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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 28, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number:0-15086
SUN MICROSYSTEMS, INC.
(Exact Name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2805249
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
901 SAN ANTONIO ROAD PALO ALTO, CA 94303
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (650) 960-1300
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS OUTSTANDING AT MARCH 28, 1999
Common Stock - $0.00067 par value 773,862,552
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INDEX
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<CAPTION>
PAGE
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COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8 - K 31
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 32
SIGNATURES 33
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 28, June 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 707,403 $ 822,267
Short-term investments 1,291,438 476,185
Accounts receivable, net 2,211,592 1,845,765
Inventories 311,842 346,446
Deferred tax assets 380,113 371,841
Other current assets 398,553 285,021
----------- -----------
Total current assets 5,300,941 4,147,525
Property, plant and equipment, at cost 2,669,308 2,257,228
Accumulated depreciation and amortization (1,163,260) (956,616)
----------- -----------
1,506,048 1,300,612
Other assets, net 702,285 262,925
----------- -----------
$ 7,509,274 $ 5,711,062
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 17,560 $ 7,169
Accounts payable 720,742 495,603
Accrued liabilities 1,468,270 1,166,491
Income taxes payable 239,700 188,641
Other current liabilities 352,258 264,967
----------- -----------
Total current liabilities 2,798,530 2,122,871
Deferred income taxes and other obligations 299,598 74,563
Total stockholders' equity 4,411,146 3,513,628
----------- -----------
$ 7,509,274 $ 5,711,062
=========== ===========
</TABLE>
See accompanying notes.
3
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SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Products $2,526,612 $2,067,282 $7,067,470 $6,077,162
Services 409,416 293,646 1,144,182 832,613
---------- ---------- ---------- ----------
Total net revenues 2,936,028 2,360,928 8,211,652 6,909,775
---------- ---------- ---------- ----------
Cost and expenses:
Cost of sales-products 1,170,043 933,499 3,279,780 2,792,127
Cost of sales-services 226,481 168,137 680,291 508,573
Research and development 323,144 252,770 909,906 734,616
Selling, general and administrative 803,852 672,606 2,263,043 1,984,549
Purchased in-process research and
development 28,700 -- 120,700 162,284
---------- ---------- ---------- ----------
Total costs and expenses 2,552,220 2,027,012 7,253,720 6,182,149
Operating income 383,808 333,916 957,932 727,626
Interest income, net 22,355 12,366 58,016 33,134
---------- ---------- ---------- ----------
Income before income taxes 406,163 346,282 1,015,948 760,760
Provision for income taxes 144,960 114,273 379,784 270,886
---------- ---------- ---------- ----------
Net income $ 261,203 $ 232,009 $ 636,164 $ 489,874
========== ========== ========== ==========
Net income per common
share - basic $ 0.34 $ 0.31 $ 0.83 $ 0.66
========== ========== ========== ==========
Net income per common
share - diluted $ 0.32 $ 0.29 $ 0.79 $ 0.62
========== ========== ========== ==========
Shares used in the calculation of
net income per share - basic 769,982 749,048 763,170 746,974
========== ========== ========== ==========
Shares used in the calculation of
net income per share - diluted 823,490 789,274 809,756 788,644
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
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SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
March 28, March 29,
1999 1998
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 636,164 $ 489,874
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 450,102 292,446
Tax benefit of options exercised 165,633 106,399
Purchased in-process research and development 120,700 162,284
Net increase in accounts receivable (357,817) (7,025)
Net decrease in inventories 35,237 (32,657)
Net increase in accounts payable 223,021 15,353
Net increase in other current
and non-current assets (443,037) (114,747)
Net increase in other current
and non-current liabilities 655,058 54,002
----------- ---------
Net cash provided from operating activities 1,485,061 965,929
----------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (512,623) (571,379)
Acquisition of spare parts and other assets (90,377) (84,918)
Payments for acquisitions, net of cash acquired (130,300) (227,655)
Acquisition of short-term investments (1,528,960) (460,278)
Sale of short-term investments 443,080 252,916
Maturities of short-term investments 251,829 318,116
----------- ---------
Net cash used by investing activities (1,567,351) (773,198)
----------- ---------
Cash flows from financing activities:
Issuance of common stock, net 125,338 58,872
Acquisition of treasury stock (218,679) (224,002)
Proceeds from employee stock purchase plans 58,540 61,905
Net proceeds (reduction) of short-term borrowings and
other obligations 2,227 (92,911)
----------- ---------
Net cash used by financing activities (32,574) (196,136)
----------- ---------
Net decrease in cash and cash equivalents (114,864) (3,405)
----------- ---------
Cash and cash equivalents, beginning of period 822,267 660,170
----------- ---------
Cash and cash equivalents, end of period $ 707,403 $ 656,765
=========== =========
</TABLE>
5
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SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
March 28, March 29,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 628 $ 388
Income taxes $ 82,002 $ 55,503
Supplemental schedule of non-cash investing activities:
Stock issued in conjunction with an acquisition $144,483 --
Fair value of assets acquired $305,242 $284,294
Cash paid for assets $134,895 $233,111
Liabilities assumed $ 25,864 $ 51,183
</TABLE>
See accompanying notes.
6
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SUN MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sun
Microsystems, Inc. ("Sun" or the "Company") and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been
eliminated. Certain amounts from prior years have been reclassified to
conform to current year presentation.
While the interim financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting
of normal recurring accruals) that the Company considers necessary for a
fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the date of the
interim balance sheet. The results for the interim periods are not
necessarily indicative of the results for the entire year. The
information included in this report should be read in conjunction with
the 1998 Annual Report to Stockholders which is incorporated by
reference in the Company's 1998 Form 10-K .
The Company announced a two-for-one stock split on January 21, 1999,
effected in the form of a stock dividend, and paid at the close of
business April 8, 1999 to stockholders of record on March 18, 1999. All
earnings per share amounts, references to common stock, and
stockholders' equity amounts have been restated as if the stock dividend
had occurred as of the earliest period presented.
INVENTORIES (IN THOUSANDS)
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<CAPTION>
March 28, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Raw materials $ 97,316 $ 92,197
Work in process 37,363 58,765
Finished goods 177,163 195,484
-------- --------
$311,842 $346,446
======== ========
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the liability method of Statement of
Financial Accounting Standards No. 109. The provision for income taxes during
the interim periods considers anticipated annual income before taxes, earnings
of foreign subsidiaries permanently invested in foreign operations, and other
differences.
RECENT PRONOUNCEMENTS
The Company adopted 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.
7
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In June 1998, Financial Accounting Standard No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" was issued and is effective for
all fiscal years beginning after June 15, 1999. FAS 133 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 will comply
with the requirements of FAS 133 in fiscal year 2000. The Company does not
expect the adoption will be material to the Company's financial position or
results of operations.
COMPREHENSIVE NET INCOME
As of July 1, 1998, the Company adopted Financial Accounting Standards No. 130
("FAS 130") , "Reporting Comprehensive Income." FAS 130 establishes new rules
for the reporting and display of comprehensive net income and its components,
however, it has no impact on the Company's net income or stockholders' equity.
FAS 130 requires foreign currency translation adjustments and changes in fair
value of available for sale securities, which prior to adoption were reported in
stockholders' equity, to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 261,203 $ 232,009 $ 636,164 $ 489,874
Change in unrealized gain (loss) on
available for sale securities 1,839 5,681 (18,798) 15,273
Change in cumulative translation
adjustment (7,253) (11,283) (5,052) (12,905)
--------- --------- --------- ---------
Comprehensive net income $ 255,789 $ 226,407 $ 612,341 $ 492,242
========= ========= ========= =========
</TABLE>
ACQUISITIONS
The Company completed four acquisitions during each of the nine months ended
March 28, 1999 and March 27, 1998 which were all 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 statements of income from the date of each acquisition and were not
material to the Company on either an individual or an aggregate basis.
The Company calculated amounts allocated to in-process research and development
("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 income approach Sun utilized gave consideration to relevant
market size and growth factors, expected industry trends, the nature and timing
of new product introductions by Sun and its competitors, individual product
sales cycles and the estimated life of each product's underlying technology.
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The Company allocated the excess purchase price over the estimated value of the
net tangible assets acquired to various intangible assets, consisting primarily
of developed technology and goodwill, as well as other goodwill-like assets,
including customer base and assembled workforce. 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 workforces.
Amounts allocated to goodwill, developed technology, and other intangibles are
amortized on a straight-line basis over periods ranging from two to five years.
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
2,746,785 shares of Sun common stock (with a fair market value of $48.26875 per
share) as consideration for the acquisition. Additionally Sun issued
approximately 568,000 stock options in exchange for NetDynamics stock options
previously outstanding, including approximately 172,000 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 workforce ($2 million). In addition to
the intangible assets acquired, an $80 million charge representing the write-off
of IPRD was recorded.
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(TM) 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 $1.4 million. In addition to the
intangible assets acquired, a $3.6 million charge was recorded, representing the
write-off of IPRD.
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
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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.
The Company completed four acquisitions during the nine months ended March 27,
1998. On November 24, 1997, the Company completed its acquisition of Encore
Computer Corporation's Storage Products Business ("Encore") for total
consideration of $186.2 million. 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") for total consideration of
$26.5 million. Chorus was conducting development, engineering and testing
activities associated with certain software products which 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 smart card
Application Programming Interface ("API"), for total consideration of $30.2
million. 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") for total
consideration of $29.7 million. Diba was conducting development and engineering
activities associated with the completion of a consumer information appliance
which 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.
SUN MICROSYSTEMS, INC. AND AMERICA ONLINE, INC. STRATEGIC DEVELOPMENT AND
MARKETING AGREEMENT
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
became effective on March 17, 1999 in accordance with its terms upon the
consummation of AOL's acquisition of Netscape Communications, Inc. ("Netscape").
Under terms of the SDMA, AOL and Sun 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 a three year period,
AOL will develop and market, together with Sun, client software and network
application and server software based in part on the 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 and share
revenues with respect to designated 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 of certain AOL
and Netscape software and services, the sale or license of certain
collaboratively developed software products and services and the license to Sun
to distribute commercially existing Netscape software will not be less than $312
million, $330 million and $333 million in the first, second and third years of
the SDMA's three year term, respectively; for these purposes a portion of the
total revenue is determined as a percentage of the gross margin or net of sales
commissions earned by Sun. In addition, Sun will pay to AOL approximately $275
million in licensing and other fees in connection with licenses granted to Sun
by AOL.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following table sets forth items from the Condensed Consolidated Statements
of Income as a percentage of total net revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ---------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues:
Products 86.1% 87.6% 86.1% 88.0%
Services 13.9 12.4 13.9 12.0
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Products 39.9 39.6 39.9 40.4
Services 7.7 7.1 8.3 7.4
----- ----- ----- -----
Total cost of sales 47.6 46.7 48.2 47.8
----- ----- ----- -----
Gross margin 52.4 53.3 51.8 52.2
Research and development 11.0 10.7 11.1 10.6
Selling, general and administrative 27.4 28.5 27.6 28.7
Purchased in-process research
and development 1.0 0.0 1.5 2.3
----- ----- ----- -----
Operating income 13.1 14.1 11.7 10.5
Interest income, net 0.7 0.3 0.7 0.5
----- ----- ----- -----
Income before income taxes 13.8 14.4 12.4 11.0
Provision for income taxes 4.9 4.9 4.7 3.9
----- ----- ----- -----
Net income 8.9% 9.5% 7.7% 7.1%
===== ===== ===== =====
</TABLE>
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below, specifically those contained in "Future Operating Results" identify
important factors that could cause actual results over the next few quarters to
differ materially from those predicted in any such forward-looking statements.
