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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER: 0-15086
SUN MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
DELAWARE 94-2805249
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
901 SAN ANTONIO ROAD (650) 960-1300
PALO ALTO, CA 94303 (REGISTRANT'S TELEPHONE NUMBER
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING AREA CODE)
INCLUDING ZIP CODE)
</TABLE>
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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 15, 1998, was approximately $18,682,000,000 based
upon the last sale price reported for such date on the Nasdaq National Market.
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 15, 1998 was 381,262,063.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to Stockholders for the fiscal year ended June
30, 1998 are incorporated by reference into Items 1, 5, 6, 7, 8 and 14 hereof.
Parts of the Proxy Statement for the 1998 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
This Annual Report on Form 10-K contains forwarding-looking statements
within the meaning of the Private Securities Litigation 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 selling, general and administrative expenses. These
forward-looking statements involve risks and uncertainties, and the cautionary
statements set forth below, including those contained in "Additional Factors
Affecting the Company's Business" identify important factors that could cause
actual results to differ materially form those predicted in any such forward
looking statements. Such factors include, but are not limited to, adverse
changes in general economic conditions, including adverse 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 advancement, risks
associated with foreign operations (including the downturn of economic trends
and unfavorable currency movements in the Asia Pacific marketplace), risks
associated with the Company's efforts to comply with Year 2000 requirements, and
other factors, including those listed below.
GENERAL
Sun Microsystems, Inc. (Sun or the Company) was incorporated in California
in February, 1982 and reincorporated in Delaware in July, 1987. Sun 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(R)
operating system, its rapid innovation and its open systems architecture.
During the last fiscal year, Sun began reorganizing its business around
specific product development competencies operating under the direction of Sun's
new Chief Operating Officer, Ed Zander. This reorganization was effective July
1, 1998. Sun's new divisions generally operate within their own charters, but
with the common corporate strategic vision of being a leading force in network
computing. Sun believes this new 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 and at any time may create, merge or discontinue
various businesses to increase customer and product focus. Sun's business is now
organized as follows:
Computer Systems -- Computer Systems designs, manufactures, and sells a
broad range of desktop systems, servers and network switches, incorporating the
Scaleable Processor Architecture (SPARC) microprocessors and the
Solaris(TM)software operating environment and it also sells storage subsystems,
as well as software to enterprise customers.
Network Storage -- Network Storage develops Sun's storage hardware and
software platforms.
Consumer and Embedded -- Consumer and Embedded develops and markets Sun's
core technologies for consumers and embedded markets which includes Chorus and
Java OS(TM) for Business(TM), PersonalJava(TM), EmbeddedJava(TM), Java Card(TM)
implementations, the hardware and software for the set-top, auto and phone
markets, Diba technologies and the Jini and Persona projects.
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Sun, the Sun Logo, Sun Microsystems, Sun Workshop, Solaris Solstice, Sun
Enterprise, Sun Internet Mail Server, Java, EmbeddedJava, PersonalJava, Java
Card, Java OS, Java OS for Business, Ultra, Ultra Enterprise, Java Studio, Java
Beans, JDK, Sunergy, Gigaplane-XB, Sun Spectrum, Java Compatible, the Java
Compatible logo are trademark or registered trademarks of Sun Microsystems, Inc.
in the United States and other countries. All SPARC trademarks, including
UltraSPARC, 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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Enterprise Services -- Enterprise Services, a leading UNIX service
organization, provides a full range of global services for heterogeneous network
computing environments, including system/network management and support,
education, information technology (IT) consulting and systems integration.
Solaris Software -- Solaris Software develops and supports Solaris, a
leading UNIX operating system software environment for enterprise-wide
distributed computing on SPARC and other volume platforms. Solaris Software also
develops software products for network management, messaging/mail management,
security, and eCommerce.
Microelectronics -- Microelectronics designs, develops and markets high
performance SPARC(TM) and Java(TM) microprocessors, as well as enabling
technologies, for Sun products and third-party customers.
Java Software -- Java Software develops, markets and supports the Java(TM)
software technology. Java Software also develops applications, tools, and
systems platforms to further enhance Java(TM) technology as a programming
standard for complex networks. Java Software oversees Sun's efforts to continue
enhancing the Java platform and works with third parties to create products and
technologies that will augment the Java platform's capabilities.
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 vendors
provides Sun and its customers with a competitive advantage and strengthens the
Company's presence in network computing.
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
Workstations -- The Company offers a full line of UltraSPARC(TM)-based
workstations from low-cost high-performance workstations to high-end,
multi-processor capable graphics systems.
The Ultra(TM) 5, based on the UltraSPARC IIi processor, is a reliable,
scaleable entry level workstation designed for customers seeking high
performance for computer intensive software development, digital content
creation and database applications at a low cost.
The Ultra 10 based on a 333 MHz Ultra SPARC IIi processor with a 2MB cache
and the Sun Elite3D graphics accelerator offers customers point-of-entry to
high-end graphical computing. The Ultra 10 was designed for graphics intensive,
price sensitive markets such as health care, software development, entry-level
MCAD, animation and digital content creation.
Sun's Ultra 60 and Ultra 450 workstations offer a combination of high-end
workstation performance and functionality at a competitive price. Available in
both uniprocessor and multiprocessor versions, these systems achieve higher
performance from the use of UltraSparc II processors at speeds of up to 360 MHz,
as well as high performance motherboards and ASIC's.
The Ultra 60 workstation, with up to two 300 or 360 MHz UltraSPARC II
processors, is designed for customers who require power for the most demanding
scientific and technical applications.
The Ultra 450 workstation is Sun's most expandable and flexible
workstation. The Ultra 450 can support two of Sun's high-end Elite3D m6 graphics
cards and scales to include up to four 300 MHz UltraSPARC II
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processors, 180GB of hard disk drive space, 4GB of memory and 10 PCI slots,
allowing customers to grow and tailor the system to address specific application
requirements.
Workgroup Servers -- The Company also offers a wide range of binary
compatible servers from the entry level high performance Ultra Enterprise(TM) 5S
Server to the Ultra Enterprise 1000 Server, a highly scaleable, reliable,
enterprise-wide symmetric multiprocessor server. Sun's entry level server
products are designed to provide high performance, reliable, easy to use,
scaleable architecture with exceptional throughput at prices comparable to PC
server products. These servers run the Solaris operating system and provide
software solutions to connect to any client as well as the ability to simply
install and manage a customer's servers.
The Ultra Enterprise 5S Server and Ultra Enterprise 10S Server utilize the
high performance UltraSPARC IIi processor and offer customers low priced
solutions that function as file and print servers, internet/intranet solutions
as well as platforms for eCommerce and Internet Service Providers.
The Company's Sun(TM) Enterprise(TM) 450 Servers provide the scalability,
performance and reliability for critical business needs. The Enterprise 450
Server supports up to four 300 MHz UltraSPARC II processors and utilizes the 1.6
GB/second UPA interconnect and 10 PCI slots, which allows the Sun Enterprise 450
to scale as application demand grows. The Sun Enterprise 450 Server is designed
with up to 20 hot pluggable disk drives, hot pluggable N+1 power, and features
such as Automatic System Recovery, providing the reliability features that are
usually found in more expensive enterprise servers. The Sun Enterprise 450
provides customers with the reliability, availability and scalability needed for
demanding applications and solutions such as groupware, distributed database
applications, clustering, enterprise resource planning as well as email and
internet/intranet requirements.
Sun Enterprise Servers -- Sun offers to its enterprise customers its Sun
Enterprise Server family. This includes the Sun Enterprise 10000 that scales to
64 processors. The Sun Enterprise Server family offers upgradeability and
expandability across the product line.
The entry level Sun Enterprise 3500 is a powerful, scaleable, versatile and
upgradeable departmental UNIX server in a compact package. The Sun Enterprise
3500 is expandable up to 8 Central Processing Units ("CPU") 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 Sun Enterprise 4500 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 Sun Enterprise 5500, Sun's entry level data center 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 Sun Enterprise 6500 is expandable up to 30 processors and provides
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 Sun Enterprise 10000 is the most scaleable system in the product line
and incorporates mainframe features such as dynamic system domains which allow
for dynamic partioning of the system, super computer class interconnection
called the Gigaplane-XB(TM) which speeds internal data handling and a separate
service processor/console for system monitoring and management.
SYSTEM AND INTERNET SOFTWARE
The system and internet 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, Sun(TM) WorkShop(TM) tools for building
network applications, and internet products including the Sun(TM) Internet Mail
Server that affords reliability and scalability across an
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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 -- The Solaris product line includes 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 the Java platform and
supports more than 12,000 applications. The Solaris environment is optimized for
corporate computing, Internet business requirements, powerful enterprise
databases and high performance technical computing environments.
Network Management Products -- These products are central to Sun's open
systems architecture and 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.
Network Security Solutions -- Sun provides businesses with a comprehensive
set of modular, heterogeneous, and scaleable security solutions for protecting
corporate assets, enabling new business models such as secure intranets,
establishing tighter relationships with partners via secure extranets, and
supporting secure remote access for mobile and remote employees. The Network
Security Solutions include encryption, authentication, access control, and
firewall defense products needed to make use of the Internet, intranets and
extranets, as communications and trading channels.
Internet Products -- The Company's Sun Internet Mail Server software helps
companies consolidate their business on a single, scaleable email architecture,
enabling open, reliable, and cost-effective communication. For service
providers, Sun Internet Mail Server delivers the superior scalability,
reliability and performance needed for finding and retaining customers and
growing their business. 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.
JavaSoftware Products -- The Java(TM) Application Environment (JAE) is one
of the first widely accepted application environments to enable the platform
independent of the development of application software. In fiscal 1998, Sun
broadly expanded the definition and availability of the Java platform, to extend
the adoption of the Java platform to the smallest devices (smart cards and
embedded controllers) and set-top boxes (PersonalJava), in addition to the
high-end enterprise platform. Java technology is licensed to over 150 system
software vendors and OEM ("Original Equipment Manufacturers") manufacturers. The
Company continues to invest in the performance, stability and compatibility of
the Java platform, to ensure its continued acceptance and deployment across the
internet.
Developer Products -- The Workshop integrated development tool suites
support the Java(TM) programming language, C++, C, and Sun(TM) FORTRAN. In
addition, Sun offers an integrated development environment for MicroFocus COBOL.
Visual Workshop for C++ and Performance Workshop Fortran provide tightly
integrated visual programming environments for professional developers to build
and deploy high-performance client-server and computing applications. Java(TM)
Workshop(TM) is a powerful and streamlined Internet programming environment
allowing developers to create and publish Internet applications. Java(TM)
Studio(TM) is an easy to use point and click environment for assembling
solutions from reusable JavaBeans(TM) components. Sun's extensive line of
software development products provide life cycle support from database modeling
to testing, improving productivity and quality of the application.
The Java(TM) Developer's Kit enables developers to create and run applets
(which are miniature applications written in the Java programming language) that
run inside a compatible web browser, and full applications written using the
Java programming 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 was recently reorganized
within Sun into two primary direct sales forces concentrating on enterprise
systems, storage, and software and consumer and embedded products. These sales
forces sell to selected end-user named accounts and numerous indirect channels
and are compensated on a channel-neutral basis to reduce potential channel
conflict with the Company distribution partners. Other distribution channels
include:
- 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 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 100 sales and service offices in the United States and
approximately 135 sales and service offices in 45 other countries. In addition,
the Company 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 48%, 49% and 50% of total
revenues in fiscal 1998, 1997, and 1996, respectively. 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. The Company is primarily
exposed to changes in exchange rates on the Japanese yen, British pound
sterling, French franc, and German 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 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 then 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 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
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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.
Furthermore, revenues from outside the United States are subject to inherent
risks related thereto, including the general economic and political conditions
in each country. 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. There can be no assurance that the economic crisis and
currency issues currently being experienced in certain parts of Asia will not
have a material adverse effect on the Company's revenue, revenue growth rates,
or operating results in the future.
One customer accounted for more than 10% of revenues in fiscal 1998. Sales
to MRA Systems, Inc. for fiscal 1998 were approximately 14% of total revenues.
No individual customer accounted for more than 10% of revenues in fiscal 1997 or
1996. Any termination by a significant customer of its relationship with the
Company or material reduction in the amount of business such a customer does
with the Company could materially adversely effect the Company's business,
financial condition or operating results. Also 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 also 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 proportionately.
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.
Sun maintains a customer resource program, Sunergy(SM), 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, 1998 was approximately $599 million,
compared with approximately $378 million at June 30, 1997. 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 (systems support for
hardware and software), 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 1 million systems in 174 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.
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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(SM). 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 36 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 technologies, 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 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's 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 $1,014 million, $826 million and $653 million in
fiscal 1998, 1997 and 1996, 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 will continue 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 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 is
a complex and uncertain process requiring high
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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 final assembly,
test and quality control of systems, materials and components. Sun has
manufacturing facilities in California, Oregon, 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 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
materially 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 materially 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 material 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
materially 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
materially 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 volumes,
mix of products and configurations, among other things, in order to achieve
acceptable yields and costs. Future operating results will depend to a
considerable extent on the Company's ability to closely manage product
introductions in order to minimize unfavorable patterns of customer orders, to
reduce levels of older inventory, and to ensure that adequate supplies of new
products can be delivered to meet customer demand. The ability of the Company to
match supply and demand is further complicated by the 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 materially 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.
