<TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<CAPTION>
(Mark One)
__X__Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended September 28, 1997 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:0-15086
SUN MICROSYSTEMS, INC.
(Exact Name of registrant as specified in its charter)
<S> <C>
Delaware 94-2805249
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
901 San Antonio Road Palo Alto, CA 94303
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (650) 960-1300
N/A
(Former name, former address and former fiscal year, if changed since last report)
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______
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
YES______ NO______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of
the latest practical date.
Class Outstanding at September 28, 1997
Common Stock - $0.00067 par value 374,630,828
</TABLE>
<PAGE>
INDEX
PAGE
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8 - K 17
SIGNATURES 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 28, June 30,
1997 1997
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 513,845 $ 660,170
Short-term investments 473,544 452,590
Accounts receivable, net 1,450,709 1,666,523
Inventories 466,868 437,978
Deferred tax assets 293,159 286,720
Other current assets 277,921 224,469
----------- -----------
Total current assets 3,476,046 3,728,450
Property, plant and equipment, at cost 1,760,844 1,658,341
Accumulated depreciation and amortization (882,166) (858,448)
----------- -----------
878,678 799,893
Other assets, net 192,973 168,931
----------- -----------
$ 4,547,697 $ 4,697,274
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 24,242 $ 100,930
Accounts payable 428,402 468,912
Accrued liabilities 824,858 963,012
Other current liabilities 299,812 316,184
----------- -----------
Total current liabilities 1,577,314 1,849,038
Long-term debt and other obligations 120,488 106,299
Total stockholders' equity 2,849,895 2,741,937
----------- -----------
$ 4,547,697 $ 4,697,274
=========== ===========
See accompanying notes
3
<PAGE>
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
------------------
September 28, September 29,
1997 1996
---------- ----------
Net revenues $2,098,604 $1,859,019
Cost and expenses:
Cost of sales 1,027,434 972,101
Research and development 222,618 186,268
Purchased in-process research and
development 52,184 --
Selling, general and administrative 615,493 524,666
---------- ----------
Total costs and expenses 1,917,729 1,683,035
Operating income 180,875 175,984
Interest income, net 10,571 5,472
---------- ----------
Income before income taxes 191,446 181,456
Provision for income taxes 83,013 58,006
---------- ----------
Net income $ 108,433 $ 123,390
========== ==========
Net income per common and
and common - equivalent
share $ 0.27 $ 0.32
========== ==========
Common and common-equivalent
shares used in the calculation
of net income per share 395,099 390,116
========== ==========
See accompanying notes.
4
<PAGE>
<TABLE>
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Three Months Ended
------------------
September 28, September 29,
1997 1996
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 108,433 $ 123,390
Adjustments to reconcile net income
to operating cash flows:
Depreciation, amortization and
other non-cash items 86,803 86,887
Tax benefit of options exercised 56,626 7,655
Other non-cash items 52,184 --
Net decrease (increase) in accounts receivable 215,814 (88,817)
Net increase in inventories (28,890) (928)
Net (decrease) increase in accounts payable (40,510) 20,072
Net increase in other current
and non-current assets (61,277) (35,988)
Net decrease in other current
and non-current liabilities (164,839) (44,119)
--------- ---------
Net cash provided from operating activities 224,344 68,152
--------- ---------
Cash flow from investing activities:
Acquisition of property, plant and equipment (161,817) (94,890)
Acquisition of spare parts and other assets (33,962) (8,119)
Payment for acquisitions (55,200) --
Acquisition of short-term investments (211,042) (17,157)
Maturities of short-term investments 190,274 270,196
--------- ---------
Net cash (used by) provided from investing activities (271,747) 150,030
--------- ---------
Cash flow from financing activities:
Issuance of common stock, net 31,594 8,595
Acquisition of treasury stock (79,745) (271,344)
Proceeds from employee stock purchase plans 23,204 17,141
Reduction of short - term borrowings, net (76,688) (4,238)
Proceeds from and reduction of long - term
borrowings and other 2,713 (36,445)
--------- ---------
Net cash used by financing activities (98,922) (286,291)
--------- ---------
Net decrease in cash and cash equivalents $(146,325) $ (68,109)
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 160 $ 4,189
Income taxes $ 29,411 $ 46,524
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
SUN MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sun
Microsystems, Inc. ("Sun" or the "Company") and its wholly - owned
subsidiaries. Intercompany accounts and transactions have been
eliminated. Certain amounts from prior years have been reclassified to
conform to current year presentation.
