<PAGE> 1
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 December 27, 1998 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 (I.R.S. Employer Identification No.)
incorporation or organization)
</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 [X] 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.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT DECEMBER 27, 1998
Common Stock - $0.00067 par value 385,264,651
</TABLE>
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8 - K 25
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 27, June 30,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 669,862 $ 822,267
Short-term investments 902,929 476,185
Accounts receivable, net 2,108,237 1,845,765
Inventories 363,664 346,446
Deferred tax assets 373,541 371,841
Other current assets 327,461 285,021
----------- -----------
Total current assets 4,745,694 4,147,525
Property, plant and equipment, at cost 2,593,985 2,257,228
Accumulated depreciation and amortization (1,141,377) (956,616)
----------- -----------
1,452,608 1,300,612
Other assets, net 363,218 262,925
----------- -----------
$ 6,561,520 $ 5,711,062
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,351 $ 7,169
Accounts payable 611,412 495,603
Accrued liabilities 1,230,718 1,166,491
Income taxes payable 205,340 188,641
Other current liabilities 288,169 264,967
-----------
Total current liabilities 2,347,990 2,122,871
Deferred income taxes and other obligations 112,527 74,563
Total stockholders' equity 4,101,003 3,513,628
-----------
$ 6,561,520 $ 5,711,062
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Products $2,384,740 $2,161,992 $4,540,858 $4,009,880
Services 399,700 288,251 734,766 538,967
---------- ---------- ---------- ----------
Total net revenues 2,784,440 2,450,243 5,275,624 4,548,847
---------- ---------- ---------- ----------
Cost and expenses:
Cost of sales-products 1,121,500 997,301 2,109,737 1,858,628
Cost of sales-services 225,710 174,329 453,810 340,436
Research and development 303,482 259,228 586,762 481,846
Selling, general and administrative 747,603 696,450 1,459,191 1,311,943
Purchased in-process research and
development 12,000 110,100 92,000 162,284
---------- ---------- ---------- ----------
Total costs and expenses 2,410,295 2,237,408 4,701,500 4,155,137
Operating income 374,145 212,835 574,124 393,710
Interest income, net 20,306 10,197 35,661 20,768
---------- ---------- ---------- ----------
Income before income taxes 394,451 223,032 609,785 414,478
Provision for income taxes 133,364 73,600 234,824 156,613
---------- ---------- ---------- ----------
Net income $ 261,087 $ 149,432 $ 374,961 $ 257,865
========== ========== ========== ==========
Net income per common share - basic $ 0.68 $ 0.40 $ 0.99 $ 0.69
========== ========== ========== ==========
Net income per common share - diluted $ 0.64 $ 0.38 $ 0.93 $ 0.65
========== ========== ========== ==========
Shares used in the calculation of
net income per share - basic 382,547 373,875 379,883 372,968
========== ========== ========== ==========
Shares used in the calculation of
net income per share - diluted 405,288 393,231 401,445 394,165
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 27, December 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 374,961 $ 257,865
Adjustments to reconcile net income
to operating cash flows:
Depreciation and amortization 313,370 183,472
Tax benefit of options exercised 96,740 74,466
Purchased in-process research and development 92,000 162,284
Net (increase) decrease in accounts receivable (258,651) 16,004
Net increase in inventories (17,218) (15,765)
Net increase in accounts payable 114,749 14,414
Net increase in other current
and non-current assets (87,687) (97,594)
Net increase in other current
and non-current liabilities 143,529 19,301
--------- ---------
Net cash provided from operating activities 771,793 614,447
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (360,322) (410,453)
Acquisition of spare parts and other assets (68,481) (49,080)
Payments for acquisitions, net of cash acquired (31,269) (227,655)
Acquisition of short-term investments (935,266) (305,738)
Sale of short-term investments 235,617 224,309
Maturities of short-term investments 252,268 214,122
--------- ---------
Net cash used by investing activities (907,453) (554,495)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 92,228 37,189
Acquisition of treasury stock (164,286) (140,537)
Proceeds from employee stock purchase plans 58,529 50,649
Net reduction of short-term borrowings and
other obligations (3,216) (94,155)
--------- ---------
Net cash used by financing activities (16,745) (146,854)
--------- ---------
Net decrease in cash and cash equivalents (152,405) (86,902)
--------- ---------
Cash and cash equivalents, beginning of period 822,267 660,170
--------- ---------
Cash and cash equivalents, end of period $ 669,862 $ 573,268
========= =========
</TABLE>
5
<PAGE> 6
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 27, December 28,
1998 1997
--------- ---------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 745 $ 388
Income taxes $ 58,448 $ 55,503
Supplemental schedule of non-cash investing activities:
Stock issued in conjunction with an acquisition $142,028 --
Fair value of assets acquired $198,629 $ 284,294
Cash paid for assets $ 35,684 $ 233,111
Liabilities assumed $ 20,737 $ 51,183
--------- ---------
</TABLE>
See accompanying notes.
6
<PAGE> 7
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 .
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 27, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Raw materials $127,115 $ 92,197
Work in process 40,577 58,765
Finished goods 195,972 195,484
-------- --------
$363,664 $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.
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
7
<PAGE> 8
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 is evaluating its expected
adoption date and currently expects to 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 for 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 Six Months Ended
------------------------ ------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 261,087 $ 149,432 $ 374,961 $ 257,865
Unrealized gain (loss) on securities (6,513) 9,406 (20,637) 9,592
Change in cumulative translation
adjustment 242 7,515 2,201 (1,622)
--------- --------- --------- ---------
Comprehensive net income $ 254,816 $ 166,353 $ 356,525 $ 265,835
========= ========= ========= =========
</TABLE>
ACQUISITIONS
On August 28, 1998 the Company acquired all of the outstanding capital stock of
NetDynamics, Inc. ("NetDynamics") by means of a merger transaction pursuant to
which all the shares of NetDynamics capital stock were converted into the right
to receive 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 the consideration for the acquisition. The transaction
was accounted for as a purchase and 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) and goodwill
($36.2 million), customer base ($10 million) and assembled workforce ($2
million). In addition to the intangible assets acquired, the Company recorded an
$80 million charge, representing the write-off of in-process research and
development ("IPRD").
On September 28, 1998 the Company acquired all of the outstanding capital stock
of i-Planet, Inc. ("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. The transaction was accounted for as a purchase and 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 ($3.3 million) and goodwill type assets ($18.3 million). In addition
to the intangible assets acquired, the Company recorded an $8.4 million charge,
representing the write-off of IPRD.
8
<PAGE> 9
On October 16, 1998, the Company acquired all of the outstanding capital stock
of Beduin Communications Incorporated ("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. The transaction was accounted for as a
purchase and 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 ($3.1 million) and goodwill type assets ($1.4
million). In addition to the intangible assets acquired, the Company recorded an
$3.6 million charge, representing the write-off of IPRD.
For financial reporting purposes, the Company is required for each acquisition
to determine the fair value of all identified intangible assets acquired and
expense the fair value associated with IPRD for which there is no alternative
future use. The allocation of $80 million, $8.4 million, and $3.6 million of the
purchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun
acquisitions, respectively, represents the estimated fair value based on risk
adjusted cash flows related to each incomplete project. The Company believes
that such fair values do not exceed the amount a third party would pay for each
such in-process technology. At the date of each of the acquisitions, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the in-progress technology had no alternative future use.
Accordingly, these costs were expensed.
In making its purchase price allocations for the NetDynamics, i-Planet, and
Bediun acquisitions, the Company considered present value calculations of
income, an analysis of project accomplishments and completion costs, an
assessment of overall contribution, as well as project risks. The values
assigned to IPRD related to each acquisition 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 associated risks. 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 weighted
average cost of capital plus a risk premium to account for the inherent
uncertainty surrounding the successful completion of each project and the
associated estimated cash flows.
The values assigned to developed technologies related to each acquisition were
based upon future discounted cash flows related to each of the existing
products' projected income stream. The values of the customer bases were
determined based upon the value of existing relationships and the expected
revenue stream. The value of the assembled workforces were based upon the cost
to replace that workforce. Intangible assets, including goodwill, are being
amortized over their estimated useful lives, generally two to five years.
9
<PAGE> 10
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 the Strategic Development and Marketing Agreement ("SDMA"). A copy of
the SDMA has been filed as exhibit 10.93 to this Form 10-Q and is incorporated
herein by reference. 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 Communications, Inc. ("Netscape") code base, 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. In a separate transaction, AOL signed a definitive agreement to acquire
Netscape (the "Merger"). The SDMA provides that in the event the Merger is not
consummated by June 30, 1999, AOL and Sun will negotiate in good faith for a
period of 30 days thereafter in an effort to agree to alternative terms, and
either party may terminate the SDMA if the parties fail to agree on alternative
terms during that period.
SUBSEQUENT EVENTS
On January 21, 1999 the Company announced a two-for-one stock split (to be
effected in the form of a stock dividend) to stockholders of record as of the
close of business on March 18, 1999. This dividend is subject to stockholder
approval of an increase in the number of authorized shares of the Company's
Common Stock to 1.8 billion shares which will be sought
at the Company's Special Meeting of Stockholders on March 17, 1999.
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. The transaction will be accounted for as a purchase, and
the purchase price will be allocated to tangible and intangible assets and IPRD.
10
<PAGE> 11
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 Six Months Ended
-------------------------- --------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues:
Products 85.6% 86.5% 86.1% 88.2%
Services 14.4 13.5 13.9 11.8
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Products 40.3 40.7 40.0 40.8
Services 8.1 7.1 8.6 7.5
----- ----- ----- -----
Total cost of sales 48.4 47.8 48.6 48.3
----- ----- ----- -----
Gross margin 51.6 52.2 51.4 51.7
Research and development 10.9 10.6 11.1 10.6
Selling, general and administrative 26.8 28.4 27.7 28.85
Purchased in-process research
and development 0.4 4.5 1.7 3.6
----- ----- ----- -----
Operating income 13.4 8.7 10.9 8.7
Interest income, net 0.8 0.4 0.7 0.4
----- ----- ----- -----
Income before income taxes 14.2 9.1 11.6 9.1
Provision for income taxes 4.8 3.0 4.5 3.4
----- ----- ----- -----
Net income 9.4% 6.1% 7.1% 5.7%
===== ===== ===== =====
</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 economic trends and unfavorable currency movements in
the Asia Pacific and Latin American marketplace),
11
<PAGE> 12
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, and other factors, including those listed
below. Other facts that may affect such results and financial condition are set
forth in the Company's 1998 Annual Report to Stockholders which is incorporated
by reference in the Company's Form 10-K.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $2,784.4 million for the second quarter of fiscal 1999 and
$5,275.6 million for the first six months of fiscal 1999, representing increases
of 13.6% and 16.0%, respectively, over the corresponding periods of fiscal 1998.
Sun's products net revenues were $2,384.7 million for the second quarter of
fiscal 1999, an increase of $222.7 million or 10.3% over the second quarter of
fiscal 1998. Net product revenues were $4,540.9 million for the six months ended
December 27, 1998, an increase of $531.0 million or 13.2% over the corresponding
period of fiscal 1998. More than 50% of the growth in products revenues for
the quarter ended December 27, 1998 resulted from strong demand for low-end
desktop products and workgroup servers, and to a lesser extent from increased
revenues generated by richly configured enterprise servers. More than 50% of
the growth in products revenues for the six month period ended December 27, 1998
resulted from strong demand for low-end desktop products and workgroup servers
and to a lesser extent, the Company's storage products. The growth in product
revenues 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 $399.7 million for the second quarter of fiscal
1999, an increase of $111.4 million or 38.6% over the second quarter of fiscal
1998. Net revenues from services were $734.8 million for the six months ended
December 27, 1998, an increase of $195.8 million or 36.3% over the corresponding
period of fiscal 1998. The increases in services revenues are primarily the
result of 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 10.1% and 14.9 % in the second quarter and
first six months of fiscal 1999, respectively. International net revenues
(including United States exports) grew 17.2% and 17.1% in the second quarter and
first six months of fiscal 1999, respectively, compared with the corresponding
periods of fiscal 1998. In US dollars, European net revenues increased 22.7% and
28.7%, Rest of World (ROW) net revenues increased 7.1% and 10.8%, and Japanese
net revenues increased 13.8% and decreased 3.3%, in the second quarter and first
six months of fiscal 1999, respectively, when compared with the corresponding
periods of fiscal 1998. The increases in Europe and the ROW are due to continued
market acceptance of Sun's network computing products and services primarily in
the United Kingdom and Germany. The Company attributes the increase in Japanese
revenues in the second quarter 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 a number of factors. In particular, if
the economic trends in Japan significantly worsen in a quarter or decline over
an extended period of time, the Company's results from operations and cash flows
would be adversely affected.
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
12
<PAGE> 13
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 51.6% for the second quarter of fiscal 1999 and 51.4% for
the first six months of fiscal 1999, compared with 52.2% and 51.7%,
respectively, for the corresponding periods of fiscal 1998.
Products gross margin was 53.0% in the second quarter of fiscal 1999 and 53.5%
for the first six months of fiscal 1999, compared with 53.9% and 53.6%,
respectively, for the corresponding periods of fiscal 1998. The decrease in the
products gross margin for the second quarter of fiscal 1999 reflects the effects
of increased volumes of lower margin low-end desktop products, partially offset
by higher margin servers and reduced component costs across product lines. There
could be a further impact upon products gross profit margins as the result of
any continued shift in customer purchasing patterns towards low-end desktop
products and workgroup servers. 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 a number of
factors. Services gross margin was 43.5% for the second quarter of fiscal 1999
and 38.2% for the first six months of fiscal 1999, compared with 39.5% and
36.8%, respectively, for the corresponding periods of fiscal 1998. The increases
in services gross margin reflect increased market penetration in Enterprise
datacenter accounts, increased enrollment in datacenter training courses and
other offerings, and continued growth in professional services offerings. These
increases have been partially offset by increased investment by the Company in
its services business.
The Company continuously evaluates the competitiveness of its product offerings.
These evaluations could result in repricing actions in the near term. Sun's
future operating results would be adversely affected if such repricing actions
were to occur and the Company were unable to mitigate the resulting margin
pressure by maintaining a favorable mix of systems, software, service, and other
products and by achieving component cost reductions, operating efficiencies and
increasing volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased to $303.5 million in the
second quarter of fiscal 1999, compared with $259.2 million for the second
quarter of fiscal 1998. R&D expenses were $586.8 million for the first six
months of fiscal 1999, compared with $481.8 million for the corresponding period
of fiscal 1998. As a percentage of total net revenues, R&D expenses increased to
10.9% and 11.1% for the second quarter and first six months of fiscal 1999,
respectively, compared with 10.6% in each of the corresponding periods of fiscal
1998. Both the dollar and percentage increase in R&D expenses in the second
quarter and first half of fiscal 1999 over the corresponding periods in fiscal
1998 primarily reflect increased expenditures focused on the development of
hardware and software products which utilize the Java (TM) platform and new
server and storage products. The remaining increase in R&D expenses is due to
13
<PAGE> 14
further development of products acquired through acquisitions and increased
compensation 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 be in the
range of 10 to 11% of revenue for fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased to $747.6 million
in the second quarter of fiscal 1999, compared with $696.5 million for the
second quarter of fiscal 1998. SG&A expenses were $1,459.2 million for the first
six months of fiscal 1999, compared with $1,311.9 million for the corresponding
period of fiscal 1998. As a percentage of total net revenues, SG&A expenses
decreased to 26.8% and 27.7% in the second quarter and first six months of
fiscal 1999, respectively, from 28.4% and 28.8%, respectively, in the
corresponding periods of fiscal 1998. Overall SG&A spending increased by
approximately $51.1 million or 7.3% in the second quarter of fiscal 1999 in
comparison with the same period of fiscal 1998. For the six month period ended
December 27, 1998, overall SG&A spending increased by approximately $147.2
million or 11.2% in comparison to the corresponding period of fiscal 1998. The
dollar increases in fiscal 1999 are primarily attributable to increased
compensation 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. The dollar increase 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 and early 1999,
to further expand its demand creation programs and support organizations.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
NETDYNAMICS, INC.
