SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _______________
Commission file number: 0-15086
SUN MICROSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-2805249
(State of incorporation) (I.R.S. Employer
Identification No.)
901 San Antonio Road (650)-960-1300
Palo Alto, CA 94303
(Address of principal executive (Registrant's telephone number,
offices, including zip code) including area code)
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Securities pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Common Share Purchase Rights
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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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference on Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of September 16, 1997, was approximately $21,833,000,000
based upon the last sale price reported for such date on the Nasdaq National
Market System. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the Registrant have been excluded
because such persons may be deemed to be affiliates. This determination is not
necessarily conclusive.
The number of shares of the Registrant's Common Stock outstanding as of
September 16, 1997 was 429,685,824.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to Stockholders for the fiscal year ended
June 30, 1997 are incorporated by reference into Items 1,5,6,7,8 and 14 hereof.
Parts of the Proxy Statement for the 1997 Annual Meeting of Stockholders
are incorporated by reference into Items 10, 11, 12 and 13 hereof.
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PART I
ITEM 1. BUSINESS
General
Sun Microsystems(TM), Inc. ("Sun (TM) " or the "Company") is a leading
supplier of enterprise network computing products including desktop systems,
servers, storage subsystems, network switches, software, microprocessors, and a
full range of services and support. Sun's products command a significant share
of a rapidly growing segment of the computer industry: networked computing
environments. The Company's products are used for many demanding commercial and
technical applications in various industries. Sun has differentiated itself from
its competitors by its commitment to the network computing model and the
UNIX(TM) operating system, its rapid innovation and its open systems
architecture.
Sun conducts its business through various operating entities and divisions
organized around the Company's principal areas of added value. The individual
businesses generally operate independently within their charters, but with the
common corporate strategic vision of being a leading force in network computing.
Sun believes this organizational structure allows it to more efficiently focus
on its customers and the products, channels and markets necessary to serve them.
The Company continually evaluates the effectiveness of its organizational
structure. As a result of its evaluation, the Company at any time may create,
merge or discontinue various business units to increase customer and product
focus. Sun's primary operating businesses are as follows:
Sun Microsystems Computer Company(TM) ("SMCC") - SMCC designs,
manufactures, and sells desktop systems, a broad range of servers, storage
subsystems, and network switches, incorporating the Scaleable Processor
Architecture ("SPARC") microprocessors and the Solaris software environment,
licensed by SunSoft, Inc. to SMCC.
SunService(TM) Division ("SunService") - A leading UNIX service
organization, SunService provides a wide range of global services for
heterogeneous network computing environments, including system support,
education, information technology (IT) consulting, systems integration, and
system/network management.
SunSoft(TM), Inc. ("SunSoft") - SunSoft develops, markets, supplies and
supports Solaris (TM), a leading UNIX operating system software environment for
enterprise-wide distributed computing on SPARC and other volume platforms,
Solstice(TM), a complete enterprise-wide management solution, and WorkShop(TM),
a set of visual development tools to quickly and easily create multiplatform
applications for the Internet. SunSoft also offers software products for network
management and PC desktop integration.
Sun Microelectronics(TM) ("SME")- SME designs and develops high performance
SPARC and Java microprocessors, as well as enabling technologies, for SMCC and
third party customers.
JavaSoft(TM) - JavaSoft develops, markets and supports the Java(TM)
software technology and products based on this technology. JavaSoft develops
applications, tools, and systems platforms to further enhance Java as a
programming standard for complex networks such as the Internet and corporate
intranets.
Sun's network computing model and its hardware and software implementations
have attracted and encouraged a large number of software vendors to port their
applications to Sun platforms, including an increasing number of vendors of
commercial applications. The availability of such third-party software provides
Sun and its customers with competitive advantage and strengthens the Company's
presence in network computing.
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Sun, the Sun Logo, Sun Microsystems, SunSoft, SunService, Sun Microelectronics,
JavaSoft,Ultra, Enterprise, NEO ,NFS, Joe, Solaris, Solstice, Netra, SolarNet,
SunNet Manager, SunSoft Workshop, Sun FORTRAN, Sun Ada, Sunergy, Gigaplane - XB
and SunSpectrum are trademarks, registered trademarks or servicemarks of Sun
Microsystems, Inc. in the United States and other countries. All SPARC
trademarks, including the SCD Compliant logo, are used under license and are
trademarks or registered trademarks of SPARC International, Inc. in the United
States and other countries. Products bearing SPARC trademarks are based upon an
architecture developed by Sun Microsystems, Inc. UNIX is a registered trademark
in the United States and other countries, exclusively licensed through
X/OpenCompany Ltd.
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Products
Sun believes that customers increasingly demand computer systems that do
not limit them to any one vendor's proprietary technology. To respond to
customer needs, Sun has been a proponent of the open systems strategy. This open
systems strategy offers users and software developers the benefits of
compatibility, interoperability, portability, upgradeability and scalability in
products. Sun's open systems architecture protects existing customer investments
while providing customers with new, innovative technology to allow them to be
competitive in their own markets.
Systems
The Company offers a full line of workstations from low-cost SPARCstations
to high-performance color graphics systems.
The current desktop workstation line includes the low-end color
SPARCstation(TM) 5, and the high performance Ultra(TM) series of uniprocessor
and multiprocessor systems.
The SPARCstation 5 is an accelerated graphics workstation and is one of the
industry's lowest priced 24-bit color systems. Based on the 170 MHz microSPARC
II processor, this workstation is designed for customers seeking expandability
and fast application performance.
The Ultra series of workstations offers a combination of high-end
workstation performance and functionality at a competitive price. Available in
both uniprocessor and multiprocessor versions, the Ultra series achieves higher
performance from the use of UltraSPARC (TM) processors running at speeds of
143mhz to 300mhz, as well as high performance motherboards and ASICs. Designed
for users needing more specialized graphics power, the Ultra series features
leading edge graphics and networking integrated at the central processing unit
(CPU) level, in addition to advanced Creator 3D graphics and networking
capabilities as add-on functionality.
The Company offers a wide range of servers from the low-end Ultra
Enterprise(TM) 1 Server to the Ultra Enterprise 10000 Server, a highly
scaleable, reliable, enterprise-wide symmetric multiprocessor server.
The low-end servers also include the multiprocessing Ultra Enterprise 2
Server and the highly reliable Enterprise 150 workgroup tower server with an
integrated storage subsystem. The Company's low-end servers are designed for
high performance, exceptional throughput, reliability and affordability. Ideal
applications include database, groupware, email, and internet/intranet
capabilities. They can also function as computational servers for electrical or
mechanical design automation. These systems are highly expandable, offering a
range of main memory and storage configurations.
For enterprises, Sun offers its new Ultra Enterprise Server family. This
includes the Enterprise 10000 server which scales to 64 processors.
Sun's Ultra Enterprise Server family offers upgradeability and
expandability across this product line. The entry level Enterprise 3000 is a
powerful, scaleable, versatile, upgradeable and affordable departmental UNIX
server in a compact package. The Enterprise 3000 is expandable up to 6 CPUs and
shares common CPU boards and peripherals that can be used across the Ultra
Enterprise product line to provide flexibility and protect the customer's
investment. The Enterprise 4000 is expandable up to 14 processors and is one of
the most modular and powerful departmental servers offering outstanding
performance and the ability to scale system performance and capacity as needs
grow. The Enterprise 5000, Sun's entry level datacenter system is expandable up
to 14 processors and is packaged in a rack configuration to enable bundling of
additional storage in a single enclosure.
The Enterprise 6000 is expandable up to 30 processors and gives customers
the ability to deploy large scale, mission critical applications in a
network-based environment. It offers the performance and availability required
for mainframe-class, mission critical applications.
The Enterprise 10000 is the most scaleable SMP system in the product lineup
and incorporates mainframe features such as dynamic system domains, which allow
for dynamic partitioning of the system, super computer class interconnect called
Gigaplane- XB (TM) which speeds internal data handling, and a separate service
processor/console for system monitoring and management.
The Company's Netra(TM) servers provide preconfigured solutions for
Internet and intranet publishing. Sun also offers the SPARCstorage(TM) Array
Model 200 Series, a high availability disk storage subsystem utilizing RAID
technology.
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System Software
The system software environment is a key component for fulfilling customer
needs around the network. The Company continues to focus on providing
customer-centric solutions, including the Solaris operating environment with
built-in networking, WorkShop tools for building network applications, and
Solstice software that connects it all together and manages the entire computing
enterprise. The Company believes it derives competitive advantage from the
stability resulting from its many years of experience with operating system
software. The Company's principal software products are as follows:
Solaris Operating Environment - Solaris products include desktop,
intranet, ISP and enterprise operating environments for SPARC and Intel
platforms. Solaris is a fast, highly reliable, scaleable and secure operating
environment, easy to install and use, optimized for Java and supports more than
12,000 applications. The Solaris environment is optimized for corporate
computing, intranet/Internet business requirements, powerful enterprise
databases and high performance technical computing environments.
Network Management Products - The Company's principal enterprise
computing management solution, Sun Network Management Products (Solstice)
provide a comprehensive suite of system and network management tools and
applications that give network managers the flexibility of distributed computing
with the control of centralized management for workgroups, departments, or the
enterprise - regardless of the vendors or operating systems comprising their
network. Solstice utilizes distributed computing technologies to scale and
manage global heterogeneous networks, such as those in telecommunications and
financial services companies. Solstice products such as Enterprise Manager
decrease the complexity of managing enterprise-wide networks while significantly
lowering the total cost of operation.
Sun Network Management Products are central to Sun's open systems
architecture. These products provide networking capabilities that make
distributed resources easily accessible by PCs, workstations, servers and other
computing devices on a single network. These products also integrate
heterogeneous global, department, local and remote network resources into
company-wide information systems. The Company is committed to developing
networking products that adhere to and promote open industry networking
standards and technologies in emerging areas such as the Internet and intranet.
In addition, Sun Internet Mail Server software helps companies consolidate
their business on a single, scaleable e-mail architecture, enabling open,
reliable, and cost-effective communication. Built on Internet and industry
standards such as SMTP and MIME, Sun Internet Mail Server offers a single, open
Internet alternative to proprietary mail systems. Sun Internet Mail Server
provides the industry's most complete implementation of the latest Internet
standard, Internet Message Access Protocol version 4 (IMAP4), for reliable mail
messaging.
Network Security Solutions - Sun provides businesses with a
comprehensive set of modular, heterogeneous, and scaleable security solutions
that include encryption, authentication, access control, and firewall defense
products needed to make use of the Internet, intranets and extranets, as
communications and trading channels.
Developer Products - The Workshop integrated development tool suites
support Java, C++, C, Sun FORTRAN(TM), Sun ADA(TM), and the Interface Definition
Language (IDL). In addition, Sun offers integrated development environments for
OpenStep, PASCAL and MicroFocus COBOL. Java Workshop is a powerful and
streamlined Internet programming environment allowing developers to create and
publish Internet applications. Visual Workshop for C++ provides a tightly
integrated visual programming environment for professional developers to build
and deploy high-performance client-server applications. Internet Workshop also
offers tools for developing object-oriented, three-tier networked applications
with Java, C++ and the NEO CORBA-compliant IDL.
The Java Developers Kit enables developers to create Java applets,
which are miniature applications that run inside a World Wide Web page, as well
as Java applications.
JavaSoft Products - The Java Application Environment (JAE) is one of
the first widely accepted application environments to enable the platform -
independent development of application software. In fiscal 1997, Sun licensed
JAE and JavaOS to over thirty computer and software companies, including several
high volume operating system vendors. These vendors plan to integrate JAE into
their operating systems so that applications written in Java will run on their
systems. In addition, the Company initiated a range of development activities
during fiscal 1997 to increase the capabilities of the Java language.
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Sales, Distribution and Marketing
Sun maintains a presence in most major markets and sells computer systems,
software and services to its customers worldwide through a combination of direct
and indirect channels. The Company also offers off-the-shelf software and
component products such as CPU chips, ASICs and embedded boards on an OEM basis
to other hardware manufacturers, and supplies after-market and peripheral
products to its end user installed base, both directly and through independent
distributors and resellers.
In general, the Company's direct sales force is compensated on a
channel-neutral basis to reduce potential channel conflict with our distribution
partners. Distribution channels include:
- a direct sales force selling to selected end-user named accounts and
numerous indirect channels,
- systems integrators, both government and commercial, who serve the
market for large commercial projects requiring substantial analysis,
design, development, implementation and support of custom solutions;
- master resellers who supply product and provide product marketing
and technical support services to the Company's smaller Value Added
Resellers ("VARs");
- VARs who provide added value in the form of software packages,
proprietary software development, high-end networking integration,
vertical integration, vertical industry expertise, training,
installation and support;
- OEMs who integrate the Company's products with other hardware and
software; and
- independent distributors who primarily cover markets in which Sun
does not have a direct presence.
The growth and management of the reseller channels is very important to the
future revenues and profitability of the Company. Channel partners account for
greater than 50% of Sun's revenue today and will continue to play a key role in
providing the value, service and support that are critical to Sun's long term
success.
The Company's direct systems sales force serves educational institutions,
software vendors, governments, businesses and other strategic accounts. The
Company has approximately 80 sales and service offices in the United States and
approximately 88 sales and service offices in 40 other countries. In addition,
it uses independent distributors in approximately 150 countries, sometimes in
concert with other resellers and direct sales operations.
Revenues from outside the United States, including those from end users,
resellers and distributors, constituted approximately 49% in fiscal 1997 and 50%
of net revenues in fiscal 1996, and 1995. Direct sales made in countries outside
of the United States are generally priced in local currencies and are,
therefore, subject to currency exchange fluctuations. The net impact of currency
fluctuations on net revenues and operating results cannot be precisely measured
as the Company's product mix and pricing change over time in various markets,
partially in response to currency movements. To minimize currency exposure gains
and losses, the Company borrows funds in local currencies, enters into forward
exchange contracts, purchases foreign currency options and promotes natural
hedges by purchasing components and incurring expenses in local currencies
whenever feasible. Sun's sales to overseas customers are made under export
licenses that must be obtained from the United States Department of Commerce.
Protectionist trade legislation in either the United States or other countries,
such as a change in the current tariff structures, export compliance laws or
other trade policies, could adversely affect Sun's ability to sell or to
manufacture in international markets. Sales to or through C. Itoh Technoscience
Co. Ltd., Fujitsu, Ltd. and Toshiba Corporation together represent a significant
portion of Sun's revenues in Japan. See Note 9 of Notes to Consolidated
Financial Statements incorporated by reference herein for additional information
concerning sales to foreign customers and industry segments.
Seasonality affects the Company's revenues and operating results,
particularly in the first and third 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 proportionatly with such increased expense levels.
The Company's marketing activities include advertising in computer
publications and the business press, direct mailings to customers and prospects,
televised programs and attendance at trade shows.
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Sun maintains a customer resource program, Sunergy(TM), which includes live
interactive satellite broadcasts and provides electronic access to newsletter
and technical information. Sun also sponsors a series of seminars to specific
resellers, university customers, end users and government customers and
prospects designed to familiarize attendees with the capabilities of the Sun
product line.
Sun's order backlog at June 30, 1997 was approximately $378 million,
compared with approximately $522 million at June 30, 1996. Backlog includes only
orders for which a delivery schedule within six months has been specified by the
customer. Backlog levels vary with demand, product availability and the
Company's delivery lead times and are subject to significant decreases as a
result of, among other things, customer order delays, changes or cancellations.
As such, backlog levels are not a reliable indicator of future operating
results.
Customer Service and Support
The Company provides expertise in heterogeneous network computing through a full
range of global services, including support services (hardware and software
systems support), educational services (education consulting, skills migration
and training) and professional services (IT consulting, systems integration and
system/network management). Sun assists both technical and commercial customers,
supporting more than 700,000 systems in 170 countries, training more than 75,000
students annually, and providing consulting, integration and operations
assistance to IT organizations worldwide.
In support services, Sun has increased field resources in direct service
delivery, especially software support engineers based in solution centers and
field offices. Higher levels of field resources are critical to the overall
investments being made in mission-critical support capability. This direct Sun
capability is complemented by third-party service providers who primarily
deliver hardware support services. Software support continues to be primarily
delivered by Sun software support engineers. Third party service providers
provide necessary leverage on critical field resources such as parts inventories
and staff to meet the service requirements of the growing installed base.
Investments by these third-party service providers in complementary support
infrastructure facilitates expansion of geographical coverage without additional
fixed cost investment by the Company.
The Company offers a warranty for parts and labor on its hardware products
generally for one year from date of sale and a limited warranty on software
generally for 90 days from date of sale. The Company maintains and services the
products during the warranty period and on a contractual basis after the initial
product warranty has expired. Post-warranty support services are primarily
offered through a tiered support offering called SunSpectrum(TM). SunSpectrum
offers four levels of differentiated support that package hardware, software and
peripherals in a single price support service. Warranty and post-warranty
services are provided through 27 solution centers worldwide.
Sun's educational services offers comprehensive skills migration, enterprise
consulting and courseware. Consultants can perform needs analysis, skills
assessment and migration, curriculum design and course customization.
Instructor-led courseware addresses the educational needs of many customers
including managers, operators, developers, system administrators, and end-users.
As an alternative to the classroom, customers may select self-study training,
including more than 50 interactive training products geared for all levels of
expertise.
In professional services, Sun provides the people, processes and technology to
deliver single point-of-contact solutions tailored to meet customer needs. Sun
technical and project management experts help customers plan, implement, and
manage heterogeneous computing environments. Sun consultants also help design IT
architectures and plan migrations from legacy systems to network computing. To
implement solutions, integration experts help customers develop and deploy
distributed computing environments for new applications. To keep the environment
operating at peak performance, operations experts help customers manage the
complexity of the heterogeneous systems and networks. In addition, Sun helps
with all phases of creating and implementing internet solutions. Investments
have been made in competencies in Internet/Java, business applications and
systems and network management.
Certain complex systems sold by Sun require a high level of implementation
support and consequently, the customer's acceptance of such systems may be
delayed in the event Sun does not provide a sufficient level of such service.
Delays in customer acceptance could adversely affect the future operating
results of the Company.
Product Development
The Company's research and product development programs are intended to
sustain and enhance its competitive position by incorporating the latest
worldwide advances in hardware, software, graphics, networking, data
communications and storage technologies. Sun's product development
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efforts, conducted within each of its businesses, are currently focused on
enhancing its products' performance and price/performance, as well as
reliability, availability, and serviceability, of both the Company's hardware
and systems software for the Company's expanding enterprise client-server
computing customer base. Additionally, Sun remains focused on system software
platforms for Internet and intranet applications, developing advanced
workstation and server architectures, designing application-specific integrated
circuits and software for networking and distributed computing. Sun product
development continues to be committed to including the high-performance
implementation of existing standards and the development of new technology
standards.
Sun conducts research and development worldwide principally through
facilities in the United States, France, and Japan. Research and development
expenses were approximately $826 million, $653 million and $563 million in
fiscal 1997, 1996 and 1995, respectively. In recent years, Sun's research and
development efforts have focused increasingly on the Java architecture, Solaris
software and SPARC microprocessors. Sun believes that software development
provides and continues to provide significant competitive differentiation.
Therefore, Sun currently devotes substantial resources to the development of
workgroup software, networking and data communications, video, graphics, disk
array, object technology and the software development environment.
The development of high performance computer products 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.
Manufacturing and Supply
The Company's manufacturing operations consist primarily of printed circuit
board assembly and final assembly, test and quality control of systems,
materials and components. Sun has manufacturing facilities in California,
Oregon, England and Scotland, and distribution facilities in California, the
Netherlands and Japan. The Company has continued its efforts to simplify its
manufacturing process by reducing the diversity of system configurations offered
to customers, increasing the standardization of components across product types
and establishing local sources of supply in major geographies.
Sun uses many standard parts and components in its products and believes
there are a number of competent vendors for most parts and components. However,
a number of important components are developed by and purchased from single
sources due to price, quality, technology or other considerations. In some
cases, those components are available only from single sources. In particular,
Sun is dependent on Sony Corporation for various monitors and on Fujitsu Limited
(Fujitsu) and Texas Instruments Incorporated for different implementations of
SPARC microprocessors. Certain custom silicon parts are designed by and produced
on a contractual basis for Sun. The process of substituting a new producer of
such parts could adversely affect Sun's operating results. Some suppliers of
certain components, including color monitors and custom silicon parts, require
long lead times such that it can be difficult for the Company to plan inventory
levels of components to consistently meet demand for Sun's products. Certain
other components, especially memory integrated circuits such as DRAMs, SRAMs,
and VRAMs, have from time to time been subject to industry wide shortages.
Future shortages of components could negatively affect the Company's ability to
match supply and demand, and therefore could adversely impact the Company's
future operating results.
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. Once a hardware product is developed the
Company must rapidly bring it to volume manufacturing, a process that requires
accurate forecasting of both volumes and configurations, among other things, in
order to achieve acceptable yields and costs. Upon introduction of new products,
the Company must also manage the transition from older, displaced products to
minimize disruptions in customer ordering patterns, reduce levels of older
product inventory, and ensure that adequate supplies of new products can be
delivered to meet
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customer demand. The ability of the Company to match supply and demand is
further complicated by the need to take pricing actions and the variability of
timing of customer orders. 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 computer systems offered by Sun generally are the result of both
hardware and software development, so that delays in software development can
delay the Company's ability to ship new hardware products. Adoption of a new
release of an operating system may require effort on the part of the customer as
well as software porting by software vendors providing applications. As a
result, the timing of conversion to a new release is inherently unpredictable.
Moreover, delays in adoption of a new release of an operating system by
customers can limit the acceptability of hardware products tied to that release.
In either situation, the future operating results of the Company could be
adversely affected.
Competition
The market for the Company'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 Sun's product line and the scalability of its products and network
computing model, the Company competes in many segments of the computer market
across a broad spectrum of customers. The requirements of those customers and
the basis of competition varies widely depending on the market segment and types
of users.
Sun's traditional customer base has been in the technical and scientific
markets. Competition in this segment is based primarily on system performance,
price/performance, availability and performance of application software,
robustness of the software development environment, system expandability and
upgradeability, adherence to standards, graphics features and performance and
product quality and reliability. Increasingly, Sun is finding that its strengths
in technical markets, particularly software development, design automation and
decision support, along with its network computing focus are enabling expansion
into mission critical enterprise applications. Sun's competitors in the
technical and scientific markets are primarily Hewlett-Packard Company (HP),
International Business Machines Corporation (IBM), Digital Equipment Corporation
(DEC) and Silicon Graphics, Inc. (SGI).
Sun has been making inroads into commercial markets both with Global 1000
companies which are downsizing and distributing their computer resources, as
well as with smaller companies which are upsizing and increasing the
capabilities of their network computing systems. Traditionally, competition in
these markets has been based on price/performance, capabilities and stability of
the systems software, product quality and reliability, ease of system operation
and administration, service and support, availability and performance of
applications and middleware, database performance, global marketing and
distribution capabilities, and corporate reputation and name recognition.
Increasingly, companies which are downsizing their operations are focusing on
distributing their computing capabilities and adopting a model of network
computing. Companies which are upsizing typically are increasing their
experience in managing larger heterogeneous environments. In addition, Sun is
continuing to expand into the Internet and intranet markets. As a result, in
both the upsizing and downsizing competitive scenarios, networking capabilities,
internet and intranet capabilities and the ability to obtain all of the
traditional security, stability and administrative features of a central
computing model in a networked environment are significant factors that
influence the buying decision and the relative strength of the competition. In
both upsizing and downsizing opportunities, Sun's competition tends to come
principally from IBM, HP, and DEC, as well as other mini and mainframe computer
suppliers. In addition, the Company is facing increasing competition from these
competitors as well as from personal computer 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.
Sun has also encouraged the proliferation of its SPARC technology as a
standard in the computer marketplace by licensing much of the technology and
promoting open interfaces to the Solaris operating environment, as well as by
offering microprocessors and enabling technologies to third party customers. As
a result, several licensees also offer SPARC/Solaris based products that compete
directly with Sun's products primarily in the desktop markets.
The Company expects that the markets for its products, technology and
services as well as its competitors within such markets, will continue to change
as the combination of these downsizing and
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upsizing trends shift customer buying patterns to network centric employing
multiple platform networks. Competition in these markets will also continue to
intensify as Sun and its competitors aggressively position themselves to benefit
from this shifting of customer buying patterns and demand. The ability to
continue to develop leading edge products and rapidly bring them to market will
continue to have a significant impact on Sun's competitiveness and its operating
results. In addition, Sun expects to see continued performance improvements in
microprocessor technology and products introduced by Intel and Motorola, Inc.
Such products, coupled with enhanced operating systems software from Microsoft
and other competitors, are expected to continue to provide competitive pressure
throughout the Company's product range. The Company expects this pressure to
continue to intensify in fiscal 1998 with the availability of Pentium Pro
systems running Windows NT server software. While many other technical, service
and support capabilities affect a customer's buying decision, Sun's future
operating results will depend, in part, on its ability to compete with these
technologies.
In order to remain competitive in a rapidly changing industry, the Company
is continually improving and changing its business practices, processes and
information systems. In this regard, the Company has begun to implement a number
of new business practices and a series of related information systems; such
activities are currently planned to be fully operational in the first half of
fiscal 1999. Implementing a number of new business practices and information
systems is a complex process, affecting numerous operational and financial
systems and processes as well as requiring comprehensive employee training.
While the Company tests these new systems and processes in advance of
implementation, there are inherent limitations in the Company's ability to
simulate a full-scale operating environment in advance of system cutover. To the
extent that the Company encounters problems after introduction of these new
systems and practices that prevent or limit their full utilization, there could
be a material, adverse impact on the Company's results.
Patents and Licenses
Sun currently holds a number of U.S. and foreign patents relating to
various aspects of its products and technology. While the Company believes that
such patent protection is important, it also believes that patents are of less
competitive significance than such factors as innovative skills and
technological expertise.
As is common in the computer industry, the Company has from time to time
been notified that it may be infringing certain patents and other intellectual
property rights of others, although no material litigation has arisen out of any
of these claims. Several pending claims are in various stages of evaluation. The
Company is evaluating the desirability of entering into licensing agreements in
certain of these cases. Based on industry practice, the Company believes that in
most cases any necessary licenses or other rights could be obtained on
commercially reasonable terms. However, no assurance can be given that licenses
can be obtained on acceptable terms or that litigation will not occur. The
failure to obtain necessary licenses or other rights, or litigation arising out
of such claims, could have a material adverse effect on the Company's
operations.
Sun has entered into separate patent exchange agreements with IBM, Cray
Research, Inc. (Cray) and Fujitsu. Under each agreement, the parties have
granted to each other non-exclusive, worldwide rights to patents in their
respective patent portfolios. These agreements cover patents issued or applied
for during certain limited periods as specified in the agreements. The
agreements with Cray and Fujitsu are royalty free. The agreement with IBM
expired at the end of fiscal 1995 and the licenses to the patents thereunder do
not apply to the patents of IBM or the Company applied for after that date.
In March 1990, Texas Instruments Incorporated (TI) alleged that a
substantial number of the Company's products infringe certain of TI's patents.
Based on its discussions with TI, the Company believes that it will be able to
negotiate a license agreement with TI, if necessary, and that the outcome of
this matter will not have a material adverse effect on Sun's financial position
or its results of operations or cash flows in any given fiscal year. Such a
negotiated license may or may not have a material adverse impact on Sun's
results of operations or cash flows in a given fiscal quarter depending upon
various factors including, but not limited to, the structure and amount of
royalty payments, offsetting consideration from TI, if any, and the allocation
of royalties between past and future product shipments, none of which can be
forecast with reasonable certainty at this time.
Employees
9
<PAGE>
As of June 30, 1997, Sun employed approximately 21,500 people. The
Company's future operating results will depend on its ability to continue to
broaden and develop senior management to attract and retain skilled employees,
and on the ability of its management and key employees to manage growth
successfully through the enhancement of management information systems and
financial controls. The Company expects to continue to increase its number of
employees to support demand creation programs, service and support operations,
and overall projected growth. None of Sun's employees in the United States are
represented by a labor union.
10
<PAGE>
ITEM 2. PROPERTIES
Sun conducts its worldwide operations using a combination of leased and
owned facilities. The Company believes that while it currently has sufficient
facilities to conduct its operations during fiscal 1998, it will continue to
lease and acquire owned facilities throughout the world as its business
requires. Properties owned by the Company consist of an approximately 260,000
square foot facility on approximately 20 acres in Palo Alto, California; an
approximately 227,000 square foot facility on approximately 30 acres in
Linlithgow, Scotland; an approximately 30,000 square foot facility on
approximately 2.5 acres in Bagshot, England; 40 acres in Farnborough England;
two separate parcels of land in Newark, California of approximately 90 acres and
60 acres, approximately 1,000,000 square feet on approximately 55 acres in Menlo
Park, California; approximately 120 acres in Broomfield, Colorado; and
approximately 158 acres in Burlington, Massachusetts. Sun also plans on
acquiring an approximately 82 acre site in Santa Clara, California and an
additional 48 acre site in Newark, California. The Company has approved the
construction of an approximately 525,000 square foot facility on one of its Bay
Area sites, an approximately 500,000 square feet facility on its Broomfield,
Colorado site, an approximately 475,000 square feet facility on its Burlington,
Massachusetts site and approximately 225,000 square foot manufacturing facility
on one of its Newark, California parcels. Total cost for these facilities are
expected to be approximately $300 to $600 million. Sun leases approximately 230
sales and service offices throughout the world aggregating about 3 million
square feet. Sun also leases approximately 3 million square feet for its
research and development and manufacturing facilities, primary in Milpitas,
Sunnyvale, San Jose and Mountain View, California and Chelmsford, Massachusetts.
Sun's California manufacturing plant, the majority of its research and
development facilities, its Corporate headquarters and other critical business
operations are located near major earthquake faults. Operating results could be
materially adversely impacted in the event of a major earthquake.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
The following sets forth certain information regarding the executive
officers of the Company as of September 16, 1997:
<CAPTION>
Name Age Position
<S> <C> <C>
Scott G. McNealy 42 Chairman of the Board of Directors, President and Chief
Executive Officer, Sun Microsystems, Inc.
Kenneth M. Alvares 53 Vice President, Human Resources, Sun Microsystems, Inc.
Alan E. Baratz 42 President, JavaSoft
Mel Friedman 59 Vice President, Worldwide Operations, Sun Microsystems
Computer Company
Lawrence W. Hambly 51 President, SunService Division
Masood A. Jabbar 47 Vice President, Chief Financial Officer, Sun Microsystems
Computer Company
Michael E. Lehman 47 Vice President, Chief Financial Officer, Sun Microsystems,
Inc.
Michael H. Morris 49 Vice President, General Counsel and Secretary, Sun
Microsystems, Inc.
Alton D. Page 41 Vice President, Treasurer, Sun Microsystems Inc.
Frank Pinto 52 Vice President, North American Field Operations, Sun
Microsystems Computer Company
William J. Raduchel 51 Vice President, Corporate Planning and Development and
Chief Information Officer, Sun Microsystems Inc.
George Reyes 43 Vice President, Corporate Controller, Sun Microsystems,
Inc.
Joseph P. Roebuck 61 Vice President, Worldwide Field Operations, Sun
Microsystems Computer Company
Edward Saliba 48 Vice President, Finance and Operations, SunSoft, Inc.
Janpieter T. Scheerder 48 President, SunSoft, Inc.
John C. Shoemaker 54 Vice President, General Manager Enterprise Servers and
Storage Group, Sun Microsystems Computer Company
Chester J. Silvestri 49 President, Sun Microelectronics
Edward T. Zander 50 President, Sun Microsystems Computer Company
</TABLE>
Mr. McNealy is a founder of the Company and has served as Chairman of the
Board of Directors, President and Chief Executive Officer since December 1984,
as President and Chief Operating Officer from February 1984 to December 1984 and
as Vice President of Operations from February 1982 to February 1984. Mr. McNealy
has served as a Director of the Company since the incorporation of Sun in
February 1982.
Mr. Alvares has served as Vice President, Human Resources of the Company
since June 1992. From 1990 to June 1992, he served as Vice President, Human
Resources, Nichols Institute. He held various positions at Frito-Lay, Inc. from
1984 to 1990, including Vice President of Personnel from 1987 to 1990.
Mr. Alan Baratz has served as President, JavaSoft, since February 1996.
From August 1994 to November 1995, Mr. Baratz served as President and Chief
Executive Officer of Delphi Internet Services Corp., an Internet services
provider. From July 1993 to July 1994, Mr. Baratz served as
12
<PAGE>
Director of Strategic Development for IBM Corporation. From January 1991 to June
1993, he served as a Director of High Performance Computing and Communication of
IBM Corporation.
Mr. Friedman has served as Vice President, Worldwide Operations of Sun
Microsystems Computer Company since April 1996. Prior to such time, since 1989,
Mr. Friedman served the Company in various positions including Vice President
Supply Management, Vice President California Operations and Vice President
Workstations, Servers and Graphics.
Mr. Hambly has served as President, SunService, a division of the Company,
since July 1993. From July 1991 to July 1993, he served as Vice President,
Marketing of Sun Microsystems Computer Company (formerly Sun Microsystems
Computer Corporation). From July 1988 to July 1991, he served as President of
Sun Microsystems Federal, Inc. From April 1983 to July 1988, he served in
various sales management capacities at the Company, most recently as Vice
President, Western Area Sales.
Mr. Jabbar has served as Vice President, and Chief Financial Officer of Sun
Microsystems Computer Company since June 1994. From July 1992 until June 1994,
Mr. Jabbar served as Vice President, Finance and Planning, Worldwide Field
Operations of Sun Microsystems Computer Company. From July 1991 to June 1992, he
served as Vice President, Finance and Administration, United States Field
Operations for Sun Microsystems Computer Company and from October 1990 to June
1991, he served as Director, Finance and Administration, United States Field
Operations for the Company. From October 1989 to October 1990, he served as
Director of United States Field Market for the Company. From April 1988 to
October 1989, he served as United States Sales and Service Controller for the
company. From December 1986 to April 1988 he served as United States and
Intercontinental Sales Controller for the Company.