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<PAGE> 10
Generally, the computer systems sold by Sun, such as the products based on
UltraSPARC processors are the result of both hardware and software development,
such that delays in software development can delay the Company's ability 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 materially adversely affect the
future operating results of the Company.
COMPETITION
The markets for the Company's products and services are 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 lines and the scalability of its products
and network computing model, the Company competes in many segments of the
network computing market across a broad spectrum of customers.
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
upgrade ability, 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), Compaq Computer Corporation
(Compaq) 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 Compaq, as well as other mini and mainframe
computer suppliers. In addition, the Company is facing increasing competition
from these competitors as well as from certain systems manufacturers such as
Dell Computer Corporation and certain of its competitors listed above, whose
products are based on microprocessors from Intel Corporation (Intel) coupled
with Windows NT operating system software from Microsoft Corporation
(Microsoft). 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 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.
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<PAGE> 11
Sun has also strived to make its Java technology a programming standard for
complex networks. Sun develops applications, tools and systems platforms, as
well as works with third-parties to create products and technologies, in order
to continue enhance the Java platform's capabilities. As part of this effort,
Sun licenses its Java technology widely encouraging competitors of Sun to also
develop products competing with these applications, tools and platforms. 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
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 HP, IBM,
Compaq and SGI, 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. Also, 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 new enhanced products. 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 and intensify into fiscal 1999 with the
increased availability of products based on microprocessors from Intel coupled
with Windows NT operating system 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.
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 or 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
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.
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
As of June 30, 1998, Sun had approximately 26,300 employees. 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
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<PAGE> 12
operations, and overall projected growth. None of Sun's employees in the United
States are represented by a labor union.
ADDITIONAL FACTORS AFFECTING THE COMPANY'S BUSINESS
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 value of its assets, and
when necessary, make adjustments thereto. Acquisitions may involve the
amortization of acquired intangible assets in periods following such
acquisitions. In addition, acquisition transactions are accompanied with a
number of risks, including, among other things, those associated with
integrating operations, personnel and technologies acquired and the potential
for unknown liabilities of the acquired business.
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 across the
enterprise that affect numerous operational and financial systems and processes.
Such activities are currently planned to be fully operational in the first half
of fiscal 1999. The time period in which the new business practices and related
information systems will be implemented are forward-looking statements subject
to risks and uncertainties, and actual results may differ materially from those
set forth above as a result of a number of risk factors. In particular, the
timing and duration of the implementation of the new business practices and
information systems is subject to a number of risks, including the complexity of
the conversion process and the new systems themselves, the transfer of business
data and information from the previous system to the new system and the need for
substantial and comprehensive employee training in connection with the adoption
of such new business practices and information systems. 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 implementing these systems. In addition, the
implementation of these systems will require the Company to be without certain
capabilities critical to normal operation of its business (such as processing
orders and shipping product) for a period of time as the Company shifts to the
new systems. There can be no assurance that this interruption in the use and
availability of enterprise-wide information systems will not have a material
adverse effect on the Company's business and operating results. In addition, 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.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20". As a
result, in less than two years, computer systems and/or software products used
by many companies may need to be upgraded to comply with such Year 2000
requirements. The Company is currently expending resources to review its
products and services, as well as its internal use software in order to identify
and modify those products, services and systems that are not Year 2000
compliant. The costs associated with this effort are not incremental to the
Company, but represents a reallocation of existing resources. The Company
believes any modifications deemed necessary will be made on a timely basis and
does not believe that the cost of such modifications will have a material effect
on the Company's operating results. In addition, the Company believes that its
internal system implementation efforts (as described in the above paragraph),
principally conducted to improve operating efficiencies, will also address the
Company's internal Year 2000 compliance issues. Additionally, the Company is in
the process of evaluating the need for contingency plans with respect to Year
2000 requirements. The necessity of any contingency plan must be evaluated on a
case-by-case basis and will vary considerably in nature depending on the Year
2000 issue it may need to address. The Company's expectations as to the extent
and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph and the paragraph
below. There can be no assurance however, that the Company will be able to
successfully
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<PAGE> 13
modify on a timely basis such products, services and systems to comply with Year
2000 requirements, which failure could have a material adverse effect on the
Company's operating results.
Based on the Company's assessment to date, most newly introduced products
and services of the Company are Year 2000 compliant, however some of the
Company's customers are running product versions that are not Year 2000
compliant. The Company has been encouraging such customers to migrate to current
product versions. In addition, the Company faces risks to the extent that
suppliers of products, services and systems purchased by the Company and others
with whom the Company transacts business on a worldwide basis do not have
business systems or products that comply with the Year 2000 requirements. To the
extent that Sun is not able to test technology provided by third-party hardware
or software vendors, Sun is in the process of obtaining assurances from such
vendors that their systems are Year 2000 compliant. In the event any such third
parties cannot in a timely manner provide the Company with products, services or
systems that meet the Year 2000 requirements, the Company's operating results
could be materially adversely effected. Although the Company believes that the
cost of Year 2000 modifications for both internal-use software and systems or
the Company's products are not material, there can be no assurance that various
factors relating to the Year 2000 compliance issues, including litigation, will
not have a material adverse effect on the Company's business, operating results
or financial position.
Eleven of the 15 member countries of the European Union are scheduled to
establish fixed conversion rates between their existing sovereign currencies and
the Euro and to adopt the Euro as their common legal currency effective January
1, 1999. The Euro will then trade on currency exchanges and be available for
non-cash transactions. The Company is currently expending resources to review
and modify its products to support the Euro's requirements, determine pricing
strategies in the new economic environment, analyze the legal and contractual
implications for contracts, evaluate system capabilities, and ensure banking
vendors can support the Company's operations with respect to Euro transactions.
The Company expects that modifications will be made to its business operations
and systems on a timely basis and does not believe that the cost of such
modifications will have a material adverse impact on the Company's operating
results. There can be no assurance, however, the Company will be able to
complete such modifications to comply with Euro requirements, which could have a
material adverse effect on the Company's operating results. In addition, the
Company faces risks to the extent that vendors upon whom the Company relies and
their suppliers are unable to make appropriate modifications to support Euro
transactions. The Company has not yet completed it evaluation of the impact of
the Euro upon its functional currency designations.
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 1999, it will continue to
lease and acquire facilities throughout the world as its business requires.
Properties owned by the Company consist of approximately 1,000,000 square feet
on approximately 55 acres in Menlo Park, California; an approximately 300,000
square foot facility on approximately 60 acres in Newark, California where an
additional 400,000 square feet of facilities are under construction; an
approximately 260,000 square foot facility on approximately 20 acres in Palo
Alto, California; an approximately 230,000 square foot facility on approximately
30 acres in Linlithgow, Scotland; an approximately 235,000 square foot facility
in Plantation, Florida; an approximately 140,000 square foot facility in
Melbourne, Florida; 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
50 acres, approximately 120 acres in Broomfield, Colorado on which an
approximately 500,000 square foot facility is under construction; and
approximately 158 acres in Burlington, Massachusetts on which an approximately
530,000 square foot facility is under construction. The Company acquired an
approximately 82 acre site in Santa Clara, California. The Company also leases
approximately 7.2 million square feet, of which, approximately 3.1 million
square feet is in the San Francisco Bay Area with the remainder in approximately
230 sales and service offices located around the world. A substantial portion of
the Company's facilities, including its corporate headquarters and other
critical business operations are located near major earthquake faults. The
Company is uninsured and does not fund for earthquake-related losses. In
addition, the Company faces risks to the extent that suppliers
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<PAGE> 14
of products, services and systems purchased by the Company and others with whom
the Company transacts business on a worldwide basis are impacted by an
earthquake. As a result, the Company's business, financial condition or
operating results could be materially adversely effected in the event of a major
earthquake.
ITEM 3. LEGAL PROCEEDINGS
On October 7, 1997, the Company filed suit against Microsoft Corporation in
the United States District Court for the Northern District of California
alleging breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. On March
24, 1998 the United States District Court judge ruled in favor of the Company
granting a preliminary injunction directing Microsoft Corporation to cease using
the Company's Java Compatible Logo(TM) on Microsoft products that failed to pass
the applicable test suites from Sun. In addition, on May 12, 1998, the Company
filed a second amended complaint alleging copyright infringement by Microsoft
and motions requesting further preliminary injunctive relief directed against
the planned release by Microsoft of additional products that failed to pass the
applicable test suites from Sun. The Court held hearings and arguments on such
motions on September 8, 9, and 10, 1998 and took the matter under advisement.
The Company believes that the outcome of this matter will not have a material
adverse impact on Sun's financial condition, results of operations or cash flows
in any given fiscal year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the Executive
Officers of the Company as of September 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott G. McNealy 43 Chairman of the Board of Directors, President and Chief
Executive Officer
William T. Agnello 49 Vice President, Real Estate and the Workplace
Kenneth M. Alvares 54 Vice President, Human Resources
Alan E. Baratz 43 President, Java Software
Mel Friedman 60 President, Microelectronics
Lawrence W. Hambly 52 President, Enterprise Services
Masood A. Jabbar 48 President, Computer Systems
James Judson 44 Vice President, Finance, Worldwide Operations
Michael E. Lehman 48 Vice President, Corporate Resources and Chief Financial
Officer
Marc L. Loupe 44 Vice President, Finance and Planning, World-wide Field
Operations, Computer Systems
John S. McFarlane 49 President, Solaris Software
Stephen T. McGowan 50 Vice President, Finance, Computer Systems
Michael H. Morris 50 Vice President, General Counsel and Secretary
Michael Murray 42 Vice President, Finance and Administration, Enterprise
Services
Alton D. Page 42 Vice President, Treasurer
Gregory M. Papadopoulos 40 Vice President and Chief Technology Officer
Marissa Peterson 36 Vice President, Worldwide Operations, Computer Systems
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Frank A. Pinto 53 Vice President, Sales, The Americas, Computer Systems
Michael L. Popov 52 Vice President, COO Staff Operations
William J. Raduchel 52 Chief Strategy Officer
George Reyes 44 Vice President, Corporate Controller
Joseph P. Roebuck 62 Vice President, Worldwide Sales, Computer Systems
Edward Saliba 49 Vice President, Finance, Solaris Software
Janpieter T. Scheerder 49 President, Network Storage
John C. Shoemaker 55 Vice President and General Manager, Enterprise Desktop and
Server Systems, Computer Systems
Mark E. Tolliver 46 President, Consumer and Embedded
Kevin Walsh 56 Vice President, Operations, Corporate Resources
Edward J. Zander 51 Chief Operating Officer
</TABLE>
Mr. McNealy is a founder of the Company and has served as Chairman of the
Board, 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 the Company in
February 1982.
Mr. Agnello has served as Vice President, Real Estate and the Workplace of
the Company since March 1994. From June 1991 to March 1994 he served as
President, CB Madison Advisory Group, CB Commercial Real Estate Services Inc.
Mr. Alvares has served as Vice President, Human Resources of the Company
since June 1992.
Mr. Baratz has served as President, Java Software of the Company since
April 1998 and as President, JavaSoft from January 1996 to April 1998. From
August 1994 to November 1995 Mr. Baratz served as President and Chief Executive
Officer of Delphi Internet Services Corp., an Internet services provider. He
held various positions at IBM Corporation, including Director of Strategic
Development from July 1993 to July 1994 and as a Director of High Performance
Computing and Communication from January 1991 to June 1993.
Mr. Friedman has served as President, Microelectronics of the Company since
March 1998 and as Vice President, Worldwide Operations of Sun Microsystems
Computer Company ("SMCC") from April 1996 to March 1998. 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, Enterprise Services of the Company
since April 1998, as President, SunService from July 1993 to April 1998, as Vice
President, Marketing of SMCC from July 1991 to July 1993, as President of Sun
Microsystems Federal, Inc. from July 1988 to July 1991 and in various sales
management capacities of the Company from April 1983 to July 1988, most recently
as Vice President, Western Area Sales.
Mr. Jabbar has served as President, Computer Systems of the Company since
April 1998 and President of SMCC from February 1998 to April 1998. He served as
Vice President and Chief Financial Officer of SMCC from June 1994 to April 1998,
as Vice President, Finance and Planning, Worldwide Field Operations of SMCC from
July 1992 to June 1994 and as Vice President, Finance and Administration, United
States Field Operations for SMCC from July 1991 to June 1992. Mr. Jabbar served
as Director, Finance Administration, United States Field Operations for the
Company from October 1990 to June 1991, as Director of United States Field
Market for the Company from October 1989 to October 1990, as United States Sales
and Service Controller for the Company from April 1988 to October 1989 and as
United States and Intercontinental Sales Controller for the Company from
December 1986 to April 1988.