On August 28, 1998, the Company acquired all of the outstanding capital stock of
NetDynamics by means of a merger transaction pursuant to which all the shares of
NetDynamics capital stock were converted into the right to receive shares of Sun
common stock 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 the consideration for the acquisition. The transaction was accounted
for as a purchase and 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, the Company recorded an $80 million charge,
representing the write-off of IPRD.
At the acquisition date, 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 in which the server
components are tightly integrated with the presentation interface. The EJB
architecture will allow for the development of more robust 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
14
<PAGE> 15
programming interfaces. Other new features include significant security
enhancements and performance and scalability improvements and the addition of
new platform adaptor components for legacy systems integration.
At the acquisition date, NetDynamics was in mid-stages of development and
substantial progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the NetDynamics New
Product Offering relate primarily to coding, testing, and addressing additional
implementation issues. The Company anticipates that the NetDynamics New Product
Offering will be complete by the end 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 expenditures to complete the NetDynamics New Product
Offering to total approximately $5.7 million in fiscal 1999 of which $2.4
million has been incurred. The preceding two sentences are forward-looking
statements that are subject to risks and uncertainties and actual results may
differ materially from those set forth in such sentences as a result of a number
of factors. In particular, there can be no assurance that the NetDynamics New
Product Offering will be completed by the end of the Company's fiscal year
ending June 30, 1999, that it will meet either technological or commercial
success or that the Company will receive any economic benefit from the
NetDynamics New Product Offering. In addition, the expenditures related to
completing the NetDynamics New Product Offering may exceed the Company's current
estimates as a result of delays in the development of the technology, the
complexity of the technology, changes in customer needs, or for other reasons.
I-PLANET, INC.
On September 28, 1998 the Company 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. The
transaction was accounted for as a purchase and 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 ($3.3 million)
and goodwill type assets ($18.3 million). In addition to the intangible assets
acquired, the Company recorded an $8.4 million charge, representing the
write-off of IPRD.
At the acquisition date, i-Planet was conducting development, engineering, and
testing activities associated with the completion of a new Java technology-based
remote Internet access product scheduled to be released in early calendar 1999.
It is anticipated that this new product offering ("i-Planet New Product
Offering") when combined with a new Sun software product 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 in mid-stages of development and
substantial progress had been made 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 complete by the end of the Company's third quarter of fiscal
1999, 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 i-Planet New Product Offering are expected to total approximately
$6 million in fiscal 1999. The preceding two sentences are forward-looking
statements that are subject to risks and uncertainties and actual results may
differ materially from those set forth in such sentences as a result of a number
of factors. In particular, there can be no assurance that the i-Planet New
Product Offering will be completed by the end of the Company's fiscal year
ending June 30, 1999, that it will meet either technological or commercial
success or that the Company will receive any economic benefit from the i-Planet
New Product Offering. In addition, the expenditures related to completing the
i-Planet New Product Offering may exceed the Company's current estimates as a
result of delays in the development of the technology, the complexity of the
technology, changes in customer needs, or for other reasons.
BEDIUN COMMUNICATIONS INCORPORATED
On October 16, 1998, the Company 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.
The transaction was accounted for as a purchase and 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 ($3.1
million) and goodwill type assets ($1.4 million). In addition to the intangible
assets acquired, the Company recorded an $3.6 million charge, representing the
write-off of IPRD.
At the acquisition date, Bediun was conducting development, engineering, and
testing activities associated with the completion of a suite of products
("Bediun New Product Offerings") which included: 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
15
<PAGE> 16
these smart devices). The Lifestyle PIM and the email client were scheduled to
be released in the second quarter of calendar year 1999. It is anticipated that
these Bediun 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 Bediun New Product
Offerings are designed to integrate and synchronize communications and data
processing systems to enable communications across time and space.
At the acquisition date, Bediun was in mid-stages of development and substantial
progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the Bediun New Product
Offerings relate primarily to coding, testing, and addressing additional
implementation issues. The Company anticipates that the Bediun 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. Expenditures to complete the Bediun New Product Offerings are expected
to total approximately $1 million in fiscal 1999. The preceding two sentences
are forward-looking statements that are subject to risks and uncertainties and
actual results may differ materially from those set forth in such sentences as a
result of a number of factors. In particular, there can be no assurance that the
Bediun New Product Offerings will be completed by the end of the Company's
fiscal year ending June 30, 1999, that it will meet either technological or
commercial success or that the Company will receive any economic benefit from
the Bediun New Product Offerings. In addition, the expenditures related to
completing the Bediun New Product Offerings may exceed the Company's current
estimates as a result of delays in the development of the technology, the
complexity of the technology, changes in customer needs, or for other reasons.
VALUATIONS OF IPRD
For financial reporting purposes, the Company is required to determine the fair
value of all identified intangible assets and expense the fair value associated
with IPRD for which there is no alternative future use for each of its
acquisitions. The allocation of $80 million, $8.4 million, and $3.6 million of
the purchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun
acquisitions, respectively, represents the estimated fair values based on risk
adjusted cash flows related to each incomplete project. The Company believes
that such fair values do not exceed the amount a third party would pay for each
such in-process technology. At the date of each of the acquisitions, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the R&D in progress had no alternative future uses. Accordingly,
these costs were expensed.
Forecasts of future results that management believes are likely to occur were
the basis for assigning value to IPRD. For the NetDynamics, i-Planet, and Bediun
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 weighted average cost of
capital ("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 20% for the NetDynamics acquisition,
25% for the i-Planet acquisition, and 40% for the Bediun acquisition. These
discount rates are higher than the 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. Management expects
to continue its development each project and believes that there is a reasonable
chance of successfully completing such development. 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
16
<PAGE> 17
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. The foregoing statements in this paragraph are forward-looking
statements that are subject to risks and uncertainties, and actual results may
differ materially from those set forth in such statements as the result of a
number of factors, including those stated in this paragraph.
Purchased IPRD of $110.1 million and $162.3 million in the second quarter and
first six months of fiscal 1998, respectively, represent the write-off of
purchased IPRD associated with the Company's acquisitions of Chorus Systems
S.A., and the storage products business of Encore Computer Corporation in the
second quarter of fiscal 1998 and Diba, Inc. and Integrity Arts, Inc. in the
first quarter of fiscal 1998.
INTEREST INCOME, NET
Net interest income was $20.3 million for the second quarter and $35.7 million
for the first six months of fiscal 1999, compared with $10.2 million and $20.8
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.
INCOME TAXES
The Company's effective income tax rate was 33% for the second quarter and first
six months of fiscal 1999, before non-recurring tax charges of $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
second quarter and six months ended December 27, 1998 was 33.8% and 38.5%,
respectively. The Company's effective income tax rate for the second quarter and
six months ended December 28, 1997 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
17
<PAGE> 18
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
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 microprocessor is a
complex and uncertain process requiring high levels of innovation from the
Company's designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things, in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be 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
18
<PAGE> 19
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 (TM) 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.
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 fully operational by the end of the second
quarter of fiscal 1999, these systems will be further tested in the second half
of the Company's fiscal year, and in particular, the fourth quarter to the
extent that the Company
19
<PAGE> 20
experiences higher volumes of orders and shipments as it has typically
experienced during these periods. In addition, during the balance of fiscal
1999, 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 half 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 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 $35 million, of which approximately $5 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. 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
20
<PAGE> 21
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 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
21
<PAGE> 22
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 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 December 27, 1998 when
compared with June 30, 1998. During the first six months of fiscal 1999, cash
flows from operating activities generated $771.8 million in cash and cash
equivalents. Non-cash expenses affecting cash provided by operating activities
in the first six months of fiscal 1999 included depreciation and amortization
expense of $313.4 million, tax benefits of options exercised of $96.8 million
and charges for IPRD of $92 million in connection with the acquisitions of
22
<PAGE> 23
NetDynamics, i-Planet and Bediun. Favorably impacting cash provided by
operations were increases in accounts payable and other liabilities of $114.7
million and $144.5 million, respectively, which reflect the timing of payments
for inventory and other items. Offsetting these items, accounts receivable
increased $258.7 million which reflects an increase in 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 acquisition of NetDynamics.
The Company's investing activities used $907.5 million of cash in the first six
months of fiscal 1999, an increase of $353 million from the prior year's
comparable period. The increase resulted primary from increased acquisitions of
short-term investments during the first six months of fiscal 1999, as compared
with the prior year's comparable 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.
At December 27, 1998, the Company's primary sources of liquidity consisted of
cash, cash equivalents and short-term investments of $1,572.8 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 1999. However, the Company believes the level of financial resources is a
significant competitive factor in its industry and may choose at any time to
raise additional capital through debt or equity financing to strengthen its
financial position, facilitate growth and provide the Company with additional
flexibility to take advantage of business opportunities that may arise.
23
<PAGE> 24
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. The Company believes
that the outcome of this matter will not have a material adverse impact on Sun's
financial condition, results of operations or cash flows in any given fiscal
year.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 11, 1998 the Annual Meeting of Stockholders of the Company was
held in Menlo Park, California. The results of voting of the 313,381,495 shares
of Common Stock represented at the meeting or by proxy are described below.
An election of directors was held with the following individuals being
elected to the Board of Directors of the Company:
<TABLE>
<CAPTION>
Name Shares Voted For Votes Withheld
- ---- ---------------- --------------
<S> <C> <C>
Scott G. McNealy 314,513,658 1,581,681
L. John Doerr 305,306,845 10,788,494
Judith L. Estrin 314,554,906 1,540,433
Robert J. Fisher 314,551,674 1,543,665
Robert L. Long 314,544,221 1,551,118
M. Kenneth Oshman 314,556,052 1,539,287
A. Michael Spence 314,511,203 1,584,136
</TABLE>
24
<PAGE> 25
The seven nominees who received the highest number of votes (all of the
above individuals) were elected to the Board of Directors.
The stockholders approved an amendment to the Company's 1990 Long-Term
Equity Incentive Plan in order to increase the number of shares of Common Stock
authorized for issuance thereunder by 18,000,000 shares of Common Stock to an
aggregate of 119,400,000 shares. There were 193,531,834 votes cast for the
amendment, 121,004,835 votes cast against the amendment and 1,558,670
abstentions.
The stockholders approved an amendment to the Company's 1988 Directors'
Stock Option Plan in order to decrease the number of shares of Common Stock
subject to the one-time automatic nonemployee director grant (granted on the
date of the initial appointment of a director who is not affiliated with an
entity having an equity investment in the Company) from 80,000 shares to 30,000
shares. There were 259,580,690 votes cast for the amendment, 54,345,777 votes
cast against the amendment and 2,168,872 abstentions.
ITEM 5 - OTHER INFORMATION
a) SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER
None
b) NON-RULE 14a-8 STOCKHOLDER PROPOSALS
Proposals of the Company's stockholders that such stockholders intend to present
at the Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting"), but
not included in the Company's Proxy Statement and form of Proxy related to the
Annual Meeting (a "Non-Rule 14a-8 Proposal"), must be received by the Company's
Secretary at the Company's offices at 901 San Antonio Road, Palo Alto,
California 94303 no later than September 13, 1999 and no earlier than August 12,
1999. In the event that the Company does not receive timely notice with respect
to a Non-Rule 14a-8 Proposal, management of the Company would use its
discretionary authority to vote the shares it represents as the Board of
Directors may recommend.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<S> <C>
10.64 Registrant's 1998 Directors' Stock Option Plan as amended on
August 12, 1998.
10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended
on August 12, 1998.
10.93+ Strategic Development and Marketing Agreement dated November 23,
1998 by and between America Online, Inc. and the Registrant.
27.0 Financial Data Schedule for the period ended December 27, 1998.
</TABLE>
+ Confidentiality Treatment Requested.
(1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to
Registrant's Amendment No. 1 to Registration Statement Form S-8/A file
number 333-67183 filed with the Securities and Exchange Commission on
January 26, 1999.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 27,
1998.
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 December 27, 1998.
25
<PAGE> 26
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: February 8, 1999
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<S> <C> <C>
10.64 Registrant's 1998 Directors' Stock Option Plan as amended on
August 12, 1998.
10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended
on August 12, 1998.
10.93+ Strategic Development and Marketing Agreement dated November 23,
1998 by and between America Online, Inc. and the Registrant.
27.0 Financial Data Schedule for the period ended December 27, 1998.
</TABLE>
+ Confidentiality Treatment Requested.
(1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to
Registrant's Amendment No. 1 to Registration Statement Form S-8/A file number
333-67183 filed with the Securities and Exchange Commission on January 26, 1999.
27
<PAGE> 1
Exhibit 10.64
SUN MICROSYSTEMS, INC.
1988 DIRECTORS' STOCK OPTION PLAN
(AMENDED AS OF NOVEMBER 11, 1998)
1. Purposes of the Plan. The purposes of this Directors' Stock Option
Plan are to attract and retain the best available personnel for services as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Common Stock" shall mean the Common Stock of the Company.
(c) "Company" shall mean Sun Microsystems, Inc., a Delaware
corporation.
(d) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(e) "Director" shall mean a member of the Board.
(f) "Employee" shall mean any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Option" shall mean a stock option granted pursuant to the Plan.
(i) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(j) "Optionee" shall mean an Outside Director who receives an Option.
(k) "Outside Director" shall mean a Director who is not an Employee.
(l) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of
1986.
(m) "Plan" shall mean this 1988 Directors' Stock Option Plan.
(n) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(o) "Subsidiary" shall mean a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 425(f) of the Internal Revenue Code
of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the
<PAGE> 2
maximum aggregate number of Shares which may be optioned and sold under the Plan
is 2,200,000 Shares (the "Pool") of Common Stock. The Shares may be authorized,
but unissued, or required Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, shall become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and non-discretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who is a partner, officer or director
of an entity having an equity investment in the Company (or who was so
affiliated with such an entity at the time of his or her initial appointment or
election to the Board) shall be automatically granted an Option to purchase
20,000 Shares (the "First Option") upon the effective date of the Plan, as
determined in accordance with Section 6 hereof, or the date on which such person
first becomes a Director, whether through election by the shareholders of the
Company or appointment by the Board of Directors to fill a vacancy; provided,
however, that no Option shall be issued under the Plan or become exercisable
until shareholder approval of the Plan has been obtained. Each Outside Director
who is not, on the date of his or her initial appointment or election to the
Board, affiliated with an investment entity as described above, shall
automatically be granted a First Option of 30,000 Shares, subject to the above
provision.
(iii) After the First Option has been granted to an Outside
Director, such Outside Director shall thereafter be automatically granted an
Option to purchase 20,000 Shares (a "Subsequent Option") on the date of and
immediately following each Annual Meeting of Shareholders of the Company at
which such non-employee director is re-elected, if on such date,
2
<PAGE> 3
he shall have served on the Board for at least six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Directors on the automatic grant date. Any
further grants shall then be deferred until such time, if any, as additional
Shares become available for grant under the Plan of Shares which may be issued
under the Plan or through cancellation or expiration of Options previously
granted hereunder.