Mr. Lehman has served as Vice President, and Chief Financial Officer of the
Company since February 1994. From June 1990 until February 1994, Mr. Lehman
served as Vice President and Corporate Controller of the Company. From September
1989 to June 1990 he served as Director of Finance and Administration of Sun
Microsystems of California Ltd., one of the Company's Hong Kong subsidiaries. He
served as Assistant Corporate Controller of the Company from September 1988 to
August 1989 and as External Reporting Manager from August 1987 to August 1988.
Mr. Morris has served as Vice President, General Counsel and Secretary of
the Company since October 1987.
Mr. Page has served as Vice President, Treasurer of the Company since
February 1996. Prior to that time, Mr. Page was a Partner of Ernst & Young, LLP.
Mr. Pinto has served as Vice President, North American Field Operations of
Sun Microsystems Computer Company since July 1995. From January 1993 to June
1995, Mr. Pinto served as Vice President, Northeast Area for Sun Microsystems
Computer Company. From June 1989 to December 1992, he served as Metro Regional
Director of the Company and from November 1988 to June 1989, he served as the
Company's District Manager, Northeast Major OEM District.
Mr. Raduchel has served as Vice President, Corporate Planning and
Development and Chief Information Officer of the Company since July 1991. In
addition, from July 1991 to June 1992, he served as Vice President, Human
Resources (acting). From June 1989 to July 1991, he served as Vice President and
Chief Financial Officer of the Company; he was also acting Chief Information
Officer of the Company from November 1990 to July 1991. From October 1988 to
June 1989, he served as Vice President, Corporate Planning and Development. From
1985 to 1988, he served as Vice President of Document Systems in the Strategic
Business Office of Xerox Corporation.
Mr. Reyes has served as Vice President, and Corporate Controller of the
Company since April 1994. From April 1992 to March 1994, Mr. Reyes served as
Audit Director for the Company. From April 1991 to April 1992, he was Director
of Finance for the Company's ICON operations. From June 1989 to April 1991, he
served as Assistant Controller. From July 1988 to June 1989, Mr. Reyes was the
Controller of the Company's General Systems Group. From March 1988 to June 1988,
Mr. Reyes served as the Company's Marketing Controller.
Mr. Roebuck has served as Vice President, Worldwide Field Operations of Sun
Microsystems Computer Company since April 1992. From November 1988 to April
1992, he served as Vice President, United States Field Operations, Sun
Microsystems Computer Company and from January 1986 to November 1988, he served
as Vice President of Sales for the Company.
Mr. Saliba has served as Vice President, Finance SunSoft, Inc. since
February 1996. From May 1994 to February 1996, he served as Finance Director for
Sun Microelectronics. From May 1993 to
13
<PAGE>
May 1994 he served as Finance Director of Worldwide Operations for Sun
Microsystems Computer Company. From June 1991 to May 1993 he served as Finance
Director for Sun Microsystems Computer Company Engineering. From April 1989 to
June 1991 he served as Finance Manager and Director East Coast Operations.
Mr. Scheerder has served as President, of SunSoft, Inc., since August 1995.
From April 1995 to August 1995, he served as Vice President, Server Products of
Sun Microsystems Computer Company. From March 1992 to April 1995, Mr. Scheerder
served as Vice President, Solaris Products of SunSoft, Inc. From August 1991 to
March 1992, he was Director of Marketing and Programming of SunSoft, Inc. and
from February 1990 to August 1991, he was Vice President, Industry Standard
System Development at Data General.
Mr. Shoemaker has served as Vice President, General Manager, Enterprise
Server and Storage Group, Sun Microsystems Computer Company since April 1996.
From July 1993 to April 1996 he served as Vice President, Worldwide Operations
of Sun Microsystems Computer Company. From June 1992 to July 1993 he served as
Vice President, U.S. Operations of Sun Microsystems Computer Company. From May
1990 to July 1993, he also served as Vice President, Finance and Planning,
Worldwide Operations (on an acting basis since July 1992). He served as Vice
President (acting), Materials, Worldwide Operations from October 1991 to June
1992. From March 1989 to March 1990, he served as Senior Vice President,
Electronic Printing Worldwide Marketing, Xerox Corporation. From December 1986
to March 1989, he served as Vice President and General Manager, Document Systems
Business, Xerox Corporation.
Mr. Silvestri has served as President, Sun Microelectronics, a division of
the Company, since February 1994. From August 1992 to February 1994, Mr.
Silvestri served as Vice President, SPARC Sales. Prior to joining Sun, from
December 1986 to August 1992, he served as Vice President and General Manager,
Technology Products for MIPS Computer Systems, Inc., later acquired by Silicon
Graphics Incorporated.
Mr. Zander has served as President, Sun Microsystems Computer Company since
February 1995. From July 1991 to February 1995, Mr. Zander served as President
of SunSoft, Inc. From October 1987 to July 1991, he served as Vice President of
Corporate Marketing of the Company.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
inside back cover of Sun's 1997 Annual Report to Stockholders. At September 16,
1997 there were 8,521 stockholders of record.
The following is a summary of all sales of the Company's Common Stock by
the Company's directors and executive officers who are subject to Section 16 of
the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended
June 30, 1997:
Number of
Officer Date Price Shares Sold
------- ---- ----- -----------
Kenneth Alvares 5/16/97 $32.00 15,000
5/16/97 $32.1875 15,000
5/27/97 $33.93750 10,000
Robert Long 5/16/97 $31.875 6,338
Scott McNealy 5/1/97 $28.50 600,000
Frank Pinto 5/29/97 $33.50 12,000
5/29/97 $33.50 8,000
5/29/97 $33.50 5,200
5/29/97 $33.50 4,800
George Reyes 5/6/97 $30.375 920
5/6/97 $30.375 1,040
5/6/97 $30.375 4,800
Edward Saliba 5/16/97 $31.875 4,800
5/16/97 $31.875 4,800
5/16/97 $31.875 2,400
5/16/97 $31.875 800
5/16/97 $31.875 1,840
Janpieter Scheerder 4/22/97 $26.125 12,000
5/29/97 $33.375 936
John Shoemaker 2/10/97 $33.815 8,000
2/20/97 $34.065 11,000
2/20/97 $34.190 1,000
5/23/97 33.57 8,000
Chester Silvestri 1/22/97 $33.375 5,000
1/22/97 $33.250 2,000
1/22/97 33.13 2,000
1/22/97 $33.00 18,000
1/22/97 $33.50 5,000
1/22/97 $33.00 8,000
5/14/97 $32.00 20,000
15
<PAGE>
Number of
Officer Date Price Shares Sold
------- ---- ----- -----------
Edward Zander 1/21/97 $32.0625 10,000
1/21/97 33.25 6,000
1/21/97 $31.95 10,000
4/22/97 27 10,000
4/23/97 27.5 10,000
4/29/97 $28.5625 7,200
5/7/97 30.56 10,000
5/7/97 $31.00 10,000
5/13/97 $30.9375 10,000
5/13/97 31.31 20,000
- -------------------
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
information included under the caption "Historical Financial Review" on pages 18
and 19 of Sun's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
information included under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 20 through 25 of Sun's
1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item, with the exception of the subsequent
events described here, is incorporated by reference to the information included
under the captions "Consolidated Statements of Income","Consolidated Balance
Sheets", "Consolidated Statements of Cash Flows", "Consolidated Statements of
Stockholders' Equity", "Notes to Consolidated Financial Statements"and "Report
of Ernst & Young LLP, Independent Auditors" on pages 26 through 44 of Sun's 1997
Annual Report to Stockholders.
During September 1997 the Company acquired all of the outstanding capital
stock of Integrity Arts, Inc. The transaction will be accounted for as a
purchase and, on this basis, the purchase price will be allocated to tangible
and intangible assets, and in-process research and development.
16
<PAGE>
On August 22, 1997 the Company signed a definitive agreement to purchase
substantially all of the assets and certain liabilities of Chorus Systems SA,
Chorus Systems KK and Chorus Systems, Inc. Upon and subject to closing, the
transaction will be accounted for as a purchase and, on this basis, the purchase
price will be allocated to tangible and intangible assets, and in-process
research and development. The closing of this acquisition is contingent upon the
completion of various closing conditions
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by reference
from the information contained under the caption "Election of Directors" in
Sun's 1997 Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders. Current executive officers of the Registrant found under the
caption "Executive Officers of the Registrant" in Part 1 hereof is also
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in Sun's 1997
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
information contained under the caption "Information Concerning Solicitation and
Voting - Record Date and Outstanding Shares" and "Security Ownership of
Management" in Sun's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation - Summary
Compensation Table", "Certain Transactions With Management" and "Employment
Contracts and Change-In-Control Arrangements" in Sun's 1997 Proxy Statement.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements that are incorporated herein by reference
to the following in Sun's 1997 Annual Report to Stockholders.
Consolidated Statements of Income for each of the three years
in the period ended June 30, 1997 (page 26).
Consolidated Balance Sheets at June 30, 1997 and 1996 (page
27).
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1997 (page 28).
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 1997 (page 29).
Notes to Consolidated Financial statements (pages 30 through
43).
Report of Ernst & Young LLP, Independent Auditors (page 44).
The Company's 1997 Annual Report to Stockholders is not deemed
filed as part of this report except for those parts specifically
incorporated herein by reference.
2. Financial Statement schedule:
Page Schedule Title
--------------------------
S-1 II Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is not present or is not present in amounts sufficient
to require submission of the schedule, or because the information
required is included in the consolidated financial statements,
including the notes thereto.
19
<PAGE>
3. Exhibits
Exhibit
Number Description
------ -----------
3.2(9) Bylaws of Registrant, as amended. 3.3(8) Certificate of
Amendment of the Restated Certificate of Incorporation of
Registrant.
3.3(19) Registrant's Amended and Restated Certificate of Incorporation
(as amended to date).
4.3(9) First Amended and Restated Common Shares Rights Agreement dated
December 14, 1990, between Registrant and The First National
Bank of Boston.
4.4(11) Amendment dated as of October 28, 1991 to the First Amended and
Restated Common Shares Rights Agreement dated December 14,
1990.
4.5(12) Second Amendment dated as of August 5, 1992 to the First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990.
4.6(17) Third Amendment dated as of November 2, 1994 to First Amended
and Restated Common Shares Rights Agreement dated December 14,
1990.
4.7(17) Fourth Amendment dated as of November 1, 1995 to First Amended
and Restated Common Shares Rights Agreement dated December 14,
1990.
10.1(1) Technology Transfer Agreement dated February 27, 1982, for the
purchase by the Registrant of certain technology for cash, and
related Assumption Agreement dated February 27, 1982.
10.3(1) Form of Founders' Restricted Stock Purchase Agreement.
10.8(1) Registration Rights Agreement dated as of November 26, 1984.
10.8A(1) Amendment to Registration Rights Agreement.
10.9(3) Registrant's 1982 Stock Option Plan, as amended, and
representative forms of Stock Option Agreement.
10.10(3) Registrant's Restricted Stock Plan, as amended, and
representative form of Stock Purchase Agreement.
10.11(10) Registrant's 1984 Employee Stock Purchase Plan, as amended.
10.21(1) License Agreement dated July 26, 1983, by and between
Registrant and The Regents of the University of California.
10.22(1) Software Agreement effective as of April 1, 1982 by and between
Registrant and American Telephone and Telegraph Company, and
Supplemental Agreement dated effective as of May 28, 1983.
10.48(3) Registrant's 1987 Stock Option Plan and representative form of
Stock Option Agreement.
10.56(4) Building Loan Agreement dated May 11, 1989, between Sun
Microsystems Properties, Inc. and the Toyo Trust and Banking
Company Limited, New York Branch and the related Promissory
Note; First Deed of Trust, Assignment of Leases, Rents and
Other Income and Security Agreement; Guaranty of Payment;
Guaranty of Completion (Sun Microsystems Properties, Inc.);
Guaranty of Completion (Sun Microsystems, Inc.; Shortfall
Agreement and Indemnity.
20
<PAGE>
Exhibit
Number Description
------ -----------
10.64(8) Registrant's 1988 Directors' Stock Option Plan and
representative form of Stock Option Agreement.
10.65(16) Registrant's 1990 Employee Stock Purchase Plan, as amended on
August 9, 1995.
10.66(15) Registrant's 1990 Long-Term Equity Incentive Plan, as amended
on August 15, 1996.
10.66A(10) Representative form of agreement to Registrant's 1990 Long-Term
Equity Incentive Plan.
10.73(10) Representative form of letter dated June 25, 1991 between the
Registrant and the insurance companies who are parties to the
Note and Warrant Purchase Agreements dated September 16, 1986
and December 15, 1989.
10.74(10) Software Distribution Agreement dated January 28, 1991 by and
between the Registrant and UNIX Systems Laboratories, Inc.
10.77(14) Lease Agreement between BNP Leasing Corporation and Registrant,
effective as of September 25, 1992.
10.82 Restated Revolving Credit Agreement dated August 27, 1997,
between the Registrant; Citicorp USA, Inc.; Bank of America
National Trust and Savings Association; ABN AMRO Bank N.V.; The
First National Bank of Boston; Barclays Bank PLC; Morgan
Guaranty Trust Company of New York; The Fuji Bank Limited, San
Francisco Agency: The Toyo Trust and Banking Co. Ltd.: The
Sumitomo Bank, Limited; The Sakura Bank Limited, San Francisco
Agency; Banque Nationale de Paris; Bayerische Vereinsbank AG,
Los Angeles Agency; The Industrial Bank of Japan, Limited, San
Francisco Agency; The Bank of New York; Cariplo - Cassa
Di-Risparmio Delle Provincie Lombade SPA; Corestes Bank NA; The
Northern Trust Company, Royal Bank Of Canada, Union Bank of
California.
10.84 Registrant's Non-Qualified Deferred Compensation Plan dated
July 1, 1995, as amended and restated effective October 1,
1997.
10.85(16) Registrant's Section 162 (m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.86(15) First Amendment to Lease Agreement between BNP Leasing
Corporation and Registrant, effective as of September 23, 1994.
10.87 The Sun Microsystems, Inc. Equity Compensation Acquisition
Plan, as amended.
10.89(18) Form of Change of Control Agreement executed by each corporate
executive officer of Registrant.
10.90(18) Form of Change of Control Agreement executed by Chief Executive
Officer of Registrant.
10.91(18) Form of Vice President Change of Control Severance Plan.
10.92(18) Form of Director - Level Change of Control Severance Plan.
11 Statement of Computation of Earnings per Share.
13.0 1997 Annual Report to Stockholders (to be deemed filed only to
the extent required by the instructions to exhibits for reports
on Form 10-K).
22.0 Subsidiaries of Registrant.
21
<PAGE>
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (See page 25).
27 Financial Data Schedule.
22
<PAGE>
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-2897), which became effective March 4, 1986.
(2) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1987.
(3) Incorporated by reference to Exhibits 19.1, 19.3 or 19.4, filed as
Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 25, 1987.
(4) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1989.
(5) Not used.
(6) Not used.
(7) Not used.
(8) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1990.
(9) Incorporated by reference to Exhibits 3.1 and 4.1 filed as exhibits to
the Registrant's Report on Form 8-K filed on December 28, 1990.
(10) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1991.
(11) Incorporated by reference to Exhibit 4.0 filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 27, 1991.
(12) Incorporated by reference to Exhibit 3 filed as an exhibit to the
Registrant's Form 8 Amendment No. 3 to Registration Statement on Form
8-A filed on September 16, 1992.
(13) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992.
(14) Not used.
(15) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
(16) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
(17) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 1, 1995.
(18) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 29, 1996.
(19) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 29, 1996.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUN MICROSYSTEMS, INC.
Registrant
September 25, 1997
By: /s/ MICHAEL E. LEHMAN
------------------------------------------
Michael E. Lehman
Vice President and Chief Financial Officer
24
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Scott G. McNealy and Michael E. Lehman jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, which include the Chief
Executive Officer, the Chief Financial Officer and Corporate Controller and a
majority of the Board of Directors, on behalf of the registrant and in the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
--------- -----
<S> <C> <C>
/s/ SCOTT G. McNEALY Chairman of the Board of Directors, September 25, 1997
- -------------------------- President and Chief Executive Officer
(Scott G. McNealy) (Principal Executive Officer)
/s/ MICHAEL E. LEHMAN Vice President and Chief Financial September 25, 1997
- -------------------------- Officer (Principal Financial Officer)
(Michael E. Lehman)
/s/ GEORGE REYES Vice President and Corporate Controller September 25, 1997
- -------------------------- (Principal Accounting Officer)
(George Reyes)
/s/ L. JOHN DOERR Director September 25, 1997
- --------------------------
(L. John Doerr)
/s/ JUDITH L. ESTRIN Director September 25, 1997
- --------------------------
(Judith L. Estrin )
/s/ ROBERT J. FISHER Director September 25, 1997
- --------------------------
(Robert J. Fisher)
/s/ ROBERT L. LONG Director September 25, 1997
- --------------------------
(Robert L. Long)
/s/ M. KENNETH OSHMAN Director September 25, 1997
- --------------------------
(M. Kenneth Oshman)
/s/ A. MICHAEL SPENCE Director September 25, 1997
- --------------------------
(A. Michael Spence)
</TABLE>
25
<PAGE>
<TABLE>
SCHEDULE 2
SUN MICROSYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deduction/ End of
Description of Period Expenses Write-off Period
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Accounts receivable $79,845 $186,993 $167,231 $99,607
allowances......................... ======== ======== ======== ========
Year ended June 30, 1996:
Accounts receivable $99,607 $195,840 $194,717 $100,730
allowances......................... ======== ======== ======== ========
Year ended June 30, 1997:
Accounts receivable $100,730 $273,959 $178,598 $196,091
allowances......................... ======== ======== ======== ========
</TABLE>
26
U.S. $500,000,000
CREDIT AGREEMENT
Dated as of August 28, 1997, among
SUN MICROSYSTEMS, INC.
as Borrower
and
THE LENDERS NAMED HEREIN
as Lenders
and
CITICORP USA, INC.
as Administrative Agent
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS....................................... 1
SECTION 1.01. Certain Defined Terms.......................................................... 1
SECTION 1.02. Computation of Time Periods.................................................... 11
SECTION 1.03. Accounting Terms............................................................... 11
SECTION 1.04. Application of Level Pricing................................................... 11
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES...................................... 12
SECTION 2.01. The A Advances................................................................. 12
SECTION 2.02. Making the A Advances.......................................................... 12
SECTION 2.03. The B Advances................................................................. 14
SECTION 2.04. Fees........................................................................... 17
SECTION 2.05. Termination, Reduction or Increase of the Commitments.......................... 17
SECTION 2.06. Repayment of A Advances........................................................ 20
SECTION 2.07. Interest on A Advances......................................................... 20
SECTION 2.08. Notes.......................................................................... 21
SECTION 2.09. Interest Rate Determination.................................................... 21
SECTION 2.10. Sharing of Payments, Etc....................................................... 21
SECTION 2.11. Prepayments of A Advances...................................................... 22
SECTION 2.12. Increased Costs................................................................ 22
SECTION 2.13. Illegality..................................................................... 23
SECTION 2.14. Payments and Computations...................................................... 24
SECTION 2.15. Taxes.......................................................................... 25
ARTICLE III
CONDITIONS OF LENDING............................................ 27
SECTION 3.01. Condition Precedent to Initial Advances........................................ 27
SECTION 3.02. Conditions Precedent to Each A Borrowing....................................... 28
SECTION 3.03. Conditions Precedent to Each B Borrowing....................................... 28
ARTICLE IV
REPRESENTATIONS AND WARRANTIES........................................ 29
SECTION 4.01. Representations and Warranties of the Borrower................................. 29
i
<PAGE>
ARTICLE V
COVENANTS OF THE BORROWER.......................................... 33
SECTION 5.01. Affirmative Covenants.......................................................... 33
SECTION 5.02. Negative Covenants............................................................. 38
ARTICLE VI
EVENTS OF DEFAULT.............................................. 43
SECTION 6.01. Events of Default.............................................................. 43
SECTION 6.02. Mandatory Prepayment; Event of Early Termination............................... 45
ARTICLE VII
THE AGENT.................................................. 46
SECTION 7.01. Authorization and Action....................................................... 46
SECTION 7.02. Agent's Reliance, Etc.......................................................... 46
SECTION 7.03. CUSA and Affiliates............................................................ 47
SECTION 7.04. Lender Credit Decision......................................................... 47
SECTION 7.05. Indemnification................................................................ 47
SECTION 7.06. Successor Agent................................................................ 48
SECTION 7.07 Co-Agents...................................................................... 48
ARTICLE VIII
MISCELLANEOUS................................................ 48
SECTION 8.01. Amendments Etc................................................................. 48
SECTION 8.02. Notices; Payments, Etc......................................................... 49
SECTION 8.03. No Waiver; Remedies............................................................ 49
SECTION 8.04. Costs and Expenses............................................................. 49
SECTION 8.05. Right of Set-off............................................................... 51
SECTION 8.06. Binding Effect................................................................. 52
SECTION 8.07. Assignments and Participations................................................. 52
SECTION 8.08. Governing Law.................................................................. 55
SECTION 8.09. Headings....................................................................... 55
SECTION 8.10. Commitment Extension........................................................... 55
SECTION 8.11. Execution in Counterparts...................................................... 55
SECTION 8.12. Confidentiality................................................................ 56
SECTION 8.13. Termination.................................................................... 56
SECTION 8.14. Jurisdiction, Etc.............................................................. 56
SECTION 8.15. WAIVER OF JURY TRIAL........................................................... 57
</TABLE>
ii
<PAGE>
SCHEDULES
SCHEDULE I
EXHIBITS
EXHIBIT A-1 FORM OF A NOTE
EXHIBIT A-2 FORM OF B NOTE
EXHIBIT B-1 NOTICE OF A BORROWING
EXHIBIT B-2 NOTICE OF B BORROWING
EXHIBIT C ASSIGNMENT AND ACCEPTANCE
EXHIBIT D ASSUMPTION AGREEMENT
EXHIBIT E OPINION OF WILSON, SONSINI, GOODRICH & ROSATI
EXHIBIT F COVENANT COMPLIANCE CERTIFICATE
EXHIBIT G LIENS
EXHIBIT H SUBSIDIARIES
EXHIBIT I RESPONSIBLE OFFICERS
iii
<PAGE>
CREDIT AGREEMENT
Dated as of August 28, 1997
SUN MICROSYSTEMS, INC., a Delaware corporation (the "Borrower"), the
Lenders listed on the signature pages hereof, and CITICORP USA, INC., a Delaware
corporation ("CUSA"), as administrative agent (the "Agent") for the Lenders
hereunder, agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"A Advance" means an advance by a Lender to the Borrower as part of an
A Borrowing and refers to an Alternate Base Rate Advance or a Eurodollar Rate
Advance, each of which shall be a "Type" of A Advance.
"A Borrowing" means a borrowing consisting of simultaneous A Advances
of the same Type made by each of the Lenders pursuant to Section 2.01.
"A Note" means a promissory note of the Borrower payable to the order
of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the
aggregate indebtedness of the Borrower to such Lender resulting from the A
Advances made by such Lender.
"Adjusted EBIT" means, for any accounting period, net income (or net
loss) plus the amounts (if any) which, in the determination of net income (or
net loss) for such period, have been deducted for (a) gross interest expense,
(b) income tax expense and (c) rent expense under leases of real and personal
property (excluding, however, from the determination of such rent expense, taxes
and normal and customary operating expenses passed on to the Borrower for
reimbursement pursuant to the terms of such real property leases whether
denominated under such leases as "rent", "additional rent" or otherwise, but
only to the extent that such operating expenses are actually incurred and passed
through to the Borrower), in each case determined in accordance with generally
accepted accounting principles, consistent with those applied in the preparation
of the financial statements referred to in Section 4.01(e).
"Advance" means an A Advance or a B Advance.
<PAGE>
2
"Affiliate" means, as to any Person, any other Person that, directly or
indirectly, controls, is controlled by or is under common control with such
Person or is a director or officer of such Person.
"Alternate Base Rate" means, for any period (including a period
consisting of a single day), a fluctuating interest rate per annum as shall be
in effect from time to time which rate per annum shall at all times be equal to
the highest of:
(a) the rate of interest announced publicly by Citibank in New York,
New York, from time to time, as Citibank's base rate; or
(b) 1/2 of one percent per annum above the latest three-week moving
average of secondary market morning offering rates in the United States for
three-month certificates of deposit of major United States money market
banks, such three- week moving average being determined weekly on each
Monday (or, if any such date is not a Business Day, on the next succeeding
Business Day) for the three-week period ending on the previous Friday by
the Agent on the basis of such rates reported by certificate of deposit
dealers to and published by the Federal Reserve Bank of New York or, if
such publication shall be suspended or terminated, on the basis of
quotations for such rates received by the Agent from three New York
certificate of deposit dealers of recognized standing selected by the
Agent, in either case adjusted to the nearest 1/16 of one percent or, if
there is no nearest 1/16 of one percent, to the next higher 1/16 of one
percent; or
(c) for any day, 1/2 of one percent per annum above the weighted
average of the rates on overnight Federal funds transactions with members
of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by
it.
"Alternate Base Rate Advance" means an A Advance which bears interest
as provided in Section 2.07(a).
"Applicable Lending Office" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of an Alternate Base Rate Advance,
and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate
Advance and, in the case of a B Advance, the office of such Lender notified by
such Lender to the Agent as its Applicable Lending Office with respect to such B
Advance.
<PAGE>
3
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Lender and an assignee reasonably acceptable to the Agent and
reasonably consented to by the Borrower, in substantially the form of Exhibit C
hereto.
"Assuming Lender" means an assignee reasonably acceptable to the Agent
not previously a Lender that becomes a Lender hereunder pursuant to Section
2.05(b).
"B Advance" means an advance by a Lender to the Borrower as part of a B
Borrowing resulting from the auction bidding procedure described in Section
2.03.
"B Borrowing" means a borrowing consisting of B Advances made at or
about the same time by each of the Lenders whose offer to make one or more B
Advances as part of such borrowing has been accepted by the Borrower under the
auction bidding procedure described in Section 2.03.
"B Note" means a promissory note of the Borrower payable to the order
of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the
indebtedness of the Borrower to such Lender resulting from a B Advance made by
such Lender.
"B Reduction" has the meaning specified in Section 2.01.
"Borrowing" means an A Borrowing or a B Borrowing.
"Business Day" means a day of the year other than a Saturday, Sunday or
other day on which banks are not required or authorized to close in New York
City or San Francisco, California and, if the applicable Business Day relates to
any Eurodollar Rate Advances, on which dealings are carried on in the London,
England interbank market.
"Change of Control Event" means the occurrence of the following: (i)
any corporation or Person, or a group of related corporations or Persons, shall
acquire (a) beneficial ownership in excess of 50% of the outstanding Voting
Stock of the Borrower or (b) all or substantially all of the assets of the
Borrower, or (ii) a majority of the Board of Directors of the Borrower is, at
any time, composed of persons other than (a) persons who were members of such
Board on the date of this Agreement, (b) successors to such persons elected or
nominated in the ordinary course of business, and (c) any person who has served
as a member of such Board for at least the prior 12 months.
"Citibank" means Citibank, N.A., a national banking association.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated and rulings issued thereunder.
<PAGE>
4
"Commitment" has the meaning specified in Section 2.01.
"consolidated" refers to the consolidation of the accounts of the
Borrower and its Subsidiaries in accordance with generally accepted accounting
principles, including principles of consolidation, consistent with those applied
in the preparation of the consolidated financial statements referred to in
Section 4.01(e).
"Consolidated Tangible Net Worth" means the excess of consolidated
total assets over consolidated total liabilities, consolidated total assets and
consolidated total liabilities each to be determined on a consolidated basis for
the Borrower in accordance with generally accepted accounting principles
consistent with those applied in the preparation of the financial statements
referred to in Section 4.01(e), excluding, however, from the determination of
consolidated total assets (i) goodwill, organizational expenses, research and
development expenses, trademarks, trade names, copyrights, patents, patent
applications, licenses and rights in any thereof, and other similar intangibles,
(ii) all unamortized debt discount and expense, (iii) asset, liability,
contingency and other appropriate reserves, including reserves for depreciation
and for deferred income taxes, (iv) treasury stock, (v) any write-up in the book
value of any asset resulting from a revaluation thereof subsequent to June 30,
1996, (vi) the book value of investments in Persons that are not Subsidiaries
(unless the same are readily marketable), and (vii) any items not included in
clauses (i) through (vi) above which are treated as intangibles in conformity
with generally accepted accounting principles.
"Debt" of any Person means (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes or other similar instruments,
(iii) obligations to pay the deferred purchase price of property or services
(excluding ordinary trade payables incurred in the ordinary course of business),
(iv) obligations as lessee under leases which shall have been or should be, in
accordance with generally accepted accounting principles, recorded as capital
leases, (v) all obligations of such Person to purchase securities (or other
property) which arise out of or in connection with the sale of the same or
substantially similar securities or property, (vi) any reimbursement obligations
of such Person to the issuer of a letter of credit or similar instrument, (vii)
all indebtedness or obligations of others secured by a lien on any asset of such
Person, whether or not such indebtedness or obligations are assumed by such
Person (to the extent of the value of the asset), (viii) any reimbursement
obligation of such Person or other arrangement of whatever nature having the
effect of assuring or holding harmless any other Person against loss with
respect to any real property owned by such other Person, including, without
limitation, assuring or guaranteeing that such other Person shall receive a
specified amount in connection with the conveyance of such real property, (ix)
obligations under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (i) through (viii) above, and (x)
liabilities in respect of unfunded vested
<PAGE>
5
benefits under plans covered by Title IV of ERISA. Notwithstanding any provision
herein to the contrary, no obligations of any Person (whether such obligations
be direct or indirect, contingent or otherwise) under any Permitted Receivables
Facility shall be "Debt" for purposes of this Agreement; provided that the
foregoing exclusion shall not apply to obligations of any such Person pursuant
to the indemnity or reimbursement provisions contained in any Permitted
Receivables Facility and to fees and expenses payable pursuant to any Permitted
Receivables Facility to the extent that any such obligations are required to be
recorded as liabilities on such Person's balance sheet under generally accepted
accounting principles.
"Default" means any event which, with the passage of time or the giving
of notice or both, would (if not cured within any applicable cure period)
constitute an Event of Default.
"Domestic Lending Office" means, with respect to any Lender, the office
of such Lender specified as its "Domestic Lending Office" opposite its name on
Schedule I hereto or in the Assignment and Acceptance pursuant to which it
became a Lender, or such other office of such Lender as such Lender may from
time to time specify to the Borrower and the Agent.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment, or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" means any Person who for purposes of Title IV of
ERISA is a member of the Borrower's controlled group, or under common control
with the Borrower, within the meaning of Section 414 of the Code, and the
regulations promulgated and rulings issued thereunder.
"ERISA Termination Event" means (i) a Reportable Event described in
Section 4043 of ERISA and the regulations promulgated thereunder (other than a
Reportable Event not subject to the provision for 30 day notice to the Pension
Benefit Guaranty
<PAGE>
6
Corporation under such regulations), or (ii) the withdrawal of the Borrower or
any Subsidiary from a Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a) (2) of ERISA, or (iii) the filing of a
notice of intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041 of ERISA or (iv) the institution of proceedings
to terminate a Plan by the Pension Benefit Guaranty Corporation under Section
4042 of ERISA, or (v) any other event or condition which would constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" opposite its
name on Schedule I hereto or in the Assignment and Acceptance pursuant to which
it became a Lender (or, if no such office is specified, its Domestic Lending
Office), or such other office of such Lender as such Lender may from time to
time specify to the Borrower and the Agent.
"Eurodollar Margin" means, on any day, with respect to any Eurodollar
Rate Advance made or outstanding on such day, an interest rate per annum equal
at all times to (i) .130% for each day during a Level I Period; (ii) .170% for
each day during a Level II Period; (iii) .200% for each day during a Level III
Period; (iv) .250% for each day during a Level IV Period; and (v) .325% for each
day during a Level V Period.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
Rate Advance comprising part of the same A Borrowing, an interest rate per annum
determined by the Agent to be (a) the arithmetic mean (rounded upward to the
nearest whole multiple of 1/16 of 1% per annum, if such arithmetic mean is not
such a multiple) of the rates notified to the Agent at which deposits in U.S.
dollars are offered by the principal office of each of the Eurodollar Reference
Banks in London, England to prime banks in the London interbank market at 11:00
A.M. (London time) two Business Days before the first day of such Interest
Period in an amount substantially equal to the respective Eurodollar Reference
Bank's (or its Affiliate's) Eurodollar Rate Advance comprising part of such A
Borrowing and for a period equal to such Interest Period, divided by (b) a
percentage equal to 100% minus the Eurodollar Rate Reserve Percentage (as
defined below) for such Interest Period. The "Eurodollar Rate Reserve
Percentage" for the Interest Period for each Eurodollar Rate Advance comprising
part of the same A Borrowing means the reserve percentage applicable two
Business Days before the first day of such Interest Period under regulations
issued from time to time by the Board of Governors of the Federal Reserve System
(or any successor) for determining the maximum reserve requirement (including,
but not limited to, any emergency, supplemental or other marginal reserve
requirement) for a member bank of the Federal
<PAGE>
7
Reserve System in New York City with deposits exceeding One Billion Dollars with
respect to liabilities or assets consisting of or including Eurocurrency
Liabilities (or with respect to any other category of liabilities which includes
deposits by reference to which the interest rate on Eurodollar Rate Advances is
determined) having a term equal to such Interest Period.
"Eurodollar Rate Advance" means an A Advance which bears interest as
provided in Section 2.07(b).
"Eurodollar Reference Banks" means the principal London offices of
Citibank, [Bank of America National Trust and Savings Association and ABN AMRO
Bank N.V.] and each such other bank as may be approved pursuant to Section
8.07(i).
"Events of Default" has the meaning specified in Section 6.01.
"Excess Interest in Receivables" means the extent to which (i) any
ownership interest, security interest or other interest of any third party in
the accounts receivable of the Borrower and its Subsidiaries, exceeds (ii) the
aggregate amount advanced by such third party in respect of the purchase of such
interest (net of amounts received by such third party from the collection of
such accounts receivable).