Such factors include, but are not limited to, adverse changes in general
economic conditions, including adverse changes in the specific markets for the
Company's products, adverse business conditions, decreased or lack of growth in
the computing industry, adverse changes in customer order patterns, increased
competition, lack of acceptance of new products, pricing pressures, lack of
success in technological advancements, risks associated with foreign operations
(including the downturn of
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economic trends and unfavorable currency movements in the Asia Pacific and Latin
American marketplaces), risks associated with the Company's efforts to comply
with Year 2000 requirements, risks associated with the Company's new business
practices, processes and information systems.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $2,936 million for the third quarter of fiscal 1999 and
$8,211.7 million for the first nine months of fiscal 1999, representing
increases of 24.4% and 18.8%, respectively, over the corresponding periods of
fiscal 1998.
Sun's products net revenues were $2,526.6 million for the third quarter of
fiscal 1999, an increase of $459.3 million or 22.2% over the third quarter of
fiscal 1998. Net product revenues were $7,067.5 million for the nine months
ended March 28, 1999, an increase of $990.3 million or 16.3% over the
corresponding period of fiscal 1998. Substantially all of the growth in products
revenues for the quarter ended March 28, 1999 resulted from strong demand for
Sun's enterprise and workgroup servers, and to a lesser extent from increased
revenues generated by Sun's storage products. More than half of the growth in
products revenues for the nine month period ended March 28, 1999 resulted from
strong demand for workgroup servers and to a lesser extent, the Company's
low-end desktop and storage products. The growth in products revenue in both the
quarter and year to date periods was partially offset by a decline in high-end
desktop product volumes as the result of a shift in customer purchasing patterns
towards low-end desktop products and workgroup servers.
Sun's services net revenues were $409.4 million for the third quarter of fiscal
1999, an increase of $115.8 million or 39.4% over the third quarter of fiscal
1998. Net revenues from services were $1,144.2 million for the nine months ended
March 28, 1999, an increase of $311.6 million or 37.4% over the corresponding
period of fiscal 1998. The increases in services revenues are primarily the
result of a shift in product mix toward premium priced contracts and a larger
installed product base due to increased product unit sales, as well as increased
revenues associated with Sun's professional and educational services.
Domestic net revenues increased by 22% and 17.3 % in the third quarter and first
nine months of fiscal 1999, respectively. International net revenues (including
United States exports) grew 26.7% and 20.4% in the third quarter and first nine
months of fiscal 1999, respectively, compared with the corresponding periods of
fiscal 1998. In US dollars, European net revenues increased 23.6% and 26.9%,
Rest of World (ROW) net revenues increased 26.8% and 16%, and Japanese net
revenues increased 35% and 9.2%, in the third quarter and first nine months of
fiscal 1999, respectively, when compared with the corresponding periods of
fiscal 1998. The increases in Europe and the ROW are due to demand for Sun's
network computing products and services. For the quarter ended March 28, 1999,
demand was particularly strong in Germany and certain southern European
countries, while relatively unchanged in the United Kingdom and certain Northern
European countries in relation to the prior year's comparable period. For the
nine months ended March 28, 1999, Sun experienced continued growth on a year
over year basis in all European regions, with the strongest growth in Germany
and Southern Europe. Although Sun has experienced US dollar revenue growth in
the European marketplace on both a year over year and quarter over quarter basis
in relation to the prior year's comparable periods, there can be no assurance
that such trends will continue. In particular, if capital spending declines in
certain countries or industries as the result of Year 2000 spending concerns or
other economic factors, the Company's result from operations and cash flows
could be adversely impacted. The Company attributes the increase in Japanese
revenues in the third quarter and nine months ended March 28, 1999 primarily to
increased demand within the region for Sun's products, rather than a sign of
strengthening in the Asian economies. Sun remains cautious with regard to the
Japanese market and does not expect the current Japanese macroeconomic trends to
change significantly or materially in the near term. The foregoing is a
forward-looking statement that is subject to risks and uncertainties, and actual
results may differ materially from those set forth in such statement as the
result of
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a number of factors. In particular, if the Japanese economy significantly
worsens in a quarter or declines over an extended period of time, the Company's
results from operations and cash flows could be adversely affected.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. As a result, the Company's results could be
significantly adversely affected by factors such as changes in foreign currency
exchange rates or economic conditions in the foreign markets in which the
Company distributes its products. The Company is primarily exposed to changes in
exchange rates on the Japanese yen, British pound sterling, French franc and
German mark. When the U.S. dollar strengthens against these currencies, the U.S.
dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar
weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based
sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based
costs increases when the U.S. dollar weakens and decreases when the U.S. dollar
strengthens. Overall the Company is a net receiver of currencies other than the
U.S. dollar and, as such, benefits from a weaker dollar, and is adversely
affected by a stronger dollar relative to major currencies worldwide.
Accordingly, changes in exchange rates, and in particular a strengthening of the
U.S. dollar, may adversely affect the Company's consolidated sales and gross
margins as expressed in U.S. dollars.
To mitigate the short-term effect of changes in currency exchange rates on the
Company's non-US dollar-based sales, product procurement, and operating
expenses, the Company regularly hedges its net non-U.S. dollar-based exposures
by entering into foreign exchange forward and option contracts to hedge
transactions. Currently, hedge contracts do not extend beyond three months.
Given the short-term nature of the Company's foreign exchange forward and
options contracts, the Company's exposure to risk associated with currency
market movement on these instruments is not material.
GROSS MARGIN
Total gross margin was 52.4% for the third quarter of fiscal 1999 and 51.8% for
the first nine months of fiscal 1999, compared with 53.3% and 52.2%,
respectively, for the corresponding periods of fiscal 1998.
Products gross margin was 53.7% in the third quarter of fiscal 1999 and 53.6%
for the first nine months of fiscal 1999, compared with 54.8% and 54.1 %,
respectively, for the corresponding periods of fiscal 1998. The decreases in the
products gross margin for the third quarter and first nine months of fiscal 1999
reflect the effects of increased volumes of lower margin low-end desktop
products and certain workgroup servers. These decreases in products gross margin
are partially offset by an increased volume of higher margin richly configured
enterprise servers and a reduction in manufacturing costs. There could be a
further downward impact upon products gross margins as the result of continued
shifts in customer purchasing patterns towards low-end desktop products and
workgroup servers.
Services gross margin was 44.7% for the third quarter of fiscal 1999 and 40.5%
for the first nine months of fiscal 1999, compared with 42.7% and 38.9%,
respectively, for the corresponding periods of fiscal 1998. The increases in
services gross margin for the third quarter and first nine months of fiscal 1999
reflect increased market penetration in Enterprise datacenter accounts, an
overall shift in service contract product mix toward premium priced contract
offerings resulting from a larger installed base of high-end server products,
increased enrollment in training courses, increased utilization of customer
training facilities, continued growth in professional services, and increased
economies of scale in certain geographic markets. The quarter over quarter
increase in services gross margin was greater than the year over year increase,
partially due to further realization of benefits related to infrastructure
investments by the Company in its services business in fiscal 1998 and early
fiscal 1999. There can be no assurance that services gross margins will continue
to grow at a rate consistent with rates previously realized.
The Company continuously evaluates the competitiveness of its product offerings.
These evaluations could result in repricing actions in the near term. Sun's
future operating results would be adversely affected if such
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repricing actions were to occur and the Company were unable to mitigate the
resulting margin pressure by maintaining a favorable mix of systems, software,
service, and other products and by achieving component cost reductions,
operating efficiencies and increasing volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased to $323.1 million in the third
quarter of fiscal 1999, compared with $252.8 million for the third quarter of
fiscal 1998. R&D expenses were $909.9 million for the first nine months of
fiscal 1999, compared with $734.6 million for the corresponding period of fiscal
1998. As a percentage of total net revenues, R&D expenses were 11.0% and 11.1%
for the third quarter and first nine months of fiscal 1999, respectively,
compared with 10.7 % and 10.6% for the third quarter and first nine months of
fiscal 1998, respectively. Both the dollar and percentage increase in R&D
expenses in the third quarter and first nine months of fiscal 1999 over the
corresponding periods in fiscal 1998 primarily reflects increased expenditures
focused on the development of a broad line of scaleable hardware products,
including servers, workstations and storage technologies, software products
which utilize the Java (TM) platform, Solaris (TM) operating environment
software and SPARC (TM) microprocessors. The remaining increase in R&D expenses
is 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 in R&D expenses reflects the Company's
belief that to maintain its competitive position in a market characterized by
rapid rates of technological advancement, the Company must continue to invest
significant resources in new systems, software products and microprocessor
development, as well as enhancements to existing products. The Company continues
to expect the level of R&D expenses to remain at approximately 11% of revenue
for fiscal 1999. The foregoing is a forward-looking statement that is subject to
risks and uncertainties and actual results could differ materially from those
set forth in such statement as a result of a number of factors. In particular,
the Company's costs of product development and related compensation expenses
could increase.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased to $803.9 million
in the third quarter of fiscal 1999, compared with $672.6 million for the third
quarter of fiscal 1998. SG&A expenses were $2,263 million for the first nine
months of fiscal 1999, compared with $1,984.5 million for the corresponding
period of fiscal 1998. As a percentage of total net revenues, SG&A expenses
decreased to 27.4% and 27.6% for the third quarter and first nine months of
fiscal 1999, respectively, from 28.5% and 28.7%, for the third quarter and first
nine months of fiscal 1998, respectively. Overall SG&A spending increased by
approximately $131.2 million or 19.5% in the third quarter of fiscal 1999 in
comparison with the same period of fiscal 1998. For the nine month period ended
March 28, 1999, overall SG&A spending increased by approximately $278.5 million
or 14% in comparison to the corresponding period of fiscal 1998. The dollar
increases in fiscal 1999 are 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. The dollar increase
for the nine months ended March 28, 1999 also reflects investments aimed at
improving Sun's own business processes. The Company expects to continue to hire
personnel, although at a lower rate than in fiscal 1998, to further expand its
demand creation programs and support organizations.
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 the Company's expectations, including percentage of completion,
expected product release dates, dates for which the Company expects to begin
generating benefits from projects, expected product capabilities and product
life cycles, costs and efforts to
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complete projects, growth rates, projected revenue and expense information used
by the Company 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, the
Company's 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 meet
either technological or commercial success or that the Company 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 $28.7 million and
$120.7 million in the third quarter and first nine months of fiscal 1999,
respectively, represent the write-off of purchased IPRD associated with the
Company's acquisitions of Maxstrat Corporation ("Maxstrat") in the third quarter
of fiscal 1999, i-Planet, Inc. ("i-Planet") and Beduin Communications, Inc.
("Beduin") in the second quarter of fiscal 1999, and NetDynamics in the first
quarter of fiscal 1999 (collectively the "Acquired Companies"). A description of
the acquired IPRD, including the assumptions made by the Company in its
valuation analysis, as well as the status of the efforts to date related to the
acquired IPRD for each of the Acquired Companies, has been set forth below.