Mr. Judson has served as Vice President, Finance, Worldwide Operations of
the Company since May 1998. He served as SMCC Controller from May 1995 to May
1998 and as Assistant Controller for SMCC
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<PAGE> 16
Worldwide Field Operations from November 1993 to May 1995. Mr. Judson served as
Director of Financial Planning & Analysis, Worldwide Operations of the Company
from February 1992 to November 1993, as Director of Finance, Product Development
of the Company from November 1989 to August 1991, as Director and Division
Controller, Sun Microsystems Federal, Inc. from July 1986 to November 1989 and
as Plant Controller, Cost Accounting Manager, Financial Analyst of the Company
from July 1983 to July 1986.
Mr. Lehman has served as Vice President, Corporate Resources and Chief
Financial Officer of the Company since January 1998. He has served as Vice
President and Chief Financial Officer from February 1994 to January 1998, as
Vice President and Corporate Controller from June 1990 to February 1994, as
Director of Finance and Administration of Sun Microsystems of California, Ltd.
from September 1989 to June 1990, 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. Loupe has served as Vice President, Finance and Planning, Worldwide
Field Operations (WWFO), Computer Systems of the Company since May 1998. He
served as Director, International Development from June 1997 to May 1998, as
Director of Internal Audit from April 1994 to June 1997, as Director of Finance,
Intercontinental Operations from April 1991 to April 1994 and as Vice
President -- Finance & Operations, Sitka Corporation from July 1990 to April
1991. From July 1987 to July 1990, he served as Controller, Centram Systems
West.
Mr. McFarlane has served as President, Solaris Software of the Company
since April 1998. He served as Vice President, Solaris and Network Software from
December 1997 to April 1998 and as Vice President, Network Software Group from
May 1997 to December 1997. Mr. McFarlane served as Vice President, Technology at
Northern Telecom from 1993 to 1997.
Mr. McGowan has served as Vice President, Finance, Computer Systems of the
Company since March 1998. He served as Vice President, Finance, WWFO from June
1995 to March 1998 and as Vice President, Finance, Noth American Field
Operations (NAFO) from October 1992 to June 1995.
Mr. Morris has served as Vice President, General Counsel and Secretary of
the Company since October 1987.
Mr. Murray has served as Vice President, Finance and Administration,
Enterprise Services of the Company since April 1998 and as Assistant Corporate
Controller from August 1996 to April 1998. He served as Director, Finance, Sun
Microsystems Australia Pty. Ltd. from August 1994 to August 1996 and as
Director, Finance, Sun Microsystems of California, Ltd. from April 1992 to
August 1994. Mr. Murray served as Director, Internal Audit of the Company from
October 1989 to April 1992 and as Manager, Internal Audit from March 1989 to
October 1989.
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. Papadopoulos has served as Vice President and Chief Technology Officer
of the Company since March 1998. He served as Vice President and Chief
Technology Officer of SMCC from March 1996 to March 1998, as Chief Technology
Officer of SMCC from December 1995 to March 1996 and as Chief Scientist, Server
Systems Engineering of the Company from September 1994 to December 1995. Mr.
Papadopoulos served as Senior Architect, Thinking Machines Corporation from May
1993 to September 1994 and as Associate Professor, MIT from June 1991 to June
1995.
Ms. Peterson has served as Vice President, Worldwide Operations, Computer
Systems of the Company since April 1998. She served as Vice President, Worldwide
Logistics from October 1996 to April 1998. Prior to such time, since 1989 Ms.
Peterson served the Company in various positions, including Director, Worldwide
Manufacturing, Director, Sun Manufacturing and Director, Business Proc.
Mr. Pinto has served as Vice President, Sales, The Americas, Computer
Systems of the Company since July 1998. He served as Vice President, NAFO of
SMCC from July 1995 to July 1998, as Vice President, Northeast Area for SMCC
from January 1993 to June 1995, as Metro Regional Director of the Company
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<PAGE> 17
from June 1989 to December 1992 and as the Company's District Manager, Northeast
Major OEM District from November 1988 to June 1989.
Mr. Popov has served as Vice President, COO Staff Operations of the Company
since April 1998. He served as Vice President, Finance, SunService from June
1994 to April 1998 and as Assistant Corporate Controller of the Company from
January 1992 to June 1994.
Mr. Raduchel has served as Chief Strategy Officer of the Company since
January 1998. He served as Vice President, Corporate Planning and Development
and as Chief Information Officer from July 1991 to January 1998, as Vice
President Human Resources (acting) from July 1991 to June 1992, as Vice
President and Chief Financial Officer from June 1989 to July 1991, as well as
Chief Information Officer (acting) from November 1990 to July 1991 and as Vice
President, Corporate Planning and Development from October 1988 to June 1989.
Mr. Reyes has served as Vice President, Corporate Controller of the Company
since April 1994. He served as Audit Director from April 1992 to March 1994, as
Director of Finance for the Company's ICON operations from April 1991 to April
1992, as Assistant Controller from June 1989 to April 1991, as the Controller of
the Company's General Systems Group from July 1988 to June 1989 and as the
Company's Marketing Controller from March 1988 to June 1988.
Mr. Roebuck has served as Vice President, Worldwide Sales, Computer Systems
of the Company since April 1998. He served as Vice President, WWFO of SMCC from
April 1992 to April 1998, as Vice President, United States Field Operations,
SMCC from November 1988 to April 1992, and as Vice President of Sales for the
Company from January 1986 to November 1988.
Mr. Saliba has served as Vice President, Finance, Solaris Software of the
Company since May 1998. He served as Vice President, Finance, SunSoft, Inc. from
February 1996 to May 1998, as Finance Director, Sun Microelectronics from May
1994 to February 1996, as Finance Director, SMCC Worldwide Operations from May
1993 to May 1994, as Finance Director, SMCC Engineering from June 1991 to May
1993 and as Finance Manager and Director, East Coast Operations from April 1989
to June 1991.
Mr. Scheerder has served as President, Network Storage of the Company since
April 1998. He served as President, SunSoft, Inc. from August 1995 to April
1998, as Vice President, Server Products, SMCC from April 1995 to August 1995,
as Vice President, Solaris Products, SunSoft, Inc. from March 1992 to April 1995
and as Director of Marketing and Programming, SunSoft, Inc. from August 1991 to
March 1992.
Mr. Shoemaker has served as Vice President, General Manager, Enterprise
Desktop and Server Systems, Computer Systems of the Company since April 1998. He
served as Vice President, General Manager, Enterprise Server and Storage Group,
SMCC from April 1996 to April 1998, as Vice President, Worldwide Operations,
SMCC from July 1993 to April 1996, as Vice President, U.S. Operations, SMCC from
June 1992 to July 1993, as Vice President, Finance and Planning, Worldwide
Operations of the Company (on an acting basis since July 1992) from May 1990 to
July 1993, and as Vice President (acting), Materials, Worldwide Operations from
October 1991 to June 1992.
Mr. Tolliver has served as President, Consumer and Embedded of the Company
since April 1998. He served as Vice President, Market Development from July 1996
to April 1998 and as Vice President, Strategy from December 1995 to July 1996.
Mr. Tolliver served as Vice President, Marketing, MasPar Computer Corporation
from 1991 to 1994.
Mr. Walsh has served as Vice President, Operations, Corporate Resources of
the Company since March 1998. He served as Vice President, Worldwide Operations,
Finance and Planning, from February 1993 to March 1998.
Mr. Zander has served as Chief Operating Officer of the Company since
January 1998. He served as President, SMCC from February 1995 to January 1998,
as President, SunSoft, Inc. from July 1991 to February 1995 and as Vice
President, Corporate Marketing of the Company from October 1987 to July 1991.
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<PAGE> 18
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 1998 Annual Report to Stockholders. At September 15,
1998 there were 9,145 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, 1998:
<TABLE>
<CAPTION>
NUMBER OF
OFFICER DATE PRICE SHARES SOLD
------- ------- ------ -----------
<S> <C> <C> <C>
Michael L. Popov............................................ 4/28/98 $40.50 10,160
Janpieter T. Scheerder...................................... 5/21/98 $41.50 4,024
5/21/98 $41.50 687
</TABLE>
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 1998 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
1998 Annual Report to Stockholders.
ITEM 7A.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures pursuant to item 7A are not material
and are therefore not required.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item, 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 1998 Annual Report to Stockholders.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by reference
from the information contained under the caption "Election of Directors" in
Sun's 1998 Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders. Information regarding 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. Information regarding
Section 16 reporting compliance is incorporated by reference from information
contained under the caption "Executive Compensation -- Section 16(a) Beneficial
Ownership Reporting Compliance" in Sun's 1998 Proxy Statement.
17
<PAGE> 19
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 1998
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 1998 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 1998 Proxy
Statement.
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 1998 Annual Report to Stockholders.
Consolidated Statements of Income for each of the three years in the
period ended June 30, 1998 (page 26).
Consolidated Balance Sheets at June 30, 1998 and 1997 (page 27).
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 1998 (page 28).
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended June 30, 1998 (page 29).
Notes to Consolidated Financial Statements (pages 30 through 43).
Report of Ernst & Young LLP, Independent Auditors (page 44).
The Company's 1998 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:
<TABLE>
<CAPTION>
PAGE SCHEDULE TITLE
---- -------- -----
<C> <C> <S>
S-1... II Valuation and Qualifying Accounts
</TABLE>
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.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(11) Registrant's Restated Certificate of Incorporation, as
amended February 12, 1998.
3.2(11) Registrant's Bylaws, as amended February 11, 1998.
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.8(12) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998.
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(2) Registrant's 1982 Stock Option Plan, as amended, and
representative forms of Stock Option Agreement.
10.10(2) Registrant's Restricted Stock Plan, as amended, and
representative form of Stock Purchase Agreement.
10.11(4) 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(2) Registrant's 1987 Stock Option Plan and representative form
of Stock Option Agreement.
10.56(3) 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.
10.64(10) Registrant's 1988 Directors' Stock Option Plan as amended on
August 13, 1997.
10.65(10) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 13, 1997.
10.66(6) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 15, 1996.
10.66A(5) Representative form of agreement to Registrant's 1990
Long-Term Equity Incentive Plan.
10.74(5) Software Distribution Agreement dated January 28, 1991 by
and between the Registrant and UNIX Systems Laboratories,
Inc.
10.82(9) Revolving Credit Agreement dated August 28, 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, N.A.; and The Sumitomo
Trust Banking Co., Ltd.
10.84 Registrant's Non-Qualified Deferred Compensation Plan, as
amended July 1, 1998.
10.85(7) Registrant's Section 162(m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.87(9) Registrant's Equity Compensation Acquisition Plan, as
amended on August 28, 1997.
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.89(8) Form of Change of Control Agreement executed by each
corporate executive officer of Registrant.
10.90(8) Form of Change of Control Agreement executed by Chief
Executive Officer of Registrant.
10.91(8) Form of Vice President Change of Control Severance Plan.
10.92(8) Form of Director-Level Change of Control Severance Plan.
13.0 Registrant's 1998 Annual Report to Stockholders (to be
deemed filed only to the extent required by the instructions
to exhibits for reports on Form 10-K).
21.0 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (See pages 21-22).
27 Financial Data Schedule.
</TABLE>
- ---------------
(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 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.
(3) 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.
(4) Incorporated by reference to Exhibit 4.1 filed as an Exhibit to
Registrant's Registration Statement on Form S-8 file number 33-38220, filed
with the Securities and Exchange Commission on December 14, 1990.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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, 1997.
(10) Incorporated by reference to Exhibits 4.2 and 4.1, respectively filed as
exhibits to Registrant's Registration Statement on Form S-8 file number
333-40677, filed with the Securities and Exchange Commission on November
20, 1997.
(11) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998.
(12) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 6 filed on February 13, 1998.
20
<PAGE> 22
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 24, 1998
By: /s/ MICHAEL E. LEHMAN
------------------------------------
Michael E. Lehman
Vice President, Corporate Resources
and Chief Financial Officer
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.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SCOTT G. MCNEALY Chairman of the Board of September 24, 1998
- ------------------------------------------ Directors, President and Chief
(Scott G. McNealy) Executive Officer (Principal
Executive Officer)
/s/ MICHAEL E. LEHMAN Vice President, Corporate September 24, 1998
- ------------------------------------------ Resources and Chief Financial
(Michael E. Lehman) Officer (Principal Financial
Officer)
/s/ GEORGE REYES Vice President and Corporate September 24, 1998
- ------------------------------------------ Controller (Principal Accounting
(George Reyes) Officer)
/s/ L. JOHN DOERR Director September 24, 1998
- ------------------------------------------
(L. John Doerr)
/s/ JUDITH L. ESTRIN Director September 24, 1998
- ------------------------------------------
(Judith L. Estrin)
/s/ ROBERT J. FISHER Director September 24, 1998
- ------------------------------------------
(Robert J. Fisher)
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT L. LONG Director September 24, 1998
- ------------------------------------------
(Robert L. Long)
/s/ M. KENNETH OSHMAN Director September 24, 1998
- ------------------------------------------
(M. Kenneth Oshman)
/s/ A. MICHAEL SPENCE Director September 24, 1998
- ------------------------------------------
(A. Michael Spence)
</TABLE>
22
<PAGE> 24
SCHEDULE II
SUN MICROSYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<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, 1996:
Accounts receivable allowances..................... $ 99,607 $195,840 $194,717 $100,730
======== ======== ======== ========
Year ended June 30, 1997:
Accounts receivable allowances..................... $100,730 $273,959 $178,598 $196,091
======== ======== ======== ========
Year ended June 30, 1998:
Accounts receivable allowances..................... $196,091 $345,071 $305,599 $235,563
======== ======== ======== ========
</TABLE>
<PAGE> 25
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(11) Registrant's Restated Certificate of Incorporation, as
amended February 12, 1998.