While the quarterly financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting
of normal recurring accruals) that the Company considers necessary for
a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for the interim periods
are not necessarily indicative of the results for the entire year. The
information included in this report should be read in conjunction with
the 1997 Annual Report to Stockholders which is incorporated by
reference in the Company's 1997 Form 10-K (as amended on Form 10-K/A).
INVENTORIES (in thousands)
September 28, 1997 June 30, 1997
------------------ -------------
Raw materials $250,951 $236,900
Work in process 58,706 50,577
Finished goods 157,211 150,501
-------- --------
$466,868 $437,978
======== ========
INCOME TAXES
The Company accounts for income taxes under the liability method of Statement of
Financial Accounting Standards No. 109. The provision for income taxes during
the interim periods considers anticipated annual income before taxes, earnings
of foreign subsidiaries permanently invested in foreign operations, and other
differences.
STOCK SPLIT
The Company effected a two-for-one stock split (effected in the form of a stock
dividend), to stockholders of record as of the close of the business on November
18, 1996. Share and per-share amounts presented have been adjusted to reflect
the stock dividend.
RECENT PRONOUNCEMENTS
In 1997, Financial Accounting Standards No. 128 (FAS 128), "Earnings per Share,"
was issued and is effective for interim and annual periods ending after December
15, 1997. The impact is expected to result in an increase in primary earnings
per share of $.02 for the quarters ended September 28, 1997 and September 29,
1996.
6
<PAGE>
ACQUISITIONS
On August 22, 1997, the Company acquired all of the outstanding stock of Diba,
Inc. for $25,000,000 in cash. The transaction was accounted for as a purchase
and, on this basis, the excess purchase price over the estimated fair value of
net tangible assets has been allocated, based upon an independent third-party
valuation, to various intangible assets, primarily consisting of purchased
in-process research and development and goodwill. In connection with this
acquisition, purchased in-process research and development of $22,300,000,
associated with products which had not achieved technological feasibility and
for which no alternative uses have been established by the Company, was written
off. Intangible assets, including goodwill, are being amortized over three
years. The results of operations of Diba, Inc. from the date of acquisition
through September 28, 1997 are included in the Company's consolidated statement
of income and were not material to the Company.
On September 22, 1997, the Company acquired all of the outstanding stock of
Integrity Arts, Inc. for $30,200,000 in cash. The transaction was accounted for
as a purchase and, on this basis, the excess purchase price over the estimated
fair value of net tangible assets has been allocated, based upon an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
this acquisition, purchased in-process research and development of approximately
$29,900,000, associated with products which had not achieved technological
feasibility and for which no alternative uses have been established by the
Company, was written off. Intangible assets, including goodwill, are being
amortized over three years. The results of operations of Integrity Arts, Inc.
from the date of acquisition through September 28, 1997 are included in the
Company's consolidated statement of income and were not material to the Company.
SUBSEQUENT EVENTS
On October 16, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the registration for public
offering of senior and subordinated debt securities and common stock with an
aggregate initial public offering price of up to $1,000,000,000. On October 24,
1997, the Registration Statement became effective, so that the Company may now
choose to offer, from time to time, the securities and common stock pursuant to
Rule 415 in one or more separate series, in amounts, at prices and on terms to
be set forth in the prospectus contained in the Registration Statement and in
one or more supplements to the prospectus.