Additionally, Sun has provided updated information concerning the status of IPRD
technology acquired prior to fiscal 1999. Also see the Acquisitions footnote to
the condensed consolidated financial statements.
Purchased IPRD of $162.3 million in the first nine months of fiscal 1998
represents the write-off of purchased IPRD associated with the Company's
acquisitions of Chorus Systems S.A. ("Chorus"), and the storage products
business of Encore Computer Corporation ("Encore") in the second quarter of
fiscal 1998 and Diba, Inc. ("Diba") and Integrity Arts, Inc.
("Integrity Arts") in the first quarter of fiscal 1998.
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, the Company has expanded its disclosures related to acquisitions
involving IPRD charges for each of the Acquired Companies. The Company believes
it is in compliance with all of the rules and related guidance as they currently
exist. However, there can be no assurance that the Commission will not seek to
reduce the amount of purchased IPRD previously expensed by the Company. This
would result in the restatement of previously filed financial statements of the
Company and could have a material adverse impact on financial results for
periods subsequent to acquisitions.
Overall Valuation of IPRD
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 had not been achieved and no alternative future uses had been
established. The valuation technique utilized gave consideration to relevant
market sizes and growth factors, expected industry trends, the anticipated
nature and timing of new product introductions by Sun and its competitors,
individual product sales cycles, and the estimated life of each product's
underlying technology.
The Company assigned values to developed technologies related to each
acquisition based upon future discounted cash flows related to each of the
existing product's 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 were known
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at the date of each acquisition. The Company does not expect to achieve a
material amount of expense reductions or synergies, therefore the valuation
assumptions do not include significant anticipated cost savings.
Status of IPRD technology acquired prior to fiscal 1999
With respect to the Company's acquisitions completed in the three years ended
June 30, 1998, with the exception of Encore and IMP which are discussed
separately below, management believes that the projections the Company used in
performing its valuations with respect to each acquisitions are still valid, in
all material respects, however, there can be no assurance that the projected
results will be achieved. Management expects to continue the development of each
project and believes that there is a reasonable chance of successfully
completing such development efforts. 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 March 28, 1999 and for the three and nine months then ended, the impact
upon the Company's 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.
The Company acquired Encore, a company which was conducting development and
engineering activities associated with its Intershare and DASD-NET products (the
"Encore Products") on November 24, 1997. Sun anticipated that completion of the
Encore Products would help the Company 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 can 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 the Company
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 which will provide the price and performance required to compete
within the market place, and resolving several design issues during the porting
phase of development.
As of March 28, 1999, the Company 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 March 28, 1999, the Company has
delayed its expected release of the Encore Products from the third quarter of
fiscal 1999 until the second half of fiscal 2000. The Company has 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 the Company's original projections of
approximately $40 million on Sun's consolidated results of operations for the
three and nine month periods ended March 28, 1999. This amount reflects a
shortfall in Sun's original plan assumptions with regard to the technologies
acquired from Encore only and does not reflect any offsetting benefits the
Company may have achieved from its 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, the Company is actively developing the acquired technology and
expects over the long term to realize benefits associated with the Encore
Products which are consistent with the initial acquisition strategy.
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Regarding the acquisition of IMP, management's original projections included a
planned introduction date of late calendar 1997 for IMP's fault tolerant
computers based on Sun's UltraSPARC (TM) microprocessors. As of March 28, 1999,
the introduction date was delayed as a result of increased complexities
surrounding the development efforts which had not been identified as of the
acquisition date and is expected during the fourth quarter of fiscal 1999. The
delay with respect to IMP's technology does not reflect any offsetting benefits
the Company may have achieved from modifications to its overall business plan,
including those resulting from a reallocation of resources among alternative
development projects. The total expected cost to complete the IPRD technology
acquired from IMP has increased an additional $6 million to approximately $30
million as of March 28, 1999, and approximately $27 million had been incurred.
The impact of the delayed release of the product based upon IMP's IPRD
technology is not considered material to the consolidated results of operations
or financial position of Sun for the quarter or nine months ended March 28,
1999.
Fiscal 1999 Acquisitions
The Company completed four acquisitions during the nine months ended March 28,
1999. Included below are further details regarding the nature of technology
acquired, the valuation assumptions utilized, and the status of the IPRD related
such acquisitions.
NetDynamics, Inc.
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 scheduled to be released in mid
calendar 1999. It is anticipated that this new product offering ("NetDynamics
New Product Offering") will employ a new server-side component model, based on
the Enterprise JavaBeans (TM) ("EJB") architecture, which will allow 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 will allow for
the development of more robust and scaleable 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.
At the acquisition date, NetDynamics was approximately 60% complete with the
development of the NetDynamics New Product Offering and substantial progress had
been made in the areas of specifications, design, and implementation. Remaining
efforts necessary to complete the NetDynamics New Product Offering related
primarily to coding, testing, and addressing additional implementation issues.
Valuation Analysis- NetDynamics
The value of the IPRD technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product sales. The
discounted cash flow analysis was based upon management's forecast of future
revenues, cost of revenues and operating expenses related to the product and
technology acquired from NetDynamics which are intended to be utilized in the
Company's future enterprise application platform products. Total projected
revenue for NetDynamics increased at a compound growth rate of approximately 30%
from fiscal 1999 through 2008. Revenues are expected to peak in fiscal 2000 and
decline
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thereafter, as new product technologies are expected to be introduced by the
Company. These projections are based on management's 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 include: (i) cost of goods
sold, (ii) SG&A expenses, and (iii) R&D expenses. Selected operating expense
assumptions 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. Cost of revenues (expressed as a
percentage of revenue) for the IPRD averages 18% over the projection period.
SG&A (expressed as a percentage of revenue) for the IPRD, averages 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 selected for the IPRD was 20%. In the selection of the
appropriate discount rate, consideration was given to Sun's 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 are known at this time, and the stage of completion of
the technology. The discount rate utilized for the IPRD was determined to be
greater than Sun's 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. The Company 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 - NetDynamics
As of March 28, 1999, the NetDynamics New Product Offering had been completed
for a total cost of approximately $4.7 million, compared to the planned total
cost of $5.7 million. The NetDynamics New Product Offering was available for
release in late March of 1999. Sun expects to begin to realize the benefits of
the NetDynamics acquired technology at the end of the fourth quarter of fiscal
1999, based upon general customer purchasing patterns in the software industry.
Through this date, no significant adjustments have been made in the economic
assumptions or expectations which underlie the Company's acquisition decision
and related purchase accounting.
Given the uncertainties of the commercialization process, no assurance can be
given that deviations from these estimates will not occur. Management believes
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 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.
MAXSTRAT Corporation
IPRD Overview - Maxstrat
At the acquisition date (January 22, 1999), Maxstrat Corporation ("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 in mid-calendar 1999. The Noble
Product Offering utilizes Fibre Channel, a fiber optic technology
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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-AL's 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. The Company anticipates that the
Noble Product Offering will be complete by the end of the Company's first
quarter of fiscal 2000, after which the Company expects to begin generating
economic benefits from the value of the completed development associated with
the IPRD. Expenditures to complete the Noble Product Offering are expected to
total approximately $8 million in fiscal 1999 and fiscal 2000.
Valuation Analysis - Maxstrat
The value of the IPRD technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product sales. The
discounted cash flow analysis was based upon management's forecast of future
revenues, cost of revenues and operating expenses related to the product and
technology acquired from Maxstrat which are intended to be utilized in the
Company's future enterprise application platform products. Total projected
revenue for Maxstrat increased at a compound growth rate of approximately 30%
from fiscal 1999 through 2008. Revenues are expected to peak in fiscal 2003 and
decline thereafter, as new product technologies are expected to be introduced by
the Company. These projections are based on management's 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 include: (i) cost of goods
sold, (ii) SG&A expenses, and (iii) R&D expenses. Selected operating expense
assumptions 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 selected for the IPRD was 25%. In the selection of the
appropriate discount rate, consideration was given to Sun's 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 this
time, and the stage of completion of the technology. The discount rate utilized
for the IPRD was determined to be greater than Sun's 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. The Company 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 March 28, 1999, significant progress had been made on the development related
to the Noble Product Offering that was underway as of the acquisition date. In
general, the Company believes that research and development efforts associated
with the Noble Product Offering are consistent with management's plans at the
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time the Maxstrat acquisition occurred. The Company is continuing to invest in
the development of new technologies that were underway at the consummation of
the Maxstrat acquisition. Approximately $1.4 million of the planned total cost
to complete of $8.0 million had been incurred as of March 28, 1999. Through this
date, no significant adjustments have been made in the economic assumptions or
expectations which underlie the Company's acquisition decision and related
purchase accounting. The Company is continuing its development efforts related
to the IPRD technology acquired. These development efforts are advancing at a
rate consistent with management's expectations.
Given the uncertainties of the development process, no assurance can be given
that deviations from these estimates will not occur. Management expects to
continue the development of each project and believes 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 other intangible assets
acquired may become impaired.
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 (TM) technology-based remote Internet access product scheduled to
be released in early calendar year 1999. It is anticipated that this new product
offering ("i-Planet (TM) New Product Offering") will be designed to 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 relate primarily to coding,
testing, and addressing additional implementation issues. The Company
anticipates that the i-Planet New Product Offering will be completed and
released in May 1999, after which the Company expects to begin generating
economic benefits from the value of the completed development associated with
the IPRD. Approximately $1.8 million of the planned total costs to complete the
i-Planet New Product Offering of $6 million had been incurred at March 28, 1999.
Through this date, no significant adjustments have been made in the economic
assumptions or expectations which underlie the Company's acquisition decision
and related purchase accounting.
IPRD Overview - Beduin
At the acquisition date (October 15, 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 "email client" (a next generation
email client specialized to take advantage of the benefits of these smart
devices). The Lifestyle PIM and the email client are scheduled to be released in
the second quarter of calendar year 1999. The Company anticipates 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.
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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. The Company anticipates that the Beduin New Product
Offerings will be complete during the fourth quarter of the Company's fiscal
year ending June 30, 1999, after which the Company expects to begin generating
economic benefits from the value of the completed development associated with
the IPRD. The Company continues to expect that the total costs to complete the
Beduin New Product Offerings will approximate $1 million.
Valuations of IPRD - i-Planet and Beduin
Forecasts of future results that management believes are likely to occur were
the basis for assigning value to IPRD. For the i-Planet and Beduin acquisitions,
the values assigned to IPRD were determined 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 these forecasts were 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 which was derived based on the Company's 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 the Company's 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 technology and the
uncertainty of technological advances that are unknown at this time.
The estimates utilized in the valuation of the IPRD charges are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. Given the
uncertainties of the development process, no assurance can be given that
deviations from these estimates will not occur. Management expects to continue
the development of each project and believes 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 other intangible assets
acquired may become impaired.
INTEREST INCOME, NET
Net interest income was $22.4 million for the third quarter and $58.0 million
for the first nine months of fiscal 1999, compared with $12.4 million and $33.1
million, respectively for the corresponding periods in fiscal 1998. The
increases in 1999 are primarily the result of higher interest earnings due to a
larger average portfolio of cash and short-term investments.