(v) The terms of an Option granted hereunder shall be as
follows:
(A) The term of the Option shall be five (5) years.
(B) The Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section 9
hereof.
(C) The exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Option.
(D) The Option shall become exercisable in installments
cumulatively as to twenty-five percent (25%) of the Shares subject to the Option
on each of the first, second, third and fourth anniversaries of the date of
grant of the Option.
(c) Powers of the Board. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to exercise on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of the Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
Officer or his designee reasonably believes that an Optionee has committed an
act of misconduct, the Chief
3
<PAGE> 4
Executive Officer may suspend the Optionee's right to exercise any option
pending a determination by the Board of Directors (excluding the Outside
Director accused of such misconduct). If the Board of Directors (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation
owed to the Company, breach of fiduciary duty or deliberate disregard of the
Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any option whatsoever. In making such determination, the Board of
Directors (excluding the Outside Director accused of such misconduct) shall act
fairly and shall give the Optionee an opportunity to appear and present evidence
on Optionee's behalf at a hearing before the Board or committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect until December 31, 2008
unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be five (5) years from
the date of grant thereof.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option. In the case of an Option granted
to an Optionee who, immediately before the grant of such Option, owns stock
representing more than ten percent (10%) of the voting power or
4
<PAGE> 5
value of all classes of stock of the Company or its parents or subsidiaries, the
per Share exercise price for the Shares to be issued pursuant to exercise of
such Option shall be at least 110% of the fair market value per Share on the
date of grant of the Option.
(b) Fair Market Value. The fair market value shall be the closing
price of the Common Stock on the date of grant, as reported on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System or, in
the event the Common Stock is traded on a stock exchange, the fair market value
per Share shall be the closing price on such exchange on the date of grant of
the Option.
(c) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, or any combination of such methods of payment.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
(b) Termination of Status as a Director. If an Outside Director
ceases to serve as
5
<PAGE> 6
a Director, he may, but only within ninety (90) days after the date he ceases to
be a Director of the Company, exercise his Option to the extent that he was
entitled to exercise it at the date of such termination. Notwithstanding the
foregoing, in no event may the Option be exercised after its five (5) year term
has expired. To the extent that he was not entitled to exercise an Option at the
date of such termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event a Director is unable to continue his service as a
Director with the Company as a result of his total and permanent disability (as
defined in Section 22(e)(3) of the Internal Revenue Code), he may, but only
within six (6) months from the date of termination, exercise his Option to the
extent he was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
five (5) year term has expired. To the extend that he was not entitled to
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) During the term of the Option, Optionee who is, at the time
of his death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as Director for six (6) months after the date of death. Notwithstanding
the foregoing, in no event may the Option be exercised after its five (5) year
term has expired.
(ii) Within one (l) month after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within six (6)
months following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
five (5) year term has expired.
10. Non-Transferability of Options. Options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of
6
<PAGE> 7
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title l of the Employee Retirement Income Security Act,
or the rules thereunder. The designation of a beneficiary by an Optionee does
not constitute a transfer. An Option may be exercised, during the lifetime of
the Optionee, only by the Optionee or a transferee permitted by this Section 10.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Common Stock subject to
an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action. In the event of a proposed sale of all or substantially all of
the assets of the Company or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event that such successor corporation refuses to
assume the Option or to substitute an equivalent option, the Board shall, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option as to all of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable, in which case, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
7
<PAGE> 8
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the termination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule l6b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the shareholders of the Company of Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in
Sections 2(k), 4(b), 5, 7 and 8(a) of this Plan (and any other Sections of this
Plan that affect the formula award terms required to be specified in this Plan
by Rule l6b-3) shall not be amended more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.
(i) any increase in the number of Shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan; or
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any material increase in the benefits accruing to
participants under the Plan; or
(iv) any change in the number of shares subject to Options to be
granted hereunder or in the terms thereof as set forth in Section 4(b) hereof.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such
8
<PAGE> 9
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended the
Exchange Act, the rules and regulations promulgated thereunder, state securities
laws, and the requirements of any stock exchange upon which the Shares may then
be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports to shareholders, proxy statements and other
information provided to all shareholders of the Company.
9
<PAGE> 1
Exhibit 10.93
CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
ASTERISKS (*) DENOTE SUCH OMISSIONS
STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT
This Strategic Development and Marketing Agreement (this "Agreement") is made
and entered into this 23rd day of November, 1998, by and between America Online,
Inc. ("AOL") and Sun Microsystems, Inc. ("Sun").
Certain terms used in this Agreement are defined in Section 24 hereof. This
agreement is confidential between the parties, provided that either party may
disclose the terms of this Agreement, and any associated collateral documents,
in order to comply with applicable laws and regulations, including securities
laws and regulations, and further provided that either party may disclose
information regarding portions of the financial provisions of this Agreement
after consulting with and obtaining the approval of the other party's Executive
Representative, which consent will not be unreasonably withheld or delayed. AOL
and Sun hereby agree as follows:
1.0 OBJECTIVES. AOL and Sun intend to cooperate in the development and marketing
of software and services in the area of electronic commerce and extended
communities and connectivity ("EC(2)") to businesses worldwide. The parties
intend to offer together an integrated, end-to-end solution including consumer
traffic, dial-up connectivity, network services, client software, server
software, computer systems, computer hardware, professional services, help desk
and service and support, but, subject to the terms and conditions herein, each
party would be free to offer its components in conjunction with competitive
components from third-parties. As described in this Agreement, some components
of such solution will be collaboratively developed, and some will be developed
principally or entirely by AOL or Sun. The solution offered by the parties is
expected to include traffic from AOL's multiple brands and related directory
services, configurable Netcenter or AOL.Com services and information, AOL
network access services, AOL instant messaging functionality, Sun support
services, Sun or AOL consulting services and Netscape or AOL outsourcing
services. As described in this Agreement, some components of such solution will
be marketed and sold by both parties pursuant to collaborative marketing and
sales plans, and some components would be marketed and sold by AOL or Sun only.
The business objectives of the parties include the following:
1.1 Establish a cooperative relationship between AOL, the world's
leading internet content provider, and Sun, the world's leading network
computing platform supplier, to create and deliver the best, integrated,
end-to-end enterprise commerce solutions using, where appropriate, the
Java and Jini technology from Sun.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
<PAGE> 2
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
1.2 Sustain and grow leadership in the browser marketplace for both
consumers and the enterprise to deeply penetrate the enterprise desktop
environment.
1.3 Accelerate revenues from merchants and build deep relationships with
top merchants by speeding their adoption of electronic commerce.
1.4 Create more value from relationships with electronic commerce
merchants and customers by *** creating new services revenues.
1.5 Sustain and grow a strong electronic commerce and enterprise
middleware software and services business, including developing a
leading commerce software and service platform that enables powerful
turnkey and customized solutions.
1.6 Sustain and grow the Sun Solaris, SPARC, Java and Jini business
technologies, as the choice for enterprises and service providers
worldwide.
1.7 *** APPROXIMATELY 3 LINES OMITTED ***
1.8 Establish and operate productive research and development,
marketing, sales and services to support this strategy.
2.0 SOFTWARE TO BE DEVELOPED. The parties intend to develop the following
products:
2.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. The "AOL Distributed
Communicator Client" will be a client application that will include the
fullest and most robust set of features and functions of any of the
client applications to be developed pursuant to this Section 2,***
APPROXIMATELY 2 LINES OMITTED ***. The AOL Distributed Communicator
Client *** will include the initial Release of the AOL Distributed
Communicator Client and all subsequent Releases of such application. ***
APPROXIMATELY 9 LINES OMITTED ***
2.2 THIRD PARTY COMMUNICATOR CLIENT. The "Third Party Communicator
Client" will be a client application.*** APPROXIMATELY 6 LINES OMITTED
*** The specification of the features and functions included in the
Third Party Communicator Client may be modified from time to time by
AOL, after consultation with Sun. The Third Party Communicator Client
*** will include the initial Release of the Third Party Communicator
Client and all subsequent Releases of such application that are
commercially released during the term of this Agreement.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
2
<PAGE> 3
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
2.3 OEM COMMUNICATOR CLIENT. The "OEM Communicator Client" will be a
client application incorporating a browser component, with features and
functions as set forth in the Collaborative Work Plans. The OEM
Communicator Client will include the initial Release of such application
and all subsequent Releases of such application that are commercially
released during the term of this Agreement.
2.4 NEW BROWSER. The "New Browser" will consist of a basic browser with
functions for browsing, rendering display of and accessing the Internet,
including enabling access to a portal, *** APPROXIMATELY 4 LINES OMITTED
***. The functions and features to be included in the New Browser will
be described in more detail in the Collaborative Work Plans. The New
Browser will include the initial Release of such application and all
subsequent Releases of such application that are commercially released
during the term of this Agreement. *** APPROXIMATELY 3 LINES OMITTED ***
2.5 NETWORK APPLICATION AND SERVER SOFTWARE. The "Network Application
and Server Software" will consist of network applications and server
software as specified in the Collaborative Development Work Plans, and
will include, without limitation, an application server, email server,
commerce server and directory software, as well as other software
specified in the Collaborative Development Work Plans.
2.6 COMMENCEMENT OF DEVELOPMENT. No collaborative development work shall
commence pursuant to this Agreement, and Sun shall not be provided with
access to any Netscape or AOL code, prior to the Closing Date.
3.0 DEVELOPMENT RESPONSIBILITIES.
3.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. AOL will develop the AOL
Distributed Communicator Client, *** APPROXIMATELY 4 LINES OMITTED ***
3.2 THIRD PARTY COMMUNICATOR CLIENT. AOL will, with assistance from Sun,
develop the Third Party Communicator Client, *** APPROXIMATELY 6 LINES
OMITTED ***
3.3 OEM COMMUNICATOR CLIENT. AOL will, with assistance from Sun, develop
the OEM Communicator Client,*** APPROXIMATELY 6 LINES OMITTED ***
3.4 NEW BROWSER. AOL will, with assistance from Sun, develop the New
Browser, *** APPROXIMATELY 8 LINES OMITTED ***
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
3
<PAGE> 4
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
3.5 NETWORK APPLICATION AND SERVER SOFTWARE. AOL and Sun will
collaboratively develop the Network Application and Server Software, ***
APPROXIMATELY 3 LINES OMITTED ***. AOL and Sun shall cooperate and
coordinate their development efforts so that, to the extent commercially
reasonable, the Client Software shall be compatible with and support the
interfaces, protocols and APIs of the Network Application and Server
Software in the Product Suites and vice versa.
3.6 JAVA TECHNOLOGY. The parties agree to use reasonable efforts to
modify the existing Netscape browser to develop the New Browser to
incorporate, for each System Platform, the most current release
available of the complete Java Runtime Environment (JRE) on all System
Platforms for which Sun has a JRE available. The parties agree to use
all reasonable efforts to ensure that Java code executing on the JRE so
invoked has the same access privileges and capabilities as Java code
running native on the operating system and can display user interfaces
within the browser window consistent with the user experience of running
Java applets today, provided that Sun provides such JRE to AOL, *** in
binary form in a fully operational and commercially viable form. Without
limiting the foregoing, AOL shall have no obligation to incorporate into
any browser any JRE provided by Sun that fails to operate properly on
the applicable System Platform for such version of such browser due to
the fault of Sun or any party other than AOL, or *** or which would
cause a material degradation in the performance characteristics of such
browser relative to competitive browsers in the marketplace, or which
cannot ***APPROXIMATELY 8 LINES OMITTED*** Without limiting the
foregoing, with respect to the *** AOL shall have no obligation to
***APPROXIMATELY 3 LINES OMITTED*** Sun agrees to provide error
corrections and bug fixes for the JREs on all supported System Platforms
pursuant to its standard terms of support (but without fee to AOL). In
the event Sun fails to provide such error corrections and bug fixes in a
timely commercially reasonable manner, Sun shall, pursuant to the TLDA
entered into between AOL and Sun, provide AOL with the source code, test
suites and related development tools for such JREs and the right to use
such source code, test suites and related development tools for the
purpose of supporting and maintaining such JREs in accordance with the
TLDA. Sun agrees to use reasonable efforts to *** In order to permit the
binary JRE to be integrated into such browsers, AOL agrees to use
reasonable efforts to incorporate and support the Open Java Interface in
such browsers. AOL and Sun agree to collaborate and consult with one
another and to cooperate with one another in good faith in an effort to
define and integrate this interface into such browsers for use by the
JREs in such browsers. AOL further agrees that if such incorporation of
the JRE is successfully implemented in a version of such browser for any
applicable System Platform, AOL will incorporate such version of such
browser in the versions of the OEM Communicator Client, Third Party
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
4
<PAGE> 5
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Client and AOL Distributed Communicator Client for such System Platform
*** If the JRE is so incorporated in the OEM Communicator Client, Third
Party Client or AOL Distributed Communicator Client, and AOL elects to
distribute any version of such product via download, such version shall
either be the JRE enabled version of such product, or AOL will make the
JRE enabled version of such product available for download in addition
to any non-JRE enabled version of such product made available for
download. If the JRE is so incorporated in the OEM Communicator Client,
Third Party Client or AOL Distributed Communicator Client, and AOL
elects to distribute any version of such product via CD-ROM, the version
of the product distributed by AOL via CD-ROM will be such JRE-enabled
version, to the extent contractually permissible and subject to size
limitations, and provided that AOL shall have no obligation to require
that its OEMs include the JRE-enabled version. AOL shall have the right
to distribute via download a smaller version of the New Browser without
the JRE, provided such version has hooks that permit the user optionally
to download and install the JRE. AOL will consider as part of the
Collaborative Development Work Plans whether to expose to the JRE all
public and private developer interfaces within the browser (including,
without limitation those in NSHTML.DLL), but shall have no obligation to
do so. AOL's obligations pursuant to this Section 3.6 are conditioned
upon Sun's granting to AOL *** any rights to Java technology necessary
to comply with this Section 3.6. In the event of any inconsistency or
conflict between this Section 3.6 or Section 9.8.1 of this Agreement and
the TLDA entered into between Sun and AOL, the terms of this Section 3.6
and the terms of Section 9.8.1 shall control.
3.7 INTENT TO DEVELOP LEADING PRODUCTS. The parties agree to use their
reasonable efforts to maintain the existing Netscape browser and the New
Browser as competitive alternatives to the browser component of Internet
Explorer from Microsoft, and agree that it is their intention to make
all products developed and distributed pursuant to this Agreement
leading and competitive products in their respective product categories.
3.8 JRE BUNDLING ON CD-ROMS. On any CD-ROMs on which AOL ships the AOL
classic client and on which AOL provides installation options permitting
third party software other than AOL classic client software to be a
separate installable item, ***APPROXIMATELY 3 LINES OMITTED*** AOL
agrees, subject to any third party contractual limitations, to use
reasonable efforts to co-package the latest version of the JRE with such
client and to offer to users an installation option to install such JRE,
provided that the JRE meets commercially reasonable standards making it
suitable for inclusion and installation, including without limitation
reasonable quality assurance and size limitations. AOL shall have no
obligation to display such installation option until after
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
5
<PAGE> 6
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
the user has gone through any included registration process for any AOL
Service Offering. AOL will also consider including*** APPROXIMATELY 6
LINES OMITTED ***
3.9 DESIGN OF CLIENTS. *** APPROXIMATELY 7 LINES OMITTED ***.
3.10 THIRD PARTY COMPONENTS AND PROTOCOLS; DIVERGENCE OF DEVELOPMENT. In
the event AOL (i) elects to use third party software or technology for
core functionality and features of the browser component of any of the
Client Software, (ii) adopts and maintains protocols or interfaces that
are inconsistent with Sun's reasonable server-dictated requirements; or
(iii) fails to support protocols or interfaces that are reasonably
required by Sun's server-dictated requirements, Sun shall have the
right, but not the obligation, to have AOL provide to Sun the source
code, test suites, and related development tools reasonably required for
Sun to pursue independent development of a browser based on the Existing
Netscape Software and/or Collaborative Software and to create client
applications incorporating such independently developed Sun browser. Any
resulting products developed by Sun shall be deemed to constitute
Designated Collaborative Software for purposes of this Agreement.
