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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-15086
SUN MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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
(ADDRESS OF PRINCIPAL EXECUTIVE (REGISTRANT'S TELEPHONE NUMBER,
OFFICES, INCLUDING ZIP CODE) INCLUDING AREA CODE)
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SECURITIES PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
SHARE PURCHASE RIGHTS
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 14, 1999, was approximately $65,196,694,478 based
upon the last sale price reported for such date on The Nasdaq Stock 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 14, 1999 was 780,552,918.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to Stockholders for the fiscal year ended June
30, 1999 are incorporated by reference into Items 1, 5, 6, 7, 8 and 14 hereof.
Parts of the Proxy Statement for the 1999 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 forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995,
particularly statements regarding economic trends in geographic markets, trends
relating to customer buying patterns, trends and growth in the Internet
marketplace, and our expectations relating to future research and development
and selling, general and administrative expenses. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below and 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 our 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 our efforts to comply with Year 2000 requirements and
other factors.
GENERAL
We are a leading worldwide provider of products, services and support
solutions for building and maintaining network computing environments. We sell
scalable computer systems, high-speed microprocessors, and a complete line of
high performance software for operating network computing equipment and storage
products. We also provide a full range of services, including support,
education, and professional services. Our products and services command a
significant share of the rapidly growing network computing market, which
includes the Internet and corporate intranets. Our products are used for many
demanding commercial and technical applications in various industries including
telecommunications, manufacturing, financial services, education, retail,
government, energy and healthcare. We owe much of our success to our adherence
to open industry standards, the Solaris(TM)Operating Environment, the UNIX(R)
platform, and the UltraSPARC(TM) (Ultra Scalable Processor Architecture)
microprocessor architecture. In addition we are committed to investment in and
ownership of intellectual property, leveraging our partnerships with industry
leaders and enabling the Internet and the "Net Economy."
For the latest fiscal year ended June 30, 1999, we had annual revenues of
more than $11.7 billion, over 29,000 employees, and we conducted business in
over 170 countries. We were incorporated in California in February, 1982 and
reincorporated in Delaware in July, 1987.
BUSINESS STRATEGY
Our objective is to expand our position as a leading global provider of
network computing products and services. The key elements of our strategy
include:
- developing network computing products and technologies that enable the
Internet and the Net Economy
- providing competitive solutions based on open industry standards
- extending our technology leadership and innovation
- investing in support, education and professional services
- leveraging strong industry relationships
DEVELOPING NETWORK COMPUTING PRODUCTS AND TECHNOLOGIES THAT ENABLE THE INTERNET
AND THE NET ECONOMY
We were founded on the notion that computer networks are greater than the
sum of their parts and that communication and information access should be
uninhibited by the boundaries of proprietary software and
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hardware architectures. To help us explain this vision we coined the phrase,
"The Network is the Computer(TM)," and built networking technologies into every
product. From the Solaris(TM) Operating Environment to UltraSPARC
microprocessors, from scalable servers to the Java(TM) and Jini(TM) platforms,
we are focused on providing customers with a single, high performance, highly
reliable network computing architecture. This single focus provides customers
with investment protection for their legacy computing environments, a single
operating environment that is both backward compatible and scalable across our
entire product line (binary compatibility) and an upgrade path for their entire
network.
The Internet has grown to encompass much more than simple information
sharing. Increasingly, the Internet is enabling a whole new paradigm of business
commerce that brings customers closer to suppliers and streamlines the delivery
of goods and services. This new paradigm is commonly referred to as the Net
Economy and is changing the fundamentals of most every business and industry
across the globe. Through our products and technologies, we are helping
customers participate in the Net Economy by implementing new processes and
practices to take advantage of the opportunities that the Internet can provide.
PROVIDING COMPETITIVE SOLUTIONS BASED ON OPEN INDUSTRY STANDARDS
From inception, we have focused on developing products and technologies
based upon open industry standards to provide customers with flexibility for
their networking environments. Through our commitment to open, industry
standards, we have created technologies, such as Network File System (NFS(TM)),
Scalable Processor Architecture (SPARC(TM)) and most recently Java(TM) and
Jini(TM), that have facilitated industry growth.
Through the Internet, we are realizing our long-standing vision of a
network where information can be accessed at anytime, from anywhere, by anyone
and from any device. The Internet is growing and expanding to be more than just
a repository of information. Increasingly, businesses are looking to the
Internet to enable more effective and efficient methods of electronic commerce
and communication, to streamline business practices, increase productivity and
reduce both costs and complexity. By harnessing the power of the Internet,
businesses are transforming traditional practices and promoting the Net Economy.
We support this transformation by leveraging the power of our computing
technologies in order to provide our customers with the solutions they need to
effectively utilize the power of the Internet.
EXTENDING OUR TECHNOLOGY LEADERSHIP AND INNOVATION
We believe that in order to be a leading developer of enterprise and
Internet-based products and technologies, we must continue to invest and
innovate. Through our research and development investments, which have typically
been approximately 10% of annual revenues, we are continually focusing on
raising the bar of technological innovation. Over the past few years, we have
made significant investments in several of our product technologies, including
our highly scalable UltraSPARC processor architecture, our highly reliable and
scalable Solaris Operating Environment, our cross-platform Java software
development environment powering Internet-based applications, our Java-based
Jini technology that allows a broad range of devices to connect and share
information over the Internet and with one another, our scalable enterprise
servers and workstations, and our network-based storage systems and software.
Many of these technologies provide us with a competitive advantage and
differentiation in the marketplace. We intend to continue our investments into
new computing technologies and are focused on continuing to develop and deliver
leading edge network computing products based upon our innovations.
INVESTING IN SUPPORT, EDUCATION AND PROFESSIONAL SERVICES
We are also investing in the expansion of our support, education and
professional services. As the market for network computing and Internet products
and technologies expands, the demand for services also increases. In recognition
of this demand, we hired nearly 1,700 people in the last fiscal year ended June
30, 1999 into our Enterprise Services organization, which now employs over 7,500
professionals. With a shortage of computing professionals worldwide, our
customers are increasingly demanding support for enterprise as well as Internet
projects. They require key integration, training, support and development
services to bring their
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business processes and practices to the Internet. In addition, customers are
looking for network computing suppliers to provide them with solutions to their
enterprise and Internet computing needs. To meet the needs of our customers and
partners, we will continue to invest in acquiring additional personnel to staff
our rapidly growing support, education and professional services organization.
LEVERAGING STRONG INDUSTRY RELATIONSHIPS
While our product and service offerings are very broad, we recognize that
no single supplier of computing solutions can meet all of the needs of all of
its customers. We have established relationships with leading value-added
resellers, OEMs, service providers, independent software vendors (ISV) and
systems integrators to deliver solutions that customers demand. Through these
relationships, we are able to provide the end-to-end solutions that customers
require to compete in the Net Economy. We also have relationships with leading
network and application service providers, and offer the products, technologies
and services they require for highly reliable applications and networking
services to their customers. These cooperative relationships provide an
attractive business model for these partners and create an environment where Sun
benefits as our partners' businesses grow. In order to foster strong
relationships, we have also instituted sales force incentive and flexible
financing programs that align our operations with the success of their business.
BUSINESS ORGANIZATION
To facilitate innovation and provide world class support for our global
client base, we are structured as a group of businesses, each providing open,
standard products and services for commercial and technical computing.
We have focused our business on the following opportunities in the network
computing industry:
COMPUTER SYSTEMS AND STORAGE
Computer Systems and Storage designs, develops, manufactures and sells a
broad range of desktop systems, servers, storage and network switches,
incorporating the UltraSPARC(TM) microprocessors and the Solaris Operating
Environment.
ENTERPRISE SERVICES
Enterprise Services provides a full range of global services and support
for heterogeneous network computing environments, including system/network
management, systems integration, and support, education, and professional
services.
SOFTWARE PRODUCTS AND PLATFORMS
Software Products and Platforms designs, develops and sells our Solaris
Operating Environment, Java software and our core technologies for consumer and
embedded markets which include Chorus OS(TM) (a real-time operating
environment), Java implementations and Jini technologies, as well as our
software tools and security products. In addition, this organization is also
responsible for software marketing, a software technology OEM sales group and an
expanded and integrated ISV/developer relations and market development group.
MICROELECTRONICS
Microelectronics designs, develops and markets high performance SPARC and
Java microprocessors, board reference platforms, processor modules, chips sets
and logic products for Sun products and third-party customers.
NETWORK SERVICE PROVIDER
Network Service Provider sells real-time network platforms and
carrier-grade, fault tolerant products that are designed to be extremely
reliable. Our Network Service Provider business focuses on the needs of
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network-based telecommunications companies, cable operators, and the network
equipment suppliers who develop products and technologies for the broader
service provider industry.
In addition, through our recent alliance with America Online, Inc. (AOL),
the Sun-Netscape Alliance, we develop, market and sell enterprise and E-commerce
software for consumers and businesses. These software products and technologies,
commonly referred to as middleware, complement our enterprise servers, storage
and workstation products. Combined, these products provide customers with
comprehensive solutions to their enterprise and Internet computing needs.
PRODUCTS
Our products and technologies, from our microprocessors to our Solaris
Operating Environment to high-end enterprise scalable servers, were designed,
developed and produced for the network computing environment.
WORKSTATIONS
Our workstation products include the Ultra(TM) 5, Ultra 10 and Ultra 60
models. The Ultra 5 is used for business application and software development,
offering high performance at a low cost. The Ultra 10 offers value and
performance for 3-D graphics applications and is designed for applications such
as drafting and design, animation and rendering, modeling and analysis. Finally,
the Ultra 60 is Sun's highest performance workstation, in both single and dual
processor configurations, and is suited for modeling and virtual prototyping,
medical imaging, animation and geosciences.
ENTERPRISE SERVERS
Our enterprise servers consist of workgroup servers, mid-range servers and
data center/high-performance computing servers. These products run enterprise
mission critical application environments, directories, databases, websites and
many other applications. They offer significant scalability, reliability,
availability, serviceability and performance. In addition, all enterprise
servers share common components and offer binary compatibility for all
application environments because they all run the Solaris Operating Environment
on the UltraSPARC architecture. The primary competitive differentiators for
these products in the marketplace are their performance, scalability and
reliability. Scalability refers to a system's ability to add resources such as
additional microprocessors, memory or input/output to increase performance
without adding complexity. Reliability refers to the system's ability to run
continuously without interruption. These two important attributes in our
enterprise server products help our customers avoid costly architecture
migrations and downtime that can result from increasing business demands.
WORKGROUP SERVERS. We offer two products in the Workgroup Server group: the
Sun Enterprise(TM) 250 and 450. The Sun Enterprise 250 can be configured with up
to two microprocessors, six Ultra SCSI disks, fast ethernet, multiple
independent data paths, and multiple redundancy to provide customers with high
performance, high throughput, and high reliability for business critical
applications. The Sun Enterprise 250 can host electronic mail, websites,
directory databases and many other applications.
The Sun Enterprise 450 servers provide the scalability, performance and
reliability for critical business needs. The Sun Enterprise 450 server supports
up to four microprocessors and utilizes high speed interconnect and offers 10
PCI slots, which allow the Sun Enterprise 450 to scale as application demand
grows. The Sun Enterprise 450 provides the reliability, availability and
scalability needed for demanding applications and solutions such as groupware,
distributed database applications, clustering, enterprise resource planning as
well as e-mail and Internet/intranet services.
MID-RANGE SERVERS. Our mid-range servers offer scalability supporting up to
eight processor configurations in the Sun Enterprise 3500 and up to thirty
processor configurations in the Sun Enterprise 6500. The entry level Sun
Enterprise 3500 is a powerful, scalable, versatile and upgradeable departmental
server in a compact package. The Sun Enterprise 4500 is expandable up to 14
processors and is one of our most modular and powerful departmental servers,
offering outstanding performance and the ability to scale system
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performance and capacity as needs grow. The Sun Enterprise 5500 is also
expandable up to 14 processors and is packaged in a rack configuration allowing
the bundling of additional storage in a single enclosure. Finally, the Sun
Enterprise 6500 provides customers the ability to deploy large scale, mission
critical applications in a network-based environment. The Sun Enterprise 6500
offers the performance and availability required for mainframe-class
mission-critical applications. Our mid-range servers are utilized for
E-commerce, databases, decision support, data mining and warehousing,
telecommunications, enterprise resource planning and network file system
support.
DATA CENTER/HIGH-PERFORMANCE COMPUTING SERVERS. In the data
center/high-performance computing server group, we offer the Sun Enterprise
10000, which is the most scalable UNIX system in the marketplace and
incorporates mainframe features. The Sun Enterprise 10000 is designed to offer
greater performance and lower total cost of ownership than mainframe products.
The Sun Enterprise 10000 is used for server consolidations, application
migrations, data mining and warehousing, custom applications, on-line
transaction support, enterprise resource planning and databases.
TELECOMMUNICATIONS SERVERS
For telecommunications, cable, wireless and network equipment providers,
our Netra servers provide NEBS (Network Equipment Building Standard) compliant,
carrier grade, high-availability solutions for mission critical applications.
The Netra telecommunications servers are all based on the scalable SPARC/
Solaris architecture. At the entry level, the Netra(TM) t1 server offers high
availability at low cost with features such as automatic server restart,
hot-pluggable disks and lights-out management, which allow providers to remotely
manage power status and monitor system health. The Netra t1 was specifically
designed for network service providers offering a compact chassis that can be
easily stacked into existing racks.
The Netra t1120/t1125 are NEBS certified, carrier-grade servers which allow
network service providers to deploy mission critical applications and services
outside the central office. The Netra t1120 is for DC power environments,
whereas the Netra t1125 is for AC power. The Netra t1120/t1125 are used by
telecommunications and service provider customers for network policy management,
directory, load balancing, security, voice messaging and many other
applications. The Netra ft1800 is a fault tolerant server offering customers
NEBS compliance and extreme reliability. It is specifically designed for central
office and data networking environments for running mission critical
applications. The Netra ft1800 has been designed to eliminate all single points
of failure in order to provide continuous availability. The Netra ft1800 is used
for network management and telecommunications applications.
NETWORK STORAGE
Our Network Storage systems and software also support our strategy of
providing products and technologies to network computing environments. Through
our broad product line, we are able to deliver not only storage connectivity,
but also storage intelligence to the network across multiple operating
environments, including NT.
The Intelligent Storage Server(TM) A7000 offers seamless UNIX/mainframe/NT
information sharing capabilities. It is designed to deliver high-end,
heterogeneous storage supporting UNIX platforms, mainframes and NT platforms and
as such it is well-suited for storage consolidation of multiple servers into a
single storage unit. The A7000 also offers campus remote mirroring for disaster
recovery or business continuance in the event of system failures.
The A5000 storage array is an all fibre channel array for high performance
data warehousing or high bandwidth applications due to the all fibre channel
pipes from host to fibre channel disks. It offers cluster support for mission
critical availability and performance. Both Solaris and NT platforms are
supported. This highly reliable and scalable product is a building block disk
for creating a new breed of intelligent storage networks.
The A3500 array features a high-availability design and outstanding
performance and capacity for OLTP (On-Line Transaction Processing) applications
and departmental-level storage requirements. It also offers
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cluster support for OLTP applications. This product scales from disks to dual
controller, high performance, high availability storage.
The A1000/D1000 products provide a building-block solution for workgroups
and small departments. These products offer a high-performance, affordable, and
versatile storage solution. These expandable RAID (Redundant Array of
Independent Disks) systems allow customers to customize their storage
environments as a stand-alone device offered with or without a controller and to
provide optimum scalability as a rack-mounted solution.
Our tape automation products provide the flexibility, scalable capacities,
and high performance for enterprises of all sizes. Sun offers autoloaders using
8mm and digital data service (DDS-3) technology for workgroup environments. The
complete family of Sun StorEdge(TM) enterprise tape libraries has been designed
with digital linear tape (DLT) technology and one of the industry's leading
robotics technology.
Our storage software applications provide a high level of information
protection. Remote Dual Copy of the Sun StorEdge A7000 is designed to offer
continuous business operation in the event of a data center disaster, while the
Sun StorEdge Enterprise NetBackup(TM) system provides backup/restore for
thousands of users and high performance hot database backup for Oracle, Sybase,
Informix and SAP databases. Solstice Backup(TM) is a workgroup and departmental
solution, optimized for backups of local data. Sun StorEdge Volume Manager(TM),
Sun StorEdge LibMON(TM), and Sun StorEdge Enterprise HSM products provide
flexible, cost effective information management, allowing more effective
utilization of storage resources.
MICROELECTRONICS
In addition to creating the microprocessors for Sun's workstation and
server products, Microelectronics provides OEM customers with a wide range of
reference platforms in multiple markets, including enterprise, communications,
and consumer electronics. Our microelectronics products include board reference
platforms, microprocessor modules, chip sets and logic solutions and
microprocessors. The UltraSPARC architecture is one of the most scalable
solutions on the market, providing the power behind our servers and workstation
products. In addition, we also design Java-based processors for consumer
electronics, telecommunications and embedded solutions.
Our PCI, compact PCI, SBus, Java and ATX board platforms are also used in
telecommunications, enterprise computing and consumer electronics solutions,
providing OEM customers with a low-cost, scalable, highly reliable solution.
Finally, our modules, chip sets and logic products provide customers with the
performance and flexibility to create low cost, scalable, easy to integrate
solutions.
SYSTEM AND INTERNET SOFTWARE
SOLARIS OPERATING ENVIRONMENT. The Solaris product line includes desktop,
intranet, Internet Service Provider (ISP) and enterprise operating environments
for SPARC and Intel platforms. The Solaris Operating Environment is a high
performance, highly reliable, scalable and secure operating environment that is
easy to install and use, optimized for the Java platform and supports more than
12,000 applications. The Solaris Operating Environment is optimized for
enterprise computing, Internet/intranet business requirements, powerful
databases and high performance technical computing environments.
We also provide software solutions that focus on network management and
network security that complement our server and storage product offerings. In
addition, we provide Solaris and Java-based tools for software developers who
create high performance applications for enterprises, telecommunications and the
Internet.
JAVA. Our Java application environment is one of the first widely accepted
application environments to allow development of application software
independent of the underlying platform. In fiscal 1999, Sun broadly expanded the
definition and availability of the Java platform and extended it to the smallest
devices, such as smart cards, personal digital assistants, and embedded
controllers and set-top boxes with our MicroJava(TM) platform, as well as to the
enterprise with our EnterpriseJava platform. These two new Java platforms
address
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very different markets, yet share a common core architecture and Application
Programming Interface (API) set. These platforms complement our StandardJava
platform which is intended for PC and workstation clients.
The Java Development 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.
JINI. Jini connection technology is based upon a single concept, that
devices should work together and simply connect to the network. This means that
there are no drivers to find, no complex proprietary software requirements, and
no cables and connectors that can be difficult to match. There are three Jini
System Software product offerings: the Jini System Software Starter Kit, the
Jini Technology Core Platform Compatibility Kit, and the JavaSpaces(TM)
Technology Kit. These products contain components of the Jini technology to
assist developers in creation of new Jini services.
ENTERPRISE SUPPORT, EDUCATION, AND PROFESSIONAL SERVICES
Sun is one of the largest network computing systems providers worldwide,
with over 1.2 million network systems supported by Sun's products and
technologies and with support available in over 170 countries. The
SunSpectrum(TM) support services product offerings allow customers the power and
flexibility to customize their support services contracts. Customers can choose
from four different support contract offerings that range from mission-critical
to self-support options. Each contract type is specifically designed to provide
our customers with the support they require to ensure high availability and
continuous operation.
Our education services provide customers with innovative education
solutions, from technical instructor led courses, to education consulting
services, to self-paced technology-based training. We specialize in UNIX and
Java technology training to assist our customers with their network computing
and Internet operations.
Finally, our professional services specialize in providing customers with
platform integration, enterprise management and operation, advanced Internet,
Java technology and Enterprise Resource Planning services. These offerings are
tailored to meet specific customer needs in training, integration and consulting
services, providing technical knowledge and network computing/Internet
expertise.
THE SUN-NETSCAPE ALLIANCE
In March 1999, we formed the Sun-Netscape Alliance, which is focused on
providing software applications and professional services that provide
enterprise customers and service providers with the ability to put their
businesses on the Internet quickly and to scale to meet rapid increases in
demand. With products such as i-Planet remote access, the Netscape browser, web
server, application server, directory, mail and E-commerce applications, this
alliance is uniquely positioned to provide technologies and products that better
support enterprises and service providers. In addition, alliance products
support the Solaris Operating Environment, NT, HP-UX, AIX and Linux.
SALES, DISTRIBUTION AND MARKETING
We maintain a presence in most major markets and sell computer systems,
software and services to our customers worldwide through a combination of direct
and indirect channels. We also offer off-the-shelf software and component
products such as CPU chips, ASICs and embedded boards on an OEM basis to other
hardware manufacturers, and supply after-market and peripheral products to their
end-user installed base, both directly and through independent distributors and
resellers.
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Our direct sales force is organized into two primary sales forces: a sales
force concentrating on enterprise systems, storage, and some software products
and a sales force for software products and platforms. These sales forces sell
to selected end-user named accounts and numerous indirect channels. Each sales
force is compensated on a channel-neutral basis to reduce potential channel
conflict between distribution partners. Our 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 our 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 our products with other hardware and software; and
- independent distributors who primarily cover markets in which we do not
have a direct presence.
The growth and management of the reseller channels is very important to our
future revenues and profitability. Channel partners account for more than 50% of
our revenues and will continue to play a key role in providing the value,
service and support critical to our long-term success.
Our direct systems sales force serves educational institutions, software
vendors, governments, businesses and other strategic accounts. We have
approximately 100 sales and service offices in the United States and
approximately 140 sales and service offices in 45 other countries. In addition,
we use independent distributors in approximately 150 countries, sometimes with
other resellers and direct sales operations.
Our revenues from outside the United States, including those from
end-users, resellers and distributors were approximately 49%, 48% and 49% of our
total revenues in fiscal 1999, 1998, and 1997, respectively. If we are unable to
continue generating substantial revenues from international sales our business
could be substantially harmed. Our ability to sell our products internationally
is subject to the following risks:
- general economic and political conditions in each country could adversely
affect demand for our products and services in these markets, as recently
occurred in certain Asian and Latin American markets;
- currency exchange rate fluctuations could result in lower demand for our
products, as well as currency translation losses;
- changes to and compliance with a variety of foreign laws and regulations
may increase our cost of doing business in these jurisdictions; and
- trade protection measures and import and export licensing requirements
subject us to additional regulation and may prevent us from shipping
products to a particular market and increase our operating costs.
Direct sales we make in countries outside of the United States are
generally priced in local currencies and can be subject to currency exchange
fluctuations. The net impact of currency fluctuations on net revenues and
operating results cannot be precisely measured as our product mix and pricing
change over time in various markets, partially in response to currency
movements. Our results of operations could be harmed by factors such as changes
in foreign currency rates or real economic conditions in the foreign markets in
which we distribute our products. We are primarily exposed to changes in
exchange rates on the Japanese yen, British pound, French franc, and German
deutsche mark. When the U.S. dollar strengthens against these currencies, the
U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar
weakens against these currencies, the 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
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strengthens. Overall we are a net receiver of currencies other than the U.S.
dollar and, as such, benefit from a weaker dollar, and are 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 our consolidated sales and operating margins as expressed in
U.S. dollars. To minimize currency exposure gains and losses, we may borrow
funds in local currencies, enter into forward exchange contracts, purchase
foreign currency options and promote natural hedges by purchasing components and
incurring expenses in local currencies, whenever feasible.
Our sales to overseas customers are made under export licenses that must be
obtained from the United States Department of Commerce. Protectionist trade
legislation in either the United States or other countries, such as a change in
the current tariff structures, export compliance laws or other trade policies,
could adversely affect our ability to sell or to manufacture in international
markets. Furthermore, revenues from outside the United States are subject to
inherent risks, 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. We remain cautious with regard to the Japanese market and do not
expect the current Japanese macroeconomic trends to change significantly in the
near term. If the economic trends in Japan significantly worsen in a quarter or
decline over an extended period of time, our results of operations and cash
flows could suffer. Although we have experienced U.S. dollar revenue growth in
the European marketplace on a year over year basis, there can be no assurance
that such trends will continue. In particular, if capital spending declines in
certain countries or industries over an extended period of time our results of
operations and cash flows could suffer.
One of our customers accounted for more than 10% of our revenues in fiscal
1999 and 1998. No individual customer accounted for more than 10% of revenues in
fiscal 1997. Sales to MRA Systems, Inc., an authorized reseller, were
approximately 14% of our fiscal 1999 and 1998 revenues. Our business could
suffer if this customer or another significant customer terminated its business
relationship with us or significantly reduced the amount of business it did with
us. Also see Note 10 of Notes to Consolidated Financial Statements incorporated
by reference herein for additional information concerning sales to foreign
customers and business segments.
Our marketing activities include advertising in computer publications and
the business press, direct mailings to customers and prospects, televised
programs and attendance at trade shows. We maintain a customer resource program,
Sunergy(SM), which includes live interactive satellite broadcasts and provides
electronic access to newsletters and technical information. We also sponsor 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.
Our future operating results will continue to be subject to quarterly
fluctuations based upon a variety of factors. Our operating results usually
fluctuate downward in the first and third quarters of each fiscal year due to
customer buying patterns for hardware and software products and services. Our
operating expenses will continue to increase as we continue to expand our
operations. Our operating results could suffer if our revenues do not increase
at least as fast as our expenses. If, in the future, we acquire technologies,
products or businesses, or we form alliances with companies requiring technology
investments or revenue commitments (such as our recent alliance with AOL), we
will face a number of risks to our business. The risks we may encounter include
those associated with integrating or co-managing operations, personnel, and
technologies acquired or licensed, and the potential for unknown liabilities of
the acquired or combined business. Also, we will include amortization expense of
acquired intangible assets in our financial statements for several years
following these acquisitions. Our business and operating results on a quarterly
basis could be harmed if our acquisition or alliance activities are not
successful.
Our order backlog at June 30, 1999 was approximately $825 million, compared
with approximately $599 million at June 30, 1998. Our 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 our 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.
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CUSTOMER SERVICE AND SUPPORT
We provide expertise in heterogeneous network computing through a full
range of global services, including support services (systems support for
hardware and software), education 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 more than 170
countries, training more than 75,000 students annually, and providing
consulting, integration and operations assistance to IT organizations worldwide.
In support services, we have increased resources in the field for 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. Our
direct services are complemented by third-party service providers who primarily
deliver hardware support services. Software support continues to be primarily
delivered by our 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 help us expand geographic
coverage without additional fixed cost investment on our part.
