Repurchase Option on the last day of the month. If Wilmot performs continuous consulting services for the Company through July 31, 2000, all Shares shall have been released from the Repurchase Option by such date. At the request of Purchaser, the Company will deliver to Purchaser a certificate or certificates representing the Shares released from the Repurchase Option. 2.4.1 Accelerated Release From Repurchase Option Upon Sequent Change of Control. If at any time before all of the Shares have been released from the Repurchase Option, there is a Change of Control of the Company, all Shares then subject to the Repurchase Option shall immediately be released from the Repurchase Option, and the Repurchase Option shall terminate as of the date of the Change of Control. As used in this Agreement, the term "Change of Control of the Company" means the occurrence either of the following events: (a) Any "person" (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than Sequent or its subsidiaries is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act ), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company's then outstanding voting securities; or (b) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) the majority of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. 3. Limitations on Transfer. Without the written consent of the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer (including transfer by operation of law) any interest in any Shares that have not been released from the Repurchase Option. The Company shall hold in escrow all Shares subject to the Repurchase Option. 4. Lock-up Period. Purchaser hereby agrees that if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), Purchaser shall not sell, make short sale of, loan, grant any option for the purchase of, or otherwise transfer any Shares or other securities of the Company during the 180- day period (or such longer period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. Stock Certificate Legends. All certificates representing any of the Shares shall contain the following legends: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." "THE CORPORATION IS AUTHORIZED TO ISSUE DIFFERENT CLASSES OF SHARES OR DIFFERENT SERIES WITHIN A CLASS. THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF EACH CLASS OF SHARES AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN THE RIGHTS, PREFERENCES AND LIMITATIONS BETWEEN THE SHARES OF EACH SERIES SO FAR AS THEY HAVE BEEN DETERMINED. THE BOARD OF DIRECTORS IS AUTHORIZED TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF A SERIES BEFORE THE ISSUANCE OF ANY SHARES OF THAT SERIES." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND TRANSFERABLE ONLY UPON COMPLIANCE WITH THE TERMS AND CONDITIONS CONTAINED IN ARTICLE VII OF THE COMPANY'S BYLAWS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." 6. Assignment by the Company. The right of the Company under the Repurchase Option to purchase any part of the Shares may be assigned in whole or in part to any person or persons designated by the Board of Directors of the Company. 7. Transfer on Books of Company. The Company shall not be required (a) to transfer on its books any of the Shares which have been sold or transferred in violation of any of the provisions set forth in this Agreement or the Company's Bylaws, or (b) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. 8. Restricted Securities. Purchaser understands and acknowledges that the sale of the Shares has not been registered under the Securities Act, or applicable state securities laws, that the Shares must be held indefinitely unless subsequently registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirement is available, that the Company is under no obligation to register the Shares, and that the certificate representing the Shares will be stamped with the legends specified in Section 5 of this Agreement. The Purchaser agrees to comply with the transfer restrictions specified in the legends set forth in Section 5. 9. Investment Representations and Warranties. Purchaser warrants and represents to the Company as follows: 9.1 Purchase Entirely for Own Account. The Shares will be acquired for investment for Purchaser's own account and not with a view to the resale or distribution of any part thereof, and Purchaser has no intention of selling, granting any participation in, or otherwise distributing the same. 9.2 Investment Experience. Purchaser is experienced in evaluating and investing in companies in the development stage, can bear the economic risk of an investment in the Shares, and has enough knowledge and experience in financial and business matters to evaluate the merits and risks of the investment in the Shares. 9.3 Qualifications as an Accredited Investor. Purchaser is an accredited investor, as that term is defined in Rule 501(a) under the Securities Act. 9.4 Opportunity to Review Documents and Ask Questions. The Company has made available to Purchaser all documents and information requested by Purchaser relating to an investment in the Company. In addition, Purchaser has had adequate opportunity to ask questions and to receive answers from the management of the Company covering the terms and conditions of the purchase and sale of the Shares and the Company's business, management, and financial affairs. 10. Miscellaneous. 10.1 Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and the Purchaser. 10.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its address shown below its signature or to the Purchaser at the address shown below the Purchaser's signature, or at such other address as such party may designate by ten (10) days' advance written notice to the other party. 10.3 Rights and Benefits. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Company's successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon the Purchaser's heirs, executors, administrators, beneficiaries, successors and assigns. 10.4 Further Action. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 10.5 Applicable Law; Attorneys' Fees. The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys' fees to be set by the trial court and, upon any appeal, the appellate court. 10.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE COMPANY: DP APPLICATIONS, INC. By: /s/Robert S. Gregg Title: President PURCHASER: THE ROBERT W. WILMOT AND MARY J. WILMOT, TRUSTEES OF THE WILMOT LIVING TRUST U/D/T DATED APRIL 18TH 1995 By: /s/Robert W. Wilmot, Trustee By: /s/Mary J. Wilmot, Trustee Address: 13333 La Cresta Drive Los Altos, CA 94022 EX-27 11
5 12-MOS JAN-03-1998 JAN-03-1998 133,299,000 0 332,005,000 3,121,000 28,147,000 671,349,000 329,668,000 194,938,000 890,845,000 271,451,000 9,910,000 0 0 430,000 508,858,000 890,845,000 600,496,000 833,886,000 309,016,000 480,611,000 299,451,000 2,694,000 5,829,000 50,512,000 11,825,000 38,687,000 0 0 0 38,687,000 1.02 0.95
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