4.0 SALES AND MARKETING.
4.1 CUSTOMERS.
4.1.1 GENERAL. In accordance with the Marketing and Sales
Plan, the parties will work together to actively market
Product Suites, as well as other related products,
including Sun, Netscape, and AOL products and services,
to customers.
4.1.2 AOL COMMITTED SALES FORCE. Sun acknowledges that AOL
intends to commit an AOL sales force to target sales by
AOL to AOL EC Service Opportunities. Such sales force
may consist of (i) AOL interactive marketing sales
personnel and (ii) the current Netscape Netcenter sales
personnel. AOL shall bear all costs of such committed
sales force. Sun shall provide reasonable assistance to
AOL, as reasonably requested by AOL from time to time,
in connection with this AOL committed sales effort. Sun
shall provide such assistance through the sales and
marketing resources that Sun is required to provide
pursuant to the provisions of Section 4.1.3 and the
Marketing and Sales Plan, which may include access to
and participation of Sun employees who are not part of
the collaborative
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
6
<PAGE> 7
sales team, such as Sun technical personnel. Sun also
acknowledges that AOL intends to maintain a professional
services group to support AOL EC Services Opportunities
independent of any persons providing collaborative
services pursuant to this Agreement.
4.1.3 COLLABORATIVE SALES. AOL and Sun shall each form their
own respective sales forces targeting sales of the
Product Suites to non AOL EC Service Opportunities. The
AOL collaborative sales force shall consist of AOL and
Netscape enterprise sales and marketing, professional
services and technical support personnel selected by
AOL. The Sun collaborative sales force shall consist of
Sun sales personnel selected by Sun. The AOL and the Sun
collaborative sales forces shall both sell only off a
common pricelist and on standard terms and conditions,
with such pricelist and terms and conditions to be
designated by the Lead Executive for marketing and
sales. Each of AOL and Sun will, as specified in the
Marketing and Sales Plan, commit specified target levels
of sales and marketing resources (personnel and a
portion of marketing budget) to the staffing and support
of their respective collaborative sales forces and
coordinate the efforts of their respective collaborative
sales forces. In addition, Sun will support the
collaborative sales activities of the AOL collaborative
sales force with respect to any Sun products and
services, which may include access to and participation
of Sun employees who are not part of the collaborative
team, such as Sun technical personnel, and AOL will
support the collaborative sales activities of the Sun
collaborative sales force with respect to AOL Services
Offerings, which may include access to and participation
of AOL employees who are not part of the collaborative
team, such as AOL technical personnel.
4.1.4 SHARING OF REVENUES COLLECTED FROM CUSTOMERS. Subject to
the provisions of Section 4.2, revenues from the sale or
license of products or services shall be shared as set
forth below. Each party acknowledges that these
provisions are intended to reflect how revenues are
allocated and are not controlling as to which revenues
are recognized by which parties, which recognition shall
be at the sole discretion of each party in accordance
with Generally Accepted Accounting Principles.
4.1.4.1 AOL AND NETSCAPE SOFTWARE AND ASSOCIATED
SERVICES. AOL will receive 100% of the revenues
(and pay all of the associated cost of goods)
collected from any sale or license of AOL and
Netscape products and Associated Services,
including without limitation from sales or
licenses of the AOL Distributed Communicator
Client and Associated Services (but excluding
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
7
<PAGE> 8
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Existing Netscape Software and Existing Netscape
Software Upgrades and Associated Services), less
a sales commission equal to *** of such revenues
which shall be payable to Sun if a Sun
salesperson was primarily responsible for making
the sale of the AOL products or Associated
Services.
4.1.4.2 THIRD PARTY COMMUNICATOR AND EXISTING NETSCAPE
SOFTWARE AND ASSOCIATED SERVICES. AOL will
receive 100% of the revenues (and pay all of the
associated cost of goods) collected from any
sale or license of the Third Party Communicator
and Associated Services and Existing Netscape
Software and Existing Netscape Software Upgrades
and Associated Services, less a sales commission
equal to *** of such revenues, which shall be
payable to Sun if a Sun salesperson not on the
collaborative marketing and sales force was
primarily responsible for making the sale of the
AOL products or Associated Services.
4.1.4.3 SUN SOFTWARE AND SERVICES. Sun will receive 100%
of the revenues collected (and pay all of the
costs of goods) from any sale or license of Sun
software and professional services, less a sales
commission equal to *** of such revenues, which
shall be payable to AOL if an AOL salesperson
was primarily responsible for making the sale of
the Sun products or Associated Services. This
Section 4.1.4.3 shall not apply to "Sun
Products" as defined in the Service Provider
Agreement between the parties of even date
herewith.
4.1.4.4 DESIGNATED COLLABORATIVE SOFTWARE AND SERVICES.
AOL will receive *** of the Gross Margin
collected from any sale or license of Designated
Collaborative Software products and Associated
Services and Sun will receive *** of the Gross
Margin collected from such sales or licenses.
Whichever party to this Agreement enters into
the sales contract with the customer will
receive the revenues from such contract and
remit *** of the Gross Margin to the other party
as provided in this Section.
4.1.4.5 SALES BONUS. To the extent the amounts payable
to AOL in any quarter that are applied to the
Minimum Commitment exceed one
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
8
<PAGE> 9
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
hundred twenty-five percent (125%) of the
applicable Minimum Commitment for such quarter
as set forth in Section 4.5, Sun shall, in
addition to any other amounts payable by Sun to
AOL, pay to AOL a bonus equal to*** of the
amount by which such amounts payable to AOL
exceed one hundred twenty-five percent (125%) of
the applicable Minimum Commitment for such
quarter.
4.1.5 MARKETING CO-OP FEE. During the term of this Agreement,
as consideration for the marketing and selling of Sun
products and services and the products and services
developed under the Collaborative Activity, Sun will pay
AOL a marketing co-op fee, which shall be applied as
determined by AOL. The marketing co-op fee shall be Ten
Million Dollars ($10,000,000) for the first year
following the Closing Date, Ten Million ($10,000,000)
for the second year following the Closing Date, and Ten
Million Dollars ($10,000,000) for the third year
following the Closing Date, payable each year in
quarterly payments as provided in Section 8.l.
4.2 ADDITIONAL REVENUE DETERMINATION AND ALLOCATION PROVISIONS
4.2.1 REVENUE CALCULATION. For purposes of determining the
appropriate revenue or Gross Margin allocation under
Section 4.1.4, in cases where a single product or
service is sold, the revenues received shall be deemed
to equal the gross revenues (before sales commission)
collected from the end user or the OEM customer and the
Gross Margin shall be calculated in accordance with
Section 21.20. In cases where multiple products or
services are sold in a bundled sale, the revenues per
product or service will be calculated by computing the
overall discount (or ***, whichever is lower) from list
price for the bundled sale (or the aggregate sum of the
list prices for each individual component in the bundled
sale, if there is no list price for the bundled sale)
and applying that discount to the list price for the
product. *** APPROXIMATELY 10 LINES OMITTED ***.
4.2.2 SPECIAL REVENUE ALLOCATIONS. Notwithstanding anything to
the contrary herein, including without limitation the
provisions of Section 4.1.4, AOL shall retain all
collected revenues from existing Netscape OEM and
customer contracts (including without limitation
revenues collected in connection with any existing
service, development, support, maintenance, reseller,
VAR, OEM and other contracts) and existing contracts for
the
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
9
<PAGE> 10
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
sale and distribution of Existing Netscape Software and
any updates, enhancements and/or new releases thereof.
As used in this Section 4.2.2, the term "existing
contracts" shall mean any contracts entered into on or
before the Closing Date for the duration of the
remaining term of such contracts as well as any
extensions or renewals of the term of such contracts to
the extent the customer or OEM elects to exercise any
unilateral right of extension or renewal contained in
such existing contracts. AOL and Sun each shall retain
their existing customer contracts for the Netscape
client software, with all service, maintenance and
support provided by AOL, to the extent Netscape is
obligated to provide such service, maintenance and
support under existing service, maintenance and support
agreements, and all service, maintenance and support
provided by Sun, to the extent Sun is obligated to
provide such service, maintenance and support under
existing service, support and maintenance agreements.
AOL and Sun will each have the right to fulfill its
respective obligations under existing contracts,
notwithstanding anything to the contrary contained in
this Agreement
4.3 PRIORITY OF MARKETING BY SUN. In conducting its marketing
activities, Sun shall prioritize the marketing of the following client
products, where they exist for the customer platform, in the following
manner:
(a) As part of the standard Product Suites offering and any
other time Sun is marketing, distributing or selling a browser
component, Sun will give first priority to the marketing and
sale of ***.
(b) If a customer indicates that it does not want ***,Sun will
next attempt to market and sell ***.
(c) If a customer indicates that it does not want ***, Sun will
next attempt to market and sell ***.
*** APPROXIMATELY 7 LINES OMITTED ***
4.4 AOL SERVICE COMPONENTS AND SERVICE OFFERINGS. AOL and Sun each
agrees actively to market, promote and support the Product Suites.
Without limiting the foregoing, Sun will actively market, promote and
support the AOL Service Components and AOL Service Offerings that are
incorporated into products comprising the Product
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
10
<PAGE> 11
Suites in connection with its marketing, promotion and sales of the
Product Suites, provided that Sun customers will not be required to use
or maintain any AOL Service Components included in the Product Suites.
Notwithstanding anything to the contrary herein, including without
limitation the provisions of Section 4.1.4, AOL shall retain all
collected revenues related to or derived from sales or licenses of AOL
Service Components and AOL Service Offerings. Neither Sun nor the
collaborative sales team shall have any right to sell any AOL Service
Offerings without AOL's prior written consent, and AOL shall have no
obligation to provide such consent.
4.5 MINIMUM REVENUE COMMITMENTS BY SUN. Sun will commit that, during the
term of this Agreement, the total of the net amounts paid per year to
AOL under Sections, 4.1.4.2, 4.1.4.4, 9.6.2 (including, without
limitation, net of commissions payable to Sun sales personnel) and under
4.2.2 (which includes revenues derived by AOL from the sale of Existing
Netscape Software and Existing Netscape Software Upgrades and Associated
Services), will be not less than Three Hundred Twelve Million Dollars
($312,000,000) for the first year following the Closing Date, Three
Hundred Thirty Million Dollars ($330,000,000) for the second year
following the Closing Date, and Three Hundred Thirty Three Million Two
Hundred Fifty Thousand Dollars ($333,250,000) for the third year
following the Closing Date, payable in quarterly minimum payments the
("Minimum Commitment") as set forth in Section 8.1.
4.6 PENETRATION RATE FOR BUSINESS DESKTOP. So long as certain specified
milestone deliverable dates are satisfied as set forth in the
Collaborative Development Work Plans, Sun shall use all reasonable
efforts to achieve penetration of enterprise desktops by the Third Party
Communicator Client and AOL Distributed Communicator Client as set forth
in the Marketing and Sales Plan as mutually-agreed in writing prior to
the Closing Date, including without limitation bundling the Third Party
Communicator with Sun's Solaris operating system, actively promoting the
Third Party Communicator on Sun's website, and such other actions as Sun
normally takes to promote and market its products, provided that Sun
shall be relieved of such obligations to achieve such penetration if Sun
embarks on a divergent development path with respect to the Third Party
Communicator Client pursuant to Section 3.10. If the agreed level of
penetration is not achieved, Sun will take reasonable steps (e.g.,
increased marketing, promotion and salesforce incentives) to increase
the penetration rate to the required level within six months; provided
that, if Sun believes that the failure to achieve the requisite level of
penetration was due to factors beyond its reasonable control and/or that
the penetration rate shortfall cannot reasonably be remedied through
increased marketing and promotion unless additional remedial action is
also taken during such six month period, Sun will so inform AOL and the
parties shall discuss Sun's concerns and attempt to agree through good
faith negotiation on an appropriate plan to increase the penetration
rate within such six month period. Such plan may include actions by Sun
and/or AOL, depending on the circumstances. The Executive
Representatives shall facilitate such negotiation. If either
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
11
<PAGE> 12
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Executive Representative believes that negotiation will not succeed in a
timely fashion, he or she may refer such dispute to the two chief
executive officers to resolve. The Incentive Plan referred to in Section
13.1 will set forth the method by which Sun will provide incentives to
its sales force to achieve the requisite penetration rate. The
escalation procedures set forth in this Section 4.6 shall constitute
AOL's sole and exclusive remedy for any failure to achieve the specified
target penetration rate.
4.7 MARKETING AND SALES PLAN. The Marketing and Sales Plan will set
forth a detailed description of how the two sales and marketing teams
(i.e., the sale forces described in Sections 4.1.2 and 4.1.3,
respectively) will collaborate, including the initial sales force
compensation and incentive plans (as further described in Section 13.1)
to be implemented independently by the parties, the goal of which will
be to provide appropriate incentives for the sales forces to meet and
exceed the Minimum Commitments.
4.8 WARRANTIES, INDEMNIFICATION AND SUPPORT. Sun shall have the
exclusive right to provide and will provide all warranty and support
services in connection with sales and licenses (other than pursuant to
existing contracts as set forth in Section 4.2.2) by the collaborative
sales force and by the dedicated AOL sales force of the Product Suites,
including warranty and support services for supported Systems Platforms
other than the Sun Systems Platform, which may include Systems Platforms
such as Windows NT, HP-UX, Linux and IBM AIX. Sun will fulfill warranty
and support obligations in connection with all sales and licenses by AOL
arising from sales by the collaborative sales force and by the dedicated
AOL sales force of the Product Suites (other than pursuant to existing
contracts as set forth in Section 4.2.2). In consideration of Sun's
providing such support services, AOL will pay to Sun the sum of One
Million Dollars ($1,000,000) per month during the term of this
Agreement. In addition, Sun will, at the request of AOL, fulfill
warranty and support obligations for existing contracts as set forth in
Section 4.2.2 ***. Such support services shall include frontline
technical support, including call receipt, call screening, installation
assistance, problem identification and diagnosis, and other standard
support services customarily provided by Sun's twenty-four hour per day,
seven day per week support center. Backline escalation support shall be
provided by the collaborative development team. Sun shall defend,
indemnify and hold AOL harmless from all third party claims and
allegations relating to alleged breach or failure to provide support
services or breach of support service obligations under Sun's standard
maintenance contracts under which it is obligated to support the Product
Suites. AOL will promptly notify Sun in writing of any such claim or
allegation giving Sun the sole right of defense and settlement, and will
assist Sun, at Sun's expense (except for the value
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
12
<PAGE> 13
of time of AOL employees), to defend or settle such claim or allegation.
AOL shall have the right to employ separate counsel and to participate
in the defense of such claim at its own cost. Sun shall not be liable
for litigation expenses of or settlements by any third parties unless
Sun agrees in writing.