We offer a warranty for parts and labor on hardware products, generally for
one year from date of sale and a limited warranty on software, generally for 90
days from date of sale. We service products during the warranty period and
provide contract service 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.
Our education services offer 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 education needs of many customers
including managers, operators, developers, system administrators, and end-users.
As an alternative to the classroom, our customers may select technology-based
training options including our web-based learning solution which is available to
those having Internet access, built on the Java platform, and provides modular
courses on Jini technologies. Additionally, we provide interactive training
products on CD-ROM which can be geared for various levels of expertise.
In professional services, we provide the people, processes and technology
to deliver single point-of-contact solutions tailored to meet customer needs.
Our technical and project management experts help customers plan, implement, and
manage heterogeneous computing environments. Our 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, we help 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 we sell require a high level of implementation
support and consequently, a 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 seriously harm our business.
PRODUCT DEVELOPMENT
Our research and product development programs are intended to sustain and
enhance our competitive position by incorporating the latest worldwide advances
in hardware, software, graphics, networking, data communications and storage
technologies. The product development efforts conducted within each of our
businesses are focused on enhancing the performance, reliability, availability,
and serviceability of our hardware and systems software. Additionally, we remain
focused on system software platforms for Internet
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and intranet applications, developing advanced workstation and server
architectures, as well as designing application-specific integrated circuits and
software for networking and distributed computing. Sun's product development
continues to focus on the high-performance implementation of existing standards
and the development of new technology standards.
We conduct research and development worldwide principally in the United
States, France, United Kingdom, Ireland, Japan, and Israel. Research and
development expenses were approximately $1,263 million, $1,014 million and $826
million in fiscal 1999, 1998 and 1997, respectively. In recent years, our
research and development efforts have focused increasingly on the Java
architecture, Solaris software and SPARC microprocessors. We believe that
software development provides and will continue to provide significant
competitive differentiation. Therefore, we devote substantial resources to the
development of workgroup software, networking and data communications, video,
graphics, disk array, object technology and the software development
environment.
The products we make are very complex and if we are unable to rapidly and
successfully develop and introduce new products, we will not be able to satisfy
customer demand. We operate in a highly competitive, quickly changing
environment, and our future success depends on our ability to develop and
introduce new products that our customers choose to buy. If we are unable to
develop new products, our business and operating results would be seriously
harmed. We must quickly develop, introduce and deliver in quantity new, complex
systems, software, and hardware products and components, including our
UltraSPARC(TM) microprocessors, the Solaris operating environment, our
intelligent storage products and other software products, such as those products
under development or to be developed under our recent alliance with AOL. The
development process for these complicated products is very uncertain. It
requires high levels of innovation from both our product designers and our
suppliers of the components used in our products. The development process is
also lengthy and costly. If we fail to accurately anticipate our customers'
needs and technological trends or are otherwise unable to complete the
development of a product on a timely basis, we will be unable to introduce new
products into the market on a timely basis, if at all, and our business and
operating results would be adversely affected. In addition, the successful
development of software products under our alliance with AOL depends on many
factors, including our ability to work effectively within the alliance on
complex product development and any encumbrances that may arise from time to
time that may prevent us from developing, marketing or selling these alliance
software products. If we are unable to successfully develop or market or sell
the alliance software products, or other software products, our business and
operating results could be seriously harmed. Software and hardware products such
as ours may contain known as well as undetected errors and these defects may be
found following introduction and shipment of new products or enhancements to
existing products. Although we attempt to fix errors that we believe would be
considered serious by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues and delays
in customer acceptance, and could be detrimental to our business and reputation.
Delays in product development or customer acceptance and implementation of
new products and technologies could seriously harm our business. Delays in the
development and introduction of our products may occur for various reasons. For
example, delays in software development could delay shipments of related new
hardware products. Generally, the computer systems that we sell to customers
incorporate many of our hardware and software products, such as the UltraSPARC
microprocessor, the Solaris operating environment and intelligent storage
products. Any delay in the development of the software and hardware included in
our systems could delay our shipment of these systems.
In addition, if customers decided to delay the adoption and implementation
of new releases of our Solaris operating environment this could also delay
customer acceptance of new hardware products tied to that release. Adopting a
new release of an operating system requires a great deal of time and money for a
customer to convert its systems to the new release. The customer must also work
with software vendors who port their software applications to the new operating
system and make sure these applications will run on the new operating system. As
a result, customers may decide to delay their adoption of a new release of an
operating system because of the cost of a new system and the effort involved to
implement it. Also, customers may wait
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to implement new systems until after January 1, 2000 so that there is less
likelihood of Year 2000 computer problems.
MANUFACTURING AND SUPPLY
Our manufacturing operations consist primarily of final assembly, test and
quality control of systems, materials and components. We manufacture in
California, Oregon, and Scotland, and distribute in California, the Netherlands
and Japan. We have continued efforts to simplify the manufacturing process by
reducing the diversity of system configurations offered, increasing the
standardization of components across product types and establishing local
sources of supply in major geographies.
Our reliance on single source suppliers could delay product shipments and
increase our costs. We depend on many suppliers for the necessary parts and
components to manufacture our products. There are a number of vendors producing
the parts and components that we need. However, there are some components that
can only be purchased from a single vendor due to price, quality or technology
reasons. For example, we depend on Sony for various monitors and on Texas
Instruments for our SPARC microprocessors. If we were unable to purchase the
necessary parts and components from a particular vendor and we had to find a new
supplier for such parts and components, our new and existing product shipments
could be delayed, severely affecting our business and operating results.
Our future operating results depend on our ability to purchase a sufficient
amount of components to meet the demands of our customers. We depend heavily on
our suppliers to timely design, manufacture and deliver the necessary components
for our products. While many of the components we purchase are standard, we do
purchase some components, specifically color monitors and custom memory
integrated circuits such as SRAMS and VRAMS, that require long lead times to
manufacture and deliver. Long lead times make it difficult for us to plan
component inventory levels in order to meet the customer demand for our
products. In addition, in the past, we have experienced shortages in certain of
our components (specifically DRAMS and SRAMS). If a component delivery from a
supplier is delayed, if we experience a shortage in one or more components or if
we are unable to provide for adequate levels of component inventory our new and
existing product shipments could be delayed and our business and operating
results could suffer.
Since we order our components (and in some cases commit to their purchase)
from suppliers in advance of receipt of customer orders for our products that
include these components, we face a substantial inventory risk. As part of our
component inventory planning, we frequently pay certain suppliers well in
advance of receipt of customer orders. For example, we often enter into
noncancelable purchase commitments with vendors early in the manufacturing
process of our microprocessors to make sure we have enough of these components
for our new products to meet customer demand. Because the design and
manufacturing process for these components is very complicated it is possible
that we could experience a design or manufacturing flaw that could delay or even
prevent the production of the components for which we have previously committed
to pay. We also face the risk of ordering too many components, or conversely,
not enough components, since the orders are based on the forecasts of customer
orders rather than actual orders. If we cannot change or be released from the
noncancelable purchase commitments, we could incur significant costs from the
purchase of unusable components, due to a delay in the production of the
components or as a result of inaccurately predicting component orders in advance
of customer orders. Our business and operating results could be seriously harmed
as a result of these increased costs.
The manufacture and introduction of our new hardware and software products
is also a complicated process. Once we have developed a new product we face the
following challenges in the manufacturing process:
- we must be able to manufacture new products in high enough volumes so
that we can have an adequate supply of new products to meet customer
demand;
- we must be able to manufacture the new products at acceptable costs. This
requires us to be able to accurately forecast customer demand so that we
can procure the appropriate components at optimal
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costs. Forecasting demand requires us to predict order volumes, the
correct mixes of our software and hardware products and the correct
configurations of these products;
- we must manage new product introductions so that we can minimize the
impact of customers delaying purchases of existing products in
anticipation of the new product release. We must also try to reduce the
levels of older product and component inventories to minimize inventory
write-offs; and
- we may also decide to adjust prices of our existing products during this
process in order to try to increase customer demand for these products.
If we are introducing new products at the same time or shortly after the
price adjustment, this will complicate our ability to anticipate customer
demand for our new products.
If we were unable to timely develop, manufacture and introduce new products
in sufficient quantity to meet customer demand at acceptable costs or if we were
unable to correctly anticipate customer demand for our new products, our
business and operating results could be significantly harmed.
COMPETITION
If we are unable to compete effectively with existing or new competitors,
our resulting loss of competitive position could result in price reductions,
fewer customer orders, reduced revenues, reduced margins, reduced levels of
profitability and loss of market share. We compete in the hardware and software
products and services markets. These markets are intensely competitive. If we
fail to compete successfully in these markets, the demand for our products would
decrease. Any reduction in demand could lead to a decrease in the prices of our
products, fewer customer orders, reduced revenues, reduced margins, reduced
levels of profitability, and loss of market share. These competitive pressures
could seriously harm our business and operating results.
Our competitors are some of the largest, most successful companies in the
world. They include Hewlett Packard Company (HP), International Business
Machines Corporation (IBM), Compaq Computer Corporation (Compaq) and EMC
Corporation (EMC). Our future competitive performance depends on a number of
factors, including our ability to perform the following:
- continually develop and introduce new products and services with better
prices and performance than offered by our competitors;
- offer a wide range of products and solutions from small single-processor
systems to large complex enterprise-level systems;
- offer solutions to customers that operate effectively within a computing
environment that includes hardware and software from multiple vendors;
- offer products that are reliable and that ensure the security of data and
information;
- create products for which third party software vendors will develop a
wide range of applications; and
- offer high quality products and services.
We also compete with systems manufacturers and resellers of systems based
on microprocessors from Intel Corporation (Intel) and Windows NT operating
system software from Microsoft Corporation (Microsoft). These competitors
include Dell Computer Corporation, HP and Compaq, in addition to Intel and
Microsoft. This competition creates increased pressure, including pricing
pressure, on our workstation and lower-end server product lines. We expect this
competitive pressure to intensify considerably during our fiscal year 2000 with
the anticipated releases of new software products from Microsoft and new
microprocessors from Intel.
The computer systems that we sell are made up of many products and
components, including workstations, servers, storage products, microprocessors,
the Solaris(TM) operating environment and other software products. In addition,
we sell some of these components separately and as add-ons to installed systems.
If we are unable to offer products and services that compete successfully with
the products and services offered by our competitors or that meet the complex
needs of our customers, our business and
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operating results could be seriously harmed. In addition, if in responding to
competitive pressures, we are forced to lower the prices of our products and
services and we are unable to reduce our component costs or improve operating
efficiencies, our business and operating results would be seriously harmed.
Over the last two years, we have invested significantly in our storage
products business with a view to increasing the sales of these products both on
a stand-alone basis to customers using the systems of our competitors and as
part of the systems that we sell. The intelligent storage products business is
intensely competitive. EMC is currently the leader in this market. To the extent
we are unable to penetrate this market and compete effectively, our business and
operating results could be seriously harmed. In addition, we will be making
significant investments over the next few years to develop, market and sell
software products under our recent alliance with AOL and have agreed to
significant minimum revenue commitments. These alliance products are targeted at
the E-commerce market and are strategic to our ability to successfully compete
in this market. If we are unable to successfully compete in this market, our
business and operating results could be seriously harmed.
We have encouraged the use of 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 our products, primarily in the desktop markets. We have also worked to make
our Java technology a programming standard for complex networks. We develop
applications, tools and systems platforms, as well as work with third-parties to
create products and technologies, in order to continue to enhance the Java
platform's capabilities. As part of this effort, we license Java technology
widely to encourage competitors of Sun to also develop products competing with
these applications, tools and platforms.
PATENTS AND LICENSES
We hold a number of U.S. and foreign patents relating to various aspects of
our products and technology. While we believe that patent protection is
important, we also believe that patents are of less competitive significance
than factors such as innovative skills and technological expertise.
We have from time to time been notified that we 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. We are evaluating the desirability of entering
into licensing agreements in certain of these cases. Based on industry practice,
we believe 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 harm our business.
EMPLOYEES
As of June 30, 1999, we had approximately 29,700 employees. We depend on
key employees and face competition in hiring and retaining qualified employees.
Our employees are vital to our success, and our key management, engineering and
other employees are difficult to replace. We expect to continue to increase the
number of our employees to support our growth. We generally do not have
employment contracts with our key employees. Further, we do not maintain key
person life insurance on any of our employees. The expansion of high technology
companies in Silicon Valley and Colorado, as well as many other cities, has
increased demand and competition for qualified personnel. We may not be able to
attract, assimilate or retain additional highly qualified employees in the
future and this could harm our business.
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ADDITIONAL FACTORS AFFECTING OUR BUSINESS
Our failure or the failure of our business partners and customers to be Year
2000 compliant could harm our business.
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 be able to distinguish years
beginning with "19" from those beginning with "20." As a result, in less than
six months, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements. We are currently
expending resources to review our products and services, as well as our internal
use software in order to identify and modify those products, services and
systems that are not Year 2000 compliant. We believe that the vast majority of
these costs are not incremental to us but represent a reallocation of existing
resources and include regularly scheduled systems upgrades and maintenance. In
addition, we have made custom coding enhancements to our mission critical
internal business systems and we believe that such internal systems are now Year
2000 compliant. We are working to make our remaining internal systems Year 2000
compliant by September 30, 1999.
Although we believe that the costs associated with the aforementioned Year
2000 efforts are not material, we currently estimate that such costs will be
between $40 to $45 million, of which approximately $25 million had been spent
through June 30, 1999. The aforementioned costs are estimates due in large part
to the fact that we do not separately track the internal labor costs associated
with Year 2000 compliance, unless such costs are incurred by individuals devoted
primarily to Year 2000 compliance efforts. These cost estimates do not include
any potential costs related to any customer or other claim. In addition, these
cost estimates are based on the current assessment of the ongoing activities
described above, and are subject to change as we continuously monitor these
activities. We believe any modifications deemed necessary will be made on a
timely basis and we do not believe that the cost of such modifications will
seriously harm our business. We currently expect the aforementioned evaluation
of our products, services and systems and any remediation necessary will be
completed by September 30, 1999. As of June 30, 1999, we had not identified any
items or areas which would require material remediation efforts. Our
expectations as to the extent and timeliness of any modifications required in
order to achieve Year 2000 compliance and the costs related thereto are forward-
looking statements 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 section. We cannot be sure, however, that we will be able to
successfully modify on a timely basis such products, services and systems to
comply with Year 2000 requirements. Our business could suffer if we fail to make
our products, services and systems Year 2000 compliant in time.
We have established a program to assess whether certain of our products are
Year 2000 compliant. Under this program, we are in the process of performing
tests on Sun products listed on our price lists. To monitor this program and to
help customers evaluate their Year 2000 issues we have created a Web site at
http://sun.com/y2000/cpl.html which identifies the following categories:
products that were released Year 2000 compliant; products that require
modifications to be Year 2000 compliant; products under review; products that
are not Year 2000 compliant and need to be replaced with a Year 2000 compliant
product; source code products that could be modified and implemented without our
review; and products that do not process or manipulate date data or have no
date-related technology. We update this list periodically as our analysis of
additional products is completed.
Based on our assessment to date, most of our newly introduced products and
services are Year 2000 compliant, however, we cannot be sure that our current
products do not contain undetected errors or defects associated with Year 2000
functions that may result in material costs to us. In addition, some of our
customers are running products that are not Year 2000 compliant and will require
an upgrade or other remediation to become Year 2000 compliant. We provide
limited warranties as to Year 2000 compliance on certain of our products and
services. Except as specifically provided for in the limited warranties, we do
not believe that we are legally responsible for costs incurred by customers to
achieve Year 2000 compliance. We have been taking steps to identify affected
customers, raise customer awareness related to noncompliance of our older
products and encourage such customers to migrate to current products or product
versions. It is possible that we may
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experience increased expenses if we need to upgrade or perform other remediation
on products that our customers are using that are not Year 2000 compliant. Our
business may also materially suffer if customers become concerned about or are
dissatisfied with our products and services as a result of Year 2000 issues.
We also face risks to the extent that suppliers of products, services and
systems purchased by us or the suppliers of others with whom we transact
business cannot timely provide us with products, components, services or systems
that meet Year 2000 requirements. To the extent that we are not able to test
technology provided by third party hardware or software vendors, we are in the
process of carrying out audits and obtaining Year 2000 compliance certifications
from each of our major vendors that their products and internal systems, as
applicable, are Year 2000 compliant. In the event any such third parties cannot
timely provide us with products, services or systems that meet the Year 2000
requirements, our business could be harmed. Furthermore, a reasonably likely
worst case scenario would be if one of our major vendors experienced a material
disruption in business, which caused us to experience a material disruption in
business. If either our internal systems or the internal systems, products or
services of one or more of our major vendors (including banks, energy suppliers
and transportation providers) fail to achieve Year 2000 compliance, our business
could be seriously harmed. We are currently developing contingency plans to deal
with potential Year 2000 problems related to our internal systems that are
deemed to be high risk and with respect to products and services provided by
outside vendors. We expect these plans to be complete by September 30, 1999. If
these plans are not timely completed or if they are not successful or if new
Year 2000 problems not covered by our contingency plans emerge, our business and
operating results may be seriously harmed.
Although we believe that the cost of Year 2000 modifications for both
internal use software and systems, as well as Sun's products are not material,
we cannot be sure that various factors relating to the Year 2000 compliance
issues will not seriously harm our business or operating results. For example, a
significant amount of litigation may arise out of Year 2000 compliance issues
and we cannot be sure about the extent to which we may be affected by any of
this litigation. Even though we do not believe that we are legally responsible
for our customers' Year 2000 compliance obligations, it is unclear whether
different governments or governmental agencies may decide to allocate liability
relating to Year 2000 compliance to us without regard to specific warranties or
warranty disclaimers. Our business could suffer in any given quarter if any
liability is allocated to us. Furthermore, we do not know how customer spending
patterns may be affected by Year 2000 issues. We believe, however, that
customers will focus on preparing their businesses for the Year 2000 and that
their capital budgets will be spent in large part on remediation efforts,
potentially delaying the purchase and implementation of new systems, thereby
creating less demand for our products and services. Our business could be harmed
if customers delay purchasing our products during the first half of our fiscal
Year 2000 because of Year 2000 concerns, or if our customers are unable to
conduct their business or are prevented from placing orders or paying us because
of their own Year 2000 problems. A significant disruption of our financial
management and control systems or a lengthy interruption in our operations
caused by a Year 2000 related issue could also result in a material adverse
impact on our operating results and financial condition.
OUR ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS.
We intend to continue to make investments in companies, products and
technologies, either through acquisitions or investment alliances. For example,
we have purchased several companies in the past and formed alliances, including
our recent alliance with AOL. Acquisitions and alliance activities often involve
risks, including:
- we may experience difficulty in assimilating the acquired operations and
employees;
- we may experience difficulty in managing product co-development
activities with our alliance partners;
- we may be unable to retain the key employees of the acquired operation;
- the acquisition or investment may disrupt our ongoing business;
- we may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures; and
- we may lack the experience to enter into new markets, products or
technologies.
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Some of these factors are beyond our control. Failure to manage these
alliance activities effectively and to integrate acquisitions would affect our
operating results or financial condition.
ITEM 2. PROPERTIES
We conduct our worldwide operations using a combination of leased and owned
facilities. While we believe we have sufficient facilities to conduct business
during fiscal 2000, we will continue to lease and acquire facilities throughout
the world as necessary. Our owned properties consist of an approximately
1,000,000 square foot facility on approximately 57 acres in Menlo Park,
California; an approximately 700,000 square foot facility on approximately 58
acres in Newark, California; an approximately 540,000 square foot facility on
approximately 158 acres in Burlington, Massachusetts; an approximately 530,000
square foot facility on approximately 120 acres in Broomfield, Colorado where an
additional 200,000 square foot facility is under construction; an approximately
260,000 square foot facility on approximately 12 acres in Palo Alto, California;
an approximately 230,000 square foot facility on approximately 24 acres in
Linlithgow, Scotland; an approximately 180,000 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; an 82 acre site in Santa Clara, California where a 630,000
square foot facility is under construction; 40 acres in Farnborough, England
where an approximately 240,000 square foot facility is under construction; and a
parcel of land in Newark, California of approximately 85 acres. We also lease
approximately 7.3 million square feet, including three million square feet is in
the San Francisco Bay Area. The remaining leased space is located in 270 sales
and service offices around the world. A substantial portion of our facilities,
including our corporate headquarters and other critical business operations are
located near major earthquake faults. We are uninsured and do not fund for
earthquake-related losses. In addition, we face risks to the extent that our
suppliers of products, services and systems and others with whom we do business
on a worldwide basis are impacted by an earthquake. As a result, our 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, we filed suit against Microsoft 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. We filed an amended complaint on October 14, 1997. Microsoft 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. We believe that the counterclaims are without merit and/or
that we have affirmative defenses and intend vigorously to defend ourselves with
respect thereto. On March 24, 1998 the United States District Court judge ruled
in our favor granting a preliminary injunction directing Microsoft to cease
using our Java Compatible Logo(TM) on Microsoft products that failed to pass the
applicable test suites from Sun. In addition, on May 12, 1998, we 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 our applicable
test suites. The Court held hearings and arguments on such motions on September
8, 9, and 10, 1998. On November 17, 1998, the District Court issued an Order
granting, in substantial part, our request for preliminary injunctions. On
December 15, 1998 Microsoft filed notice of its intent to appeal the District
Court's Order and on December 18, 1998 Microsoft filed motions with the District
Court to extend the time for compliance with the Order and to clarify or modify
the Order. On January 13, 1999, Microsoft filed an appeal to the District
Court's Order issued on November 17, 1998. On January 22, 1999, Sun and
Microsoft filed numerous motions for summary judgment with the District Court.
On May 24, 1999, the District Court issued tentative rulings on three pending
motions for summary judgment which were argued on June 24, 1999.
An appellate argument before the Ninth Circuit Court of Appeals relating to
the November 1998 preliminary injunction granted in our favor occurred on June
16, 1999. On August 23, 1999, a three-judge panel of the Ninth Circuit Court of
Appeals issued an opinion and ruling on Microsoft's appeal to that Court
17
<PAGE> 19
of the November 1998 preliminary injunction issued by the District Court. The
Ninth Circuit panel, in its ruling, found sufficient evidence in the record that
Sun is likely to prevail on the merits of its breach of contract claims against
Microsoft. However, the panel vacated the copyright infringement-based
injunction that the District Court had entered and remanded the case back to the
District Court for further consideration. The Remand Order and the lifting of
the injunction took effect on September 13, 1999. The District Court has
scheduled a hearing regarding the Remand Order for October 15, 1999. If the
injunction is not reinstated, Microsoft may, during the pendency of the case,
elect to offer products that fail to pass the applicable test suites from Sun.
We believe that the outcome of this matter will not have a material adverse
impact on our 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 our Executive
Officers as of September 14, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott G. McNealy............ 44 Chairman of the Board of Directors and Chief Executive Officer
William T. Agnello.......... 50 Vice President, Workplace Resources
Mel Friedman................ 61 President, Microelectronics
Lawrence W. Hambly.......... 53 President, Enterprise Services
H. William Howard........... 65 Vice President, Chief Information Officer
Masood A. Jabbar............ 49 President, Computer Systems
William N. Joy.............. 44 Founder and Chief Scientist
James Judson................ 45 Vice President, Finance, Worldwide Operations
Jon E. Kannegaard........... 49 Acting President, Software Products & Platforms
Michael E. Lehman........... 49 Vice President, Corporate Resources and Chief Financial Officer
Marc L. Loupe............... 45 Vice President, Finance and Planning, Worldwide Field Operations
John E. Marselle............ 45 Vice President, The Americas
John S. McFarlane........... 50 President, Network Service Provider
Stephen T. McGowan.......... 51 Vice President, Finance, Computer Systems
Michael H. Morris........... 51 Vice President, General Counsel and Secretary
Michael A. Murray........... 43 Vice President, Finance and Administration, Enterprise Services
Alton D. Page............... 43 Vice President, Operations, Sun-Netscape Alliance
Gregory M. Papadopoulos..... 41 Vice President and Chief Technology Officer
Marissa Peterson............ 37 Vice President, Worldwide Operations, Computer Systems
Frank A. Pinto.............. 54 Vice President, Worldwide Sales, Computer Systems
Michael L. Popov............ 53 Vice President, Corporate Controller
George Reyes................ 45 Vice President, Treasurer
Edward Saliba............... 50 Vice President, Human Resources
Janpieter T. Scheerder...... 50 President, Network Storage
John C. Shoemaker........... 56 Vice President and General Manager, Enterprise Desktop and
Server Systems, Computer Systems
Mark E. Tolliver............ 47 President and General Manager, Sun-Netscape Alliance
Kevin Walsh................. 57 Vice President, Operations, Corporate Resources
Edward J. Zander............ 52 President and Chief Operating Officer
</TABLE>
Mr. McNealy is a Founder of Sun and has served as Chairman of the Board of
Directors and Chief Executive Officer since April 1999, as Chairman of the Board
of Directors, President and Chief Executive Officer from December 1984 to April
1999, as President and Chief Operating Officer from February 1984 to
18
<PAGE> 20
December 1984 and as Vice President of Operations from February 1982 to February
1984. Mr. McNealy has served as a Director of Sun since the incorporation of Sun
in February 1982.
Mr. Agnello has served as Vice President, Workplace Resources of Sun since
March 1994.
Mr. Friedman has served as President, Microelectronics of Sun 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 Sun 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 Sun 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 Sun, most recently as Vice President, Western Area Sales from
April 1983 to July 1988.
Mr. Howard has served as Vice President, Chief Information Officer of Sun
since September 1998. From September 1990 to September 1998, he served as
Corporate Vice President, Information Technology and Chief Information Officer
for Inland Steel Industries, Inc.
Mr. Jabbar has served as President, Computer Systems of Sun since April
1998 and as President of SMCC from February 1998 to April 1998. He served as
Vice President and Chief Financial Officer of SMCC from June 1994 to February
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 Sun from October 1990 to June 1991, as Director of United States
Field Market for Sun from October 1989 to October 1990, as United States Sales
and Service Controller for Sun from April 1988 to October 1989 and as United
States and Intercontinental Sales Controller for Sun from December 1986 to April
1988.
Mr. Joy is a Founder of Sun and has served as Chief Scientist of Sun since
September 1998. From January 1996 to September 1998 he served as Vice President
of Research and from July 1991 to January 1996 he served as Vice President and
Chief Executive Officer.