21
<PAGE> 22
INCOME TAXES
The Company's effective income tax rate was 33% for the third quarter and first
nine months of fiscal 1999, before tax charges of $10.9 million resulting from a
write-off of IPRD associated with the acquisition of Maxstrat in the third
quarter of fiscal 1999, $3.2 million resulting from a write-off of IPRD
associated with the acquisition of i-Planet in the second quarter of fiscal 1999
and $30.4 million resulting from a write-off of IPRD associated with the
acquisition of NetDynamics in the first quarter of fiscal 1999. The effective
tax rate including such charges for the third quarter and nine months ended
March 28, 1999 was 35.7% and 37.4%, respectively. The Company's effective income
tax rate for the third quarter and nine months ended March 29, 1998 was 33%
before a tax charge of $19.8 million resulting from a write-off of IPRD
associated with the acquisitions of Diba Inc. and Integrity Arts, Inc. in the
first quarter of fiscal 1998. The Company currently expects its effective tax
rate to remain at 33% for the balance of fiscal 1999, exclusive of any
acquisition-related charges.
FUTURE OPERATING RESULTS
COMPETITION
The markets for Sun's hardware and software products and services are intensely
competitive and subject to continuous, rapid technological change, short product
life cycles and frequent product performance improvements and price reductions.
Due to the breadth of the Company's product lines and the scalability of its
products and network computing model, Sun competes principally with
Hewlett-Packard Company, International Business Machines Corporation, Compaq
Computer Corporation, Silicon Graphics, Inc. and EMC Corporation, in many
segments of the network computing market across a broad spectrum of customers.
The Company expects the markets for its products, technologies, and services, as
well as its competitors within such markets, will continue to change as the
rightsizing trend shifts customer buying patterns to network-based systems which
often employ solutions from multiple vendors. Competition in these markets will
also continue to intensify as Sun and many of its competitors aggressively
position themselves to benefit from this shifting of customer buying patterns
and demand. The Company is also facing competition from certain systems
manufacturers, including Dell Computer Corporation and certain of its
competitors listed above, whose products are based on microprocessors from Intel
Corporation coupled with Windows NT operating system software from Microsoft
Corporation. These products demonstrate the viability of certain networked
personal computer solutions and have increased the competitive pressure,
particularly in the Company's workstation and lower-end server product lines.
Finally, the timing of introductions of new products and services by Sun's
competitors may negatively impact the future operating results of the Company,
particularly when such introductions occur in periods leading up to the
Company's introduction of its own new enhanced products. The Company expects
this pressure to continue and intensify throughout the balance of fiscal 1999.
While many other technical, service and support capabilities affect a customer's
buying decision, the Company's future operating results will depend, in part, on
its ability to compete with these technologies.
PRODUCT DEVELOPMENT
The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high-performance computer products,
such as the Company's recent development of the UltraSPARC (TM) microprocessor
is a complex and uncertain process requiring high levels of innovation from the
Company's designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things, in order to achieve acceptable yields and costs. Future
operating results
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<PAGE> 23
will depend to a considerable extent on the Company's ability to closely manage
product introductions in order to minimize unfavorable patterns of customer
orders, to reduce levels of older inventory and to ensure that adequate supplies
of new products can be delivered to meet customer demand. The ability of the
Company to match supply and demand is further complicated by the Company's need
to adjust prices to reflect changing competitive market conditions as well as
the variability and timing of customer orders with respect to the Company's
older products. As a result, the Company's operating results could be materially
adversely affected if the Company is not able to correctly anticipate the level
of demand for the mix of products. Because the Company is continuously engaged
in this product development, introduction, and transition process, its operating
results may be subject to considerable fluctuation, particularly when measured
on a quarterly basis.
MANUFACTURING AND SUPPLY
Sun uses many standard parts and components in its products and believes there
are a number of competent vendors for most parts and components. However, a
number of important components are developed by and purchased from single
sources due to price, quality, technology or other considerations. In some
cases, those components are available only from single sources. In particular,
Sun is dependent on Sony Corporation for various monitors and on Texas
Instruments Incorporated for different implementations of SPARC (TM)
microprocessors. Certain custom silicon parts are designed by and produced on a
contractual basis for Sun. The process of substituting a new producer of such
parts could materially adversely affect Sun's operating results. Some suppliers
of certain components, including color monitors and custom silicon parts,
require long lead times such that it can be difficult for the Company to plan
inventory levels of components to consistently meet demand for Sun's products.
Certain other components, especially memory integrated circuits such as DRAMs,
SRAMs, and VRAMs, have from time to time been subject to industry wide
shortages. Future shortages of components could negatively affect the Company's
ability to match supply and demand, and therefore could materially adversely
impact the Company's future operating results.
The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a material adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
materially adversely affect the Company's net revenues and operating results. To
secure components for development, production, and introduction of new products,
the Company frequently makes advanced payments to certain suppliers and often
enters into noncancelable purchase commitments with vendors early in the design
process. Due to the variability of material requirement specifications during
the design process, the Company must closely manage material purchase
commitments and respective delivery schedules. In the event of a delay or flaw
in the design process, the Company's operating results could be materially
adversely affected due to the Company's obligations to fulfill such
noncancelable purchase commitments.
SALES, DISTRIBUTION AND MARKETING
Generally, the computer systems sold by Sun, such as products based on
UltraSPARC processors, are the result of hardware and software development, such
that delays in the software development can delay the ability of the Company to
ship new hardware products. In addition, adoption of a new release of an
operating system may require effort on the part of the customer and porting by
software vendors providing applications. As a result, the timing of conversion
to a new release is inherently unpredictable. Moreover, delays by customers in
adopting a new release of an operating system can limit the acceptability of
hardware products tied to that release. Such delays could materially adversely
affect the future operating results of the Company.
23
<PAGE> 24
A significant portion of the Company's revenues is derived from international
sales and is therefore subject to inherent risks related thereto, including the
general economic and political conditions in each country, currency exchange
rate fluctuations, the effect of the tax structures of various jurisdictions,
changes to and compliance with a variety of foreign laws and regulations, trade
protection measures and import and export licensing requirements. There can be
no assurance that the economic crisis and currency issues currently being
experienced in certain parts of Asia will not have an adverse effect on the
Company's revenue or revenue growth rates in the future. The impact of any of
the foregoing factors could have a material adverse effect on the Company's
future financial condition and operating results.
Seasonality also affects the Company's operating results, particularly in the
first and third quarter of each fiscal year. In addition, the Company's
operating expenses are increasing as the Company continues to expand its
operations, and future operating results will be adversely affected if revenues
do not increase accordingly. Additionally, the Company plans to continue to
evaluate and, when appropriate, make acquisitions of complementary technologies,
products or businesses. As part of this process, the Company will continue to
evaluate the changing value of its assets, and when necessary, make adjustments
thereto. Acquisitions may involve amortization of acquired intangible assets in
periods following such acquisitions. In addition, acquisition transactions are
accompanied by a number of risks, including, among other things, those
associated with integrating operations, personnel, and technologies acquired,
and the potential for unknown liabilities of the acquired business.
One customer accounted for more than 10% of revenues in fiscal 1998. Any
termination by a significant customer of its relationship with the Company or
material reduction in the amount of business such a customer does with the
Company could materially adversely effect the Company's business, financial
condition or operating results.
BUSINESS PRACTICES, PROCESSES AND INFORMATION SYSTEMS
In order to remain competitive in a rapidly changing industry, the Company is
continually improving and changing its business practices, processes, and
information systems. In this regard, during fiscal 1999 the Company implemented
a number of new business practices and a series of related information systems
across the enterprise that affect numerous operational and financial systems and
processes. Although the systems were operational during the third quarter of
fiscal 1999, these systems will be further tested in the fourth quarter to the
extent that the Company experiences higher volumes of orders and shipments as it
has typically experienced during these periods. In addition, the Company expects
to continue its efforts to optimize usage of systems capabilities, enhance user
skills surrounding system features, and reduce runtime errors. However, there
can be no assurance that the system will be able to support the increased volume
of activities expected at the Company's fiscal year end.
The time period in which the new business practices and related information
systems will be fully tested and leveraged are forward-looking statements
subject to risks and uncertainties, and actual results may differ materially
from those set forth above as a result of a number of risk factors. In
particular, the ability to fully leverage systems capabilities are subject to a
number of risks, including the complexity of the new systems themselves and the
need for substantial and comprehensive employee training in connection with the
adoption of such new business practices and information systems. While the
Company has tested these new systems and processes in advance of their
implementation and continues to monitor the systems and processes ability to
support increased volumes of transactions, there are inherent limitations in the
Company's ability to simulate a full-scale operating environment in advance of
actual transaction volumes. Any increase in the volume of orders and shipments
of products during the last quarter of the fiscal year may have a material
adverse effect on the Company's business and operating results, if the systems
and processes are unable to support the increased volume of activity. In
addition, to the extent that the Company encounters problems with these new
systems
24
<PAGE> 25
and practices that prevent or limit their full utilization, there could be a
material adverse impact on the Company's operating results.
YEAR 2000 COMPLIANCE
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 a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such Year 2000 requirements. The Company is
currently expending resources to review its products and services, as well as
its internal use software in order to identify and modify those products,
services and systems that are not Year 2000 compliant. The Company believes that
the vast majority of these costs are not incremental to the Company but
represent a reallocation of existing resources and include regularly scheduled
system upgrades and maintenance. In addition, the Company is working to make
custom coding enhancements to its internal systems (described in the above
paragraphs) so that such systems will be Year 2000 compliant by the end of
fiscal year 1999.
Although the Company believes that the costs associated with the aforementioned
Year 2000 efforts are not material, the Company currently estimates that such
costs will be approximately $37 million, of which approximately $17 million has
been spent to date. The aforementioned costs are estimates due in large part to
the fact that the Company does 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 the Company
continuously monitors these activities. The Company believes any modifications
deemed necessary will be made on a timely basis and does not believe that the
cost of such modifications will have a material adverse effect on the Company's
operating results. The Company currently expects the aforementioned evaluation
of its products, services, and systems and any remediation necessary will be
completed by the end of fiscal year 1999. As of March 28, 1999, the Company has
not identified any items or areas which would require significant remediation
efforts. The Company's 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. There can be
no assurance however, that the Company will be able to successfully modify on a
timely basis such products, services and systems to comply with Year 2000
requirements, which failure could have a material adverse effect on the
Company's operating results.
The Company has established a program to assess whether certain of its products
are Year 2000 compliant. Under the program, the Company is in the process of
performing tests on its products listed on the Company's price lists. To monitor
this program and to help customers evaluate their Year 2000 issues the Company
has 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 Sun's review; and products that do not process or manipulate
date data or have no date-related technology. This list is periodically updated
as analysis of additional products is completed.
Based on the Company's assessment to date, most newly introduced products and
services of the Company are Year 2000 compliant, however, there can be no
assurance that the Company's current products do not contain undetected errors
or defects associated with Year 2000 functions that may result in material costs
to the Company. In addition, some of the Company's customers are running
products that are not Year 2000
25
<PAGE> 26
compliant and will require an upgrade or other remediation to become Year 2000
compliant. The Company provides limited warranties as to Year 2000 compliance on
certain of its products and services. Except as specifically provided for in the
limited warranties, the Company does not believe it is legally responsible for
costs incurred by customers to achieve Year 2000 compliance. The Company has
been taking steps to identify affected customers, raise customer awareness
related to noncompliance of the Company's older products and encourage such
customers to migrate to current products or product versions. It is possible
that the Company may experience increased expenses in addressing migration
issues for such customers or customer dissatisfaction as a result of Year 2000
issues, which may have a material adverse effect on the Company's operating
results.