On October 21, 1997, the Company acquired substantially all of the assets and
liabilities of Chorus Systems S.A. and its wholly-owned subsidiaries for
approximately $26,500,000 in cash. The transaction will be accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of net tangible assets will be allocated, based on an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. Purchased in-process
research and development of approximately $13 million, associated with products
which had not achieved technological feasibility and for which no alternative
uses have been established by the Company, will be written off.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following table sets forth items from the Condensed Consolidated Statements
of Income as a percentage of net revenues:
Three Months Ended,
-------------------
September 28, September 29,
1997 1996
---- ----
Net revenues 100.0% 100.0%
Cost of sales 49.0 52.3
----- -----
Gross margin 51.0 47.7
Research and development 10.6 10.0
Purchased in-process research and
development 2.5 --
Selling, general and administrative 29.3 28.2
----- -----
Operating income 8.6 9.5
Interest income, net 0.5 0.3
----- -----
Income before income taxes 9.1 9.8
Provision for income taxes 3.9 3.2
----- -----
Net income 5.2% 6.6%
===== =====
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks and uncertainties such that actual results may vary
materially. Certain factors that may affect the Company's results and financial
condition over the next few quarters are discussed under the caption "future
operating results" below. Other factors that may affect such results and
financial condition are set forth in the Company's 1997 Annual Report to
Stockholders which is incorporated by reference in the Company's Form 10-K (as
amended on Form 10-K/A).
RESULTS OF OPERATIONS
Net revenues
Net revenues were $2.099 billion for the first quarter of fiscal 1998,
representing an increase of 12.9% over the corresponding period of fiscal 1997.
The growth in revenues resulted primarily from strong demand for work group,
enterprise and departmental servers, high-end desktop systems and from high-end
storage products. The remaining increase
8
<PAGE>
reflects growth in revenues from other Sun businesses, primarily service. The
12.9% revenue growth in the first quarter of fiscal 1998 was lower than the
corresponding 25.2% revenue growth rate experienced in the first quarter of
fiscal 1997 due mainly to a smaller backlog entering the quarter, coupled with
the impacts of foreign currency fluctuations and weaker demand in certain
geographies as described below.
Domestic net revenues increased by 16.5% while international net revenues
(including United States exports) grew 9.1% in the first quarter of fiscal 1998
compared with the corresponding period of fiscal 1997. In U.S. dollars, European
net revenues increased 5.8%, Japanese net revenues increased 10.3%, and net
revenues in rest of world increased 14.9% in the first quarter of fiscal 1998
when compared with the corresponding periods of fiscal 1997. These increases are
due primarily to continued strengthening of the markets in Japan, Italy, Belgium
and France. The increases in U.S. dollar revenues are net of the foreign
currency impact of a strengthening in the U.S. dollar within our major markets,
particularly Japan and Europe. The foreign currency impact was partially offset
by pricing actions taken by the Company. The Company also experienced weakening
demand in other parts of Europe, Southeast Asia and Latin America.
The Company generally manages currency exposure through the use of simple,
short-term forward foreign exchange and currency option contracts, the objective
of which is to minimize the impact of currency fluctuations on the results of
operations. As the Company utilizes projected data to establish its forward
exchange and currency exchange contracts, variances which result from
forecasting differences and the extent of currency movement during the quarter
could have a material adverse effect on the results of operations and cash
flows.
Gross margin
Gross margin was 51.0% for the first quarter of fiscal 1998, compared with 47.7%
for the corresponding period of fiscal 1997. The increase in the gross margin
reflects the effects of increased revenues generated from higher margin servers,
desktop and storage options, as well as continued decreases in costs of key
components, including CPUs and memory.
The factors described above resulted in a favorable impact on gross margin for
the first quarter of fiscal 1998. The Company continuously evaluates the
competitiveness of its product offerings. These evaluations could result in
repricing actions in the near term. Sun's future operating results would be
adversely affected if such repricing actions were to occur and the Company were
unable to mitigate the resulting margin pressure by maintaining a favorable mix
of systems, software, service, and other products and by achieving component
cost reductions, operating efficiencies and increasing volumes.
Research and development
Research and development (R&D) expenses were $222.6 million in the first quarter
of fiscal 1998, compared with $186.3 million for the corresponding period of
fiscal 1997. As a percentage of net revenues, R&D expenses increased to 10.6%
for the first quarter of fiscal 1998 from 10.0% in the corresponding period of
fiscal 1997. The dollar increase in the first quarter of fiscal 1998 over the
corresponding period in fiscal 1997 primarily reflects increased expenditures
focused on the development of hardware and software products which utilize the
Java architecture. The remaining increase in R&D expenses is due primarily to
continued development of ULTRASparc systems, storage products, further
development of products acquired through acquisitions, and increased
compensation due primarily to higher levels of R&D staffing.