Mr. Judson has served as Vice President, Finance, Worldwide Operations of
Sun since May 1998. He served as SMCC Controller from May 1995 to May 1998 and
as Assistant Controller for SMCC Worldwide Field Operations from November 1993
to May 1995. Mr. Judson served as Director of Financial Planning & Analysis,
Worldwide Operations of Sun from February 1992 to November 1993, as Director of
Finance, Product Development of Sun 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 Sun from July 1983 to July 1986.
Mr. Kannegaard has served as Acting President, Software Platforms &
Products of Sun since August 1999, as Vice President, Java Products from October
1995 to August 1999 and President, SunSoft, Inc. from April 1995 to August 1995.
From May 1992 to April 1995 he served as Vice President and General Manager of
Developer Products and from May 1987 to May 1992 as Director of Engineering.
Mr. Lehman has served as Vice President, Corporate Resources and Chief
Financial Officer of Sun 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 Sun 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, Computer Systems of Sun 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
19
<PAGE> 21
Operations (ICON) 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. Marselle has served as Vice President, The Americas of Sun since May
1999 and as President, Sun Federal, Inc., from June 1992 to May 1999.
Mr. McFarlane has served as President, Network Service Provider of Sun
since July 1999 and as President, Solaris Software of Sun from April 1998 to
July 1999. 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 Sun
since March 1998. He served as Vice President, Finance, Worldwide Field
Operations from June 1995 to March 1998 and as Vice President, Finance, North
American Field Operations from October 1992 to June 1995.
Mr. Morris has served as Vice President, General Counsel and Secretary of
Sun since October 1987.
Mr. Murray has served as Vice President, Finance and Administration,
Enterprise Services of Sun 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 July
1994. Mr. Murray served as Director, Internal Audit of Sun from October 1989 to
March 1992 and as Manager, Internal Audit from March 1989 to October 1989.
Mr. Page has served as Vice President, Operations, Sun-Netscape Alliance
since May 1999 and as Vice President, Treasurer of Sun from February 1996 to May
1999. 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 Sun since April 1998. He served as Vice President and Chief Technology
Officer of SMCC from March 1996 to April 1998, as Chief Technology Officer of
SMCC from December 1995 to March 1996 and as Chief Scientist, Server Systems
Engineering of Sun from September 1994 to December 1995. Mr. Papadopoulos served
as Senior Architect and Director of Product Strategy, 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 Sun since April 1998. She served as Vice President, Worldwide
Logistics from October 1996 to April 1998 and as Director, U.S. Manufacturing
from April 1995 to October 1996.
Mr. Pinto has served as Vice President, Worldwide Sales, Computer Systems
of Sun since November 1998 and as Vice President, Sales, The Americas, Computer
Systems of Sun from July 1998 to November 1998. He served as Vice President,
North American Field Operations 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 Sun from June 1989 to December 1992 and as Sun's District
Manager, Northeast Major OEM District from November 1988 to June 1989.
Mr. Popov has served as Vice President, Corporate Controller of Sun since
April 1999 and as Vice President, COO Staff Operations of Sun from April 1998 to
April 1999. He served as Vice President, Finance, SunService from June 1994 to
April 1998 and as Assistant Corporate Controller of Sun from January 1992 to
June 1994.
Mr. Reyes has served as Vice President, Treasurer of Sun since April 1999
and as Vice President, Corporate Controller of Sun from April 1994 to April
1999. He served as Audit Director from April 1992 to March 1994, as Director of
Finance for Sun's ICON operations from April 1991 to April 1992, as Assistant
Controller from June 1989 to April 1991, as the Controller of Sun's General
Systems Group from July 1988 to June 1989 and as Sun's Marketing Controller from
March 1988 to June 1988.
20
<PAGE> 22
Mr. Saliba has served as Vice President, Human Resources of Sun since June
1999 and Vice President, Finance, Solaris Software of Sun from May 1998 to June
1999. 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 Sun 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 Sun 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 Sun (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 and General Manager, Sun-Netscape
Alliance since March 1999 and President, Consumer and Embedded of Sun from April
1998 to March 1999. 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
Sun since May 1998. He served as Vice President, Worldwide Operations, Finance
and Planning, from February 1993 to May 1998.
Mr. Zander has served as President and Chief Operating Officer of Sun since
April 1999 and Vice President, Chief Operating Officer of Sun from April 1998 to
April 1999. He served as President, SMCC from February 1995 to April 1998, as
President, SunSoft, Inc. from July 1991 to February 1995 and as Vice President,
Corporate Marketing of Sun from October 1987 to July 1991.
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
last page of our 1999 Annual Report to Stockholders. At September 14, 1999 there
were 10,780 stockholders of record and the closing price of Sun's common stock
was $45.3750 per share as reported by The Nasdaq Stock Market.
21
<PAGE> 23
The following is a summary of all sales of Sun's common stock by the our
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, 1999:
<TABLE>
<CAPTION>
NUMBER OF
OFFICER DATE PRICE SHARES SOLD
------- ------- -------- -----------
<S> <C> <C> <C>
James Judson............................................... 5/12/99 $64.0000 2,500
John S. McFarlane.......................................... 5/11/99 $59.5630 1,000
Michael H. Morris.......................................... 4/21/99 $58.2500 23,600
Alton D. Page.............................................. 4/26/99 $63.8750 10,000
Gregory M. Papadopoulos.................................... 5/27/99 $58.6875 12,000
5/28/99 $60.0000 10,200
Michael L. Popov........................................... 4/23/99 $62.5000 22,400
George Reyes............................................... 4/22/99 $63.0000 42,400
Edward Saliba.............................................. 5/13/99 $66.0803 35,200
John C. Shoemaker.......................................... 4/26/99 $63.4961 36,000
5/12/99 $65.8973 28,000
Mark E. Tolliver........................................... 5/20/99 $64.0375 5,000
Edward J. Zander........................................... 5/19/99 $63.2397 25,000
5/19/99 $62.5000 25,000
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
information included under the caption "Financial Review" on page S11 of our
1999 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 S12 through S15 of our
1999 Annual Report to Stockholders.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our 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 S16 through S22 of our 1999 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 our directors is incorporated by reference from the
information contained under the caption "Election of Directors" in our 1999
Proxy Statement for the 1999 Annual Meeting of Stockholders. Information
regarding current executive officers found under the caption "Executive Officers
of the Registrant" in Part 1 hereof is also incorporated by reference into this
Item 10. Information regarding
22
<PAGE> 24
Section 16 reporting compliance is incorporated by reference from information
contained under the caption "Executive Compensation -- Section 16(a) Beneficial
Ownership Reporting Compliance" in our 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in our 1999
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 "Security Ownership of Management" in
our 1999 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 our 1999 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 our 1999 Annual Report to Stockholders.
Consolidated Statements of Income for each of the three years in the
period ended June 30, 1999 (page S16).
Consolidated Balance Sheets at June 30, 1999 and 1998 (page S16).
Consolidated Statements of Cash Flows for each of the three years in the
period ended June 30, 1999 (page S17).
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended June 30, 1999 (page S17).
Notes to Consolidated Financial Statements (pages S18 through S22).
Report of Ernst & Young LLP, Independent Auditors (page S22).
Our 1999 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
---- -------- -----
<S> <C> <C>
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.
23
<PAGE> 25
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(11) Registrant's Restated Certificate of Incorporation, as
amended March 17, 1999.
3.2 Registrant's Bylaws, as amended September 1, 1999.
3.3(3) Certificate of Amendment of Registrant's Restated
Certificate of Incorporation filed March 17, 1999.
3.4(4) Amended Certificate of Designations filed March 17, 1999.
4.8(12) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998.
4.9(4) Amendment to Second Amended and Restated Share Rights
Agreement dated April 14, 1999.
4.10(6) Indenture, dated August 1, 1999 (the "Indenture") between
Registrant and The Bank of New York, as Trustee.
4.11(6) Form of Subordinated Indenture.
4.12(6) Officers' Certificate Pursuant to Section 301 of the
Indenture, without exhibits, establishing the terms of
Registrant's Senior Notes.
4.13(6) Form of Senior Notes.
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.
10.9(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.
10.21(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.
10.64 Registrant's 1988 Directors' Stock Option Plan, as amended
on August 11, 1999.
10.65(10) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 13, 1997.
10.66(14) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 12, 1998.
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(3) Registrant's Non-Qualified Deferred Compensation Plan, as
amended December 16, 1998.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.85(7) Registrant's Section 162 (m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.87(3) Registrant's Equity Compensation Acquisition Plan, as
amended on November 11, 1998.
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.
10.93(13)+ Strategic Development and Marketing Agreement dated November
23, 1998 by and between America Online, Inc. and the
Registrant.
13.0 Registrant's 1999 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 page 28).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Portions of the exhibit have been omitted pursuant to an order granted by
the Securities and Exchange Commission for confidential treatment.
(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 the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 25, 1987.
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the Quarter ended March 28, 1999.
(4) Incorporated by reference to Registrant's Registration Statement on Form
8-A/A, Amendment No. 7, filed on April 15, 1999.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991.
(6) Incorporated by reference to Registrant's Current Report on Form 8-K filed
August 6, 1999.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995.
(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 29, 1996.
(9) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
(10) Incorporated by reference 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 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. 7 filed on April 15, 1999.
(13) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q/A,
Amendment No. 2 for the Quarter ended December 27, 1998.
(14) Incorporated by reference to Registrant's Registration Statement on Form
S-8/A Amendment No. 1 filed on January 26, 1999.
25
<PAGE> 27
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 23, 1999 By: /s/ MICHAEL E. LEHMAN
------------------------------------
Michael E. Lehman
Vice President, Corporate Resources
and Chief Financial Officer
26
<PAGE> 28
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
--------- ----- ----
<C> <C> <S>
/s/ SCOTT G. MCNEALY Chairman of the Board of Directors September 23, 1999
- ------------------------------------ and Chief Executive Officer
(Scott G. McNealy) (Principal Executive Officer)
/s/ MICHAEL E. LEHMAN Vice President, Corporate Resources September 23, 1999
- ------------------------------------ and Chief Financial Officer
(Michael E. Lehman) (Principal Financial Officer)
/s/ MICHAEL L. POPOV Vice President and Corporate September 23, 1999
- ------------------------------------ Controller
(Michael L. Popov) (Principal Accounting Officer)
/s/ JAMES L. BARKSDALE Director September 23, 1999
- ------------------------------------
(James L. Barksdale)
/s/ L. JOHN DOERR Director September 23, 1999
- ------------------------------------
(L. John Doerr)
/s/ JUDITH L. ESTRIN Director September 23, 1999
- ------------------------------------
(Judith L. Estrin )
/s/ ROBERT J. FISHER Director September 23, 1999
- ------------------------------------
(Robert J. Fisher)
/s/ ROBERT L. LONG Director September 23, 1999
- ------------------------------------
(Robert L. Long)
/s/ M. KENNETH OSHMAN Director September 23, 1999
- ------------------------------------
(M. Kenneth Oshman)
</TABLE>
27
<PAGE> 29
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, 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
======== ======== ======== ========
Year ended June 30, 1999:
Accounts receivable allowances............... $235,563 $493,740 $390,532 $338,771
======== ======== ======== ========
</TABLE>
28
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(11) Registrant's Restated Certificate of Incorporation, as
amended March 17, 1999.
3.2 Registrant's Bylaws, as amended September 1, 1999.
3.3(3) Certificate of Amendment of Registrant's Restated
Certificate of Incorporation filed March 17, 1999.
3.4(4) Amended Certificate of Designations filed March 17, 1999.
4.8(12) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998.
4.9(4) Amendment to Second Amended and Restated Share Rights
Agreement dated April 14, 1999.
4.10(6) Indenture, dated August 1, 1999 (the "Indenture") between
Registrant and The Bank of New York, as Trustee.
4.11(6) Form of Subordinated Indenture.
4.12(6) Officers' Certificate Pursuant to Section 301 of the
Indenture, without exhibits, establishing the terms of
Registrant's Senior Notes.
4.13(6) Form of Senior Notes.
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.
10.9(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.
10.21(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.
10.64 Registrant's 1988 Directors' Stock Option Plan, as amended
on August 11, 1999.
10.65(10) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 13, 1997.
10.66(14) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 12, 1998.
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.
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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(3) Registrant's Non-Qualified Deferred Compensation Plan, as
amended December 16, 1998.
10.85(7) Registrant's Section 162 (m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.87(3) Registrant's Equity Compensation Acquisition Plan, as
amended on November 11, 1998.
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.
10.93(13)+ Strategic Development and Marketing Agreement dated November
23, 1998 by and between America Online, Inc. and the
Registrant.
13.0 Registrant's 1999 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 page 28).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Portions of the exhibit have been omitted pursuant to an order granted by
the Securities and Exchange Commission for confidential treatment.
(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 the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 25, 1987.
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the Quarter ended March 28, 1999.
(4) Incorporated by reference to Registrant's Registration Statement on Form
8-A/A, Amendment No. 7, filed on April 15, 1999.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991.
(6) Incorporated by reference to Registrant's Current Report on Form 8-K filed
August 6, 1999.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995.
(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 29, 1996.
<PAGE> 32
(9) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
(10) Incorporated by reference to Registrant's Registration Statement on on Form
S-8 file number 333-40677, filed with the Securities and Exchange
Commission on November 20, 1997.
(11) Incorporated by reference to Registrant's Quarterly Report on Form10-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. 7 filed on April 15, 1999.
(13) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q/A,
Amendment No. 2 for the Quarter ended December 27, 1998.
(14) Incorporated by reference to Registrant's Registration Statement on Form
S-8/A Amendment No. 1 filed on January 26, 1999.
<PAGE> 1
BYLAWS
OF
SUN MICROSYSTEMS, INC.
(As adopted on December 14, 1990
and amended as of September 1, 1999)
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - CORPORATE OFFICES.......................................... 5
1.1 REGISTERED OFFICE........................................... 5
1.2 OTHER OFFICES............................................... 5
ARTICLE II - STOCKHOLDERS.............................................. 5
2.1 PLACE OF MEETINGS........................................... 5
2.2 ANNUAL MEETING.............................................. 5
2.3 SPECIAL MEETING............................................. 6
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................ 7
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................ 7
2.6 QUORUM...................................................... 7
2.7 ADJOURNED MEETING; NOTICE................................... 8
2.8 CONDUCT OF BUSINESS......................................... 8
2.9 WAIVER OF NOTICE............................................ 8
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING..................................................... 8
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS.................................................... 9
2.12 VOTING...................................................... 10
2.13 PROXIES..................................................... 10
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE....................... 11
2.15 INSPECTORS OF ELECTION...................................... 11
ARTICLE III - DIRECTORS................................................ 11
3.1 POWERS...................................................... 11
3.2 NUMBER OF DIRECTORS......................................... 11
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS..... 12
3.4 RESIGNATION AND VACANCIES................................... 12
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................... 13
3.6 REGULAR MEETINGS............................................ 13
3.7 SPECIAL MEETINGS; NOTICE.................................... 14
3.8 QUORUM...................................................... 14
3.9 WAIVER OF NOTICE............................................ 14
3.10 CONDUCT OF BUSINESS......................................... 14
3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........... 14
3.12 FEES AND COMPENSATION OF DIRECTORS.......................... 15
3.13 APPROVAL OF LOANS TO OFFICERS............................... 15
3.14 REMOVAL OF DIRECTORS........................................ 15
ARTICLE IV - COMMITTEES................................................ 15
4.1 COMMITTEES OF DIRECTORS..................................... 15
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
4.2 COMMITTEE MINUTES........................................... 16
4.3 MEETINGS AND ACTION OF COMMITTEES........................... 16
ARTICLE V - OFFICERS................................................... 16
5.1 GENERAL MATTERS............................................. 16
5.2 APPOINTMENT OF OFFICERS..................................... 17
5.3 SUBORDINATE OFFICERS........................................ 17
5.4 REMOVAL AND RESIGNATION OF OFFICERS......................... 17
5.5 VACANCIES IN OFFICES........................................ 17
5.6 CHAIRMAN OF THE BOARD....................................... 17
5.7 CHIEF EXECUTIVE OFFICER..................................... 17
5.8 PRESIDENT................................................... 18
5.9 VICE PRESIDENTS............................................. 18
5.10 SECRETARY................................................... 18
5.11 CHIEF FINANCIAL OFFICER..................................... 18
5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............. 19
5.13 AUTHORITY AND DUTIES OF OFFICERS............................ 19
ARTICLE VI - INDEMNITY................................................. 19
6.1 THIRD PARTY ACTIONS......................................... 19
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION............... 19
6.3 SUCCESSFUL DEFENSE.......................................... 20
6.4 DETERMINATION OF CONDUCT.................................... 20
6.5 PAYMENT OF EXPENSES IN ADVANCE.............................. 20
6.6 INDEMNITY NOT EXCLUSIVE..................................... 20
6.7 INSURANCE INDEMNIFICATION................................... 20
6.8 THE CORPORATION............................................. 21
6.9 EMPLOYEE BENEFIT PLANS...................................... 21
6.10 INDEMNITY FUND.............................................. 21
6.11 INDEMNIFICATION OF OTHER PERSONS............................ 21
6.12 SAVINGS CLAUSE.............................................. 21
6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.................................................... 22
ARTICLE VII - RECORDS AND REPORTS...................................... 22
7.1 MAINTENANCE AND INSPECTION OF RECORDS....................... 22
7.2 INSPECTION BY DIRECTORS..................................... 22
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................ 22
ARTICLE VIII - GENERAL MATTERS......................................... 23
8.1 CHECKS...................................................... 23
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............ 23
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...................... 23
8.4 SPECIAL DESIGNATION ON CERTIFICATES......................... 23
8.5 LOST CERTIFICATES........................................... 24
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C> <C>
8.6 CONSTRUCTION; DEFINITIONS.................................. 24
8.7 DIVIDENDS.................................................. 24
8.8 FISCAL YEAR................................................ 24
8.9 SEAL....................................................... 24
8.10 TRANSFER OF STOCK.......................................... 24
8.11 STOCK TRANSFER AGREEMENTS.................................. 25
8.12 REGISTERED STOCKHOLDERS.................................... 25
8.13 NOTICES.................................................... 25
ARTICLE I - AMENDMENTS................................................ 25
</TABLE>
4
<PAGE> 5
BYLAWS
OF
SUN MICROSYSTEMS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of the stockholders of this corporation shall be held
each year on a date and at a time designated by the board of directors. At the
meeting, directors shall be elected and any other proper business may be
transacted. Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders only (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the corporation who was a stockholder of
record at the time of giving of notice provided for in these Bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.
For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of the preceding sentence, the
stockholder must have given timely notice thereof in writing to the secretary of
the corporation and such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder proposal to be presented at an
annual meeting must be delivered to the secretary of the corporation at the
corporation's principal executive offices not less than 60 or more than 90
calendar days prior to the first anniversary of the date that the corporation
first mailed its proxy statement to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been
5
<PAGE> 6
changed by more than 30 calendar days from the first anniversary date of the
previous year's annual meeting, notice by the stockholder to be timely must be
received no later than the close of business on the tenth day following the day
on which public announcement of the date of such annual meeting is first made.
In no event shall the public announcement of an adjournment of an annual meeting
commence a new period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of director in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (or any successor thereto) (the "Exchange Act")
and Rule 14a-11 thereunder (or any successor thereto) (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the corporation's books, and such
beneficial owner, and (ii) the class and number of shares for the corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner. Notwithstanding any provision herein to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 2.2. For purposes of Section 2.2 and 3.3 of
these Bylaws "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or a comparable
national news service or in a document publicly filed by the corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by any executive officer
of the corporation, or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing to the secretary of the
corporation, and shall set forth (a) as to each person whom such person or
persons propose to nominate for election or reelection as a director at such
meeting all information relating to such proposed nominee that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Exchange Act (or any successor thereto) and Rule 14a-11 thereunder (or any
successor thereto)(including such proposed nominee's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business to be taken the meeting, a brief
description of such business, the reasons for conducting such business and any
material interest in such business of the person
6
<PAGE> 7
or persons calling such meeting and the beneficial owners, if any, on whose
behalf such meeting is called; and (c) as to the person or persons calling such
meeting and the beneficial owners, if any, on whose behalf the meeting is called
(i) the name and address of such persons, as they appear on the corporation's
books, and of such beneficial owners, and (ii) the class and number of shares of
the corporation which are owned beneficially and of record by such persons and
such beneficial owners. No business may be transacted at such special meeting
otherwise than specified in such notice or by or at the direction of the
corporation's board of directors. The corporation's secretary shall cause notice
to be promptly given to the stockholders entitled to vote, in accordance with
the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time
reasonably requested by the person or persons who called the meeting, not less
than 60 nor more than 90 days after the receipt of the request. If the notice is
not given within 20 days after the receipt of a valid request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph 2.3 shall be construed as limiting, fixing or affecting the time when
a meeting of stockholders called by action of the board of directors may be
held.
Only such business shall be conducted at a special meeting of stockholders
called by action of the board of directors as shall have been brought before the
meeting pursuant to the corporation's notice of meeting.
This Section 2.3 may not be amended to eliminate the right of one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent of the votes at a special meeting of stockholders to call such a special
meeting of stockholders, unless holders of at least seventy-five percent of the
shares entitled to vote thereon approve such an amendment.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these Bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting, except as otherwise provided
herein or required by law (meaning, here and hereinafter, as required from time
to time by the General Corporation Law of Delaware or the certificate of
incorporation of the corporation). The notice shall specify the place, date, and
hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of the shares of
such
7
<PAGE> 8
class or classes entitled to take action with respect to that vote on that
matter, present in person or by proxy, shall constitute a quorum. If a quorum
shall fail to attend any meeting, the chairman of the meeting may adjourn the
meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, those present at such adjourned meeting
shall constitute a quorum, and all matters shall be determined by a majority of
the votes cast at such meeting, except as otherwise required by law.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these Bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
Such person as the board of directors may have designated or, in the
absence of such a person, any executive officer of the corporation, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the secretary of the corporation, the secretary of the meeting
shall be such person as the chairman appoints. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order. The date and time of the opening and closing
of the polls for each matter upon which the stockholders will vote at the
meeting shall be announced at the meeting.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or able to be taken at any annual or special meeting
of stockholders may be taken without a meeting, without prior notice, and
without a vote if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation at its registered office in
Delaware, its principal place of
8
<PAGE> 9
business, or to an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery to
the corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the date
the earliest dated consent is delivered to the corporation, a written consent or
consents signed by a sufficient number of holders to take action are delivered
to the corporation in the manner prescribed in the first paragraph of this
section.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix a record date, which shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting, nor
more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to receive
payment of any dividend or other distribution or allotment of rights or to
exercise any rights of change, conversion or exchange of stock or for any
other purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall neither precede nor be more than
ten (10) days after the date upon which such resolution is adopted by the board
of directors. Any stockholder of record seeking to have the stockholders
authorize or take action by written consent shall, by written notice to the
secretary, request the board of directors to fix a record date. The board of
directors shall promptly, but in
9
<PAGE> 10
all events within ten (10) days after the date on which such noticed is
received, adopt a resolution fixing the record date.
If the board of directors has not fixed a record date within such time,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation in the manner prescribed in the first paragraph of Section 2.10
of these Bylaws. If the board of directors has not fixed a record date within
such time and prior action by the board of directors is required by law, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the board of directors adopts the resolution taking such prior action.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Each stockholder shall have one (1) vote for every share of stock entitled
to vote that is registered in his or her name on the record date for the meeting
(as determined in accordance with Section 2.11 of these Bylaws), except as
otherwise provided herein or required by law.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been properly placed in
nomination (in accordance with these Bylaws) prior to commencement of the voting
and the stockholder requesting cumulative voting has given notice prior to
commencement of the voting of the stockholder's intention to cumulate votes. If
cumulative voting is properly requested, each holder of stock, or of any class
or classes or of a series or series thereof, who elects to cumulate votes shall
be entitled to as many votes as equals the number of votes which (absent this
provision as to cumulative voting) he would be entitled to cast for the election
of directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and he may cast all of such votes for a single
director or may distribute them among the number to be voted for, or for any two
or more of them, as he may see fit.
Every stock vote shall be taken by ballots, each of which shall state the
name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting. All elections shall be
determined by a plurality of the votes cast, and except as otherwise required by
law or provided herein, all other matters shall be determined by a majority of
the votes cast affirmatively or negatively.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or
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dissent to corporate action in writing without a meeting may authorize another
person or persons to act for him by a written or electronic proxy, filed in
accordance with the procedure established for the meeting or taking of action in
writing, but no such proxy shall be voted or acted upon after three (3) years
from its date, unless the proxy provides for a longer period. Any copy,
facsimile telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this Section 2.13 may be substituted or used in
lieu of the original writing or transmission for any and all purposes for which
the original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission. An electronic proxy
(which may be transmitted via telephone, e-mail, the Internet or such other
electronic means as the Board of Directors may determine from time to time)
shall be deemed executed if the Company receives an appropriate electronic
transmission from the stockholder or the stockholder's attorney-in-fact along
with a pass code or other indentifier which reasonably establishes the
stockholder or the stockholder's attorney-in-fact as the sender of such
transmission. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Section 212(c) of the General
Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
2.15 INSPECTORS OF ELECTION
The corporation may, and to the extent required by law, shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability. Every vote taken by ballots shall be
counted by an inspector or inspectors appointed by the chairman of the meeting.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the Certificate of Incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be no less than five
(5) or more than nine (9). The exact number of directors shall be seven (7),
until changed, within the limits specified above, by a Bylaw amending this
Section 3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by an adopted amendment to this
Bylaw duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
reducing the number or the minimum number of directors to a number less than
five (5) cannot be adopted if the votes cast against its adoption at a meeting
of the shareholders, or the shares not consenting in the case of action by
written consent, are equal to more than sixteen and two-thirds percent (16-2/3%)
of the outstanding shares entitled to vote thereon. No amendment may change the
stated maximum number of authorized directors to a number greater than two (2)
times the stated number of directors minus one (1).
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Nominations for election to the board of directors of the corporation at
an annual meeting of stockholders may be made by the board or on behalf of the
board by a nominating committee appointed by the board, or by any stockholder of
the corporation entitled to vote for the election of directors at such meeting.
Such nominations, other than those made by or on behalf of the board, shall be
made by notice in writing received by the secretary of the corporation at the
corporation's principal executive offices not less than 60 or more than 90
calendar days prior to the first anniversary of the date that the corporation
first mailed its proxy statement to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 calendar days from the first anniversary date of the previous year's
annual meeting, notice by the stockholder to be timely must be received no later
than the close of business on the tenth day following the day on which public
announcement (as defined in Section 2.2) of the date of such annual meeting is
first made. Such notice shall set forth as to each proposed nominee who is not
an incumbent director (i) the name, age, business address and, if
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known, residence address of each nominee proposed in such notice, (ii) the
principal occupation or employment of such nominee, (iii) the number of shares
of stock of the corporation beneficially owned by each such nominee and by the
nominating stockholder, and (iv) any other information concerning the nominee
that must be disclosed of nominees in proxy solicitations pursuant to Regulation
14A under the Securities Exchange Act of 1934.