3.2(11) Registrant's Bylaws, as amended February 11, 1998.
4.8(12) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998.
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(2) Registrant's 1982 Stock Option Plan, as amended, and
representative forms of Stock Option Agreement.
10.10(2) Registrant's Restricted Stock Plan, as amended, and
representative form of Stock Purchase Agreement.
10.11(4) 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(2) Registrant's 1987 Stock Option Plan and representative form
of Stock Option Agreement.
10.56(3) 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.
10.64(10) Registrant's 1988 Directors' Stock Option Plan as amended on
August 13, 1997.
10.65(10) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 13, 1997.
10.66(6) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 15, 1996.
10.66A(5) Representative form of agreement to Registrant's 1990
Long-Term Equity Incentive Plan.
10.74(5) Software Distribution Agreement dated January 28, 1991 by
and between the Registrant and UNIX Systems Laboratories,
Inc.
10.82(9) Revolving Credit Agreement dated August 28, 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, N.A.; and The Sumitomo
Trust Banking Co., Ltd.
10.84 Registrant's Non-Qualified Deferred Compensation Plan, as
amended July 1, 1998.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.85(7) Registrant's Section 162(m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.87(9) Registrant's Equity Compensation Acquisition Plan, as
amended on August 28, 1997.
10.89(8) Form of Change of Control Agreement executed by each
corporate executive officer of Registrant.
10.90(8) Form of Change of Control Agreement executed by Chief
Executive Officer of Registrant.
10.91(8) Form of Vice President Change of Control Severance Plan.
10.92(8) Form of Director-Level Change of Control Severance Plan.
13.0 Registrant's 1998 Annual Report to Stockholders (to be
deemed filed only to the extent required by the instructions
to exhibits for reports on Form 10-K).
21.0 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (See pages 21-22).
27 Financial Data Schedule.
</TABLE>
- ---------------
(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 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.
(3) 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.
(4) Incorporated by reference to Exhibit 4.1 filed as an Exhibit to
Registrant's Registration Statement on Form S-8 file number 33-38220, filed
with the Securities and Exchange Commission on December 14, 1990.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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, 1997.
(10) Incorporated by reference to Exhibits 4.2 and 4.1, respectively filed as
exhibits to Registrant's Registration Statement on Form S-8 file number
333-40677, filed with the Securities and Exchange Commission on November
20, 1997.
(11) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998.
(12) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 6 filed on February 13, 1998.
<PAGE> 1
EXHIBIT 10.84
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
(As Amended through July 1, 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Election to Participate in Plan . . . . . . . . . . . . . . . . . . . . . . . 5
5. Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Deferral Increments and Growth. . . . . . . . . . . . . . . . . . . . . . . . 6
7. Earnings or Losses on Accounts. . . . . . . . . . . . . . . . . . . . . . . . 6
8. Certain In-Service Account Distributions . . . . . . . . . . . . . . . . . . 7
9. Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10. Form and Time of Payment of Accounts . . . . . . . . . . . . . . . . . . . 7
11. Effect of Death of Participant. . . . . . . . . . . . . . . . . . . . . . . 8
12. General Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . 9
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 . . . . . . . . . . . . . . . . . . . . . . . . . 10
18. Amendment or Termination of the Plan . . . . . . . . . . . . . . . . . . . . 10
19. Choice of Law and Claims Procedure . . . . . . . . . . . . . . . . . . . . . 10
20. Execution and Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
2
<PAGE> 3
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
(As Amended through July 1, 1998)
Sun Microsystems, Inc. (the "Company"), acting on behalf of itself and
its U.S. subsidiaries, initially adopted the Sun Microsystems, Inc. U.S.
Non-Qualified Deferred Compensation Plan (the "Plan"), effective July 1, 1995.
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 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 (the "Trust").
4. The Company intends to make contributions to the Trust so that such
contributions will be held by the Trust and invested, reinvested and
distributed, all in accordance with this Plan and the Trust Agreement.
5. The Company intends that amounts contributed 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.
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:
3
<PAGE> 4
1. Purpose: The Plan provides Participants an opportunity to defer payment
of a portion of:
* Employee salary and incentive bonus/commissions (for Sales Vice
Presidents and Directors);
* Employee annual bonus awards; and
* Board of Directors retainer payments.
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. and its U.S. subsidiaries.
(f) Compensation means:
(i) The amount of the Eligible Employee's base salary paid by the
Company or one of its U.S. subsidiaries; and
(ii) The amount paid by the Company or one of its U.S.
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, incentive
bonus/commissions; and
(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.
For purposes of the foregoing, Compensation as described in
clauses (i), (ii) and (iii) shall be eligible for deferral only to the extent
such amounts are otherwise subject to U.S. payroll reporting and withholding.
(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.
4
<PAGE> 5
(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 U.S. subsidiaries.
(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 if the Participant has 10 years of Service;
or
(iv) 20th year anniversary of Service.
(o) Service means:
(i) Employment as a common-law employee of the Company or one of
its subsidiaries; or
(ii) Period served 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
5
<PAGE> 6
(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; or
(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 the Company's fiscal 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:
(a) He or she is subject to U.S. income and social security taxes and
not covered under a non-U.S. retirement plan;
(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 subject to the limits 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.
6
<PAGE> 7
(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.
(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; and
(ii) Up to 60% 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 benchmarks 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
7
<PAGE> 8
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 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
8
<PAGE> 9
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.
(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
9
<PAGE> 10
revocation 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 Plan 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 Plan Year are less than total
future liabilities (other than death benefits) created with respect to
Participants' Accounts as of the close of the current Plan Year. Contributions
to the Trust Fund are based on 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 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.
10
<PAGE> 11
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.
(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
11
<PAGE> 12
(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
12
<PAGE> 1
FINANCIAL REVIEW
OPEN HERE FOR A LONG-TERM VIEW OF SUN'S GROWTH
<PAGE> 2
HISTORICAL FINANCIAL REVIEW OF SUN MICROSYSTEMS, INC.
SUMMARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Dollars % Dollars % Dollars % Dollars %
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $9,791 100.0 $8,598 100.0 $7,095 100.0 $5,902 100.0
-----------------------------------------------------------------
Costs and expenses:
Cost of sales 4,693 47.9 4,320 50.2 3,921 55.3 3,336 56.5
Research and development 1,014 10.4 826 9.6 653 9.2 563 9.5
Selling, general and administrative 2,777 28.4 2,402 27.9 1,788 25.2 1,503 25.5
Purchased in-process research
and development 177 1.8 23 0.3 58 0.8 -- --
Total costs and expenses 8,661 88.5 7,571 88.0 6,420 90.5 5,402 91.5
-----------------------------------------------------------------
Operating income 1,130 11.5 1,027 12.0 675 9.5 500 8.5
Gain on sale of equity investment -- -- 62 0.7 -- -- -- --
Interest income (expense), net 46 0.5 32 0.4 34 0.5 23 0.4
Litigation settlement -- -- -- -- -- -- -- --
Income before income taxes 1,176 12.0 1,121 13.1 709 10.0 523 8.9
Provision for income taxes 413 4.2 359 4.2 232 3.3 167 2.8
-----------------------------------------------------------------
Net income $ 763 7.8 $ 762 8.9 $ 477 6.7 $ 356 6.1
Net income per common share--diluted $ 1.93 $ 1.96 $ 1.21 $ 0.91
-----------------------------------------------------------------
Shares used in the calculation of net
income per common share--diluted 394 389 393 394
- ------------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING AND CAPITALIZATION DATA YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets (millions) $ 5,771 $ 4,697 $ 3,801 $ 3,545
--------------------------------------------------
Long-term debt and other obligations (millions) $ 75 $ 106 $ 60 $ 91
--------------------------------------------------
Current ratio 2.0 2.0 2.0 2.2
--------------------------------------------------
Long-term debt-to-equity ratio -- 0.015 0.018 0.039
--------------------------------------------------
Return on average equity 24% 31% 22% 19%
--------------------------------------------------
Return on average capital 24% 30% 23% 18%
--------------------------------------------------
Return on average assets 15% 18% 13% 11%
--------------------------------------------------
Effective income tax rate 35.1% 32% 33% 32%
--------------------------------------------------
Average shares and equivalents (thousands) 394,274 388,967 393,380 393,700
--------------------------------------------------
Book value per outstanding share $ 9.34 $ 7.40 $ 6.05 $ 5.39
- -------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 3
HISTORICAL FINANCIAL REVIEW OF SUN MICROSYSTEMS, INC.
SUMMARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars % Dollars % Dollars % Dollars % Dollars % Dollars %
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $4,690 100.0 $4,309 100.0 $3,589 100.0 $3,221 100.0 $2,466 100.0 $1,765 100.0
-------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 2,753 58.7 2,518 58.4 1,963 54.7 1,758 54.6 1,399 56.7 1,010 57.2
Research and development 500 10.7 445 10.3 382 10.6 356 11.1 302 12.2 234 13.3
Selling, general and administrative 1,160 24.7 1,105 25.7 983 27.4 812 25.2 588 23.9 433 24.5
Purchased in-process research
and development -- -- -- -- -- -- -- -- -- -- -- --
Total costs and expenses 4,413 94.1 4,068 94.4 3,328 92.7 2,926 90.9 2,289 92.8 1,677 95.0
-------------------------------------------------------------------------------------------
Operating income 277 5.9 241 5.6 261 7.3 295 9.1 177 7.2 88 5.0
Gain on sale of equity investment -- -- -- -- -- -- -- -- -- -- -- --
Interest income (expense), net 6 0.1 (2) -- (6) (0.2) (11) (0.3) (23) (0.9) (10) (0.6)
Litigation settlement -- -- (15) (0.4) -- -- -- -- -- -- -- --
Income before income taxes 283 6.0 224 5.2 255 7.1 284 8.8 154 6.3 78 4.4
Provision for income taxes 87 1.8 67 1.6 82 2.3 94 2.9 43 1.8 17 1.0
-------------------------------------------------------------------------------------------
Net income $ 196 4.2 $ 157 3.6 $ 173 4.8 $ 190 5.9 $ 111 4.5 $ 61 3.4
Net income per common share--diluted $ 0.50 $ 0.37 $ 0.42 $ 0.45 $ 0.30 $ 0.19
-------------------------------------------------------------------------------------------
Shares used in the calculation of net
income per common share--diluted 388 430 431 439 395 348
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING AND CAPITALIZATION DATA YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets (millions) $ 2,898 $ 2,768 $ 2,672 $ 2,326 $ 1,779 $ 1,269
-------------------------------------------------------------------------
Long-term debt and other obligations (millions) $ 122 $ 178 $ 348 $ 401 $ 359 $ 145
-------------------------------------------------------------------------
Current ratio 2.0 2.4 2.6 2.5 2.6 1.9
-------------------------------------------------------------------------
Long-term debt-to-equity ratio 0.075 0.11 0.23 0.33 0.39 0.22
-------------------------------------------------------------------------
Return on average equity 12% 10% 13% 18% 14% 12%
-------------------------------------------------------------------------
Return on average capital 12% 9% 10% 13% 11% 9%
-------------------------------------------------------------------------
Return on average assets 7% 6% 7% 9% 7% 6%
-------------------------------------------------------------------------
Effective income tax rate 33% 30% 32% 33% 28% 22%
-------------------------------------------------------------------------
Average shares and equivalents (thousands) 387,056 420,500 406,560 412,268 377,476 340,664
-------------------------------------------------------------------------
Book value per outstanding share $ 4.34 $ 4.03 $ 3.72 $ 3.15 $ 2.51 $ 1.97
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 4
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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Products 87.9 90.1 90.2
Services 12.1 9.9 9.8
------------------------------------
Total net revenues 100.0% 100.0% 100.0%
Cost of sales:
Products 40.5 44.0 48.9
Services 7.4 6.2 6.4
------------------------------------
Total cost of sales 47.9 50.2 55.3
Gross margin 52.1 49.8 44.7
Research and development 10.4 9.6 9.2
Selling, general and administrative 28.4 27.9 25.2
Purchased in-process research and development 1.8 0.3 0.8
------------------------------------
Operating income 11.5 12.0 9.5
Gain on sale of investment -- 0.7 --
Interest income, net 0.5 0.4 0.5
------------------------------------
Income before income taxes 12.0 13.1 10.0
Provision for income taxes 4.2 4.2 3.3
------------------------------------
Net income 7.8% 8.9% 6.7%
- --------------------------------------------------------------------------------------
</TABLE>
This Annual Report, including the following sections, contains forward-looking
statements within the meaning of the Private Securities Litigation 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 selling, 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 predicted in any such forward-looking statements. Such
factors include, but are not limited to, adverse changes in general economic
conditions, including adverse 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
(including the downturn of economic trends and unfavorable currency movements in
the Asia Pacific marketplace), risks associated with the Company's efforts to
comply with Year 2000 requirements, and other factors, including those listed
below.