9
<PAGE>
Selling, general and administrative
Selling, general and administrative (SG&A) expenses were $615.5 million in the
first quarter of fiscal 1998 compared with $524.7 million for the same period of
fiscal 1997. As a percentage of net revenues, SG&A expenses increased to 29.3%
in the first quarter of fiscal 1998 from 28.2% in the corresponding period of
fiscal 1997. The dollar increase in fiscal 1998 is primarily attributable to
increased compensation resulting from higher levels of headcount (principally in
the sales organization) in addition to marketing costs related to demand
creation programs. The increase is also due to costs incurred in connection with
the Company's ongoing efforts to improve business processes and cycle times. The
Company expects to continue to hire personnel to further expand its demand
creation programs and service support.
Purchased in-process research and development
Purchased in-process research and development represents the write-off of
purchased in-process research and development associated with the Company's
acquisitions of Diba, Inc. and Integrity Arts, Inc. The Company expects an
additional in-process research and development write-off of approximately $13
million in connection with the acquisition of Chorus Systems S.A. and its
wholly-owned subsidiaries.
Interest income, net
Net interest income was $10.6 million for the first quarter of fiscal 1998,
compared with $5.5 million in net interest income for the corresponding period
in fiscal 1997. The increase in 1998 is primarily the result of higher interest
earnings due to a larger average portfolio of cash and short-term investments.
Income taxes
The Company's effective income tax rate for the first quarter of fiscal 1998 was
33% before a $19.8 million tax charge resulting from a non-recurring write-off
of in-process research and development associated with the acquisitions of Diba,
Inc. and Integrity Arts, Inc. The effective income tax rate for the first
quarter of fiscal 1998 including these acquisition-related charges was 43.4%.
The effective tax rate for the first quarter of fiscal 1997 was 32%. The
increase in the overall effective tax rate to 33% for fiscal 1998 is
attributable to an increase in anticipated worldwide earnings without offsetting
tax credits or other tax savings.
FUTURE OPERATING RESULTS
The market for Sun's products and services is intensely competitive and subject
to continuous, rapid technological change, short product life cycles and
frequent product performance improvements and price reductions. Due to the
breadth of the Company's product lines and the scalability of its products and
network computing model, Sun competes in many segments of the network computing
market across a broad spectrum of customers. The Company expects the markets for
its products and technologies, as well as its competitors within such markets,
will continue to change as the rightsizing trend shifts customer buying patterns
to network based systems which often employ solutions from multiple vendors.
Competition in these markets will also continue to intensify as Sun and its
competitors, principally Hewlett-Packard Corporation, International Business
Machines Corporation, Digital Equipment Corporation, and Silicon Graphics, Inc.,
aggressively position themselves to benefit from this shifting of customer
buying patterns and demand. The Company is also facing competition from these
competitors, as well as other systems manufacturers, such as Compaq Computer
Corporation and Dell Computer Corporation, with respect to products based on
microprocessors from Intel Corporation coupled with Windows NT operating system
software from Microsoft Corporation. These products demonstrate the viability of
certain networked personal computer solutions and have increased the competitive
pressure, particularly in the Company's workstation and lower-end server product
lines. Finally, the timing of introductions of new products and services by
Sun's competitors may negatively impact the future operating results of the
Company, particularly when such introductions occur in periods leading up to the
Company's
10
<PAGE>
introduction of its own new enhanced products. The Company expects this pressure
to continue and intensify throughout fiscal 1998. While many other technical,
service and support capabilities affect a customer's buying decision, the
Company's future operating results will depend, in part, on its ability to
compete with these technologies.
The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high - performance computer products,
such as the Company's development of the UltraSPARC microprocessor, is a complex
and uncertain process requiring high levels of innovation from the Company's
designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be adversely affected if the Company is not able to correctly anticipate
the level of demand for the mix of products. Because the Company is continuously
engaged in this product development, introduction, and transition process, its
operating results may be subject to considerable fluctuation, particularly when
measured on a quarterly basis.