The chairman of the annual meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
foregoing procedure. If such determination and declaration is made, the
defective nomination shall be disregarded.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the attention
of the Secretary of the corporation. When one or more directors so resigns and
the resignation is effective at a future date, only a majority of the directors
then in office, including those who have so resigned, shall have power to fill
such vacancy or vacancies, the vote thereon to take effect when such resignation
or resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled only
by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled only by a
majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section
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211 of the General Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the board of directors and publicized among all directors. A
notice of each regular meeting shall not be required.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by any executive officer of the corporation, or by
one-third of the directors then in office (rounded up to the nearest whole
number) and shall be held at a place, on a date and at a time as such officer or
such directors shall fix. Notice of the place, date and time of special
meetings, unless waived, shall be given to each director by mailing written
notice not less than two (2) days before the meeting or by sending a facsimile
transmission of the same not less than two (2) hours before the time of the
holding of the meeting. If the circumstances warrant, notice may also be given
personally or by telephone not less than two (2) hours before the time of the
holding of the meeting. Oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. Unless otherwise indicated in the notice thereof, any and
all business may be transacted at a special meeting.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof,
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signed by the person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the directors, or members of a
committee of directors, need be specified in any written waiver of notice unless
so required by the certificate of incorporation or these Bylaws.
3.10 CONDUCT OF BUSINESS
At any meeting of the board of directors, business shall be transacted in
such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.12 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.13 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.14 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, so long as shareholders of the corporation are entitled to cumulative
voting, if less than the entire board is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire board of
directors.
No reduction of the authorized number of directors shall have the effect
of removing any
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director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the Bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the Bylaws of the corporation; and, unless the board
resolution establishing the committee, a supplemental resolution of the board of
directors, the Bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and
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meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.11 (action without a meeting), with such changes in the context of
those Bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special meetings of
committees may also be called by resolution of the board of directors and that
notice of special meetings of committees shall also be given to all alternate
members, who shall have the right to attend all meetings of the committee. The
board of directors may adopt rules for the government of any committee not
inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 GENERAL MATTERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, a chief executive officer, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the chief executive officer
or the president to appoint, such other officers and agents as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these Bylaws or
as the board of directors may from time to time determine. Officers appointed by
the board of directors shall constitute executive officers of the corporation.
Officers appointed by the president or chief executive officer shall be
subordinate officers, unless otherwise specified by the board of directors.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified
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in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors if such officer was appointed by the board of directors,
or by such other person as appointed by the board of directors to fill such
vacancy.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Bylaws. If there is no chief
executive officer or president, then the chairman of the board shall also be the
chief executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these Bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
chief executive officer of the corporation shall, subject to the control of the
board of directors, have general supervision, direction, and control of the
business and the officers of the corporation. He shall preside at all meetings
of the stockholders and, in the absence or nonexistence of a chairman of the
board, at all meetings of the board of directors. He shall have the general
powers and duties of management usually vested in the chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the board of directors or these Bylaws.
5.8 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board or the chief executive officer, if
there be such officers, the president shall have general supervision, direction,
and control of the business and other officers of the corporation. He shall have
the general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the board of directors or these Bylaws.
5.9 VICE PRESIDENTS
In the absence or disability of the chief executive officer and president,
the vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president and chief executive officer. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these Bylaws, the president, chief
executive officer or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all
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meetings and actions of directors, committees of directors, and stockholders.
The minutes shall show the time and place of each meeting, whether regular or
special (and, if special, how authorized and the notice given), the names of
those present at directors' meetings or committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these Bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these Bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
chief executive officer, president and directors, whenever they request it, an
account of all his transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or the Bylaws.
5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, any executive officer of this corporation, or
any other person designated by the board of directors, shall be authorized to
vote, represent, and exercise on behalf of this corporation all rights incident
to any and all shares of any other corporation or corporations standing in the
name of this corporation. The authority granted herein may be exercised either
by such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
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ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the corporation, or that such
director or officer is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise (collectively "Agent"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was an Agent (as defined in Section 6.1)
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in manner he reasonably believed to be in or not opposed
to the best interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Delaware
Court of Chancery or such other court shall deem proper.
6.3 SUCCESSFUL DEFENSE
To the extent that an Agent of the corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made
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by the corporation only as authorized in the specific case upon a determination
that the indemnification of the Agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 6.l and 6.2.
Such determination shall be made (1) by the board of directors or the executive
committee by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding or (2) or if such quorum is not
obtainable or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain on behalf
any person who is or was an Agent of the corporation, or is or was serving at
the request of the corporation, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of this Article VI.
6.8 THE CORPORATION
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors and officers, so that any person who is or
was a director or Agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under and subject to the provisions
of this Article VI (including, without limitation the provisions of Section 6.4)
with respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall
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include any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 INDEMNITY FUND
Upon resolution passed by the board, the corporation may establish a trust
or other designated account, grant a security interest or use other means
(including, without limitation, a letter of credit), to ensure the payment of
certain of its obligations arising under this Article VI and/or agreements which
may be entered into between the company and its officers and directors from time
to time.
6.11 INDEMNIFICATION OF OTHER PERSONS
The provisions of this Article VI shall not be deemed to preclude the
indemnification of any person who is not an agent (as defined in Section 6.1),
but whom the corporation has the power or obligation to indemnify under the
provisions of the General Corporation Law of the State of Delaware or
other-wise. The corporation may, in its sole discretion, indemnify an employee,
trustee or other agent as permitted by the General Corporation Law of the State
of Delaware. The corporation shall indemnify an employee, trustee or other agent
where required by law.
6.12 SAVINGS CLAUSE
If this article or any portion thereof shall be invalidated on any ground
by any court of competent jurisdiction, then the corporation shall nevertheless
indemnify each agent against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement with respect to any action, suit,
proceeding or investigation, whether civil, criminal or administrative, and
whether internal or external, including a grand jury proceeding and an action or
suit brought by or in the right of the corporation, to the full extent permitted
by any applicable portion of this Article that shall not have been invalidated,
or by any other applicable law.
6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number of class of shares
held by each stockholder, a copy of these Bylaws as
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amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the
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corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertified shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the corporation.
Notwithstanding the adoption of such a resolution by the board of directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the corporation by the chairman of or vice-chairman of the board
of directors, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case or uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law or
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
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destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its hooks as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof,
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except as otherwise provided by the laws of Delaware.
8.13 NOTICES
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery, by mail, postage paid, or by facsimile transmission. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his last known address as it appears on the books of the corporation. The time
when such notice shall be deemed received, if hand delivered, or dispatched, if
sent by mail or facsimile, transmission, shall be the time of the giving of the
notice.
ARTICLE IX
AMENDMENTS
Any of these Bylaws may be altered, amended or repealed by the affirmative
vote of a majority of the board of directors or, with respect to Bylaw
amendments placed before the stockholders for approval and except as otherwise
provided herein or required by law, by the affirmative vote of the holders of
seventy-five percent of the shares of the corporation's stock entitled to vote
in the election of directors, voting as one class.
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SUN MICROSYSTEMS, INC.
1988 DIRECTORS' STOCK OPTION PLAN
(AMENDED AS OF AUGUST 11, 1999)
1. Purposes of the Plan. The purposes of this Directors' Stock Option
Plan are to attract and retain the best available personnel for services as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Common Stock" shall mean the Common Stock of the Company.
(c) "Company" shall mean Sun Microsystems, Inc., a Delaware
corporation.
(d) "Continuous Status as a Director" shall mean the absence of
any interruption or termination of service as a Director.
(e) "Director" shall mean a member of the Board.
(f) "Employee" shall mean any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(h) "Option" shall mean a stock option granted pursuant to the
Plan.
(i) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(j) "Optionee" shall mean an Outside Director who receives an
Option.
(k) "Outside Director" shall mean a Director who is not an
Employee.
(l) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of
1986.
(m) "Plan" shall mean this 1988 Directors' Stock Option Plan.
(n) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(o) "Subsidiary" shall mean a "subsidiary corporation", whether
now or hereafter existing, as defined in Section 425(f) of the Internal Revenue
Code of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 11
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is
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4,400,000 Shares (the "Pool") of Common Stock. The Shares may be authorized, but
unissued, or required Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, shall become
available for future grant under the Plan. If Shares which were acquired upon
exercise of an Option are subsequently repurchased by the Company, such Shares
shall not in any event be returned to the Plan and shall not become available
for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and non-discretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) Each Outside Director who is a partner, officer or
director of an entity having an equity investment in the Company (or who was so
affiliated with such an entity at the time of his or her initial appointment or
election to the Board) shall be automatically granted an Option to purchase
10,000 Shares (which number, notwithstanding the provisions of Section 11, shall
not be adjusted to reflect any stock split, stock dividend, combination,
reclassification or similar transaction that increases the number of issued
shares of Common Stock without the receipt of consideration by the Company) (the
"First Option") upon the effective date of the Plan, as determined in accordance
with Section 6 hereof, or the date on which such person first becomes a
Director, whether through election by the shareholders of the Company or
appointment by the Board of Directors to fill a vacancy; provided, however, that
no Option shall be issued under the Plan or become exercisable until shareholder
approval of the Plan has been obtained. Each Outside Director who is not, on the
date of his or her initial appointment or election to the Board, affiliated with
an investment entity as described above, shall automatically be granted a First
Option of 20,000 Shares (which number, notwithstanding the provisions of Section
11, shall not be adjusted to reflect any stock split, stock dividend,
combination, reclassification or similar transaction that increases the number
of issued shares of Common Stock without the receipt of consideration by the
Company), subject to the above provision.
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(iii) After the First Option has been granted to an Outside
Director, such Outside Director shall thereafter be automatically granted an
Option to purchase 10,000 Shares (which number, notwithstanding the provisions
of Section 11, shall not be adjusted to reflect any stock split, stock dividend,
combination, reclassification or similar transaction that increases the number
of issued shares of Common Stock without the receipt of consideration by the
Company) (a "Subsequent Option") on the date of and immediately following each
Annual Meeting of Shareholders of the Company at which such non-employee
director is re-elected, if on such date, he shall have served on the Board for
at least six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Directors on the automatic grant
date. Any further grants shall then be deferred until such time, if any, as
additional Shares become available for grant under the Plan of Shares which may
be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
(v) The terms of an Option granted hereunder shall be as
follows:
(A) The term of the Option shall be five (5) years.
(B) The Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof.
(C) The exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Option.
(D) The Option shall become exercisable in
installments cumulatively as to twenty-five percent (25%) of the Shares subject
to the Option on each of the first, second, third and fourth anniversaries of
the date of grant of the Option (each a "Vesting Date"); provided, however, if
the Company's Annual Meeting of Shareholders for any year after the Annual
Meeting at which the Option is granted is held prior to a Vesting Date, the
Vesting Date for that year shall be the date of the Annual Meeting of
Shareholders. Notwithstanding the foregoing, in no event shall any portion of
the Option vest before the date six (6) months after the date of grant of the
Option.
(c) Powers of the Board. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its discretion:
(i) to determine, upon review of relevant information and in accordance with
Section 8(b) of the Plan, the fair market value of the Common
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Stock; (ii) to determine the exercise price per share of Options to be granted,
which exercise price shall be determined in accordance with Section 8(a) of the
Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules
and regulations relating to the Plan; (v) to authorize any person to exercise on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted hereunder; and (vi) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(d) Effect of the Board's Decision. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
Officer or his designee reasonably believes that an Optionee has committed an
act of misconduct, the Chief Executive Officer may suspend the Optionee's right
to exercise any option pending a determination by the Board of Directors
(excluding the Outside Director accused of such misconduct). If the Board of
Directors (excluding the Outside Director accused of such misconduct) determines
an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment
of an obligation owed to the Company, breach of fiduciary duty or deliberate
disregard of the Company rules resulting in loss, damage or injury to the
Company, or if an Optionee makes an unauthorized disclosure of any Company trade
secret or confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any option whatsoever. In making such determination, the Board of
Directors (excluding the Outside Director accused of such misconduct) shall act
fairly and shall give the Optionee an opportunity to appear and present evidence
on Optionee's behalf at a hearing before the Board or committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect
to continuation of service as a Director or nomination to serve as a Director,
nor shall it interfere in any way with any rights which the Director or the
Company may have to terminate his directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption
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by the Board of Directors or its approval by the shareholders of the Company. It
shall continue in effect until December 31, 2008 unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be five (5) years from
the date of grant thereof.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option. In the case of an Option
granted to an Optionee who, immediately before the grant of such Option, owns
stock representing more than ten percent (10%) of the voting power or value of
all classes of stock of the Company or its parents or subsidiaries, the per
Share exercise price for the Shares to be issued pursuant to exercise of such
Option shall be at least 110% of the fair market value per Share on the date of
grant of the Option.
(b) Fair Market Value. The fair market value shall be the closing
price of the Common Stock on the date of grant, as reported on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System or, in
the event the Common Stock is traded on a stock exchange, the fair market value
per Share shall be the closing price on such exchange on the date of grant of
the Option.
(c) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, or any combination of such methods of payment.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
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the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
(b) Termination of Status as a Director. If an Outside Director
ceases to serve as a Director, he may, but only within ninety (90) days after
the date he ceases to be a Director of the Company, exercise his Option to the
extent that he was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
five (5) year term has expired. To the extent that he was not entitled to
exercise an Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event a Director is unable to continue his service as
a Director with the Company as a result of his total and permanent disability
(as defined in Section 22(e)(3) of the Internal Revenue Code), he may, but only
within six (6) months from the date of termination, exercise his Option to the
extent he was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
five (5) year term has expired. To the extend that he was not entitled to
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) During the term of the Option, Optionee who is, at the
time of his death, a Director of the Company and who shall have been in
Continuous Status as a Director since the date of grant of the Option, the
Option may be exercised, at any time within six (6) months following the date of
death, by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that would have accrued had the Optionee continued living and
remained in Continuous Status as Director for six (6) months after the date of
death. Notwithstanding the foregoing, in no event may the Option be exercised
after its five (5) year term has expired.
(ii) Within one (l) month after the termination of Continuous
Status as a
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Director, the Option may be exercised, at any time within six (6) months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
five (5) year term has expired.
10. Non-Transferability of Options. Options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title l of the Employee
Retirement Income Security Act, or the rules thereunder. The designation of a
beneficiary by an Optionee does not constitute a transfer. An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 10.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Common Stock subject to
an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action. In the event of a proposed sale of all or substantially all of
the assets of the Company or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor
7
<PAGE> 8
corporation. In the event that such successor corporation refuses to assume the
Option or to substitute an equivalent option, the Board shall, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable, in which case, the Board
shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the termination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule l6b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the shareholders of the Company of Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in
Sections 2(k), 4(b), 5, 7 and 8(a) of this Plan (and any other Sections of this
Plan that affect the formula award terms required to be specified in this Plan
by Rule l6b-3) shall not be amended more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.
(i) any increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under Section 11 of the Plan;
or
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any material increase in the benefits accruing to
participants under the Plan; or
(iv) any change in the number of shares subject to Options to
be granted hereunder or in the terms thereof as set forth in Section 4(b)
hereof.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the
8
<PAGE> 9
Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Information to Optionees. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports to shareholders, proxy statements and
other information provided to all shareholders of the Company.
9
<PAGE> 1
EXHIBIT 13.1
Annual Report 1999 o Sun Microsystems, Inc. S11
Management's Discussion and Analysis o Page S12
Consolidated Financial Statements o Page S16
Notes to Consolidated Financial Statements o Page S18
Report of Independent Auditors o Page S22
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
The Last Ten Years
Sun's revenues have grown an average of 21% annually over the past decade as
demand for our open, network computing products and services has increased. With
over 49% of revenues generated from outside the United States in fiscal 1999,
Sun's portfolio of revenues by geography is well balanced.
Cash from operating activities has grown an average of 70% annually over the
past ten years, demonstrating the strength and consistency of Sun's business
model.
While Sun's vision and strategy have remained consistent, the market
opportunities for Sun's products and technologies have expanded as companies
embrace Internet computing. Increasingly, Sun's business is being driven by
customer efforts to implement e-commerce, middleware, network storage, and
enterprise software. Customers are also increasingly demanding Sun's
high-quality enterprise services to help them implement, manage, and monitor
their Internet/network computing environments.
In addition, Sun's component technologies, Java, Jini, and UltraSPARC, are
increasingly being implemented in consumer and telecommunications environments,
promising to increase the number of Internet-enabled devices and thus Internet
traffic. The greater the demand for information and services over the Internet,
the greater the opportunity for Sun to sell servers, storage, and software.
In order to capitalize on these opportunities, Sun has invested carefully--in
research and development, enterprise services, and other demand creation
activities.
Sun's excellence in financial and asset management continues to yield
outstanding results in almost every conventional measure of profitability and
productivity. Our balance sheet is superb, and we are strongly capitalized,
effectively positioning Sun for the .com era.
NET REVENUES
(in millions of dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,466 11,726
</TABLE>
Net revenues grew to $11,726 million in fiscal 1999, an increase of 20% from
$9,791 million in fiscal 1998.
NET INCOME PER COMMON
SHARE--DILUTED (in dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.15 1.27
</TABLE>
Earnings per share for fiscal 1999, including
acquisition-related charges, totaled $1.27, an increase of 31% over fiscal 1998.
Over the past ten years, Sun has grown earnings per share an average of 33%.
OPERATING INCOME
(in millions of dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
177 1,522
</TABLE>
Operating income as a percent of revenues for fiscal 1999 reached a record level
of 13%. Over the past decade, Sun's operating income has increased 37% on an
average annual basis.
R&D INVESTMENT
(in millions of dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
302 1,263
</TABLE>
During fiscal 1999, Sun invested nearly 11% of revenues in research and
development, primarily in the areas of system design, SPARC microprocessors,
Solaris software, network storage, and Java technologies. Sun's investments in
research and development have led to increasingly innovative products and
technologies that promise to change the ways in which customers use the
Internet.
CASH PORTFOLIO (in millions of dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
393 2,665
</TABLE>
Excellence in financial management resulted in another record cash balance for
fiscal 1999. Sun's cash portfolio, which includes cash, cash equivalents, and
short-term investments, totaled $2,665 million at the end of fiscal 1999.
CASH FROM OPERATING ACTIVITIES
(in millions of dollars)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
298 2,517
</TABLE>
In fiscal 1999, Sun achieved record cash from operating activities increasing by
nearly $1 billion over fiscal 1998 to reach $2,517 million during fiscal 1999.
LONG-TERM DEBT-TO-EQUITY RATIO
(percentage)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
39.0 0.0
</TABLE>
At the end of fiscal 1998 and 1999, Sun had no long-term debt, resulting in a
0.0% debt-to-equity ratio.
RETURN ON AVERAGE EQUITY
(percentage)
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14.0 25.0
</TABLE>
In fiscal 1999, Sun's return on equity was 25%, demonstrating the strong
customer acceptance of Sun's server, storage, workstation, and software products
and technologies.
REVENUES BY GEOGRAPHY
(in millions of dollars)
[ ] Rest of World
[ ] Europe
[ ] U.S.
<TABLE>
<CAPTION>
90 91 92 93 94 95 95 96 97 98 99
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,466 11,726
</TABLE>
Sun is a global company with more than 49% of its revenues generated outside the
United States. Despite the ongoing macroeconomic difficulties in Japan and
Southeast Asia, Sun continued to experience strong revenue growth in the United
States, Europe, and Latin America, demonstrating the value of a balanced
geographical portfolio.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997 1996 1995
--------------- --------------- --------------- -------------- --------------
Dollars % Dollars % Dollars % Dollars % Dollars %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $11,726 100.0 $9,791 100.0 $8,598 100.0 $7,095 100.0 $5,902 100.0
Costs and expenses:
Cost of sales 5,648 48.2 4,693 47.9 4,320 50.2 3,921 55.3 3,336 56.5
Research and development 1,262 10.8 1,014 10.4 826 9.6 653 9.2 563 9.5
Selling, general and
administrative 3,173 27.1 2,777 28.4 2,402 27.9 1,788 25.2 1,503 25.5
Purchased in-process
research and development 121 0.9 177 1.8 23 0.3 58 0.8 -- --
Total costs and expenses 10,204 87.0 8,661 88.5 7,571 88.0 6,420 90.5 5,402 91.5
- ------------------------------------------------------------------------------------------------------------------------
Operating income 1,522 13.0 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 84 0.7 46 0.5 32 0.4 34 0.5 23 0.4
Litigation settlement -- -- -- -- -- -- -- -- -- --
Income before income taxes 1,606 13.7 1,176 12.0 1,121 13.1 709 10.0 523 8.9
Provision for income taxes 575 4.9 413 4.2 359 4.2 232 3.3 167 2.8
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,031 8.8 $ 763 7.8 $ 762 8.9 $ 477 6.7 $ 356 6.1
Net income per common
share--diluted $ 1.27 $ 0.97 $ 0.98 $ 0.61 $ 0.46
- ------------------------------------------------------------------------------------------------------------------------
Shares used in the calculation
of net income per common
share--diluted 814 788 778 786 788
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended June 30, 1994 1993 1992 1991 1990
-------------- -------------- -------------- ------------ -------------
Dollars % Dollars % Dollars % Dollars % Dollars %
- ----------------------------------------------------------------------------------------------------------------------
<S> <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
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
Research and development 500 10.7 445 10.3 382 10.6 356 11.1 302 12.2
Selling, general and
administrative 1,160 24.7 1,105 25.7 983 27.4 812 25.2 588 23.9
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
- ----------------------------------------------------------------------------------------------------------------------
Operating income 277 5.9 241 5.6 261 7.3 295 9.1 177 7.2
Gain on sale of equity
investment -- -- -- -- -- -- -- -- -- --
Interest income (expense), net 6 0.1 (2) -- (6) (0.2) (11) (0.3) (23) (0.9)
Litigation settlement -- -- (15) (0.4) -- -- -- -- -- --
Income before income taxes 283 6.0 224 5.2 255 7.1 284 8.8 154 6.3
Provision for income taxes 87 1.8 67 1.6 82 2.3 94 2.9 43 1.8
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 196 4.2 $ 157 3.6 $ 173 4.8 $ 190 5.9 $ 111 4.5
Net income per common
share--diluted $ 0.25 $ 0.19 $ 0.21 $ 0.23 $ 0.15
- ----------------------------------------------------------------------------------------------------------------------
Shares used in the calculation
of net income per common
share--diluted 776 860 862 878 790
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
OPERATING AND CAPITALIZATION DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets (millions) $ 8,420 $ 5,711 $ 4,697 $ 3,801 $ 3,545 $ 2,898 $ 2,768 $ 2,672 $ 2,326 $ 1,779
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt, deferred
income taxes, and other
obligations (millions) $ 382 $ 75 $ 106 $ 60 $ 91 $ 122 $ 178 $ 348 $ 401 $ 359
- ----------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.9 2.0 2.0 2.0 2.2 2.0 2.4 2.6 2.5 2.6
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt-to-equity ratio -- -- 0.02 0.02 0.04 0.08 0.11 0.23 0.33 0.39
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average equity 25% 24% 31% 22% 19% 12% 10% 13% 18% 14%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average capital 23% 24% 30% 23% 18% 12% 9% 10% 13% 11%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 15% 15% 18% 13% 11% 7% 6% 7% 9% 7%
- ----------------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 36% 35% 32% 33% 32% 33% 30% 32% 33% 28%
- ----------------------------------------------------------------------------------------------------------------------------------
Average shares and
equivalents (thousands) 814,241 788,548 777,934 786,760 787,400 774,112 841,000 813,120 824,536 754,952
- ----------------------------------------------------------------------------------------------------------------------------------
Book value per
outstanding share $ 6.19 $ 4.67 $ 3.70 $ 3.03 $ 2.70 $ 2.17 $ 2.02 $ 1.86 $ 1.58 $ 1.26
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 4
S12 Annual Report 1999 o SUN MICROSYSTEMS, INC.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
The following table sets forth items from our Consolidated Statements of Income
as a percentage of total net revenues:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues
Products 86.1 87.9 90.1
Services 13.9 12.1 9.9
- --------------------------------------------------------------------------------
Total net revenues 100.0% 100.0% 100.0%
Cost of sales:
Products 39.9 40.5 44.0
Services 8.3 7.4 6.2
- --------------------------------------------------------------------------------
Total cost of sales 48.2 47.9 50.2
- --------------------------------------------------------------------------------
Gross margin 51.8 52.1 49.8
Research and development 10.8 10.4 9.6
Selling, general and administrative 27.1 28.4 27.9
Purchased in-process research and development 0.9 1.8 0.3
Operating income 13.0 11.5 12.0
Gain on sale of investment -- -- 0.7
Interest income (expense), net 0.7 0.5 0.4
- --------------------------------------------------------------------------------
Income before income taxes 13.7 12.0 13.1
Provision for income taxes 4.9 4.2 4.2
- --------------------------------------------------------------------------------
Net income 8.8% 7.8% 8.9%
- --------------------------------------------------------------------------------
</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 economic trends in geographic markets,
trends relating to customer buying patterns, and the Company's expectations
relating to future research and development and selling, general and
administrative expenses. These forward-looking statements involve risks and
uncertainties, and the cautionary statements set forth below and 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 our 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.
<PAGE> 5
RESULTS OF OPERATIONS
NET REVENUES
Our products net revenues increased $1,488 million, or 17.3%, to $10,091 million
in fiscal 1999, compared with an increase of $856 million, or 11%, in fiscal
1998. More than 50% of the increase in products revenues in fiscal 1999 was
primarily due to strong demand for our enterprise and workgroup servers, and to
a lesser extent from increased revenues generated by our storage products. The
growth in products revenue was partially offset by a decline in high-end desktop
system volumes as the result of a shift in customer purchasing patterns towards
low-end desktop systems and workgroup servers. More than 50% of the increase in
net revenues in fiscal 1998 over fiscal 1997 resulted from increased demand for
workgroup, enterprise, and departmental servers and high-end desktop systems and
to a lesser extent from high-end storage, memory, and related products.
Our services net revenues increased $448 million, or 37.7%, to $1,635
million in fiscal 1999, compared with an increase of $336 million, or 40%, in
fiscal 1998. The dollar increase in services revenues in fiscal 1999 was
primarily the result of a shift in product mix toward premium-priced service and
support contracts and a larger installed product base due to increased product
unit sales, as well as increased revenues associated with our professional and
education services. The increase in services revenues from fiscal 1997 to fiscal
1998 was primarily the result of a larger installed product base due to
increased product unit sales, as well as increased revenues associated with our
professional services.