RESULTS OF OPERATIONS
NET REVENUES
Sun's products net revenues increased $856 million, or 11%, to $8,603 million in
fiscal 1998, compared with an increase of $1,355 million, or 21%, in fiscal
1997. More than 50% of the increase in products revenues in fiscal 1998 resulted
from increased demand throughout the fiscal year for workgroup, enterprise, and
departmental servers and high-end desktop systems and to a lesser extent from
high-end storage, memory and related products. The increase in products revenues
in fiscal 1997 over fiscal 1996 was primarily attributable to increased
shipments of richly configured servers, and higher revenues from memory, storage
options, and accessories.
Sun's services net revenues increased $336 million, or 40%, to $1,188 million in
fiscal 1998, compared with an increase of $149 million, or 21%, in fiscal 1997.
The increase in services revenues is primarily the result of a larger installed
product base due to increased product unit sales as described above, as well as
increased revenues associated with Sun professional services. The increase in
services revenue from fiscal 1996 to fiscal 1997 is primarily the result of
products revenue growth.
In fiscal 1998 and fiscal 1997, domestic net revenues grew by 16% and 25%,
respectively, while international net revenues (including United States exports)
grew 12% and 17%, respectively. Revenues from international operations
represented 48%, 49%, and 50% of total revenues in fiscal 1998, 1997, and 1996,
respectively.
European net revenues increased 20% in fiscal 1998 and 1997, primarily due to
continued market acceptance of Sun's network computing products and services in
most major European markets.
Japan net revenues decreased 5% for fiscal 1998, compared to a decrease of 3% in
fiscal 1997. The Company attributes
20
<PAGE> 5
the decrease in revenues to current macroeconomic trends affecting the Japanese
market, including currency movements against the U.S. dollar. The Company does
not expect these trends to change materially in the near term. The foregoing is
a forward-looking statement that is subject to risks and uncertainties, and
actual results may differ materially from those set forth in such statement as a
result of a number of factors. In particular, 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 9% in fiscal 1998, compared with 33%
in fiscal 1997, primarily due to expanding markets in China, Australia, and
Latin America. This slowing in the growth rate in fiscal 1998 is attributable to
a downturn in economic trends and unfavorable currency movements in the Asia
Pacific marketplace.
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 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
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 movement on these instruments is not material. See "Other Financial
Instruments" in Note 1 of the "Notes to Consolidated Financial Statements" for
more details.
GROSS MARGIN
Products gross margin was 53.8% for fiscal 1998, compared with 51.1% and 45.7%
for fiscal 1997 and 1996, respectively.
The increase in products gross margin in fiscal 1998 resulted primarily from
sales of more richly configured, higher margin servers and desktop systems, and
to a lesser extent, from decreased component costs. The increase in products
gross margin in fiscal 1997 over fiscal 1996 was primarily due to increased
shipments of richly configured servers and higher revenues from memory, storage
options, and accessories.
Services gross margin was 39.3% for fiscal 1998, compared with 37.7% and 35.5%
for fiscal 1997 and 1996, respectively. These increases reflect the increase in
services revenues year over year as the result of a larger installed base and
increased investment by the Company in its services business.
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 was unable to mitigate the resulting margin
pressure by maintaining a favorable mix of systems, software, service, and other
products, and by achieving component cost reductions, operating efficiencies,
and increasing volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased $188 million, or 22.7%, in
fiscal 1998 to $1,014 million, compared with an increase of $173 million, or
26.5%, in fiscal 1997. As a percentage of net revenues, R&D expenses were 10.4%,
9.6%, and 9.2% in fiscal 1998, 1997, and 1996, respectively. The increase in R&D
spending, both in dollars and as a percentage of revenues, was a result of the
Company's continued significant investment related to the 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 for systems and software products, as well as
microprocessor technologies, the Company must continue to invest significant
resources in new systems, software, and microprocessor development, as well as
in enhancements to existing products. The Company expects R&D expenses to
increase in dollar amount in fiscal 1999 while remaining in the range of 10% of
revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased $375 million, or
15.6%, in fiscal 1998 to $2,777 million compared with an increase of $615
million, or 34.4%, in fiscal 1997. As a percentage of net revenues, these
expenses were 28.4%, 27.9%, and 25.2% in fiscal 1998, 1997, and 1996,
respectively. The increase as a percentage of net revenues in fiscal 1998
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
reflects, in part, the Company's ongoing efforts to expand its demand creation
programs and service and support organizations. The dollar increase also
reflects investments aimed at improving Sun's own business processes. The
increase in dollar amount of SG&A expenses in fiscal 1997 was primarily
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. In fiscal 1999,
the Company expects SG&A expenses to increase in dollar amount, as the Company
continues 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 organizations.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development of $176.4 million, $23 million,
and $57.9 million in fiscal 1998, 1997, and 1996, respectively, represents the
write-off of technology associated with the Company's acquisitions of Diba,
Inc.; Integrity Arts, Inc.; Chorus Systems, S.A.; Red Cape Software,
Inc.; and the storage products business of Encore Computer Corporation in fiscal
1998, Long View Technologies, LLC in fiscal 1997 and Integrated Micro Products
plc, and Lighthouse Design, Ltd. in fiscal 1996. See also "Acquisitions" in
Footnote 2 of the "Notes to Consolidated Financial Statements."
GAIN ON SALE OF EQUITY INVESTMENT
In fiscal 1997, the gain on sale of equity investment of $62 million represents
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 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 note payable.
Net interest income increased to $46.1 million in fiscal 1998, compared with
$32.4 million and $33.9 million in fiscal 1997 and fiscal 1996, respectively.
The increase in net interest income for fiscal 1998 is primarily the result of
higher interest earnings due to a larger average portfolio of cash and
investments as compared with the corresponding period in fiscal 1997. The
decrease in net interest income for fiscal 1997, as compared with fiscal 1996,
was 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 principal/notional amount of the Company's cash equivalents and short-term
investments at June 30, 1998 were $783.8 million. These investments, which
generally mature in fiscal 1999, bear interest at an average rate of 5.2% and
have a fair market value of $783.9 million.
INCOME TAXES
The effective tax rate for fiscal 1998 was 33% before a $25.2 million tax charge
resulting from a nonrecurring write-off of in-process research and development
associated with the acquisitions of Diba, Inc.; Integrity Arts, Inc.; and Red
Cape Software, Inc. 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 Company currently expects its effective tax rate to remain at 33% for fiscal
1999. This rate excludes the impact of potential mergers and acquisitions, the
tax effect of which will be accounted for in the interim quarter in which the
transaction takes place. The expected rate is based on current tax law and
current estimate of earnings, and is subject to change.
FUTURE OPERATING RESULTS
The markets for Sun's products and services are intensely competitive and
subject to continuous, rapid technological change, short product life cycles,
and frequent product performance improvements and price reductions. Due to the
breadth of the Company's product lines and the scalability of its products and
network computing model, Sun competes in many segments of the network computing
market across a broad spectrum of customers. The Company expects the markets for
its products and technologies, as well as its competitors within such markets,
will continue to change as the rightsizing trend shifts customer buying patterns
to network-based systems, which often employ solutions from multiple vendors.
Competition in these markets will also continue to intensify as Sun and its
competitors, principally Hewlett-Packard Co., International Business Machines
Corporation, Compaq Computer 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 certain
systems manufacturers, including Dell Computer Corporation and certain of its
competitors listed above, whose products are based on micro-processors 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
22
<PAGE> 7
in periods leading up to the Company's introduction of its own new enhanced
products. The Company expects this pressure to continue and intensify into
fiscal 1999. While many other technical, service, and support capabilities
affect a customer's buying decision, the Company's future operating results will
depend, in part, on its ability to compete with these technologies.
The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high-performance computer products,
such as the Company's development of the UltraSPARC microprocessor, is a complex
and uncertain process requiring high levels of innovation from the Company's
designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things, in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory, and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be adversely affected if the Company is not able to correctly anticipate
the level of demand for the mix of products. Because the Company is continuously
engaged in this product development, introduction, and transition process, its
operating results may be subject to considerable fluctuation, particularly when
measured on a quarterly basis.
The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a significant adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
adversely affect the Company's net revenues and operating results. To secure
components for development, production, and introduction of new products, the
Company frequently makes advanced payments to certain suppliers and often enters
into non-cancelable 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 products based on
UltraSPARC processors, 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.
A significant portion of the Company's revenues is derived from international
sales and is therefore subject to inherent risks related thereto, including the
general economic and political conditions in each country, currency exchange
rate fluctuations, the effect of the tax structures of various jurisdictions,
changes to and compliance with a variety of foreign laws and regulations, trade
protection measures, and import and export licensing requirements. There can be
no assurance that the economic crisis and currency issues currently being
experienced in certain parts of Asia will not have an adverse effect on the
Company's revenue or revenue growth rates in the future. The impact of any of
the foregoing factors could have an adverse effect on the Company's future
financial condition and operating results.
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 value of its assets, and when necessary, make adjustments thereto.
Acquisitions may involve the amortization of acquired intangible assets in
periods following such acquisitions. In addition, acquisition transactions are
accompanied by a number of risks, including, among other things, those
associated with integrating operations, personnel, and technologies acquired,
and the potential for unknown liabilities of the acquired business.
23
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 across the
enterprise that affect numerous operational and financial systems and processes.
Such activities are currently planned to be fully operational in the first half
of fiscal 1999. The time period in which the new business practices and related
information systems will be implemented are forward-looking statements subject
to risks and uncertainties, and actual results may differ materially from those
set forth above as a result of a number of risk factors. In particular, the
timing and duration of the implementation of the new business practices and
information systems are subject to a number of risks, including the complexity
of the conversion process and the new systems themselves, the transfer of
business data and information from the previous system to the new system, and
the need for substantial and comprehensive employee training in connection with
the adoption of such new business practices and information systems. 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 implementing these systems. In addition, the
implementation of these systems will require the Company to be without certain
capabilities critical to normal operation of its business (such as processing
orders and shipping product) for a period of time as the Company shifts to the
new systems. There can be no assurance that this interruption in the use and
availability of enterprise-wide information systems will not have a material
adverse effect on the Company's business and operating results. In addition, 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.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As the year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20." As a
result, in less than two years, computer systems and/or software products used
by many companies may need to be upgraded to comply with such Year 2000
requirements. The Company is currently expending resources to review its
products and services, as well as its internal-use software in order to identify
and modify those products, services, and systems that are not Year 2000
compliant. The costs associated with this effort are not incremental to the
Company, but represent reallocation of existing resources. The Company believes
any modifications deemed necessary will be made on a timely basis and does not
believe that the cost of such modifications will have a material effect on the
Company's operating results. In addition, the Company believes that its internal
system implementation efforts (as described in the above paragraph), principally
conducted to improve operating efficiencies, will also address the Company's
internal Year 2000 compliance issues. Additionally, the Company is in the
process of evaluating the need for contingency plans with respect to Year 2000
requirements. The necessity of any contingency plan must be evaluated on a
case-by-case basis and will vary considerably in nature depending on the Year
2000 issue it may need to address. The Company's expectations as to the extent
and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph and the paragraph
below. There can be no assurance however, that the Company will be able to
successfully modify on a timely basis such products, services, and systems to
comply with Year 2000 requirements, which failure could have a material adverse
effect on the Company's operating results.
Based on the Company's assessment to date, most newly introduced products and
services of the Company are Year 2000 compliant, however some of the Company's
customers are running product versions that are not Year 2000 compliant. The
Company has been encouraging such customers to migrate to current product
versions. In addition, the Company faces risks to the extent that suppliers of
products, services, and systems purchased by the Company and others with whom
the Company transacts business on a worldwide basis do not have business systems
or products that comply with the Year 2000 requirements. To the extent that Sun
is not able to test technology provided by third-party hardware or software
vendors, Sun is in the process of obtaining assurances from such vendors that
their systems are Year 2000 compliant. In the event any such third parties
cannot, in a timely manner, provide the Company with products, services, or
systems that meet the Year 2000 requirements, the Company's operating results
could be materially adversely effected. Although the Company believes that the
cost of Year 2000 modifications for both internal-use software and systems or
the Company's products are not material, there can be no assurance that various
factors relating to the Year 2000 compliance issues, including litigation, will
not have a material adverse effect on the Company's business, operating results,
or financial position.