The Company also faces risks to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not have business systems or products that
comply with Year 2000 requirements. To the extent that Sun is not able to test
technology provided by third party hardware or software vendors, Sun is in the
process of obtaining Year 2000 compliance certifications from each of its major
vendors that their products and internal systems, as applicable, are Year 2000
compliant. In the event any such third parties cannot timely provide the Company
with products, services or systems that meet the Year 2000 requirements, the
Company's operating results could be materially adversely affected. Furthermore,
a reasonably likely worst case scenario would be if one of the Company's major
vendors experienced a material disruption in business, which caused the Company
to experience a material disruption in business, such a disruption would have a
material adverse effect on the Company's business, financial condition and
operating results. Should either the Company's internal systems or the internal
systems, products or services of one or more of the Company's major vendors fail
to achieve Year 2000 compliance, the Company's business, financial position or
results of operations could be materially adversely affected. The Company is
currently developing contingency plans to deal with potential Year 2000 problems
related to its internal systems and products and services provided by outside
vendors and expects these plans to be complete by the end of fiscal year 1999.
Although the Company believes that the cost of Year 2000 modifications for both
internal use software and systems, as well as the Company's products are not
material, there can be no assurance that various factors relating to the Year
2000 compliance issues will not have a material adverse effect on the Company's
business, operating results or financial position. For example, a significant
amount of litigation may arise out of Year 2000 compliance issues and there can
be no assurance as to the extent the Company may be affected by any such
litigation. Even though the Company does not believe that it is legally
responsible for its customer's Year 2000 compliance obligations, it is unclear
whether different governments or governmental agencies may decide to allocate
liability relating to Year 2000 compliance to the Company without regard to
specific warranties or warranty disclaimers. Such allocation of liability could
have a materially adverse effect on the Company's financial condition and
results of operations in any given quarter. Furthermore, it is unknown how
customer spending patterns may be impacted by Year 2000 issues. As customers
focus on preparing their businesses for the Year 2000, capital budgets may be
spent on remediation efforts, potentially delaying the purchase and
implementation of new systems, thereby creating less demand for the Company's
products and services. These as well as other factors could have a material
adverse effect on the Company's revenues or operating results.
EURO COMPLIANCE
Eleven of the fifteen member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the Euro and
adopted the Euro as their common legal currency effective for the initial
implementation date of January 1, 1999. The Euro trades on currency exchanges
and is available for non-cash transactions, while the legacy currencies will
remain legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During the transition period,
cash-less payments can be made in the Euro and parties can elect to pay for
goods and services and transact business
26
<PAGE> 27
using either the Euro or the legacy currency. Between January 1, 2002 and July
1, 2002, the participating countries will introduce Euro notes and coins and
withdraw all legacy currencies.
The Company has expended and continues to expend resources to review and modify
its products to support the Euro's requirements, determine pricing strategies in
the new economic environment, analyze the legal and contractual implications for
contracts, evaluate system capabilities, and ensure banking vendors can support
the Company's operations with respect to Euro transactions for the initial
implementation as of January 1, 1999 and during the transition period through to
January 1, 2002 and thereafter. The Company does not expect that the
introduction and use of the Euro will materially affect the Company's foreign
exchange and hedging activities, expects that modifications will be made to its
business operations and systems, as necessary, on a timely basis and does not
believe that the cost of such modifications will have a material adverse impact
on the Company's operating results. The Company's expectations as to the extent
and timeliness of modifications required to accommodate the conversion to Euro
transactions is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially, as a result of a number of factors,
including among others, those described in this paragraph. There can be no
assurance that the Company will be able to complete such modifications to comply
with Euro requirements, which could have a material adverse effect on the
Company's operating results. In addition, the Company faces risks to the extent
that vendors upon whom the Company relies and their suppliers are unable to make
appropriate modifications to support Euro transactions. The Company has not yet
completed its evaluation of the impact of the Euro upon its functional currency
designations.
While the Company cannot predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition strengthened as of March 28, 1999 when
compared with June 30, 1998. During the first nine months of fiscal 1999, cash
flows from operating activities generated $1,485.1 million in cash and cash
equivalents. Non-cash expenses affecting cash provided by operating activities
in the first nine months of fiscal 1999 included depreciation and amortization
expense of $450.1 million, tax benefits of options exercised of $165.6 million
and charges for IPRD of $120.7 million in connection with the acquisitions of
NetDynamics, Maxstrat, i-Planet and Beduin. Favorably impacting cash provided by
operations were increases in accounts payable and other liabilities of $223
million and $655.1 million, respectively, which reflect the timing of payments
for inventory and other items. Offsetting these items, accounts receivable
increased $357.8 million which reflects an increase in revenue and days sales
outstanding. Additionally, other current assets increased due to the timing of
payments for insurance and other taxes. Other long-term assets increased
primarily due to an increase in intangible assets in connection with the
acquisitions of NetDynamics. and Maxstrat, as well as a license acquired in
connection with the Sun/AOL transaction as described in the footnotes to the
condensed consolidated financial statements.
The Company's investing activities used $1,567.4 million of cash in the first
nine months of fiscal 1999, an increase of $794.2 million from the prior year's
comparable period. The increase resulted primary from increased acquisitions of
short-term investments during the first nine months of fiscal 1999, as compared
with the prior year's period. Also included in investing activities is capital
spending for real estate development, as well as capital additions to support
increased headcount, primarily in the Company's engineering, services and
marketing organizations.
The Company's financing activities used $32.6 million of cash in the first nine
months of fiscal 1999, a decrease of $163.6 million from the prior year's
comparable period. The decrease is primarily due to an
27
<PAGE> 28
increase in stock issuances during the first nine months of fiscal 1999 and a
reduction in short-term borrowings for the first nine months of fiscal 1998.
At March 28, 1999, the Company's primary sources of liquidity consisted of cash,
cash equivalents and short-term investments of $1,998.8 million and a revolving
credit facility with banks aggregating $500 million, which was available subject
to compliance with certain covenants. Additionally, on October 16, 1997, the
Company filed a Registration Statement with the Securities and Exchange
Commission relating to the registration for public offering of senior and
subordinated debt securities and common stock with an aggregate initial public
offering price of up to $1 billion. On October 24, 1997, the Registration
Statement became effective, so that the Company may now choose to offer, from
time to time, the securities pursuant to Rule 415 in one or more separate
series, in amounts, at prices and on terms to be set forth in the prospectus
contained in the Registration Statement and in one or more supplements to the
prospectus. The Company believes that the liquidity provided by existing cash
and short-term investment balances and the borrowing arrangements described
above will be sufficient to meet the Company's capital requirements through
fiscal 2000. However, the Company believes the level of financial resources is a
significant competitive factor in its industry and may choose at any time to
raise additional capital through debt or equity financing to strengthen its
financial position, facilitate growth and provide the Company with additional
flexibility to take advantage of business opportunities that may arise.
(C) Sun, Sun Microsystems, the Sun Logo, Java, Java Card, Solaris, Enterprise
JavaBeans, i-Planet and NetDynamics are trademarks or registered trademarks of
Sun Microsystems, Inc. in the United States and other countries. All SPARC
trademarks are used under license and are trademarks or registered trademarks of
SPARC International, Inc. in the United States and other countries. Products
bearing SPARC trademarks are based upon an architecture developed by Sun
Microsystems, Inc.
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<PAGE> 29
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 7, 1997, the Company filed suit against Microsoft Corporation in the
United States District Court for the Northern District of California alleging
breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. On March
24, 1998 the United States District Court judge ruled in favor of the Company
granting a preliminary injunction directing Microsoft Corporation to cease using
the Company's Java Compatible Logo(TM) on Microsoft products that failed to pass
the applicable test suites from Sun. In addition, on May 12, 1998, the Company
filed a second amended complaint alleging copyright infringement by Microsoft
and motions requesting further preliminary injunctive relief directed against
the planned release by Microsoft of additional products that failed to pass the
applicable test suites from Sun. The Court held hearings and arguments on such
motions on September 8, 9, and 10, 1998. On November 17, 1998, the District
Court issued an Order granting, in substantial part, Sun's 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 December 29, 1998 the District
Court issued a further Order directing the parties to schedule a settlement
conference with respect to certain issues before a designated Magistrate or
mutually selected individual. 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. The Company believes that the outcome of this matter will not have a
material adverse impact on Sun's financial condition, results of operations or
cash flows in any given fiscal year.
ITEM 5 - OTHER INFORMATION
SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER
The following is a summary of all sales of the Company's Common Stock by
the Company's executive officers and directors who are subject to Section
16 of the Securities Exchange Act of 1934, as amended, during the fiscal
quarter ended March 28, 1999:
<TABLE>
<CAPTION>
OFFICER/ DATE PRICE NUMBER OF
DIRECTOR SHARES SOLD
====================================================================
<S> <C> <C> <C>
William T. Agnello 1/27/99 $52.9978 28,000
Alan E. Baratz 1/27/99 $53.8438 136,000
</TABLE>
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<PAGE> 30
<TABLE>
<S> <C> <C> <C>
1/27/99 $52.6875 40,000
Lawrence W. Hambly 1/29/99 $54.9375 20,000
2/23/99 $52.4375 20,000
2/23/99 $53.4375 20,000
Masood A. Jabbar 1/29/99 $55.1375 100,000
James Judson 1/27/99 $52.2188 19,200
Michael E. Lehman 1/27/99 $53.4375 112,000
2/16/99 $51.1425 40,000
2/16/99 $51.1425 20,000
Robert L. Long 1/27/99 $52.3282 40,000
Marc L. Loupe 2/23/99 $52.1250 2,300
John S. McFarlane 1/29/99 $54.3125 18,000
Stephen T. McGowan 1/27/99 $53.8750 12,000
Scott G. McNealy 2/8/99 $50.8125 19,800
Michael H. Morris 1/27/99 $53.7188 6,000
M. Kenneth Oshman 2/1/99 $55.3433 320,000
Alton D. Page 1/29/99 $54.3125 10,000
Gregory M. Papadopoulos 2/18/99 $47.3750 8,000
2/22/99 $50.0227 8,000
2/23/99 $52.5703 8,000
Marissa Peterson 2/25/99 $51.2692 42,400
Frank A. Pinto 2/3/99 $55.0000 98,000
2/3/99 $55.0313 2,000
Michael L. Popov 1/27/99 $53.7500 47,000
William J. Raduchel 2/11/99 $52.5000 47,348
2/23/99 $52.6275 47,352
2/23/99 $51.6896 47,348
George Reyes 1/27/99 $53.0000 20,000
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C> <C>
Edward Saliba 2/1/99 $55.0000 43,200
Janpieter T. Scheerder 1/27/99 $52.5943 68,400
John C. Shoemaker 2/1/99 $54.9390 12,000
2/1/99 $54.9600 8,000
2/8/99 $51.9963 14,000
2/8/99 $51.9650 2,000
2/23/99 $52.3786 36,000
A. Michael Spence 1/27/99 $53.8438 30,000
Kevin Walsh 1/28/99 $54.0313 36,800
Edward J. Zander 1/27/99 $52.4219 40,000
2/8/99 $50.1193 24,000
2/8/99 $52.0625 24,000
2/23/99 $53.1052 20,800
2/23/99 $52.8750 20,000
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<S> <C>
3.3 Registrant's Certificate of Amendment of the Restated
Certificate of Incorporation filed March 17, 1999.