5.0 MANAGEMENT PROCESS FOR DEVELOPMENT AND SALES AND MARKETING.
5.1 EXECUTIVE REPRESENTATIVES. Each party shall designate a senior
executive reporting to its chief executive officer, president or chief
operating officer as its Executive Representative to the other for the
purpose of this Agreement. AOL's initial Executive Representative shall
be David Colburn, and Sun's initial Executive Representative shall be
William J. Raduchel. The Executive Representatives shall collaboratively
report quarterly in writing (which may be electronic) to both chief
executive officers on the progress of development under this Agreement
and shall work to facilitate cooperation between the parties to achieve
the development goals of this Agreement. The chief executive officers
shall consult prior to changing the Executive Representatives.
5.2 EXECUTIVE MEETING. In January and July of each year, the chief
executive officers and the relevant members of their management teams
including the Executive Representatives shall meet to review the
development progress and sales and marketing progress under this
Agreement. The January meetings shall be in California hosted by Sun and
the July meetings in Virginia, hosted by AOL. The host Executive
Representative shall be responsible, in consultation with the
participants and the other Executive Representative, for organizing such
meeting and establishing its agenda.
5.3 MANAGEMENT PROCESS FOR CLIENT SOFTWARE DEVELOPMENT AND NETWORK
APPLICATION AND SERVER SOFTWARE DEVELOPMENT.
5.3.1 LEAD EXECUTIVES. The initial Lead Executives and Deputy
Lead Executives for each major component ("MC") of the
collaborative development activity are set forth in
Sections 5.3.3 and 5.3.4. Future Lead Executives will be
designated by AOL after consultation with Sun. AOL shall
have the right, after consultation with Sun, to replace
the Lead Executive for either MC at any time if in its
good faith judgement such action is in the best
interests of the parties. The Lead Executive and Deputy
Lead Executive must be replaced by a person of similar
rank and stature unless the parties otherwise agree. The
Lead Executives and Deputy Lead Executives shall not be
changed prior to the Closing Date.
5.3.2 POWERS OF DEVELOPMENT LEAD EXECUTIVES; DEPUTY LEAD
EXECUTIVES. The Lead Executive shall maintain and revise
the corresponding
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
13
<PAGE> 14
Collaborative Development Work Plan for each MC in
accordance with its terms and will have the right, after
consultation with the Deputy Lead Executive, to
designate the project leader for each major project and
to establish teams and team leaders for various
development projects. For each Lead Executive there
shall be a Deputy Lead Executive. The Deputy Lead
Executive shall be assigned by the party other than the
party employing the Lead Executive, after consultation
with the Lead Executive. Each party shall structure all
employees and resources for each MC under the Lead
Executive or Deputy Lead Executive for that MC, and the
Lead and Deputy Lead Executives and project leaders
shall direct such resources in accordance with and to
achieve the objectives of the Collaborative Development
Work Plan.
5.3.3 CLIENT SOFTWARE. The initial Lead Executive for the
Client Software MC shall be Barry Schuler. The Lead
Executive for the Client Software MC shall have the
right, after consultation with the Deputy Lead
Executive, to make all decisions with respect to the
design and development of the Client Software and the
New Browser, including without limitation the features
and functions to be included in each such product design
and all decisions regarding development priorities and
resource allocation.
5.3.4 NETWORK APPLICATION AND SERVER SOFTWARE. The initial
Lead Executive for the Network Application and Server
Software MC shall be Ed Zander. As part of the
Collaborative Development Work Plans, with the consent
of each party through its Lead Executive or Deputy Lead
Executive, which consent shall not be unreasonably
withheld or delayed, the Lead Executive will establish
mutually agreeable targets for development of the
Network Application and Server Software. It is AOL's
present intention not to replace the initial Lead
Executive for Network Application and Server Software
unless such development targets are missed in a material
fashion, but AOL shall have the right, after
consultation with Sun, to replace the Lead Executive for
the Network Application and Server Software MC at any
time after the Closing Date. The Lead Executive for the
Network Application and Server Software may be an
employee of either party. In selecting the project
leader and team leaders for various development projects
to be undertaken in the development of the Network
Application and Server Software, the Lead Executive for
the Network Application and Server Software shall
appoint a significant number of AOL employees as project
and/or team leaders.
5.3.5 COLLABORATIVE DEVELOPMENT WORK PLANS. Prior to the
Closing Date, the Lead Executive and Deputy Lead
Executives shall establish and attach
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
14
<PAGE> 15
hereto as Schedule 5.3 the initial Collaborative
Development Work Plans for the two MCs of the initial
Collaborative Development Activity (consisting of an MC
for Client Software development and an MC for Network
Application and Server Software development), setting
forth the objectives, principal deliverables of each
such MC and providing for priorities in going forward.
Changes to the principal deliverables or priorities
sections of the Collaborative Development Work Plan for
Network Application and Server Software shall require
the consent of both parties not to be unreasonably
withheld or delayed, but all other changes to such
Collaborative Development Work Plans may be made by the
Lead Executive for the applicable MC after consultation
with the Deputy Lead Executive for such MC. In making
such changes, the Lead Executive must act solely in
accordance with the terms and objectives of this
Agreement.
5.3.6 CROSS PLATFORM DEVELOPMENT. Understanding that it is the
parties' intention to offer cross platform solutions,
the parties shall, to the extent commercially
reasonable, develop the Client Software and the Network
Applications and System Software to operate on a variety
of System Platforms, including the Sun System Platform
as well as other Systems Platforms including Windows NT,
IBM AIX, Linux, HP-UX and other Systems Platforms. Any
decision to support a platform other than Solaris or
Windows NT shall require a financial analysis showing a
reasonably appropriate return on investment, and in all
cases all Collaboratively Developed Software at the date
of first customer shipment must ship on Solaris.
5.3.7 NON-DISCLOSURE; LIMITATIONS ON WORK ON OTHER
DEVELOPMENT. All individuals engaged in Collaborative
Development Activities will be prohibited from using or
disclosing any confidential information or trade secrets
learned or developed in the course of such Collaborative
Development Activities other than in the course of their
work on the Collaborative Development Activities or
their work for AOL or Sun, respectively. AOL and Sun
each acknowledges that the parties may have to establish
procedures and/or enter into supplemental
confidentiality agreements to address issues that may
arise in connection with Collaborative Development
Activities, such as, by way of example, the use of
confidential information of third parties which one
party may not have the right to disclose to the other
party. In addition, AOL and Sun each agrees that after
it has assigned developers to the Collaborative
Development Activities, it shall use reasonable efforts
to keep such individuals assigned to the Collaborative
Development Activities, and
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
15
<PAGE> 16
AOL and Sun each agrees that it will not reassign
multiple employees engaged in the Collaborative
Development Activities to work on similar or competitive
development activities for other customers, clients, or
strategic partners. If AOL or Sun reassigns an
individual employee to work on similar or competitive
development activities for a customer, client, strategic
partner or other third party, such party to this
agreement shall advise the customer, client, strategic
partner or other third party that such employee was
involved in similar or competitive development
activities pursuant to this Agreement and that such
individual is subject to a confidentiality and
non-disclosure agreement prohibiting such individual
from using or disclosing any confidential information or
trade secrets learned or developed in the course of such
Collaborative Development Activities.
5.3.8 PROTECTION OF SOFTWARE. AOL and Sun will agree on
procedures so that development is conducted in a such a
manner that AOL Service Components, other AOL and
Netscape proprietary software, Sun software, and the
Collaborative Software are not inadvertently placed in
the public domain or required to be publicly disclosed
pursuant to the Mozilla Public License or Netscape
Public License. Both parties shall comply with such
procedures, and notwithstanding anything to the contrary
contained in this Agreement, in no event may a Lead
Executive make any decision to implement development in
a manner inconsistent with such procedures without the
written consent of both AOL and Sun, which either party
may withhold in its sole discretion.
5.4 MANAGEMENT PROCESS FOR SALES AND MARKETING.
5.4.1 MARKETING AND SALES PLANS. An initial draft of the
Marketing and Sales Plan for the Collaborative Marketing
and Sales Activity will be mutually agreed upon prior to
the Closing Date by the Lead Executive and Deputy Lead
Executive for marketing and sales, setting forth the
objectives and targets, and principal methods for
marketing and sales of the Product Suites and components
thereof. Major substantive changes to such initial
Marketing and Sales Plan shall require the consent of
both parties, such consent not to be unreasonably
withheld, but any minor changes may be made by the
corresponding Lead Executive after consultation with the
Deputy Lead Executive. In making such changes, the Lead
Executive must act solely in accordance with the terms
and objectives of this Agreement. The Lead Executive and
Deputy Lead Executive shall not be changed prior to the
Closing Date.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
16
<PAGE> 17
5.4.2 POWERS OF MARKETING AND SALES LEAD EXECUTIVE. The Lead
Executive for Marketing and Sales shall maintain and
revise the Marketing and Sales Plan in accordance with
its terms. For each Lead Executive there shall be a
Deputy Lead Executive. The Deputy Lead Executive shall
be assigned by the party other than the party employing
the Lead Executive. The Lead Executive for Marketing and
Sales, after consultation with the Deputy Lead Executive
for Marketing and Sales, shall have the right to
establish projects and teams and project and team
leaders for various major sales efforts ("SE's") of the
Marketing and Sales Plan. Each party shall structure all
employees and resources of such party's respective
collaborative sales team under the Lead Executive or
Deputy Lead Executive, and the Lead Executive and Deputy
Lead Executives and their subordinates shall direct such
resources in accordance with and to achieve the
objectives of the applicable Marketing and Sales Plan.
5.4.3 LEAD EXECUTIVES. The initial Lead Executive for
Marketing and Sales shall be Ed Zander. The initial
Deputy Lead Executive for Marketing and Sales shall be
Barry Schuler. As part of the Marketing and Sales Plans,
AOL and Sun will establish mutually agreeable targets
for marketing and sales of the Product Suites. It is
AOL's present intention not to replace the initial Lead
Executive for Marketing and Sales unless such targets
are not met, but AOL shall have the right, after
consultation with Sun, to replace the Lead Executive for
Marketing and Sales at any time after the Closing Date.
In the event replaced, the Lead Executive and Deputy
Lead Executive may only be replaced by a person of
similar rank and stature unless the parties otherwise
agree. The Lead Executive for Marketing and Sales must
be an employee of either AOL or Sun.
5.4.4 COORDINATION. The AOL collaborative sales force and the
Sun collaborative sales force shall coordinate their
sales efforts and endeavor to cooperate with one another
to achieve maximum sales of the Product Suites in
accordance with the Marketing and Sales Plan.
5.4.5 CROSS PLATFORM MARKETING AND SALES. The collaborative
sales forces of AOL and Sun will be trained and
knowledgeable about and shall, to the extent
commercially reasonable, actively market and promote the
sale or license of the Product Suites on the Sun Systems
Platform, Windows NT and on a variety of other System
Platforms to which the Product Suites have been ported,
which may include IBM AIX, Linux, HP-UX and other
Systems Platforms, which marketing and promotion shall
include efforts to license the Product Suites on an OEM
basis.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
17
<PAGE> 18
6.0 OTHER DEVELOPMENT AND MARKETING RIGHTS AND LIMITATIONS.
6.1 AOL. During the term of this Agreement, AOL will market Network
Application and Server Software only to AOL EC Service Opportunities and
only to enable such opportunities. In sales to AOL EC Service
Opportunities made by AOL personnel, AOL may elect to have the sales and
licensing agreements for the goods and services sold be between the
customer and AOL or may elect to have such agreements be between Sun and
the customer. AOL shall have the unrestricted right to market and
distribute the Client Software and New Browser during and after the term
of this Agreement in any manner whatsoever, including without limitation
through OEM licensing arrangements.
6.2 SUN. During the term of this Agreement, Sun will have the right to
market, including through reseller and OEM arrangements, the
Collaborative Software through the Collaborative Marketing and Sales
Activities as well as its independent sales force, subject to the
provisions of Section 4.1.4.
6.3 SUN DEVELOPMENT. Subject to the provisions of Sections 6.6 and 6.7,
Sun is free to develop at its own expense additional client, server and
application software, functionality and features for EC(2). Any such
software developed by Sun independently which is not a derivative work
of the Existing Netscape Software or the Collaborative Software and was
not developed pursuant to any Collaborative Development Work Plan shall
not constitute Collaborative Software or Designated Collaborative
Software, and Sun shall own such independent developments and all
proprietary rights therein.
6.4 AOL DEVELOPMENT. AOL is free to develop at its own expense and to
collaborate with one or more third parties in developing additional
client, server and application software, and functionality and features
for electronic commerce and extended communities and connectivity,
including without limitation software based on and derived from the
Existing Netscape Software. Any such software developed by AOL
independent of any Collaborative Development Work Plan shall not
constitute Collaborative Software or Designated Collaborative Software,
and AOL shall own such independent developments and all proprietary
rights therein.
6.5 REPLACEMENT OF IE BROWSER. To the extent contractually permissible,
AOL will periodically evaluate replacing the browser component of
Microsoft Internet Explorer browser with the New Browser in the AOL
classic online service offering and to use the New Browser in clients
for other brands such as ICQ and CompuServe, provided that the parties
acknowledge that AOL has no present intention to make any such
replacement or use and shall have no obligation to make any such
replacement or use, and that it is AOL's present expectation that it
will not seek to terminate or limit its present agreement
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
18
<PAGE> 19
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
and may seek to renew and/or extend and expand its present agreement
with Microsoft Corporation to continue to distribute Microsoft Internet
Explorer. It is acknowledged that among the critical issues for AOL in
evaluating the merits of any such possible replacement would be ***
APPROXIMATELY 8 LINES OMITTED ***
6.6 NO DEVELOPMENT OR MARKETING OF COMPETITIVE CLIENTS. Except as
provided in Section 3.10, for any System Platform for which AOL
implements, in the OEM Communicator Client and Third Party Communicator
Client, the most recent version of Sun's JRE pursuant to Section 3.6,
Sun shall not during the term of this Agreement, directly or indirectly
through any third party, develop, market, advertise, or distribute any
software product or assist in advertising, marketing, or distributing
any software product on such System Platform (including without
limitation any other browser component) including or bundled with
features and functions which make it competitive with a desktop client
such as the client for the AOL classic online service, AOL Distributed
Communicator Client, the Third Party Communicator Client, the OEM
Communicator Client or Microsoft Internet Explorer (as it continues to
evolve away from a browser to a fully featured online desktop
client),*** APPROXIMATELY 11 LINES OMITTED *** This Section 6.6 shall
not be deemed to limit or prohibit Sun from continuing to develop,
market, advertise, promote and distribute browsers that are 100% Pure
Java or are for platforms other than personal computers or workstations,
subject to the provisions of Section 4.3, nor from continuing to
develop, market and promote client software other than browsers except
as provided in this Section.
6.7 SUPPORT FOR PRODUCT SUITES STANDARDS. It is the intention of the
parties that all client software will support industry-standard
protocols and the standards, protocols and defaults in the Product
Suites, including without limitation the standards, protocols and
defaults of the AOL Services Components in the Product Suites, and
except as provided in Section 3.10, Sun agrees not to implement, in the
Sun Systems Platform or in other software competitive with or offering
similar functionality to the Product Suites, inconsistent or conflicting
standards, protocols or defaults, including without limitation
inconsistent or conflicting with the components, features,
functionality, interfaces, protocols and APIs of the New Browser.