"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Fixed Charges" means, for any accounting period, the sum, without
duplication, of (i) gross interest expense during such period, plus (ii)
scheduled amortization of principal in respect of all Debt during such period
(but excluding any required principal payment in respect of any obligation that
is a "bullet" payment, i.e., the entire amount thereof is due in full at
maturity without any amortizing payments prior to said maturity), plus (iii)
amortization of debt discount (but excluding from this clause (iii) and clause
(i) above noncash amortization of debt discount if the maturity of the
obligation so discounted is no earlier than December 31, 1998 pursuant to the
terms and conditions of the instruments and agreements creating such debt
discount), plus (iv) rent expense under leases of real and personal property
during such period (excluding, however, from the determination of such rent
expense, taxes and normal and customary operating expenses passed on to the
Borrower for reimbursement pursuant to the terms of such real property leases
whether denominated
<PAGE>
8
under such leases as "rent", "additional rent" or otherwise, but only to the
extent that such operating expenses are actually incurred and passed through to
the Borrower).
"Interest Period" means, for each Eurodollar Rate Advance comprising
part of the same A Borrowing, the period commencing on the date of such A
Advance and ending on the last day of the period selected by the Borrower
pursuant to the provisions below. The duration of each such Interest Period
shall be 1, 2, 3 or 6 months or, if available, 9 or 12 months, as the Borrower
may, upon notice received by the Agent in accordance with Section 2.02, select;
provided, however, that:
(i) the Borrower may not select any Interest Period which ends after
the then existing Termination Date;
(ii) Interest Periods commencing on the same date for A Advances
comprising part of the same A Borrowing shall be of the same duration; and
(iii) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day; provided, in the
case of any Interest Period for a Eurodollar Rate Advance, that if such
extension would cause the last day of such Interest Period to occur in the next
following calendar month, the last day of such Interest Period shall occur on
the next preceding Business Day.
"Lenders" means the lenders listed on the signature pages hereof and
each assignee that shall become a party hereto pursuant to Sections 8.07(a) or
(b).
"Level I Period" means a period of time, which may consist of a single
day, during which the Public Debt Rating is (i) A- or better by S&P or (ii) A3
or better by Moody's.
"Level II Period" means a period of time other than a Level I Period,
which may consist of a single day, during which the Public Debt Rating is (i)
BBB+ or better by S&P or (ii) Baa1 or better by Moody's.
"Level III Period" means a period of time other than a Level I Period
or a Level II Period, which may consist of a single day, during which the Public
Debt Rating is (i) BBB or better by S&P or (ii) Baa2 or better by Moody's.
"Level IV Period" means a period of time other than a Level I Period, a
Level II Period or a Level III Period, which may consist of a single day, during
which the Public Debt Rating is (i) BBB- or better by S&P, or (ii) Baa3 or
better by Moody's.
<PAGE>
9
"Level V Period" means a period of time, which may consist of a single
day, during which the Public Debt Rating is (i) lower than BBB- by S&P and lower
than Baa3 by Moody's (or lower than the level indicated for either S&P or
Moody's if unrated by the other), or (ii) no Public Debt Rating is available for
whatever reason.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction). Customary bankers' rights of
set-off arising by operation of law or by contract in connection with working
capital facilities, lines of credit, term loans and letter of credit facilities
and other contractual arrangements entered into with banks in the ordinary
course of business are not "Liens" for the purposes of this Agreement.
"Majority Lenders" means at any time Lenders holding at least 51% of
the then aggregate unpaid principal amount of the A Advances then outstanding
or, if no such principal amount is then outstanding, then either (i) if the
Commitments have not been terminated or there are no B Advances outstanding,
Lenders having at least 51% of the Commitments, or (ii) if the Commitments have
been terminated and there are B Advances outstanding, Lenders holding at least
51% of the then aggregate unpaid principal amount of the B Advances then
outstanding.
"Material Subsidiary" means, at any point in time, any Subsidiary
having total assets of $500,000 or more as of the end of its most recent fiscal
year or annual gross revenues of $5,000,000 or more during its most recent
fiscal year.
"Moody's" means Moody's Investors Service, Inc., or its successors.
"Note" means an A Note or a B Note.
"Notice of A Borrowing" has the meaning specified in Section 2.02(a).
"Notice of B Borrowing" has the meaning specified in Section 2.03(a).
"Permitted Receivables Facility" shall mean one or more accounts
receivable securitization arrangements which provide for (a) the sale of
accounts receivables and any related property by Borrower and/or any of its
Subsidiaries to a financing party or a special purpose vehicle, and (b) if a
special purpose vehicle is used in any such arrangement, the granting of a
security interest in accounts receivables and any related property by such
special purpose vehicle and/or the granting of a security interest by Borrower
in any such related property, provided, however, that the sum of the aggregate
net unrecovered investment and the aggregate outstanding advances from the
financing parties under such
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10
accounts receivables securitization arrangements shall not exceed the greater of
(i) $250,000,000 and (ii) 15% of Consolidated Tangible Net Worth at any one
time.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Plan" means at any time an employee pension benefit plan which is
covered under Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code and is either (i) maintained by the Borrower or
any Subsidiary for employees of the Borrower or any Subsidiary or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
the Borrower or any Subsidiary is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions.
"Public Debt Rating" means, as of any date, the lowest rating that has
been most recently announced (and is then in effect) by either S&P or Moody's
for any class of non-credit enhanced long-term senior unsecured debt issued by
the Borrower or, if the Borrower has no such debt issued, the lowest "implied
rating" (or similar rating in effect from time to time) that has been most
recently stated in writing (and is then in effect) by S&P and/or Moody's for
non-credit enhanced long-term senior unsecured debt of the Borrower. For
purposes of the foregoing, (a) if any rating established by either of S&P or
Moody's shall be changed, such change shall be effective as of the date on which
such change is first announced publicly by the rating agency making such change;
and (b) if S&P or Moody's shall change the basis on which ratings are
established, each reference to the Public Debt Rating announced by S&P or
Moody's, as the case may be, shall refer to the then equivalent rating by S&P or
Moody's, as the case may be.
"Register" has the meaning specified in Section 8.07(c).
"Responsible Financial Officer" means the chief financial officer, the
controller, the treasurer or any assistant treasurer of the Borrower.
"Responsible Officer" means the individuals occupying the executive
offices of the Borrower described in Exhibit I hereto and any successors to the
offices held by the individuals identified therein, and the individuals
occupying any other executive offices of the Borrower which at any time have the
authority, functions and responsibilities as the offices described in Exhibit I.
"S&P" means Standard and Poor's Ratings Group, or its successors.
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11
"Subsidiary" means any corporation of which the Borrower and/or its
other Subsidiaries own, directly or indirectly, such number of outstanding
shares as have more than 50% of the ordinary voting power for the election of
directors.
"Termination Date" means August 26, 2002 or such later date as
determined pursuant to Section 8.10, or the earlier date of termination in whole
of the Commitments pursuant to Section 2.05 or 6.01.
"Transfer" means, with respect to any asset, to sell, lease, transfer
or otherwise dispose of such asset.
"Voting Stock" of any Person means any shares of stock of such Person
whose holders are entitled under ordinary circumstances to vote for the election
of directors of such Person (irrespective of whether at the time stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"wholly owned Subsidiary" means any Subsidiary all of the outstanding
capital stock (other than directors' qualifying shares and shares issued to
satisfy local ownership requirements) of which is owned, directly or indirectly,
by the Borrower.
SECTION 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
SECTION 1.03. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in the preparation of the
financial statements referred to in Section 4.01(e).
SECTION 1.04. Application of Level Pricing. For purposes of applying
the Level pricing formula in the definition of "Eurodollar Margin" and in
Section 2.04(a), (a) if only one of S&P and Moody's shall have in effect a
Public Debt Rating, the applicable Level shall be determined by reference to the
available rating and (b) if the Public Debt Ratings established by S&P and
Moody's shall fall within different Levels, the applicable Level shall be based
upon the higher rating; provided that, if the lower of such ratings is more than
one level below the higher of such ratings, the applicable Level shall be based
on the level immediately above such lower rating.
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12
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. The A Advances. Each Lender severally agrees, on the
terms and conditions hereinafter set forth, to make A Advances to the Borrower
from time to time on any Business Day during the period from the date hereof
until the Termination Date in an aggregate amount not to exceed at any time the
amount set forth opposite such Lender's name on the signature pages hereof or,
if such Lender has entered into any Assignment and Acceptance, set forth for
such Lender in the Register maintained by the Agent pursuant to Section 8.07(c),
as such amount may be reduced pursuant to Section 2.05 (such Lender's
"Commitment"); provided that the aggregate amount of the Commitments of the
Lenders shall be deemed used from time to time to the extent of the aggregate
amount of the B Advances then outstanding and such deemed use of the aggregate
amount of the Commitments shall be applied to the Lenders ratably according to
their respective Commitments (such deemed use of the aggregate amount of the
Commitments being a "B Reduction"). Each A Borrowing shall be in an aggregate
amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess
thereof (or, with respect to an A Borrowing comprised of Alternate Base Rate
Advances, such lesser amount as shall equal the then unborrowed amount of the
aggregate Commitments), and shall consist of A Advances of the same Type made on
the same day by the Lenders ratably according to their respective Commitments.
Within the limits of each Lender's Commitment, the Borrower may from time to
time borrow, prepay pursuant to Section 2.11(b) and reborrow under this Section
2.01.
SECTION 2.02. Making the A Advances. (a) Each A Borrowing shall be made
on notice, given not later than 11:00 A.M. (New York City time) on (x) the date
of a proposed A Borrowing comprised of Alternate Base Rate Advances, and (y) the
third Business Day prior to the date of a proposed A Borrowing comprised of
Eurodollar Rate Advances, by the Borrower to the Agent, which shall give to each
Lender prompt notice thereof (and in any event not later than the same day) by
telecopier or telex. Each such notice of an A Borrowing (a "Notice of A
Borrowing") shall be by telecopier or telex, confirmed immediately in writing,
in substantially the form of Exhibit B-1 hereto, specifying therein the
requested (i) date of such A Borrowing, (ii) Type of A Advances comprising such
A Borrowing, (iii) aggregate amount of such A Borrowing, and (iv) Interest
Period for each such A Advance in the case of Eurodollar Rate Advances. Each
Lender shall, before 12:00 Noon (New York City time) on the date of such A
Borrowing, make available for the account of its Applicable Lending Office to
the Agent at its address referred to in Section 8.02(b), in same day funds, such
Lender's ratable portion of such A Borrowing. After the Agent's receipt of such
funds and upon fulfillment of the applicable conditions set forth in Article
III, the Agent will make such funds available to the Borrower at the Agent's
aforesaid address.
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13
(b) Each Notice of A Borrowing shall be irrevocable and binding on the
Borrower. In the case of any A Borrowing which the related Notice of A Borrowing
specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall
indemnify each Lender against any loss, cost or expense incurred by such Lender
as a result of any failure to fulfill on or before the date specified in such
Notice of A Borrowing for such A Borrowing the applicable conditions set forth
in Article III, including, without limitation, any loss (including loss of
anticipated profits), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Lender to fund the A
Advance to be made by such Lender as part of such A Borrowing when such A
Advance, as a result of such failure, is not made on such date.
(c) Unless the Agent shall have received notice from a Lender prior to
the date of any A Borrowing that such Lender will not make available to the
Agent such Lender's ratable portion of such A Borrowing, the Agent may assume
that such Lender has made such portion available to the Agent on the date of
such A Borrowing in accordance with subsection (a) of this Section 2.02 and the
Agent may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Lender shall
not have so made such ratable portion available to the Agent, such Lender and
the Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent, at (i) in the case of the Borrower, the interest rate
applicable at the time to A Advances comprising such A Borrowing and (ii) in the
case of such Lender, the Federal Funds Rate. If such Lender shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Lender's A Advance as part of such A Borrowing for purposes of this Agreement,
and the interest payable thereon shall be allocated such that the Agent shall
receive (from a combination of the sum, if any, paid to the Agent by such Lender
pursuant to clause (ii) of the preceding sentence and any interest payment made
by the Borrower) an amount equal to interest on such A Advance at the interest
rate applicable thereto from the date the corresponding amount was made
available by the Agent to the Borrower as contemplated by this Section 2.02(c)
to and including the date such amount is repaid to the Agent by such Lender, and
such Lender shall receive the balance of the interest payments made by the
Borrower with respect to such Advance in accordance with the provisions of this
Agreement.
(d) The failure of any Lender to make the A Advance to be made by it as
part of any A Borrowing shall not relieve any other Lender of its obligation, if
any, hereunder to make its A Advance on the date of such A Borrowing, but no
Lender shall be responsible for the failure of any other Lender to make the A
Advance to be made by such other Lender on the date of any A Borrowing.
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14
SECTION 2.03. The B Advances. (a) Each Lender severally agrees that the
Borrower may make B Borrowings under this Section 2.03 from time to time on any
Business Day during the period from the date hereof until the date occurring 30
days prior to the Termination Date in the manner set forth below; provided that,
following the making of each B Borrowing, the aggregate amount of the Advances
then outstanding shall not exceed the aggregate amount of the Commitments of the
Lenders (computed without regard to any B Reduction).
(i) The Borrower may request a B Borrowing under this Section 2.03 by
delivering to the Agent, by telecopier or telex, confirmed immediately in
writing, a notice of a B Borrowing (a "Notice of B Borrowing"), in substantially
the form of Exhibit B-2 hereto, specifying the date and aggregate amount of the
proposed B Borrowing, the maturity date for repayment of each B Advance to be
made as part of such B Borrowing (which maturity date (x) may not be earlier
than the date occurring seven days after the date of such B Borrowing or later
than 180 days after the date of such B Borrowing or the Termination Date,
whichever occurs first, if the Borrower shall specify in the Notice of B
Borrowing that the rates of interest to be offered by the Lenders shall be fixed
rates per annum, or (y) shall be 1, 2, 3, 4, 5 or 6 months after the date of
such B Borrowing (but in no event later than the Termination Date) if the
Borrower shall instead specify in the Notice of B Borrowing the basis to be used
by the Lenders in determining the rates of interest to be offered by them), the
interest payment date or dates relating thereto, whether the proposed B
Borrowing shall bear interest at a fixed or fluctuating rate per annum and, if a
fluctuating rate is so specified, the basis to be used by the Lenders in
determining the rate of interest to be offered by them, and any other terms to
be applicable to such B Borrowing, not later than 11:00 A.M. (New York City
time) (A) at least one Business Day prior to the date of the proposed B
Borrowing, if the Borrower shall specify in the Notice of B Borrowing that the
rates of interest to be offered by the Lenders shall be fixed rates per annum
and (B) at least four Business Days prior to the date of the proposed B
Borrowing, if the Borrower shall instead specify in the Notice of B Borrowing
the basis to be used by the Lenders in determining the rates of interest to be
offered by them. The Agent shall in turn promptly notify each Lender of each
request for a B Borrowing received by it from the Borrower by sending such
Lender a copy of the related Notice of B Borrowing.
(ii) Each Lender may, if, in its sole discretion, it elects to do so,
irrevocably offer to make one or more B Advances to the Borrower as part of such
proposed B Borrowing at a rate or rates of interest specified by such Lender in
its sole discretion, by notifying the Agent (which shall give prompt notice
thereof to the Borrower) before 10:00 A.M. (New York City time) (A) on the date
of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered
pursuant to clause (A) of paragraph (i) above and (B) three Business Days before
the date of such proposed B Borrowing, in the case of a Notice of B Borrowing
delivered pursuant to clause (B) of paragraph (i) above, of the minimum amount
and maximum amount of each B Advance which such Lender would be willing to make
as
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15
part of such proposed B Borrowing (which amounts may, subject to the proviso to
the first sentence of this Section 2.03(a), exceed such Lender's Commitment),
the rate or rates of interest therefor and such Lender's Applicable Lending
Office with respect to such B Advance; provided that if the Agent in its
capacity as a Lender shall, in its sole discretion, elect to make any such
offer, it shall notify the Borrower of such offer before 9:00 A.M. (New York
City time) on the date on which notice of such election is to be given to the
Agent by the other Lenders. If any Lender shall elect not to make such an offer,
such Lender shall so notify the Agent, before 10:00 A.M. (New York City time) on
the date on which notice of such election is to be given to the Agent by the
other Lenders, and such Lender shall not be obligated to, and shall not, make
any B Advance as part of such B Borrowing; provided that the failure by any
Lender to give such notice shall not cause such Lender to be obligated to make
any B Advance as part of such proposed B Borrowing.
(iii) The Borrower shall, in turn, (A) before 11:00 A.M. (New York City
time) on the date of such proposed B Borrowing, in the case of a Notice of B
Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B) before
12:00 Noon (New York City time) three Business Days before the date of such
proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant
to clause (B) of paragraph (i) above, either
(x) cancel such B Borrowing by giving the Agent notice to that
effect, or
(y) accept one or more of the offers made by any Lender or
Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving
notice to the Agent of the amount of each B Advance (which amount shall be equal
to or greater than the minimum amount, and equal to or less than the maximum
amount, notified to the Borrower by the Agent on behalf of such Lender for such
B Advance pursuant to paragraph (ii) above) to be made by each Lender as part of
such B Borrowing, and reject any remaining offers made by Lenders pursuant to
paragraph (ii) above by giving the Agent notice to that effect; provided that
acceptance of offers may only be made on the basis of ascending interest rates
specified by the Lenders pursuant to paragraph (ii) above.
(iv) If the Borrower notifies the Agent that such B Borrowing is
cancelled pursuant to paragraph (iii)(x) above, the Agent shall give prompt
notice thereof to the Lenders and such B Borrowing shall not be made.
(v) If offers are made by two or more Lenders with the same specified
rate of interest for a greater aggregate principal amount than the amount in
respect of which offers are accepted for any B Borrowing, the principal amount
of B Advances in respect of which such offers are accepted shall be allocated by
the Agent among such Lenders as nearly as possible (in such multiples of
$1,000,000 as the Agent may deem appropriate) in
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16
proportion to the aggregate principal amount of such offers. Determinations by
the Agent of the amounts of B Advances shall be conclusive in the absence of
manifest error.
(vi) If the Borrower accepts one or more of the offers made by any
Lender or Lenders pursuant to paragraph (iii)(y) above, the Agent shall in turn
promptly notify (A) each Lender that has made an offer as described in paragraph
(ii) above, of the date and aggregate amount of such B Borrowing and whether or
not any offer or offers made by such Lender pursuant to paragraph (ii) above
have been accepted by the Borrower, and (B) each Lender that is to make a B
Advance as part of such B Borrowing, of the amount of each B Advance to be made
by such Lender as part of such B Borrowing. Each Lender that is to make a B
Advance as part of such B Borrowing shall, before 12:00 noon (New York City
time) on the date of such B Borrowing specified in the notice received from the
Agent pursuant to clause (A) of the preceding sentence, make available for the
account of its Applicable Lending Office to the Agent at its address referred to
in Section 8.02(b) such Lenders portion of such B Borrowing, in same day funds.
Upon satisfaction of the applicable conditions set forth in Article III and
after receipt by the Agent of such funds, the Agent will make such funds
available to the Borrower at the Agent's aforesaid address. Promptly after each
B Borrowing the Agent will notify each Lender of the amount of the B Borrowing,
the consequent B Reduction and the dates upon which such B Reduction commenced
and will terminate.
(b) Each B Borrowing shall be in an aggregate amount not less than
$10,000,000 or an integral multiple of $1,000,000 in excess thereof and,
following the making of each B Borrowing, the Borrower shall be in compliance
with the limitation set forth in the proviso to the first sentence of subsection
(a) above.
(c) Within the limits and on the conditions set forth in this Section
2.03, the Borrower may from time to time borrow under this Section 2.03, repay
or prepay pursuant to subsection (d) below, and reborrow under this Section
2.03; provided that a B Borrowing shall not be made within two Business Days of
the date of any other B Borrowing.
(d) The Borrower shall repay to the Agent for the account of each
Lender which has made a B Advance, or each other holder of a B Note, on the
maturity date of each B Advance (such maturity date being that specified by the
Borrower for repayment of such B Advance in the related Notice of B Borrowing
delivered pursuant to subsection (a)(i) above), the then unpaid principal amount
of such B Advance. The Borrower shall have no right to prepay any principal
amount of any B Advance unless, and then only on the terms, specified by the
Borrower for such B Advance in the related Notice of B Borrowing delivered
pursuant to subsection (a)(i) above; provided that the Borrower shall be
obligated to reimburse each Lender whose B Advance has been prepaid by the
Borrower in respect thereof pursuant to Section 8.04(b).
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17
(e) The Borrower shall pay interest on the unpaid principal amount of
each B Advance from the date of such B Advance to the date the principal amount
of such B Advance is repaid in full, at the rate of interest for such B Advance
specified by the Lender making such B Advance in its notice with respect thereto
delivered pursuant to subsection (a)(ii) above, payable on the maturity date
specified by the Borrower for such B Advance and on each other interest payment
date or dates specified by the Borrower for such B Advance in the related Notice
of B Borrowing delivered pursuant to subsection (a)(i) above; provided, however,
that if the maturity date of the B Advances comprising a B Borrowing is more
than 90 days after the date of such B Borrowing, then interest shall be payable
on each day which occurs at intervals of 90 days after the date of such B
Borrowing; provided, further, that any amount of principal which is not paid
when due (whether at stated maturity, by acceleration or otherwise) shall bear
interest, from the date on which such amount is due until such amount is paid in
full, payable on demand, at a rate per annum equal at all times (i) from such
due date to the applicable maturity date, to 2% per annum above the interest
rate otherwise payable with respect to such B Advance hereunder, and (ii) from
and after the applicable maturity date, to 2% per annum above the Alternate Base
Rate in effect from time to time.
SECTION 2.04. Fees. (a) Facility Fee. The Borrower agrees to pay to the
Agent, for the account of each Lender, a facility fee on the daily average
amount of such Lender's Commitment (including both the portion thereof that is
used and the portion thereof that is unused) from the date hereof in the case of
each Lender listed on the signature pages hereof and from the effective date
specified in the Assignment and Acceptance pursuant to which it became a Lender
in the case of each other Lender until the Termination Date, payable in arrears
on the last day of each March, June, September and December during the term of
such Lender's Commitment, commencing September 30, 1997, and on the Termination
Date, at the rate of (i) .070% per annum during each Level I Period, (ii) .080%
per annum during each Level II Period, (iii) .100% per annum during each Level
III Period, (iv) .125% per annum during each Level IV Period and (v) .175% per
annum during each Level V Period.
(b) Agent's Fees. The Borrower agrees to pay to the Agent certain fees
for its role hereunder and in connection with the execution and delivery hereof
in the amounts and at the times described in one or more letter agreements
between the Borrower and the Agent dated on or about the date hereof, as the
same may be amended, modified, supplemented or replaced from time to time by the
mutual agreement of the Borrower and the Agent. All such fees shall be for the
sole account and benefit of the Agent.
SECTION 2.05. Termination, Reduction or Increase of the Commitments.
(a) Termination or Reduction of the Commitments. The Borrower shall have the
right, upon at least three Business Days' notice to the Agent, to terminate in
whole or reduce ratably in part the unused portions of the respective
Commitments of the Lenders; provided, that the
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18
aggregate amount of the Commitments of the Lenders shall not be reduced to an
amount which is less than the aggregate principal amount of the B Advances then
outstanding; provided further that each partial reduction shall be in the
aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess
thereof. Any Commitments terminated or reduced by the Borrower pursuant to this
Section 2.05 may not be reinstated, unless pursuant to an increase of the
Commitments as described below in Section 2.05(b).
(b) Increase in Aggregate of the Commitments. (i) The Borrower may at
any time, by notice to the Agent, propose that the aggregate amount of the
Commitments be increased (such incremental increased amount being, a "Commitment
Increase"), effective as at a date prior to the Termination Date (an "Increase
Date") as to which agreement is to be reached by an earlier date specified in
such notice (a "Commitment Date"); provided, however, that (A) the Borrower may
not propose more than two Commitment Increases in any 12-month period, (B) the
minimum proposed Commitment Increase per notice shall be $25,000,000, (C) in no
event shall the aggregate amount of the Commitments at any time exceed
$650,000,000, (D) the Borrower has a Public Debt Rating from S&P or Moody's of
better than or equal to BBB- or Baa3, respectively, but if the Borrower has a
Public Debt Rating from both S&P and Moody's, the Public Debt Rating of the
Borrower is better than or equal to BBB- and Baa3, respectively, (E) no Default
shall have occurred and be continuing on such Increase Date and (F) a
certificate as to corporate authorization and other documentation similar to
that delivered pursuant to Section 3.01 is received by the Agent. The Agent
shall notify the Lenders thereof promptly upon its receipt of any such notice.
The Agent agrees that it will cooperate with the Borrower in discussions with
the Lenders and other assignees with a view to arranging the proposed Commitment
Increase through the increase of the Commitments of one or more of the Lenders
(each such Lender that is willing to increase its Commitment hereunder being an
"Increasing Lender") and the addition of one or more other assignees as Assuming
Lenders and as parties to this Agreement; provided, however, that it shall be in
each Lender's sole discretion whether to increase its Commitment hereunder in
connection with the proposed Commitment Increase; and provided further that the
minimum Commitment of each such Assuming Lender that becomes a party to this
Agreement pursuant to this Section 2.05(b) shall be at least equal to
$25,000,000. If any of the Lenders agree to increase their respective
Commitments by an aggregate amount in excess of the proposed Commitment
Increase, the proposed Commitment Increase shall be allocated among such Lenders
as determined at such time by the Borrower. If agreement is reached on or prior
to the applicable Commitment Date with any Increasing Lenders and Assuming
Lenders as to a Commitment Increase (which may be less than but not greater than
specified in the applicable notice from the Borrower), such agreement to be
evidenced by a notice in reasonable detail from the Borrower to the Agent on or
prior to the applicable Commitment Date, such Assuming Lenders, if any, shall
become Lenders hereunder as of the applicable Increase Date and the Commitments
of such Increasing Lenders and such Assuming Lenders shall become or be, as the
case may be, as of the Increase Date, the amounts specified in such notice;
provided that:
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19
(x) the Agent shall have received (with copies for each
Lender, including each such Assuming Lender) by no later than 10:00
A.M. (New York City time) on the applicable Increase Date a copy
certified by the Secretary, an Assistant Secretary or a comparable
officer of the Borrower, of the resolutions adopted by the Board of
Directors of the Borrower authorizing such Commitment Increase, which
resolutions shall be satisfactory to the Agent;
(y) each such Assuming Lender shall have delivered to the
Agent by no later than 10:00 A.M. (New York City time) on such Increase
Date, an appropriate Assumption Agreement in substantially the form of
Exhibit D hereto, duly executed by such Assuming Lender and the
Borrower; and
(z) each such Increasing Lender shall have delivered to the
Agent by no later than 10:00 A.M. (New York City time) on such Increase
Date (A) its existing A Note and (B) confirmation in writing
satisfactory to the Agent as to its increased Commitment.
(ii) In the event that the Agent shall have received notice
from the Borrower as to its agreement to a Commitment Increase on or prior to
the applicable Commitment Date and each of the actions provided for in clauses
(x) through (z) above shall have occurred prior to 10:00 A.M. (New York City
time) on the applicable Increase Date, the Agent shall notify the Lenders
(including any Assuming Lenders) and the Borrower of the occurrence of such
Commitment Increase by telephone, confirmed immediately in writing, telecopier
or telex and in any event no later than 1:00 P.M. (New York City time) on such
Increase Date and shall record in the Register the relevant information with
respect to each Increasing Lender and Assuming Lender. Each Increasing Lender
and each Assuming Lender shall, before 2:00 P.M. (New York City time) on the
applicable Increase Date, make available for the account of its Applicable
Lending Office to the Agent at the Agent's Account, in same day funds, in the
case of such Assuming Lender, an amount equal to such Assuming Lender's ratable
portion of the A Borrowings then outstanding (calculated based on its Commitment
as a percentage of the aggregate Commitments outstanding after giving effect to
the relevant Commitment Increase) and, in the case of such Increasing Lender, an
amount equal to the excess of (i) such Increasing Lender's ratable portion of
the A Borrowings then outstanding (calculated based on its Commitment as a
percentage of the aggregate Commitments outstanding after giving effect to the
relevant Commitment Increase) over (ii) such Increasing Lender's ratable portion
of the A Borrowings then outstanding (calculated based on its Commitment
(without giving effect to the relevant Commitment Increase) as a percentage of
the aggregate Commitments (without giving effect to the relevant Commitment
Increase). After the Agent's receipt of such funds from each such Increasing
Lender and each such Assuming Lender, the Agent will promptly thereafter cause
to be distributed like funds to the other Lenders for the account of their
respective Applicable Lending Offices in an amount to each other Lender such
that the aggregate amount of the
<PAGE>
20
outstanding A Advances owing to each Lender after giving effect to such
distribution equals such Lender's ratable portion of the A Borrowings then
outstanding (calculated based on its Commitment as a percentage of the aggregate
Commitments outstanding after giving effect to the relevant Commitment
Increase). Within five Business Days after the Borrower receives notice from the
Agent, the Borrower, at its own expense, shall execute and deliver to the Agent,
A Notes payable to the order of each Assuming Lender, if any, and, each
Increasing Lender, dated as of the applicable Increase Date, in a principal
amount equal to such Lender's Commitment after giving effect to the relevant
Commitment Increase, and substantially in the form of Exhibit A-1 hereto. The
Agent, upon receipt of such A Notes, shall promptly deliver such A Notes to the
respective Assuming Lenders and Increasing Lenders.
(iii) In the event that the Agent shall not have received notice from
the Borrower as to such agreement on or prior to the applicable Commitment Date
or that Borrower shall, by notice to the Agent prior to the applicable Increase
Date, withdraw its proposal for a Commitment Increase or any of the actions
provided for above in clauses (i)(x) through (i)(z) shall not have occurred by
10:00 A.M. (New York City time) on the such Increase Date, such proposal by the
Borrower shall be deemed not to have been made. In such event, any actions
theretofore taken under clauses (i)(x) through (i)(z) above shall be deemed to
be of no effect and all the rights and obligations of the parties shall continue
as if no such proposal had been made.
SECTION 2.06. Repayment of A Advances. The Borrower shall repay the
principal amount of each A Advance made by each Lender on the last day of the
Interest Period for such A Advance.
SECTION 2.07. Interest on A Advances. The Borrower shall pay interest
on the unpaid principal amount of each A Advance made by each Lender from the
date of such A Advance until such principal amount shall be paid in full, at the
following rates per annum and at the following times:
(a) Alternate Base Rate Advances. If such A Advance is an Alternate
Base Rate Advance, a rate per annum equal at all times to the Alternate Base
Rate in effect from time to time, payable quarterly on the last day of each
March, June, September, and December and on the date such Alternate Base Rate
Advance shall be paid in full; provided that any amount of principal or interest
which is not paid when due (whether at stated maturity, by acceleration or
otherwise) shall bear interest, from the date on which such amount is due until
such amount is paid in full, payable on demand, at a rate per annum equal at all
times to 2% per annum above the Alternate Base Rate in effect from time to time.
<PAGE>
21
(b) Eurodollar Rate Advances. If such A Advance is a Eurodollar Rate
Advance, a rate per annum equal at all times during the Interest Period for such
A Advance to the sum of the Eurodollar Rate for such Interest Period plus the
applicable Eurodollar Margin, payable on the last day of such Interest Period
and, if such Interest Period is longer than three months, at intervals of three
months after the first day thereof; provided that any amount of principal or
interest which is not paid when due (whether at stated maturity, by acceleration
or otherwise) shall bear interest, from the date on which such amount is due
until such amount is paid in full, payable on demand, at a rate per annum equal
at all times (i) from such due date to the last day of the applicable Interest
Period, to 2% per annum above the interest rate otherwise payable with respect
to such A Advance hereunder, and (ii) from and after the last day of the
applicable Interest Period, to 2% per annum above the Alternate Base Rate in
effect from time to time.
SECTION 2.08. Notes. The obligation of the Borrower to repay the A
Advances made to the Borrower by each Lender hereunder shall be further
evidenced by an A Note in favor of such Lender in the form and substance of
Exhibit A-1 attached hereto. The obligation of the Borrower to repay the B
Advances made to the Borrower by any Lender shall be evidenced by a B Note in
favor of such Lender in the form and substance of Exhibit A-2 attached hereto.
SECTION 2.09. Interest Rate Determination. (a) The Agent shall give
prompt notice to the Borrower and the Lenders of the applicable interest rate
determined by the Agent for purposes of Section 2.07(a) or (b).
(b) If the Majority Lenders shall, at least one Business Day before the
date of any requested A Borrowing comprised of Eurodollar Rate Advances, notify
the Agent that the Eurodollar Rate for Eurodollar Rate Advances comprising such
A Borrowing will not adequately reflect the cost to such Majority Lenders of
making, funding or maintaining their respective Eurodollar Rate Advances for
such A Borrowing, the Agent shall forthwith so notify the Borrower and the
Lenders, whereupon the right of the Borrower to select Eurodollar Rate Advances
for such A Borrowing or any subsequent A Borrowing shall be suspended until the
Agent shall notify the Borrower and the Lenders that the circumstances causing
such suspension no longer exist, and each A Advance comprising such A Borrowing
shall be an Alternate Base Rate Advance.
SECTION 2.10. Sharing of Payments, Etc. If any Lender shall obtain any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) on account of the A Advances made by it (other than
pursuant to Section 2.12 or 2.15) in excess of its ratable share of payments on
account of the A Advances obtained by all the Lenders, such Lender shall
forthwith purchase from the other Lenders such participations in the A Advances
made by them as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them; provided, however, that if all or any
<PAGE>
22
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each Lender shall be rescinded and such Lender shall
repay to the purchasing Lender the purchase price to the extent of such recovery
together with an amount equal to such Lender's ratable share (according to the
proportion of (i) the amount of such Lender's required repayment to (ii) the
total amount so recovered from the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the total amount
so recovered. The Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section 2.10 may, to the fullest extent
permitted by law, exercise all its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrower in the amount of such participation.