In fiscal 1999 and fiscal 1998, domestic net revenues grew by 19% and 16%,
respectively, while international net revenues (including United States exports)
grew 21% and 12%, respectively. Revenues from international operations
represented 49%, 48%, and 49% of total revenues in fiscal 1999, 1998, and 1997,
respectively.
European net revenues increased 23% and 20% in fiscal 1999 and 1998,
respectively. The increase in fiscal 1999 was due to increased demand for our
network computing products and services. We experienced continued growth in all
European regions during fiscal 1999, with the strongest growth in Germany and
Southern Europe. The increase in fiscal 1998 was primarily due to continued
market acceptance of our network computing products and services in most major
European markets. Although we have experienced U.S. dollar revenue growth in the
European marketplace on a year over year basis, there can be no assurance that
such trends will continue. In particular, if capital spending declines in
certain countries or industries, our results of operations and cash flow could
suffer.
Japan net revenues increased 14% for fiscal 1999, compared to a decrease of
5% in fiscal 1998. The increase in fiscal 1999 was primarily due to increased
demand within the region for our products, with the most notable increase in
demand for our servers. We attribute the decrease in revenues in fiscal 1998 to
macroeconomic trends affecting the Japanese market, including currency movements
against the U.S. dollar. We remain cautious with regard to the Japanese market
and do not expect the current Japanese macroeconomic trends to change
significantly in the near term. In addition, if the economic trends in Japan
significantly worsen in a quarter or decline over an extended period of time,
our results of operations and cash flows could suffer.
Net revenues in Rest of World increased by 22% in fiscal 1999 compared with
9% in fiscal 1998. The increases in fiscal 1999 and fiscal 1998 were primarily
due to increased demand for our network computing products and services from
expanding markets in China, Australia, and Latin America.
A portion of our operations consists of manufacturing and sales activities
in foreign jurisdictions. As a result, our results of operations 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 we
distribute our products. We are primarily exposed to changes in exchange rates
on the Japanese yen, British pound, 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 we are a net receiver of currencies other than the U.S. dollar and, as
such, benefit from a weaker dollar, and are 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 our consolidated sales and operating margins as expressed in U.S.
dollars.
To mitigate the short-term effect of changes in currency exchange rates on
our non-U.S. dollar-based sales, product procurement, and operating expenses, we
regularly hedge our 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 our foreign exchange forward and option contracts, our exposure to risk
associated with currency market movement on the instruments is not material. See
"Other Financial Instruments" in Note 1--"Summary of Significant Accounting
Policies."
<PAGE> 6
GROSS MARGIN
Products gross margin was 53.7% for fiscal 1999, compared with 53.8% and 51.1%
for fiscal 1998 and 1997, respectively. Fiscal year 1999 products gross margin
was relatively flat in relation to fiscal 1998. Products gross margin was
adversely impacted by increased volumes of low-end desktop systems and certain
workgroup servers, as well as increased manufacturing costs, the effects of
which were offset by an increased volume of higher margin, richly configured
enterprise servers and storage products. The increase in gross margin in fiscal
1998 over fiscal 1997 resulted primarily from sales of more richly configured,
higher margin servers and desktop systems, and to a lesser extent from decreased
component costs. There could be a further downward impact on our products gross
margins as the result of continued shifts in customer purchasing patterns toward
low-end desktop systems and workgroup servers.
Services gross margin was 40.4% for fiscal 1999, compared with 39.3% and
37.7% for fiscal 1998 and 1997, respectively. The increase in fiscal 1999
reflects increased market penetration in enterprise data center accounts, an
overall shift toward premium priced service and support contracts resulting from
a larger installed base of high-end server products, continued growth in
professional services, and increased economies of scale in certain geographic
markets. The increase in services gross margin in fiscal 1998 over fiscal 1997
was primarily the result of a larger installed base offset by our increased
investment in services business. There can be no assurance that services gross
margins will continue to grow at rates consistent with the rates previously
realized.
We continuously evaluate the competitiveness of our product and service
offerings. These evaluations could result in repricing actions in the near term.
Our future operating results would be adversely affected if such repricing
actions were to occur and we were unable to mitigate the resulting margin
pressure by maintaining a favorable mix of systems, software, service, and other
products, and by achieving component cost reductions, operating efficiencies,
and increasing volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased $249 million, or 24.5%, in
fiscal 1999 to $1,263 million, compared with an increase of $188 million, or
22.7%, in fiscal 1998. As a percentage of net revenues, R&D expenses were 10.8%,
10.4%, and 9.6% in fiscal 1999, 1998, and 1997, respectively. The increase in
spending in fiscal 1999 was focused on the development of a broad line of
scalable hardware products, including servers, workstations, and storage
technologies, software products which utilize the Java platform, Solaris
operating environment software, and SPARC(TM) microprocessors. The remaining
increase in R&D expenses was due to further development of products acquired
through acquisitions and increased compensation and compensation-related costs
due primarily to higher levels of R&D staffing. The increase as a percentage of
net revenues reflects our belief that to maintain our competitive position in a
market characterized by rapid rates of technological advancement, we must
continue to invest significant resources in new systems, software, and
microprocessor development, as well as in enhancements to existing products. The
Company expects research and development expenses to increase in dollar amount
in fiscal 2000 while remaining in the range of 11% of revenue in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased $396 million, or
14.2%, in fiscal 1999 to $3,173 million compared with an increase of $375
million, or 15.6%, in fiscal 1998. As a percentage of net revenues, these
expenses were 27.1%, 28.4%, and 27.9% in fiscal 1999, 1998, and 1997,
respectively. The increase in dollar amount in fiscal 1999 was primarily
attributable to increased compensation and compensation-related expenses
resulting from higher levels of headcount, principally in the sales
organization, annual salary adjustments, and to a lesser extent, marketing costs
related to promotional programs and increased goodwill amortization expense
resulting from several acquisitions. We also made additional investments aimed
at improving our own business processes. In fiscal 2000, we expect SG&A expenses
to increase in dollar amount, as we continue to invest in efforts to achieve
additional operating efficiencies through the continual review and improvement
of business processes. In addition, we expect to continue to hire personnel to
drive demand-creation programs and service and support organizations.
<PAGE> 7
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The following paragraphs contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, particularly statements
regarding our expectations, including percentage of completion, expected product
release dates, dates for which we expect to begin generating benefits from
projects, expected product capabilities and product life cycles, costs and
efforts to complete projects, growth rates, royalty rates, projected revenue and
expense information used by us to calculate discounted cash flows and discount
rates. These forward-looking statements involve risks and uncertainties, and the
cautionary statements including those set forth below and in "Future Operating
Results" identify important factors that could cause actual results to differ
materially from those predicted in any such forward-looking statement. Such
factors include but are not limited to, delays in the development of in-process
technologies or the release of products into the market, the complexity of the
technology, our ability to successfully manage product introductions, lack of
customer acceptance, competition and changes in technological trends, and market
or general economic conditions. In addition, there can be no assurance that any
of the new products discussed below will be completed, that such products will
achieve either technological or commercial success or that we will receive any
economic benefit from such products as a result of delays in the development of
the technology, the complexity of the technology, changes in customer needs, or
for other reasons, including those described above.
Purchased in-process research and development (IPRD) of $121 million, $176
million, and $23 million in fiscal 1999, 1998, and 1997, respectively,
represents the write-off of in-process technologies associated with our
acquisitions of NetDynamics, Inc. (NetDynamics), Maxstrat Corporation
(Maxstrat), i-Planet, Inc. (i-Planet), and Beduin Communications Incorporated
(Beduin) in fiscal 1999, Diba, Inc. (Diba), Integrity Arts, Inc. (Integrity
Arts), Chorus Systems, S.A. (Chorus), Red Cape Software, Inc. (Red Cape), and
the storage products business of Encore Computer Corporation (Encore) in fiscal
1998, and Long View Technologies, LLC (Long View) in fiscal 1997 (collectively
the Acquired Companies). At the date of each acquisition noted above, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the R&D in process had no alternative future uses. Accordingly,
these amounts were expensed on the respective acquisition dates of each of the
Acquired Companies. Also see Note 2--"Acquisitions."
In response to recent actions and comments from the Securities and Exchange
Commission regarding its views on the application of valuation methodologies to
purchased IPRD, we have expanded our disclosures related to acquisitions
involving IPRD charges for each of the Acquired Companies.
VALUATION OF IPRD
The following table summarizes the significant assumptions underlying the
valuations in fiscal years 1999, 1998, and 1997 related to the IPRD from each of
the Acquired Companies (in millions, except percentages).
- --------------------------------------------------------------------------------
Acquisition Assumptions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED
COST TO COMPLETE RISK ADJUSTED
TECHNOLOGY AT DISCOUNT RATE ON
ENTITY/PROJECT TIME OF ACQUISITION LICENSE RATE(1) IN-PROCESS R&D
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL 1999 ACQUISITIONS
NetDynamics $ 5.7 n/a 20%
- -------------------------------------------------------------------------------------------
Maxstrat $ 8.0 n/a 25%
- -------------------------------------------------------------------------------------------
i-Planet $ 6.0 n/a 25%
- -------------------------------------------------------------------------------------------
Beduin $ 0.4 n/a 40%
- -------------------------------------------------------------------------------------------
FISCAL 1998 ACQUISITIONS
Red Cape $ 7.4 n/a 25%
- -------------------------------------------------------------------------------------------
Encore $ 30.0 12% in 1999 30%
10% in 2000
6% for 2001-2005
- -------------------------------------------------------------------------------------------
Chorus-JaZZr.1.1 $ 0.2 21% in 1999 25%
19% in 2000
17% in 2001
15% for 2002-2005
- -------------------------------------------------------------------------------------------
Chorus-Other IPRD $ 3.0 n/a 25%
- -------------------------------------------------------------------------------------------
Integrity Arts $ 16.0 n/a 38%
- -------------------------------------------------------------------------------------------
Diba $105.0 n/a 36%
- -------------------------------------------------------------------------------------------
FISCAL 1997 ACQUISITION
Long View $ 8.1 6.5% 33%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the license rate (as a percentage of revenue) that a third
party would have paid and therefore would avoid paying, as the result of
acquiring the related technology.
n/a Not applicable based upon the valuation method used.
<PAGE> 8
The following table provides information regarding the status of IPRD projects
upon acquisition and as of June 30, 1999 (except as otherwise described in the
footnotes):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERCENTAGE COMPLETE AT ACTUAL OR EXPECTED
ENTITY/PROJECT TIME OF ACQUISITION PRODUCT RELEASE DATE
- --------------------------------------------------------------------------------
NetDynamics 60% Q3 Fiscal 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Maxstrat 70% Q1 Fiscal 2000
- --------------------------------------------------------------------------------
i-Planet 30% Q4 Fiscal 1999
- --------------------------------------------------------------------------------
Beduin 65% Q2 Fiscal 2000
- --------------------------------------------------------------------------------
Red Cape 15% Q4 Fiscal 1999
- --------------------------------------------------------------------------------
Encore 60% Fiscal 1999(1)
- --------------------------------------------------------------------------------
Chorus-JaZZr.1.1 50% Q4 Fiscal 1998(2)
- --------------------------------------------------------------------------------
Chorus-Other IPRD 20% Q4 Fiscal 1999(3)
- --------------------------------------------------------------------------------
Integrity Arts 5% Q3 Fiscal 1998(4)
- --------------------------------------------------------------------------------
Diba 10% Q4 Fiscal 1999(5)
- --------------------------------------------------------------------------------
Long View 25% Q4 Fiscal 1998(6)
- --------------------------------------------------------------------------------
</TABLE>
(1) Revised expected release date is Q1 Fiscal 2000.
(2) Released in Q4 Fiscal 1999.
(3) Revised expected release date is Q2 Fiscal 2000.
(4) Released in Q4 Fiscal 1999.
(5) Project was abandoned in Fiscal 1999. See additional discussion at "Overall
status of IPRD acquired prior to fiscal 1999."
(6) Released in Q4 Fiscal 1999.
We calculated amounts allocated to IPRD using established valuation techniques
in the high technology industry and expensed such amounts in the quarter that
each acquisition was consummated because technological feasibility had not been
achieved and no alternative future uses had been established. This approach gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by us and
our competitors, individual product sales cycles, and the estimated life of each
products' underlying technology.
The values assigned to developed technologies related to each acquisition
were based upon future discounted cash flows related to the existing products'
projected income stream. The discount rates used in the present value
calculations were generally derived from a weighted average cost of capital,
adjusted upward to reflect the additional risks inherent in the development life
cycle, including the useful life of the technology, profitability levels of the
technology, and the uncertainty of technology advances that are known at the
date of each acquisition. We do not expect to achieve a material amount of
expense reductions or synergies, therefore the valuation assumptions do not
include significant anticipated cost savings.
OVERALL STATUS OF IPRD ACQUIRED PRIOR TO FISCAL 1999
With respect to acquisitions completed prior to fiscal 1999, with the exception
of Encore, which is discussed separately below, we believe that the projections
we used in performing our valuations with respect to each acquisition are still
valid; however, there can be no assurance that the projected results will be
achieved. We expect to continue the development of each project and believe that
there is a reasonable chance of successfully completing such development
efforts, except for IPRD technology acquired from Lighthouse and Diba, which is
discussed below. However, there is risk associated with the completion of the
in-process projects and there can be no assurance that any project will meet
with either technological or commercial success. Failure to successfully develop
and commercialize these in-process projects would result in the loss of the
expected economic return inherent in the fair value allocation. Additionally,
the value of other intangible assets acquired may become impaired. As of June
30, 1999 and for each of the three fiscal years then ended, the impact upon our
consolidated results of operations or financial position with respect to the
success, or lack thereof, related to any acquisition, individually or in
aggregate, is not considered material, except as discussed below.
In fiscal 1997, we terminated our development efforts with respect to the
IPRD technology acquired through the acquisition of Lighthouse, a company
conducting development and engineering associated with the completion of a suite
of software products using the NEXTSTEP and OpenStep operating environments for
Solaris and Windows NT systems (collectively the "Lighthouse Software
Products"). During fiscal 1997 our commitment to OpenStep was scaled back
thereby impacting development decisions related to the Lighthouse Software
Products. Additionally, in fiscal 1999 we terminated our development efforts
with respect to the IPRD technology acquired from Diba, which related to the
completion of a set-top box product. The decisions to abandon the in-process
technologies acquired from Lighthouse and Diba were based upon changes in the
long-term strategy for certain of our products, the impact of which was not
material to our consolidated results of operations or financial position.
Included below are further details regarding the nature of technology
acquired, the valuation assumptions, and the status of the IPRD related to our
acquisitions completed during fiscal 1999, as well as Encore, our largest
additional acquisition, completed during the three years ended June 30, 1999.
<PAGE> 9
NETDYNAMICS
IPRD OVERVIEW--NETDYNAMICS
At the acquisition date (August 28, 1998), NetDynamics was conducting
development, engineering, and testing activities associated with the completion
of a new enterprise application platform product. This new product offering
(NetDynamics New Product Offering) employs a new server-side component model,
based on the Enterprise JavaBeans(TM) (EJB) architecture, which allows business
logic to reside in the middle tier of the enterprise computing model independent
of the client presentation layer and independent of legacy and database systems.
This architecture is significantly different than the business logic
architecture in NetDynamics' existing product offering, which is tightly
integrated with the presentation interface. The EJB architecture allows for the
development of more robust and scalable applications with improved reusability,
better connectivity to a wide variety of data sources, and a more-industry
standard interface through the use of Java enterprise application programming
interfaces. Other new features include significant security enhancements and
performance improvements, and the addition of new platform adaptor components
for legacy systems integration.
VALUATION ANALYSIS--NETDYNAMICS
We calculated the value of the IPRD technology using a discounted cash flow
analysis on the anticipated income stream of the related product sales. The
discounted cash flow analysis was based upon our forecast of future revenues,
cost of revenues, and operating expenses related to the product and technology
acquired from NetDynamics, which are intended to be used in our future
enterprise application platform products. We projected total revenue for
NetDynamics to increase at a compound growth rate of approximately 30% from
fiscal 1999 through 2008. Revenues are expected to peak in fiscal 2000 and
decline thereafter, as we expect to introduce new product technologies. These
projections are based on our estimates of market size and growth, expected
trends in technology, and the expected timing of new product introductions.
Our assumptions with respect to operating expenses used in the valuation
analysis included: (i) cost of goods sold, (ii) SG&A expenses, and (iii) R&D
expenses. Selected operating expense assumptions we used were based on an
evaluation of NetDynamics' overall business model, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics. We projected that the cost of revenues (expressed as a
percentage of revenue) for the IPRD would decrease over time from approximately
26% in fiscal 1999 to 15% in fiscal 2005. We estimated SG&A (expressed as a
percentage of revenue) for the IPRD to average 34% over the projection period.
Maintenance R&D related to the IPRD was estimated to be approximately 1% of
revenue over the projection period.
The discount rate we selected for the IPRD was 20%. In the selection of the
appropriate discount rate, we gave consideration to our weighted average cost of
capital (WACC), as well as other factors, including the useful life of the
technology, profitability levels of the technology, the uncertainty of
technology advances that were known at the valuation date, and the stage of
completion of the technology. The discount rate we used for the IPRD was
determined to be greater than our WACC due to the fact that the technology had
not yet reached technological feasibility as of the date of the valuation.
The value of the IPRD reflects the relative value and contribution of the
acquired research and development. We gave consideration to the R&D's stage of
completion, the complexity of the work completed at the valuation date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the project in determining the value assigned to
IPRD.
COMPARISON TO ACTUAL RESULTS--NETDYNAMICS
The NetDynamics New Product Offering was completed in March 1999 for a total
cost of approximately $4.7 million, compared to the planned total cost of $5.7
million. We began to realize the benefits of the NetDynamics acquired technology
during the fourth quarter of fiscal 1999. Through June 30, 1999, no significant
adjustments have been made in the economic assumptions or expectations which
underlie our acquisition decision and related purchase accounting.
Given the uncertainties of the commercialization process, no assurance can
be given that deviations from our estimates will not occur. We believe there is
a reasonable chance of realizing the economic return expected from the acquired
in-process technology. However, as there is risk associated with the realization
of benefits related to commercialization of an in-process project due to rapidly
changing customer needs, complexity of technology, and growing competitive
pressures, there can be no assurance that any project will meet with commercial
success. Failure to successfully commercialize an in-process project would
result in the loss of the expected economic return inherent in the fair value
allocation. Additionally, the value of our intangible assets acquired may become
impaired.
<PAGE> 10
MAXSTRAT
IPRD OVERVIEW--MAXSTRAT
At the acquisition date (January 22, 1999), Maxstrat was conducting development,
engineering, and testing activities associated with the completion of a new
modular mass data storage system product family (Noble Product Offering)
scheduled to be released during the first quarter of fiscal 2000. The Noble
Product Offering utilizes Fibre Channel, a fiber-optic technology designed for
mass storage devices requiring very high bandwidth. Using optical fiber to
connect devices, each Fibre Channel Arbitrated Loop (FC-AL) supports full-duplex
data transfer rates of 100 mbps. Multiple FC-ALs increase the redundancy and
availability of the system. If an FC-AL fails, another automatically takes over
to keep the traffic flow consistent and predictable.
At the acquisition date, Maxstrat had made substantial progress in the
areas of specifications, design, and implementation. Remaining efforts necessary
to complete the Noble Product Offering relate primarily to coding, testing, and
addressing additional implementation issues. We anticipate that the Noble
Product Offering will be complete by the end of our first quarter of fiscal
2000, after which we expect to begin generating economic benefits from the IPRD
associated with the Noble Product Offering. Expenditures to complete the Noble
Product Offering are expected to total approximately $8 million during fiscal
1999 and fiscal 2000.
VALUATION ANALYSIS--MAXSTRAT
We calculated the IPRD technology using a discounted cash flow analysis on the
anticipated income stream of the related product sales. The discounted cash flow
analysis was based upon our forecast of future revenues, cost of revenues, and
operating expenses related to the product and technology acquired from Maxstrat,
which are intended to be used in our future enterprise application platform
products. We projected total revenue for Maxstrat to increase at a compound
growth rate of approximately 30% from fiscal 1999 through 2008. We also expect
revenues to peak in fiscal 2003 and decline thereafter, as we expect to
introduce new product technologies. These projections are based on our estimates
of market size and growth, expected trends in technology, and the expected
timing of new product introductions.
Operating expenses used in the valuation analysis included: (i) cost of
goods sold, (ii) SG&A expenses, and (iii) R&D expenses. Selected operating
expense assumptions we used were based on an evaluation of Maxstrat's overall
business model, including both historical and expected direct expense levels (as
appropriate), and an assessment of general industry metrics. Cost of revenues
(expressed as a percentage of revenue) for the IPRD averages 50% over the
projection period. SG&A (expressed as a percentage of revenue) for the IPRD
averages 20% over the projection period. Maintenance R&D related to the IPRD was
estimated to be approximately 2% of revenue over the projection period.
The discount rate we selected for the IPRD was 25%. In the selection of the
appropriate discount rate, we gave consideration to our WACC, as well as other
factors, including the useful life of the technology, profitability levels of
the technology, the uncertainty of technology advances that are known at the
valuation date, and the stage of completion of the technology. The discount rate
we used for the IPRD was determined to be greater than our WACC due to the fact
that the technology had not yet reached technological feasibility as of the date
of the valuation.
The value of the IPRD reflects the relative value and contribution of the
acquired research and development. We gave consideration to the R&D's stage of
completion, the complexity of the work completed to date, the difficulty
completing the remaining development, costs already incurred, and the projected
cost to complete the project in determining the value assigned to IPRD.
COMPARISON TO ACTUAL RESULTS--MAXSTRAT
At June 30, 1999, significant progress had been made on the development related
to the Noble Product Offering that was underway as of the acquisition date. We
are continuing to invest in the development of new technologies that were
underway at the consummation of the Maxstrat acquisition. At June 30, 1999, we
had incurred approximately $5 million of the planned total cost to complete of
$8 million, and no significant adjustments have been made in the economic
assumptions or expectations which underlie our acquisition decision and related
purchase accounting. We are continuing our development efforts related to the
IPRD technology acquired. These development efforts are advancing at a rate
consistent with our expectations.
Given the uncertainties of the development and commercialization process,
no assurance can be given that deviations from these estimates will not occur.
We expect to continue the development of the Noble Product Offering and believe
that there is a reasonable chance of successfully completing such development.
However, as there is risk associated with the completion of the in-process
project due to the remaining efforts to achieve technological feasibility,
rapidly changing customer needs, complexity of technology, and growing
competitive pressures, there can be no assurance that any project will meet with
either technological or commercial success. Failure to successfully develop and
commercialize this in-process project would result in the loss of the expected
economic return inherent in the fair value allocation. Additionally, the value
of our intangible assets acquired may become impaired.
<PAGE> 11
IPRD OVERVIEW--i-PLANET
At the acquisition date (September 28, 1998), i-Planet was conducting
development, engineering, and testing activities associated with the completion
of a new Java technology-based remote Internet access product scheduled to be
released in early calendar year 1999. It was anticipated that this new product
offering (i-Planet(TM) New Product Offering) would allow cost-effective, secure,
and ubiquitous Internet access for applications such as remote access to
corporate intranets, supply chain management, and commerce applications.
At the acquisition date, i-Planet was performing development efforts in the
areas of specifications, design, and implementation. Remaining efforts necessary
to complete the i-Planet New Product Offering related primarily to coding,
testing, and addressing additional implementation issues. Approximately $3
million of the total costs to complete the i-Planet New Product Offering of $6
million had been incurred at June 1999. We completed and released the product
related to the i-Planet technology, i-Planet Webtop, in May 1999. As of June 30,
1999, no significant adjustments have been made in the economic assumptions or
expectations which underlie our acquisition decision and related purchase
accounting.
IPRD OVERVIEW--BEDUIN
At the acquisition date (October 16, 1998), Beduin was conducting development,
engineering, and testing activities associated with the completion of a suite of
products (Beduin New Product Offerings) which included the Lifestyle Manager
Personal Information Manager (PIM) (a next-generation PIM targeted at smart
devices incorporating Java technology), and "e-mail client" (a next generation
e-mail client specialized to take advantage of the benefits of these smart
devices). We anticipate that these Beduin New Product Offerings will provide the
core functionality for smart devices incorporating Java technology and enable
more efficient communication, regardless of time, location, or type of device.
These Beduin New Product Offerings are designed to integrate and synchronize
communications and data processing systems, enabling communications across time
and space.
At the acquisition date, Beduin was performing development efforts and
substantial progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the Beduin New Product
Offerings relate primarily to coding, testing, and addressing additional
implementation issues. We anticipate that the Beduin New Product Offerings will
be completed during the second quarter of our fiscal year ending June 30, 2000,
after which we expect to begin generating economic benefits from the value of
the completed development associated with the IPRD. We expect that the total
costs to complete the Beduin New Product Offerings will approximate $2 million.
VALUATIONS OF IPRD--i-PLANET AND BEDUIN
Forecasts of future results that we believe are likely to occur were our basis
for assigning value to IPRD. For the i-Planet and Beduin acquisitions, we
assigned values to IPRD by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from each project, excluding the cash flows related to
the portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of our
forecasts was based upon future discounted cash flows, taking into account the
state of development of each in-process project, the cost to complete that
project, the expected income stream, the life cycle of the product ultimately
developed, and the risks associated with successful development and
commercialization of each project. Projected future net cash flows attributable
to the in-process technology, assuming successful development of such
technologies, were discounted to their present value using a discount rate that
was derived based on our estimated WACC plus a risk premium to account for the
inherent uncertainty surrounding the successful completion of each project and
the associated estimated cash flows. The discount rates used in valuing the net
cash flows from each purchased in-process technology were 25% for the i-Planet
acquisition and 40% for the Beduin acquisition. These discount rates are higher
than our WACC due to the inherent uncertainties in the estimates described
above, including the uncertainty surrounding the successful development of the
purchased in-process technologies, the useful life of such technologies, the
profitability levels of such technologies, and the uncertainty of technological
advances that are unknown at this time.
The estimates we used in the valuation of the IPRD charges are subject to
change. Given the uncertainties of the development and commercialization
process, no assurance can be given that deviations from these estimates will not
occur. We expect to continue the development of each project and believe that
there is a reasonable chance of successfully completing such development.