3.4(1) Registrant's Amended Certificate of Designations filed March
17, 1999.
4.9(1) Registrant's Amendment to Second Amended and Restated Shares
Rights Agreement dated April 14, 1999.
10.84 Registrant's Non-Qualified Deferred Compensation Plan, as
amended December 16, 1998.
10.87 Registrant's Equity Compensation Acquisition Plan, as
amended November 11, 1998.
27.0 Financial Data Schedule for the period ended March 28, 1999.
</TABLE>
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A/A Amendment filed on April 15, 1999.
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<PAGE> 32
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 28, 1999.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1998 Form 10-K have
not changed significantly through the quarter ended March 28, 1999.
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<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
SUN MICROSYSTEMS, INC.
BY
/s/ Michael E. Lehman
------------------------
Michael E. Lehman
Vice President, Corporate Resources
and Chief Financial Officer
/s/ George Reyes
--------------------
George Reyes
Vice President and Corporate Controller,
Chief Accounting Officer
Dated: May 5, 1999
33
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.3 Registrant's Certificate of Amendment of the Restated Certificate
of Incorporation filed March 17, 1999.
3.4(1) Registrant's Amended Certificate of Designations filed March 17,
1999.
4.9(1) Registrant's Amendment to Second Amended and Restated Shares
Rights Agreement dated April 14, 1999.
10.84 Registrant's Non-Qualified Deferred Compensation Plan, as amended
December 16, 1998.
10.87 Registrant's Equity Compensation Acquisition Plan, as amended
November 11, 1998.
27.0 Financial Data Schedule for the period ended March 28, 1999.
</TABLE>
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A/A Amendment filed on April 15, 1999.
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
SUN MICROSYSTEMS, INC.
Michael E. Lehman and Michael H. Morris, certify that:
1. They are the Vice-President, Corporate Resources and Chief
Financial Officer and Vice President, General Counsel and Secretary,
respectively, of Sun Microsystems, Inc., a Delaware corporation (the
"Corporation").
2. That Section (a) of Article 4 of the Restated Certificate of
Incorporation of the Corporation now reads:
"The Corporation is authorized to issue two classes of shares
designated "Common Stock" and "Preferred Stock". The total number of
shares which the Corporation shall have authority to issue is Nine
Hundred Fifty Million (950,000,000), of which Nine Hundred Forty
Million (940,000,000) shall be Common Stock with a par value of
$0.00067 per share and Ten Million (10,000,000) shall be Preferred
Stock with a par value of $0.001 per share."
is amended to read as follows:
"The Corporation is authorized to issue two classes of shares
designated "Common Stock" and "Preferred Stock". The total number of
shares which the Corporation shall have authority to issue is One
Billion Eight Hundred Ten Million (1,810,000,000), of which One Billion
Eight Hundred Million (1,800,000,000) shall be Common Stock with a par
value of $0.00067 per share and Ten Million (10,000,000) shall be
Preferred Stock with a par value of $0.001 per share."
3. The foregoing Certificate of Amendment of the Restated Certificate
of Incorporation has been duly approved by the Board of Directors.
4. The foregoing Certificate of Amendment of the Restated Certificate
of Incorporation has been duly approved by the required vote of stockholders in
accordance with Section 242 of the Delaware Corporations Code. The total number
of outstanding shares of Common Stock of the Corporation is 385,583,263. No
shares of Preferred Stock are outstanding. The number of shares voting in favor
of the amendment equaled or exceeded the vote required. The percentage vote
required was more than 50% of the outstanding Common Stock.
We further declare under penalty of perjury under the laws of the State
of Delaware that the matters set forth in the foregoing Certificate of Amendment
are true and correct of our own knowledge.
1
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and the Certificate of Amendment to be signed by Michael E.
Lehman, Vice President, Corporate Resources and Chief Financial Officer and
attested by Michael H. Morris, Vice President, General Counsel and Secretary
this 17th day of March, 1999.
SUN MICROSYSTEMS, INC.
[Corporate Seal] /s/ MICHAEL E. LEHMAN
-----------------------------------
Michael E. Lehman
/s/ MICHAEL H. MORRIS
-----------------------------------
ATTEST: Michael H. Morris
2
<PAGE> 1
EXHIBIT 10.84
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
Amended as of December 16, 1998
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Purpose ..................................................................4
2. Definitions...............................................................4
3. Eligibility ..............................................................6
4. Election to Participate in Plan...........................................6
5. Accounts..................................................................7
6. Deferral Increments and Growth............................................7
7. Earnings or Losses on Accounts............................................7
8. Certain In-Service Account Distributions..................................8
9. Statements................................................................8
10. Form and Time of Payment of Accounts......................................8
11. Effect of Death of Participant............................................9
12. General Duties of Trustee................................................10
13. Withholding Taxes........................................................10
14. Participant's Unsecured Rights...........................................10
15. Non-assignability of Interests...........................................11
16. Limitation of Rights.....................................................11
17. Administration of the Plan...............................................11
18. Amendment or Termination of the Plan.....................................11
19. Choice of Law and Claims Procedure.......................................12
20. Execution and Signature..................................................12
</TABLE>
2
<PAGE> 3
SUN MICROSYSTEMS, INC.
U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
AMENDED AS OF DECEMBER 16, 1998
Sun Microsystems, Inc. (the "Company"), acting on behalf of itself and
its U.S. subsidiaries, initially adopted the Sun Microsystems, Inc. U.S.
Non-Qualified Deferred Compensation Plan (the "Plan"), effective July 1, 1995.
RECITALS
1. The Company maintains the Plan, a deferred compensation plan for the
benefit of a select group of management or highly compensated employees of the
Company as well as members of the Company's Board of Directors.
2. Under the Plan, the Company is obligated to pay vested accrued
benefits to Plan Participants and their Beneficiary or Beneficiaries from the
Company's general assets.
3. The Company intends to enter into an agreement (the "Trust
Agreement") with a person or persons, including an entity, who shall serve as
trustee (the "Trustee") under an irrevocable trust, to be used in connection
with the Plan (the "Trust").
4. The Company intends to make contributions to the Trust so that such
contributions will be held by the Trust and invested, reinvested and
distributed, all in accordance with this Plan and the Trust Agreement.
5. The Company intends that amounts contributed to the Trust and the
earnings thereon shall be used by the Trustee to satisfy the liabilities of the
Company under the Plan with respect to each Plan Participant for whom an Account
has been established and such utilization shall be in accordance with the
procedures set forth herein.
6. The Company intends that the Trust be a "grantor trust" with the
principal and income of the Trust treated as assets and income of the Company
for federal and state income tax purposes.
7. The Company intends that the assets of the Trust shall at all times
be subject to the claims of the general creditors of the Company as provided in
the Trust Agreement.
8. The Company intends that the existence of the Trust shall not alter
the characterization of the Plan as "unfunded" for purposes of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be
construed to provide income to Plan Participants under the Plan prior to actual
payment of the vested accrued benefits hereunder.
NOW THEREFORE, the Company does hereby adopt this amended and restated
Plan as follows and does also hereby agree that the Plan shall be structured,
held and disposed of as follows:
3
<PAGE> 4
1. Purpose: The Plan provides Participants an opportunity to defer
payment of a portion of:
- Employee salary and incentive bonus/commissions (for
Sales Vice Presidents and Directors);
- Employee annual bonus awards; and
- Board of Directors retainer payments.
2. Definitions:
(a) Account means a bookkeeping account established pursuant
to Section 5(a) for Compensation that is subject to a Participant's deferral
election.
(b) Beneficiary means the person or persons designated by the
Participant or by the Plan under Section 11(b) to receive payment of the
Participant's Account in the event of the Participant's death.
(c) Board means the Board of Directors of the Company, as
constituted from time to time.
(d) Committee means the Benefits Plan Committee, appointed by
the Board from time to time.
(e) Company means Sun Microsystems, Inc. and its U.S.
subsidiaries.
(f) Compensation means:
(i) The amount of the Eligible Employee's base salary paid
by the Company or one of its U.S. subsidiaries; and
(ii) The amount paid by the Company or one of its U.S.
subsidiaries to an Eligible Employee as an annual corporate bonus award and any
other bonus/incentive award that is approved by the Committee as earnings that
can be deferred under the Plan (some incentive/bonus awards will not be eligible
for deferral); and
(iii) For Sales Vice Presidents and Directors, incentive
bonus/commissions; and
(iv) In the case of an Eligible Board Member, the amount
of his or her director's fees from the Company, which includes only retainer
payments. Compensation does not include directors' expense reimbursements or
meeting fees.
For purposes of the foregoing, Compensation as described in
clauses (i), (ii) and (iii) shall be eligible for deferral only to the extent
such amounts are otherwise subject to U.S.
payroll reporting and withholding.
(g) Election Period means:
4
<PAGE> 5
(i) Generally June of each year; and
(ii) For newly hired vice presidents, at the sole
discretion of the Benefits Plan Committee, may be eligible to enroll within
thirty (30) days of hire.
(iii) With respect to the Plan Restatement, September,
1997.
(h) Eligible Board Member means a member of the Board (other
than a member who is also an Eligible Employee).
(i) Eligible Employee means an officer of the Company or other
common-law employee of the Company or one of its U.S. subsidiaries.
(j) Participant means an Eligible Board Member or an Eligible
Employee who has elected to defer Compensation.
(k) Plan means this Sun Microsystems, Inc. U.S. Non-Qualified
Deferred Compensation Plan, as amended from time to time.
(l) Plan Restatement means the amendment and restatement of
the Plan as approved by the Board on August 13, 1997.
(m) Plan Restatement Effective Date means October 1, 1997.
(n) Retirement Date means the first day of the month
coinciding with or next day following the Participant's termination of
employment following the earlier of his or her:
(i) 65th birthday;
(ii) 60th birthday if the Participant has 5 years of
Service;
(iii) 55th birthday if the Participant has 10 years of
Service; or
(iv) 20th year anniversary of Service.
(o) Service means:
(i) Employment as a common-law employee of the Company or
one of its subsidiaries; or
(ii) Period served as an elected Board Member.
A Participant's Service shall be determined by the Committee
in its sole discretion.
(p) Total Disability means that the Participant is unable to
engage in any substantial gainful activity by reason of a medically determinable
physical or mental impairment which may result in Participant's death, or
condition which lasts, or may last, a continuous period
5
<PAGE> 6
of not less than twelve consecutive months. Total Disability shall be determined
by the Committee in its sole discretion.
(q) Unforeseeable Emergency means a severe financial hardship
to the Participant resulting from:
(i) Sudden or unexpected illness or accident of either the
Participant or dependent of same; or
(ii) Loss of the Participant's property due to casualty or
other extraordinary and unforeseeable circumstances beyond the control of the
Participant.