Eleven of the 15 member countries of the European Union are scheduled to
establish fixed conversion rates between their existing sovereign currencies and
the Euro, and to adopt the Euro as their common legal currency effective January
1, 1999. The Euro will then trade on currency exchanges and be available for
non-cash transactions. The Company is currently expending resources to review
and modify its products to support the Euro's requirements, determine pricing
strategies in the new economic environment, analyze the legal and
24
<PAGE> 9
contractual implications for contracts, evaluate system capabilities, and ensure
banking vendors can support the Company's operations with respect to Euro
transactions. The Company expects that modifications will be made to its
business operations and systems on a timely basis and does not believe that the
cost of such modifications will have a material adverse impact on the Company's
operating results. There can be no assurance, however, the Company will be able
to complete such modifications to comply with Euro requirements, which could
have a material adverse effect on the Company's operating results. In addition,
the Company faces risks to the extent that vendors upon whom the Company relies
and their suppliers are unable to make appropriate modifications to support Euro
transactions. The Company has not yet completed it evaluation of the impact of
the Euro upon its functional currency designations.
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. Also see Footnote 1 "Summary of Significant Accounting Policies."
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition strengthened as of fiscal 1998 year end when
compared with fiscal 1997. During fiscal 1998, operating activities generated
$1,527 million in cash and cash equivalents, compared with $1,105 million in
fiscal 1997. Accounts receivable increased $179 million, or 11%, to $1,846
million, due primarily to a 13% increase in net revenues in the fourth quarter
of fiscal 1998 as compared with the corresponding period of 1997. Deferred tax
assets and other current and noncurrent assets increased $240 million, or 35% to
$920 million, due primarily to the timing of payments for income and other
taxes, and due to the recording of goodwill and other intangible assets related
to the Company's acquisitions. Accrued liabilities and other increased $185
million, or 30%, due in part to increases in sales and marketing costs. Accounts
payable increased $27 million, or 6% due in part to additional operating
expenses associated with the expansions of business and corresponding increase
in head count.
The Company's investing activities used $1,169 million of cash in fiscal 1998,
an increase of $625 million from the $544 million used in fiscal 1997. The
increase resulted primarily from payments made for additions to property, plant
and equipment, and in connection with acquisitions. Additions to property, plant
and equipment totaled $830 million, up $276 million, or 50%, from fiscal 1997
additions, primarily due to the real estate development of the Company's
facilities and capital additions to support increased head count. The Company
plans to expend $800 to $900 million during fiscal 1999 related to fixed asset
additions, including approximately $300 million associated with the development
of additional campuses in Colorado, Massachusetts, California, and the United
Kingdom. In connection with the acquisition of NetDynamics, Inc. and other
acquisitions expected to be completed in the first and second quarters of fiscal
1999, contingent upon the completion of various closing conditions, the Company
also expects to record in-process research and development write-offs that are
not likely to exceed $170 million.
Approximately $195 million of cash was used by financing activities in fiscal
1998, compared with $430 million used in fiscal 1997. This change is primarily
due to a reduction in the dollar value of shares repurchased, from $456 million
for fiscal 1997 to $284 million for fiscal 1998, retirement of the receivable
purchase agreement of $125 million in 1997, and repayment of short-term
borrowings of $93 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 $7 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 agreement on the Company's mortgage loan
interest rate is not expected to be material.
At June 30, 1998, the Company's primary sources of liquidity consisted of cash,
cash equivalents, and short-term investments of $1,298 million, and a revolving
credit facility with banks aggregating $500 million, which was available subject
to compliance with certain covenants, and $694 million of borrowings under
available lines of credit to the Company's international subsidiaries. On
October 16, 1997, the Company filed a Registration Statement with the Securities
and Exchange Commission relating to the registration for public offering of
senior and subordinated debt securities and common stock with an aggregate
initial public offering price of up to $1 billion. On October 24, 1997, the
Registration Statement became effective, so that the Company may now choose to
offer, from time to time, the debt securities and common stock pursuant to Rule
415 in one or more separate series, in amounts, at prices, and on terms to be
set forth in the prospectus contained in the Registration Statement and in one
or more supplements to the prospectus. The Company believes that the liquidity
provided by existing cash and short-term investment balances and the borrowing
arrangements described above will provide sufficient capital to meet the
Company's requirements through fiscal 1999. However the Company believes the
level of financial resources is a significant competitive factor in its industry
and may choose at any time to raise additional capital through debt or equity
financing to strengthen its financial position, facilitate growth, and provide
the Company with additional flexibility to take advantage of business
opportunities that may arise.
25
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended June 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Products $8,603,259 $7,747,115 $6,392,358
Services 1,187,581 851,231 702,393
-----------------------------------------
Total net revenues 9,790,840 8,598,346 7,094,751
Costs and expenses:
Cost of sales--products 3,972,283 3,790,284 3,468,416
Cost of sales--services 721,053 530,176 452,812
Research and development 1,013,782 825,968 653,044
Selling, general and administrative 2,777,264 2,402,442 1,787,567
Purchased in-process research
and development 176,384 22,958 57,900
-----------------------------------------
Total costs and expenses 8,660,766 7,571,828 6,419,739
Operating income 1,130,074 1,026,518 675,012
Gain on sale of equity investment -- 62,245 --
Interest income 47,663 39,899 42,976
Interest expense (1,571) (7,455) (9,114)
-----------------------------------------
Income before income taxes 1,176,166 1,121,207 708,874
Provision for income taxes 413,304 358,787 232,486
-----------------------------------------
Net income $ 762,862 $ 762,420 $ 476,388
-----------------------------------------
Net income per common share--basic $ 2.04 $ 2.07 $ 1.28
-----------------------------------------
Net income per common share--diluted $ 1.93 $ 1.96 $ 1.21
-----------------------------------------
Shares used in the calculation of net income
per common share--basic 373,728 368,426 371,134
-----------------------------------------
Shares used in the calculation of net income
per common share--diluted 394,274 388,967 393,380
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
26
<PAGE> 11
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JUNE 30,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 822,267 $ 660,170
Short-term investments 476,185 452,590
Accounts receivable, net of allowances of
$235,563 in 1998 and $196,091 in 1997 1,845,765 1,666,523
Inventories 346,446 437,978
Deferred tax assets 371,841 286,720
Other current assets 285,021 224,469
-------------------------
Total current assets 4,147,525 3,728,450
Property, plant and equipment:
Machinery and equipment 1,251,660 1,057,239
Furniture and fixtures 113,636 93,078
Leasehold improvements 256,233 166,745
Land and buildings 635,699 341,279
-------------------------
2,257,228 1,658,341
Accumulated depreciation and amortization (956,616) (858,448)
-------------------------
1,300,612 799,893
Other assets, net 262,925 168,931
-------------------------
$5,711,062 $4,697,274
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 7,169 $ 100,930
Accounts payable 495,603 468,912
Accrued payroll-related liabilities 315,929 337,412
Accrued liabilities and other 810,562 625,600
Deferred service revenues 264,967 197,616
Income taxes payable 188,641 118,568
Note payable 40,000 --
-------------------------
Total current liabilities 2,122,871 1,849,038
Deferred income taxes and other obligations 74,563 106,299
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: 430,311,441 shares in 1998 and 430,535,886 shares in 1997 288 288
Additional paid-in capital 1,345,508 1,229,797
Retained earnings 3,150,935 2,409,850
Treasury stock, at cost: 54,007,866 shares in 1998 and
60,050,380 shares in 1997 (1,003,191) (915,426)
Currency translation adjustment and other 20,088 17,428
-------------------------
Total stockholders' equity 3,513,628 2,741,937
-------------------------
$5,711,062 $4,697,274
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
27
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
(IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 762,862 $ 762,420 $ 476,388
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 439,921 356,003 294,541
Gain on sale of equity investment -- (62,245) --
Tax benefit of options exercised 111,375 59,799 53,000
Purchased in-process research and development 176,384 22,958 57,900
Net increase in accounts receivable (176,075) (334,911) (160,238)
Net (increase) decrease in inventories 97,394 22,936 (135,742)
Net increase (decrease) in accounts payable (12,298) 143,845 17,275
Net increase in other current and non-current assets (206,210) (152,510) (43,701)
Net increase in other current and non-current liabilities 333,159 286,793 128,891
------------------------------------------
Net cash provided from operating activities 1,526,512 1,105,088 688,314
------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (830,143) (554,018) (295,638)
Acquisition of other assets (91,521) (37,645) ( 83,889)
Acquisition of short-term investments (958,354) (973,884) (1,301,798)
Maturities of short-term investments 523,032 634,765 1,424,324
Sales of short-term investments 432,047 347,771 228,377
Proceeds from sale of equity investment -- 62,245 --
Payments for acquisitions, net of cash acquired (244,020) (22,958) (96,100)
------------------------------------------
Net cash used by investing activities (1,168,959) (543,724) (124,724)
------------------------------------------
Cash flows from financing activities:
Issuance of stock, net of employee repurchases 71,975 52,969 59,554
Acquisition of treasury stock (284,396) (456,090) (522,336)
Proceeds from employee stock purchase plans 93,581 81,313 54,840
Proceeds (reduction) of short-term borrowings, net (92,967) 51,769 (1,625)
Repayment of receivable purchase agreement -- (125,000) --
Proceeds (reduction) of note payable and other 16,351 (35,009) (39,038)
------------------------------------------
Net cash used by financing activities (195,456) (430,048) (448,605)
Net increase in cash and cash equivalents 162,097 131,316 114,985
Cash and cash equivalents, beginning of year 660,170 528,854 413,869
------------------------------------------
Cash and cash equivalents, end of year $ 822,267 $ 660,170 $ 528,854
------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 905 $ 15,126 $ 18,140
Income taxes $ 334,550 $ 380,814 $ 193,461
Supplemental schedule of non-cash investing and
financing activities:
In conjunction with the Company's acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ 301,415 -- $ 101,500
Cash paid for assets (249,806) -- (96,100)
------------------------------------------
Liabilities assumed $ 51,609 -- $ 5,400
------------------------------------------
Stock issued in conjunction with acquisitions -- -- $ 19,012
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
28
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
SHARES AMOUNT ADDITIONAL RETAINED SHARES AMOUNT CURRENCY TOTAL
THREE YEARS ENDED JUNE 30, 1998 PAID-IN EARNINGS TRANSLATION STOCKHOLDERS'
(in thousands, except share amounts) CAPITAL ADJUSTMENT EQUITY
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 425,509,924 $ 72 $1,089,478 $1,205,483 (31,452,316) $ (206,067) $ 33,629 $2,122,595
Issuance of stock, net of
employee repurchases (40,468) -- -- (19,516) 14,561,928 131,493 -- 111,977
Issuance of restricted stock 850,662 -- 19,012 -- -- -- -- 19,012
Treasury stock purchased -- -- -- -- (37,465,488) (522,336) -- (522,336)
Net income -- -- -- 476,388 -- -- -- 476,388
Tax benefit and other -- -- 55,859 -- -- -- (12,009) 43,850
Balances at June 30, 1996 426,320,118 72 1,164,349 1,662,355 (54,355,876) (596,910) 21,620 2,251,486
Issuance of stock, net of
employee repurchases (10,000) -- -- (14,710) 10,378,115 137,574 -- 122,864
Treasury stock purchased -- -- -- -- (16,072,619) (456,090) -- (456,090)
Exercise of warrants 4,225,768 1 1,611 -- -- -- -- 1,612
Net income -- -- -- 762,420 -- -- -- 762,420
Tax benefit and other -- -- 63,837 -- -- -- (4,192) 59,645
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) 17,428 2,741,937
Issuance of stock, net of
employee repurchases (224,445) -- (2) (21,777) 12,638,384 196,631 -- 174,852
Treasury stock purchased -- -- -- -- (6,595,870) (284,396) -- (284,396)
Net income -- -- -- 762,862 -- -- -- 762,862
Tax benefit and other -- -- 115,713 -- -- -- 2,660 118,373
Balances at June 30, 1998 430,311,441 $288 $1,345,508 $3,150,935 (54,007,866) $(1,003,191) $ 20,088 $3,513,628
-------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
29
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Sun Microsystems, Inc. (the Company or Sun) 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,
floating rate notes, 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, 1998 and
1997.
Realized and unrealized gains and losses are computed on the specific
identification method based upon actual and quoted market prices, respectively.
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." The change in net unrealized gains and losses
in investments, net of income taxes, included in stockholders' equity at June
30, 1998 and 1997, 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:
<TABLE>
<CAPTION>
AT JUNE 30,
(In thousands) 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Raw materials $ 92,197 $236,900
Work in progress 58,765 50,577
Finished goods 195,484 150,501
----------------------
Total $346,446 $437,978
- ---------------------------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided principally on the straight-line method. Depreciation of fixed
assets is generally calculated for machinery and equipment, furniture and
fixtures, and buildings based upon useful lives of one to five years, five years
and twenty-five years, respectively. Leasehold improvement useful lives are the
shorter of five years or the applicable lease term.