However, as there is risk associated with the completion of the in-process
projects due to the remaining efforts to achieve technological feasibility,
rapidly changing customer needs, complexity of technology, and growing
competitive pressures, there can be no assurance that any project will meet with
either technological or commercial success. Failure to successfully develop and
commercialize these in-process projects would result in the loss of the expected
economic return inherent in the fair value allocation. Additionally, the value
of our intangible assets acquired may become impaired.
<PAGE> 12
ENCORE
IPRD OVERVIEW--ENCORE
At the time of the acquisition (November 24, 1997), Encore was conducting
development and engineering activities associated with its Intershare and
DASD-NET products (the Encore Products). We anticipated that completion of the
Encore Products would help us establish a viable position in the computer
mainframe/open systems storage market. In addition, Encore's current products
and technology would help facilitate efforts to develop a high-end "intelligent"
storage product, which could also be modified to address the low-end storage
market. As of the date of the acquisition, the release of the Encore products
was expected to commence in fiscal 1999, at which time we expected to generate
economic benefits from the value of the development associated with the IPRD.
At the acquisition date, Encore needed to perform substantial development
efforts before reaching technological feasibility. These efforts include
converting the box-system architecture to a storage-area-network, developing an
alternative to the interconnect technology used by Encore that will provide the
price and performance required to compete within the market place, and resolving
several design issues during the porting phase of development.
VALUATION OF IPRD--ENCORE
At the acquisition date, we estimated that total revenue related to the IPRD
technology would increase at a compound annual growth rate of approximately 55%
from fiscal 1999 to 2002. We projected that revenues would peak in fiscal 2002
and decline thereafter as we expect to introduce new product technologies. These
projections were based on our estimates of market size and growth, expected
trends in technology, and the expected timing of new product introductions. The
product life cycle used by us resulted in the use of estimated royalty rates of
12% in 1999, 10% in 2000, and 6% for 2001 through 2005. The 12% rate was based
upon a 25% operating margin related to the storage product and with 80% of the
value of the product being related to software and 60% of the software being
related to the acquired technology. The rate decline is attributable to
proportionately lower levels of acquired technology in advancing products.
We selected a discount rate of 30%. In the selection of the appropriate
discount rate, we considered our WACC, as well as other factors including the
useful life of the technology, profitability levels of the technology, the
uncertainty of technology advances that were known at the acquisition date, and
the stage of completion of the technology. The discount rate chosen was greater
than our WACC, as the technology had not yet reached technological feasibility
as of the valuation date.
The value assigned to the IPRD reflects our determination of the relative
value and contribution of the acquired research and development. We arrived at
the value of the IPRD by giving consideration to the R&D's stage of completion,
the complexity of the work completed to date, the difficulty in completing the
remaining development, costs already incurred, and the projected costs to
complete the project.
COMPARISON TO ACTUAL RESULTS--ENCORE
As of June 30, 1999, we had made progress on the development efforts related to
the Encore Products that were underway as of the acquisition date, and
approximately $19 million of the estimated total cost to complete of $30 million
had been incurred. Although the research and development effort is behind
schedule, the total expected cost to complete the IPRD technology acquired from
Encore has not increased nor is it expected to exceed the original anticipated
cost to complete the development efforts. As of June 30, 1999, we have delayed
our expected release of the Encore Products from the fourth quarter of fiscal
1999 until the first quarter of fiscal 2000. We have experienced this delay in
the realization of benefits related to the acquired technology as the result of
increased complexities associated with the completion of the project. The impact
of the delay in completion of the Encore Products has resulted in a net
shortfall from our original projections of approximately $40 million on our
consolidated results of operations for the year ended June 30, 1999. This amount
reflects a shortfall in our original plan assumptions with regard to the
technologies acquired from Encore only, and does not reflect any offsetting
benefits we may have achieved from our overall business plan, including those
resulting from a reallocation of resources among alternative development
projects. Although the realization of benefits related to the Encore Products
has been delayed, we are actively developing the acquired technology and expect
over the long term to realize benefits associated with the Encore Products that
are consistent with the initial acquisition strategy.
Given the uncertainties of the development and commercialization process,
no assurance can be given that deviations from these estimates will not occur.
We expect to continue the development of each project and believe that there is
a reasonable chance of successfully completing such development. However, as
there is risk associated with the completion of the in-process projects due to
the remaining efforts to achieve technological feasibility, rapidly changing
customer needs, complexity of technology, and growing competitive pressures,
there can be no assurance that any project will meet with either technological
or commercial success. Failure to successfully develop and commercialize these
in-process projects would result in the loss of the expected economic return
inherent in the fair value allocation. Additionally, the value of our intangible
assets acquired may become impaired.
<PAGE> 13
INTEREST INCOME (EXPENSE), NET
Our interest income and expense are 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 our cash equivalents and short-term investments, as well
as interest paid on our short-term borrowings. To mitigate the impact of
fluctuations in U.S. interest rates, we entered into an interest rate swap
transaction. This swap was intended to better match our floating-rate interest
income on cash equivalents and short-term investments with the interest expense
on our note payable.
Net interest income increased to $84 million in fiscal 1999, compared with
$46 million and $32 million in fiscal 1998 and fiscal 1997, respectively. The
increase in net interest income for fiscal 1999 was primarily the result of
higher interest earnings due to a larger average portfolio of cash and
investments as compared with the corresponding periods in fiscal 1998 and 1997.
The principal/notional amount of our cash equivalents and short-term
investments at June 30, 1999 was $2,035 million. These investments, which
generally mature in fiscal 2000, bear interest at an average rate of 4.6% and
have a fair market value of $2,034 million.
INCOME TAXES
Our effective income tax rate for fiscal 1999 was 33% before non-recurring tax
charges of $45 million resulting from our write-off of IPRD associated with the
acquisitions of Maxstrat, i-Planet and NetDynamics. The effective tax rate
including such charges was 35.8%. Our effective income tax rate for fiscal 1998
was 33% before non-recurring tax charges of $25 million resulting from the
write-off of IPRD associated with the acquisitions of Red Cape, Diba, and
Integrity Arts. The effective tax rate including such charges was 35.1%. Our
effective tax rate for fiscal 1997 was 32%.
We currently expect an effective tax rate of 33% for fiscal 2000. The
expected rate excludes the impact of potential mergers and acquisitions. The tax
effects of merger and acquisition transactions would be accounted for in the
interim quarter in which the transactions occur. The expected rate is based on
current tax law and current estimates of earnings, and is subject to change.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition strengthened as of the end of fiscal 1999 when compared
with fiscal 1998. During fiscal 1999, operating activities generated $2,517
million in cash, compared with $1,527 million in fiscal 1998. Accounts
receivable increased $433 million, or 23%, to $2,287 million, due primarily to a
20% increase in net revenues in fiscal 1999 as compared with the fiscal 1998.
Deferred tax assets, other current and noncurrent assets increased $533 million,
or 58%, to $1,552 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 our acquisitions. Other current and noncurrent liabilities
increased $1,186 million, or 72% due to liabilities resulting from the strategic
development and marketing agreement with America Online, Inc. (AOL), increased
compensation and compensation-related costs, and increases in sales and
marketing costs. Accounts payable increased $256 million, or 52%, due to
additional operating expenses associated with the expansion of our business.
Our investing activities used $2,096 million of cash in fiscal 1999, an
increase of $927 million from the $1,169 million used in fiscal 1998. The
increase resulted primarily from additions to short-term investments. Additions
to short-term investments totaled $2,433 million, up $1,474 million, or 154%,
from fiscal 1998 additions, primarily due to having additional resources
available for investment. Also included in investing activities is capital
spending for real estate development, as well as capital additions to support
increased headcount, primarily in our engineering, services, and marketing
organizations.
Approximately $154 million of cash was used by financing activities in
fiscal 1999, compared with $195 million used in fiscal 1998. The decrease was
primarily due to an increase in stock issuances, as well as a decrease in
short-term borrowings.
Our exposure to interest rate risk on the international short-term
borrowings of $1.6 million was not material, given the short-term maturity of
these instruments and our evaluation of the potential for rate changes
associated with such instruments.
At June 30, 1999, our primary sources of liquidity consisted of cash, cash
equivalents, and short-term investments of $2,665 million and a revolving credit
facility with banks aggregating $500 million, which was available subject to
compliance with certain covenants, and $740 million of borrowings under
available lines of credit to our international subsidiaries. On October 16,
1997, we filed a shelf 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, this shelf registration
statement became effective. On June 18, 1999, we filed an additional shelf
registration statement with the Securities and Exchange Commission relating to
the registration for public offering of senior and subordinated debt securities
and common and preferred stock with an aggregate initial public offering price
of up to $3 billion. On July 14, 1999, this shelf registration statement became
effective. As a result, we may choose to offer up to $4 billion, from time to
time, of debt securities and common and preferred 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 these registration statements and in one or more
supplements to the prospectus. On August 4, 1999, the Company issued $1.5
billion in unsecured debt securities in four tranches. Each tranche is comprised
of the following notes (the Senior Notes): $200 million (due on August 15, 2002
and bearing interest at 7%), $250 million (due on August 15, 2004 and bearing
interest at 7.35%), $500 million (due on August 15, 2006 and bearing interest at
7.5%), $550 million (due on August 15, 2009 and bearing interest at 7.65%). Sun
also entered into various interest rate swap agreements to modify the interest
characteristics of the Senior Notes such that the interest associated with these
Senior Notes becomes variable.
We believe that the liquidity provided by existing cash and short-term
investments, and the borrowing arrangements described above will provide
sufficient capital to meet our requirements through fiscal 2000. We believe the
level of financial resources is a significant competitive factor in our industry
and may choose at any time to raise additional capital through debt or equity
financings to strengthen our financial position, facilitate growth, and provide
us with additional flexibility to take advantage of business opportunities that
may arise.
<PAGE> 14
FUTURE OPERATING RESULTS
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR
RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER
CUSTOMER ORDERS, REDUCED REVENUES, REDUCED MARGINS, REDUCED LEVELS OF
PROFITABILITY, AND LOSS OF MARKET SHARE.
We compete in the hardware and software products and services markets. These
markets are intensely competitive. If we fail to compete successfully in these
markets, the demand for our products would decrease. Any reduction in demand
could lead to a decrease in the prices of our products, fewer customer orders,
reduced revenues, reduced margins, reduced levels of profitability, and loss of
market share. These competitive pressures could seriously harm our business and
operating results.
Our competitors are some of the largest, most successful companies in the
world. They include Hewlett-Packard Company (HP), International Business
Machines Corporation (IBM), Compaq Computer Corporation (Compaq), and EMC
Corporation (EMC). Our future competitive performance depends on a number of
factors, including our ability to: continually develop and introduce new
products and services with better prices and performance than offered by our
competitors; offer a wide range of products and solutions from small
single-processor systems to large complex enterprise-level systems; offer
solutions to customers that operate effectively within a computing environment
that includes hardware and software from multiple vendors; offer products that
are reliable and that ensure the security of data and information; create
products for which third-party software vendors will develop a wide range of
applications; and offer high-quality products and services.
We also compete with systems manufacturers and resellers of systems based
on microprocessors from Intel Corporation (Intel) and Windows NT operating
system software from Microsoft Corporation (Microsoft). These competitors
include Dell Computer Corporation (Dell), HP, and Compaq, in addition to Intel
and Microsoft. This competition creates increased pressure, including pricing
pressure, on our workstation and lower-end server product lines. We expect this
competitive pressure to intensify considerably during our fiscal year 2000 with
the anticipated releases of new software products from Microsoft and new
microprocessors from Intel.
The computer systems that we sell are made up of many products and
components, including workstations, servers, storage products, microprocessors,
the Solaris operating environment and other software products. In addition, we
sell some of these components separately and as add-ons to installed systems. If
we are unable to offer products and services that compete successfully with the
products and services offered by our competitors or that meet the complex needs
of our customers, our business and operating results could be seriously harmed.
In addition, if in responding to competitive pressures, we are forced to lower
the prices of our products and services and we are unable to reduce our
component costs or improve operating efficiencies, our business and operating
results would be seriously harmed.
Over the last two years, we have invested significantly in our storage
products business with a view to increasing the sales of these products both on
a stand-alone basis to customers using the systems of our competitors, and as
part of the systems that we sell. The intelligent storage products business is
intensely competitive. EMC is currently the leader in this market. To the extent
we are unable to penetrate this market and compete effectively, our business and
operating results could be seriously harmed. In addition, we will be making
significant investments over the next few years to develop, market, and sell
software products under our recent alliance with AOL and have agreed to
significant minimum revenue commitments. These alliance products are targeted at
the e-commerce market and are strategic to our ability to successfully compete
in this market. If we are unable to successfully compete in this market, our
business and operating results could be seriously harmed.
THE PRODUCTS WE MAKE ARE VERY COMPLEX AND IF WE ARE UNABLE TO RAPIDLY AND
SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, WE WILL NOT BE ABLE TO SATISFY
CUSTOMER DEMAND.
We operate in a highly competitive, quickly changing environment, and our future
success depends on our ability to develop and introduce new products that our
customers choose to buy. If we are unable to develop new products, our business
and operating results would be seriously harmed. We must quickly develop,
introduce, and deliver in quantity new, complex systems, software, and hardware
products and components including our UltraSPARC microprocessors, the Solaris
operating environment, our intelligent storage products, and other software
products, such as those products under development or to be developed under our
recent alliance with AOL. The development process for these complicated products
is very uncertain. It requires high levels of innovation from both our product
designers and our suppliers of the components used in our products. The
development process is also lengthy and costly. If we fail to accurately
anticipate our customers' needs and technological trends, or are otherwise
unable to complete the development of a product on a timely basis, we will be
unable to introduce new products into the market on a timely basis, if at all,
and our business and operating results would be adversely affected. In addition,
the successful development of software products under our alliance with AOL
depends on many factors, including our ability to work effectively within the
alliance on complex product development and any encumbrances that may arise from
time to time that may prevent us from developing, marketing, or selling these
alliance software products. If we are unable to successfully develop, market, or
sell the alliance software products or other software products, our business and
operating results could be seriously harmed.
<PAGE> 15
Software and hardware products such as ours may contain known as well as
undetected errors, and these defects may be found following introduction and
shipment of new products or enhancements to existing products. Although we
attempt to fix errors that we believe would be considered critical by our
customers prior to shipment, we may not be able to detect or fix all such
errors, and this could result in lost revenues and delays in customer
acceptance, and could be detrimental to our business and reputation.
The manufacture and introduction of our new hardware and software products
is also a complicated process. Once we have developed a new product we face the
following challenges in the manufacturing process. We must be able to
manufacture new products in high enough volumes so that we can have an adequate
supply of new products to meet customer demand. We must be able to manufacture
the new products at acceptable costs. This requires us to be able to accurately
forecast customer demand so that we can procure the appropriate components at
optimal costs. Forecasting demand requires us to predict order volumes, the
correct mixes of our software and hardware products, and the correct
configurations of these products. We must manage new product introductions so
that we can minimize the impact of customers delaying purchases of existing
products in anticipation of the new product release. We must also try to reduce
the levels of older product and component inventories to minimize inventory
write-offs. We may also decide to adjust prices of our existing products during
this process in order to try to increase customer demand for these products. If
we are introducing new products at the same time or shortly after the price
adjustment, this will complicate our ability to anticipate customer demand for
our new products.
If we were unable to timely develop, manufacture, and introduce new
products in sufficient quantity to meet customer demand at acceptable costs, or
if we were unable to correctly anticipate customer demand for our new products,
our business and operating results could be significantly harmed.
OUR RELIANCE ON SINGLE SOURCE SUPPLIERS COULD DELAY PRODUCT SHIPMENTS AND
INCREASE OUR COSTS.
We depend on many suppliers for the necessary parts and components to
manufacture our products. There are a number of vendors producing the parts and
components that we need. However, there are some components that can only be
purchased from a single vendor due to price, quality, or technology reasons. For
example, we depend on Sony for various monitors, and on Texas Instruments for
our SPARC microprocessors. If we were unable to purchase the necessary parts and
components from a particular vendor and we had to find a new supplier for such
parts and components, our new and existing product shipments could be delayed,
severely affecting our business and operating results.
OUR FUTURE OPERATING RESULTS DEPEND ON OUR ABILITY TO PURCHASE A SUFFICIENT
AMOUNT OF COMPONENTS TO MEET THE DEMANDS OF OUR CUSTOMERS.
We depend heavily on our suppliers to timely design, manufacture, and deliver
the necessary components for our products. While many of the components we
purchase are standard, we do purchase some components, specifically color
monitors and custom memory integrated circuits such as SRAMs and VRAMs, that
require long lead times to manufacture and deliver. Long lead times make it
difficult for us to plan component inventory levels in order to meet the
customer demand for our products. In addition, in the past, we have experienced
shortages in certain of our components (specifically DRAMs and SRAMs). If a
component delivery from a supplier is delayed, if we experience a shortage in
one or more components, or if we are unable to provide for adequate levels of
component inventory, our new and existing product shipments could be delayed and
our business and operating results could suffer.
SINCE WE ORDER OUR COMPONENTS (AND IN SOME CASES COMMIT TO PURCHASE) FROM
SUPPLIERS IN ADVANCE OF RECEIPT OF CUSTOMER ORDERS FOR OUR PRODUCTS THAT INCLUDE
THESE COMPONENTS, WE FACE A SUBSTANTIAL INVENTORY RISK.
As part of our component inventory planning, we frequently pay certain suppliers
well in advance of receipt of customer orders. For example, we often enter into
noncancelable purchase commitments with vendors early in the manufacturing
process of our microprocessors to make sure we have enough of these components
for our new products to meet customer demand. Because the design and
manufacturing process for these components is very complicated it is possible
that we could experience a design or manufacturing flaw that could delay or even
prevent the production of the components for which we have previously committed
to pay. We also face the risk of ordering too many components, or conversely,
not enough components, since the orders are based on the forecasts of customer
orders rather than actual orders. If we cannot change or be released from the
noncancelable purchase commitments, we could incur significant costs from the
purchase of unusable components, due to a delay in the production of the
components or as a result of inaccurately predicting component orders in advance
of customer orders. Our business and operating results could be seriously harmed
as a result of these increased costs.
<PAGE> 16
DELAYS IN PRODUCT DEVELOPMENT OR CUSTOMER ACCEPTANCE AND IMPLEMENTATION OF NEW
PRODUCTS AND TECHNOLOGIES COULD SERIOUSLY HARM OUR BUSINESS.
Delays in product development and customer acceptance and implementation of new
products could seriously harm our business. Delays in the development and
introduction of our products may occur for various reasons. For example, delays
in software development could delay shipments of related new hardware products.
Generally, the computer systems we sell to customers incorporate hardware and
software products that we sell, such as the UltraSPARC microprocessor, the
Solaris operating environment, and intelligent storage products. Any delay in
the development of the software and hardware included in our systems could delay
our shipment of these systems.
In addition, if customers decided to delay the adoption and implementation
of new releases of our Solaris operating environment this could also delay
customer acceptance of new hardware products tied to that release. Adopting a
new release of an operating environment requires a great deal of time and money
for a customer to convert its systems to the new release. The customer must also
work with software vendors who port their software applications to the new
operating system and make sure these applications will run on the new operating
system. As a result, customers may decide to delay their adoption of a new
release of an operating system because of the cost of a new system and the
effort involved to implement it. Also, customers may wait to implement new
systems until after January 1, 2000 so that there is less likelihood of Year
2000 computer problems.
IF WE ARE UNABLE TO CONTINUE GENERATING SUBSTANTIAL REVENUES FROM INTERNATIONAL
SALES, OUR BUSINESS COULD BE SUBSTANTIALLY HARMED.
Currently, approximately half of our revenues come from international sales. Our
ability to sell our products internationally is subject to the following risks:
general economic and political conditions in each country could adversely affect
demand for our products and services in these markets, as recently occurred in
certain Asian and Latin American markets; currency exchange rate fluctuations
could result in lower demand for our products, as well as currency translation
losses; changes to and compliance with a variety of foreign laws and regulations
may increase our cost of doing business in these jurisdictions; trade protection
measures and import and export licensing requirements subject us to additional
regulation and may prevent us from shipping products to a particular market, and
increase our operating costs.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS.
Future operating results will continue to be subject to quarterly fluctuations
based on a wide variety of factors, including:
Seasonality. Our operating results usually fluctuate downward in the first
and third quarters of each fiscal year due to customer buying patterns for
hardware and software products and services.
Increases in Operating Expenses. Our operating expenses will continue to
increase as we continue to expand our operations. Our operating results could
suffer if our revenues do not increase at least as fast as our expenses.
Acquisitions/Alliances. If, in the future, we acquire technologies,
products, or businesses, or we form alliances with companies requiring
technology investments or revenue commitments (such as our recent alliance with
AOL), we will face a number of risks to our business. The risks we may encounter
include those associated with integrating or comanaging operations, personnel,
and technologies acquired or licensed, and the potential for unknown liabilities
of the acquired or combined business. Also, we will include amortization expense
of acquired intangible assets in our financial statements for several years
following these acquisitions. Our business and operating results on a quarterly
basis could be harmed if our acquisition or alliance activities are not
successful.
Significant Customers. Only one of our customers accounted for more than
10% of our revenues in fiscal 1999 and fiscal 1998. Sales to this customer
accounted for approximately 14% of our fiscal 1999 and 1998 revenues. Our
business could suffer if this customer or another significant customer
terminated its business relationship with us or significantly reduced the amount
of business it did with us.
OUR FAILURE OR THE FAILURE OF OUR BUSINESS PARTNERS AND CUSTOMERS TO BE YEAR
2000 COMPLIANT COULD HARM OUR BUSINESS.
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 be able to distinguish years
beginning with "19" from those beginning with "20." As a result, in less than
six months, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements. We are currently
expending resources to review our products and services, as well as our
internal-use software in order to identify and modify those products, services,
and systems that are not Year 2000 compliant. We believe that the vast majority
of these costs are not incremental to us but represent a reallocation of
existing resources and include regularly scheduled systems upgrades and
maintenance. In addition, we have made custom coding enhancements to our
mission-critical internal business systems, and we believe that such internal
systems are now Year 2000 compliant. We are working to make our remaining
internal systems Year 2000 compliant by September 30, 1999.
<PAGE> 17
Although we believe that the costs associated with the aforementioned Year
2000 efforts are not material, we currently estimate that such costs will be
between $40 to $45 million, of which approximately $25 million had been spent
through June 30, 1999. The aforementioned costs are estimates due in large part
to the fact that we do not separately track the internal labor costs associated
with Year 2000 compliance, unless such costs are incurred by individuals devoted
primarily to Year 2000 compliance efforts. These cost estimates do not include
any potential costs related to any customer or other claim. In addition, these
cost estimates are based on the current assessment of the ongoing activities
described above, and are subject to change as we continuously monitor these
activities. We believe any modifications deemed necessary will be made on a
timely basis and we do not believe that the cost of such modifications will
seriously harm our business. We currently expect the aforementioned evaluation
of our products, services, and systems and any remediation necessary will be
completed by September 30, 1999. As of June 30, 1999, we had not identified any
items or areas that would require material remediation efforts. Our expectations
as to the extent and timeliness of any modifications required in order to
achieve Year 2000 compliance and the costs related thereto are forward-looking
statements 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 section. We cannot be sure, however, that we will be able to
successfully modify on a timely basis such products, services, and systems to
comply with Year 2000 requirements. Our business could suffer if we fail to make
our products, services, and systems Year 2000 compliant in time.
We have established a program to assess whether certain of our products are
Year 2000 compliant. Under this program, we are in the process of performing
tests on Sun products listed on our price lists. To monitor this program and to
help customers evaluate their Year 2000 issues we have created a Web site at
http://sun.com/y2000/cpl.html that identifies the following categories: products
that were released Year 2000 compliant; products that require modifications to
be Year 2000 compliant; products under review; products that are not Year 2000
compliant and need to be replaced with a Year 2000 compliant product; source
code products that could be modified and implemented without our review; and
products that do not process or manipulate date data or have no date-related
technology. We update this list periodically as our analysis of additional
products is completed.
Based on our assessment to date, most of our newly introduced products and
services are Year 2000 compliant; however, we cannot be sure that our current
products do not contain undetected errors or defects associated with Year 2000
functions that may result in material costs to us. In addition, some of our
customers are running products that are not Year 2000 compliant and will require
an upgrade or other remediation to become Year 2000 compliant. We provide
limited warranties as to Year 2000 compliance on certain of our products and
services. Except as specifically provided for in the limited warranties, we do
not believe that we are legally responsible for costs incurred by customers to
achieve Year 2000 compliance. We have been taking steps to identify affected
customers, raise customer awareness related to noncompliance of our older
products, and encourage such customers to migrate to current products or product
versions. It is possible that we may experience increased expenses if we need to
upgrade or perform other remediation on products that our customers are using
that are not Year 2000 compliant. Our business may also materially suffer if
customers become concerned about or are dissatisfied with our products and
services as a result of Year 2000 issues.
We also face risks to the extent that suppliers of products, services, and
systems purchased by us or the suppliers of others with whom we transact
business cannot timely provide us with products, components, services, or
systems that meet Year 2000 requirements. To the extent that we are not able to
test technology provided by third-party hardware or software vendors, we are in
the process of carrying out audits and obtaining Year 2000 compliance
certifications from each of our major vendors that their products and internal
systems, as applicable, are Year 2000 compliant. In the event any such third
parties cannot timely provide us with products, services, or systems that meet
the Year 2000 requirements, our business could be harmed. Furthermore, a
reasonably likely worst-case scenario would be if one of our major vendors
experienced a material disruption in business, which caused us to experience a
material disruption in business. If either our internal systems or the internal
systems, products, or services of one or more of our major vendors (including
banks, energy suppliers, and transportation providers) fail to achieve Year 2000
compliance, our business could be seriously harmed. We are currently developing
contingency plans to deal with potential Year 2000 problems related to our
internal systems that are deemed to be high risk and with respect to products
and services provided by outside vendors. We expect these plans to be complete
by September 30, 1999. If these plans are not timely completed or if they are
not successful or if new Year 2000 problems not covered by our contingency plans
emerge, our business and operating results may be seriously harmed.