The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a significant adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
adversely affect the Company's net revenues and operating results. To secure
components for development, production, and introduction of new products, the
Company frequently makes advanced payments to certain suppliers and often enters
into noncancelable purchase commitments with vendors early in the design
process. Due to the variability of material requirement specifications during
the design process, the Company must closely manage material purchase
commitments and respective delivery schedules. In the event of a delay or flaw
in the design process, the Company's operating results could be adversely
affected due to the Company's obligations to fulfill such noncancelable purchase
commitments.
Generally, the computer systems sold by Sun, such as the UltraSPARC based
products, are the result of hardware and software development, such that delays
in the software development can delay the ability of the Company to ship new
hardware products. In addition, adoption of a new release of an operating system
may require effort on the part of the customer and porting by software vendors
providing applications. As a result, the timing of conversion to a new release
is inherently unpredictable. Moreover, delays by customers in adopting a new
release of an operating system can limit the acceptability of hardware products
tied to that release. Such delays could adversely affect the future operating
results of the Company.
Seasonality also affects the Company's operating results, particularly in the
first quarter of each fiscal year. In addition, the Company's operating expenses
are increasing as the Company continues to expand its operations, and future
operating results will be adversely affected if revenues do not increase
accordingly. Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complimentary technologies, products or
businesses. As part of this process, the Company will continue to evaluate the
11
<PAGE>
changing value of its assets, and when necessary, make adjustments thereto.
While the Company cannot predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at September 28, 1997 decreased by approximately $150 million from
June 30, 1997, due principally to decreases in cash, cash equivalents and
short-term investments of $125 million and accounts receivable of $216 million,
offset by increases in inventory of $29 million, other current assets of $60
million, property, plant and equipment-net of $79 million and other long-term
assets of $24 million. The decrease in accounts receivable reflects the
Company's normal seasonal experience, which is lower revenue in the first
quarter of fiscal 1998 as compared to the fourth quarter of the prior fiscal
year. The increase in inventory also reflects the lower revenue in the first
quarter of fiscal 1998 as compared to the fourth quarter of fiscal 1997. Other
current assets increased due to the timing of payments for insurance and other
taxes. The increase in property, plant and equipment reflects capital spending
for real estate development as well as capital additions to support increased
headcount, primarily in the Company's engineering, service and marketing
organizations. Other long-term assets increased primarily due to an increase in
spares inventory.
Total current liabilities decreased $272 million from June 30, 1997, due
principally to decreases in short-term borrowings of $77 million, accounts
payable of $40 million, accrued liabilities of $138 million, and other current
liabilities of $17 million. The decrease in short-term borrowings reflect
payments related to debt of subsidiaries. The decrease in accounts payable
reflects the timing of payments for inventory and other items. Accrued
liabilities decreased due to the payment of performance based compensation and
commissions, offset by an increase in the employee stock participation program
liability. The other current liabilities decrease reflects the decrease in
income taxes payable and deferred service revenues.
At September 28, 1997, the Company's primary sources of liquidity consisted of
cash, cash equivalents and short-term investments of $987 million and a
revolving credit facility with banks aggregating $500 million, which was
available subject to compliance with certain covenants. On October 16, 1997, the
Company filed a Registration Statement with the Securities and Exchange
Commission relating to the registration for public offering of senior and
subordinated debt securities and common stock with an aggregate initial public
offering price of up to $1,000,000,000. On October 24, 1997, the Registration
Statement became effective, so that the Company may now choose to offer, from
time to time, the securities and common stock pursuant to Rule 415 in one or
more separate series, in amounts, at prices and on terms to be set forth in the
prospectus contained in the Registration Statement and in one or more
supplements to the prospectus. The Company believes that the liquidity provided
by existing cash and short-term investment balances and the offering and
borrowing arrangements described above will be sufficient to meet the Company's
capital requirements through fiscal 1998. However, the Company believes the
level of financial resources is a significant competitive factor in its industry
and may choose at any time to raise additional capital through debt or equity
financing to strengthen its financial position, facilitate growth and provide
the Company with additional flexibility to take advantage of business
opportunities that may arise.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 7, 1997, the Company filed suit against Microsoft Corporation in the
United States District Court for the Northern District of California alleging
breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. The
Company believes that the outcome of this matter will not have a material
adverse impact on Sun's financial position, results of operations or cash flows
in any given fiscal year.