6.8 IMPACT OF LICENSE TO COMPETING OEM. If, during the term of this
Agreement, AOL grants an OEM license to any of the network application
and server software comprising the Existing Netscape Software or any
derivative works thereof developed by
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
19
<PAGE> 20
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
AOL to any other Systems Platform suppliers, each such transaction must
be structured so that the revenues to AOL reflect *** and in such event
the Minimum Commitment as set forth in Section 4.5 for each quarter
subsequent to AOL granting such a license shall be reduced by *** of the
consideration received by AOL during the preceding quarter pursuant to
such license agreement for the rights granted to such OEM with respect
to any such software, provided that in the event AOL receives an upfront
large sum or advance pursuant to such an agreement, the reduction
arising from such amount shall be applied pro rata across all then
remaining quarterly Minimum Commitments.
6.9 LICENSES BY SUN. During the term of this Agreement, Sun shall
structure its license transactions for the Existing Netscape Software
and Designated Collaborative Software so that the revenues to Sun ***
and Sun shall not enter into licenses for such software intending to (a)
have a material adverse impact on the penetration rate for the business
desktop as set forth in Section 4.6 or (b) materially reduce the amounts
payable to AOL hereunder.
6.10 RESOURCES. AOL and Sun shall each provide a minimum level of
staffing through their respective collaborative sales forces, as set
forth in the Marketing and Sales Plan, to achieve the objectives of the
SE's, and AOL and Sun shall each provide a minimum level of development
staffing, as set forth in the initial Collaborative Development Work
Plans, to achieve the objectives of the Network Application and Server
Software development MC. Sun shall be responsible for using all
reasonable efforts at its expense to provide whatever remaining
resources are needed to achieve the goals of each SE as set forth in the
Marketing and Sales Plan and to achieve the goals set forth in the
Collaborative Development Work Plan for Network Application and Server
Software, but in no event will Sun be required to provide more than the
maximum levels of Sun staffing set forth in the Marketing and Sales Plan
and the Collaborative Development Work Plan for Network Application and
Server Software. Sun will provide a level of staffing for Sun's
collaborative sales force at least as large as that of AOL's
collaborative sales force, and Sun shall provide a level of staffing for
the Collaborative Development Activities at least as great as the
staffing AOL provides for the Collaborative Development Activities.
Either party may reduce its level of staffing if such party concludes
that then current and reasonably anticipated business conditions no
longer justify then current staffing levels. In the event the aggregate
level of staffing provided by AOL in any quarter for Collaborative
Development Activities and Collaborative Marketing and Sales Activities
is less than ***, the otherwise applicable Minimum Sales Commitment for
the next quarter shall be reduced by *** per person for such shortfall
(i.e., for each person by which such staffing by AOL is below ***),
provided that in the event the composition of
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
20
<PAGE> 21
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
such AOL staffing with respect to mix of salary levels changes
materially, Sun and AOL will negotiate in good faith adjustments to such
*** per person shortfall reduction.
7.0 ESCALATION AND DISPUTE RESOLUTION FOR COLLABORATIVE DEVELOPMENT AND
MARKETING AND SALES.
7.1 GENERAL. The parties shall attempt to promptly resolve through good
faith negotiation any dispute or disagreement between them directly
relating to design and development priorities and decisions and resource
allocation under the Collaborative Development Work Plan for Network
Application and Server Software and marketing and sales priorities and
decisions under the Marketing and Sales Plans. ***APPROXIMATELY 10 LINES
OMITTED***
7.2 DEADLOCK ON MAJOR DISPUTES. ***APPROXIMATELY 48 LINES OMITTED***
8.0 PAYMENT TIMING PROVISIONS.
8.1 TIMING. Fees payable pursuant to Section 4.1.5, 4.5 and 9.8.2 shall
be paid quarterly in advance not later than the fifth business day of
the quarter for which due, except that amounts payable pursuant to such
Sections for the first quarter shall be paid on the Closing Date, and,
in the event to first quarter is not a complete quarter, amounts payable
pursuant to such Sections for the first partial quarter and the first
full quarter shall be payable on the Closing Date. Unless otherwise
specified, other fees shall be paid no later than 45 calendar days after
the end of the quarter for which due (including fees in excess of the
minimum amounts due with respect to any quarter). No fees are payable
until the quarter in which the Closing Date occurs, and any fees for
that quarter, including minimum quarterly fees specified in this
Agreement, including in Sections 4.1.5, 4.5 and 9.8.2, shall be a pro
rata amount based on the number of days remaining in such quarter. In
the event the first quarter is not a complete quarter (i.e., the Closing
Date occurs other than at the beginning of the quarter), any reductions
in minimum revenues or other fees specified in this Agreement, including
in Sections 4.1.5, 4.5 and 9.8.2, shall not apply until the second full
quarter. For partial quarters at the beginning and the end of each year
of the term of this Agreement, the quarterly amount payable shall be a
prorated portion of the full quarterly amount specified for such year,
based on the number of days in such partial quarter period. (For
example, if the first anniversary of the Closing Date is March 20, 2000,
the prorated Minimum Commitment payable pursuant to Section 4.5 for the
partial period running from January 1, 2000 through March 20, 2000 shall
be the applicable prorated portion of $78,000,000, which amount shall be
due and payable on January 1, 2000, and the prorated Minimum Commitment
for the partial period running
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
21
<PAGE> 22
from March 21, 2000 through March 30, 2000 shall be the applicable
prorated portion of $82,500,000, which amount shall also be due and
payable on January 1, 2000.
8.2 NO RIGHT TO WITHHOLD OR OFFSET. Sun will have no right whatsoever to
withhold payment of any minimum fees or revenues provided for in
Sections 4.1.5, 4.5 or 9.8.1 on the basis of any alleged right of offset
or any alleged breach by AOL of any of its obligations pursuant to this
Agreement or for any other reasons except to the extent permitted
pursuant to a final, non-appealable judgment obtained from a court of
competent jurisdiction in litigation between AOL and Sun.
Notwithstanding anything to the contrary set forth in this Agreement, in
the event Sun believes that AOL has breached any obligations under this
Agreement, Sun shall have no right to cease paying any such minimum fees
and revenues, even if Sun has terminated or purported to terminate this
Agreement, and Sun's sole and exclusive remedy shall be to litigate the
dispute and to continue making such payments during the pendency of the
litigation. AOL shall be entitled to injunctive relief to compel Sun to
continue making such payments during the pendency of such litigation.
8.3 LATE CHARGES. In the event that either party does not receive any
amounts from the other party hereunder on or before the day upon which
such amounts are due and payable, and fails to cure such breach within
ten (10) business days following written notice from the other party,
such outstanding amounts shall thereupon be subject to payment of a late
charge which shall accrue until payment at the rate of one percent (1%)
per month. Amounts received by shall first be credited against any
unpaid late charges accrued pursuant to this Section, and accrual of
such late charges shall be in addition to and without limitation of any
and all additional rights or remedies under this Agreement or at law or
in equity.
9.0 INTELLECTUAL PROPERTY RIGHTS.
9.1 OWNERSHIP. Each party shall own all preexisting software and/or
technology which it makes available to the Collaborative Development
Activity or which it developed or develops with its own resources
without use of any intellectual property of the other party and not as
part of the Collaborative Development Activities and all proprietary
rights therein. To the extent such software and/or technology is
incorporated into the Designated Collaborative Software, it shall, to
the extent so incorporated, be subject to the provisions of Sections
9.2, 9.3 and 9.4.
9.2 DESIGNATED COLLABORATIVE SOFTWARE. AOL shall own all improvements
and modifications to any preexisting software or technology of either
party, any new software and technology created through Collaborative
Development Activity to create the Client Software and/or New Browser,
and all newly-created intellectual property rights therein, whether
completed or work in progress. Sun shall own all improvements and
modifications to any preexisting software of either party and any new
software and
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
22
<PAGE> 23
technology created through Collaborative Development Activity to create
the Network Application and Server Software and all newly-created
intellectual property rights therein.
9.3 AOL LICENSE TO SUN. AOL hereby grants to Sun and its subsidiary, Sun
Microsystems International, B.V. ("Sun International B.V.") a Software
License to all Designated Collaborative Software owned by AOL pursuant
to Sections 9.1 and/or 9.2, subject only to the payment by Sun of the
amounts provided in this Agreement. Such license shall be unrestricted
as to field of use, except for those limitations set forth in Section
6.6 and 6.7. AOL also hereby grants to Sun a non-exclusive, perpetual,
non-terminable, fully sublicensable right under any patents issued
anywhere in the world for which AOL is or becomes the beneficial or
legal owner which were reduced to practice in the course of the
Collaborative Development Activity to make, have made, practice, have
practiced, use, lease, sell and otherwise transfer any and all
inventions, methods or processes which are the subject of any claim of
any such patent.
9.4 SUN LICENSE TO AOL. Sun shall grant to AOL a Software License to all
Designated Collaborative Software owned by Sun pursuant to Sections 9.1
and/or 9.2, whether written in Java or any other programming language.
Such license shall be unrestricted as to field of use. Notwithstanding
the foregoing grant to AOL, AOL's rights to the Java Platform shall be
governed solely by the TLDA executed concurrently herewith by the
parties. Sun also hereby grants to AOL a non-exclusive, perpetual,
non-terminable, fully sublicensable right under any patents issued
anywhere in the world for which Sun is or becomes the beneficial or
legal owner which were reduced to practice in the course of the
Collaborative Development Activity to make, have made, practice, have
practiced, use, lease, sell and otherwise transfer any and all
inventions, methods or processes which are the subject of any claim of
any such patent.
9.5 PROCEDURES FOR LITIGATING PROPRIETARY RIGHTS CLAIMS AGAINST THIRD
PARTIES. AOL and Sun agree to cooperate with one another and to
negotiate in good faith procedures and terms and conditions permitting
each party to pursue infringement claims against third parties with
respect to the Designated Collaborative Software and other rights
licensed to one another pursuant to this Agreement. The parties will
consider and discuss whatever arrangements might most efficiently and
fairly permit such actions to be pursued, which might include, by way of
example, an assignment of an undivided joint interest in the software at
issue in order to confer standing to sue on the party seeking to bring
such action, an agreement by which the other party is joined as a party
plaintiff in the action with provisions allocating the responsibilities
and costs of litigating such claims, or some other mechanism.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
23
<PAGE> 24
9.6 LICENSE TO EXISTING NETSCAPE SOFTWARE.
9.6.1 LICENSE FOR DEVELOPMENT. As of the Closing Date, as
between AOL and Sun, AOL shall own all rights in and
shall grant to Sun a Software License to the Existing
Netscape Software. AOL may also elect to grant to Sun a
Software License to any Existing Netscape Software
Upgrades that AOL makes available for Collaborative
Development Activities pursuant to this Agreement. Such
license shall be subject to the limitations set forth in
this Agreement on Sun's marketing and licensing thereof
during the term of this Agreement, which shall include
those limitations set forth in Sections 6.3, 6.6 and 6.7
of this Agreement as well as limitations during and
after the term of this Agreement permitting Sun and Sun
International B.V. to use the Existing Netscape Software
(and any Existing Netscape Software Upgrades, if any,
licensed to Sun) solely for purpose of developing the
New Browser, the OEM Communicator Client, and the
Designated Collaborative Software as part of the
Collaborative Development Activity. Such licenses shall
also be subject to any contractual restrictions with
third parties for the duration of such contractual
restrictions. AOL represents that concurrently with the
execution of this Agreement, AOL is obtaining from
Netscape contractual commitments requiring that Netscape
cooperate with AOL between the date of this Agreement
and the Closing Date to identify any "Encumbrances" (as
defined in this Section) that may adversely affect AOL's
rights to Netscape Existing Software and/or any
components thereof as set forth below, including without
limitation AOL's rights to grant others access to source
code and sublicense such rights. Such cooperation shall
include granting AOL full access to Netscape technology
licenses, agreements by which technology rights were
acquired by Netscape and information regarding
intellectual property infringement or misappropriation
claims, if any, relating to the Netscape Existing
Software and all components thereof. As used in this
Section, "Encumbrances" means any restriction or limit
that would prevent or materially limit or restrict AOL
from granting pursuant to this Agreement the applicable
source and binary access, use and distribution rights
under Sections 9.6.1, 9.6.2 and 14.7 of the Agreement
with respect to the Netscape Existing Software or any
component thereof ("Sun License Rights"), including,
without limitation, limitations and restrictions on
source access and sublicensing fights, as well as
prohibitions or requirements to obtain consents to
assignment of rights from Netscape to AOL upon the
Closing Date where to failure to obtain such consent
would materially limit or restrict AOL's rights,
including sublicensing rights. AOL further represents
that it is obtaining from Netscape concurrently with the
execution of this Agreement contractual commitments
obligating Netscape to use reasonable efforts to remove,
limit or diminish such
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
24
<PAGE> 25
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Encumbrances, in a priority order to be specified by
AOL. After the Closing Date, AOL shall continue such
efforts. *** APPROXIMATELY 4 LINES OMITTED *** Sun and
AOL will consider the scope and impact of any such
Encumbrances in determining what work to undertake
pursuant to the Collaborative Development Plans and the
products to be included in the Product Suites.
9.6.2 RESELLER RIGHTS. AOL shall grant to Sun, effective as of
the Closing Date and continuing for the term of this
Agreement, (a) the right to distribute the Existing
Netscape Software in binary form only except as set
forth below; (b) the right to use the source code for
the Existing Netscape Software solely for purposes of
supporting and maintaining the binary copies distributed
to Sun customers; and (c) the right to license the
source code for the Existing Netscape Software to OEM
licensees solely for the purpose of permitting such OEM
licensees to support and maintain the binary copies
distributed by such OEMs, provided that Sun may provide
such source code to OEM licensees only pursuant to the
terms of a written agreement substantially in
conformance with a form approved by AOL, which approval
shall not be unreasonably withheld or delayed,
containing customary terms and conditions to preserve
the confidentiality of such source code and containing
customary limitations and disclaimers of warranties and
exclusions and limitations of liability. The rights
granted to Sun pursuant to this Section 9.6.2 with
respect to the Existing Netscape Software shall
terminate upon expiration or termination of this
Agreement, except that Sun shall retain thereafter a
limited source code license to retain and use such
software solely for the support of existing customers as
of such expiration or termination.
9.6.3 DELIVERY. Promptly following the Closing Date, AOL will
deliver to Sun a copy of all Existing Netscape Software
that is subject to the license granted pursuant to
Section 9.6.1 and 9.6.2.
9.7 POST TERMINATION RIGHTS. The license rights of the parties following
expiration or termination of this Agreement are set forth in Sections
14.5 and 14.7.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
25
<PAGE> 26
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
9.8 LICENSE FEES.
9.8.1 PAYMENTS FROM AOL TO SUN. AOL shall pay to Sun quarterly
license fees of $5 million per quarter during the term
of this Agreement for the Sun-owned components licensed
to AOL by Sun pursuant to Section 9.4. No license fee
shall be required after expiration or termination of
this Agreement for any such license rights that survive
termination. AOL may allocate up to *** of the fees
under this section to any payments required under any
TLDA between Sun and AOL, and any unused balance of such
amounts not applied to TLDA fees may be carried forward
and applied to future fees under any TLDA.
9.8.2 PAYMENTS FROM SUN TO AOL. Sun shall pay to AOL quarterly
license fees during the term of this Agreement for the
software and trademark rights granted to Sun by AOL
pursuant to Sections 9.3, 9.6 and 12, which shall be
Eighty-Six Million Dollars ($86,000,000) for the first
year following the Closing Date, Ninety-Five Million
Five Hundred Thousand Dollars ($95,500,000) for the
second year following the Closing Date, and Ninety-Seven
Million Dollars ($97,000,000) for the third year
following the Closing Date, payable in quarterly
payments as provided in Section 8.1. No license fee
shall be required after expiration or termination of the
definitive agreement for any such license rights that
survive termination.