SECTION 2.11. Prepayments of A Advances. (a) The Borrower shall have no
right to prepay any principal amount of any A Advances other than as provided in
subsection (b) below.
(b) The Borrower may, upon at least two Business Days' notice, or in
the case of A Borrowings comprised of Alternate Base Rate Advances notice given
not later than 11:00 A.M. (New York City time) one Business Day prior to the
proposed date of prepayment, to the Agent stating the proposed date and
aggregate principal amount of the prepayment, and if such notice is given the
Borrower shall, prepay the outstanding principal amounts of the A Advances
comprising part of the same A Borrowing in whole or ratably in part, together
with accrued interest to the date of such prepayment on the principal amount
prepaid; provided, however, that (x) each partial prepayment shall be in an
aggregate principal amount not less than $10,000,000 or an integral multiple of
$1,000,000 in excess thereof, and (y) in the case of any such prepayment of a
Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the
Lenders in respect thereof pursuant to Section 8.04(b).
(c) Except as provided in Section 2.03(d), the Borrower shall have no
right to prepay any principal amount of any B Advance.
SECTION 2.12. Increased Costs. (a) If, after the date hereof, due to
either (i) the introduction of or any change (other than any change by way of
imposition or increase of reserve requirements, in the case of Eurodollar Rate
Advances, included in the Eurodollar Rate Reserve Percentage) in or in the
interpretation of any law or regulation or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to any Lender of agreeing to make or making, funding or maintaining
Eurodollar Rate Advances, then the Borrower shall from time to time, upon
written demand by such Lender (with a copy of such demand to the Agent), which
demand must be made no later than the date that is one year after the date on
which the Commitments have been terminated and all
<PAGE>
23
sums owing hereunder have been paid in full, pay to the Agent for the account of
such Lender additional amounts sufficient to compensate such Lender for such
increased cost. A certificate as to the amount of such increased cost, submitted
to the Borrower and the Agent by such Lender, shall be conclusive and binding
for all purposes, absent manifest error. It shall be assumed, for the purpose of
computing amounts to be paid by the Borrower to CUSA pursuant to this Section
2.12(a), that the making, funding or maintaining by CUSA of any Advance
hereunder has been by Citibank.
(b) If any Lender determines that compliance with any law or regulation
or any guideline or request from any central bank or other governmental
authority (whether or not having the force of law) affects the amount of capital
to be maintained by such Lender or any corporation controlling such Lender and
that the amount of such capital is increased by or based upon the existence of
such Lender's commitment to lend hereunder and other commitments of this type,
then, upon written demand by such Lender (with a copy of such demand to the
Agent), which demand must be made no later than the date that is one year after
the date on which the Commitments have been terminated and all sums owing
hereunder have been paid in full, the Borrower shall immediately pay to the
Agent for the account of such Lender, from time to time as specified by such
Lender, additional amounts sufficient to compensate such Lender or such
corporation in the light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital is allocable to the existence of
such Lender's commitment to lend hereunder. A certificate as to such amounts
submitted to the Borrower and the Agent by such Lender shall be conclusive and
binding for all purposes, absent manifest error. It shall be assumed, for the
purpose of computing amounts to be paid by the Borrower to CUSA pursuant to this
Section 2.12(b), that the making, funding or maintaining by CUSA of any Advance
hereunder has been by Citibank.
(c) Each Lender agrees that if the Borrower is required to make any
payments to such Lender upon demand therefor pursuant to Sections 2.12(a) or (b)
such Lender shall use reasonable efforts to select an alternative Applicable
Lending Office which would avoid the need thereafter for making such demand;
provided, however, that no Lender shall be obligated to select an alternative
Applicable Lending Office if such Lender determines in its reasonable discretion
that (i) as a result of such selection such Lender would be in violation of any
applicable law, regulation, treaty or directive of any central bank or other
governmental authority, or (ii) such selection would be otherwise
disadvantageous to such Lender.
SECTION 2.13. Illegality. (a) Notwithstanding any other provision of
this Agreement, if any Lender shall notify the Agent that the introduction of or
any change in or in the interpretation of any law or regulation makes it
unlawful, or any central bank or other governmental authority asserts that it is
unlawful, for any Lender or its Eurodollar Lending Office to perform its
obligations hereunder to make Eurodollar Rate Advances or to fund or
<PAGE>
24
maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders
to make Eurodollar Rate Advances shall be suspended until the Agent shall notify
the Borrower and the Lenders that the circumstances causing such suspension no
longer exist and (ii) the Borrower shall forthwith prepay in full all Eurodollar
Rate Advances of all Lenders then outstanding, together with interest accrued
thereon.
(b) Each Lender agrees that if it determines, or if a central bank or
other governmental authority asserts, that it is unlawful for such Lender to
make, fund or maintain Eurodollar Rate Advances hereunder, such Lender shall use
reasonable efforts to select an alternative Eurodollar Lending Office to perform
its obligations hereunder to make, fund or maintain Eurodollar Rate Advances;
provided, however, that no Lender shall be obligated to select an alternative
Eurodollar Lending Office if such Lender determines in its reasonable discretion
that (i) as a result of such selection such Lender would be in violation of any
applicable law, regulation, treaty or directive of any central bank or other
governmental authority, or (ii) such selection would be otherwise
disadvantageous to such Lender.
SECTION 2.14. Payments and Computations. (a) The Borrower shall make
each payment hereunder and under the Notes not later than 11:00 A.M. (New York
City time) on the day when due in U.S. dollars to the Agent at its address
referred to in Section 8.02(b) in same day funds. The Agent will promptly
thereafter cause to be distributed like funds relating to the payment of
principal or interest or facility fees ratably (other than amounts payable
pursuant to Section 2.03, 2.12 or 2.15) to the Lenders for the account of their
respective Applicable Lending Offices, and like funds relating to the payment of
any other amount payable to any Lender to such Lender for the account of its
Applicable Lending Office, in each case to be applied in accordance with the
terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and
recording of the information contained therein in the Register pursuant to
Section 8.07(d), from and after the effective date specified in such Assignment
and Acceptance, the Agent shall make all payments hereunder and under the Notes
in respect of the interest assigned thereby to the Lender assignee thereunder,
and the parties to such Assignment and Acceptance shall make all appropriate
adjustments in such payments for periods prior to such effective date directly
between themselves.
(b) The Borrower hereby authorizes each Lender, if and to the extent
payment owed to such Lender is not made when due hereunder or under any Note
held by such Lender, to charge from time to time against (i) any or all of the
Borrower's accounts with such Lender or (ii) in the event any such payment is
not made to CUSA when due, any or all of the Borrower's accounts with Citibank
or any other Affiliate of CUSA (and the Borrower hereby authorizes Citibank and
each such Affiliate to permit such charge), any amount so due.
(c) All computations of interest based on the Alternate Base Rate shall
be made by the Agent on the basis of a year of 365 or 366 days, as the case may
be, and all
<PAGE>
25
computations of interest based on the Eurodollar Rate or the Federal Funds Rate
and of interest on B Advances prior to the maturity date applicable thereto and
of facility fees shall be made by the Agent on the basis of a year of 360 days,
in each case for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such interest or fees
are payable. Each determination by the Agent of an interest rate hereunder shall
be conclusive and binding for all purposes, absent manifest error.
(d) Whenever any payment hereunder and under the Notes shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or facility fee, as the case
may be; provided, however, if such extension would cause payment of interest on
or principal of Eurodollar Rate Advances to be made in the next following
calendar month, such payment shall be made on the next preceding Business Day.
(e) Unless the Agent shall have received notice from the Borrower prior
to the date on which any payment is due to the Lenders hereunder that the
Borrower will not make such payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Lender on
such due date an amount equal to the amount then due such Lender. If and to the
extent that the Borrower shall not have so made such payment in full to the
Agent, each Lender shall repay to the Agent forthwith on demand such amount
distributed to such Lender together with interest thereon, for each day from the
date such amount is distributed to such Lender until the date such Lender repays
such amount to the Agent, at the Federal Funds Rate.
SECTION 2.15. Taxes. (a) All payments by the Borrower hereunder shall
be made without set-off or counterclaim and free and clear of and without
deduction on account of restrictions or conditions of any nature now or
hereafter imposed or levied by the United States or any political subdivision
thereof, except as specifically provided to the contrary in Section 2.15(b),
unless the Borrower is required by law to make such deductions. If any such
obligation is imposed upon the Borrower with respect to any amount payable by it
hereunder, it will pay to each affected Lender, on the date on which such amount
becomes due and payable hereunder, such additional amount as shall be necessary
to enable such Lender to receive the same net amount which it would have
received on such due date had no such obligation been imposed upon the Borrower.
(b) Each payment to be made by the Borrower hereunder to any Lender
shall be made free and clear of and without deduction or withholding for or on
account of any tax imposed by any governmental or taxing authority of or in the
United States unless the Borrower is required to make such a payment subject to
the deduction or withholding of such tax, in which case the Borrower will pay to
each affected Lender, on the date on which
<PAGE>
26
such amount becomes due and payable hereunder, such additional amount as shall
be necessary to enable such Lender to receive the same net amount which it would
have received on such due date had no such obligation been imposed upon the
Borrower; provided, however, that the Borrower shall not be required to pay any
additional amount on account of any tax of, or imposed by, the United States,
pursuant to this Section 2.15(b), to any Lender and shall be entitled to deduct
and withhold such tax if such Lender (i) shall have failed to submit a valid
United States Internal Revenue Service Form 1001 or any successor form thereto
("Form 1001") relating to such Lender and entitling it to a complete exemption
from deduction or withholding on all amounts to be received by such Lender,
including fees, pursuant to this Agreement, or a valid United States Internal
Revenue Service Form 4224 or any successor form thereto ("Form 4224") relating
to such Lender and entitling it to receive all amounts, including fees, pursuant
to this Agreement, without deduction or withholding, or a statement conforming
to the requirements of United States Treasury Regulation 1.1441-5(b), or (ii)
shall have failed to submit such form or other statement which it is required to
deliver pursuant to Section 2.15(c) hereof.
(c) Prior to the date of the initial Borrowing in the case of each
Lender listed on the signature pages hereof, and on the date of the Assignment
and Acceptance pursuant to which it became a Lender in the case of each other
Lender, each Lender agrees that it will deliver to the Borrower either (i) a
statement, in duplicate, conforming to the requirements of United States
Treasury Regulation Section 1.1441-5(b), or (ii) if it is not incorporated under
the laws of the United States or a state thereof, two duly completed copies of
Form 1001 or 4224, or successor applicable forms, as the case may be, certifying
that such Lender is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes. Subject to
any change in applicable laws or regulations, each Lender which delivers to the
Borrower a Form 1001 or 4224, or successor applicable forms, pursuant to the
provisions of this Section 2.15(c), further undertakes to deliver to the
Borrower, upon request by the Borrower, two further copies of said Form 1001 or
4224, or successor applicable forms, on or before the date that any such form
expires or becomes obsolete certifying that such Lender is entitled to receive
payments under this Agreement without deduction or withholding of any United
States federal income taxes.
(d) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 2.15 shall survive the termination of this Agreement, the
termination of the Commitments and the payment in full of the Notes.
(e) Each Lender agrees that if the Borrower is required to increase any
amounts payable to such Lender under Sections 2.15(a) or 2.15(b), such Lender
shall use reasonable efforts to select an alternative Applicable Lending Office
which would not result in such increased payment by the Borrower to such Lender;
provided, however, that no
<PAGE>
27
Lender shall be obligated to select an alternative Applicable Lending Office if
such Lender determines in its reasonable discretion that (i) as a result of such
selection such Lender would be in violation of any applicable law, regulation,
treaty or directive of any central bank or other governmental authority, or (ii)
such selection would be otherwise disadvantageous to such Lender.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Condition Precedent to Initial Advances. The
effectiveness of the Commitment of each Lender is subject to the condition
precedent that the Agent shall have received the following, in form and
substance satisfactory to the Agent and (except for the Notes) in sufficient
copies for each Lender:
(a) The Notes payable to the order of the Lenders, respectively.
(b) This Agreement executed by the Borrower, the Agent and each of the
Lenders.
(c) Certified copies of the resolutions of the Board of Directors of
the Borrower approving this Agreement and the Notes and of all documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to this Agreement and the Notes.
(d) A certificate of the Secretary or an Assistant Secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Agreement and the Notes and the other documents
to be delivered hereunder.
(e) A favorable opinion of Wilson, Sonsini, Goodrich & Rosati, special
counsel for the Borrower, substantially in the form attached hereto as Exhibit
E, and covering such other matters as any Lender through the Agent may
reasonably request.
(f) Evidence that the obligations of the lenders and agent (including
commitments to make advances thereunder) under that certain Credit Agreement
dated as of June 28, 1996 among the Borrower, the lenders thereunder and CUSA,
as agent for the lenders thereunder, as amended, have been terminated and all
unpaid principal and interest thereunder and all other amounts then payable by
the Borrower thereunder have been paid in full (or will be paid in full by
application of the proceeds of the initial Borrowing hereunder).
(g) A favorable opinion of Shearman & Sterling, counsel for the Agent.
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28
SECTION 3.02. Conditions Precedent to Each A Borrowing. The obligation
of each Lender to make an A Advance on the occasion of each A Borrowing
(including the initial A Borrowing) shall be subject to the further conditions
precedent that (i) the Agent shall have received the written confirmatory Notice
of A Borrowing with respect thereto and (ii) on the date of such A Borrowing (a)
the following statements shall be true (and each of the giving of the applicable
Notice of A Borrowing and the acceptance by the Borrower of the proceeds of such
A Borrowing shall constitute a representation and warranty by the Borrower that
on the date of such A Borrowing such statements are true):
(1) The representations and warranties contained in Section 4.01 are
correct on and as of the date of such A Borrowing (except the
representation contained in Section 4.01(e) which shall be made only upon
the initial A Borrowing), before and after giving effect to such A
Borrowing and to the application of the proceeds therefrom, as though made
on and as of such date (except to the extent such representations or
warranties specifically relate to an earlier date, in which case they shall
be true and correct as of such date),
(2) No Default or Event of Default has occurred and is continuing, or
would result from such A Borrowing or from the application of the proceeds
therefrom, and
(3) The aggregate amount of such A Borrowing and all other Borrowings
to be made on the same day hereunder is within the aggregate amount of the
unused Commitments of the Lenders, and
(b) if the Agent or any Lender has any reason to believe that any of
the conditions set forth in this Section 3.02 shall not be satisfied on the date
of such A Borrowing, then the Agent shall have received such other approvals,
opinions or documents as the Agent or such Lender through the Agent may
reasonably request.
SECTION 3.03. Conditions Precedent to Each B Borrowing. The obligation
of each Lender which is to make a B Advance on the occasion of a B Borrowing
(including the initial B Borrowing) to make such B Advance as part of such B
Borrowing shall be subject to the further conditions precedent that (i) the
Agent shall have received the written confirmatory Notice of B Borrowing with
respect thereto, and (ii) on the date of such B Borrowing the following
statements shall be true (and each of the giving of the applicable Notice of B
Borrowing and the acceptance by the Borrower of the proceeds of such B Borrowing
shall constitute a representation and warranty by the Borrower that on the date
of such B Borrowing such statements are true):
(a) The representations and warranties contained in Section 4.01 are
correct on and as of the date of such B Borrowing before and after giving effect
to such B
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29
Borrowing and to the application of the proceeds therefrom, as though made on
and as of such date (except to the extent such representations or warranties
specifically relate to an earlier date, in which case they shall be true and
correct as of such date),
(b) No Default or Event of Default has occurred and is continuing, or
would result from such B Borrowing or from the application of the proceeds
therefrom, and
(c) The aggregate amount of such B Borrowing and all other Borrowings
to be made on the same day hereunder is within the aggregate amount of the
unused Commitments of the Lenders.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction indicated at the beginning
of this Agreement. Each Subsidiary is duly organized and validly existing under
the laws of the jurisdiction in which it is incorporated and is in good standing
under the laws of such jurisdiction except where the failure to so be in good
standing (i) in the case of Restricted Subsidiaries, is remedied within a
reasonable time period after a Responsible Officer has knowledge of any such
failure, and (ii) such failure will not have a material adverse effect on the
business, financial condition, assets, properties or operations of the Borrower
or the Borrower and its Subsidiaries taken as a whole. The Borrower and each
Restricted Subsidiary has the corporate power to own its respective property and
to carry on its respective business as now being conducted.
(b) The execution, delivery and performance by the Borrower of this
Agreement and the Notes are within the Borrower's corporate powers, have been
duly authorized by all necessary corporate action, and do not contravene (i) the
Borrower's charter or by-laws or (ii) any law or contractual restriction binding
on or affecting the Borrower.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by the Borrower of this Agreement or
the Notes.
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30
(d) This Agreement is, and the Notes when delivered hereunder will be,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally.
(e) The audited consolidated balance sheet of the Borrower as at June
30, 1996, and the related consolidated audited statements of income and
stockholders' equity of the Borrower for the fiscal year then ended, copies of
which have been furnished to each Lender, fairly present in all material
respects the consolidated financial condition of the Borrower as at such date
and the consolidated results of the operations of the Borrower for the period
ended on such date, all in accordance with generally accepted accounting
principles consistently applied except as noted therein, and since June 30,
1996, there has been no material adverse change in the business, financial
condition, assets, properties or operations of the Borrower or the Borrower and
its Subsidiaries taken as a whole.
(f) There is no pending or, to the knowledge of any Responsible Officer
of the Borrower, threatened action or proceeding affecting the Borrower or any
of its Subsidiaries before any court, governmental agency or arbitrator, which
(i) is reasonably likely to be adversely determined and such adverse
determination would likely have a material adverse effect on the business,
financial condition, assets, properties or operations of the Borrower or the
Borrower and its Subsidiaries taken as a whole, or (ii) purports to affect the
legality, validity or enforceability of this Agreement or any Note.
(g) The Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U issued by the Board of Governors of the Federal Reserve System),
and no proceeds of any Advance will be used to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing or carrying
any margin stock.
(h) The Borrower and each of its Restricted Subsidiaries has met its
minimum funding requirements under ERISA with respect to all of its Plans and
has not incurred any material liability to the Pension Benefit Guaranty
Corporation under ERISA in connection with any such Plan. No ERISA Termination
Event has occurred and is continuing with respect to any Plan.
(i) The Borrower is not an "investment company" or a company
"controlled" by an "investment company", within the meaning of the Investment
Company Act of 1940, as amended.
(j) Except as disclosed to the Agent and the Lenders in that certain
letter dated August 28, 1997 from the Borrower to the Agent, the Borrower and
its Restricted
<PAGE>
31
Subsidiaries, to the best knowledge of the Responsible Officers, have obtained
the right to use all patents, trademarks, service-marks, trade names,
copyrights, licenses and other rights, free from burdensome restrictions, or
could obtain the same on terms and conditions not materially adverse to the
Borrower and its Restricted Subsidiaries and their operations taken as a whole,
that are necessary for the operation of their respective businesses as presently
conducted and for the operation of businesses described to the Lenders in
writing as proposed to be conducted.
(k) The Borrower has and each of its Subsidiaries has good and
indefeasible title to all material properties, assets and rights of every type
and nature now purported to be owned by it (other than properties and assets
disposed of in the ordinary course of business), subject to no Lien of any kind
except Liens permitted by Section 5.02(a). All leases material to the conduct of
the respective businesses of the Borrower and its Subsidiaries as currently
conducted are valid and subsisting and are in full force and effect.
(l) The Borrower has and each of its Restricted Subsidiaries has filed
all Federal, State and other tax returns which, to the best knowledge of the
Borrower, are required to be filed, and each has paid all taxes as shown on such
returns and on all assessments received by it to the extent that such taxes have
become due, except such taxes as are being contested in good faith by
appropriate proceedings and for which adequate reserves have been established in
accordance with generally accepted accounting principles and except where (i)
nonpayment thereof will not have a material adverse effect on the business,
financial condition, assets, properties or operations of the Borrower or of the
Borrower and its Subsidiaries taken as a whole, and (ii) either (A) the
aggregate unpaid amount thereof is less than $1,000,000, or (B) the unpaid
amount thereof shall be paid in full promptly upon the Borrower or the
Restricted Subsidiary owing the same obtaining knowledge of the delinquency
thereof, together with any penalties payable as a result of such delinquency.
(m) Neither the Borrower nor any of its Subsidiaries is a party to any
contract or agreement or subject to any charter or other corporate restriction
which materially and adversely affects the business, financial condition,
assets, properties or operations of the Borrower or the Borrower and its
Subsidiaries taken as a whole. Neither the execution nor delivery of this
Agreement or the Notes, nor fulfillment of nor compliance with the terms and
provisions hereof or thereof will conflict with, or result in a breach of the
terms, conditions or provisions of, or constitute a default under, or result in
any violation of, or result in the creation of any Lien upon any of the
properties or assets of the Borrower or any of its Restricted Subsidiaries
pursuant to, the charter or by-laws of the Borrower or any of its Restricted
Subsidiaries, any award of any arbitrator or any agreement (including any
agreement with stockholders), instrument, order, judgment, decree, statute, law,
rule or regulation to which the Borrower or any of its Restricted Subsidiaries
is subject.
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32
(n) The documents, certificates and written statements furnished by any
Responsible Officer to the Agent or any Lender pursuant to any provision of this
Agreement or any other agreement, document or instrument delivered to the Agent
or any Lender pursuant hereto or in connection herewith, taken together with all
such other documents, certificates and written statements, do not contain any
untrue statement of a material fact or omit any material fact necessary to make
the statements made therein, taken together, in light of the circumstances under
which they were made, not misleading. It is recognized by the Agent and the
Lenders that projections and forecasts provided by or on behalf of the Borrower,
although reflecting the Borrower's good faith projections or forecasts based on
methods and data which the Borrower believes to be reasonable and accurate, are
not to be viewed as facts and that actual results during the period or periods
covered by any such projections and forecasts may (and are likely to) differ
from the projected or forecasted results.
(o) Listed on Exhibit H attached hereto are all of the Subsidiaries of
the Borrower as of the date of this Agreement, identifying which of the
Subsidiaries constitute Restricted Subsidiaries as of the date of this
Agreement. All of the issued and outstanding shares (other than shares of any
foreign Subsidiary required by applicable local law to be issued to directors of
such foreign Subsidiary or shares of foreign Subsidiaries issued to Persons to
satisfy local ownership requirements imposed by applicable local law) of the
capital stock of each Subsidiary owned by the Borrower or any Subsidiary are
duly issued and outstanding, fully paid and non-assessable and are free and
clear of any Lien.
(p) In the ordinary course of its business, the Borrower conducts an
ongoing review of the effect of Environmental Laws on the business, operations
and properties of the Borrower and its Subsidiaries, in the course of which it
identifies and evaluates associated liabilities and costs (including, without
limitation, any capital or operating expenditures required for clean-up or
closure of its properties, any capital or operating expenditures required to
achieve or maintain compliance with environmental protection standards imposed
by law or as a condition of any license, permit or contract, any related
constraints on operating activities, including any periodic or permanent
shutdown of any facility or reduction in the level of or change in the nature of
operations conducted thereat and any actual or potential liabilities to third
parties, including employees, and any related costs and expenses). On the basis
of this review, the Borrower has reasonably concluded that Environmental Laws
are not likely to have a material adverse effect on the business, financial
condition, assets, properties or operations of the Borrower or the Borrower and
its Subsidiaries taken as a whole.
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33
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any amount payable
hereunder or under any Note shall remain unpaid or any Lender shall have any
Commitment hereunder, the Borrower will, unless the Majority Lenders shall
otherwise consent in writing:
(a) Compliance with Laws, Etc. Comply, and cause each of its
Subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders of any governmental authority, the noncompliance
with which would materially adversely affect the business, financial condition,
assets, properties or operations of the Borrower or the Borrower and its
Subsidiaries taken as a whole.
(b) Payment of Taxes and Claims. Pay, and cause each of its Restricted
Subsidiaries to pay, all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or profits before any penalty accrues thereon or
immediately upon any determination that any interest is due thereon, and all
claims (including, without limitation, claims for labor, services, materials and
supplies) for sums which have become due and payable and which by law have or
may become a Lien upon any of its properties or assets; provided that no such
tax, assessment, charge or claim need be paid if it is being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted
and if such accrual or other appropriate provision, if any, as shall be required
by generally accepted accounting principles shall have been made therefor;
provided, further, that the Borrower shall not be deemed to have breached this
Section 5.01(b) on account of the failure to pay any such tax, assessment,
charge or claim if (i) nonpayment thereof will not have a material adverse
effect on the business, financial condition, assets, properties or operations of
the Borrower or the Borrower and its Restricted Subsidiaries taken as a whole,
and (ii) either (A) the aggregate unpaid amount thereof is less than $1,000,000,
or (B) the unpaid amount thereof shall be paid in full promptly upon the
Borrower or the Restricted Subsidiary owing the same obtaining knowledge of the
delinquency thereof, together with any penalties payable as.a result of such
delinquency.
(c) Maintenance of Properties; Insurance; Books and Records. Maintain
or cause to be maintained, and cause each of its Restricted Subsidiaries to
maintain or cause to be maintained (i) to the extent consistent with good
business practices, in good repair, working order and condition all properties
material to the continued conduct of the business of the Borrower and its
Subsidiaries taken as a whole, and from time to time will make or cause to be
made all necessary repairs, renewals and replacements thereof; (ii) with
financially sound and reputable insurers, insurance with respect to its
properties and business and the properties and business of its Restricted
Subsidiaries against loss or damage of the
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34
kinds customarily insured against by corporations of established reputation
engaged in the same or similar business and similarly situated, of such types
and in such amounts as are customarily carried under similar circumstances by
such other corporations ("Industry Standards"); provided that the Borrower and
its Restricted Subsidiaries may self insure to the extent, and only to the
extent, consistent with Industry Standards; and (iii) proper books of record and
account in accordance with generally accepted accounting principles consistently
applied.
(d) Corporate Existence, etc. At all times preserve and keep in full
force and effect its corporate existence, and corporate rights and franchises
material to its business, and those of each of its Restricted Subsidiaries,
except as otherwise specifically permitted by Sections 5.02(b). 5.02(d)or
5.02(e), and will qualify, and cause each of its Restricted Subsidiaries to
qualify, to do business in any jurisdiction where the failure to do so (i) is
remedied within a reasonable time period after a Responsible Officer has
knowledge of any such failure, and (ii) will not have a material adverse effect
on the business, financial condition, assets, properties or operations of the
Borrower or the Borrower and its Subsidiaries taken as a whole; provided that
the corporate existence of any Subsidiary may be terminated if, in the good
faith judgment of the Board of Directors of the Borrower, such termination is in
the best interests of the Borrower and is not disadvantageous to the Lenders.
(e) Reporting Requirements. Furnish to the Lenders:
(i) as soon as available and in any event within 45 days after
the end of each of the first three fiscal quarters of each fiscal year of
the Borrower, the unaudited consolidated balance sheet of the Borrower as
of the end of such quarter and consolidated unaudited statements of income,
stockholders' equity and cash flow of the Borrower for the period
commencing at the end of the previous fiscal year and ending with the end
of such quarter, setting forth in comparative form figures for the
corresponding period in the preceding fiscal year, in the case of such
statements of income, stockholders' equity and.cash flow, and figures at
the end of the preceding fiscal year in the case of such balance sheet, all
in reasonable detail, in accordance with generally accepted accounting
principles consistently applied (except as noted therein and subject to
normal year-end adjustments), and certified in a manner reasonably
acceptable to the Majority Lenders by a Responsible Financial Officer of
the Borrower;
(ii) as soon as available and in any event within 90 days
after the end of each fiscal year of the Borrower, the consolidated balance
sheet of the Borrower as of the end of such fiscal year and consolidated
statements of income, stockholders' equity and cash flow of the Borrower
for the period commencing at the end of the previous fiscal year and ending
with the end of such fiscal year, setting forth in comparative form figures
for the preceding fiscal year, all in reasonable
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35
detail, in accordance with generally accepted accounting principles
consistently applied (except as noted therein), and certified in a manner
reasonably acceptable to the Majority Lenders by independent public
accountants of recognized national standing reasonably acceptable to the
Majority Lenders;
(iii) together with the financial statements furnished in
accordance with subdivisions (i) and (ii) of this Section 5.01(e) except as
noted with respect to clause (d) hereof, a certificate of a Responsible
Financial Officer of the Borrower in the form of Exhibit F attached hereto
(a) representing and warranting that no Event of Default or Default has
occurred and is continuing (or, if such an Event of Default or Default has
occurred, stating the nature thereof and the action which the Borrower
proposes to take with respect thereto), (b) setting forth a schedule
containing the information and calculations with respect to the Borrower's
compliance with Sections 5.01(h)- 5.01(i) and 5.02(h), (c) stating that the
representations and warranties contained in Section 4.01 are true and
correct on and as of the date of such certificate as though made on and as
of such date (except to the extent such representations or warranties
specifically relate to an earlier date, in which case they shall be true
and correct as of such date), and (d) only as to the financial statements
furnished in accordance with subdivision (ii) of this Section 5.01(e),
setting forth all changes, if any, to Exhibit H since the date of the
previous certificate furnished to the Lenders hereunder; provided that the
Borrower may, if no Advance is outstanding and no other amount payable
hereunder or under the Notes is then unpaid, elect not to submit the
statement otherwise required pursuant to the foregoing clause (c) so long
as such statement is made at least once each calendar year;
(iv) as soon as possible and in any event within five days after a
Responsible Officer or a Responsible Financial Officer knows or has reason
to know of the occurrence of any Default that is not an Event of Default
(provided, with respect to any such Default, at the time of such Default
any Advance is outstanding or any other amount payable hereunder or under
the Notes shall remain unpaid) and any Event of Default, a statement of a
Responsible Financial Officer of the Borrower setting forth details of such
Event of Default or Default and the action which the Borrower has taken and
proposes to take with respect thereto;
(v) promptly after the same are sent, copies of all financial
statements and reports which the Borrower sends to its shareholders
generally; and promptly after the same are filed, copies of all final
registration statements on Form S-1, S-2, S-3 or S-4 (without exhibits
unless specifically requested) or their successor forms relating to
offerings of debt or equity by the Borrower and copies of all reports on
Form 10-K, Form 10-Q and Form 8-K or their successor forms (without
exhibits unless specifically requested) which the Borrower may make to, or
file with, the Securities and Exchange Commission or any successor or
similar governmental entity;
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36
(vi) as soon as practicable and in any event (a) within 30 days after
any Responsible Officer or any Responsible Financial Officer knows or has
reason to know that any ERISA Termination Event described in clause (i) of
the definition of ERISA Termination Event with respect to Any Plan has
occurred and (b) within 10 days after any Responsible Officer or any
Responsible Financial Officer knows or has reason to know that any other
ERISA Termination Event with respect to any Plan has occurred, a statement
of a Responsible Financial Officer of the Borrower describing such ERISA
Termination Event and the action, if any, which the Borrower or such ERISA
Affiliate proposes to take with respect thereto;
(vii) promptly upon receipt thereof, a copy of each other summary
report in its final form submitted to the Borrower or any Restricted
Subsidiary for delivery to, or which is actually delivered to, the Board of
Directors of the Borrower by independent accountants in connection with any
annual, interim or special audit made by them of the books of the Borrower
or any Restricted Subsidiary;
(viii) promptly after a Responsible Officer or a Responsible Financial
Officer knows or has reason to know thereof, notice of all actions, suits
and proceedings before any court or governmental authority or
instrumentality affecting the Borrower or any of its Subsidiaries of the
type described in Section 4.01(f), and promptly after any material adverse
development or change in the status of any such continuing action, suit or
proceeding, notice of such development or change;
(ix) promptly after a Responsible Officer or a Responsible Financial
Officer knows or has reason to know thereof, notice of any violation of any
Environmental Law that is reported or reportable by the Borrower or any of
its Subsidiaries to any federal, state or local environmental agency that
could be reasonably expected to have a material adverse effect on the
business, financial condition, assets, properties or operations of the
Borrower or the Borrower and its Subsidiaries taken as a whole;
(x) (a) promptly after any termination of any commitment (other than at
the request of the Borrower or any of its Subsidiaries) pursuant to any
Permitted Receivables Facility, notice of such termination; (b) promptly
after any change in any collection agent or similar entity pursuant to any
Permitted Receivables Facility (other than designation of any collection
agent affiliated with the Borrower), notice of such change; (c) promptly
after any material change in the financial institutions participating in
any Permitted Receivables Financing, notice of such change; and (d)
promptly after the execution and delivery thereof, copies of any Permitted
Receivables Facility and all amendments thereto, whether or not the consent
thereto of the Lenders is required hereunder; and
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37
(xi) such other information respecting the condition or operations,
financial or otherwise (including, without limitation, information
pertaining to any change in accounting principles adopted by the Borrower
or any of its domestic Subsidiaries (or any of its foreign Subsidiaries if
such change in accounting principles would have a material effect on the
financial condition, operating performance or cash flow of the Borrower and
its Subsidiaries taken as a whole) during any fiscal year of the Borrower
and the effect thereof on the financial condition, operating performance or
cash flow of the Borrower and its Subsidiaries taken as a whole), of the
Borrower or any of its Subsidiaries as any Lender through the Agent may
from time to time reasonably request.
(f) Inspection of Property. Permit any employee of, or independent
financial, legal, environmental or other professional consultant or advisor
(other than a Person that is or is affiliated with a direct competitor of the
Borrower) retained by, the Agent or any of the Lenders or any agents or
representatives thereof, at the Agent's or such Lender's expense, to visit and
inspect any of the properties of the Borrower and its Subsidiaries, to examine
the corporate books and financial records of the Borrower and its Subsidiaries
and make copies thereof or extracts therefrom (except that the Borrower, as to
any information certified by the Borrower as constituting trade secrets or other
proprietary information of a non-financial nature, in a certificate delivered to
the Agent or Lender who has requested copies or extracts of such information,
may in its discretion refuse to allow such copies or extracts to be made) and to
discuss the affairs, finances and accounts of any of such corporations with the
principal officers of the Borrower or its independent public accountants (and by
this provision the Borrower authorizes such accountants to discuss with any
Person so designated the affairs, finances and accounts of the Borrower and its
Subsidiaries, whether or not the Borrower is present), all at such reasonable
times and as often as the Agent or any Lender may reasonably request, in each
case as to matters reasonably related to this Agreement or the transactions
contemplated hereby or the interests of the Agent or the Lenders hereunder.