Although we believe that the cost of Year 2000 modifications for both
internal use software and systems, as well as Sun's products are not material,
we cannot be sure that various factors relating to the Year 2000 compliance
issues will not seriously harm our business or operating results. For example, a
significant amount of litigation may arise out of Year 2000 compliance issues
and we cannot be sure about the extent to which we may be affected by any of
this litigation. Even though we do not believe that we are legally responsible
for our customers' Year 2000 compliance obligations, it is unclear whether
different governments or governmental agencies may decide to allocate liability
relating to Year 2000 compliance to us without regard to specific warranties or
warranty disclaimers. Our business could suffer in any given quarter if any
liability is allocated to us. Furthermore, we do not know how customer spending
patterns may be affected by Year 2000 issues. We believe, however, that
customers will focus on preparing their businesses for the Year 2000 and that
their capital budgets will be spent in large part on remediation efforts,
potentially delaying the purchase and implementation of new systems, thereby
creating less demand for our products and services. Our business could be harmed
if customers delay purchasing our products during the first half of our fiscal
Year 2000 because of Year 2000 concerns, or if our customers are unable to
conduct their business or are prevented from placing orders or paying us because
of their own Year 2000 problems. A significant disruption of our financial
management and control systems or a lengthy interruption in our operations
caused by a Year 2000 related issue could also result in a material adverse
impact on our operating results and financial condition.
<PAGE> 18
OUR ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS.
We intend to continue to make investments in companies, products, and
technologies, either through acquisitions or investment alliances. For example,
we have purchased several companies in the past and formed alliances, including
our recent alliance with AOL. Acquisitions and alliance activities often involve
risks, including: we may experience difficulty in assimilating the acquired
operations and employees; we may experience difficulty in managing product
codevelopment activities with our alliance partners; we may be unable to retain
the key employees of the acquired operation; the acquisition or investment may
disrupt our ongoing business; we may not be able to incorporate successfully the
acquired technology and operations into our business and maintain uniform
standards, controls, policies, and procedures; and we may lack the experience to
enter into new markets, products, or technologies.
Some of these factors are beyond our control. Failure to manage these
alliance activities effectively and to integrate acquisitions could affect our
operating results or financial condition.
WE DEPEND ON KEY EMPLOYEE AND FACE COMPETITION IN HIRING AND RETAINING QUALIFIED
EMPLOYEES.
Our employees are vital to our success, and our key management, engineering, and
other employees are difficult to replace. We generally do not have employment
contracts with our key employees. Further, we do not maintain key person life
insurance on any of our employees. The expansion of high technology companies in
Silicon Valley and Colorado, as well as many other cities, has increased demand
and competition for qualified personnel. We may not be able to attract,
assimilate, or retain additional highly qualified employees in the future. These
factors could harm our business.
<PAGE> 19
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except share and per share amounts) YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Net revenues:
Products $10,091,046 $8,603,259 $7,747,115
Services 1,635,251 1,187,581 851,231
- ----------------------------------------------------------------------------------------------------
Total net revenues 11,726,297 9,790,840 8,598,346
Cost and expenses:
Cost of sales--products 4,674,390 3,972,283 3,790,284
Cost of sales--services 973,970 721,053 530,176
Research and development 1,262,517 1,013,782 825,968
Selling, general and administrative 3,172,955 2,777,264 2,402,442
Purchased in-process research and development 120,700 176,384 22,958
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 10,204,532 8,660,766 7,571,828
Operating income 1,521,765 1,130,074 1,026,518
Gain on sale of equity investment -- -- 62,245
Interest income 84,599 47,663 39,899
Interest expense (675) ( 1,571) ( 7,455)
- ----------------------------------------------------------------------------------------------------
Income before income taxes 1,605,689 1,176,166 1,121,207
Provision for income taxes 574,355 413,304 358,787
- ----------------------------------------------------------------------------------------------------
Net income $ 1,031,334 $ 762,862 $ 762,420
- ----------------------------------------------------------------------------------------------------
Net income per common share--basic $1.35 $1.02 $1.03
- ----------------------------------------------------------------------------------------------------
Net income per common share--diluted $1.27 $0.97 $0.98
- ----------------------------------------------------------------------------------------------------
Shares used in the calculation of net income per
common share--basic 765,853 747,456 736,852
- ----------------------------------------------------------------------------------------------------
Shares used in the calculation of net income per
common share--diluted 814,241 788,548 777,934
See accompanying notes.
</TABLE>
<PAGE> 20
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except share and per share amounts) AT JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,088,972 $ 822,267
Short-term investments 1,576,079 476,185
Accounts receivable, net of allowances of $338,771 in 1999
and $235,563 in 1998 2,286,911 1,845,765
Inventories 307,873 346,446
Deferred tax assets 487,150 371,841
Other current assets 369,365 285,021
- -----------------------------------------------------------------------------------------------
Total current assets 6,116,350 4,147,525
Property, plant and equipment:
Machinery and equipment 1,552,184 1,251,660
Furniture and fixtures 172,912 113,636
Leasehold improvements 287,740 256,233
Land, buildings and building improvements 858,512 635,699
- -----------------------------------------------------------------------------------------------
2,871,348 2,257,228
Accumulated depreciation and amortization (1,262,427) (956,616)
- -----------------------------------------------------------------------------------------------
1,608,921 1,300,612
Other assets, net 695,081 262,925
- -----------------------------------------------------------------------------------------------
$ 8,420,352 $ 5,711,062
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,646 $ 7,169
Accounts payable 753,838 495,603
Accrued payroll-related liabilities 520,068 315,929
Accrued liabilities and other 1,126,497 810,562
Deferred service revenues 422,115 264,967
Income taxes payable 402,813 188,641
Note payable -- 40,000
- -----------------------------------------------------------------------------------------------
Total current liabilities 3,226,977 2,122,871
Deferred income taxes and other obligations 381,595 74,563
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized
(3,000,000 of which have been designated as Series A Preferred
participating stock); no shares issued and outstanding -- --
Common stock, $0.00067 par value, 1,800,000,000 shares authorized;
issued: 867,254,728 shares in 1999 and 860,622,882 shares
in 1998 581 288
Additional paid-in capital 1,742,652 1,345,508
Retained earnings 4,124,607 3,150,935
Treasury stock, at cost: 89,919,137 shares in 1999 and
108,015,732 shares in 1998 (1,045,961) (1,003,191)
- -----------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) (10,099) 20,088
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 4,811,780 3,513,628
- -----------------------------------------------------------------------------------------------
$ 8,420,352 $ 5,711,062
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 21
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 1,031,334 $ 762,862 $ 762,420
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 626,946 439,921 356,003
Gain on sale of equity investment -- -- (62,245)
Tax benefit of options exercised 222,364 111,375 59,799
Purchased in-process research and development 120,700 176,384 22,958
Net increase in accounts receivable (433,136) (176,075) (334,911)
Net decrease in inventories 39,206 97,394 22,936
Net increase (decrease) in accounts payable 256,117 (12,298) 143,845
Net increase in other current and non-current assets (532,979) (206,210) (152,510)
Net increase in other current and non-current liabilities 1,186,305 333,159 286,793
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 2,516,857 1,526,512 1,105,088
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property, plant and equipment (738,707) (830,143) (554,018)
Acquisition of other assets (108,240) (91,521) (37,645)
Acquisition of short-term investments (2,432,725) (958,354) (973,884)
Maturities of short-term investments 688,154 523,032 634,765
Sales of short-term investments 625,690 432,047 347,771
Proceeds from sale of equity investment -- -- 62,245
Payments for acquisitions, net of cash acquired (130,300) (244,020) (22,958)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (2,096,128) (1,168,959) (543,724)
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Issuance of stock, net of repurchases 142,596 71,975 52,969
Acquisition of treasury stock (358,434) (284,396) (456,090)
Proceeds from employee stock purchase plans 115,699 93,581 81,313
Proceeds (reduction) of short-term borrowings, net (15,523) (92,967) 51,769
Repayment of receivable purchase agreement -- -- (125,000)
Proceeds (reduction) of note payable and other (38,362) 16,351 (35,009)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (154,024) (195,456) (430,048)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 266,705 162,097 131,316
Cash and cash equivalents, beginning of year 822,267 660,170 528,854
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $1,088,972 $ 822,267 $ 660,170
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 836 $ 905 $ 15,126
Income taxes $ 138,596 $ 334,550 $380,814
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 $ 305,242 $ 301,415 $--
Cash paid for assets (134,895) (249,806) --
Stock issued (144,483) -- --
- -------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 25,864 $ 51,609 $--
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 22
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
THREE YEARS ENDED JUNE 30, 1999 -------------------- PAID-IN RETAINED ---------------------
(In thousands, except share amounts) SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 852,640,236 $ 72 $ 1,164,349 $ 1,662,355 (108,711,752) $ (596,910)
Net income -- -- -- 762,420 -- --
Currency translation adjustments and other -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of stock, net of repurchases (20,000) -- -- (14,710) 20,756,230 137,574
Treasury stock purchased -- -- -- -- (32,145,238) (456,090)
Exercise of warrants 8,451,536 1 1,611 -- -- --
Tax benefit of employee stock transactions
and other -- -- 63,837 -- -- --
Issuance of common stock dividend -- 215 -- (215) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 861,071,772 288 1,229,797 2,409,850 (120,100,760) (915,426)
Net income -- -- -- 762,862 -- --
Currency translation adjustments and other -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of stock, net of repurchases (448,890) -- (2) (21,777) 25,276,768 196,631
Treasury stock purchased -- -- -- -- (13,191,740) (284,396)
Tax benefit of employee stock transactions
and other -- -- 115,713 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 860,622,882 288 1,345,508 3,150,935 (108,015,732) (1,003,191)
Net income -- -- -- 1,031,334 -- --
Currency translation adjustments and other -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of stock, net of repurchases 6,631,846 2 144,483 (57,371) 27,506,499 315,664
Treasury stock purchased -- -- -- -- (9,409,904) (358,434)
Tax benefit of employee stock transactions
and other -- -- 252,661 -- -- --
Issuance of common stock dividend -- 291 -- (291) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 867,254,728 $581 $ 1,742,652 $ 4,124,607 (89,919,137) $(1,045,961)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
THREE YEARS ENDED JUNE 30, 1999 COMPREHENSIVE STOCKHOLDERS'
(In thousands, except share amounts) INCOME (LOSS) EQUITY
<S> <C> <C>
Balances at June 30, 1996 $ 21,620 $ 2,251,486
Net income -- 762,420
Currency translation adjustments and other (4,192) (4,192)
-------------
Total comprehensive income -- 758,228
Issuance of stock, net of repurchases -- 122,864
Treasury stock purchased -- (456,090)
Exercise of warrants -- 1,612
Tax benefit of employee stock transactions
and other -- 63,837
Issuance of common stock dividend -- --
- ----------------------------------------------------------------------------------------
Balances at June 30, 1997 17,428 2,741,937
Net income -- 762,862
Currency translation adjustments and other 2,660 2,660
-------------
Total comprehensive income -- 765,522
Issuance of stock, net of repurchases -- 174,852
Treasury stock purchased -- (284,396)
Tax benefit of employee stock transactions
and other -- 115,713
- ----------------------------------------------------------------------------------------
Balances at June 30, 1998 20,088 3,513,628
Net income -- 1,031,334
Currency translation adjustments and other (30,187) (30,187)
-------------
Total comprehensive income -- 1,001,147
Issuance of stock, net of repurchases -- 402,778
Treasury stock purchased -- (358,434)
Tax benefit of employee stock transactions
and other -- 252,661
Issuance of common stock dividend -- --
- ----------------------------------------------------------------------------------------
Balances at June 30, 1999 $(10,099) $ 4,811,780
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 23
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
Sun Microsystems, Inc. (the Company or Sun) is a provider of products, services,
and support solutions for building and maintaining network computing
environments. Sun sells scalable computer systems, high-speed microprocessors,
and a line of high-performance software for operating networks, computing
equipment, and storage products. Sun also provides a full range of services
including support, education, and professional services. The Company markets its
products primarily to business, government, and education customers and operates
in various product segments 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 and tax-exempt securities 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 were classified as either trading or
available-for-sale and are carried at fair value. All of the Company's cash
equivalents and short-term investments were classified as available-for-sale at
June 30, 1999 and 1998. Realized and unrealized gains and losses are computed on
the specific identification method based upon actual sales prices 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 the consolidated balance sheet caption "Accumulated
other comprehensive income (loss)." The change in net unrealized gains and
losses on investments, net of income taxes, included in stockholders' equity at
June 30, 1999 and 1998, was not material.
The Company maintains certain trading assets to generate returns that
offset changes in certain liabilities related to deferred compensation
arrangements. The trading assets consist of marketable equity securities and are
stated at fair value. Both realized and unrealized gains and losses generally
offset the change in the deferred compensation liability and have not been
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 records inventory write downs for potentially excess and
obsolete inventory based on backlog and forecasted demand. However, such backlog
and forecasted demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecasted demand,
and such differences may be material to the financial statements. Inventories
consist of:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
<S> <C> <C>
Raw materials $113,070 $ 92,197
Work in progress 51,183 58,765
Finished goods 143,620 195,484
-------- --------
Total $307,873 $346,446
======== ========
</TABLE>
<PAGE> 24
PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided principally on the straight-line method over the estimated useful
lives of the assets. Depreciation of fixed assets is generally calculated for
machinery and equipment, furniture and fixtures, and buildings and related
building improvements based upon useful lives of one to five years, five years,
and seven to twenty-five years, respectively. Leasehold improvement useful lives
are the shorter of five years or the applicable lease term.
OTHER ASSETS
- --------------------------------------------------------------------------------
Other assets consist primarily of 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 1999, 1998, and 1997 was $78 million, $42 million, and $27
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 sheet caption
"Accumulated other comprehensive income (loss)." Currency transaction gains or
losses are recognized in current operations and have not been significant to the
Company's operating results in any period. The effect of foreign currency rate
changes on cash and cash equivalents is not material.
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, 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 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.
<PAGE> 25
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 expense was
$246 million, $235 million, and $272 million for fiscal years 1999, 1998, and
1997, respectively.
SELF-INSURANCE
- --------------------------------------------------------------------------------
The Company is self-insured up to specific levels for certain liabilities.
Accruals are provided each year based on historical claim costs and include
estimated amounts for incurred but not reported claims. The Company maintains
stop loss coverage with third-party insurance companies to cover aggregate
annual losses in excess of $25 million.
WARRANTY EXPENSE
- --------------------------------------------------------------------------------
The Company provides currently for the estimated costs that may be incurred
under warranties for product shipped. Accrued warranty liability of $166 million
and $116 million at June 30, 1999 and 1998, respectively, is included in the
consolidated balance sheet caption "Accrued liabilities and other."
NET INCOME PER COMMON SHARE
- --------------------------------------------------------------------------------
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period and
excludes any dilutive effects of options, warrants, and convertible securities.
Dilutive earnings per common share is calculated by dividing net income by the
weighted average number of common shares used in the basic earnings per common
share calculation plus the dilutive effect of options, warrants, and convertible
securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In thousands, except per share amounts) Years Ended June 30,
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE 1999 1998 1997
<S> <C> <C> <C>
Net income $1,031,334 $762,862 $762,420
- --------------------------------------------------------------------------------
Shares used to compute net income
per common share--basic 765,853 747,456 736,852
Effect of dilutive securities 48,388 41,092 41,082
- --------------------------------------------------------------------------------
Shares used to compute net income
per common share--diluted 814,241 788,548 777,934
- --------------------------------------------------------------------------------
Net income per common share--basic $ 1.35 $ 1.02 $ 1.03
- --------------------------------------------------------------------------------
Net income per common share--diluted $ 1.27 $ 0.97 $ 0.98
- --------------------------------------------------------------------------------
</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, 1999 and 1998. 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 1999, the Company
provided approximately $18 million for doubtful accounts ($23 million and $20
million in 1998 and 1997, respectively).
<PAGE> 26
STOCK DIVIDEND
- --------------------------------------------------------------------------------
The Company announced a two-for-one stock split (in the form of a stock
dividend) on January 21, 1999, which was distributed at the close of business on
April 8, 1999. The Company also effected a two-for-one stock split (in the form
of a stock dividend) to stockholders of record as of the close of business on
November 18, 1996. All earnings per common share amounts, as well as references
to common stock and stockholders' equity amounts have been restated as if these
stock dividends had occurred as of the earliest period presented.
STOCK-BASED COMPENSATION
- --------------------------------------------------------------------------------
As permitted by Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock-Based Compensation," the Company measures compensation expense for its
stock-based employee compensation plans using the intrinsic method prescribed by
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and has provided in Note 9 pro forma disclosures of the
effect on net income and earnings 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
- --------------------------------------------------------------------------------
In fiscal 1999, the Company adopted 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." Comprehensive income is defined as the change in equity of a
company during a period from transactions and other events and circumstances
excluding transactions resulting from investment by owners and distributions to
owners. The primary difference between net income and comprehensive income for
the Company is due to currency translation adjustments. Comprehensive income is
reflected in the consolidated statements of stockholders' equity. FAS 131
supersedes Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas, and
major customers. See Note 10 for these disclosures.
In June 1998, Financial Accounting Standards No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities" was issued and was effective
for all fiscal years beginning after June 15, 1999. FAS 133 was subsequently
amended by Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" and will now be effective for fiscal years beginning after
June 15, 2000, with early adoption permitted. FAS 133, as amended, requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, and foreign currency
hedges and establishes respective accounting standards for reporting changes in
the fair value of the derivative instruments. Upon adoption, the Company will be
required to adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gains or losses as adjustments to be reported in net
income or other comprehensive income, as appropriate. The Company has not
completed its assessment of the impact of FAS 133, as amended, on its
consolidated financial position or results of operations and is in the process
of determining when it will adopt FAS 133.
The Company also adopted Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" effective
July 1, 1998. The adoption of SOP 98-1 did not have a material effect on the
Company's consolidated financial position or operating results.
<PAGE> 27
2. ACQUISITIONS
During the three years ended June 30, 1999, the Company completed ten
acquisitions which were accounted for under the purchase method of accounting.
Pro forma results of operations have not been presented for any of the
acquisitions because the effects of these acquisitions were not material to the
Company on either an individual or an aggregate basis. The results of operations
of each acquisition are included in the Company's consolidated statement of
income from the date of each acquisition and were not material to the Company on
either an individual or an aggregate basis.
On August 28, 1998, the Company completed its acquisition of NetDynamics,
Inc. (NetDynamics), a company conducting development, engineering, and testing
activities associated with the completion of a new enterprise application
platform product. Sun 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 based upon an agreed-upon exchange ratio which was calculated using
an agreed-upon average market price for Sun common stock. The Company issued
5,493,570 shares of Sun common stock (with a fair market value of $24.13 per
share) as consideration for the acquisition. Additionally, Sun issued
approximately 1,136,000 stock options in exchange for NetDynamics stock options
previously outstanding, including approximately 344,000 Sun options in exchange
for vested NetDynamics stock options, with terms similar to Sun stock options.
The fair value of the Sun stock options exchanged for rights to vested
NetDynamics stock options at the time of the acquisition was included as part of
the purchase price. The excess purchase price over the estimated fair value of
net tangible assets has been allocated to various intangible assets, primarily
consisting of developed technology ($20 million), goodwill ($36.2 million),
customer base ($10 million), and assembled work force ($2 million). In addition
to the intangible assets acquired, an $80 million charge representing the
write-off of purchased in-process research development (IPRD) was recorded.
On January 22, 1999, the Company acquired all of the outstanding capital
stock of Maxstrat Corporation (Maxstrat), by means of a merger transaction
pursuant to which all of the shares of Maxstrat capital stock were converted
into the right to receive cash for total consideration of $101.5 million, net of
cash received of $18.7 million and including $2.5 million associated with vested
stock options. The excess purchase price over the estimated fair value of net
tangible assets has been allocated to various intangible assets, primarily
consisting of developed technology of $8.6 million and goodwill and
goodwill-like assets totaling $61.5 million. In addition to the intangible
assets acquired, the Company recorded a $28.7 million charge, representing the
write-off of IPRD.
On September 28, 1998, the Company completed its acquisition of i-Planet,
Inc. (i-Planet), a company conducting development, engineering, and testing
activities associated with the completion of a new Java technology based remote
Internet access product. Sun acquired all of the outstanding capital stock of
i-Planet by means of a merger transaction pursuant to which all the shares of
i-Planet capital stock were converted into the right to receive cash for total
consideration of $30 million, including $1.2 million associated with vested
stock options. The excess purchase price over the estimated fair value of net
tangible assets has been allocated to various intangible assets, primarily
consisting of developed technology of $3.3 million and various goodwill and
goodwill-like assets totaling $18.3 million. In addition to the intangible
assets acquired, an $8.4 million charge representing the write-off of IPRD was
recorded.
On October 16, 1998, the Company completed its acquisition of Beduin
Communications Incorporated (Beduin), a company conducting development,
engineering, and testing activities associated with the completion of a suite of
smart device products. Sun acquired all of the outstanding capital stock of
Beduin by means of a share purchase transaction pursuant to which all the shares
of Beduin capital stock were converted into the right to receive cash for total
consideration of $8.4 million. The excess purchase price over the estimated fair
value of net tangible assets has been allocated to various intangible assets,
primarily consisting of developed technology of $3.1 million and various
goodwill and goodwill-like assets totaling $1.7 million. In addition to the
intangible assets acquired, a $3.6 million charge was recorded, representing the
write-off of IPRD.
<PAGE> 28
The Company completed five acquisitions in fiscal 1998. On May 29, 1998,
the Company completed its acquisition of Red Cape Software, Inc. (Red Cape), a
company which was conducting engineering and testing activities to further
develop its Framework for Policy Management Software, a Java-technology based,
goal-oriented, policy-based storage management software that can be used across
platforms. On November 24, 1997, the Company completed its acquisition of Encore
Computer Corporation's Storage Products Business (Encore). Encore was conducting
development and engineering activities associated with its Intershare and
DASD-NET products (the Encore Products) for the computer mainframe/open systems
storage market. The acquired technology of the Encore Products will facilitate
the Company's efforts to develop a high-end "intelligent" storage product, which
can be modified to address the low-end storage market. On October 21, 1997 the
Company completed its acquisition of Chorus Systems, S.A. (Chorus). Chorus was
conducting development, engineering, and testing activities associated with
certain software products that will allow the Company to create a robust product
line leveraging the Java programming language, including a tool set and flash
file system, as well as embedded operating systems. On September 22, 1997, the
Company completed its acquisition of Integrity Arts, Inc. (Integrity Arts), a
company developing a Java Card(TM) Application Programming Interface (API). An
API defines the concepts, terms, and structures of a software platform that can
be followed by application designers and architects and describes application
functionality, data management principles, communication principles, and network
infrastructure. Integrity Arts was also developing the related smart card and
terminal run-time software modules, software development tools, card application
architectures, and data security software. On August 22, 1997, the Company
completed its acquisition of Diba, Inc. (Diba). Diba was conducting development
and engineering activities associated with the completion of a consumer
information appliance that will offer improved performance and efficiency by
allowing processing of software applications at either the local-area network
located in the consumer's home or at another location.
The Company completed one acquisition, Long View Technologies, LLC (Long
View) during fiscal 1997. Long View was acquired on February 14, 1997, and at
the time was conducting development and engineering activities associated with
the completion of a Java virtual machine for the Microsoft Windows '95 and NT
operating systems which would contribute to the speed and robustness of the Sun
Java platform's ability to operate in the network computing market.
A summary of the Company's purchase transactions that included IPRD charges
is included in the following table (in millions):
<TABLE>
<CAPTION>
Entity Name Consideration Date IPRD Charge Form of Consideration & Other Notes
FISCAL 1999
- -----------
<S> <C> <C> <C> <C>
NetDynamics $148.2 August 28, 1998 $80.0 $140.8 in common stock and $7.4 in assumed liabilities; developed
technology of $20.0; goodwill and other intangibles of $48.2
Maxstrat $101.5 January 22, 1999 $28.7 $99.0 in cash and $2.5 in common stock; developed technology of $8.6;
goodwill and other intangibles of $61.5
i-Planet $ 30.0 September 28, 1998 $ 8.4 $28.6 in cash, $1.2 in common stock, and $0.2 in assumed liabilities
Beduin $ 8.4 October 16, 1998 $ 3.6 Cash
FISCAL 1998
- -----------
Red Cape $ 16.7 May 29, 1998 $14.1 Cash
Encore $186.2 November 24, 1997 $97.0 Cash; developed technology of $56; goodwill and other intangibles
of $6.7
Chorus $ 26.5 October 21, 1997 $13.1 Cash
Integrity Arts $ 30.2 September 22, 1997 $29.9 Cash
Diba $ 29.7 August 22, 1997 $22.3 $25.6 in cash and $4.1 in assumed liabilities
FISCAL 1997
- -----------
Long View $ 23.0 February 14, 1997 $23.0 Cash
</TABLE>
<PAGE> 29
The Company calculated amounts allocated to IPRD using established valuation
techniques in the high technology industry, and expensed such amounts in the
quarter that each such acquisition was consummated because technological
feasibility of the in-process technologies so acquired had not been achieved and
no alternative future uses had been established. The Company computed its
valuations of purchased IPRD for certain of the above acquisitions, specifically
NetDynamics, Maxstrat, i-Planet, Beduin, Red Cape, Integrity Arts, and Diba, as
well as certain technology acquired from Chorus, using a discounted cash flow
analysis on the anticipated income stream to be generated by the purchased
technologies. The Company computed its valuations of IPRD related to certain of
the acquisitions, specifically, Encore and Long View, as well as certain
technology acquired from Chorus, using an income approach that is based on the
assumption that in lieu of ownership, a company would be willing to pay for the
right to exploit the related benefits of the acquired technology. This method
utilizes revenue related to the acquired technology, an appropriate rate for the
use of such technology, expected technology life cycles, amortization cost of
the asset acquired, and an appropriate discount rate.
The excess purchase price over the estimated value of the net tangible
assets acquired was allocated to various intangible assets, consisting primarily
of developed technology and goodwill, as well as other goodwill-like assets,
such as customer base and assembled work force. The values assigned to developed
technologies related to each acquisition were based upon future discounted cash
flows related to the existing products' projected income streams. The values of
the customer bases were determined based upon the value of existing
relationships and the expected revenue stream. The values of the assembled
workforces were based upon the cost to replace those work forces. Amounts
allocated to goodwill and other intangibles are amortized on a straight-line
basis over periods ranging from two to five years.
3. STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT WITH AMERICA ONLINE, INC.
On November 23, 1998, Sun and America Online, Inc. (AOL) entered into a
Strategic Alliance consisting of several agreements between the parties,
including a Strategic Development and Marketing Agreement (SDMA). The SDMA has a
term of three years which commenced on March 17, 1999 in accordance with its
terms upon the consummation of AOL's acquisition of Netscape Communications,
Inc. (Netscape).
Under the terms of the SDMA, AOL and Sun are committed to collaboratively
develop, market, and sell client and server software, and collaboratively
develop an AOL-specific Java environment that will enable AOL services to be
accessed through a variety of hardware devices. The SDMA provides that over its
term, AOL will develop and market, together with Sun, client software and
network application and server software based in part on Netscape code, on Sun
code and technology, and on certain AOL services features to business
enterprises. In addition, AOL and Sun have agreed to coordinate their sales
efforts with respect to designated AOL, Netscape, Sun, and collaboratively
developed client software and network application and server software and
associated services.