10.0 NETCENTER.
10.1 OBJECTIVES. AOL shall develop the Netcenter to be a portal for a
variety of customers with a focus on business customers in terms of the
services, information and customization options offered.
10.2 OWNERSHIP. AOL owns and controls the Netcenter without restriction
and shall be responsible for all of its associated costs.
10.3 PORTAL REVENUES. Notwithstanding anything to the contrary herein,
AOL shall retain all revenue, and bear all costs, related to or derived
from the Netcenter.
10.4 PROMOTION. Sun agrees to cooperate with AOL to make the Netcenter
the Sun default network portal for the Product Suites and to help gain
additional traffic for the Netcenter. Without limiting the foregoing,
the Netcenter will be the default home page in the New Browser, Third
Party Communicator Client and OEM Communicator Client, any client
applications developed by Sun pursuant to Section 3.10, the HotJava
browser
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
26
<PAGE> 27
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
and, to the extent practicable and commercially reasonable, the Bedouin
browser or any other thin client browser used on platforms other than
personal computers and workstations, although Sun customers shall not be
required to maintain such home page against their will. ***
APPROXIMATELY 5 LINES OMITTED *** Sun shall always position the
Netcenter in its meetings, promotions and advertising no less favorably
than any other portal addressed in such meetings, promotions and
advertising, if any, but the parties recognize and agree that the
objectives of this Agreement require that Sun market and distribute the
Product Suites and System Platform to other connectivity and portal
vendors without restriction, and in such cases such other connectivity
and portal vendors shall have the right to use and promote their own
home pages and/or portals in connection with the Products Suites and
System Platform.
11.0 SYSTEMS PLATFORM.
11.1 OWNERSHIP. Sun owns and controls the Sun System Platform without
restriction and shall be responsible for all of its associated costs.
Sun shall develop the Sun System Platform to be the premiere foundation
for Product Suites customers in terms of its performance, scalability,
reliability and cost-effectiveness.
11.2 PROMOTION. AOL agrees to cooperate with Sun to make the Sun System
Platform the AOL preferred System Platform for Products Suites for both
AOL and AOL EC Service Opportunities. AOL shall always position the Sun
System Platform in its meetings, promotions and advertising no less
favorably than any other Systems Platform addressed in such meetings,
promotions and advertising, if any, but the parties recognize and agree
that the objectives of this Agreement may require that AOL market and
distribute the Product Suites on other System Platforms to meet customer
requirements.
12.0 BRANDING.
12.1 OWNERSHIP. Each party shall retain all rights, title and other
interest to its brand names, service marks, trademarks and other
proprietary markings except as expressly provided otherwise in this
Agreement.
12.2 BRAND NAMES AND TRADEMARKS. Subsequent to the execution of this
Agreement and prior to the Closing Date, AOL and Sun shall negotiate in
good faith and enter into a written trademark license, which shall
include reasonable and customary terms, including appropriate quality
control provisions, pursuant to which AOL shall license to Sun on a
royalty-free, non-sublicensable basis effective as of the Closing Date:
(a) the right to use the Netscape Communicator trademark in connection
with the Third-Party Communicator
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
27
<PAGE> 28
Client and related sales and marketing materials, and shall license to
Sun the right to use successors or replacements of the Netscape
Communicator trademark in connection with the Third-Party Communicator
Client and related sales and marketing materials, provided the
Third-Party Communicator Client meets the requirements for branding with
such mark(s); (b) the right to use the Netscape trademarks that Netscape
currently uses as the titles for the Existing Netscape Software in
connection with the collaborative marketing and sales of the Existing
Netscape Clients pursuant to this Agreement; and (c) such other
trademarks, if any, as AOL and Sun may mutually agree. Such trademarks
shall be licensed to Sun following expiration or termination of this
Agreement subject to reasonable quality control requirements and a
reasonable transition period (not to exceed fifteen (15) months) and
plan which shall be set forth in the definitive trademark license. Such
trademark license shall also provide for a trademark license from AOL to
Sun to use the Netscape Communicator trademark, and such other
trademarks, if any, as AOL and Sun may mutually agree, for any software
developed by Sun pursuant to Section 3.10, subject to such software
meeting AOL's reasonable quality control and other transition
requirements for such branding and subject to a phase-out of Sun's use
of such trademarks in connection with such products after a reasonable
transition period (not to exceed fifteen (15) months).
12.3 BRANDING OF COLLABORATIVE SOFTWARE. The branding for the
Collaborative Software shall be determined by mutual agreement of the
Lead Executive and Deputy Lead Executive for marketing and sales, and
each party shall have the right to use such marks in connection with the
Product Suites and related sales and marketing materials during the term
of this Agreement. Following any expiration or termination of this
Agreement, Sun shall retain ownership of any trademark by which the
entire Product Suites are identified, subject to transition or phase-out
terms permitting continued use by AOL for a reasonable transition period
(not to exceed fifteen (15) months), which terms and conditions shall be
negotiated in good faith and embodied in a written trademark license
agreement. Following any expiration or termination of the Agreement, Sun
and AOL shall each have the non-exclusive right to use any titles by
which the individual Network Application and Server Products in the
Product Suites were identified during the term of this Agreement,
provided that AOL and Sun shall differentiate their uses of such marks
following any expiration or termination of this Agreement by always
using any such mark in connection with a name or trademark prominently
identifying AOL or Sun as the source of such goods or services (for
example, AOL Commerce Server and Sun Commerce Server).
13.0 EMPLOYEE INCENTIVES.
13.1 INCENTIVE PLAN. The parties recognize and agree that proper
motivation and economic incentives for their respective employees
engaged in the Collaborative Development Activity and collaborative
marketing and sales is essential to its success and shall create and
operate an Incentive Plan ("Incentive Plan") for all employees
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
28
<PAGE> 29
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
engaged full-time in the Collaborative Development Activity or in
collaborative marketing and sales. Each party shall bear its own
expenses in connection with its respective Incentive Plans. Compensation
for the collaborative marketing and sales force will consist of base
salary with an additional commission/incentive opportunity, and the
commission incentive plan will (i) represent a significant part of each
individual's total annual compensation (base salary plus
commission/incentive plan) and (ii) support the metrics included in the
Marketing and Sales Plan. The parties commit to cooperate with one
another to complete the Incentive Plan as soon as practicable and
commercially reasonable and prior to the Closing.
13.2 SENIOR MANAGERS. All senior managers and above shall receive a
significant portion of their compensation through an annual bonus
program, tied to performance under the Collaborative Development Work
Plans and/or Marketing and Sales Plans, and paid annually to those
employees still employed by either party as of the date of payment of
the bonus.
13.3 SALES REPRESENTATIVES. All sales representatives shall receive a
significant portion of their compensation through an incentive bonus
program tied to meeting objectives under the Marketing and Sales Plans.
13.4 POOL FOR ALL PERSONNEL. The Lead Executives and Deputy Lead
Executive from each party, respectively, may make periodic project and
spot bonus payments tied to performance under the Collaborative
Development Work Plans and/or Marketing and Sales Plans, to employees of
such party from a pool of funds of up to*** of total salaried
compensation for all personnel employed by such party in such
activities.
13.5 LEAD EXECUTIVES AND DEPUTY LEAD EXECUTIVES. At least one-half of
the total incentive compensation by MC for any Lead Executives or Deputy
Lead Executives (other than an Executive Officer of Sun or AOL, if a
Lead Executive or Deputy Lead Executive is an Executive Officer) must be
provided under the IP.
14.0 TERMINATION.
14.1 TERM. This Agreement shall terminate at midnight Pacific Daylight
Time on the date three (3) years following the Closing Date.
14.2 EARLY TERMINATION. This Agreement assumes the intended merger of
Netscape and AOL. If the Closing Date does not occur on or before June
30, 1999, the parties agree to negotiate in good faith for a period of
thirty (30) days thereafter in an effort to
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
29
<PAGE> 30
agree on alternative terms to achieve as much as possible the same
effect as this Agreement using solely Sun technology, provided that if
the parties fail to agree on such alternative terms within such thirty
(30) day period, either party may elect to terminate this Agreement by
giving written notice to the other party.
14.3 TERMINATION FOR BREACH. Subject to Section 7.2 of this Agreement,
either party may terminate this Agreement for a material breach of its
terms by the other party by giving the other party written notice at
least ninety (90) days in advance of such termination date, and the
Agreement shall terminate on that date unless the breaching party has
cured or corrected such breach prior to that time, provided that such
ninety (90) day period shall be shortened to a ten (10) business day
cure period following written notice in the event of a failure to pay
amounts due pursuant to this Agreement. Without limiting the foregoing,
in the event Sun fails to pay any amounts due to AOL pursuant to this
Agreement, including without limitation minimum fees or revenues
provided for in Sections 4.1.5, 4.5 and 9.8.2, and fails to cure such
breach within the ten (10) business day cure period provided for in this
Section, AOL shall have the right, exercisable upon written notice to
Sun, without limiting any of AOL's other rights or remedies, to
terminate this Agreement and all licenses granted to Sun by AOL,
including all licenses granted to Sun by AOL pursuant to Sections 9.3,
9.6 and 12 (in which event Sun will have no license rights pursuant to
Section 14.7.1 or 14.7.2). In the event of a termination of this
Agreement and all licenses granted to Sun by AOL as a result of Sun's
failure to pay any minimum fees and revenues in a timely manner, Sun's
obligation to pay all minimum fees and revenues provided for in Sections
4.1.5, 4.5 and 9.8.2 shall be accelerated so as to make all such fees
and revenues be due and payable immediately. Notwithstanding anything to
the contrary set forth in this Agreement, AOL shall have no right to
terminate the licenses granted to Sun by AOL pursuant to Sections 9.3,
9.6 and 12, except for a failure by Sun to pay any fees and revenues due
pursuant to this Agreement and a failure to cure such breach in a timely
manner as provided in this Section 14.3.
14.4 LIMITATION ON AOL RIGHT TO TERMINATE LICENSES. Except in the event
Sun fails to pay the fees payable under Sections 4.1.5, 4.5 and 9.8.2 as
required in Section 8 (the "Specified Payment Obligations"), AOL shall
have no right whatsoever to terminate or reduce Sun's license rights set
forth in Sections 9.4, 9.6.1, 9.6.2, 12.2, 12.3, 14.7.1 or 14.7.2 (the
"Licenses") on the basis of any alleged breach by Sun of any of its
obligations pursuant to this Agreement or for any other reasons, except
to the extent permitted pursuant to a final, non-appealable judgment
obtained from a court of competent jurisdiction in litigation between
AOL and Sun. Notwithstanding anything to the contrary set forth in this
Agreement, in the event AOL believes that Sun has breached any
obligations under this Agreement, other than the Specified Payment
Obligations, AOL shall have no right to terminate or reduce such
licenses, even if AOL has terminated or purported to terminate this
Agreement, and AOL's sole and exclusive remedy shall be to litigate the
dispute, provided that nothing contained herein shall be deemed to limit
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
30
<PAGE> 31
AOL's right to enforce the limitations set forth in this Agreement on
the scope or duration of such licenses. Sun shall be entitled to
injunctive relief to prevent AOL from terminating or limiting such
licenses in any way other than as expressly allowed in this Section.
14.5 TERMINATION ON A CHANGE IN CONTROL. During the term of this
Agreement, if either party is acquired or if any third-party acquires
effective voting control of either party, such party shall promptly
notify the other party in writing, and the other party may terminate
this Agreement effective six (6) months after receipt of such notice;
provided that if Sun terminates this Agreement pursuant to this Section
14.4, it shall be obligated to continue to pay all then remaining
minimum payments and fees that would have been due if this Agreement had
expired on the date set forth in Section 14.1, when and as such minimum
payments and fees would otherwise be payable pursuant to this Agreement.
14.6 AOL POST TERMINATION LICENSE RIGHTS. Following any expiration or
termination of this Agreement, AOL shall be free to further develop and
enhance the Designated Collaborative Software for its own account in all
respects, shall be entitled to full ownership of any AOL separately
developed code based on or derived from the Designated Collaborative
Software, including without limitation any AOL separately developed
modifications and enhancements to the Designated Collaborative Software
(such as, by way of example, the Third Party Communicator Client and AOL
Distributed Communicator Client), shall have no duty to account to or
pay Sun with respect to any use or exploitation of the Designated
Collaborative Software, and shall not be subject to any limitations on
field of use with respect to the Designated Collaborative Software.
Following any expiration or termination of this Agreement, AOL shall
have no rights of any kind to any software developed by Sun, which does
not constitute Collaborative Software or Designated Collaborative
Software.
14.7 SUN POST TERMINATION LICENSE RIGHTS.
14.7.1 DESIGNATED PRODUCTS. As used in this Agreement,
"Designated Products" means (a) any network applications
and server software included in the Product Suites or
marketed and sold through Collaborative Marketing and
Sales Activities pursuant to the Marketing and Sales
Plan at any time during the term of this Agreement, and
(b) the Designated Collaborative Software. Except as
provided in Section 14.3, Sun and Sun International B.V.
shall be granted effective upon expiration or
termination of this Agreement a Software License to the
Designated Products and shall be free following any
expiration or termination of this Agreement to further
develop and enhance any Designated Products for their
own respective accounts in all respects, shall be
entitled to full ownership of any Sun and Sun
International B.V. separately developed code based on or
derived from the Designated Products, including without
limitation any Sun
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
31
<PAGE> 32
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
separately developed modifications and enhancements to
the Designated Products, shall have no duty to account
to or pay AOL with respect to any use or exploitation of
the Designated Products, and shall not be subject to any
limitations on field of use with respect to the
Designated Products (including without limitation those
limitations set forth in Sections 6.3, 6.6 and 6.7 of
this Agreement), provided that (a) AOL may elect to
require that, within one hundred eighty (180) days
following any expiration or termination of this
Agreement, Sun cease to distribute and remove from any
Designated Products and derivative works thereafter
marketed or distributed by Sun and Sun International
B.V. any or all AOL Service Components, as specified by
AOL, and (b) such license shall be subject to any
contractual restrictions with third-parties for the
duration of such contractual restrictions.
14.7.2 THIRD PARTY COMMUNICATOR CLIENT AND AOL DISTRIBUTED
COMMUNICATOR CLIENT. Following any expiration or
termination of this Agreement, Sun shall have no rights
of any kind to the Third Party Communicator Client or
the AOL Distributed Communicator Client or any software
developed by AOL which does not constitute Designated
Software, other than a limited source code license to
retain and use such software solely for the support of
existing customers as of such expiration or termination.
14.7.3 DELIVERY. Promptly following expiration or termination
of this Agreement, AOL shall deliver to Sun a copy of
all source code and binary code comprising the
Designated Products to the extent Sun does not already
have such code in its possession.
14.8 PURCHASE OF SUN PRODUCTS AND SERVICES POST-TERMINATION.
14.8.1 EC(2) PRODUCTS AND SERVICES. For seven years after the
expiration or termination of this Agreement for any
reason other than (a) a termination by Sun arising from
a material breach by AOL or (b) a termination pursuant
to Section 14.2 resulting from a failure of the Closing
Date to occur, AOL will be entitled to purchase Sun ***
14.8.2 OTHER PRODUCTS AND SERVICES. For seven years after the
expiration or termination of this Agreement for any
reason other than (a) a termination
by Sun arising from a material breach by AOL or (b) a
termination
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
32
<PAGE> 33
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
pursuant to Section 14.2 resulting from a failure of the
Closing Date to occur, AOL will be entitled to purchase
***
14.9 POST TERMINATION LIMITATIONS. For a period of eighteen (18) months
following any termination or expiration of this Agreement (other than a
termination arising from a material breach by the other party), each
party agrees to continue to market and distribute the Network
Applications and Server Software in a manner generally consistent with
the manner in which such Network Applications and Server Software were
marketed and distributed by such party during the term of this
Agreement, and each party agrees not to sell or dispose of all or
substantially all of its respective rights in such software during such
eighteen (18) month period, provided that this Section shall not be
deemed to limit or prohibit either party from selling or disposing of
such rights in connection with a merger or sale of assets in which a
third party acquires or succeeds to all or substantially all of such
party's assets, including such rights.