(g) Use of Proceeds. The proceeds of all Advances shall be used for general
corporate purposes, including, without limitation, the retirement of Debt.
Notwithstanding any other term or provision set forth in this Agreement, no
portion of any Advance may be used to initiate or participate in the acquisition
of a controlling interest in the Voting Stock or assets of any corporation
unless such acquisition is made with the consent of such corporation and does
not otherwise violate the terms and provisions of this Agreement.
(h) Debt to Consolidated Tangible Net Worth Ratio. Maintain a ratio of (A)
Consolidated Debt of the Borrower, to (B) Consolidated Tangible Net Worth of not
more than 0.45 to 1.00.
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38
(i) Fixed Charge Ratio. Maintain (i) as of the last day of the first fiscal
quarter of each fiscal year of the Borrower a ratio of (A) Adjusted EBIT of the
Borrower determined on a consolidated basis for the 12-month period ending on
such date, to (B) consolidated Fixed Charges of the Borrower for the 12-month
period ending on such date, of not less than 1.25 to 1.00; and (ii) as of the
last day of the second, third and fourth fiscal quarters of each fiscal year of
the Borrower a ratio of (A) Adjusted EBIT of the Borrower for the 12-month
period ending on such date, to (B) consolidated Fixed Charges of the Borrower
for the 12-month period ending on such date, of not less than 1.50 to 1.00, in
each case determined on a consolidated basis.
SECTION 5.02. Negative Covenants. So long as any amount payable hereunder
or under any Note shall remain unpaid or any Lender shall have any Commitment
hereunder, the Borrower will not, without the written consent of the Majority
Lenders:
(a) Liens, Excess Interest in Receivables, Etc. (i) Create, assume or
suffer to exist, or permit any Subsidiary to create, assume or suffer to exist,
any Lien upon any of its property or assets, whether now owned or hereafter
acquired , or any Excess Interest in Receivables, except
(A) Liens for taxes not yet due or which are being actively
contested in good faith by appropriate proceedings,
(B) other Liens incidental to the conduct of its business or
the ownership of its property and assets which were not incurred in
connection with the borrowing of money or the obtaining of advances of
credit, and which do not in the aggregate materially detract from the
value of its property or assets or materially impair the use of such
property or assets in the operation of its business,
(C) Liens existing on the property or assets of the Borrower
or any Subsidiary on the date of this Agreement and set forth on
Exhibit G,
(D) Liens on property or assets of a Subsidiary to secure
obligations of such Subsidiary to the Borrower or a wholly owned
Subsidiary,
(E) any Lien created to secure the purchase price or cost of
construction, or to secure Debt incurred to pay the purchase price or
cost of construction, of any property acquired by the Borrower or any
Subsidiary after the date hereof or any improvements to real property
constructed by or for the account of the Borrower or any Subsidiary
after the date hereof; provided that (x) any such Lien shall be
confined solely to the item or items of property so acquired or
constructed (and any theretofore unimproved real property on
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39
which such improvements are located), and (y) any such Lien shall be
created concurrently with or within 12 months following the acquisition
of such property or the completion of construction of improvements
thereon,
(F) Liens on accounts receivable and related property of any
Subsidiary and/or on any such related property of the Borrower, in each
case subject to a Permitted Receivables Facility and created in
connection with such Permitted Receivables Facility,
(G) Liens existing on property including the proceeds thereof
and accessions thereto acquired by the Borrower or any Subsidiary
(including Liens on assets of any corporation at the time it becomes a
Subsidiary, unless such Lien was created in contemplation of such
corporation becoming a Subsidiary),
(H) Liens which constitute rights of set-off of a customary
nature or bankers' Liens with respect to amounts on deposit, whether
arising by operation of law or by contract, in connection with
arrangements entered into with banks in the ordinary course of
business, including rights of set-off created pursuant to or by virtue
of this Agreement and the Notes,
(I) leases or subleases and license and sublicenses granted to
others in the ordinary course of the Borrower's or any Subsidiary's
business not interfering in any material respect with the business of
the Borrower and its Subsidiaries taken as a whole, and any interest or
title of a lessor or licensor under any lease or license,
(J) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section
6.01(i), and Liens to secure appeal bonds, supersedeas bonds and other
similar Liens arising in connection with court proceedings (including,
without limitation, surety bonds and letters of credit) or any other
instrument serving a similar purpose; provided, however, that the total
amount secured by Liens described in this subsection (J) may not exceed
at any time 5% of Consolidated Tangible Net Worth (plus Liens so
described that are permitted in accordance with Section 5.02(a)(ii)
below),
(K) easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not interfering in any material
respect with the ordinary conduct of the business of the Borrower and
its Subsidiaries taken as a whole,
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40
(L) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection
with the importation of goods, and
(M) any Lien renewing, extending, or refunding any Lien
permitted under clauses (A) through (L), inclusive, of this Section
5.02(a); provided that the principal amount secured is not increased
and that such Lien is not extended to other property (other than
pursuant to its original terms).
(ii) Notwithstanding the provisions contained in subdivision (i) of
this Section 5.02(a), in addition to the permitted Liens described above,
the Borrower and its Subsidiaries, or any of them, may create, assume or
suffer to exist other Liens and Excess Interest in Receivables if, after
giving effect thereto and to the retirement of any Debt which is
concurrently being retired, the aggregate of (A) the total amount of Debt
then secured by such Liens, and (B) the total amount of Excess Interest in
Receivables then existing, does not exceed 10% of Consolidated Tangible Net
Worth; provided, however, if the aggregate of (A) the total amount of Debt
then secured by such Liens, and (B) the total amount of Excess Interest in
Receivables then existing, exceeds 10% of Consolidated Tangible Net Worth,
no Event of Default shall occur hereunder provided the Borrower
simultaneously therewith makes or causes to be made effective provision
whereby the indebtedness evidenced by this Agreement and the Notes will be
secured by such Liens (pursuant to documentation in form and substance
reasonably satisfactory to the Agent and the Majority Lenders) equally and
ratably with any and all other Debt thereby secured so long as such other
Debt shall be so secured.
(b) Merger and Consolidation. Merge into or consolidate with or into a
corporation, or permit any Subsidiary to do so, except that (i) any Subsidiary
may merge or consolidate with any other Subsidiary and any Subsidiary may merge
into the Borrower, (ii) the Borrower may merge or consolidate with any other
corporation; provided that (A) either (1) the Borrower shall be the continuing
or surviving corporation, or (2) the successor corporation shall be a solvent
corporation organized under the laws of any State of the United States of
America with a financial condition at least equal to that of the Borrower at the
time of such merger or consolidation, and such corporation shall expressly
assume in writing all of the obligations of the Borrower under this Agreement
and under the Notes, including all covenants herein and therein contained which
assumption shall not otherwise violate any term, condition or provision of this
Agreement or the Notes, and such successor shall be substituted for the Borrower
with the same effect as if it had been named herein as a party hereto, and (B)
immediately after giving effect to such merger or consolidation, no Default or
Event of Default shall have occurred, (iii) a Subsidiary may merge into or
consolidate with a corporation in connection with such corporation becoming a
Subsidiary or being combined with any existing Subsidiary, and (iv) provided
that the disposition of such
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41
Subsidiary is not otherwise prohibited under the terms of this Agreement
(including pursuant to Section 5.02(d)(ii) below), any Subsidiary may merge into
or consolidate with a corporation, if after giving effect to such merger or
consolidation, neither such Subsidiary nor such corporation is a Subsidiary.
(c) Change in Nature of Business. Make, or permit any Subsidiary to make,
any material change in the nature of its business as carried on at the date
hereof; provided, however, that the Borrower and its Subsidiaries-may enter into
businesses which are appropriate extensions of or are reasonably related or
incidental to the current businesses of the Borrower and its Subsidiaries.
(d) Maintenance of Ownership of Subsidiaries. Sell or otherwise dispose of
any shares of capital stock of any Subsidiary or permit any Subsidiary to issue,
sell or otherwise dispose of any shares of its capital stock or the capital
stock of any other Subsidiary, except
(i) to the Borrower or another Subsidiary;
(ii) that all shares of stock of any Subsidiary at the time
owned by the Borrower or any Subsidiary may be sold as an entirety for
a consideration which represents the fair value (as determined in good
faith by the Board of Directors of the Borrower) at the time of sale of
the shares of stock so sold; provided that after giving effect to the
sale thereof the sum of (A) the total assets of all Subsidiaries whose
stock is so sold pursuant to this clause (ii) after the date of this
Agreement, plus (B) the total assets of all Subsidiaries that have been
merged into or consolidated with a corporation pursuant to clause (iv)
of Section 5.02(b) after the date of this Agreement, does not exceed
15% of the consolidated total assets of the Borrower;
(iii) shares of stock of any Subsidiary may be sold if, after
giving effect to such sale, such Subsidiary shall continue to be a
Subsidiary; and
(iv) shares of stock of any foreign Subsidiary may be issued
to directors of such foreign Subsidiary to satisfy director ownership
requirements imposed by applicable local law and shares of stock of
foreign Subsidiaries may be issued to Persons to the extent necessary
to satisfy local ownership requirements imposed by applicable local
law.
(e) Sales, Etc. of Assets. Transfer, or permit any Subsidiary to
Transfer any assets, if after giving effect to such Transfer the sum of (1) the
total assets as to which there has been a Transfer not permitted by clauses (i)
or (ii) of this Section 5.02(e) after the date of this Agreement, plus (2) the
total assets of all Subsidiaries whose stock is sold pursuant to clause (ii) of
Section 5.02(d) after the date of this Agreement, plus (3) the total
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42
assets of all Subsidiaries that have been merged into or consolidated with a
corporation pursuant to clause (iv) of Section 5.02(b) after the date of this
Agreement, would exceed 20% of the consolidated total assets of the Borrower,
except that:
(i) any Subsidiary may Transfer any of its assets to the Borrower or to
another Subsidiary and the Borrower may Transfer assets to a wholly-owned
Subsidiary that had been transferred to the Borrower from a Subsidiary
after the date of this Agreement; and
(ii) the provisions of this Section 5.02(e) shall not apply to (A) any
Transfer made in the ordinary course of business, (B) any Transfer of
obsolete assets, (C) any Transfer by the Borrower or any Subsidiary of
assets (but not of all or substantially all of its assets) if such Transfer
is made pursuant to a plan to replace the assets subject to such Transfer
and such replacement occurs no later than six months after the Transfer
(or, if replacement is not reasonable by such date, binding commitments to
construct and/or acquire replacement assets shall have been entered into no
later than six months after the Transfer and such replacement shall occur
within a reasonable period of time, which shall in no event exceed 18
months), or (D) the sale of notes, leases and accounts receivable pursuant
to and in accordance with the terms of a Permitted Receivables Facility by
Borrower or any Subsidiary.
(f) Sale of Receivables. Sell with recourse, or discount or otherwise sell
for less than the face value thereof, or sell with or without recourse for
consideration other than cash, or permit any Subsidiary to sell with recourse,
or discount or otherwise sell for less than the face value thereof, or sell with
or without recourse for consideration other than cash, any of its notes or
accounts receivable; provided that the foregoing restrictions shall not apply to
(i) any license or sale of products or services in the ordinary course of
business where payment For such transactions is made by credit card; provided
that the fees and discounts incurred by the Borrower or the Subsidiary in
connection therewith shall not exceed the normal and customary fees and
discounts incurred for general credit card transactions through major credit
card issuers; (ii) the delivery and endorsement to banks in the ordinary course
of business by the Borrower or any of its Subsidiaries of promissory notes
received in payment of trade receivables, where delivery and endorsement are
made prior to the date of maturity of such promissory notes, and the retention
by said banks of normal and customary fees and discounts therefor; provided that
such practice is usual and customary in the country where such activity occurs;
and (iii) any sale of notes or accounts receivable (or interests therein) by the
Borrower or any Subsidiary in connection with a Permitted Receivables Facility.
(g) Subsidiary Debt. Permit any Subsidiary organized under the laws of any
State of the United States of America to create, incur, assume or suffer to
exist any Debt if, after giving effect thereto and to the concurrent repayment
of any other Debt, the
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43
aggregate Debt of all such Subsidiaries will exceed $300,000,000 (not including
Debt of Subsidiaries incurred in connection with Permitted Receivables
Facilities).
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) the Borrower shall fail to pay (i) any principal of any Advance when
the same becomes due and payable; or (ii) any interest on any Advance or any
fees payable hereunder within five Business Days after the same becomes due; or
(iii) any other amounts payable hereunder within 30 days of the date of invoice
or written demand therefor; or
(b) any representation or warranty made by the Borrower herein or by the
Borrower (or any of its officers) in connection with this Agreement shall prove
to have been incorrect in any material respect when made; or
(c) the Borrower shall fail. to perform or observe any term, covenant or
agreement contained in Sections 5.01(h), 5.01(i), 5.02(b), 5.02(c), 5.02(d),
5.02(e), 5.02(g) or 5.02(h); or
(d) the Borrower shall fail to perform or observe any term, covenant or
agreement contained in this Agreement (other than those covered by the other
clauses of this Section 6.01) on its part to be performed or observed if the
failure to perform or observe such other term, covenant or agreement shall
remain unremedied for 30 days after written notice thereof shall have been given
to the Borrower by the Agent at the request of any Lender; or
(e) (i) the Borrower or any of its Subsidiaries shall fail to pay any
principal of or premium or interest on any Debt which is outstanding in a
principal amount of at least $10,000,000 in the aggregate (but excluding Debt
outstanding hereunder) of the Borrower or such Subsidiary (as the case may be),
when the same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any other event shall occur or condition
shall exist under any agreement or instrument relating to any such Debt and
shall continue after the applicable grace period, if any, specified in such
agreement or instrument; but only if the effect of such failure to pay, event or
condition is to accelerate the maturity of such Debt; or any such Debt shall be
declared by the creditor to be due and payable, or required
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44
to be prepaid (other than by a regularly scheduled required prepayment),
redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or
defease such Debt shall be required to be made, in each case prior to the stated
maturity thereof; or (ii) any event shall occur or condition shall exist under
any agreement or instrument relating to any Debt of the Borrower or any of its
Subsidiaries outstanding in a principal amount in excess of $50,000,000 in the
aggregate and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event or
condition is to permit the acceleration by the creditor of, the maturity of such
Debt; or
(f) the Borrower or any of its Subsidiaries shall generally not pay its
debts as such debts become due, or shall admit in writing its inability to pay
its debts generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against the Borrower or
any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
property and, in the case of any such proceeding instituted against it (but not
instituted by it), either such proceeding shall remain undismissed or unstayed
for a period of 30 consecutive days, or any of the actions sought in such
proceeding (including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee, custodian or other similar
official for, it or for any substantial part of its property) shall occur; or
the Borrower or any of its Subsidiaries shall take any corporate action to
authorize any of the actions set forth above in this subsection (f); or
(g) any order, judgment or decree is entered in any proceedings against the
Borrower or any Material Subsidiary decreeing the dissolution of the Borrower or
such Material Subsidiary and such order, judgment or decree remains unstayed and
in effect for more than 60 consecutive days; or
(h) any order, judgment or decree is entered in any proceedings against the
Borrower or any Material Subsidiary decreeing a split-up of the Borrower or such
Material Subsidiary which requires the divestiture of assets representing a
substantial part, or the divestiture of the stock of a Material Subsidiary whose
assets represent a substantial part, of the consolidated assets of the Borrower
(determined in accordance with generally accepted accounting principles) or
which requires the divestiture of assets, or stock of a Material Subsidiary,
which shall have contributed a substantial part of the consolidated net income
of the Borrower (determined in accordance with generally accepted accounting
principles) for any of the three fiscal years then most recently ended, and such
order, judgment or decree remains unstayed and in effect for more than 60
consecutive days; or
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45
(i) a final judgment or order for the payment of money in an amount (not
covered by insurance) which exceeds $10,000,000 shall be rendered against the
Borrower or any of its Subsidiaries and; prior to the payment in full of the
amount thereof, either (i) enforcement proceedings shall have been commenced by
any creditor upon such judgment or order, or (ii) there shall be any period of
30 consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; or
(j) any ERISA Termination Event that the Lenders determine in good faith
might constitute grounds for the termination of any Plan or for the appointment
by the appropriate United States district court of a trustee to administer any
Plan shall have occurred and be continuing for 30 days after written notice
shall have been given to the Borrower by the Agent, or any Plan shall be
terminated, or a trustee shall be appointed by an appropriate United States
district court to administer any Plan, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any Plan or to appoint a
trustee to administer any Plan;
then, and in any such event, the Agent (i) shall at the request, or may
with the consent, of the Majority Lenders, by notice to the Borrower, declare
the obligation of each Lender to make Advances to be terminated, whereupon the
same shall forthwith terminate, and (ii) shall at the request, or may with the
consent, of the Majority Lenders, by notice to the Borrower, declare the
Advances, all interest thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Advances, all such
interest and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower; provided, however, that if an Event
of Default specified in Section 6.01(f) shall occur or in the event of an actual
or deemed entry of an order for relief with respect to the Borrower or any of
its subsidiaries under the Federal Bankruptcy Code, (A) the obligation of each
Lender to make Advances shall automatically be terminated and (B) the Advances,
all such interest and all such amounts shall automatically become and be due and
payable, without presentment, demand, protest or any notice of any kind, all of
which are hereby expressly waived by the Borrower.
SECTION 6.02. Mandatory Prepayment; Event of Early Termination.
Notwithstanding anything to the contrary contained herein, in the event that a
Change of Control Event shall occur with respect to the Borrower, the Agent (i)
shall at the request, or may with the consent, of the Majority Lenders, by
notice to the Borrower, declare the obligation of each Lender to make Advances
to be terminated, whereupon the same shall forthwith terminate, and (ii) shall
at the request, or may with the consent, of the Majority Lenders, by notice to
the Borrower, declare the Advances, all interest thereon and all other amounts
payable under this Agreement to be forthwith due and payable, whereupon the
Advances, all such interest and all such amounts shall become and be forthwith
due and
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46
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Borrower.
ARTICLE VII
THE AGENT
SECTION 7.01. Authorization and Action. Each Lender hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto. As to
any matters not expressly provided for by this Agreement (including, without
limitation, enforcement or collection of the amounts payable hereunder and under
the Notes), the Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Majority Lenders, and such instructions shall be binding upon all Lenders
and all holders of Notes; provided, however, that the Agent shall not be
required to take any action which exposes the Agent to personal liability or
which is contrary to this Agreement or applicable law. The Agent agrees to give
to each Lender prompt notice of each notice given to it by the Borrower pursuant
to the terms of this Agreement.
SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them under or in connection with this Agreement,
except for its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, the Agent: (i) may treat the
payee of any Note as the holder thereof until the Agent receives and accepts an
Assignment and Acceptance entered into by the Lender which is the payee of such
Note, as assignor, and an assignee, as provided in Section 8.07; (ii) may
consult with legal counsel (including counsel for the Borrower), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts; (iii) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations (whether written or oral) made in or
in connection with this Agreement; (iv) shall not have any duty to ascertain or
to inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement on the part of the Borrower or to inspect the
property (including the books and records) of the Borrower; (v) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or any other
instrument or document furnished pursuant hereto; and (vi) shall incur no
liability under or in respect of this Agreement by acting upon any notice,
consent, certificate or other
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47
instrument or writing (which may be by telecopier, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 7.03. CUSA and Affiliates. With respect to its Commitment and the
Advances made by lt and the Notes issued to lt, CUSA shall have the same rights
and powers under this Agreement as any other Lender and may exercise the same as
though it were not the Agent; and the term "Lender" or "Lenders" shall, unless
otherwise expressly indicated, include CUSA in its individual capacity. CUSA and
its Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, the Borrower,
any of its Subsidiaries and any Person who may do business with or own
securities of the Borrower or any such Subsidiary, all as if CUSA were not the
Agent and without any duty to account therefor to the Lenders.
SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements referred to in Section 4.01 and such other documents
and information as lt has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement.
SECTION 7.05. Indemnification. The Lenders agree to indemnify the Agent (to
the extent not reimbursed by the Borrower), ratably according to the respective
principal amounts outstanding under the A Notes then held by each of them (or if
no A Advances are at the time outstanding or if any A Notes are held by Persons
which are not Lenders, ratably according to the respective amounts of their
Commitments), from and against any and all claims, liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against the Agent in any way relating to or arising out of this
Agreement or any action taken or omitted by the Agent under this Agreement;
provided that no Lender shall be liable for any portion of such claims,
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the Agent's gross negligence or
willful misconduct. Without limitation of the foregoing, each Lender agrees to
reimburse the Agent promptly upon demand for its ratable share of any
out-of-pocket expenses (including counsel fees, court costs and all other
reasonable litigation expenses, including, but not limited to, expert witness
fees, document copying expenses, exhibit preparation, courier expenses, postage,
and communication expenses) incurred by the Agent in connection with the
preparation, execution, delivery. administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under,
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48
this Agreement, to the extent that the Agent is not reimbursed for such expenses
by the Borrower, provided that to the extent indemnification payments made by
the Lenders pursuant to this Section 7.05 are subsequently recovered from or for
the account of the Borrower, the Agent shall promptly refund such previously
paid indemnification payments to the Lenders.
SECTION 7.06. Successor Agent. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower. Upon any such
resignation, the Majority Lenders shall have the right to appoint a successor
Agent, which successor Agent shall (if no Event of Default then exists) be
subject to the approval of the Borrower not to be unreasonably withheld. If no
successor Agent shall have been so appointed by the Majority Lenders, and shall
have accepted such appointment, within 20 days after the retiring Agent's giving
of notice of resignation, then the Borrower may appoint a successor Agent, which
successor Agent shall be subject to the approval of the Majority Lenders not to
be unreasonably withheld. If no successor Agent shall have been so appointed by
the Borrower, and shall have accepted such appointment, within 30 days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of the Lenders, appoint a successor Agent which shall be a commercial
bank organized under the laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $300,000,000 or an
Affiliate thereof. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by lt while lt was Agent under this Agreement.
SECTION 7.07. Co-Agents. None of the Lenders identified on the facing page
or signature pages of this Agreement as a "co-agent" shall have any right,
power, obligation, liability, responsibility or duty under this Agreement other
than those applicable to any Lender. Without limiting the foregoing, none of the
Lenders so identified as a "co- agent" shall have or be deemed to have any
fiduciary relationship with any Lender. Each Lender acknowledges that it has not
relied, and will not rely, on any of the Lenders so identified in deciding to
enter into this Agreement or in taking or not taking any action hereunder.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments Etc. No amendment or waiver of any provision of
this Agreement or the Notes, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Majority Lenders and the Borrower, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no amendment, waiver or consent
shall, unless in writing and signed by all the Lenders, do any of the following:
(a) waive any of the conditions specified in Section 3.01. 3.02 or 3.03, (b)
increase the Commitments of the Lenders or subject the Lenders to any additional
obligations, (c) reduce the principal of, or interest on, the Advances or any
fees or other amounts payable hereunder, (d) postpone any date fixed for any
payment of principal of, or interest on, the Advances or any fees or other
amounts payable hereunder, (e) change the percentage of the Commitments or the
number of Lenders which shall be required for the Lenders or any of them to take
any action hereunder, or (f) amend this Section 8.01; and
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49
provided further that no amendment, waiver or consent shall, unless in writing
and signed by the Agent in addition to the Lenders required above to take such
action, affect the rights or duties of the Agent under this Agreement.
SECTION 8.02. Notices; Payments, Etc. (a) All notices and other
communications provided for hereunder shall be in writing (including telecopier
communication) and mailed, telecopied or delivered, if to the Borrower, at its
address at 2550 Garcia Avenue PAL 1-211, Mountain View, California 94043,
Attention: Treasurer, with a copy to the attention of General Counsel at the
same address (but with the following mail stop substituted: PAL 1-521); if to
any Lender specified on Schedule I, at its Domestic Lending Office specified
opposite its name on Schedule I hereto; if to any other Lender, at its Domestic
Lending Office specified in the Assignment and Acceptance pursuant to which it
became a Lender; and if to the Agent, at its address c/o Citicorp North America,
Inc. at Citicorp Center, One Sansome Street, 27th Floor, San Francisco,
California 94111, Attention: John Wetzler with copies to Citicorp Securities,
Inc., Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Loan
Disclosure, Elizabeth Bradley; provided that all notices to the Agent pursuant
to Article II shall be at Citicorp Securities, Inc., Two Penns Way, Suite 200,
New Castle, Delaware 19720, Attention: Loan Investor Services; or, as to the
Borrower or the Agent, at such other address as shall be designated by such
party in a written notice to the other parties and, as to each other party, at
such other address as shall be designated by such party in a written notice to
the Borrower and the Agent. All such notices and communications shall, (i) when
telecopied, be effective when telecopied, (ii) when sent by an overnight (next
day) courier service, be effective on the Business Day after the date when
delivered to such service, and (iii) when mailed, be effective on the fifth
Business Day after the date deposited in the mails, except that notices and
communications to the Agent pursuant to Article II or VII shall not be effective
until received by the Agent, and any notice of default which is given to the
Borrower only by means of telecopier shall not be effective until such telecopy
is received by the Borrower.
(b) All payments made or funds delivered to the Agent hereunder shall be
made or delivered to the Agent at its Domestic Lending Office or at such other
address as the Agent may designate from time to time in a written notice to the
other parties.
SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or
the Agent to exercise, and no delay in exercising, any right hereunder or under
any Note shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to pay on written
demand all reasonable costs and expenses incurred by the Agent in connection
with the preparation, execution, delivery, administration, modification and
amendment and
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50
syndication of this Agreement, the Notes and the other documents to be delivered
hereunder, including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Agent with respect thereto and with respect to
advising the Agent as to its rights and responsibilities under this Agreement.
The Borrower further agrees to pay on written demand all reasonable costs and
expenses, if any (including, without limitation, reasonable counsel fees, court
costs, and all other reasonable litigation expenses, including, but not limited
to, expert witness fees, document copying expenses, exhibit preparation, courier
expenses, postage, communication expenses and other expenses, specifically
including reasonable allocated costs of in-house counsel), incurred by the Agent
and the Lenders in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement, the Notes and
the other documents to be delivered hereunder, including, without limitation,
reasonable counsel fees and expenses in connection with the enforcement of
rights under this Section 8.04(a). In addition, the Borrower shall pay any and
all stamp and other taxes payable or determined to be payable in connection with
the execution and delivery of this Agreement, the Notes and the other documents
to be delivered hereunder, and agrees to save the Agent and each Lender harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes.
(b) If any payment of principal of any Eurodollar Rate Advance or B Advance
is made other than on the last day of the Interest Period for such A Advance or
the applicable maturity date for such B Advance, as the case may be, as a result
of a payment pursuant to Section 2.13 or acceleration of the maturity of the
Advances pursuant to Section 6.01 or for any other reason, the Borrower shall,
upon written demand by any Lender (with a copy of such demand to the Agent), pay
to the Agent for the account of such Lender any amounts required to compensate
such Lender for any additional losses, costs or expenses which it may reasonably
incur as a result of such payment, including, without limitation, any loss
(including loss of anticipated profits), cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by any
Lender to fund or maintain such Advance. Upon the Borrower's written request,
any Lender demanding compensation under this Section 8.04(b) shall furnish to
the Borrower a summary statement as to the method of calculation of any such
losses, costs or expenses.
(c) The Borrower agrees to indemnify, protect, defend and hold harmless the
Agent and each Lender and each of their Affiliates and their respective
officers, directors, employees, agents, advisors and representatives (each, an
"Indemnified Party") from and against any and all claims, damages, losses,
liabilities, obligations, penalties, actions, judgments, suits, costs,
disbursements and expenses (including, without limitation, reasonable fees and
expenses of counsel, including but not limited to court costs and all other
reasonable litigation expenses including, but not limited to, expert witness
fees, document copying expenses, exhibit preparation, courier expenses, postage,
and communication expenses) that may be incurred by or asserted against any
Indemnified Party, in each case
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51
arising out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation, proceeding or
settlement arising out of, related to or in connection with (i) this Agreement
or the transactions contemplated by this Agreement or the use of any proceeds of
the Advances, (ii) the Advances, the Borrowings or the Commitments, (iii) the
failure of the Borrower or any of its Subsidiaries to comply fully with any and
all Environmental Laws applicable to it, or (iv) any acquisition or proposed
acquisition by the Borrower or any of its Subsidiaries of all or any portion of
the stock or substantially all of the assets of any Person (including, without
limitation, the Borrower), whether or not an Indemnified Party is a party
thereto and whether or not the transactions contemplated hereby are consummated
and whether or not such investigation, litigation or proceeding is brought by
the Borrower, any of its shareholders or creditors, an Indemnified Party or any
other Person, except to the extent such claims, damages, losses, liabilities,
obligations, penalties, actions, judgments, suits, costs, disbursements and
expenses are found in a final, nonappealable judgment by a court of competent
jurisdiction to have resulted from the gross negligence or willful misconduct of
such Indemnified Party; provided, however, that the Borrower's indemnification
obligations set forth herein shall not extend to expenses or fees paid by an
Indemnified Party for reasons other than in connection with this Agreement or
the transactions contemplated hereby. The Borrower agrees that no Indemnified
Party shall have any liability (whether direct or indirect, in contract, tort or
otherwise) to the Borrower or any of its creditors or shareholders in connection
with this Agreement or the transactions contemplated hereby except to the extent
such liability is found in a final, nonappealable judgment by a court of
competent jurisdiction to have resulted from such Indemnified Party's gross
negligence or willful misconduct.
(d) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 8.04 shall survive the termination of this Agreement, the
termination of the Commitments and the payment in full of the Notes.
SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the
continuance of any Event of Default and (ii) the making of the request or the
granting of the consent specified by Section 6.01 to authorize the Agent to
declare the Advances and all other amounts payable under this Agreement to be
forthwith due and payable pursuant to the provisions of Section 6.01, each
Lender is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by such Lender to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement and any Note held by such Lender,
whether or not such Lender shall have made any demand under this Agreement or
such Note and although such obligations may be unmatured. Each Lender agrees
promptly to notify the Borrower after any such set-off and application made by
such Lender; provided that the failure to give such notice shall not affect
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52
the validity of such set-off and application. The rights of each Lender under
this Section 8.05 are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which such Lender may have. The
Borrower hereby authorizes CUSA, in accordance with the provisions of this
Section 8.05, to so set off and apply any and all such deposits held and other
indebtedness owing by Citibank or any other Affiliate of CUSA to or for the
credit or the account of the Borrower and hereby authorizes Citibank and each
such Affiliate to permit such setoff and application by CUSA.
SECTION 8.06. Binding Effect. This Agreement shall become effective when it
shall have been executed by the Borrower and the Agent and when the Agent shall
have been notified by each Lender that such Lender has executed it and
thereafter shall be binding upon and inure to the benefit of the Borrower, the
Agent and each Lender and their respective successors and assigns, except that
the Borrower shall not have the right to assign its rights hereunder or any
interest herein without the prior written consent of the Lenders.
SECTION 8.07. Assignments and Participations. (a) Each Lender may assign to
one or more banks or other financial institutions all or a portion of its rights
and Obligations under this Agreement (including, without limitation, all or a
portion of its Commitment and the A Advances owing to it and the A Note or Notes
held by it); provided, however, that (i) each such assignment shall be of a
constant, and not a varying, percentage of all rights and obligations under this
Agreement (other than any B Advances or B Notes), (ii) the amount of the
Commitment of the assigning Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $25,000,000 (or such
assigning Lender's entire Commitment if such Lender's Commitment is less than
$25,000,000) and shall be an integral multiple of $1,000,000, (iii) each such
assignment shall be to an assignee reasonably acceptable to the Agent and
consented to by the Borrower, which consent shall not be unreasonably withheld;
provided, however, that the consent of the Borrower shall not be required with
respect to any such assignment by CUSA to Citibank or any other Affiliate of
CUSA of any Advance made by CUSA or any such assignment by any other Lender to
an Affiliate of such Lender of any Advance made by such Lender, and (iv) the
parties to each such assignment shall execute and deliver to the Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance, together
with any A Note or Notes subject to such assignment and a processing and
recordation fee of $3,000. Upon such execution, delivery, acceptance and
recording, from and after the effective date specified in each Assignment and
Acceptance, x) the assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, have the rights and obligations of a Lender
hereunder and (y) the Lender assignor thereunder shall, to the extent that
rights and obligations hereunder have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto).
<PAGE>
53
(b) By executing and delivering an Assignment and Acceptance, the Lender
assignor thereunder and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than as provided in
such Assignment and Acceptance, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto; (ii) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrower or the performance or observance by the Borrower of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with copies of the financial statements referred to in
Section 4.01 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and without
reliance upon the Agent, such assigning Lender or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (v) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this Agreement
as are delegated to the Agent by the terms hereof, together with such powers as
are reasonably incidental thereto; and (vi) such assignee agrees that it will
perform in accordance with their terms all of the obligations which by the terms
of this Agreement are required to be performed by it as a Lender.
(c) The Agent shall maintain at its address referred to in Section 8.02(a)
a copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Lenders and the
Commitment of, and principal amount of the A Advances owing to, each Lender from
time to time (the "Register"). The entries in the Register shall be conclusive
and binding for all purposes, absent manifest error, and the Borrower, the Agent
and the Lenders may treat each Person whose name is recorded in the Register as
a Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower or any Lender at any reasonable time
and from time to time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee acceptable to the Agent and reasonably
consented to by the Borrower together with any A Note or Notes subject to such
assignment, the Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of Exhibit C hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Borrower.
<PAGE>
54
(e) Each Lender may assign to one or more banks or other entities any B
Note or Notes held by it.