ITEM 5 - OTHER INFORMATION
SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER
The following is a summary of all sales of the Company's Common Stock
by the Company's executive officers and directors who are subject to Section 16
of the Securities Exchange Act of 1934, as amended, during the fiscal quarter
ended September 28, 1997:
OFFICER/ DATE PRICE NUMBER OF
DIRECTOR SHARES SOLD
=======================================================================
Kenneth M. Alvares 7/23/97 $45.75 10,000
7/23/97 $46.125 10,000
7/23/97 $46.5625 20,000
7/24/97 $46.00 14,000
7/25/97 $47.00 24,000
8/7/97 $49.1146 24,000
8/20/97 $50.7525 8,000
8/20/97 $52.00 6,000
8/20/97 $52.0625 2,000
8/20/97 $52.5625 2,700
8/20/97 $52.50 3,300
Alan E. Baratz 8/5/97 $46.25 20,000
8/6/97 $47.0625 12,000
8/6/97 $47.0625 12,000
Mel Friedman 8/6/97 $47.1875 20,000
8/6/97 $47.1652 28,000
Lawrence W. Hambly 8/6/97 $47.5313 10,000
8/6/97 $48.25 10,000
13
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8/6/97 $48.50 10,000
8/7/97 $49.00 10,000
Masood Jabbar 7/25/97 $46.8019 26,000
7/25/97 $46.8641 6,000
7/25/97 $46.8641 3,000
7/25/97 $46.9264 5,000
8/19/97 $50.00 8,000
8/19/97 $49.875 3,658
8/19/97 $49.9375 5,000
8/19/97 $50.00 23,342
8/19/97 $49.875 12,000
8/19/97 $49.875 32,000
8/19/97 $50.00 1,158
8/19/97 $50.00 16,000
Michael E. Lehman 7/23/97 $46.750 20,000
7/23/97 $46.00 10,000
7/23/97 $46.125 10,000
7/28/97 $47.0625 4,000
8/1/97 $45.00 4,000
8/4/97 $45.00 20,000
8/4/97 $44.625 10,000
8/5/97 $46.25 5,000
8/5/97 $46.00 5,000
8/6/97 $47.125 5,000
8/7/97 $48.8125 3,000
8/11/97 $48.4375 4,000
8/11/97 $48.00 4,000
Robert L. Long 8/5/97 $45.5625 10,000
Scott G. McNealy 7/23/97 $46.3670 150,000
7/30/97 $46.313 150,000
8/6/97 $47.9420 150,000
8/13/97 $47.190 150,000
Michael H. Morris 7/23/97 $46.1562 8,000
7/23/97 $46.1562 4,800
8/5/97 $45.875 8,000
8/5/97 $45.875 8,000
8/11/97 $47.50 6,400
Alton D. Page 8/6/97 $47.5625 10,000
William J. Raduchel 7/23/97 $46.0538 35,000
8/1/97 $45.00 8,000
8/1/97 $45.625 10,000
8/1/97 $44.5844 10,000
8/4/97 $44.5625 5,000
14
<PAGE>
8/4/97 $45.00 5,000
8/5/97 $46.25 6,000
8/5/97 $46.25 5,000
8/5/97 $46.00 5,000
8/6/97 $47.0625 10,000
8/12/97 $48.0312 5,000
8/13/97 $46.6413 5,000
George Reyes 7/24/97 $46.00 8,000
7/24/97 $46.00 4,000
7/24/97 $46.00 510
8/5/97 $46.00 6,000
8/19/97 $50.00 4,000
Joseph P. Roebuck 8/25/97 $51.750 10,000
8/25/97 $51.50 25,000
8/25/97 $51.750 25,000
Janpieter T. Scheerder 7/23/97 $45.9118 12,000
7/23/97 $45.9118 8,000
7/23/97 $45.9118 14,000
8/1/97 $45.0937 5,200
8/5/97 $46.1875 8,000
8/11/97 $48.8067 48,000
8/19/97 $49.6875 7,200
John Shoemaker 7/23/97 $46.00625 12,000
8/4/97 $44.9556 12,000
8/7/97 $49.7525 12,800
8/13/97 $46.565 13,000
8/13/97 $46.5025 3,000
8/20/96 $52.565 10,000
8/20/97 $52.565 4,000
Chester J. Silvestri 7/25/97 $46.75 10,000
7/25/97 $46.9375 3,000
7/25/97 $46.875 7,000
8/19/97 $48.6875 20,000
8/26/97 $52.00 20,000
Dorothy A. Terrell 7/23/97 $46.6042 30,000
7/23/97 $45.750 10,000
7/23/97 $46.125 10,000
7/25/97 $47.00 12,500