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. Amortization expense for fiscal
30
<PAGE> 15
1998, 1997, and 1996 was $41.8 million, $26.6 million, and $13.4 million,
respectively. The Company evaluates the recoverability of 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 its effectiveness is determined by
matching 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 accrued liabilities or other assets, respectively.
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 quarter 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 as 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 or 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. When
significant obligations remain after products are delivered, revenue is only
recognized after such obligations are fulfilled. Service revenues are recognized
ratably over the contractual period or as the services are provided.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred. Advertising expenses
were $235 million, $272 million, and $168 million for fiscal years 1998, 1997,
and 1996, 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.
31
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTY
The Company provides currently for the estimated costs that may be incurred
under warranties for product shipped. Included in the balance sheet caption
"Accrued liabilities and other" is an accrued warranty liability of $115.5
million and $87.9 million at June 30, 1998 and 1997, respectively.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128 (FAS 128), "Earnings Per Share" which replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. The Company adopted FAS 128 in the second quarter of fiscal
1998. Share and per share amounts for all periods presented have been restated
to comply with FAS 128.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $762,862 $762,420 $476,388
--------------------------------------------
Shares used to compute net income per common share--basic 373,728 368,426 371,134
Effect of dilutive securities, options and warrants 20,546 20,541 22,246
--------------------------------------------
Shares used to compute net income per common share--diluted 394,274 388,967 393,380
--------------------------------------------
Net income per common share--basic $ 2.04 $ 2.07 $ 1.28
--------------------------------------------
Net income per common share--diluted $ 1.93 $ 1.96 $ 1.21
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 is immaterial at June 30, 1998 and 1997. 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 1998 the Company
provided approximately $23 million for doubtful accounts ($20 million and $11
million in 1997 and 1996, 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
As permitted by Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock-Based Compensation," the
32
<PAGE> 17
Company measures 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 net income per common share as if the fair value-based
method prescribed by FAS 123 had been applied in measuring compensation expense.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
OTHER RECENT PRONOUNCEMENTS
The Company intends to adopt Financial Accounting Standards No. 130 (FAS 130),
"Reporting Comprehensive Income" and Financial Accounting Standards No. 131 (FAS
131), "Disclosures About Segments of an Enterprise and Related Information" in
fiscal 1999. Both will require additional disclosure but will not have a
material effect on the Company's consolidated financial position or results of
operations. FAS 130 will be reflected in the Company's first quarter of 1999
interim financial statements. Components of comprehensive income for the Company
include items such as net income and changes in the value of available-for-sale
securities. FAS 131 requires segments to be determined based upon how management
measures performance and makes decisions about allocating resources. FAS 131
will first be reflected in the Company's 1999 Annual Report.
In 1998, Financial Accounting Standards No. 133 (FAS 133), "Accounting for
Derivative Instruments and Hedging Activities" was issued and is effective for
fiscal years commencing after June 15, 1999. The Company will comply with the
requirements of FAS 133 in fiscal year 2000 and does not expect the adoption of
FAS 133 will be material to the Company's consolidated results of operations.
In 1997, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition," is effective for all
transactions entered into in fiscal years beginning after December 15, 1997. The
Company will comply with the requirements of SOP 97-2, as amended by SOP 98-4,
in fiscal year 1999. The Company has not yet completed its assessment of the
impact of SOP 97-2, as amended by SOP 98-4, on the Company's consolidated
results of operations.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
fiscal years beginning after December 15, 1998 with early adoption permitted.
The Company has not yet completed its assessment of the impact of SOP 98-1 on
the Company's consolidated financial position or results of operations and may
adopt SOP 98-1 in fiscal 1999.
2. ACQUISITIONS
During fiscal 1998, 1997, and 1996, the Company acquired all of the outstanding
securities of a total of six technology companies (Diba, Inc.; Integrity Arts,
Inc.; Red Cape Software, Inc.; Long View Technologies, LLC.; Integrated Micro
Products, plc; and Lighthouse Design, Ltd.) and acquired the assets of two other
technology companies (Chorus Systems, S.A. and the storage products business of
Encore Computer Corporation), in separate transactions. These companies were
principally engaged in the development and/or sale of software and hardware
products. The aggregate consideration for all transactions was approximately
$404 million in cash, 850,000 shares of common stock, and the assumption of
certain liabilities. Sun has a payment due in fiscal 1999 of $35 million related
to the Encore Computer Corporation transaction. These transactions were
accounted for as purchases. The excess purchase price over the estimated fair
value of the net tangible assets acquired was allocated, based upon independent
third-party valuations, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
these acquisitions, purchased in-process research and development of
approximately $176.4 million, $23 million, and $57.9 million, associated with
products which had not achieved technological feasibility and for which no
alternative future uses were established by the Company, was written off in
1998, 1997, and 1996, respectively. Intangible assets, including goodwill, are
being amortized over their estimated useful lives, generally three years. The
results of operations of each company acquired from the dates of acquisition are
included in the Company's consolidated statements of income and are not material
to the Company.
On June 30, 1998, the Company entered into an Agreement and Plan of
Reorganization (Merger Agreement) with NetDynamics, Inc. (NetDynamics). Upon the
effectiveness of the Merger Agreement, NetDynamics' shareholders will exchange
all of their shares of common stock and preferred stock for shares of common
stock of Sun at an agreed-upon exchange ratio. See Footnote 12 "Subsequent
Events."
33
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The fair value of the Company's cash equivalents and short-term investments is
as follows:
<TABLE>
<CAPTION>
GROSS GROSS AT JUNE 30, 1998
UNREALIZED UNREALIZED ESTIMATED
(In thousands) COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and local government debt $ 94,843 $ 22 $ 11 $ 94,854
Corporate and other non-governmental debt 421,573 -- -- 421,573
U.S. government debt 53,474 74 -- 53,548
Floating rate notes 99,460 -- -- 99,460
Money market fund 97,900 -- -- 97,900
Other investments 16,599 -- -- 16,599
--------------------------------------------------------
Total $783,849 $ 96 $ 11 $783,934
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS AT JUNE 30, 1997
UNREALIZED UNREALIZED ESTIMATED
(In thousands) COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and local government debt $120,579 $ 16 $ 56 $120,539
Corporate and other non-governmental debt 282,240 5 89 282,156
U.S. government debt 85,628 233 13 85,848
Floating rate notes 45,870 -- -- 45,870
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
--------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 19
The cost and estimated fair values of cash equivalents and short-term
investments by contractual maturity are as follows:
<TABLE>
<CAPTION>
CASH EQUIVALENTS AND SHORT-TERM AT JUNE 30, 1998
INVESTMENTS COST ESTIMATED
(In thousands) FAIR VALUE
----------------------------------------------------------
<S> <C> <C>
Maturing in one year or less $684,389 $684,474
Maturing after one year 99,460 99,460
-----------------------
Total $783,849 $783,934
----------------------------------------------------------
</TABLE>
The fair value of the Company's borrowing arrangements and other financial
instruments is as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT JUNE 30, 1997
ASSET (LIABILITY) ASSET (LIABILITY)
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10.18% mortgage loan $(40,000) $(41,495) $ (40,000) $ (42,541)
Forward foreign exchange contracts 4,265 4,265 (2,861) (2,861)
Foreign currency option contracts -- 7,531 -- 1,262
Short-term borrowings (7,169) (7,169) (100,930) (100,930)
Interest-rate swap agreement -- 292 -- 196
------------------------------------------------------------------------------------------------
</TABLE>
4. DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments were as
follows:
<TABLE>
<CAPTION>
AT JUNE 30,
(In thousands) 1998 1997
--------------------------------------------------------------
<S> <C> <C>
Swap hedging debt $ 40,000 $ 40,000
Forward foreign exchange
contracts 930,155 856,979
Foreign currency option
contracts 241,861 254,182
--------------------------------------------------------------
</TABLE>
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. See additional information at "Other financial instruments"
contained in Footnote 1.
At June 30, 1998 and 1997, the Company had forward foreign exchange contracts of
less than three months duration, to exchange principally Japanese yen, British
pounds sterling, French francs, and German marks for U.S. dollars in the total
gross notional amounts of $930 million and $857 million, respectively. Of these
notional amounts, forward contracts to purchase foreign currency represented
$139 million and $128 million and forward contracts to sell foreign currency
represented $791 million and $729 million, at June 30, 1998 and 1997,
respectively. The Company also has purchased foreign currency options of less
than two months duration, to exchange principally Japanese yen, British pounds
sterling, French francs, and German marks for U.S. dollars.
5. BORROWING ARRANGEMENTS
The Company has a $40 million mortgage loan which is secured by real property
and a building and is included in note payable and other obligations at June 30,
1998 and 1997, respectively. 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, pay
variable) that results in the Company paying a rate based on three-month LIBOR,
which was 5.625% at June 30, 1998. The interest-rate swap agreement matures with
the loan agreement.
35
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1997, the Company negotiated a $500 million unsecured revolving credit
agreement with an international group of 20 banks. The agreement expires on
August 28, 2002. 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, 1998.
There were no borrowings under this facility at June 30, 1998.
At June 30, 1998, Sun's international subsidiaries had uncommitted lines of
credit aggregating approximately $694 million, of which approximately $7
million, denominated in Japanese yen, had been drawn. The average interest rate
at June 30, 1998 was 0.89%.
On October 16, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the registration for public
offering of senior and subordinated debt securities and common stock with an
aggregate initial public offering price of up to $1 billion. On October 24,
1997, the Registration Statement became effective, so that the Company may now
choose to offer, from time to time, the debt securities and common stock
pursuant to Rule 415 in one or more separate series, in amounts, at prices, and
on terms to be set forth in the prospectus contained in the Registration
Statement and in one or more supplements to the prospectus.
6. INCOME TAXES
Income before income taxes and the provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
(In thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
United States $ 589,387 $ 566,554 $291,126
Foreign 586,779 554,653 417,748
--------------------------------------------------
Total income before income taxes $1,176,166 $1,121,207 $708,874
--------------------------------------------------
Provision for income taxes:
Current:
United States federal $ 349,095 $ 303,537 $146,351
State 47,270 46,894 16,192
Foreign 106,192 67,234 67,959
--------------------------------------------------
Total current income taxes 502,557 417,665 230,502
--------------------------------------------------
Deferred:
United States federal (81,319) (66,027) (10,419)
State (6,492) (5,231) 1,178
Foreign (1,442) 12,380 11,225
--------------------------------------------------
Total deferred income taxes (89,253) (58,878) 1,984
--------------------------------------------------
Provision for income taxes $ 413,304 $ 358,787 $232,486
--------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 21
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:
<TABLE>
<CAPTION>
AT JUNE 30,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Inventory valuation $ 67,006 $ 66,057
Reserves and other accrued expenses 165,724 115,722
Fixed asset basis differences 81,926 63,717
Compensation not currently deductible 41,407 38,979
State income taxes 15,468 21,926
Other 68,687 33,901
--------------------------
Gross deferred tax assets 440,218 340,302
Deferred tax liabilities:
Net undistributed profits of subsidiaries (124,777) (112,758)
Other 428 (928)
--------------------------
Gross deferred tax liabilities (124,349) (113,686)
Net deferred tax assets $315,869 $226,616
- -----------------------------------------------------------------------------------------------
</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:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax rate at 35% $411,658 $392,423 $ 248,106
State income taxes, net of federal tax benefit 26,506 27,081 11,291
Foreign earnings permanently reinvested in
foreign operations (49,600) (63,550) (36,580)
Acquired in-process research and development 25,194 -- 5,690
Other (454) 2,833 3,979
--------------------------------------------------
Provision for income taxes $413,304 $358,787 $232,486
- -----------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1998, the Company has unrecognized deferred tax liabilities of
approximately $173 million related to cumulative net undistributed earnings of
foreign subsidiaries of approximately $559 million. These earnings are
considered to be permanently invested in operations outside the United States.
37
<PAGE> 22
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 $111,375, $59,799, and $53,000 in
fiscal 1998, 1997 and 1996, respectively, and were credited to stockholders'
equity.
The Company's United States income tax returns for fiscal years ended June 30,
1988 through 1996, are under examination, and the Internal Revenue Services 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
$132 million, $114 million, $86 million, $69 million, and $52 million for
fiscal years 1999, 2000, 2001, 2002, and 2003, respectively, and approximately
$175 million for years following fiscal 2003. Rent expense under the
noncancelable operating leases was $139 million in 1998, $113 million in 1997,
and $99 million in 1996.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has adopted a share purchase rights plan to protect stockholders'
rights in the event of a proposed takeover of the Company. Under the plan, a
preferred share purchase right (a "Right") is associated with each share of the
Company's common stock (a "Common Share"). Upon becoming exercisable, each Right
will entitle its holder to purchase 1/1000th of a share of Series A
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000th of a share has economic attributes and voting
rights equivalent to one Common Share at an exercise price of $300, 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 10% 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, each Right not held by the Acquiring Person
will entitle the holder to purchase for the exercise price that number of Common
Shares having 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 $0.01 per Right at any time prior
to becoming exercisable and in certain other circumstances. The Rights expire on
February 11, 2008.