(f) A Lender may at any time grant participations to one or more banks or
other entities in or to all or any part of its rights and obligations under this
Agreement or any Borrowings hereunder without the consent of the Borrower or the
Agent; provided, however, that (i) the Borrower and the Agent shall be entitled
to continue to deal solely with the granting Lender regarding notices, payments,
payment instructions and any other matters arising pursuant to this Agreement;
(ii) the granting Lender's obligations under this Agreement shall remain
unchanged and the granting Lender shall remain solely responsible for the
performance thereof, and (iii) the granting Lender shall remain the holder of
its Note(s) for all purposes under this Agreement. Any agreement pursuant to
which any Lender may grant such a participating interest shall provide that such
Lender shall retain the sole right and responsibility to enforce the obligations
of the Borrower hereunder, including, without limitation, the right to approve
any amendment, modification or waiver of any provision of this Agreement;
provided that such participation agreement may provide that such Lender will not
agree, without the consent of the participant, to any modification, amendment or
waiver of any provision of this Agreement described in clauses (b), (c) or (d)
of Section 8.01, or to the release of any Lien that may at any time be created
to secure any obligations owing to the Agent and/or the Lenders hereunder or
under the Note.
(g) Any Lender may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this Section 8.07, disclose to
the assignee or participant or proposed assignee or participant, any information
relating to the Borrower furnished to such Lender by or on behalf of the
Borrower; provided that, prior to any such disclosure, the assignee or
participant or proposed assignee or participant shall agree, pursuant to Section
8.11, to preserve the confidentiality of any confidential information relating
to the Borrower received by it from such Lender.
(h) Notwithstanding anything else contained herein, each Lender may assign,
as collateral or otherwise, any of its rights (including, without limitation,
rights to payments of principal or interest) under this Agreement to any Federal
Reserve Bank without notice to or the consent of the Borrower or the Agent and
without any requirement that the assignee assume any obligations of such Lender
hereunder.
(i) If any Eurodollar Reference Bank or its Lender Affiliate assigns its
Notes to an unaffiliated institution, the Agent shall, in consultation with the
Borrower and with the consent of the Majority Lenders, appoint another bank to
act as a Eurodollar Reference Bank hereunder, and pending such appointment, the
Eurodollar Rate shall be determined on the basis of the remaining Eurodollar
Reference Bank(s).
<PAGE>
55
SECTION 8.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
SECTION 8.09. Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
SECTION 8.10. Commitment Extension. The Borrower shall have the right in
each year to request a one-year extension of the Termination Date then in
effect; such request shall be received by the Agent at least 60 days (but not
more than 75 days) prior to each anniversary of the Effective Date. Such request
shall be irrevocable and binding upon the Borrower. The Agent shall promptly
notify each Lender of such request. If a Lender agrees, in its individual and
sole discretion, to so extend its Commitment (an "Extending Lender"), it will
notify the Agent, in writing, of its decision to do so within 30 days after
receipt of such notice from the Agent but in any event, no later than 15 days
prior to the next anniversary of the Effective Date. The Commitment of any
Lender that fails to accept the Borrower's request for extension of the
Termination Date (a "Declining Lender") shall be terminated on the Termination
Date originally in effect (without regard to extension by other Lenders). The
Borrower shall have the right to first, accept from the Extending Lenders
increases in their respective Commitments by an aggregate amount up to the
amount of all Declining Lenders' Commitments and second, to identify assignees
(reasonably acceptable to the Agent) that agree to accept assignments of
Commitments ("Replacement Lenders") in an amount equal to the amount of all
Declining Lenders' Commitments not otherwise assumed by Extending Lenders, in
each case by requiring each Declining Lender to assign in full its rights and
obligations under this Agreement to one or more extending Lenders or Replacement
Lenders; provided that (i) such assignment is otherwise in compliance with
Section 8.07, (ii) such Declining Lender receives payment in full of the
principal amount of all Advances owing to such Declining Lender, together with
accrued interest thereon to the date of such payment of principal and all other
amounts payable to such Declining Lender under this Agreement and (iii) any such
assignment shall be effective on the date specified by the Borrower and agreed
to by the applicable Extending Lenders or Replacement Lenders and the Agent. If
Extending Lenders and/or Replacement Lenders provide Commitments in an aggregate
amount equal to 100% of the aggregate amount of the Commitments outstanding
immediately prior to the Termination Date in effect at the time the Borrower
requests such extension, the Termination Date shall be extended by one year.
SECTION 8.11. Execution in Counterparts. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
<PAGE>
56
SECTION 8.12. Confidentiality. In accordance with normal procedures
regarding proprietary information supplied by customers, each of the Lenders
agrees to keep confidential and to cause its employees, agents and
representatives to keep confidential information relating to the Borrower or any
Subsidiary received pursuant to or in connection with this Credit Agreement and
the transactions contemplated hereby; provided that nothing herein shall be
construed to prevent the Agent or any Lender from disclosing such information
(i) upon the order of any court or administrative agency, (ii) upon the request
or demand of any regulatory agency or authority having jurisdiction over the
Agent or such Lender, (iii) which has been publicly disclosed, (iv) which has
been lawfully obtained by any of the Lenders from a Person other than the
Borrower or any Subsidiary, the Agent or any other Lender, or (v) to the Agent's
or any Lender's attorneys, accountants or auditors (internal or independent) or
to any participant in or assignee of, or prospective participant in or assignee
of, all or any part of the rights and obligations of such Agent or such Lender
under this Agreement or any Advances hereunder (provided that such attorney,
accountant, auditor, participant or assignee, or prospective participant or
assignee, agrees to comply with the confidentiality requirements set forth in
this Section 8.12).
SECTION 8.13. Termination. Except as otherwise provided in this Agreement
and the Notes and the other agreements and instruments executed pursuant hereto,
all rights and obligations hereunder and thereunder shall terminate when all
amounts payable under this Agreement, the Notes and such other agreements shall
have been paid in full and no Lender shall have any Commitment hereunder;
provided, however, that notwithstanding the foregoing the Borrower shall remain
liable for all of its obligations hereunder and thereunder to indemnify or
reimburse the Agent and the Lenders, including, without limitation, pursuant to
the provisions of Sections 2.12. 2.15 and 8.04 hereof.
SECTION 8.14. Jurisdiction, Etc. (a) Each of the parties hereto hereby
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any California State court or federal court of the
United States of America sitting in San Francisco, and any appellate court from
any thereof, in any action or proceeding arising out of or relating to this
Agreement or the Notes, or for recognition or enforcement of any judgment, and
each of the parties hereto hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be heard and
determined in any such California State or, to the extent permitted by law, in
such federal court. Each of the parties hereto agrees that a final nonappealable
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
or the Notes in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or
<PAGE>
57
relating to this Agreement or the Notes in any California State or federal
court. Each of the parties hereto hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
SECTION 8.15. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE
LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES OR THE ACTIONS OF THE
AGENT OR ANY LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR
ENFORCEMENT THEREOF.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
58
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SUN MICROSYSTEMS, INC.
By: /s/ Alton D. Page
----------------------------
Name: Alton D. Page
Title: Vice President & Treasurer
CITICORP USA, INC.,
as Administrative Agent
By:
----------------------------
Name:
Title:
CITICORP USA, INC.,
COMMITMENTS: as Lender
$41,000,000 By:
----------------------------
Name:
Title:
ABN AMRO BANK N.V.,
as Lender and Co-Agent
$36,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
<PAGE>
59
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Lender and Co-Agent
$36,000,000 By:
----------------------------
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK,
as Lender and Co-Agent
$36,000,000 By:
----------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.,
as Lender and Co-Agent
$36,000,000 By:
----------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
<PAGE>
60
BANKBOSTON, N.A.
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
BANQUE NATIONALE DE PARIS,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
BARCLAYS BANK PLC,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
<PAGE>
61
BAYERISCHE VEREINSBANK AG,
Los Angeles Agency, as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
CARIPLO-CASSA DI RISPARMIO
DELLE PROVINCIE LOMBARDE SPA,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
CORESTATES BANK, N.A.,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
<PAGE>
62
THE FUJI BANK, LIMITED,
San Francisco Agency, as Lender
$21,000,000 By:
----------------------------
Name:
Title:
THE INDUSTRIAL BANK OF
JAPAN, LIMITED,
San Francisco Agency, as Lender
$21,000,000 By:
----------------------------
Name:
Title:
THE NORTHERN TRUST COMPANY,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
ROYAL BANK OF CANADA,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
<PAGE>
63
THE SAKURA BANK, LIMITED,
San Francisco Agency, as Lender
$21,000,000 By:
----------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
San Francisco Branch, as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
THE SUMITOMO TRUST & BANKING
CO, LTD., Los Angeles Agency,
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
<PAGE>
64
THE TOYO TRUST AND BANKING
COMPANY LTD., New York Branch
as Lender
$21,000,000 By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
$500,000,000 Total Commitments
EXHIBIT 10.84
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
<PAGE>
SUN MICROSYSTEMS, INC.
U.S.
NON-QUALIFIED DEFERRED
COMPENSATION PLAN
(As Amended and Restated Effective October 1, 1997)
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purpose.................................................................2
2. Definitions.............................................................2
3. Eligibility.............................................................4
4. Election to Participate in Plan.........................................5
5. Accounts................................................................5
6. Deferral Increments and Growth..........................................5
7. Earnings or Losses on Accounts..........................................6
8. Certain Account Distributions After Completion of
Two Years of Plan Participation.........................................6
9. Statements..............................................................6
10. Form and Time of Payment of Accounts....................................7
11. Effect of Death of Participant..........................................7
12. General Duties of Trustee...............................................8
13. Withholding Taxes:......................................................9
14. Participant's Unsecured Rights..........................................9
15. Non-assignability of Interests..........................................9
16. Limitation of Rights....................................................9
17. Administration of the Plan..............................................9
18. Amendment or Termination of the Plan....................................9
19. Choice of Law and Claims Procedure.....................................10
20. Execution and Signature................................................11
<PAGE>
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
The Sun Microsystems, Inc. U.S. Non-Qualified Deferred Compensation Plan
(the "Plan"), effective July 1, 1995, is hereby amended and restated in its
entirety effective as of October 1, 1997 by Sun Microsystems, Inc. (the
"Company"), acting on behalf of itself and its designated subsidiaries.
Throughout, the term "Company" shall include wherever relevant any entity that
is directly or indirectly controlled by the Company or any entity in which the
Company has a significant equity or investment interest, as determined by the
Company.
RECITALS
1. The Company maintains the Plan, a deferred compensation plan for the
benefit of a select group of management or highly compensated employees of the
Company as well as members of the Company's Board of Directors.
2. Under the Plan, the Company is obligated to pay vested accrued benefits
to Plan participants and their beneficiary or beneficiaries ("Plan
Beneficiaries") from the Company's general assets.
3. The Company intends to enter into an agreement (the "Trust Agreement")
with a person or persons, including an entity, who shall serve as trustee (the
"Trustee") under an irrevocable trust, to be used in connection with the Plan.
4. The Company intends to make contributions to the Trust so that such
contributions will be held by the Trust and invested, reinvested and
distribution, all in accordance with this Plan and the Trust Agreement.
5. The Company intends that amounts allocated to the Trust and the earnings
thereon shall be used by the Trustee to satisfy the liabilities of the Company
under the Plan with respect to each Plan participant for whom an Account has
been established and such utilization shall be in accordance with the procedures
set forth herein.
6. The Company intends that the Trust be a "grantor trust" with the
principal and income of the Trust treated as assets and income of the Company
for federal and state income tax purposes.
7. The Company intends that the assets of the Trust shall at all times be
subject to the claims of the general creditors of the Company as provided in the
Trust Agreement.
<PAGE>
8. The Company intends that the existence of the Trust shall not alter the
characterization of the Plan as "unfunded" for purposes of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be
construed to provide income to Plan participants under the Plan prior to actual
payment of the vested accrued benefits hereunder.
NOW THEREFORE, the Company does hereby adopt this amended and restated Plan
as follows and does also hereby agree that the Plan shall be structured, held
and disposed of as follows:
1. Purpose: The Plan provides Participants an opportunity to defer payment of
a portion of:
o Employee salary and incentive bonus/commissions (for Sales Vice
Presidents and Directors);
o Employee annual bonus awards; and
o Board of Directors fees.
2. Definitions:
(a) Account means a bookkeeping account established pursuant to Section
5(a) for Compensation that is subject to a Participant's deferral election.
(b) Beneficiary means the person or persons designated by the Participant
or by the Plan under Section 11(b) to receive payment of the Participant's
Account in the event of the Participant's death.
(c) Board means the Board of Directors of the Company, as constituted from
time to time.
(d) Committee means the Benefits Plan Committee, appointed by the Board
from time to time.
(e) Company means Sun Microsystems, Inc.
(f) Compensation means:
(i) The amount of the Eligible Employee's base salary paid by the
Company or one of its subsidiaries; and
(ii) The amount paid by the Company or one of its subsidiaries to an
Eligible Employee as an annual corporate bonus award and any other
bonus/incentive award that is approved by the Committee as earnings that can be
deferred under the Plan (some incentive/bonus awards will not be eligible for
deferral); and
(iii) for Sales Vice Presidents and Directors, commissions; and
-2-
<PAGE>
(iv) In the case of an Eligible Board Member, the amount of his or her
director's fees from the Company, which includes only retainer payments.
Compensation does not include directors' expense reimbursements or meeting fees.
(g) Election Period means:
(i) Generally June of each year; and
(ii) For newly hired vice presidents, at the sole discretion of the
Benefits Plan Committee, may be eligible to enroll within thirty (30) days of
hire.
(iii) With respect to the Plan Restatement, September, 1997.
(h) Eligible Board Member means a member of the Board (other than a member
who is also an Eligible Employee).
(i) Eligible Employee means an officer of the Company or other common-law
employee of the Company or one of its subsidiaries who is designated under
Section 3.
(j) Participant means an Eligible Board Member or an Eligible Employee who
has elected to defer Compensation.
(k) Plan means this Sun Microsystems, Inc. U.S. Non-Qualified Deferred
Compensation Plan, as amended from time to time.
(l) Plan Restatement means the amendment and restatement of the Plan as
approved by the Board on August 13, 1997.
(m) Plan Restatement Effective Date means October 1, 1997.
(n) Retirement Date means the first day of the month coinciding with or
next day following the Participant's termination of employment following the
earlier of his or her:
(i) 65th birthday,
(ii) 60th birthday if the Participant has 5 years of Service,
(iii) 55th birthday it the Participant has 10 years of Service; or
(iv) 20th year anniversary of Service.
-3-
<PAGE>
(o) Service means:
(i) Employment as a common-law employee of the Company or one of its
subsidiaries; or
(ii) Period serving as an elected Board Member.
A Participant's Service shall be determined by the Committee in its sole
discretion.
(p) Total Disability means that the Participant is unable to engage in any
substantial gainful activity by reason of a medically determinable physical or
mental impairment which may result in Participant's death, or condition which
lasts, or may last, a continuous period of not less than twelve consecutive
months. Total Disability shall be determined by the Committee in its sole
discretion.
(q) Unforeseeable Emergency means a severe financial hardship to the
Participant resulting from:
(i) Sudden or unexpected illness or accident of either the Participant
or dependent of same, or
(ii) Loss of the Participant's property due to casualty or other
extraordinary and unforeseeable circumstances beyond the control of the
Participant.
Hardship shall not constitute an unforeseeable Emergency under the Plan to
the extent that it is, or may be, relieved by:
(i) Reimbursement or compensation, by insurance or otherwise;
(ii) Liquidation of the Participant's assets to the extent that the
liquidation of such assets would not itself cause severe financial hardship.
An Unforeseeable Emergency under the Plan does not include:
(i) Sending a child to college; or
(ii) Purchasing a home, per Rev. Proc. 95-64.
(r) Year means a calendar year unless otherwise noted.
3. Eligibility: Participation in the Plan is limited to Eligible Board
Members, and Eligible Employees, who are eligible to participate in the Plan if:
-4-
<PAGE>
(a) He or she is subject only to U.S. income taxes for the year in which
the deferral is effective; and
(b) He or she is an officer, or his or her position is approved as a
director level, or higher; or
(c) He or she has been designated expressly as an Eligible Employee by the
Committee.
If a Participant receives a distribution described in Section 10(c), the
Participant shall be ineligible to participate in the Plan for the balance of
the Plan Year in which the distribution occurs and the following Plan Year.
4. Election to Participate in Plan:
(a) Deferral Election. A Participant may elect to participate in the Plan
by filing a written "Deferred Compensation Election Form" with the Company
during any Election Period. Such election applies to applicable Compensation
paid in payroll periods commencing after the close of the Election Period. A new
election must be made for each Election Period. The Participant shall specify
any amount greater than or equal to the minimum deferral as described in Section
6(a). This can be expressed as a fixed dollar amount or as a percentage.
(b) Election Form. All deferral elections under this Section 4 shall be
made in a manner prescribed for this purpose by the Committee.
5. Accounts:
(a) Establishment of Account. The Company shall establish an Account for
each Participant who duly files a Deferred Compensation Election Form.
(b) Credits to Account. A Participant's Account shall be credited with an
amount equal to the percentage of each Compensation payment which would have
been payable currently to the Participant but for the terms of the Deferred
Compensation Election Form. Deferred Compensation for Participants shall be
credited to the Participant's Account as of the first day of the month in which
such deferred amounts would otherwise be paid to the Participant.
(c) Vesting. Participants shall at all times be 100% vested in their
deferrals under the Plan and all earnings allocable thereto.
6. Deferral Increments and Growth:
(a) The minimum deferral per year will be determined by the Committee.
-5-
<PAGE>
(b) The Participant who is an Eligible Employee may elect to defer (less
any withholding requirements)
(i) Up to 100% of any eligible annual bonus award
(ii) Up to 80% of base salary and incentive awards/commissions
(c) The Participant who is an Eligible Board Member may elect to defer
(less any withholding requirements), up to 100% of their retainer payments (to
be credited to the account quarterly).
7. Earnings or Losses on Accounts:
(a) General Rule. Subject to Section 7(c) below, the amount in a
Participant's Account shall be adjusted for gain or loss on the last day of each
month based on the performance of the investment options selected by the
Participant in accordance with Section 7(b). Gain or loss shall be computed as
if all amounts credited to the Account pursuant to Section 5(b) were credited as
of the first day of the month, and all amounts withdrawn from the Account were
withdrawn on the first day of the month.
(b) Designation of Investment Indices by the Committee. The Committee shall
specify two or more investment funds that shall serve as indices for the
investment performance of amounts credited to the Accounts. Accounts shall be
adjusted to reflect the gain or loss, net of any allocable costs or expenses,
such accounts would experience had they actually been invested in the specified
funds at the relevant times. The Committee may vary the available investment
funds from time to time, but not more frequently than quarterly. Subject to
Section 7(c), a participant may select his or her investment options for new
deferrals and contributions, or for amounts already credited to his or her
Account, once per calendar quarter effective as of the first day of the
following quarter using such form or forms as the Committee may specify.
(c) Pre-Plan Restatement Accounts. Notwithstanding anything in this Section
7 to the contrary, the balance in each Account as of the Plan Restatement Date
shall be credited quarterly to reflect interest earned on the deferral in an
amount determined by the Committee; provided, however, that Participants may
elect to have earnings and losses on such Accounts credited instead in
accordance with Section 7(a) and (b) after the Plan Restatement Date. Any such
election shall be made prior to the Plan Restatement Date in such form and
subject to such other terms and conditions as the Committee shall specify.
8. Certain In-Service Account Distributions.
(a) After Completion of Two Years of Plan Participation. Each Participant
may elect in his or her Deferred Compensation Election Form to have one or more
distributions of a specified percentage or dollar amount of his or her Account,
not more frequently than once in a Plan Year, commencing in his or her third
year of participation, provided that the Participant has not terminated his or
her Service
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with the Company. A Participant may delay once or cancel such distribution at
any time prior to the date which is one year prior to the calendar year in which
the originally scheduled distribution would take place, but such election is
otherwise irrevocable.
(b) Previously Scheduled In-Service Distributions. Elections in effect
prior to the Plan Restatement Date for in-service distributions prior to January
1, 2000 shall remain in full force and effect.
9. Statements: Quarterly, and/or at intervals determined by the Committee, the
Company shall prepare and deliver to each Participant a statement listing the
amount credited to such Account as of the applicable date.
10. Form and Time of Payment of Accounts:
(a) Timing and Method of Distribution of Accounts. In the event of a
Participant's termination of Service on or after his or her Retirement Date,
distribution of the value of the Participant's Account balance shall be made as
soon as practicable after such termination consistent with the form of
distribution specified on the Participant's Deferred Compensation Election Form.
Available forms shall include either a lump sum payment or a series of
installments. Accounts subject to installment payouts shall continue to be
adjusted for gains or losses in the same manner as active Accounts.
Notwithstanding the foregoing, the Participant who is receiving an installment
payout on or after his or her Retirement Date may request a lump sum
distribution of such Participant's Account. Any such lump sum distribution shall
be at the sole discretion of the Committee, and shall be reduced by a penalty
equal to ten percent (10%) of the amount otherwise distributable, which penalty
shall be forfeited to the Company. A Participant may modify his or her elected
form of distribution (i.e., lump sum or installments) at any time prior to the
date that is three years before his or her first post-employment distribution.
If a Participant modifies his or her elected form of distribution but his or her
first post- employment distribution is less than three years following the date
of the modification election, his or her prior elected form of distribution
shall apply.
If the Participant terminates his or her service with the Company prior to
his or her Retirement Date, (other than on account of death), he or she shall
receive the value of his or her Account in one lump sum payment as soon as
practicable after such termination.
If a Participant elects a distribution date prior to termination of
Service, the distribution will be paid as soon as reasonably practicable in a
lump sum after such distribution date.
(b) Disability or Emergency. In the event of Participant's Total Disability
or Unforeseeable Emergency, and upon application by such Participant, the
Committee may determine at its sole discretion that payment of all, or part, of
such participant's Account shall be made in a different manner, or on an earlier
date than the time or times specified in Subsection (a) above. Payments due to
Participant's Total Disability or Unforeseeable Emergency shall be permitted
only to the extent reasonably required to satisfy the Participant's need.
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(c) Early Distribution Penalty. Upon application by a Participant, the
Committee may determine at its sole discretion that payments from such
Participant's Account shall be made in a different manner, or on an earlier date
than the time or times specified in Subsection (a) above. All distributions
under this Subsection (c) shall be reduced by a penalty equal to 10 percent
(10%) of the amount otherwise distributable. The penalty is forfeited to the
Company. A Participant who receives a distribution under this Subsection (c) is
ineligible to participate in the Plan for the balance of the Plan Year in which
the distribution occurs and the following Plan Year.
11. Effect of Death of Participant:
(a) Distributions. In the event of a Participant's death while an Eligible
Employee or Eligible Board Member (except in the case of a Participant's suicide
during the first two years of their participation in the Plan), the
Participant's Account balance, together with an amount equal to two times the
sum of (i) the Participant's actual deferrals under the Plan after the Plan
Restatement Effective Date (exclusive of earnings), plus (ii) the Participant's
actual deferrals under the Plan before the Plan Restatement Effective Date
(exclusive of earnings) to the extent such deferrals are scheduled to be
distributed on or after January 1, 2000, shall be distributed to the
Participant's Beneficiary. In the event of (i) a Participant's death while no
longer an Eligible Employee or Eligible Board Member (as applicable), or (ii) a
Participant's suicide during the first two years of their participation in the
Plan, the Account balance, if any, shall be distributed to the Participant's
Beneficiary. Any distributions pursuant to this paragraph shall be made to the
Beneficiary in three annual installments or, at the request of the Beneficiary
and subject to the Committee's approval, in a single lump sum, commencing in
either case as soon as reasonably practicable after the Participant's death. If
installment payments are made, the remaining account balance (during the period
of the installment payouts) shall cease to be credited with earnings on the
investment chosen by the deceased Participant, and instead shall be credited
with earnings based on a fixed rate of interest.
(b) Beneficiary Designation. Upon enrollment in the Plan, each Participant
shall file a prescribed form with the Company naming a person or persons as the
Beneficiary who will receive distributions payable under the Plan in the event
of the Participant's death. If the Participant does not name a Beneficiary, or
if none of the named Beneficiaries is living at the time payment is due, then
the Beneficiary shall be:
(i) The spouse of the deceased Participant; or
(ii) The living children of the deceased participant, in equal shares,
if no spouse of the Participant is living; or
(iii) The estate of the Participant if neither spouse nor children of
Participant are living.
The Participant may change the designation of a Beneficiary at any time in
accordance with procedures established by the Committee. Designations of a
Beneficiary, or an amendment or revocation
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thereof, shall be effective only if made in the prescribed manner and received
by the Company prior to the Participant's death.
12. General Duties of Trustee:
(a) Trustee Duties. The Trustee shall manage, invest and reinvest the Trust
Fund as provided in the Trust Agreement. The Trustee shall collect the income on
the Trust Fund, and make distributions therefrom, all as provided in this Plan
and in the Trust Agreement.
(b) Company Contributions. While the Plan remains in effect, the Company
shall make contributions to the Trust Fund at least once each year. As soon as
practicable after the close of each calendar year, the Company shall make an
additional contribution to the Trust Fund to the extent that previous
contributions to the Trust Fund for the current calendar year are less than
total future liabilities (other than death benefits) created with respect to
Participants' Accounts as of the close of the current calendar year; provided
that, for 1997, contributions to the Trust Fund need only be sufficient based on
future liabilities created with respect to Participants' Accounts on and after
the Plan Restatement Effective Date. The Trustee shall not be liable for any
failure by the Company to provide contributions sufficient to pay all accrued
benefits under the Plan in accordance with the terms of this Plan.
13. Withholding Taxes: All distributions under the Plan shall be subject to
reduction in order to reflect withholding tax obligations imposed by law.
14. Participant's Unsecured Rights: The Account of any Participant, and such
Participant's right to receive distributions from his or her Account, shall be
considered an unsecured claim against the general assists of the Company; such
Accounts are unfunded bookkeeping entries. The Company considers the Plan to be
unfunded for tax purposes and for purposes of Title I of ERISA. No Participant
shall have an interest in, or make claim against, any specified asset of the
Company pursuant to the Plan.
15. Non-assignability of Interests: The interest of a Participant under the
Plan is not subject to option nor assignable by either voluntary or involuntary
assignment or by operation of law, including without limitation to: bankruptcy,
garnishment, attachment or other creditor's process. Any act in violation of
this Section 15 shall make the Plan void.
16. Limitation of Rights:
(a) Bonuses. Nothing in this Plan shall be construed to give any Eligible
Employee any right to be granted a bonus award.
(b) Employment Rights. Neither the Plan nor deferral of any Compensation,
nor any other action taken pursuant to the Plan, shall constitute, or be
evidence of, any agreement or understanding, express or implied, that the
Company or any of its subsidiaries will employ an Eligible Employee for any
period of time, in any position at any particular rate of compensation. The
Company and its
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subsidiaries reserve the right to terminate an Eligible Employee's Service at
any time for any reason, except as otherwise expressly provided in a written
employment agreement.
17. Administration of the Plan: The Plan shall be administered by the
Committee. The Committee shall have full power and authority to administer,
interpret, establish procedures for administering the Plan, prescribe forms, and
take any and all necessary actions in connection with the Plan. The Committee's
interpretation and construction of the Plan shall be conclusive and binding on
all persons. The Committee may appoint a plan administrator or any other agent
and delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time prescribe. In
the event that any Participants are found to be ineligible, that is, not members
of a select group of management or highly compensated employees, according to a
determination made by the U.S. Department of Labor, the Committee shall take
whatever steps it deems necessary, in its sole discretion, to equitably protect
the interests of the affected Participants.
18. Amendment or Termination of the Plan: The Board may amend, suspend, or
terminate the Plan at any time; provided, however, that no such action shall
reduce a Participant's Account under the Plan without the Participant's written
consent. In the event of termination of the Plan, the Accounts of Participants
shall continue to be credited with earnings until distributed pursuant to
Section 10, unless the Board prescribes an earlier time or different manner for
the payment of such Accounts. Without limiting the generality of the foregoing,
termination of the Plan following Change in Control shall constitute an event
giving rise to distribution of Accounts. In such event, the Company shall pay
all Account balances in a lump sum or in annual installments over three years
(with earnings), in its discretion, to Participants and Beneficiaries of
deceased Participants; and all deferrals and payment of benefits except as
provided above shall cease. For purposes of this Plan, the term "Change in
Control" shall mean the purchase or acquisition by any person, entity or group
of persons, within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Act) of 30% or more of either the outstanding shares of
common stock or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally, where the approval by the
stockholders of the Company or a reorganization, merger or consolidation, in
each case with respect to which persons who are stockholders of the Company
immediately prior to such reorganization, merger or consolidation do not,
immediately thereafter, own more than 50% of the combined voting power entitled
to vote generally in the election of directors of the reorganized, merged or
consolidated Company's then outstanding securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially all of the
Company's assets.
19. Choice of Law and Claims Procedure:
(a) Choice of Law. The validity, interpretation, construction and
performance of the Plan shall be governed by ERISA, and, to the extent that they
are not preempted, by the laws of the State of California, excluding
California's choice-of-law provisions.
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<PAGE>
(b) Claims and Review Procedure. In accordance with the regulations of the
U.S. Secretary of Labor, the Committee shall:
(i) Provide adequate notice in writing to any Participant or
Beneficiary whose claim for benefits under the Plan has been denied. Specific
reasons for such denial must be presented in a clear and precise manner intended
to be easily understood by such Participant or Beneficiary, and
(ii) Afford a reasonable opportunity for a full and fair
review before the Board to any Participant or Beneficiary whose claim for
benefits has been denied.
20. Execution and Signature: To record the adoption of the Plan by the Board,
the Company has caused its duly authorized officer to affix the corporate name
hereto:
SUN MICROSYSTEMS, INC.
By:__________________________________
Authorized Company Officer
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EXHIBIT 10.87
SUN MICROSYSTEMS, INC.
EQUITY COMPENSATION ACQUISITION PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to eligible Employees and
Consultants, and
o to promote the success of the Company's business.
Nonstatutory Stock Options and Stock Purchase Rights may be granted under
the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights are, or
will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in accordance
with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Sun Microsystems, Inc., and any entity that is
directly or indirectly controlled by the Company, or any entity in which the
Company has a significant equity interest, as determined by the Administrator.
(h) "Consultant" means any person, including an advisor, engaged by the
Company to render services and who is compensated for such services, provided
that the term "Consultant" shall not include any person who is also an officer
or Director of Sun Microsystems, Inc.
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(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person employed by the Company other than any
person who is an officer or Director of Sun Microsystems, Inc.
(l) "Fair Market Value" means, as of any date, the closing sales price
for such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable.
(m) "Nonstatutory Stock Option" means an Option not intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(n) "Notice of Grant" means a written notice evidencing certain terms
and conditions of an individual Option or Stock Purchase Right grant. The Notice
of Grant is part of the Option Agreement or of the Restricted Stock Purchase
Agreement.
(o) "Option" means a stock option granted pursuant to the Plan.
(p) "Option Agreement" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(q) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(r) "Optionee" means an Employee or Consultant who holds an outstanding
Option or Stock Purchase Right.
(s) "Plan" means this Equity Compensation Acquisition Plan.
(t) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 below.
(u) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
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(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(w) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,120,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated). In addition, if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the Board or
(ii) a Committee designated by the Board, which Committee shall be constituted
to satisfy Applicable Laws. Once appointed, such Committee shall serve in its
designated capacity until otherwise directed by the Board. The Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(v) to approve forms of agreement for use under the Plan;
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(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options or Stock Purchase Rights may be exercised (which may be based
on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or Stock
Purchase Right or the shares of Common Stock relating thereto, based in each
case on such factors as the Administrator, in its sole discretion, shall
determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(ix) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(b) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. If otherwise eligible, an Employee or
Consultant who has been granted an Option or Stock Purchase Right may be granted
additional Options or Stock Purchase Rights. Notwithstanding anything to the
contrary contained in the Plan, Option and Stock Purchase Rights may not be
granted to officers or Directors under this Plan.
6. Limitations. Neither the Plan nor any Option or Stock Purchase Right
shall confer upon an Optionee any right with respect to continuing the
Optionee's employment or consulting relationship with the Company, nor shall
they interfere in any way with the Optionee's right or the Company's right to
terminate such employment or consulting relationship at any time, with or
without cause.
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<PAGE>
7. Term of Plan. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect until terminated under Section 15 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the Notice of
Grant.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
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<PAGE>
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 13 of the
Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment. Upon termination of an Optionee's status
as an Employee or Consultant (other than as a result of the Optionee's death or
Disability), the Optionee may exercise his or her Option, but only within such
period of time from the date of such termination as is determined by the
Administrator and, unless determined otherwise by the Administrator, only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). To the extent that Optionee was
not entitled to exercise an Option at the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, the Optionee's
status as an Employee or Consultant shall not automatically terminate solely as
a result of such change in status.
(c) Disability of Optionee. Upon termination of an Optionee's status as
an Employee or Consultant as a result of the Optionee's Disability, the Optionee
may exercise his or her Option,
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<PAGE>
but only within six (6) months or such time period as the Administrator shall
specify from the date of such termination, and, unless determined otherwise by
the Administrator, only to the extent that the Optionee was entitled to exercise
it at the date of such termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). To the extent
that Optionee was not entitled to exercise an Option at the date of such
termination, and to the extent that the Optionee does not exercise such Option
(to the extent otherwise so entitled) within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(d) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the deceased
Optionee's Option by bequest or inheritance may exercise the Option, but only
within six (6) months or such time period as the Administrator shall specify
following the date of death, and, unless determined otherwise by the
Administrator, only to the extent that the Optionee was entitled to exercise it
at the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). To the extent that Optionee
was not entitled to exercise an Option at the date of death, and to the extent
that the Optionee's estate or a person who acquired the right to exercise such
Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing, by means of a Notice of Grant, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
offeree shall be entitled to purchase, the price to be paid (which price shall
not be less than the per value of the Company's Common Stock, as adjusted from
time to time, and the minimum price permitted by the Delaware General
Corporation Law), and the time within which the offeree must accept such offer.