Hardship shall not constitute an unforeseeable Emergency under
the Plan to the extent that it is, or may be, relieved by:
(i) Reimbursement or compensation, by insurance or
otherwise; or
(ii) Liquidation of the Participant's assets to the extent
that the liquidation of such assets would not itself cause severe financial
hardship.
An Unforeseeable Emergency under the Plan does not include:
(i) Sending a child to college; or
(ii) Purchasing a home, per Rev. Proc. 95-64.
(r) Year means the Company's fiscal year unless otherwise
noted.
3. Eligibility: Participation in the Plan is limited to Eligible Board
Members, and Eligible Employees, who are eligible to participate in the Plan if:
(a) He or she is subject to U.S. income and social security
taxes and not covered under a non-U.S. retirement plan;
(b) He or she is an officer, or his or her position is
approved as a director level, or higher; or
(c) He or she has been designated expressly as an Eligible
Employee by the Committee.
If a Participant receives a distribution described in Section
10(c), the Participant shall be ineligible to participate in the Plan for the
balance of the Plan Year in which the distribution occurs and the following Plan
Year.
4. Election to Participate in Plan:
(a) Deferral Election. A Participant may elect to participate
in the Plan by
6
<PAGE> 7
filing a written "Deferred Compensation Election Form" with the Company during
any Election Period. Such election applies to applicable Compensation paid in
payroll periods commencing after the close of the Election Period. A new
election must be made for each Election Period. The Participant shall specify
any amount subject to the limits described in Section 6(a). This can be
expressed as a fixed dollar amount or as a percentage.
(b) Election Form. All deferral elections under this Section 4
shall be made in a manner prescribed for this purpose by the Committee.
5. Accounts:
(a) Establishment of Account. The Company shall establish an
Account for each Participant who duly files a Deferred Compensation Election
Form.
(b) Credits to Account. A Participant's Account shall be
credited with an amount equal to the percentage of each Compensation payment
which would have been payable currently to the Participant but for the terms of
the Deferred Compensation Election Form. Deferred Compensation for Participants
shall be credited to the Participant's Account as of the first day of the month
in which such deferred amounts would otherwise be paid to the Participant.
(c) Vesting. Participants shall at all times be 100% vested in
their deferrals under the Plan and all earnings allocable thereto.
6. Deferral Increments and Growth:
(a) The minimum deferral per year will be determined by the
Committee.
(b) The Participant who is an Eligible Employee may elect to
defer (less any withholding requirements).
(i) Up to 100% of any eligible annual bonus award; and
(ii) Up to 60% of base salary and incentive
awards/commissions.
(c) The Participant who is an Eligible Board Member may elect
to defer (less any withholding requirements), up to 100% of their retainer
payments (to be credited to the account quarterly).
7. Earnings or Losses on Accounts:
(a) General Rule. Subject to Section 7(c) below, the amount in
a Participant's Account shall be adjusted for gain or loss on the last day of
each month based on the performance of the investment options selected by the
Participant in accordance with Section 7(b). Gain or loss shall be computed as
if all amounts credited to the Account pursuant to Section 5(b) were credited as
of the first day of the month, and all amounts withdrawn from the Account were
withdrawn on the first day of the month.
7
<PAGE> 8
(b) Designation of Investment Indices by the Committee. The
Committee shall specify two or more investment funds that shall serve as
benchmarks for the investment performance of amounts credited to the Accounts.
Accounts shall be adjusted to reflect the gain or loss, net of any allocable
costs or expenses, such accounts would experience had they actually been
invested in the specified funds at the relevant times. The Committee may vary
the available investment funds from time to time, but not more frequently than
quarterly. Subject to Section 7(c), a Participant may select his or her
investment options for new deferrals and contributions, or for amounts already
credited to his or her Account, once per calendar quarter effective as of the
first day of the following quarter using such form or forms as the Committee may
specify.
(c) Pre-Plan Restatement Accounts. Notwithstanding
anything in this Section 7 to the contrary, the balance in each Account as of
the Plan Restatement Date shall be credited quarterly to reflect interest earned
on the deferral in an amount determined by the Committee; provided, however,
that Participants may elect to have earnings and losses on such Accounts
credited instead in accordance with Section 7(a) and (b) after the Plan
Restatement Date. Any such election shall be made prior to the Plan Restatement
Date in such form and subject to such other terms and conditions as the
Committee shall specify.
8. Certain In-Service Account Distributions.
(a) After Completion of Two Years of Plan Participation. Each
Participant may elect in his or her Deferred Compensation Election Form to have
one or more distributions of a specified percentage or dollar amount of his or
her Account, not more frequently than once in a Plan Year, commencing in his or
her third year of participation, provided that the Participant has not
terminated his or her Service with the Company. A Participant may delay once or
cancel such distribution at any time prior to the date which is one year prior
to the calendar year in which the originally scheduled distribution would take
place, but such election is otherwise irrevocable.
(b) Previously Scheduled In-Service Distributions.
Elections in effect prior to the Plan Restatement Date for in-service
distributions prior to January 1, 2000 shall remain in full force and effect.
9. Statements: Quarterly, and/or at intervals determined by the
Committee, the Company shall prepare and deliver to each Participant a statement
listing the amount credited to such Account as of the applicable date.
10. Form and Time of Payment of Accounts:
(a) Timing and Method of Distribution of Accounts. In the
event of a Participant's termination of Service on or after his or her
Retirement Date, distribution of the value of the Participant's Account balance
shall be made as soon as practicable after such termination consistent with the
form of distribution specified on the Participant's Deferred Compensation
Election Form. Available forms shall include either a lump sum payment or a
series of installments. Accounts subject to installment payouts shall continue
to be adjusted for gains or losses in the same manner as active Accounts.
Notwithstanding the foregoing, the Participant who is receiving an installment
payout on or after his or her Retirement Date may
8
<PAGE> 9
request a lump sum distribution of such Participant's Account. Any such lump sum
distribution shall be at the sole discretion of the Committee, and shall be
reduced by a penalty equal to ten percent (10%) of the amount otherwise
distributable, which penalty shall be forfeited to the Company. A Participant
may modify his or her elected form of distribution (i.e., lump sum or
installments) at any time prior to the date that is three years before his or
her first post-employment distribution. If a Participant modifies his or
her elected form of distribution but his or her first post-employment
distribution is less than three years following the date of the modification
election, his or her prior elected form of distribution shall apply.
If the Participant terminates his or her service with the
Company prior to his or her Retirement Date, (other than on account of death),
he or she shall receive the value of his or her Account in one lump sum payment
as soon as practicable after such termination.
If a Participant elects a distribution date prior to
termination of Service, the distribution will be paid as soon as reasonably
practicable in a lump sum after such distribution date.
(b) Disability or Emergency. In the event of Participant's
Total Disability or Unforeseeable Emergency, and upon application by such
Participant, the Committee may determine at its sole discretion that payment of
all, or part, of such Participant's Account shall be made in a different manner,
or on an earlier date than the time or times specified in Subsection (a) above.
Payments due to Participant's Total Disability or Unforeseeable Emergency shall
be permitted only to the extent reasonably required to satisfy the Participant's
need.
(c) Early Distribution Penalty. Upon application by a
Participant, the Committee may determine at its sole discretion that payments
from such Participant's Account shall be made in a different manner, or on an
earlier date than the time or times specified in Subsection (a) above. All
distributions under this Subsection (c) shall be reduced by a penalty equal to
10 percent (10%) of the amount otherwise distributable. The penalty is forfeited
to the Company. A Participant who receives a distribution under this Subsection
(c) is ineligible to participate in the Plan for the balance of the Plan Year in
which the distribution occurs and the following Plan Year.
11. Effect of Death of Participant:
(a) Distributions. In the event of a Participant's death while
an Eligible Employee or Eligible Board Member (except in the case of a
Participant's suicide during the first two years of their participation in the
Plan), the Participant's Account balance, together with an amount equal to two
times the sum of (i) the Participant's actual deferrals under the Plan after the
Plan Restatement Effective Date (exclusive of earnings), plus (ii) the
Participant's actual deferrals under the Plan before the Plan Restatement
Effective Date (exclusive of earnings) to the extent such deferrals are
scheduled to be distributed on or after January 1, 2000, shall be distributed to
the Participant's Beneficiary. Notwithstanding the foregoing, the amount to be
determined pursuant to this paragraph (a), shall not exceed Three Million
Dollars ($3,000,000). In the event of (i) a Participant's death while no longer
an Eligible Employee or Eligible Board Member (as applicable), or (ii) a
Participant's suicide during the first two years of their participation in the
Plan, the Account balance, if any, shall be distributed to the Participant's
9
<PAGE> 10
Beneficiary. Any distributions pursuant to this paragraph shall be made to the
Beneficiary in three annual installments or, at the request of the Beneficiary
and subject to the Committee's approval, in a single lump sum, commencing in
either case as soon as reasonably practicable after the Participant's death. If
installment payments are made, the remaining account balance (during the period
of the installment payouts) shall cease to be credited with earnings on the
investment chosen by the deceased Participant, and instead shall be credited
with earnings based on a fixed rate of interest.
(b) Beneficiary Designation. Upon enrollment in the Plan, each
Participant shall file a prescribed form with the Company naming a person or
persons as the Beneficiary who will receive distributions payable under the Plan
in the event of the Participant's death. If the Participant does not name a
Beneficiary, or if none of the named Beneficiaries is living at the time payment
is due, then the Beneficiary shall be:
(i) The spouse of the deceased Participant; or
(ii) The living children of the deceased Participant, in
equal shares, if no spouse of the Participant is living; or
(iii) The estate of the Participant if neither spouse nor
children of Participant are living.
The Participant may change the designation of a Beneficiary at
any time in accordance with procedures established by the Committee.
Designations of a Beneficiary, or an amendment or revocation thereof, shall be
effective only if made in the prescribed manner and received by the Company
prior to the Participant's death.
12. General Duties of Trustee:
(a) Trustee Duties. The Trustee shall manage, invest and
reinvest the Trust Fund as provided in the Trust Agreement. The Trustee shall
collect the income on the Trust Fund, and make distributions therefrom, all as
provided in this Plan and in the Trust Agreement.
(b) Company Contributions. While the Plan remains in effect,
the Company shall make contributions to the Trust Fund at least once each year.
As soon as practicable after the close of each Plan Year, the Company shall make
an additional contribution to the Trust Fund to the extent that previous
contributions to the Trust Fund for the current Plan Year are less than total
future liabilities (other than death benefits) created with respect to
Participants' Accounts as of the close of the current Plan Year. Contributions
to the Trust Fund are based on liabilities created with respect to Participants'
Accounts on and after the Plan Restatement Effective Date. The Trustee shall not
be liable for any failure by the Company to provide contributions sufficient to
pay all accrued benefits under the Plan in accordance with the terms of this
Plan.
13. Withholding Taxes: All distributions under the Plan shall be
subject to reduction in order to reflect withholding tax obligations imposed by
law.
14. Participant's Unsecured Rights: The Account of any Participant, and
such
10
<PAGE> 11
Participant's right to receive distributions from his or her Account, shall be
considered an unsecured claim against the general assists of the Company; such
Accounts are unfunded bookkeeping entries. The Company considers the Plan to be
unfunded for tax purposes and for purposes of Title I of ERISA. No Participant
shall have an interest in, or make claim against, any specified asset of the
Company pursuant to the Plan.