8/7/97 $49.375 14,000
8/19/97 $50.00 16,000
8/19/97 $50.00 16,000
8/20/97 $52.00 6,000
8/20/97 $53.00 6,000
Edward J. Zander 7/23/97 $46.75 20,000
15
<PAGE>
7/23/97 $46.00 10,000
7/23/97 $46.125 10,000
8/8/97 $49.625 20,000
8/8/97 $49.50 20,000
16
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
10.93* Integrity Arts, Inc. 1996 Stock Option Plan
11.0 Statement re: Computation of Earnings Per Share
27.0 Financial data for the period ended September 28, 1997
* Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (file no. 333-38163) filed
with the Securities and Exchange Commission on October 17, 1997.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 28,
1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SUN MICROSYSTEMS, INC.
BY
/s/ Michael E. Lehman
---------------------
Michael E. Lehman
Vice President and Chief Financial
Officer
/s/ George Reyes
--------------------
George Reyes
Vice President and Corporate
Controller, Chief Accounting Officer
Dated: November 11, 1997
18
<PAGE>
EXHIBITS TO REPORT
ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997
19
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS PER SHARE
(unaudited)
(in thousands, except per share amounts)
PRIMARY
Three Months Ended,
-------------------
September 28, September 29,
1997 1996
-------- --------
Net income $108,433 $123,390
======== ========
Weighted average common
shares outstanding 372,062 367,114
Common - equivalent shares
attributable to stock options and warrants 23,037 23,002
-------- --------
Total common and common -
equivalent shares outstanding 395,099 390,116
======== ========
Net income per common and
common - equivalent share $ 0.27 $ 0.32
======== ========
20
<PAGE>
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS PER SHARE
(unaudited)
(in thousands, except per share amounts)
FULLY DILUTED
Three Months Ended,
-------------------
September 28, September 29,
1997 1996
-------- --------
Net income $108,433 $123,390
======== ========
Weighted average common
shares outstanding 371,648 367,114
Common - equivalent shares
attributable to stock options and warrants 23,336 24,212
-------- --------
Total common and common -
equivalent shares outstanding 394,984 391,326
======== ========
Net income per common and
common - equivalent share $ 0.27 $ 0.32
======== ========
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> SEP-29-1996
<CASH> 460,745
<SECURITIES> 203,210
<RECEIVABLES> 1,295,429
<ALLOWANCES> 126,754
<INVENTORY> 461,842
<CURRENT-ASSETS> 2,852,835
<PP&E> 562,893
<DEPRECIATION> 793,255
<TOTAL-ASSETS> 3,622,402
<CURRENT-LIABILITIES> 1,489,269
<BONDS> 40,000
0
0
<COMMON> 73
<OTHER-SE> 2,120,165
<TOTAL-LIABILITY-AND-EQUITY> 3,622,402
<SALES> 1,859,019
<TOTAL-REVENUES> 1,859,019
<CGS> 972,101
<TOTAL-COSTS> 1,683,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,857
<INTEREST-EXPENSE> 2,657
<INCOME-PRETAX> 181,456
<INCOME-TAX> 58,066
<INCOME-CONTINUING> 123,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,390
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