The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the
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Administrator in its sole discretion. In addition, the provisions of Restricted
Stock Purchase Agreements need not be the same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. An Option or
Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner
-8-
<PAGE>
contemplated. To the extent it has not been previously exercised, an Option will
terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right will be assumed or
an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation (the "Successor Corporation"),
unless the Successor Corporation refuses to assume or substitute for the Option
or Stock Purchase Right, in which case the Optionee shall have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be exercisable. If an Option
or Stock Purchase Right is exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee that the Option or Stock Purchase Right shall be fully exercisable for
a period of thirty (30) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets was not solely
Common Stock of the Successor Corporation, the Administrator may, with the
consent of the Successor Corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
Common Stock of the Successor Corporation equal in fair market value to the per
share consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise
-9-
<PAGE>
between the Optionee and the Administrator, which agreement must be in writing
and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, Applicable Laws, and the requirements of any stock
exchange or quotation system upon which the Shares may then be listed or quoted,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Liability of Company. The inability of the Company to obtain authority
from any regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not have
been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-10-
<TABLE>
EXHIBIT 11.0
SUN MICROSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
PRIMARY
- -------
<CAPTION>
YEARS ENDED
JUNE 30,
--------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Net income $762,420 $476,388 $355,842
Weighted average common shares outstanding 368,426 371,134 382,864
Common equivalent shares attributable to the following:
Stock options and warrants 20,541 22,246 10,836
Total common and common equivalent shares
outstanding 388,967 393,380 393,700
---------------------------------------
Net income per common and common
equivalent share $ 1.96 $ 1.21 $ 0.91
=======================================
</TABLE>
27
<PAGE>
<TABLE>
Fully Diluted
- -------------
<CAPTION>
YEARS ENDED
JUNE 30,
--------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Net income $762,420 $476,388 $355,842
Weighted average common shares outstanding 368,426 371,134 382,864
Common equivalent shares attributable to the following:
Stock options and warrants 21,053 23,112 11,570
Total common and common equivalent shares
outstanding 389,479 394,246 394,434
---------------------------------------
Net income per common and common
equivalent share $ 1.96 $ 1.21 $ 0.91
=======================================
</TABLE>
27
<TABLE>
HISTORICAL FINANCIAL REVIEW OF SUN MICROSYSTEMS, INC.
Summary Consolidated Statements of Income Years Ended June 30,
<CAPTION>
(In millions, except per share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars % Dollars % Dollars % Dollars % Dollars %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 8,598 100.0 $ 7,095 100.0 $ 5,902 100.0 $ 4,690 100.0 $ 4,309 100.0
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 4,320 50.2 3,921 55.3 3,336 56.5 2,753 58.7 2,518 58.4
Research and development 826 9.6 653 9.2 563 9.5 500 10.7 445 10.3
Selling, general and administrative 2,402 27.9 1,788 25.2 1,503 25.5 1,160 24.7 1,105 25.7
Nonrecurring charges 23 0.3 58 0.8 -- -- -- -- -- --
Total costs and expenses 7,571 88.0 6,420 90.5 5,402 91.5 4,413 94.1 4,068 94.4
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 1,027 12.0 675 9.5 500 8.5 277 5.9 241 5.6
Gain on sale of equity investment 62 0.7 -- -- -- -- -- -- -- --
Interest income (expense), net 32 0.4 34 0.5 23 0.4 6 0.1 (2) --
Litigation settlement -- -- -- -- -- -- -- -- (15) (0.4)
Income before income taxes 1,121 13.1 709 10.0 523 8.9 283 6.0 224 5.2
Provision for income taxes 359 4.2 232 3.3 167 2.8 87 1.8 67 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 762 8.9 $ 477 6.7 $ 356 6.1 $ 196 4.2 $ 157 3.6
Net income per share $ 1.96 $ 1.21 $ 0.91 $ 0.50 $ 0.37
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common-
equivalent shares outstanding 389 393 394 388 420
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars % Dollars % Dollars % Dollars % Dollars %
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 3,589 100.0 $ 3,221 100.0 $ 2,466 100.0 $ 1,765 100.0 $ 1,052 100.0
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,963 54.7 1,758 54.6 1,399 56.7 1,010 57.2 551 52.3
Research and development 382 10.6 356 11.1 302 12.2 234 13.3 140 13.3
Selling, general and administrative 983 27.4 812 25.2 588 23.9 433 24.5 250 23.8
Nonrecurring charges -- -- -- -- -- -- -- -- -- --
Total costs and expenses 3,328 92.7 2,926 90.9 2,289 92.8 1,677 95.0 941 89.4
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 261 7.3 295 9.1 177 7.2 88 5.0 111 10.6
Gain on sale of equity investment -- -- -- -- -- -- -- -- -- --
Interest income (expense), net (6) (0.2) (11) (0.3) (23) (0.9) (10) (0.6) -- (0.1)
Litigation settlement -- -- -- -- -- -- -- -- -- --
Income before income taxes 255 7.1 284 8.8 154 6.3 78 4.4 111 10.5
Provision for income taxes 82 2.3 94 2.9 43 1.8 17 1.0 45 4.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 173 4.8 $ 190 5.9 $ 111 4.5 $ 61 3.4 $ 66 6.3
Net income per share $ 0.43 $ 0.47 $ 0.30 $ 0.19 $ 0.22
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common-
equivalent shares outstanding 406 412 378 340 312
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
Operating and Capitalization Data Years Ended June 30,
<CAPTION>
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets (millions) $ 4,697 $ 3,801 $ 3,545 $ 2,898 $ 2,768 $ 2,672
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt and other obligations (millions) $ 106 $ 60 $ 91 $ 122 $ 178 $ 348
- ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 2.0 2.0 2.2 2.0 2.4 2.6
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt-to-equity ratio 0.015 0.018 0.039 0.075 0.11 0.23
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average equity 31% 22% 19% 12% 10% 13%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average capital 30% 23% 18% 12% 9% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 18% 13% 11% 7% 6% 7%
- ------------------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 32% 33% 32% 33% 30% 32%
- ------------------------------------------------------------------------------------------------------------------------------------
Average shares and equivalents (thousands) 388,967 393,380 393,700 387,056 420,500 406,560
- ------------------------------------------------------------------------------------------------------------------------------------
Book value per outstanding share $ 7.40 $ 6.05 $ 5.39 $ 4.34 $ 4.03 $ 3.72
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets (millions) $ 2,326 $ 1,779 $ 1,269 $ 757
- --------------------------------------------------------------------------------------------------
Long-term debt and other obligations (millions) $ 401 $ 359 $ 145 $ 127
- --------------------------------------------------------------------------------------------------
Current ratio 2.5 2.6 1.9 2.1
- --------------------------------------------------------------------------------------------------
Long-term debt-to-equity ratio 0.33 0.39 0.22 0.34
- --------------------------------------------------------------------------------------------------
Return on average equity 18% 14% 12% 22%
- --------------------------------------------------------------------------------------------------
Return on average capital 13% 11% 9% 15%
- --------------------------------------------------------------------------------------------------
Return on average assets 9% 7% 6% 10%
- --------------------------------------------------------------------------------------------------
Effective income tax rate 33% 28% 22% 40%
- --------------------------------------------------------------------------------------------------
Average shares and equivalents (thousands) 412,268 377,476 340,664 311,520
- --------------------------------------------------------------------------------------------------
Book value per outstanding share $ 3.15 $ 2.51 $ 1.97 $ 1.28
- --------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth items from Sun's Consolidated Statements of
Income as a percentage of net revenues:
1997 1996 1995
- -------------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 50.2 55.3 56.5
- -------------------------------------------------------------------------
Gross margin 49.8 44.7 43.5
Research and development 9.6 9.2 9.5
Selling, general and administrative 27.9 25.2 25.5
Nonrecurring charges 0.3 0.8 --
- -------------------------------------------------------------------------
Operating income 12.0 9.5 8.5
Gain on sale of investment 0.7 -- --
Interest income, net 0.4 0.5 0.4
- -------------------------------------------------------------------------
Income before income taxes 13.1 10.0 8.9
Provision for income taxes 4.2 3.3 2.8
- -------------------------------------------------------------------------
Net income 8.9% 6.7% 6.1%
- -------------------------------------------------------------------------
This Annual Report, including the following section, contains forward-looking
statements within the meaning of the Private Securities Reform Act of 1995,
particularly statements regarding market opportunities, market share growth,
competitive growth, new product introductions, success of research and
development, research and development expenses, customer acceptance of new
products, gross margin, and marketing and general and administrative expenses.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below, specifically those contained in "Future
operating results," identify important factors that could cause actual results
to differ materially from those in any such forward-looking statements. Such
factors include, but are not limited to, adverse changes in general economic
conditions, including changes in the specific markets for the Company's
products, adverse business conditions, decreased or lack of growth in the
computing industry, adverse changes in customer order patterns, increased
competition, lack of acceptance of new products, pricing pressures, lack of
success in technological advancements, risks associated with foreign operations
and other factors, including those listed below.
Results of operations
Net revenues
Sun's net revenues increased $1,504 million, or 21%, to $8,598 million in fiscal
1997, compared with an increase of $1,193 million, or 20%, in fiscal 1996. Over
75% of the increase in net revenues in fiscal 1997 was due to the strong demand
experienced by Sun throughout the fiscal year for its workgroup servers,
departmental servers, enterprise servers, and high-end desktop systems. In
addition, the increase in net revenues resulted from memory, storage options,
and accessories shipped to both new and installed-base customers purchasing more
richly configured systems. Revenues from other Sun businesses, including
service, microprocessors, and software, in total increased slightly as a
percentage of net revenues and increased approximately 30% in absolute dollars
during fiscal 1997. The increase in net revenues in fiscal 1996 over fiscal 1995
was primarily attributable to increased shipments of richly configured servers,
and higher revenues from memory, storage options, and accessories.
In fiscal 1997 and fiscal 1996, domestic net revenues grew by 25% and 20%,
respectively, while international net revenues (including United States exports)
grew 17% and 21%, respectively. Revenues from international operations
represented 49% in fiscal 1997 and 50% in fiscal 1996 and 1995 of total net
revenues.
20
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
European net revenues increased 20% in fiscal 1997, primarily due to continued
market acceptance of Sun's network computing products and services in the United
Kingdom, parts of northern Europe, and Germany.
Japan net revenues increased 3% for fiscal 1997, compared to an increase of 13%
in fiscal 1996. The Company attributes the decrease in the growth of revenues
from 13% in fiscal 1996 to 3% in fiscal 1997 to current economic trends
affecting the Japanese market, including currency movements against the U.S.
dollar, which the Company does not expect to change materially in the near term.
If the economic trends in Japan significantly worsen in a quarter or decline
over an extended period of time, the Company's results from operations and cash
flows would be adversely affected.
Net revenues in Rest of World increased by 29% in fiscal 1997, compared with 28%
in fiscal 1996, primarily due to expanding markets in China, Korea, and Latin
America.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. As a result, the Company's results could be
significantly adversely affected by factors such as changes in foreign currency
exchange rates or real economic conditions in the foreign markets in which the
Company distributes its products. The Company is primarily exposed to changes in
exchange rates on the Japanese yen, British pound sterling, French franc, and
German deutsche mark. When the U.S. dollar strengthens against these currencies,
the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S.
dollar weakens against these currencies, the U.S. dollar value of non-U.S.
dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S.
dollar-based costs increases when the U.S. dollar weakens and decreases when the
U.S. dollar strengthens. Overall, the Company is a net receiver of currencies
other than the U.S. dollar and, as such, benefits from a weaker dollar and is
adversely affected by a stronger dollar relative to major currencies worldwide.
Accordingly, changes in exchange rates, and in particular a strengthening of the
U.S. dollar, may adversely affect the Company's consolidated sales and gross
margins as expressed in U.S. dollars.
To mitigate the short-term effect of changes in currency exchange rates on the
Company's non-U.S. dollar-based sales, product procurement, and operating
expenses, the Company regularly hedges its net non-U.S. dollar-based exposures
by entering into foreign exchange forward and option contracts to hedge
anticipated transactions. Currently, hedges of transactions do not extend beyond
three months. Given the short term nature of the Company's foreign exchange
forward and option contracts, the Company's exposure to risk associated with
currency market movements on the instruments in place at year end is not
material. See "Other Financial Instruments" in Note 1 of the "Notes to
Consolidated Financial Statements" for more details. Compared with fiscal 1996,
the dollar in fiscal 1997 has strengthened against the Japanese yen and most
major European currencies. Management has estimated that the net impact of
currency fluctuations on operating results, while slightly unfavorable, was not
significant in any of the fiscal years in the three-year period ended June 30,
1997.
Gross margin
Gross margin was 49.8% for fiscal 1997, compared with 44.7% and 43.5% for fiscal
1996 and 1995, respectively. Over half of the increase in gross margin resulted
from sales of more richly configured, higher margin servers and desktop systems.
The increase also resulted partly from the aggregate effect of revenue increases
in other Sun businesses.
The factors described above resulted in a favorable impact on gross margin. 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
higher volumes.
Between fiscal 1995 and fiscal 1996, gross margin increased slightly. Increased
revenues from higher margin servers and desktop systems had a favorable impact
on gross margin in fiscal 1996.
Research and development
Research and development (R&D) expenses increased $173 million, or 26.5%, in
fiscal 1997 to $826 million, compared with an increase of $90 million, or 16.0%,
in fiscal 1996. As a percentage of
21
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
net revenues, R&D expenses were 9.6%, 9.2% and 9.5% in fiscal 1997, 1996, and
1995, respectively. R&D spending continued at a substantial level throughout the
three-year period ended June 30, 1997, as the Company invested in specific
projects in support of new software and hardware product introductions and
continued development of the SPARC(TM) microprocessor product line.
Approximately half of the dollar increase in R&D expenses in fiscal 1997
reflects development of hardware and software products that utilize the Java
architecture and new server and storage products. The remaining increase in
dollar amount of such expenses is primarily attributable to continued
development of UltraSPARC systems, further development of products obtained
through acquisitions, and increased compensation due primarily to higher levels
of staffing. The increase as a percentage of net revenues reflects the Company's
belief that to maintain its competitive position in a market characterized by
rapid rates of technological advancement, the Company must continue to invest
significant resources in new systems, software, and microprocessor development,
as well as in enhancements to existing products.
Selling, general and administrative
Selling, general and administrative (SG&A) expenses increased $615 million, or
34.4%, in fiscal 1997 to $2,402 million compared with an increase of $285
million, or 18.9%, in fiscal 1996. As a percentage of net revenues, these
expenses were 27.9%, 25.2%, and 25.5% in fiscal 1997, 1996, and 1995,
respectively. Approximately half of the dollar increase is attributable to
increased marketing costs related to new product introductions and other
promotional programs, and an increase in compensation resulting primarily from
higher levels of marketing and sales head count. The dollar increase also
reflects investments aimed at improving Sun's own business processes. The dollar
increase in fiscal 1996 resulted primarily from increased marketing costs,
compensation, and investments in demand-creation programs. The increase as a
percentage of net revenues in fiscal 1997 reflects, in part, the Company's
ongoing efforts to expand its demandcreation programs and service and support
organizations. In fiscal 1998, the Company expects to continue to invest in
efforts to achieve additional operating efficiencies through the continual
review and improvement of business processes. In addition, the Company expects
to continue to hire personnel to drive its demand-creation programs and service
and support operations.
Nonrecurring Charges
Nonrecurring charges represents charges for purchased in-process research and
development associated with the Company's acquisition of Long View Technologies,
LLC, Integrated Micro Products plc, and Lighthouse Design, Ltd. See
"Acquisitions" in Note 2 of the "Notes to Consolidated Financial Statements" for
additional information.
Gain on sale of equity investment
The gain on sale of equity investment represents the net proceeds from the sale
of the Company's equity investment in Iona Technologies, plc.
Interest income (expense), net
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on the Company's cash equivalents and
short-term investments as well as interest paid on its short-term and long-term
borrowings. To mitigate the impact of fluctuations in U.S. interest rates, the
Company has entered into an interest rate swap transaction. This swap is
intended to better match the Company's floating-rate interest income on its cash
equivalents and short-term investments with the interest expense on its
long-term debt.
Net interest income decreased to $32.4 million in fiscal 1997, compared with
$33.9 million and $22.9 million in fiscal 1996 and fiscal 1995, respectively.
The decrease in net interest income for fiscal 1997 is primarily the result of
lower interest earnings due to a smaller average portfolio of cash and
investments as compared to the corresponding period in fiscal 1996. The growth
in net interest income for fiscal 1996, as compared to fiscal 1995, was
primarily the result of interest savings from reduced debt levels and an
increase in the effective interest rate earned on investments.
The principal/notional amount of the Company's cash equivalents and short-term
investments, which
22
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
bear interest rate risk, by year of expected maturity and average interest rate
are as follows:
At June 30, 1997
1998 1999 Total Fair Value
- --------------------------------------------------------------------------------
Cash equivalents and short-term
investments $643.8 $ 52.6 $696.4 $696.6
- --------------------------------------------------------------------------------
Average interest rate 5.2% 5.5% -- --
- --------------------------------------------------------------------------------
Income taxes
The effective tax rate for fiscal 1997 was 32%. The effective tax rate for
fiscal 1996 was 32% before a $5.7 million tax charge resulting from a
nonrecurring write-off of in-process research and development associated with
the acquisition of Lighthouse Design, Ltd. The effective tax rate for 1995 was
also 32%.
The Company currently expects its tax rate to increase to approximately 33% for
fiscal 1998. The estimate is based on current tax law and current estimate of
earnings, and is subject to change.
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 that 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 Co., 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, whose products are 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 introduction of its own enhanced products. The Company expects this
pressure to continue and intensify into 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.
23
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
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 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 Company's
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
processor-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 and third 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 complementary technologies,
products, or businesses. As part of this process, the Company will continue to
evaluate the changing value of its assets, and when necessary, make adjustments
thereto.
In order to remain competitive in a rapidly-changing industry, the Company is
continually improving and changing its business practices, processes, and
information systems. In this regard, the Company has begun to implement a number
of new business practices and a series of related information systems; such
activities are currently planned to be fully operational in the first half of
fiscal year 1999. Implementing a number of new business practices and
information systems is a complex process, affecting numerous operational and
financial systems and processes as well as requiring comprehensive employee
training. While the Company tests these new systems and processes in advance of
implementation, there are inherent limitations in the Company's ability to
simulate a full-scale operating environment in advance of system cutover. To the
extent that the Company encounters problems after introduction of these new
systems and practices that prevent or limit their full utilization, there could
be a material, adverse impact on the Company's operating results.
24
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
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
The Company's financial condition strengthened as of fiscal 1997 year end when
compared with fiscal 1996. During fiscal 1997, operating activities generated
$1,105 million in cash and cash equivalents, compared with $688 million in
fiscal 1996. Accounts receivable increased $335 million, or 27%, to $1,667
million, due primarily to a 26% increase in net revenues in the fourth quarter
of fiscal 1997 as compared with the corresponding period of 1996. Deferred tax
assets, and other current and noncurrent assets increased $70 million, or 12%,
to $680 million, due primarily to the timing of payments for income and other
taxes. Accrued payroll-related liabilities, accrued liabilities, and other
increased $288 million, or 26%, due in part to increases in compensation, sales,
and marketing costs. Accounts payable increased $144 million, or 44%, due in
part to additional operating expenses associated with the expansions of business
and corresponding increases in head count.
The Company's investing activities used $543 million of cash in fiscal 1997, an
increase of $418 million from the $125 million used in fiscal 1996. The increase
resulted primarily from the Company investing more of the fiscal 1997 net
operating cash flow in cash equivalents and less in short-term investments.
Additions to property, plant and equipment, totaled $554 million, up $258
million, or 87%, from fiscal 1996 additions, primarily due to the purchase of
Phase II of the campus located in Menlo Park, California, additions to support
increased marketing and tradeshow programs, and capital additions to support
increased head count. In association with the acquisition of Encore Computer
Corporation and other acquisitions expected to be completed, contingent upon the
completion of various closing conditions, in the first and second quarters of
fiscal 1998, the Company expects to record in-process research and development
write-offs that are not likely to exceed $160 million. In addition, the Company
plans to expend $300 to $600 million during fiscal 1998 associated with the
development of additional campuses in Colorado, Massachusetts, and California.
Approximately $430 million of cash was used by financing activities in fiscal
1997, compared with $449 million used in fiscal 1996. This change is primarily
due to a reduction in the dollar value of shares repurchased from $522 million
for fiscal 1996 to $456 million for fiscal 1997, retirement of the receivable
purchase agreement of $125 million and additional short-term borrowings of $52
million.
The Company's exposure to interest rate risk on the $40 million mortgage loan,
due in May 1999, and the international short-term borrowings of $101 million is
not material, given the short-term maturity of these instruments and the
Company's evaluation of the potential for rate changes associated with such
instruments. The Company has entered into an interest rate swap agreement
(exchanging a fixed rate for variable) related to the $40 million mortgage loan.
The potential impact of this swap arrangement on the Company's mortgage loan
interest rate is not expected to be material.
At June 30, 1997, the Company's primary sources of liquidity consisted of cash,
cash equivalents, and short-term investments of $1,113 million and a revolving
credit facility with banks aggregating $300 million, which was available subject
to compliance with certain covenants, and $440 million of borrowings under
available lines of credit to the Company's international subsidiaries. The
Company believes that the liquidity provided by existing cash and short-term
investment balances and the borrowing arrangements described above may have to
be supplemented with additional resources to provide sufficient capital to meet
the Company's requirements through fiscal 1998. 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.
25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30,
(In thousands, except share and
per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Net revenues $8,598,346 $7,094,751 $5,901,885
Cost and expenses:
Cost of sales 4,320,460 3,921,228 3,335,610
Research and development 825,968 653,044 562,895
Selling, general and administrative 2,402,442 1,787,567 1,503,024
Nonrecurring charges 22,958 57,900 --
- --------------------------------------------------------------------------------
Total costs and expenses 7,571,828 6,419,739 5,401,529
Operating income 1,026,518 675,012 500,356
Gain on sale of equity investment 62,245 -- --
Interest income 39,899 42,976 40,778
Interest expense (7,455) (9,114) (17,836)
- --------------------------------------------------------------------------------
Income before income taxes 1,121,207 708,874 523,298
Provision for income taxes 358,787 232,486 167,456
- --------------------------------------------------------------------------------
Net income $ 762,420 $ 476,388 $ 355,842
- --------------------------------------------------------------------------------
Net income per common
and common-equivalent share $ 1.96 $ 1.21 $ 0.91
- --------------------------------------------------------------------------------
Common and common-equivalent
shares used in the calculation of
net income per share 388,967 393,380 393,700
- --------------------------------------------------------------------------------
See accompanying notes.
26
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At June 30,
(In thousands, except share and per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 660,170 $ 528,854
Short-term investments 452,590 460,743
Accounts receivable, net of allowances for
price protection, cooperative marketing programs,
and bad debts of $196,091 in 1997 and $100,730 in 1996 1,666,523 1,206,612
Inventories 437,978 460,914
Deferred tax assets 286,720 177,554
Other current assets 224,469 199,059
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 3,728,450 3,033,736
Property, plant and equipment:
Machinery and equipment 1,057,239 928,361
Furniture and fixtures 93,078 69,059
Leasehold improvements 166,745 91,052
Land and buildings 341,279 193,912
- ------------------------------------------------------------------------------------------------------------------------------------
1,658,341 1,282,384
Accumulated depreciation and amortization (858,448) (748,535)
- ------------------------------------------------------------------------------------------------------------------------------------
799,893 533,849
Other assets, net 168,931 233,324
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4,697,274 $ 3,800,909
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 100,930 $ 49,161
Accounts payable 468,912 325,067
Accrued payroll-related liabilities 337,412 282,778
Accrued liabilities and other 625,600 518,772
Deferred service revenues 197,616 140,157
Income taxes payable 118,568 134,934
Current portion of long-term debt -- 38,400
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,849,038 1,489,269
Long-term debt and other obligations 106,299 60,154
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.00067 par value, 950,000,000 shares
authorized; issued: 430,535,886 shares in 1997 and
426,320,118 shares in 1996 288 72
Additional paid-in capital 1,229,797 1,164,349
Retained earnings 2,409,850 1,662,355
Treasury stock, at cost: 60,050,380 shares in 1997 and
54,355,876 shares in 1996 (915,426) (596,910)
Currency translation adjustment and other 17,428 21,620
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,741,937 2,251,486
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4,697,274 $ 3,800,909
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended June 30,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 762,420 $ 476,388 $ 355,842
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 341,727 284,083 240,626
Gain on sale of equity investment (62,245) -- --
Tax benefit of options exercised 63,825 53,000 20,837
Other non-cash items 33,208 68,358 2,482
Net increase in receivables (334,911) (160,238) (188,773)
Net decrease (increase) in inventories 22,936 (135,742) (24,724)
Net increase (decrease) in accounts payable 143,845 17,275 (59,833)
Net increase in other current and non-current assets (152,510) (43,701) (2,006)
Net increase in other current and non-current liabilities 286,793 128,891 293,043
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 1,105,088 688,314 637,494
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property, plant and equipment (554,018) (295,638) (242,436)
Acquisition of other assets (37,645) (83,889) (68,089)
Acquisition of short-term investments (973,884) (1,301,798) (3,470,614)
Payment for acquisitions (22,958) (96,100) --
Proceeds from sale of equity investment 62,245 -- --
Maturities of short-term investments 634,765 1,424,324 2,300,824
Sales of short-term investments 347,771 228,377 804,862
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (543,724) (124,724) (675,453)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Issuance of stock, net of employee repurchases 52,969 59,554 79,613
Acquisition of treasury stock (456,090) (522,336) (36,107)
Proceeds from employee stock purchase plans 81,313 54,840 42,750
Proceeds (reduction) of short-term borrowings, net 51,769 (1,625) (27,901)
Retirement of receivable purchase agreement (125,000) -- --
Reduction of long-term borrowings and other (35,009) (39,038) (40,464)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used by) provided from financing activities (430,048) (448,605) 17,891
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 131,316 114,985 (20,068)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 528,854 413,869 433,937
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 660,170 $ 528,854 $ 413,869
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash-flow information:
Cash paid during the period for:
Interest $ 15,126 $ 18,140 $ 14,229
Income taxes $ 380,814 $ 193,461 $ 113,999
Supplemental schedule of non-cash investing and financing activities:
The Company purchased all of the assets of Integrated Micro Products plc during
fiscal 1996. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired -- $ 101,500 --
Cash paid for assets -- (96,100) --
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities assumed -- $ 5,400 --
- ------------------------------------------------------------------------------------------------------------------------------------
Stock issued in conjunction with acquisitions -- $ 19,012 --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common stock Treasury stock
Shares Amount Additional Retained Shares Amount
Paid-in Earnings
Three years ended June 30, 1997 Capital
(in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 425,576,800 $ 72 $ 1,066,571 $ 879,135 (50,171,500) $ (329,245)
Issuance of stock, net of
employee repurchases (66,876) -- -- (29,494) 23,190,140 159,285
Treasury stock purchased -- -- -- -- (4,470,956) (36,107)
Net income -- -- -- 355,842 -- --
Tax benefit and other -- -- 22,907 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1995 425,509,924 72 1,089,478 1,205,483 (31,452,316) (206,067)
Issuance of stock, net of
employee repurchases (40,468) -- -- (19,516) 14,561,928 131,493
Issuance of restricted stock 850,662 -- 19,012 -- -- --
Treasury stock purchased -- -- -- -- (37,465,488) (522,336)
Net income -- -- -- 476,388 -- --
Tax benefit and other -- -- 55,859 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1996 426,320,118 72 1,164,349 1,662,355 (54,355,876) (596,910)
Issuance of stock, net of
employee repurchases (10,000) -- -- (14,710) 10,378,115 137,574
Treasury stock purchased -- -- -- -- (16,072,619) (456,090)
Exercise of warrants 4,225,768 1 1,611 -- -- --
Net income -- -- -- 762,420 -- --
Tax benefit and other -- -- 63,837 -- -- --
Issuance of common
stock dividend -- 215 -- (215) -- --
Balances at June 30, 1997 430,535,886 $ 288 $ 1,229,797 $ 2,409,850 (60,050,380) $ (915,426)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Currency Total
Translation Stockholders'
Adjustments Equity
and Other
- --------------------------------------------------------------------------------
Balances at June 30, 1994 $ 11,790 $ 1,628,323
Issuance of stock, net of
employee repurchases -- 129,791
Treasury stock purchased -- (36,107)
Net income -- 355,842
Tax benefit and other 21,839 44,746
- --------------------------------------------------------------------------------
Balances at June 30, 1995 33,629 2,122,595
Issuance of stock, net of
employee repurchases -- 111,977
Issuance of restricted stock -- 19,012
Treasury stock purchased -- (522,336)
Net income -- 476,388
Tax benefit and other (12,009) 43,850
- --------------------------------------------------------------------------------
Balances at June 30, 1996 21,620 2,251,486
Issuance of stock, net of
employee repurchases -- 122,864
Treasury stock purchased -- (456,090)
Exercise of warrants -- 1,612
Net income -- 762,420
Tax benefit and other (4,192) 59,645
Issuance of common
stock dividend -- --
Balances at June 30, 1997 $ 17,428 $ 2,741,937
- --------------------------------------------------------------------------------
See accompanying notes.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of business
Sun Microsystems, Inc. ("Sun" or the "Company") is a supplier of network
computing products including workstations, servers, software, microprocessors,
and a full range of services and support. The Company markets its products
primarily to business, government, and education customers. The Company operates
in a single industry segment across geographically diverse markets.
Basis of presentation
The consolidated financial statements include the accounts of Sun 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash equivalents and short-term investments
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturities of three months or less
at the date of acquisition.
Short-term investments consist primarily of time deposits, commercial paper,
tax-exempt securities, and foreign debt with original maturities beyond three
months. The Company's policy is to protect the value of its investment portfolio
and minimize principal risk by earning returns based on current interest rates.
The Company accounts for investments in accordance with Financial Accounting
Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under FAS 115, debt securities that the Company does not
have the positive intent and ability to hold to maturity and all marketable
equity securities are classified as either trading or available-for-sale and are
carried at fair market value. All of the Company's cash equivalents and
short-term investments are classified as available-for-sale at June 30, 1997 and
1996. Unrealized holding gains and losses on available-for-sale securities are
carried net of tax as a separate component of stockholders' equity in "Currency
translation adjustment and other."
Gross unrealized gains and losses are computed on the specific identification
method. The change in net unrealized gains and losses in investments, net of
income taxes, resulted in a decrease to stockholders' equity in fiscal 1997 and
1996. The net unrealized loss included in stockholders' equity at June 30, 1997
and 1996, was not material.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market (net
realizable value). Given the volatility of the market for the Company's
products, the Company makes inventory write downs for potentially excess and
obsolete inventory based on backlog and forecast demand. However, such backlog
and forecast demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand, and
such differences may be material to the financial statements. Inventories
consist of:
(In thousands) 1997 1996
Raw materials $236,900 $267,811
Work in progress 50,577 58,337
Finished goods 150,501 134,766
--------------------------------------
$437,978 $460,914
--------------------------------------
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided principally on the straight-line method over the shorter of the
estimated useful lives of the assets (ranging from one to twenty-five years) or
the applicable lease term.
30
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
Other assets
Included in other assets are purchased technology rights, other intangibles, and
spare parts that are amortized using the straight-line method over their useful
lives ranging from six months to seven years. The Company evaluates the
recoverability of the intangibles on a quarterly basis.
Currency translation
Sun translates the assets and liabilities of international non-U.S. functional
currency subsidiaries into dollars at the rates of exchange in effect at the end
of the period. Revenues and expenses are translated using rates that approximate
those in effect during the period. Gains and losses from currency translation
are included in stockholders' equity in the consolidated balance sheets.
Currency transaction gains or losses are recognized in current operations and
have not been significant to the Company's operating results in any period.
Other financial instruments
The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding long-term debt. An interest-rate swap
agreement is designated as a hedge, and effectiveness is determined by matching
the principal balance and terms with that of a specific debt obligation. Such an
agreement involves the exchange of amounts based on a fixed interest rate for
amounts based on variable interest rates over the life of the agreement without
an exchange of the notional amount upon which payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt (the accrual
method of accounting). The related amount payable to or receivable from
counterparties is included in other liabilities or assets.
The Company purchases foreign currency option contracts that effectively enable
it to sell currencies expected to be received as a result of certain of its
foreign currency denominated sales during the ensuing three to five months at
specified dollar amounts. The option contracts, which have only nominal
intrinsic value at the time of purchase, are denominated in the same foreign
currency in which sales are expected to be denominated.
These contracts are designated and effective as hedges of a portion of probable
foreign currency exposure on anticipated net sales transactions during the next
quarter, which otherwise would expose the Company to foreign currency risk.
Premiums related to option contracts are recognized into income over the life of
the contract. Gains on foreign currency option contracts that are designated
hedges on anticipated transactions are deferred until the designated net sales
are recorded. Option contracts that would result in losses if exercised are
allowed to expire.
The Company uses forward foreign exchange contracts that are designated to
reduce a portion of its exposure to foreign currency risk from operational and
balance-sheet exposures resulting from changes in foreign currency exchange
rates. Such exposures result from the portion of the Company's operations,
assets, and liabilities that are denominated in currencies other than the
functional currency of the legal entity in which the contracts are entered,
including local currency denominated assets and liabilities in U.S. dollar
functional currency entities. Forward contracts are accounted for on a
mark-to-market basis with realized and unrealized gains or losses recognized
currently. Discounts or premiums are recognized into income over the life of the
contract. Amounts receivable and payable on certain forward foreign exchange
contracts are recorded as other current assets and accrued liabilities,
respectively.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does it hold or issue leveraged derivative financial
instruments.
Revenue recognition
Sun generally recognizes revenue from hardware and software sales at the time of
shipment, with allowances established for price protection, cooperative
marketing programs with distributors, and estimated product returns. Service
revenues are recognized ratably over the contractual period or as the services
are provided.
31
<PAGE>
Notes to consolidated financial statements
Advertising costs
Advertising costs are charged to expense when incurred. Advertising expense was
$272 million, $168 million, and $152 million for fiscal years 1997, 1996, and
1995, respectively.
Self-insurance
The Company is self-insured up to specific levels for certain liabilities.