15. Non-assignability of Interests: The interest of a Participant under
the Plan is not subject to option nor assignable by either voluntary or
involuntary assignment or by operation of law, including without limitation to:
bankruptcy, garnishment, attachment or other creditor's process. Any act in
violation of this Section 15 shall make the Plan void.
16. Limitation of Rights:
(a) Bonuses. Nothing in this Plan shall be construed to give
any Eligible Employee any right to be granted a bonus award.
(b) Employment Rights. Neither the Plan nor deferral of any
Compensation, nor any other action taken pursuant to the Plan, shall constitute,
or be evidence of, any agreement or understanding, express or implied, that the
Company or any of its subsidiaries will employ an Eligible Employee for any
period of time, in any position at any particular rate of compensation. The
Company and its subsidiaries reserve the right to terminate an Eligible
Employee's Service at any time for any reason, except as otherwise expressly
provided in a written employment agreement.
17. Administration of the Plan: The Plan shall be administered by the
Committee. The Committee shall have full power and authority to administer,
interpret, establish procedures for administering the Plan, prescribe forms, and
take any and all necessary actions in connection with the Plan. The Committee's
interpretation and construction of the Plan shall be conclusive and binding on
all persons. The Committee may appoint a plan administrator or any other agent
and delegate to them such powers and duties in connection with the administra-
tion of the Plan as the Committee may from time to time prescribe. In the event
that any Participants are found to be ineligible, that is, not members of a
select group of management or highly compensated employees, according to a
determination made by the U.S. Department of Labor, the Committee shall take
whatever steps it deems necessary, in its sole discretion, to equitably protect
the interests of the affected Participants.
18. Amendment or Termination of the Plan: The Board may amend, suspend,
or terminate the Plan at any time; provided, however, that no such action shall
reduce a Participant's Account under the Plan without the Participant's written
consent. In the event of termination of the Plan, the Accounts of Participants
shall continue to be credited with earnings until distributed pursuant to
Section 10, unless the Board prescribes an earlier time or different manner for
the payment of such Accounts. Without limiting the generality of the foregoing,
termination of the Plan following Change in Control shall constitute an event
giving rise to distribution of Accounts. In such event, the Company shall pay
all Account balances in a lump sum or in annual installments over three years
(with earnings), in its discretion, to Participants and Beneficiaries of
deceased Participants; and all deferrals and payment of benefits except as
provided above shall cease. For purposes of this Plan, the term "Change in
Control" shall mean the purchase or
11
<PAGE> 12
acquisition by any person, entity or group of persons, within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Act"), or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either
the outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally, where
the approval by the stockholders of the Company or a reorganization, merger or
consolidation, in each case with respect to which persons who are stockholders
of the Company immediately prior to such reorganization, merger or consolidation
do not, immediately thereafter, own more than 50% of the combined voting power
entitled to vote generally in the election of directors of the reorganized,
merged or consolidated Company's then outstanding securities, or a liquidation
or dissolution of the Company or of the sale of all or substantially all of the
Company's assets.
19. Choice of Law and Claims Procedure:
(a) Choice of Law. The validity, interpretation, construction
and performance of the Plan shall be governed by ERISA, and, to the extent that
they are not preempted, by the laws of the State of California, excluding
California's choice-of-law provisions.
(b) Claims and Review Procedure. In accordance with the
regulations of the U.S. Secretary of Labor, the Committee shall:
(i) Provide adequate notice in writing to any Participant
or Beneficiary whose claim for benefits under the Plan has been denied. Specific
reasons for such denial must be presented in a clear and precise manner intended
to be easily understood by such Participant or Beneficiary, and
(ii) Afford a reasonable opportunity for a full and fair
review before the Board to any Participant or Beneficiary whose claim for
benefits has been denied.
20. Execution and Signature: To record the adoption of the Plan by the
Board, the Company has caused its duly authorized officer to affix the corporate
name hereto:
SUN MICROSYSTEMS, INC.
By:
----------------------------------------
Authorized Company Officer
12
<PAGE> 1
EXHIBIT 10.87
SUN MICROSYSTEMS, INC.
EQUITY COMPENSATION ACQUISITION PLAN
(AMENDED AS OF NOVEMBER 11, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are:
- to attract and retain the best available personnel
for positions of substantial responsibility,
- to provide additional incentive to eligible Employees
and Consultants, and
- to promote the success of the Company's business.
Nonstatutory Stock Options and Stock Purchase Rights may be granted under the
Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
as shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to
the administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights are, or
will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Sun Microsystems, Inc., and any entity
that is directly or indirectly controlled by the Company, or any entity in which
the Company has a significant equity interest, as determined by the
Administrator.
(h) "Consultant" means any person, including an advisor,
engaged by the Company to render services and who is compensated for such
services, provided that the term "Consultant" shall not include any person who
is also an officer or Director of Sun Microsystems, Inc.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
1
<PAGE> 2
(k) "Employee" means any person employed by the Company other
than any person who is an officer or Director of Sun Microsystems, Inc.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) the last reported sale price of the Common Stock of
the Company on the NASDAQ National Market System or, if no such reported sale
takes place on any such day, the average of the closing bid and asked prices, or
(ii) if such Common Stock shall then be listed on a
national securities exchange, the last reported sale price or, if no such
reported sale takes place on any such day, the average of the closing bid and
asked prices on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or
(iii) if such Common Stock shall not be quoted on such
National Market System nor listed or admitted to trading on a national
securities exchange, then the average of the closing bid and asked prices, as
reported by The Wall Street Journal for the over-the-counter market, or
(iv) if none of the foregoing is applicable, then the Fair
Market Value of a share of Common Stock shall be determined by the Board in its
discretion.
(m) "Nonstatutory Stock Option" means an Option not intended
to qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(n) "Notice of Grant" means a written notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement or of the Restricted
Stock Purchase Agreement.
(o) "Option" means a stock option granted pursuant to the
Plan.
(p) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(q) "Optioned Stock" means the Common Stock subject to an
Option or Stock Purchase Right.
(r) "Optionee" means an Employee or Consultant who holds an
outstanding Option or Stock Purchase Right.
(s) "Plan" means this Equity Compensation Acquisition Plan.
(t) "Restricted Stock" means shares of Common Stock acquired
pursuant to
2
<PAGE> 3
a grant of Stock Purchase Rights under Section 11 below.
(u) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(w) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 3,620,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, the unpurchased Shares
which were subject thereto shall become available for future grant or sale under
the Plan (unless the Plan has terminated). In addition, if Shares of Restricted
Stock are repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the
Board or (ii) a Committee designated by the Board, which Committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase
3
<PAGE> 4
Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each Option and Stock Purchase Right granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(ix) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(b) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights
may be granted to Employees and Consultants. If otherwise eligible, an Employee
or Consultant who has been granted an Option or Stock Purchase Right may be
granted additional Options or Stock Purchase Rights. Notwithstanding anything to
the contrary contained in the Plan, Option and Stock Purchase Rights may not be
granted to officers or Directors under this Plan.
6. Limitations. Neither the Plan nor any Option or Stock Purchase Right
shall confer
4
<PAGE> 5
upon an Optionee any right with respect to continuing the Optionee's employment
or consulting relationship with the Company, nor shall they interfere in any way
with the Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect until terminated under Section 15 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the
Notice of Grant.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option
is granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of
payment.
5
<PAGE> 6
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 13 of the
Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment. Upon termination of an
Optionee's status as an Employee or Consultant (other than as a result of the
Optionee's death or Disability), the Optionee may exercise his or her Option,
but only within such period of time from the date of such termination as is
determined by the Administrator and, unless determined otherwise by the
Administrator, only to the extent that the Optionee was entitled to exercise it
at the date of such termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). To the extent
that Optionee was not entitled to exercise an Option at the date of such
termination, and to the extent that the Optionee does not exercise such Option
(to the extent otherwise so entitled) within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
Notwithstanding the above, in the event of an Optionee's
change in status from
6
<PAGE> 7
Consultant to Employee or Employee to Consultant, the Optionee's status as an
Employee or Consultant shall not automatically terminate solely as a result of
such change in status.
(c) Disability of Optionee. Upon termination of an Optionee's
status as an Employee or Consultant as a result of the Optionee's Disability,
the Optionee may exercise his or her Option, but only within six (6) months or
such time period as the Administrator shall specify from the date of such
termination, and, unless determined otherwise by the Administrator, only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). To the extent that Optionee was
not entitled to exercise an Option at the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of an Optionee's death,
the Optionee's estate or a person who acquired the right to exercise the
deceased Optionee's Option by bequest or inheritance may exercise the Option,
but only within six (6) months or such time period as the Administrator shall
specify following the date of death, and, unless determined otherwise by the
Administrator, only to the extent that the Optionee was entitled to exercise it
at the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). To the extent that Optionee
was not entitled to exercise an Option at the date of death, and to the extent
that the Optionee's estate or a person who acquired the right to exercise such
Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid (which
price shall not be less than the par value of the Company's Common Stock, as
adjusted from time to time, and the minimum price permitted by the Delaware
General Corporation Law), and the time within which the offeree must accept such
offer. The offer shall be accepted by execution of a Restricted Stock Purchase
7
<PAGE> 8
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. An
Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common
8
<PAGE> 9
Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option and Stock Purchase Right will
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation (the
"Successor Corporation"), unless the Successor Corporation refuses to assume or
substitute for the Option or Stock Purchase Right, in which case the Optionee
shall have the right to exercise the Option or Stock Purchase Right as to all of
the Optioned Stock, including Shares as to which it would not otherwise be
exercisable. If an Option or Stock Purchase Right is exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option or Stock Purchase Right
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the
9
<PAGE> 10
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely Common Stock of the Successor Corporation, the Administrator may,
with the consent of the Successor Corporation, provide for the consideration to
be received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to be
solely Common Stock of the Successor Corporation equal in fair market value to
the per share consideration received by holders of Common Stock in the merger or
sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to
the exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, Applicable Laws, and the requirements of any
stock exchange or quotation system upon which the Shares may then be listed or
quoted, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
(b) Investment Representations. As a condition to the exercise
of an Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock
10
<PAGE> 11
Purchase Right to represent and warrant at the time of any such exercise that
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required.
17. Liability of Company. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-28-1999
<CASH> 707,403
<SECURITIES> 1,291,438
<RECEIVABLES> 2,211,592
<ALLOWANCES> 0
<INVENTORY> 311,842
<CURRENT-ASSETS> 5,300,941
<PP&E> 2,669,308
<DEPRECIATION> 1,163,260
<TOTAL-ASSETS> 7,509,274
<CURRENT-LIABILITIES> 2,798,530
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,411,146
<TOTAL-LIABILITY-AND-EQUITY> 7,509,274
<SALES> 7,067,470
<TOTAL-REVENUES> 8,211,652
<CGS> 3,279,780
<TOTAL-COSTS> 3,960,071
<OTHER-EXPENSES> 3,293,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,015,948
<INCOME-TAX> 379,784
<INCOME-CONTINUING> 636,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 636,164
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.79<F1>
<FN>
<F1>EPS HAS BEEN RESTATED TO REFLECT A 2:1 STOCK SPLIT WHICH WAS PAID ON APRIL 8,
1999.
</FN>
</TABLE>