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 non-statutory stock options as well as certain other awards. In
addition, these plans provide for issuance to eligible employees of
non-statutory 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 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 Directors' Stock Option Plan provides for the
automatic grant of stock options to non-employee 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 fiscal 1996 acquisition of
38
<PAGE> 23
Lighthouse Design, Ltd., former shareholders who are employees of the Company
were entitled to receive up to approximately 650,000 shares of stock upon
achievement of specific performance criteria over a three year period. Of this
amount, approximately 325,000 shares have vested.
Information with respect to stock option and stock purchase rights activity is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS/RIGHTS
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
(In thousands, except per share amounts) FOR GRANT OF SHARES PRICE PER SHARE EXERCISE PRICE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Additional shares reserved 5,172 -- -- --
Grants (14,881) 14,881 $0.0006 - $47.3750 $37.81
Exercises -- (9,263) $0.0006 - $33.9375 $ 8.53
Cancellations 1,991 (1,991) $1.350 - $47.3750 $21.25
------------------------------------------------------------
Balance at June 30, 1998 26,411 54,986 $ 0.00067 - $47.3750 $22.28
----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes significant ranges of outstanding and exercisable
options at June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
SHARES LIFE IN YEARS PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.0007 - $ 5.00 2,247,449 5.4 $ 4.4713 1,407,509 $ 4.6831
$5.0001 - $10.00 16,491,580 4.6 $ 7.4620 8,415,847 $ 7.2509
$10.0001 - $15.00 2,222,150 5.0 $11.5499 581,070 $11.6474
$15.0001 - $20.00 1,699,320 5.4 $19.5000 485,520 $19.5000
$20.0001 - $25.00 7,245,162 6.2 $23.6803 1,864,404 $23.5609
$25.0001 - $30.00 9,075,495 6.6 $27.1952 1,641,853 $27.1933
$30.0001 - $40.00 5,040,863 7.3 $32.9105 559,492 $31.9555
$40.0001 - $45.00 10,302,247 8.1 $40.5786 -- $ --
$45.0001 - $47.3750 661,500 7.2 $46.8873 4,240 $47.3750
---------------------------------------------------------------------
54,985,766 6.1 $22.2831 14,959,935 $12.7343
- -------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 1998, options to purchase approximately 14,960,000 shares were
exercisable at prices from $0.8496 to $47.3750 with a weighted average and
aggregate exercise price of $12.7343 and $190,505,000, respectively, (11,143,000
shares at an aggregate price of $101,264,000 at June 30, 1997). At June 30,
1998, the Company retains repurchase rights to 1,003,536 shares issued pursuant
to stock purchase agreements and other stock plans.
The weighted average fair value at date of grant for options granted during
1998, 1997, and 1996 were $26.179, $17.873, and $11.517 per option,
respectively.
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 the date of purchase, whichever is less. Pursuant to this plan, the Company
issued approximately 3,505,046, 2,928,689, and 4,714,000 shares of common stock
in fiscal 1998, 1997, and 1996, respectively. At June 30, 1998, approximately
19,730,799 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
1998, the Company repurchased 2,941,640 shares at a cost of approximately $127
million under this program (2,919,632 shares at a cost of approximately $88
million in 1997).
In June 1995, the Board of Directors approved a plan to repurchase approximately
48 million shares of the Company's common stock. In July and August 1996, the
Company repurchased 8,904,258 shares at a cost of approximately $236 million
under this program.
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 1998, the Company repurchased 3,654,230 shares at a cost of approximately
$157 million under this program (4,248,729 shares at a cost of approximately
$132 million in 1997).
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 No. 25 and provide pro forma net income and pro forma net income per
common share disclosures for stock-based awards made during the year as if the
fair-value-based method defined in FAS No. 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 7.75 year
Treasury Yield as of the date of grant, ranging from 5.38% to 6.37% for fiscal
year 1998.
40
<PAGE> 25
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life 7.8 8.1 7.7
Interest rate 5.73% 6.06% 6.36%
Volatility 49.60% 46.60% 57.99%
Dividend yield -- -- --
----------------------------------------------------------------------------------
</TABLE>
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 $132,985,000,
$76,033,000, and $35,116,000 in 1998, 1997, and 1996, respectively,
($89,374,000, $51,703,000, and $23,879,000 after tax, and $.17, $.08, and $.05
per diluted 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 1998, 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 1996.
Pro forma net income and net income per common share are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
(In thousands, except per share amounts) 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $673,488 $710,717 $452,509
-----------------------------------------------
Basic:
Pro forma shares used in the calculation of pro
forma net income per common share 373,728 368,426 371,134
-----------------------------------------------
Pro forma net income per common share $ 1.80 $ 1.93 $ 1.22
-----------------------------------------------
Diluted:
Pro forma shares used in the calculation of pro
forma net income per common share 383,377 377,288 390,390
-----------------------------------------------
Pro forma net income per common share $ 1.76 $ 1.88 $ 1.16
-------------------------------------------------------------------------------------------------
</TABLE>
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. In fiscal 1998, one customer accounted
for 14% of revenues. No customer accounted for 10% or more of revenues in fiscal
1997 or 1996. 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
41
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions. In addition, United States export sales approximated 2.3%, 3.0%,
and 3.8% of net revenues during fiscal 1998, 1997, and 1996, respectively.
Information regarding geographic areas at June 30, 1998, 1997, and 1996, and for
each of the years then ended, is as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
UNITED REST OF
(In thousands) STATES EUROPE JAPAN WORLD ELIMINATIONS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998, and for
the year then ended:
Sales to unaffiliated customers $5,349,634 $2,708,514 $ 899,029 $833,663 $ -- $9,790,840
Intercompany transfers 969,752 1,938,940 17,609 45,652 (2,971,953) --
---------------------------------------------------------------------------------------------
Net revenues $6,319,386 $4,647,454 $ 916,638 $879,315 $(2,971,953) $9,790,840
---------------------------------------------------------------------------------------------
Operating income $ 642,685 $ 510,919 $ 25,225 $ 16,480 $ (65,235) $1,130,074
---------------------------------------------------------------------------------------------
Identifiable assets $4,005,490 $2,939,584 $ 352,529 $556,087 $(2,142,628) $5,711,062
--------------------------------------------------------------- -----------------------------
Liabilities $1,763,617 $1,484,335 $ 345,115 $543,080 $(1,938,713) $2,197,434
---------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
42
<PAGE> 27
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)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED,
(In thousands, except per share amounts) JUNE 30 MARCH 29 DECEMBER 28 SEPTEMBER 28
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $2,881,065 $2,360,928 $2,450,243 $2,098,604
Gross margin 1,488,429 1,259,292 1,278,613 1,071,170
Operating income 402,448 333,916 212,835 180,875
Net income 272,988 232,009 149,432 108,433
Net income per common share--diluted $ 0.69 $ 0.59 $ 0.38 $ 0.27
-----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED,
(In thousands, except per share amounts) JUNE 30 MARCH 30 DECEMBER 29 SEPTEMBER 29
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 common share--diluted $ 0.61 $ 0.58 $ 0.46 $ 0.32
-----------------------------------------------------------------------------------------------------
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On August 28, 1998, the Company acquired all of the outstanding capital stock of
NetDynamics, by means of a merger transaction pursuant to which all the shares
of NetDynamics capital stock were converted into the right to receive shares of
Sun common stock as described in Footnote 2. The transaction will be accounted
for as a purchase, and the purchase price will be allocated to tangible and
intangible assets and in-process research and development based upon an
independent third-party valuation.
On September 2, 1998, the Company signed a definitive agreement to acquire all
the outstanding capital stock of iPlanet, Inc. by means of a merger transaction
pursuant to which all of the shares of iPlanet, Inc. will be converted into the
right to receive cash. Upon and subject to closing, the transaction will be
accounted for as a purchase, and the purchase price will be allocated to
tangible and intangible assets and in-process research and development based
upon an independent third-party valuation. The closing of this acquisition is
contingent upon the completion of various closing conditions.
43
<PAGE> 28
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 15, 1998
44
<PAGE> 29
ABOUT YOUR INVESTMENT
STOCK SYMBOL
SUNW
STOCK MARKET
The Company's stock trades on The Nasdaq Stock Market.
STOCK TRADING
The following table sets forth the per share high and low sales prices for each
quarter shown, as well as the per share closing sales prices on the last trading
day of each quarter. In addition, the table shows the average trading volume for
each quarter listed.
<TABLE>
<CAPTION>
CLOSING SALES DAILY AVERAGE
HIGH LOW PRICES TRADING VOLUME
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended June 30, 1998
First quarter $ 53.3125 $ 35.9375 $ 46.8125 5,062,402
Second quarter 48.0469 30.3750 39.8750 7,340,261
Third quarter 50.0000 37.6250 41.7188 6,947,744
Fourth quarter 45.5625 38.1875 43.4375 4,633,556
Fiscal year ended June 30, 1997
First quarter $ 32.5625 $ 22.0000 $ 31.0625 9,502,834
Second quarter 35.1250 25.5000 25.6875 8,704,392
Third quarter 35.0000 26.2500 28.8750 5,834,969
Fourth quarter 38.7500 25.8750 37.2188 5,076,927
- ----------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF TWO-YEAR CUMULATIVE TOTAL RETURN
$100 invested on June 30, 1995, in stock or applicable index assuming
reinvestment of dividends.
[PERFORMANCE GRAPH]
45
STOCK OWNERSHIP PROFILE
(as of June 30, 1998)
[GRAPHIC]
<PAGE> 1
EXHIBIT 21.0
SUN MICROSYSTEMS, INC.
Subsidiaries
Belle Gate Investment B.V.
Dakota Scientific Software, Inc.
Diba, Inc.
Diba Europe Ltd.
Integrity Arts, Inc.
Lighthouse Design, Ltd.
Lighthouse Design R&D Corporation
NetDynamics, Inc.
Nihon Sun Microsystems K.K.
Red Cape Software, Inc.
Sarrus Software, Inc.
Solaris Corporation
Sun Microsystems (Barbados), Ltd.
Sun Microsystems (Schweiz) A.G.
Sun Microsystems AB
Sun Microsystems AO
Sun Microsystems AS
Sun Microsystems Australia Pty. Ltd.
Sun Microsystems Belgium N.V./S.A.
Sun Microsystems Benelux B.V.
Sun Microsystems Czech s.r.o.
Sun Microsystems Distributions International, Inc.
Sun Microsystems Europe Properties, Inc.
Sun Microsystems Europe Properties B.V.
Sun Microsystems Federal, Inc.
Sun Microsystems France, S.A.
Sun Microsystems GmbH
Sun Microsystems (Hellas) S.A.
Sun Microsystems Holdings Limited
Sun Microsystems Hungary Computing Limited Liability Company
Sun Microsystems Iberica, S.A.
Sun Microsystems India Private Limited
Sun Microsystems Intercontinental Operations
Sun Microsystems International, Inc.
Sun Microsystems International B.V.
Sun Microsystems Ireland Ltd.
Sun Microsystems Italia S.p.A.
Sun Microsystems Korea, Ltd.
<PAGE> 2
Sun Microsystems Limited
Sun Microsystems Malaysia Sdn. Bhd.
Sun Microsystems Management Services Corporation
Sun Microsystems Nederland B.V.
Sun Microsystems (NZ) Limited
Sun Microsystems Oy
Sun Microsystems Poland, Sp.z.o.o.
Sun Microsystems (Portugal), Lta
Sun Microsystems Properties, Inc.
Sun Microsystems Pte. Ltd.
Sun Microsystems Scotland B.V.
Sun Microsystems Scotland Limited
Sun Microsystems Slovakia, s.r.o.
Sun Microsystems (South Africa)(Pty) Limited
Sun Microsystems Superannuation Nominees Pty. Ltd.
Sun Microsystems (Thailand) Limited
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 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.
<PAGE> 1
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 15, 1998, included in the
1998 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,
333-34651 333-38163, 333-40675,33-40677,333-59503 and 333-62987 and Form S-3 No.
333-38021) pertaining to the 1982 Incentive Stock Option Plan, the Restricted
Stock Plan, the 1984 Employee Stock Purchase Plan, the 1987 Stock Option Plan,
the 1988 Directors' 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, the U.S. Non-Qualified Deferred
Compensation Plan, the Integrity Arts, Inc. 1996 Stock Option Plan, the 1997
French Stock Option Plan, the Red Cape Software, Inc. 1996 Stock Option Plan,
the NetDynamics, Inc. 1995 Stock Option Plan and the registration of
$1,000,000,000 of debt securities and common stock in the related Prospectuses
of our report dated July 15, 1998, 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.
/s/ Ernst & Young LLP
- ------------------------
Palo Alto, California
September 22, 1998
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