Under the terms of the SDMA, Sun has committed that the total revenue
earned by AOL from certain existing Netscape contracts, the sale or license by
Sun or AOL of certain AOL, Netscape, and collaboratively developed software
products and services will not be less than $312 million, $330 million, and $333
million in the first, second, and third years of the SDMA. In addition, the
terms of the SDMA require Sun to pay AOL approximately $275 million over the
term of the SDMA for software and trademark rights granted to Sun by AOL. The
long-term portion of this contractual obligation of $165 million is reflected in
the consolidated balance sheet caption "Deferred income taxes and other
obligations."
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and short-term investments approximate cost due
to the short period of time to maturity. The fair value of long-term debt was
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.
<PAGE> 30
The fair value of the Company's cash equivalents and short-term investments
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands) At June 30, 1999
- --------------------------------------------------------------------------------------------
GROSS GROSS
FAIR VALUE OF CASH EQUIVALENTS UNREALIZED UNREALIZED ESTIMATED
AND SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
State and local government debt $ 236,644 $-- $195 $ 236,449
Corporate and other
non-governmental debt 1,024,320 -- 72 1,024,248
U.S. government debt 332,993 -- 234 332,759
Floating rate notes 229,540 -- 15 229,525
Money market fund 184,600 -- -- 184,600
Other investments 26,771 -- -- 26,771
- --------------------------------------------------------------------------------------------
Total $2,034,868 $-- $516 $2,034,352
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands) At June 30, 1999
- --------------------------------------------------------------------------------------------
GROSS GROSS
FAIR VALUE OF CASH EQUIVALENTS UNREALIZED UNREALIZED ESTIMATED
AND SHORT-TERM INVESTMENTS 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>
The cost and estimated fair value of cash equivalents and short-term investments
by contractual maturity are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands) At June 30, 1999
- --------------------------------------------------------------------------------------------
ESTIMATED
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS COST FAIR VALUE
<S> <C> <C>
Maturing in one year or less $1,805,328 $1,804,827
Maturing after one year 229,540 229,525
- -------------------------------------------------------------------------------------------
Total $2,034,868 $2,034,352
- -------------------------------------------------------------------------------------------
</TABLE>
The fair value of the Company's borrowing arrangements and other financial
instruments is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) At June 30, 1999 At June 30, 1999
- ------------------------------------------------------------------------------------------------
FAIR VALUE OF BORROWING ARRANGEMENTS ASSET (LIABILITY) ASSET (LIABILITY)
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
10.18% mortgage loan $ -- $ -- $(40,000) $(41,495)
Forward foreign exchange contracts 4,640 4,640 4,265 4,265
Foreign currency option contracts -- 8,574 -- 7,531
Short-term borrowings (1,646) (1,646) (7,169) (7,169)
Interest-rate swap agreement -- -- -- 292
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
5. DERIVATIVE FINANCIAL INSTRUMENTS
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In thousands)
- ---------------------------------------------------------------------------
NOTIONAL AMOUNTS FOR DERIVATIVES 1999 1998
<S> <C> <C>
Swaps hedging debt $ -- $ 40,000
Forward foreign exchange contracts 844,551 930,155
Foreign currency option contracts 476,260 241,861
</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 Note 1.
At June 30, 1999 and 1998, the Company had forward foreign exchange
contracts of less than three months duration, to exchange principally Japanese
yen, British pounds, French francs, and German marks for U.S. dollars in the
total gross notional amount of $845 million and $930 million, respectively. Of
these notional amounts, forward contracts to purchase foreign currency
represented $126 million and $139 million, and forward contracts to sell foreign
currency represented $719 million and $791 million, at June 30, 1999 and 1998,
respectively. The Company also has purchased foreign currency options of less
than two months duration, to exchange principally Japanese yen, British pounds,
German marks, and French francs for U.S. dollars.
6. BORROWING ARRANGEMENTS
As of June 30, 1998, the Company had a $40 million mortgage loan which was
secured by real property and a building. The loan agreement provided for
interest at a fixed interest rate of 10.18%. However, the Company maintained an
interest-rate swap agreement with a third party (receive fixed, pay variable)
that resulted in the Company paying a rate based on three-month LIBOR over the
life of the loan. The Company settled this mortgage in full in May 1999. The
related interest-rate swap agreement matured with the loan agreement.
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 Euro 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, 1999.
There were no borrowings outstanding under this facility at June 30, 1999.
At June 30, 1999, Sun's international subsidiaries had uncommitted lines of
credit aggregating approximately $740 million, of which approximately $1.6
million, denominated in British pound and Euro, had been drawn. The average
interest rate at June 30, 1999 was 4.06%.
On October 16, 1997, the Company filed a shelf registration statement with
the Securities and Exchange Commission (SEC) relating to the registration 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, this
shelf registration statement became effective, so that the Company may 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.
On June 18, 1999, the Company filed an additional shelf registration
statement with the SEC relating to the registration of additional senior and
subordinated debt securities and common and preferred stock with an aggregate
initial public offering price of up to $3 billion. See Note 12--"Subsequent
Events (unaudited)."
<PAGE> 32
7. INCOME TAXES
Income before income taxes and the provision for income taxes consists of the
following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(In thousands) Years Ended June 30,
- ------------------------------------------------------------------------------------
1999 1998 1997
Income before income taxes:
<S> <C> <C> <C>
United States $ 975,394 $ 589,387 $ 566,554
Foreign 630,295 586,779 554,653
Total income before income taxes $1,605,689 $1,176,166 $1,121,207
Provision for income taxes:
Current:
United States federal $ 384,563 $ 349,095 $ 303,537
State 41,517 47,270 46,894
Foreign 129,794 106,192 67,234
Total current income taxes 555,874 502,557 417,665
Deferred:
United States federal (2,563) (81,319) (66,027)
State 7,432 (6,492) (5,231)
Foreign 13,612 (1,442) 12,380
Total deferred income taxes 18,481 (89,253) (58,878)
Provision for income taxes $ 574,355 $ 413,304 $ 358,787
</TABLE>
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>
- ---------------------------------------------------------------------------
(In thousands) At June 30,
- ---------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Deferred tax assets:
Inventory valuation $ 79,565 $ 67,006
Reserves and other accrued expenses 215,489 165,724
Fixed asset basis differences 74,672 81,926
Compensation not currently deductible 39,958 41,407
State income taxes 18,089 15,468
Other 55,864 68,687
Gross deferred tax assets 483,637 440,218
Deferred tax liabilities:
Net undistributed profits of subsidiaries (171,839) (124,777)
Other (14,410) 428
Gross deferred tax liabilities (186,249) (124,349)
Net deferred tax assets $297,388 $ 315,869
</TABLE>
<PAGE> 33
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>
- --------------------------------------------------------------------------------------------
(In thousands) Years Ended June 30,
- --------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Expected tax rate at 35% $561,991 $411,658 $392,423
State income taxes, net of federal tax benefit 31,817 26,506 27,081
Foreign earnings permanently reinvested in
foreign operations (82,150) (49,600) (63,550)
Acquired in-process research and development 44,498 25,194 --
Other 18,199 (454) 2,833
Provision for income taxes $574,355 $413,304 $358,787
</TABLE>
As of June 30, 1999, the Company has unrecognized deferred tax liabilities of
approximately $265 million related to cumulative net undistributed earnings of
foreign subsidiaries of approximately $824 million. These earnings are
considered to be permanently invested in operations outside the United States.
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 were $222 million, $111 million, and $60 million in fiscal
1999, 1998, and 1997, respectively, and were credited to stockholders' equity.
The Company's United States income tax returns for fiscal years ended June
30, 1993 through 1996 are under examination, and the Internal Revenue Service
has proposed certain adjustments. Management believes that adequate amounts have
been provided for any adjustments that may ultimately result from these
examinations.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under noncancelable
operating leases. The future minimum annual lease payments are approximately
$145 million, $116 million, $92 million, $73 million, and $61 million for fiscal
years 2000, 2001, 2002, 2003, and 2004, respectively, and approximately $195
million for years following fiscal 2004. Rent expense under the noncancelable
operating leases was $166 million in 1999, $139 million in 1998, and $113
million in 1997.
From time to time and in the ordinary course of business, the Company may
be subject to various claims, charges, and litigation. In the opinion of
management, final judgments from such pending claims, charges, and litigation,
if any, against the Company would not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
9. 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 $150, 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.
<PAGE> 34
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. Additionally, in connection with the acquisition of
Lighthouse Design, Ltd., in fiscal year 1996, former shareholders who are
employees of the Company were entitled to receive up to approximately 1,300,000
shares of stock upon achievement of specific performance criteria over a three
year period. As of June 30, 1999 all outstanding performance shares related to
Lighthouse Design, Ltd., had vested.
Information with respect to stock option and stock purchase rights activity
is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands, except per share amounts) Outstanding Options/Rights
- -----------------------------------------------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES PRICE PER SHARE EXERCISE PRICE
<S> <C> <C> <C> <C>
Balance at June 30, 1996 90,556 95,512 $0.0025-$15.0625 $ 5.42
Additional shares reserved 600 -- -- --
Grants (26,578) 26,578 $0.000335-$16.96875 $13.45
Exercises -- (14,734) $0.005-$ 15.0625 $ 3.50
Cancellations 3,680 (4,638) $0.005-$ 16.6875 $ 6.66
- -----------------------------------------------------------------------------------------------
Balance at June 30, 1997 68,258 102,718 0.000335-$16.96875 $ 7.72
Additional shares reserved 10,344 -- -- --
Grants (29,762) 29,762 $0.0003-$ 23.6875 $18.91
Exercises -- (18,526) $0.0003-$16.96875 $ 4.27
Cancellations 3,982 (3,982) $0.675-$ 23.6875 $10.63
- -----------------------------------------------------------------------------------------------
Balance at June 30, 1998 52,822 109,972 $0.000335-$ 23.6875 $11.14
Additional shares reserved 37,053 -- -- --
Grants (22,995) 22,995 $0.00067-$ 62.1891 $40.07
Exercises -- (22,156) $0.00067-$ 31.4688 $ 6.51
Cancellations 6,469 (6,469) $0.01-$ 54.375 $15.07
Balance at June 30, 1999 73,349 104,342 $0.005-$ 62.1891 $17.96
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 35
The following table summarizes significant ranges of outstanding and exercisable
options at June 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(In thousands,
except per share amounts) Outstanding Options Options Exercisable
- -----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE IN YEARS PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$ 0.005-$ 6.2189 26,649 3.9 $ 3.84 18,835 $ 3.60
$ 6.219-$12.4378 12,154 5.0 $11.28 4,827 $11.31
$12.4379-$18.6567 24,135 6.0 $14.27 7,206 $14.18
$18.6568-$24.8756 23,203 7.1 $20.64 3,674 $20.42
$24.8757-$31.0946 330 8.0 $26.43 -- $ --
$31.0947-$37.3135 5,284 7.2 $31.47 5 $31.47
$37.3136-$43.5324 525 7.9 $39.94 -- $39.94
$43.5325-$49.7513 450 7.6 $48.75 -- $ --
$49.7514-$55.9702 10,338 8.2 $50.13 7 $50.13
$55.9703-$62.1891 1,274 8.3 $58.91 -- $ --
- -----------------------------------------------------------------------------------------
104,342 5.9 $17.96 34,554 $ 8.69
- -----------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, options to purchase 34,554,000 shares were exercisable at
prices from $0.01 to $50.13 with a weighted average and aggregate exercise price
of $8.69 and $300,146,000, respectively, (29,920,000 shares at an aggregate
price of $190,505,000 at June 30, 1998). At June 30, 1999, the Company retained
repurchase rights to 181,000 shares issued pursuant to stock purchase agreements
and other stock plans.
The weighted average fair value at date of grant for options granted during
1999, 1998, and 1997 was $24.93, $13.09, and $8.94 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 5,579,000, 7,010,000, and 5,857,000 shares of common stock
in fiscal 1999, 1998, and 1997, respectively. At June 30, 1999, approximately
33,956,000 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
1999, the Company repurchased 4,738,000 shares at a cost of approximately $199
million under this program (5,883,000 shares at a cost of approximately $127
million in 1998).
In August 1996, the Board of Directors approved a systematic common stock
repurchase program related to the 1990 Incentive Plan. In June 1999, the Board
renewed this repurchase plan for an additional three years. In fiscal 1999, the
Company repurchased 4,672,000 shares at a cost of approximately $159 million
under this program (7,309,000 shares at a cost of approximately $157 million in
1998).
In June 1995, the Board of Directors approved a plan to repurchase
approximately 96 million shares of the Company's common stock. In July and
August 1996, the Company repurchased 17,809,000 shares at a cost of
approximately $236 million under this program.
When the treasury shares are reissued, any excess of the average
acquisition cost of the shares over the proceeds from reissuance is charged to
retained earnings.
<PAGE> 36
STOCK-BASED COMPENSATION
- --------------------------------------------------------------------------------
FAS 123 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 applies the existing accounting rules under APB 25 and
provides pro forma net income and pro forma earnings per common share
disclosures for stock-based awards made during the year as if the
fair-value-based method defined in FAS 123 had been applied. For employee stock
options, the fair value of the stock options was estimated as of the date of
grant using the Black-Scholes option pricing model. Input variables used in the
model include a weighted average risk-free interest rate using the 6.63 year
Treasury Yield as of the date of grant ranging from 4.26% to 5.95% for fiscal
year 1999.
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,
- ----------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Expected life 6.6 7.8 8.1
Interest rate 5.06% 5.73% 6.06%
Volatility 49.51% 49.60% 46.60%
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
$194,777,000, $132,985,000, and $76,033,000 in 1999, 1998, and 1997,
respectively ($130,135,000, $89,374,000, and $51,703,000 after tax and $0.15,
$0.09, and $0.04 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
1999, 1998, and 1997 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>
- ------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Pro forma net income $901,199 $673,488 $710,717
- ------------------------------------------------------------------------------------------------
Basic:
Pro forma shares used in the calculation of pro forma
net income per common share--basic 765,853 747,456 736,852
- ------------------------------------------------------------------------------------------------
Pro forma net income per common share--basic $ 1.18 $ 0.90 $ 0.96
- ------------------------------------------------------------------------------------------------
Diluted:
Pro forma shares used in the calculation of pro forma
net income per common share--diluted 805,253 766,754 754,576
- ------------------------------------------------------------------------------------------------
Pro forma net income per common share--diluted $ 1.12 $ 0.88 $ 0.94
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 37
10. INDUSTRY SEGMENT, GEOGRAPHIC, AND CUSTOMER INFORMATION
In fiscal 1999 the Company adopted FAS 131, which establishes standards for
reporting information about operating segments and related disclosures about
products, geographic information, and major customers. Operating segment
information for 1998 and 1997 is also presented in accordance with FAS 131.
Sun designs, manufactures, markets, and services network computing systems
and software solutions that feature networked desktops and servers. The Company
is organized by various product divisions including Computer Systems and
Storage, Enterprise Services, and various other divisions. Each division has a
divisional president who reports to the President of the Company. The President
of the Company allocates resources to each of these divisions using information
regarding their respective revenues and operating income. The President of the
Company has been identified as the Chief Operating Decision Maker as defined by
FAS 131.
In addition to the aforementioned divisions, finance and administration, as
well as certain other corporate groups, report to the Chief Executive Officer of
the Company. Expenses of these groups are not allocated to the operating
segments and are included in the operating results of the Other segment reported
below.
Although the Company has various divisions, only Computer Systems and
Storage and Enterprise Services are considered reportable segments under the
criteria of FAS 131. Products in the Computer Systems and Storage segment
include a broad range of desktop systems, servers, storage, and network
switches, incorporating the UltraSPARC processors and Solaris operating
environment. In the Enterprise Services segment, the Company provides a full
range of services and support to existing and new customers, including
education, professional services, and systems integration. The Other segment
consists of various software and other miscellaneous divisions, such as
corporate, which did not meet the requirements individually for a reportable
segment as defined in FAS 131.
The Company does not identify or allocate depreciation by operating
segments, nor does the President of the Company evaluate divisions on
depreciation expense. Additionally, the Company does not allocate interest and
other income, interest expense, charges related to IPRD, or taxes to operating
segments. The accounting policies for segment reporting are the same as for the
Company taken as a whole. See "Summary of Significant Accounting Policies" in
Note 1.
<PAGE> 38
Information on reportable segments for the three years ended June 30, 1999
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------------------
COMPUTER ENTERPRISE
1999 SYSTEMS AND STORAGE SERVICES OTHER TOTAL
<S> <C> <C> <C> <C>
Revenues $9,553,098 $1,635,251 $ 537,948 $11,726,297
Interdivision revenues -- 321,388 (321,388) --
Operating income 1,644,234 219,716 (342,185) 1,521,765
Capital additions 204,003 33,686 501,018 738,707
Accounts receivable 1,746,028 447,377 93,506 2,286,911
Inventory 287,425 4,787 15,661 307,873
Total assets $4,316,120 $ 723,807 $3,380,425 $ 8,420,352
</TABLE>
<TABLE>
<CAPTION>
COMPUTER ENTERPRISE
1998 SYSTEMS AND STORAGE SERVICES OTHER TOTAL
<S> <C> <C> <C> <C>
Revenues $8,251,490 $1,187,581 $ 351,769 $ 9,790,840
Interdivision revenues 106,543 265,826 (372,369) --
Operating income 1,377,331 87,247 (334,504) 1,130,074
Capital additions 255,310 38,995 535,838 830,143
Accounts receivable 1,412,414 357,429 75,922 1,845,765
Inventory 312,743 7,115 26,588 346,446
Total assets $3,127,849 $ 531,197 $ 2,052,016 $ 5,711,062
</TABLE>
<TABLE>
<CAPTION>
COMPUTER ENTERPRISE
1997 SYSTEMS AND STORAGE SERVICES OTHER TOTAL
<S> <C> <C> <C> <C>
Revenues $7,406,193 $ 851,231 $ 340,922 $ 8,598,346
Interdivision revenues 270,881 192,653 (463,534) --
Operating income 1,167,617 96,490 (237,589) 1,026,518
Capital additions 222,349 22,758 308,911 554,018
Accounts receivable 1,385,282 213,647 67,594 1,666,523
Inventory 370,243 805 66,930 437,978
Total assets $2,884,569 $ 340,390 $1,472,315 $ 4,697,274
</TABLE>
One customer accounted for 14% of revenues in both fiscal 1999 and 1998. No
customer accounted for 10% or more of revenues in fiscal 1997. The Company's
significant operations outside the United States include manufacturing
facilities, design centers, and sales offices in Europe, Japan, and Rest of
World.
Transfers between operating segments and geographic areas are primarily
accounted for at prices that approximate arm's length transactions. In fiscal
1999, sales from Computer Systems and Storage to Enterprise Services are at
cost. In addition, United States export sales approximated 2.5%, 2.3%, and 3.0%
of net revenues during fiscal 1999, 1998, and 1997, respectively.
Information regarding geographic areas at June 30, 1999, 1998, and 1997,
and for each of the years then ended, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) UNITED STATES EUROPE JAPAN REST OF WORLD ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999, and for the
year then ended:
Sales to unaffiliated
customers $6,210,865 $3,418,412 $1,047,253 $1,049,767 $ -- $11,726,297
- ---------------------------------------------------------------------------------------------------------------------------
Long-lived assets $2,041,514 $ 403,949 $ 54,135 $ 88,515 $(284,111) $ 2,304,002
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
Long-lived assets $1,426,183 $ 331,422 $ 45,187 $ 69,303 $(308,558) $ 1,563,537
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
Long-lived assets $ 885,224 $ 225,548 $ 46,223 $ 55,719 $(243,890) $ 968,824
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) Fiscal 1999 Quarter Ended
- -------------------------------------------------------------------------------------------------
June 30 March 28 December 27 September 27
<S> <C> <C> <C> <C>
Net revenues $3,514,645 $2,936,028 $2,784,440 $2,491,184
Gross margin 1,826,356 1,539,504 1,437,230 1,274,847
Operating income 563,833 383,808 374,145 199,979
Net income 395,170 261,203 261,087 113,874
Net income per common share--diluted $ 0.48 $ 0.32 $ 0.32 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) Fiscal 1998 Quarter Ended
- -------------------------------------------------------------------------------------------------
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 $ 0.35 $ 0.29 $ 0.19 $ 0.14
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On August 5, 1999, the Company acquired all of the outstanding capital stock of
Star Division Corporation (Star Division), by means of a merger transaction
pursuant to which all of the shares of Star Division were converted into the
right to receive cash for total consideration of approximately $54 million.
Simultaneous with the acquisition of Star Division, Sun acquired certain assets
and liabilities of Star Division Software-Entwicklung und Vertriebs GmbH, a
related party of Star Division, for total cash consideration of approximately
$14 million. These transactions will be accounted for as purchases, and the
purchase prices will be allocated to tangible and intangible assets and
in-process research and development.
On July 14, 1999, the shelf registration statement that Sun filed with the
SEC on June 18, 1999, relating to the registration of senior and subordinated
debt securities and common and preferred stock with an aggregate initial
offering price of up to $3 billion, became effective. The securities registered
by Sun were in addition to the $1 billion of securities previously registered
and declared effective under a different shelf registration statement filed with
the SEC. On August 4, 1999, the Company issued $1.5 billion of unsecured senior
debt securities in four tranches. Each tranche is comprised of the following
notes (the Senior Notes): $200 million (due on August 15, 2002 and bearing
interest at 7%), $250 million (due on August 15, 2004 and bearing interest at
7.35%), $500 million (due on August 15, 2006 and bearing interest at 7.5%), and
$550 million (due on August 15, 2009 and bearing interest at 7.65%). Interest on
the Senior Notes will be payable semi-annually. Sun may redeem all or any part
of any tranche of the Senior Notes at any time at a price equal to 100% of the
principal plus accrued and unpaid interest and an amount as determined by a
quotation agent, which represents the present value of the remaining scheduled
payments. Sun anticipates that the net proceeds from this offering will be used
to fund expansion of the Company's business, including additional working
capital, capital expenditures, acquisition of products, technologies, and
businesses and general corporate matters. Sun also entered into various interest
rate swap agreements to modify the interest characteristics of the Senior Notes
such that the interest associated with these Senior Notes becomes variable.
In August 1999, the Company signed a definitive agreement (the Agreement)
to acquire Forte Software, Inc. (Forte), a publicly held enterprise tools
software company, by means of a stock-for-stock merger. Under terms of the
Agreement, each share of Forte common stock will be converted into 0.3 shares of
Sun common stock. Additionally, Sun will assume the remaining outstanding Forte
stock options, which will be converted to options to purchase Sun common stock
based on the exchange ratio used for the common shares exchanged. The merger is
subject to certain regulatory approvals, the approval of Forte's shareholders,
and other customary closing conditions. The transaction is expected to be
accounted for as a pooling of interests, and it is anticipated that it will
close in the second quarter of fiscal 2000. The historic results of operations
of Forte are not expected to be material to the financial position or results of
operations of the Company.
<PAGE> 40
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, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1999. 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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
[ERNST & YOUNG LLP]
Palo Alto, California
July 21, 1999
<PAGE> 1
EXHIBIT 21.0
SUN MICROSYSTEMS, INC.
SUBSIDIARIES
Beduin Nova Scotia Company
Belle Gate Investment B.V.
Dakota Scientific Software, Inc.
Diba, Inc.
Diba Europe Limited
Integrity Arts, Inc.
i-Planet, Inc.
Lighthouse Design, Ltd.
Lighthouse Design R&D Corporation
MAXSTRAT Corporation
MAXSTRAT FS Corporation
NetDynamics International, Inc.
NetDynamics Europe Limited
Sun Microsystems K.K
Red Cape Software, Inc.
Sarrus Software, Inc.
Solaris Corporation
Star Division Corporation
Star Office GmbH
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 Bilgisayar Sistemleri Limited Sirketi
Sun Microsystems Czech s.r.o
Sun Microsystems Distributions International, Inc.
Sun Microsystems Danmark A/S
Sun Microsystems (Egypt) LLC
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 Limited
Sun Microsystems Italia S.p.A.
Sun Microsystems Korea, Ltd.
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) Tecnias de
Informatica, Sociedade Unipessdal, Limitada
Sun Microsystems Properties, Inc.
Sun Microsystems Pte. Ltd.
Sun Microsystems Saudi Arabia B.V.
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 (U.A.E.) Ltd.
Sun Microsystems de Chile S.A.
Sun Microsystems de Colombia, S.A.
Sun Microsystems de Mexico, S.A. de C.V.
Sun Microsystems de Venezuela, S. A.
Sun Microsystems do Brasil Industria e Comercio
Ltda.
Sun Microsystems of California, Inc.
Sun Microsystems of California, Limited
Sun Microsystems of Canada Inc.
Sun Microsystems China Ltd.
Sun TSI Subsidiary, 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 21, 1999, included in
the 1999 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,
333-15179, 333-34543, 333-34651, 333-38163, 333-40677, 33-40675, 333-59503, 333-
62987, 333-65531, 333-67183, 333-72413, and 333-86267) 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 Director's 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, the i-Planet, Inc. 1996 Stock Option/Stock Issuance Plan, the Maxstrat
Corporation 1994 Stock Option Plan, and the Star Division Corporation 1998 Stock
Plan and we also consent to the incorporation by reference in Amendment No. 1 to
the Registration Statement (Form S-3 No. 333-81101) and related Prospectus of
our report dated July 21, 1999, 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. for the year ended June
30, 1999.
ERNST & YOUNG LLP
Palo Alto, California
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,088,972
<SECURITIES> 1,576,079
<RECEIVABLES> 2,286,911
<ALLOWANCES> 338,771
<INVENTORY> 307,873
<CURRENT-ASSETS> 6,116,350
<PP&E> 2,871,348
<DEPRECIATION> 1,262,427
<TOTAL-ASSETS> 8,420,352
<CURRENT-LIABILITIES> 3,226,977
<BONDS> 0
0
0
<COMMON> 581
<OTHER-SE> 4,811,780
<TOTAL-LIABILITY-AND-EQUITY> 8,420,352
<SALES> 10,091,046
<TOTAL-REVENUES> 11,726,297
<CGS> 4,674,390
<TOTAL-COSTS> 10,204,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675
<INCOME-PRETAX> 1,605,689
<INCOME-TAX> 574,355
<INCOME-CONTINUING> 1,031,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,031,334
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.27
</TABLE>