Accruals are provided each year based on historical claim costs and include
estimated amounts for incurred but not reported claims. The Company maintains
stop loss coverage with third-party insurance companies to cover aggregate
annual losses in excess of $25 million.
Warranty expense
The Company provides currently for the estimated costs that may be incurred
under warranties for products shipped.
Net income per common and common-equivalent share
Net income per common and common-equivalent share is computed using the weighted
average number of common and dilutive common-equivalent shares outstanding.
Dilutive common-equivalent shares consist of the incremental shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). Fully diluted earnings per share has not been presented because the
additional dilution effect is immaterial.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investment securities, foreign exchange
contracts, and interest-rate instruments as well as trade receivables. The
counterparties to the agreements relating to the Company's investment
securities, foreign exchange contracts, and interest-rate instruments consist of
various major corporations and financial institutions of high credit standing.
The Company does not believe there is significant risk of non-performance by
these counterparties because the Company limits the amount of credit exposure to
any one financial institution and any one type of investment. The credit risk on
receivables due from counterparties related to foreign exchange and currency
option contracts was immaterial at June 30, 1997 and 1996. The Company's
receivables are derived primarily from sales of hardware and software products
and services to customers in diversified industries as well as to a network of
resellers. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when deemed
necessary but generally requires no collateral. In fiscal 1997 the Company
provided approximately $20 million for doubtful accounts ($11 million and $12
million in 1996 and 1995, respectively).
Stock dividend
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 business on November 18,
1996. Share and per-share amounts presented have been adjusted to reflect the
stock dividend.
Stock-based compensation
The Company adopted Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock-Based Compensation" in fiscal 1997. As permitted by FAS
123, the Company continued to measure compensation expense for its stock-based
employee compensation plans using the intrinsic method prescribed by APB No. 25,
"Accounting for Stock Issued to Employees," and has provided in Note 8 pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Long-lived assets
The Company adopted Financial Accounting Standards No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" in fiscal 1997. Adoption of FAS 121 did not have a material
effect on the Company's consolidated financial position or operating results.
Other recent pronouncements
In 1997 Financial Accounting Standards No. 128 (FAS 128), "Earnings per Share,"
was issued and is effective for fiscal years commencing after December 15, 1997.
The future adoption of FAS 128 is not expected to have a material effect on the
Company's reported earnings per share.
32
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
In 1997 Financial Accounting Standards No. 130 (FAS 130), "Reporting
Comprehensive Income," was issued and is effective for fiscal years commencing
after December 15, 1997. The Company will comply with the requirements of FAS
130 in fiscal year 1999.
In 1997 Financial Accounting Standards No. 131 (FAS 131), "Disclosures About
Segments of an Enterprise and Related Information," was issued and is effective
for fiscal years commencing after December 15, 1997. The Company will comply
with the requirements of FAS 131 in fiscal year 1999.
2. Acquisitions
On February 14, 1997, the Company acquired all of the outstanding interests of
Long View Technologies, LLC ("Long View"), a limited liability development-stage
company, for $22,957,500 in cash. None of Long View's products had achieved
technological feasibility and no alternative uses have been established by the
Company. The transaction was accounted for as a purchase. The purchase price has
been allocated to purchased in-process research and development based upon an
independent third-party valuation. The purchased in-process research and
development resulted in a write-off of $22,957,500. Results of operations of
Long View for the last five months of the fiscal year ended June 30, 1997, are
included in the Company's consolidated statement of income and were not material
to the Company.
During April 1996, the Company acquired substantially all of the assets of
Integrated Micro Products plc, and its wholly-owned subsidiaries Integrated
Micro Products (UK), Ltd. and Integrated Micro Products, Inc., (collectively
IMP) for $96,100,000 in cash. In addition, the Company assumed liabilities of
$5,400,000, and incurred acquisition-related expenses of approximately
$4,200,000. The transaction was accounted for as a purchase and, on this basis,
the excess purchase price over the estimated fair value of the net tangible
assets has been allocated to various intangible assets, primarily consisting of
purchased research and development and goodwill based on independent third-party
valuation. The purchased in-process research and development resulted in a
write-off of $43,000,000. Intangible assets, including goodwill, are being
amortized over periods ranging from two to five years. Results of operations of
IMP for the last two months of the fiscal year ending June 30, 1996, are
included in the Company's consolidated statement of income and were not material
to the Company.
On June 28, 1996, the Company completed a merger with Lighthouse Design, Ltd.
("Lighthouse"). Approximately 850,000 shares of stock valued at $19,000,000 and
$3,200,000 in cash were exchanged for all of the outstanding common stock of
Lighthouse. The transaction was accounted for as a purchase and, on this basis,
the excess purchase price over the estimated fair value of the net tangible
assets has been allocated to various intangible assets, primarily consisting of
purchased research and development and goodwill based on independent third-party
valuation. The purchased in-process research and development resulted in a
write-off of $14,900,000. Intangible assets, including goodwill, are being
amortized over periods ranging from two to three years.
3. Fair Value of Financial Instruments
Fair values of cash and cash equivalents and short-term investments approximate
cost due to the short period of time to maturity. The fair value of long-term
debt is estimated based on current interest rates available to the Company for
debt instruments with similar terms, degrees of risk, and remaining maturities.
The estimated fair value of forward foreign exchange contracts is based on the
estimated amount at which they could be settled based on market exchange rates.
The fair value of foreign currency option contracts and the interest-rate swap
agreement is obtained from dealer quotes and represents the estimated amount the
Company would receive or pay to terminate the agreements. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
33
<PAGE>
Notes to consolidated financial statements
<TABLE>
The fair value of the Company's cash equivalents and short-term investments is
as follows:
<CAPTION>
At June 30, 1997
Cost Gross Gross Estimated
Unrealized Unrealized Fair Value
(In thousands) Gains Losses
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and local government debt $166,449 $ 16 $ 56 $166,409
Corporate and other non-governmental debt 282,240 5 89 282,156
U.S. government debt 85,628 233 13 85,848
Foreign debt 15,026 24 -- 15,050
Money market fund 119,600 -- -- 119,600
Other investments 27,500 -- -- 27,500
- -----------------------------------------------------------------------------------------
Total $696,443 $ 278 $ 158 $696,563
- -----------------------------------------------------------------------------------------
At June 30, 1996
Cost Gross Gross Estimated
Unrealized Unrealized Fair Value
(In thousands) Gains Losses
- -----------------------------------------------------------------------------------------
State and local government debt $343,616 $ 121 $ 173 $343,564
Corporate and other non-governmental debt 137,342 275 2,340 135,277
U.S. government debt 46,364 1 39 46,326
Foreign debt 22,256 9 13 22,252
Money market fund 108,900 -- -- 108,900
Other investments 50,400 -- -- 50,400
- -----------------------------------------------------------------------------------------
Total $708,878 $ 406 $ 2,565 $706,719
- -----------------------------------------------------------------------------------------
</TABLE>
The cost and estimated fair values of cash equivalents and short-term
investments by contractual maturity are as follows:
Cash equivalents and short-term
investments At June 30, 1997
Cost Estimated
(In thousands) Fair Value
- -----------------------------------------------------------------------
Maturing in one year or less $643,820 $643,846
Maturing after one year
through three years 52,623 52,717
- -----------------------------------------------------------------------
Total $696,443 $696,563
- -----------------------------------------------------------------------
34
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
<TABLE>
The fair value of the Company's borrowing arrangements and other financial
instruments is as follows:
<CAPTION>
At June 30, 1997 At June 30, 1996
Asset (Liability) Asset (Liability)
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10.55% senior notes -- -- $ (38,400) $ (39,855)
10.18% mortgage loan $ (40,000) $ (42,541) (40,000) (43,230)
Forward foreign exchange contracts (2,861) (2,861) 1,877 1,877
Foreign currency option contracts -- 1,262 -- 3,094
Short-term borrowings (100,930) (100,930) (49,161) (49,161)
Interest-rate swap agreement -- 196 -- 260
- --------------------------------------------------------------------------------------
</TABLE>
4. Derivative Financial Instruments
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends were as follows:
(In thousands) 1997 1996
- -----------------------------------------------------
Swaps hedging debt $ 40,000 $ 78,400
Forward foreign exchange
contracts 856,979 549,188
Foreign currency option
contracts 254,182 207,568
- -----------------------------------------------------
While the contract or notional amounts provide one measure of the volume of
these transactions, they do not represent the amount of the Company's exposure
to credit risk. The amounts potentially subject to credit risk (arising from the
possible inability of counterparties to meet the terms of their contracts) are
generally limited to the amounts, if any, by which the counterparties'
obligations exceed the obligations of the Company. The Company controls credit
risk through credit approvals, limits, and monitoring procedures. Credit rating
criteria for off balance sheet transactions are similar to those for
investments.
At June 30, 1997 and 1996, the Company had forward foreign exchange contracts of
less than three months duration, to exchange principally Japanese yen, British
pounds sterling, and French francs for U.S. dollars in the total gross notional
amount of $857 million and $549 million, respectively. Of these notional
amounts, forward contracts to purchase foreign currency represented $128 million
and $85 million and forward contracts to sell foreign currency represented $729
million and $464 million, at June 30, 1997 and 1996, respectively. The Company
also has purchased foreign currency options of less than two months duration, to
exchange principally Japanese yen, British pounds sterling, German marks, and
French francs for U.S. dollars.
5. Borrowing Arrangements
Long-term debt consists of the following:
At June 30,
(In thousands) 1997 1996
- -----------------------------------------------------------
10.55% senior notes $ -- $38,400
10.18% mortgage 40,000 40,000
40,000 78,400
- -----------------------------------------------------------
Less portion due within one year -- 38,400
- -----------------------------------------------------------
Long-term debt $40,000 $40,000
In September and December 1989, the Company signed agreements with a group of
insurance companies and received $192 million from the sale of 10.55% senior
notes due September 1996 and warrants to purchase 5,176,720 shares of Sun's
common stock at an effective exercise price of $6.20 per share, after and
subject to, further antidilution adjustments. During September 1996, the Company
made the final principal payment and all of the warrants were exercised by the
holders thereof.
The $40 million mortgage loan is secured by real property and a building.
Principal is due to the bank at maturity on May 18, 1999, with interest payable
semiannually, in arrears. The loan agreement provides for interest at a fixed
interest rate of 10.18%. However, the Company has an interest-rate swap
agreement with a third party (receive fixed,
35
<PAGE>
Notes to consolidated financial statements
pay variable) that results in the Company paying a rate based on LIBOR, which
was 5.81% at June 30, 1997. The interest-rate swap agreement matures with the
loan agreement.
In June 1996, the Company negotiated a $300 million unsecured revolving credit
agreement with an international group of 16 banks. The agreement expires on June
1, 2000. Any borrowings under this agreement bear interest at a floating rate
based on prime, certificates of deposit, or Eurodollar rates, at the Company's
option. Under the agreement, Sun is required to maintain various financial
ratios. Sun was in compliance with all covenants at June 30, 1997. There were no
borrowings under this facility at June 30, 1997.
At June 30, 1997, Sun's international subsidiaries had uncommitted lines of
credit aggregating approximately $541 million, of which approximately $101
million, denominated principally in yen, had been drawn. The average interest
rate on the borrowings at June 30, 1997, was 2.30%.
6. Income Taxes
Income before income taxes and the provision for income taxes consist of the
following:
Years Ended June 30,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Income before income taxes:
United States $ 566,554 $ 291,126 $ 249,569
Foreign 554,653 417,748 273,729
- --------------------------------------------------------------------------------
Total income before income taxes $ 1,121,207 $ 708,874 $ 523,298
- --------------------------------------------------------------------------------
Provision for income taxes
Current:
United States federal $ 303,537 $ 152,514 $ 122,769
State 46,894 16,192 10,121
Foreign 67,234 61,796 57,395
- --------------------------------------------------------------------------------
Total current income taxes 417,665 230,502 190,285
- --------------------------------------------------------------------------------
Deferred:
United States federal (50,791) (3,332) (17,129)
State (5,231) 1,178 5,319
Foreign (2,856) 4,138 (11,019)
- --------------------------------------------------------------------------------
Total deferred income taxes (58,878) 1,984 (22,829)
- --------------------------------------------------------------------------------
Provision for income taxes $ 358,787 $ 232,486 $ 167,456
- --------------------------------------------------------------------------------
36
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
Years Ended June 30,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Inventory valuation $ 66,057 $ 42,855
Reserves and other accrued expenses 115,722 56,272
Fixed asset basis differences 63,717 49,460
Compensation not currently deductible 38,979 29,015
State income taxes 21,926 2,135
Other 33,901 13,059
- --------------------------------------------------------------------------------
Gross tax assets 340,302 192,796
Deferred tax liabilities:
Net undistributed profits of subsidiaries (112,758) (20,008)
Other (928) (5,050)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (113,686) (25,058)
Net deferred tax assets $ 226,616 $ 167,738
- --------------------------------------------------------------------------------
<TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The sources and
tax effects of the difference are as follows:
<CAPTION>
At June 30,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax rate at 35% $ 392,423 $ 248,106 $ 183,154
State income taxes, net of federal tax benefit 27,081 11,291 10,036
Foreign earnings permanently reinvested in
foreign operations (63,550) (36,580) (20,460)
Other 2,833 9,669 (5,274)
- -------------------------------------------------------------------------------------
Provision for income taxes $ 358,787 $ 232,486 $ 167,456
- -------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1997, the Company has unrecognized deferred tax liabilities of
approximately $124 million related to cumulative net undistributed earnings of
foreign subsidiaries of approximately $399 million. These earnings are
considered to be permanently invested in operations outside the United States.
37
<PAGE>
Notes to consolidated financial statements
The current federal and state provisions do not reflect the tax savings
resulting from deductions associated with the Company's various stock option
plans. These savings (in thousands) were $59,799; $53,079; and $20,837 in fiscal
1997, 1996, and 1995, respectively, and were credited to stockholders' equity.
The Company's United States income tax returns for fiscal years ended June 30,
1988 through 1994, are under examination, and the Internal Revenue Service has
proposed certain adjustments. Management believes that adequate amounts have
been provided for any adjustments that may ultimately result from these
examinations.
7. Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. The future minimum annual lease payments are approximately
$110 million, $92 million, $68 million, $46 million, and $39 million for fiscal
years 1998, 1999, 2000, 2001, and 2002, respectively, and approximately $159
million for years following fiscal 2002. Rent expense under the noncancelable
operating leases was $113 million in 1997, $99 million in 1996, and $82 million
in 1995.
8. Stockholders' Equity
Common stock
In April 1989, the Company's Board of Directors approved a plan, as amended, to
protect stockholders' rights in the event of a proposed takeover of the Company.
Under the plan, the Board of Directors declared a dividend distribution of a
common share purchase right (a "Right") on each share of the Company's common
stock (a "Common Share") outstanding on May 26, 1989, and each Common Share
issued thereafter (subject to certain limitations). Upon becoming exercisable,
each Right will entitle its holder to purchase one Common Share at an exercise
price of $50 subject to adjustment. The Rights are not exercisable or
transferable apart from the Common Shares unless certain events occur, including
a public announcement that a person or group (an "Acquiring Person") has
acquired or obtained the right to acquire 10% or more (20% or more for an
Acquiring Person who has filed a Schedule 13G in accordance with the Securities
Act of 1934 ["13G Filer"]) of the outstanding Common Shares or until the
commencement or announcement of an intention to make a tender or exchange offer
for 30% or more of the outstanding Common Shares. Unless the Rights are
redeemed, in the event that an Acquiring Person acquires 10% or more (20% or
more if the Acquiring Person is a 13G Filer) of the outstanding Common Shares
(other than pursuant to a tender offer deemed fair by the Company's Board of
Directors), each Right not held by the Acquiring Person will entitle the holder
to purchase for the exercise price that number of Common Shares having a market
value equal to two times the exercise price. In the event that (i) the Company
is acquired in a merger or business combination in which the Company is not the
surviving corporation or in which the Common Shares are exchanged for stock or
assets of another entity, or (ii) 50% or more of the Company's consolidated
assets or earning power is sold, each Right not held by an Acquiring Person will
entitle the holder to purchase for the exercise price that number of shares of
common stock of the acquiring company having a market value equal to two times
the exercise price. The Rights are redeemable, in whole but not in part, at the
Company's option, at $0.0025 per Right at any time prior to becoming exercisable
and in certain other circumstances. The Rights expire on May 25, 1999.
Stock-option and incentive plans
The Company's 1990 Long-Term Equity Incentive Plan ("1990 Incentive Plan") and
other employee stock option plans provide the Board of Directors broad
discretion in creating employee equity incentives and authorize it to grant
incentive and nonstatutory stock options as well as certain other awards. In
addition, these plans provide for issuance to eligible employees of nonstatutory
stock options to purchase common stock at or below fair market value at the date
of grant subject to certain limitations set forth in the 1990 Incentive Plan.
Options expire up to ten years from the date of grant or up to three months
following termination of employment or service on the Board, whichever occurs
earlier, and are exercisable at specified times prior to such expiration. Under
the 1990 Incentive Plan, common stock may also be issued pursuant to stock
purchase agreements that grant Sun certain rights to repurchase the shares at
their original issue price in the event that the employment of the employee is
terminated prior to certain predetermined vesting dates. The above
38
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
described plans provide that shares of common stock may be sold at less than
fair market value, which results in compensation expense equal to the difference
between the market value on the date of grant and the purchase price. This
expense, which is immaterial, is recognized over the vesting period of the
shares. Sun's 1988 DirectorsO Stock Option Plan provides for the automatic grant
of stock options to nonemployee directors at each annual meeting of stockholders
and on the date each such person becomes a director. These options are granted
at fair market value on the date of grant and have a term of five years.
Finally, in connection with the acquisition of Lighthouse Design, Ltd., in
fiscal year 1996, former shareholders who are now employees of the Company are
entitled to receive up to approximately 650,000 shares of stock upon achievement
of specific performance criteria over the next three years.
<TABLE>
Information with respect to stock option and stock purchase rights activity is
as follows:
<CAPTION>
Outstanding Options/Rights
Shares Number Price per Share Weighted
Available of Shares Average
(In thousands, except per share amounts) for Grant Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 2,172 53,696 $ 0.00017-$9.25 $ 5.99
Additional shares reserved 13,400 -- -- --
Grants (14,372) 14,372 $ 0.00017-$12.282 $ 8.50
Exercises -- (14,312) $ 0.00017-$8.532 $ 5.71
Cancellations 3,484 (4,508) $ 4.19-$8.719 $ 6.49
- -------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 4,684 49,248 $ 0.0025-$12.282 $ 6.84
Additional shares reserved 49,040 -- -- --
Grants (12,886) 12,886 $ 0.00034-$30.125 $20.25
Exercises -- (9,762) $ 0.00034-$19.5 $ 6.78
Cancellations 4,440 (4,616) $ 0.005-$30.125 $ 7.64
- -------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 45,278 47,756 $ 0.005-$30.125 $10.84
Additional shares reserved 300 -- -- --
Grants (13,289) 13,289 $0.00067-$33.9375 $26.90
Exercises -- (7,367) $ 0.01-$30.125 $ 6.99
Cancellations 1,840 (2,319) $ 0.01-$33.375 $13.32
- -------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 34,129 51,359 $0.00067-$33.9375 $15.44
- -------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Notes to consolidated financial statements
<TABLE>
The following table summarizes significant ranges of outstanding and exercisable
options at June 30, 1997:
<CAPTION>
Outstanding Options Options Exercisable
- -------------------------------------------------------------------------------------------------------
Range of Shares Weighted Weighted Shares Weighted
Exercise Prices Average Average Average
Remaining Exercise Exercise
Life in Years Price Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00067-$5.00 4,288,300 4.0 $ 4.5504 2,278,900 $ 4.5733
$ 5.001-$10.00 21,839,399 5.4 $ 7.4012 6,886,896 $ 7.2443
$10.0001-$15.00 2,749,740 6.0 $11.5599 442,300 $11.7329
$15.0001-$20.00 1,985,000 6.4 $19.5000 304,680 $19.5000
$20.0001-$25.00 8,175,662 7.2 $23.6645 1,068,788 $23.3494
$25.0001-$30.00 9,803,134 7.6 $27.1950 2,500 $26.6250
$30.0001-$33.9375 2,517,930 7.6 $32.2730 159,306 $30.1250
- -------------------------------------------------------------------------------------------------------
51,359,165 6.2 $15.4370 11,143,370 $ 9.0874
</TABLE>
At June 30, 1997, options to purchase approximately 11,143,000 shares were
exercisable at prices from $4.1875 to $30.1250 with a weighted average and
aggregate exercise price of $9.0874 and $101,264,000, respectively (8,898,000
shares at an aggregate price of $57,012,000 at June 30, 1996).
At June 30, 1997, the Company retains repurchase rights to 1,059,000 shares
issued pursuant to stock-purchase agreements and other stock plans.
The weighted average fair value at date of grant for options granted during
1997, 1996, and 1995 was $17.873, $11.517, and $4.904 per option, respectively.
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
1997 1996 1995
- ------------------------------------------------------------
Expected life 8.1 7.7 7.6
Interest rate 6.06% 6.36% 7.25%
Volatility 46.60% 57.99% 38.86%
Dividend yield 0 0 0
- ------------------------------------------------------------
Employee stock-purchase plan
To provide employees with an opportunity to purchase common stock of Sun through
payroll deductions, Sun established the 1990 Employee Stock Purchase Plan. Under
this plan, Sun's employees, subject to certain restrictions, may purchase shares
of common stock at 85% of the fair market value at either the date of enrollment
or
40
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
the date of purchase whichever is less. Pursuant to this plan, and the Company's
1984 Employee Stock Purchase Plan (which terminated in August 1992), the Company
issued approximately 2,928,689; 4,714,000; and 8,808,000 shares of common stock
in fiscal 1997, 1996, and 1995, respectively. At June 30, 1997, approximately
13,235,825 shares remained available for future issuance.
Common stock repurchase programs
In December 1990, the Board of Directors approved a systematic common stock
repurchase program related to the 1990 Employee Stock Purchase Plan. In fiscal
1997, the Company repurchased 2,919,632 shares at a cost of approximately $88
million under this program (3,077,488 shares at a cost of approximately $63
million in fiscal 1996).
In June 1995, the Board of Directors approved a plan to repurchase approximately
48 million shares of the Company's common stock. During fiscal 1997 the Company
repurchased 8,904,258 shares at a cost of approximately $236 million under this
program (34,388,000 shares at a cost of approximately $460 million in 1996).
In August 1996, the Board of Directors approved a systematic common stock
repurchase program related to the 1990 Long-Term Equity Incentive Plan. In
fiscal 1997, the Company repurchased 4,248,729 shares at a cost of approximately
$132 million under this program.
When the treasury shares are reissued, any excess of the average acquisition
cost of the shares over the proceeds from reissuance is charged to retained
earnings.
Stock-based compensation
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations,
which require compensation expense for options to be recognized when the market
price of the underlying stock exceeds the exercise price on the date of grant.
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation," permits companies to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. In management's
opinion, the existing stock option valuation models do not necessarily provide a
reliable single measure of the fair value of stock-based awards. Therefore, as
permitted, the Company will continue to apply the existing accounting rules
under APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for stock-based awards made during the year as if the
fair-value-based method defined in FAS 123 had been applied. For employee stock
options, the fair value of the stock options was estimated as of the date of
grant using the Black-Scholes option pricing model. Input variables used in the
model include a weighted average risk-free interest rate using the eight-year
Treasury Yield as of the date of grant ranging from 6.02% to 6.90% for fiscal
year 1997, expected dividend yield of 0%, estimated volatility factor of the
expected market price of the Company's common stock of 46.6%, and an estimated
option life of 8.1 years.
For the Employee Stock Purchase Plan, the fair value of the stock was calculated
using actuals for the plans expiring during the year. For plans expiring after
year end, the fair value was calculated using estimated shares to be purchased
and estimated purchase price.
Stock-based compensation costs would have reduced pretax income by $76,033,000
and $35,116,000 in fiscal 1997 and 1996, respectively, ($51,703,000 and
$23,879,000 after tax and $.08 and $.05 per share) if the fair values of the
options granted in that year had been recognized as compensation expense on a
straight line basis over the vesting period of the grant. The pro forma effect
on net income for fiscal 1997 and 1996 is not representative of the pro forma
effect on net income in the future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal 1996.
Pro forma net income and earnings per share are as follows:
(In thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------
Pro forma net income $710,717 $452,509
- ------------------------------------------------------------------
Pro forma common
stock equivalents 377,288 390,390
- ------------------------------------------------------------------
Pro forma earnings per share $ 1.88 $ 1.16
- ------------------------------------------------------------------
41
<PAGE>
Notes to consolidated financial statements
9. Industry-Segment, Geographic, and Customer Information
Sun, which operates in a single industry segment, designs, manufactures,
markets, and services network computing systems and software solutions that
feature networked desktops and servers. No customer accounted for 10% or more of
revenues in fiscal 1997, 1996, or 1995. Operations of Sun's overseas
subsidiaries consist of sales, service, distribution, and manufacturing.
Intercompany transfers between geographic areas are accounted for at prices that
approximate arm's length transactions. In addition, United States export sales
approximated 3.0%, 3.8%, and 3.6% of net revenues during fiscal 1997, 1996, and
1995, respectively.
<TABLE>
Information regarding geographic areas at June 30, 1997, 1996, and 1995, and for
each of the years then ended, is as follows:
<CAPTION>
Geographic Area
United Europe Japan Rest of Eliminations Total
(In thousands) States World
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997, and for the year then ended:
Sales to unaffiliated
customers $ 4,709,343 $ 2,177,319 $ 958,753 $ 752,931 $ -- $ 8,598,346
Intercompany transfers 978,981 2,018,531 17,973 61,724 (3,077,209) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 5,688,324 $ 4,195,850 $ 976,726 $ 814,655 $(3,077,209) $ 8,598,346
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 477,136 $ 522,575 $ 13,958 $ 8,116 $ 4,733 $ 1,026,518
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 4,079,585 $ 2,408,106 $ 360,814 $ 385,763 $(2,536,994) $ 4,697,274
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities $ 2,351,239 $ 1,284,970 $ 350,076 $ 369,868 $(2,400,816) $ 1,955,337
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996, and for the year then ended:
Sales to unaffiliated
customers $ 3,791,154 $ 1,778,712 $ 991,044 $ 533,841 $ -- $ 7,094,751
Intercompany transfers 944,785 1,586,615 16,847 50,868 (2,599,115) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 4,735,939 $ 3,365,327 $ 1,007,891 $ 584,709 $(2,599,115) $ 7,094,751
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 280,296 $ 370,034 $ 23,690 $ 6,497 $ (5,505) $ 675,012
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 3,721,745 $ 1,542,890 $ 325,417 $ 319,262 $(2,108,405) $ 3,800,909
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities $ 2,023,047 $ 891,360 $ 305,045 $ 318,834 $(1,988,863) $ 1,549,423
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1995, and for the year then ended:
Sales to unaffiliated
customers $ 3,136,328 $ 1,490,960 $ 866,440 $ 408,157 $ -- $ 5,901,885
Intercompany transfers 945,264 1,189,536 17,590 36,458 (2,188,848) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 4,081,592 $ 2,680,496 $ 884,030 $ 444,615 $(2,188,848) $ 5,901,885
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 242,078 $ 251,248 $ 17,385 $ 9,371 $ (19,726) $ 500,356
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 3,573,509 $ 1,301,731 $ 378,052 $ 215,750 $(1,924,489) $ 3,544,553
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities $ 1,793,964 $ 934,427 $ 337,589 $ 199,800 $(1,843,822) $ 1,421,958
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
Sun Microsystems, Inc. 1997 Annual Report
10. Contingencies
In March 1990 Sun received a letter from Texas Instruments Incorporated ("TI")
alleging that a substantial number of Sun's products infringe certain of TI's
patents. Based on discussions with TI, Sun believes that it will be able to
negotiate a license agreement with TI and that the outcome of this matter will
not have a material adverse impact on Sun's financial position or its results of
operations or cash flows in any given fiscal year. Such a negotiated license may
or may not have a material adverse impact on Sun's results of operations or cash
flows in a given fiscal quarter depending upon various factors, including but
not limited to the structure and amount of royalty payments, offsetting
consideration from TI, if any, and allocation of royalties between past and
future product shipments, none of which can be forecast with reasonable
certainty at this time.
In the normal course of business, the Company receives and makes inquiries with
regard to other possible patent infringements. Where deemed advisable, the
Company may seek or extend licenses or negotiate settlements.
The estimate of the potential impact on the Company's financial position or
overall results of operations for the above legal proceedings could change in
the future.
11. Quarterly Financial Data (unaudited)
Fiscal 1997 Quarter Ended
(In thousands,
except per share amounts) June 30 March 30 December 29 September 29
- --------------------------------------------------------------------------------
Net revenues $2,543,121 $2,114,618 $2,081,588 $1,859,019
Gross margin 1,281,358 1,061,424 1,048,186 886,918
Operating income 337,679 257,010 255,845 175,984
Net income 237,178 223,511 178,341 123,390
Net income per share $ 0.61 $ 0.58 $ 0.46 $ 0.31
- --------------------------------------------------------------------------------
Fiscal 1996 Quarter Ended
(In thousands,
except per share amounts) June 30 March 30 December 31 October 1
- --------------------------------------------------------------------------------
Net revenues $2,018,062 $1,840,028 $1,751,383 $1,485,278
Gross margin 903,020 823,340 778,718 668,445
Operating income 182,306 201,791 177,971 112,944
Net income 122,336 143,307 126,049 84,696
Net income per share $ 0.31 $ 0.37 $ 0.32 $ 0.21
- --------------------------------------------------------------------------------
12. Subsequent Events (unaudited)
On July 17, 1997, the Company signed a definitive agreement to purchase certain
assets from Encore Computer Corporation, for $185,000,000 in cash, and the
assumption of specific liabilities. Upon and subject to closing, the transaction
will be accounted for as a purchase and, on this basis, the purchase price will
be allocated to tangible and intangible assets and in-process research and
development.
The closing of this acquisition is contingent upon the completion of various
closing conditions.
During August 1997, the Company acquired all of the outstanding shares of
capital stock of Diba, Inc. The transaction will be accounted for as a purchase
and, on this basis, the purchase price will be allocated to tangible assets,
intangible assets, and in-process research and development.
43
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders, Sun Microsystems, Inc.
We have audited the accompanying consolidated balance sheets of Sun
Microsystems, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sun Microsystems,
Inc. at June 30, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Palo Alto, California
July 16, 1997
44
EXHIBIT 22.0
SUN MICROSYSTEMS, INC.
Subsidiaries
Diba, Inc.
Lighthouse Design, Ltd.
Lighthouse Design R&D Corporation
Nihon Sun Microsystems K.K.
Solaris Corporation
Sun Microsystems (Barbados), Ltd.
Sun Microsystems (Schweiz) A.G.
Sun Microsystems AB
Sun Microsystems Australia Pty. Ltd.
Sun Microsystems Belgium N.V./S.A.
Sun Microsystems Benelux B.V.
Sun Microsystems Distributions International, Inc.
Sun Microsystems Europe Properties, Inc.
Sun Microsystems Federal, Inc.
Sun Microsystems France, S.A.
Sun Microsystems GmbH
Sun Microsystems Holdings Limited
Sun Microsystems Hungary Computing Ltd.
Sun Microsystems Iberica, S.A.
Sun Microsystems Intercontinental Operations
Sun Microsystems International, Inc.
Sun Microsystems International B.V.
Sun Microsystems Ireland Limited
Sun Microsystems Italia S.p.A
Sun Microsystems Korea, Ltd.
Sun Microsystems Ltd.
Sun Microsystems Management Services Corporation
Sun Microsystems Nederland B.V.
Sun Microsystems (NZ) Ltd.
Sun Microsystems Oy
Sun Microsystems Poland, Sp.z.o.o
Sun Microsystems Properties, Inc.
Sun Microsystems Pte. Ltd.
Sun Microsystems Scotland B.V.
Sun Microsystems Scotland Limited.
Sun Microsystems Super Annuation Nominees Pty. Ltd.
Sun Microsystems de Chile, S.A.
Sun Microsystems de Colombia, S.A.
Sun Microsystems de Mexico, S. A. de C.V.
Sun Microsystems de Venezuela, S. A.
Sun Microsystems do Brasil Industria e Comercio Ltda.
Sun Microsystems of California, Inc.
Sun Microsystems of California, Ltd.
Sun Microsystems of Canada Inc..
Sun Microsystems China Ltd.
Sun TSI Subsidiary, Inc.
SunExpress, Inc.
SunExpress International, Inc.
SunSoft, Inc.
SunSoft International, Inc.
Solaris Indemnity, Ltd.
Solaris Assurance, Inc.
Sun Microsystems Risk Management, Inc.
Sun Microsystems Taiwan, Limited.
Sun Microsystems Israel, Limited.
Sun Microsystems Technology Pty. Ltd.
Sun Microsystems (China) Co., Ltd.
Sun Microsystems de Argentina S.A.
29
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sun Microsystems, Inc. of our report dated July 16, 1997, included in the
1997 Annual Report to Stockholders of Sun Microsystems, Inc.
Our audits also included the financial statement schedule of Sun Microsystems,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-9293, 33-11154, 33-15271, 33-18602, 33-25860, 33-28505,
33-33344, 33-38220, 33-51129, 33-56577, 333-01459, 333-09867, 333-34543, and
333-34651) pertaining to the 1982 Incentive Stock Option Plan, the Restricted
Stock Plan, the 1984 Employee Stock Purchase Plan, as amended, the 1987 Stock
Option Plan, the 1988 Director Stock Option Plan, the 1989 French Stock Option
Plan, the 1990 Employee Stock Purchase Plan, the 1990 Long-Term Equity Incentive
Plan, the Equity Compensation Acquisition Plan of Sun Microsystems, Inc., and
the U.S. Non-Qualified Deferred Compensation Plan and in the related Prospectus
of our report dated July 16, 1997, with respect to the consolidated financial
statements incorporated herein by reference and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Sun Microsystems, Inc.
Ernst & Young LLP
Palo Alto, California
September 25, 1997
31
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<S> <C>
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
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0
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