15.0 GENERAL REPRESENTATIONS AND WARRANTIES.
15.1 AOL REPRESENTATIONS AND WARRANTIES. AOL warrants, covenants and
represents to Sun that:
15.1.1 AOL has the full corporate right, power and authority to
enter into this Agreement and to perform the acts
required of it pursuant to this Agreement;
15.1.2 the execution of this Agreement and the performance by
AOL of its obligations and duties under this Agreement
shall not violate any agreement to which AOL is a party
or the rights of any other party; and
15.1.3 AOL is not relying on nor does Sun make any
representations, warranties or agreements not expressly
provided for in this Agreement.
15.2 SUN REPRESENTATIONS AND WARRANTIES. Sun warrants, covenants and
represents to AOL that:
15.2.1 Sun has the full corporate right, power and authority to
enter into this Agreement, to perform the acts required
of it;
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
33
<PAGE> 34
15.2.2 the execution of this Agreement and the performance by
Sun of its obligations and duties under this Agreement
shall not violate any agreement to which Sun is a party
or the rights of any other party; and
15.2.3 Sun is not relying on nor does AOL make any
representations, warranties or agreements not expressly
provided for in this Agreement; and
16.0 NO PROPRIETARY RIGHTS INDEMNITY. Neither AOL nor Sun makes any warranties
with respect to noninfringement and expressly disclaim all implied warranties of
title and against infringement. Neither AOL nor Sun shall have any obligation to
defend or indemnify the other against any third party claims of infringement or
misappropriation of any proprietary rights in any materials or technology
provided by either party to the other or developed pursuant to this Agreement.
17.0 OTHER REMEDIES CUMULATIVE. Except where otherwise specified, the rights and
remedies granted to a party under this Agreement are cumulative and in addition
to, and not in lieu of, any other rights or remedies which the party may possess
at law or in equity, including, without limitation, rights or remedies under
applicable patent, copyright, trade secret or proprietary rights laws, rules or
regulations.
18.0 AUDIT RIGHTS. AOL and Sun agree to allow mutually acceptable independent
CPA auditors, which auditors shall not be compensated on a contingency basis and
shall be bound to keep all information confidential except as necessary to
disclose discrepancies to the other party, to audit and analyze relevant
accounting records of each other to ensure compliance with all terms of this
Agreement. Any such audit shall be permitted within thirty (30) days of one
party's receipt from the other of a written request to audit, during normal
business hours, at a time mutually agreed upon. The cost of such an audit shall
be borne by the requesting party unless a material discrepancy is found, in
which case the cost of the audit shall be borne by the other party. A
discrepancy shall be deemed material if it involves a payment or adjustment of
more than five percent (5%) of the amount actually due from the paying party in
any given quarter. Audits shall occur no more frequently than once per calendar
year and shall not interfere unreasonably with the audited party's business
activities and shall be conducted in the audited party's facilities during
normal business hours on reasonable notice. An audit may cover any period;
provided that: (i) the period has not been previously audited; and (ii) the
period under audit is within a three year period immediately preceding the
commencement of the audit. A party shall promptly reimburse the other for the
amount of any discrepancy arising out of such audit which indicates that such
party is owed amounts hereunder as well as the costs of the audit, if
applicable, as provided above.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
34
<PAGE> 35
19.0 LIMITATION OF LIABILITY; EXCLUSION OF DAMAGES; DISCLAIMER OF WARRANTIES.
19.1 EXCLUSION OF DAMAGES. NEITHER PARTY HERETO SHALL, UNDER ANY
CIRCUMSTANCES, BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL,
SPECIAL OR EXEMPLARY DAMAGES, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH
DAMAGES OCCURRING.
19.2 LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER
PARTY'S TOTAL LIABILITY OF ALL KINDS ARISING OUT OF OR RELATED TO THIS
AGREEMENT REGARDLESS OF THE FORUM AND REGARDLESS OF WHETHER ANY ACTION
OR CLAIM IS BASED IN CONTRACT, TORT NEGLIGENCE OR OTHERWISE, EXCEED THE
SUM OF (a) FIFTY MILLION DOLLARS; PLUS (b) ALL AGGREGATE AMOUNTS PAID BY
SUCH PARTY TO THE OTHER FOLLOWING NOTIFICATION TO THE OTHER PARTY OF AN
ALLEGED MATERIAL BREACH GIVING RISE TO AN ALLEGED RIGHT OF TERMINATION.
19.3 EXCEPTIONS. THE EXCLUSIONS OF DAMAGES AND LIMITATIONS OF LIABILITY
SET FORTH IN SECTIONS 19.1 AND 19.2 SHALL NOT OPERATE TO LIMIT (a)
AMOUNTS ACTUALLY DUE AND PAYABLE PURSUANT TO THE EXPRESS TERMS OF THIS
AGREEMENT, OR (b) AMOUNTS OTHERWISE RECOVERABLE BY ONE PARTY FROM THE
OTHER IN AN ACTION AT LAW OR IN EQUITY ARISING FROM THE OTHER PARTY'S
INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENTS, COPYRIGHTS, TRADE
SECRETS OR OTHER PROPRIETARY RIGHTS DURING OR AFTER THE TERM OF THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION INFRINGEMENT OR MISAPPROPRIATION
CLAIMS ARISING FROM THE OTHER PARTY'S BREACH OF THIS AGREEMENT.
19.4 DISCLAIMER OF WARRANTIES. NEITHER SUN NOR AOL MAKES ANY WARRANTIES
TO THE OTHER WITH RESPECT TO THE OPERATION OR PERFORMANCE OF ANY OF THE
SOFTWARE DEVELOPED OR LICENSED BY EITHER PARTY TO THE OTHER PURSUANT TO
THIS AGREEMENT, AND SUN AND AOL EACH HEREBY DISCLAIMS ALL SUCH
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
20.0 MISCELLANEOUS PROVISIONS
20.1 NOTICES. Any notice, consent, approval, request, authorization,
direction or other communication under this Agreement ("Notice") that is
required to be given in writing will be deemed to have been delivered
and given for all purposes (i) on the delivery date if delivered by
confirmed facsimile; (ii) on the delivery date if delivered personally
to the
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
35
<PAGE> 36
party to whom the same is directed; (iii) one business day after deposit
with a commercial overnight carrier, with written verification of
receipt; or (iv) five business days after the mailing date, whether or
not actually received, if sent by U.S. mail, return receipt requested,
postage and charges prepaid, or any other means of rapid mail delivery
for which a receipt is available. In the case of AOL, such notice will
also be deemed to have been delivered and given for all purposes on the
delivery date if delivered by electronic mail from an AOL.com email
address via the U.S. America Online brand service to screenname
"[email protected]." Notices shall be addressed as follows:
To Sun:
In the case of Sun, such notice will be provided to
both:
Chief Strategy Officer
Sun Microsystems, Inc.
901 San Antonio Road
MS CUP-01
Palo Alto, California 94033
Fax no.
And
Vice President and General Counsel
Sun Software and Technology
901 San Antonio Road
MS CUP-01
Palo Alto, California 94033
Fax No. (408) 517-1757
To AOL:
In the case of AOL, such notice will be provided to
both:
Senior Vice President for Business Affairs
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax no. 703-265-1206
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
36
<PAGE> 37
And
Deputy General Counsel
American Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax no. 703-265-1105
20.2 SECTION 365(n) OF BANKRUPTCY CODE. All rights and licenses granted
under or pursuant to this Agreement by Sun to AOL or by AOL to Sun are,
and shall otherwise be deemed to be, for purposes of Section 365(n) of
the United States Bankruptcy Code, 11 U.S.C. Section 101, et seq. (the
"Bankruptcy Code"), licenses of rights to "intellectual property" as
defined under Section 101(56) of the Bankruptcy Code. The parties agree
that AOL and Sun, as licensees of such rights and licenses, shall retain
and may fully exercise all of their respective rights and elections
under the Bankruptcy Code; provided such licensee party abides by the
terms of this Agreement.
20.3 DUE DILIGENCE. In connection with the intended merger of AOL and
Netscape, AOL and Sun has each conducted certain due diligence with
respect to Netscape and its products, services, business and technology.
At Sun's request, AOL has made available to Sun certain information and
analysis learned or developed by AOL in the course of its due diligence.
Neither Sun nor AOL makes any representations or warranties to the other
regarding Netscape or any aspect of its business, products, services or
technology, and Sun and AOL each understands, acknowledges and agrees
that it is responsible for conducting whatever due diligence it may
desire to conduct. Neither AOL nor Sun makes any representations or
warranties to the other regarding the accuracy of any materials provided
to either party by Netscape or the accuracy of any analysis or
conclusions which either party may have made based on any such
information provided by Netscape or the accuracy of any such
information, materials, analysis or conclusions which AOL and Sun may
have provided to the other party.
20.4 EMPLOYEES. Each party shall be responsible for paying all salaries,
wages, employee benefits and associated expenses for which its own
employees are eligible under such party's employment policies, any
legally required benefits or insurance, any taxes or governmental
charges payable or subject to withholding in connection with the
employment of such party, and any expenses associated with such
employees activities under this Agreement. Each party shall have
exclusive supervision and control with respect to its own respective
employees and shall have no right to supervise, control, discipline,
terminate or reassign any employees of the other party. In the event
that either party makes a reasonable and good faith determination that
an employee of the other party working on Collaborative Development
Activities or Collaborative Marketing and Sales Activities lacks
requisite skills or experience, does not work well with other project
team members, or is otherwise unsatisfactory, the parties will consult
with one another in
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
37
<PAGE> 38
good faith regarding whether such employee should be replaced, provided
that the final determination as to whether to retain, reassign or
terminate any employee shall be made solely by the party employing such
individual.
20.5 NON-EXCLUSIVITY. Sun and AOL agree except for any express
obligations of AOL and Sun as set forth in this Agreement, nothing in
this Agreement is intended or shall be construed to prohibit or restrict
either AOL or Sun from developing or acquiring products or services
similar to or competitive with products or services of the other party.
20.6 WAIVER. The waiver by either party of a breach of or a default
under any provision of this Agreement, shall not be construed as a
waiver of any subsequent breach of the same or any other provision of
the Agreement, nor shall any delay or omission on the part of either
party to exercise or avail itself of any right or remedy that it has or
may have hereunder operate as a waiver of any right or remedy. Except as
expressly provided herein to the contrary, no amendment or modification
of any provision of this Agreement shall be effective unless in writing
and signed by a duly authorized signatory of Sun and AOL.
20.7 COSTS AND EXPENSES. Except as expressly provided herein to the
contrary, each party shall be responsible for its costs and expenses
incurred in connection with the negotiation and execution of this
Agreement and its performance hereunder.
20.8 NO PARTNERSHIP. No agency, partnership, joint venture, or
employment is created as a result of this Agreement and neither AOL nor
AOL's agents shall have any authority of any kind to bind Sun in any
respect whatsoever, nor shall Sun or Sun's agents have any authority of
any kind to bind AOL.
20.9 HEADINGS. The captions and section and paragraph headings used in
this Agreement are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement.
20.10 ATTORNEYS' FEES. If any party to this Agreement brings an action
against the other party to enforce its rights under this Agreement, the
prevailing party shall be entitled to recover its costs and expenses,
including without limitation, attorneys' fees and costs incurred in
connection with such action, including any appeal of such action.
20.11 SEVERABILITY. If the application of any provision or provisions of
this Agreement to any particular facts of circumstances shall be held to
be invalid or unenforceable by any court of competent jurisdiction,
then: (i) the validity and enforceability of such provision or
provisions as applied to any other particular facts or circumstances and
the validity of other provisions of this Agreement shall not in any way
be affected or impaired thereby, and (ii) such provision or provisions
shall be reformed without further
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
38
<PAGE> 39
action by the parties hereto and only to the extent necessary to make
such provision or provisions valid and enforceable when applied to such
particular facts and circumstances.
20.12 ENTIRE AGREEMENT. This Agreement, including the attachments
hereto, constitute the entire agreement between the parties concerning
the subject matter hereof and supersedes all proposals or prior
agreements whether oral or written, and all communications between the
parties relating to the subject matter of this Agreement and all past
courses of dealing or industry custom.
20.13 NO PRESUMPTIONS. No presumption shall arise in interpreting the
provisions of this Agreement by virtue of the role a party or its
counsel played in drafting this Agreement or any provision hereof.
20.14 ASSIGNMENT AND SUBLICENSES. This Agreement may not be assigned by
either party without the prior written consent of the other party,
except that subject to the provisions of Section 14.4 of this Agreement
permitting termination of this Agreement by either party in the event of
an acquisition or change of control of the other party during the term
of this Agreement: (a) either party shall have the right, without the
other party's consent, to assign this Agreement and its rights and
obligations thereunder to any successor of such party by way of merger
or consolidation or the acquisition of substantially all or a material
portion of the business and assets of the assigning party relating to
this Agreement or the licenses granted pursuant to the definitive
Agreement (a "Successor"); and (b) either party shall have the right,
without the other party's consent, and without limiting any of its other
rights under the licenses, to sublicense any and all licenses granted
pursuant to this Agreement to any Successor. These rights shall be
retained provided that such Successor or sublicensee shall expressly
assume all of the obligations and liabilities of the assigning or
sublicensing party to the other party relating to such definitive
agreement or licenses.
20.15 APPLICABLE LAW. This Agreement shall be governed by the laws of
the State of California.
21.0 DEFINITIONS. As used in this Agreement, the following terms have the
indicated meanings:
21.1 AOL EC SERVICE OPPORTUNITIES are sales opportunities to sell to a
specific business opportunity within a commercial customer, including
both new commerce startup companies and major established companies,
looking to establish EC(2) relationships with AOL, where the essence of
the sale and relationship with AOL is the provision of EC2 services
(including, for example, providing Netcenter services, Netcenter
offerings and/or consumer traffic) and the sale of the Product Suites is
secondary to the transaction.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
39
<PAGE> 40
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
21.2 AOL DISTRIBUTED COMMUNICATOR CLIENT or AOL DISTRIBUTED COMMUNICATOR
CLIENT shall have the meaning specified in Section 2.1.
21.3 AOL SERVICE COMPONENTS are software, services or linkages to AOL
Service Offerings, such as, without limitation,***, built-in software
links to AOL default home page, etc.
21.4 AOL SERVICE OFFERINGS means AOL service offerings providing
customers with content, electronic commerce, communication and other
services, such as, without limitation, service portions of AOL services
such***, default home page,***, remote dial-up access, AOL calendar,
etc.
21.5 ASSOCIATED SERVICES means with respect to any software or hardware,
any support, maintenance, training, installation, and other professional
services associated with the applicable software or hardware and any
development and customization services associated with the applicable
software.
21.6 CLIENT SOFTWARE means the New Browser, the OEM Communicator Client,
the Third Party Communicator Client and the AOL Distributed Communicator
Client.
21.7 CLOSING DATE means the date on which the intended merger of AOL and
Odyssey closes in accordance with the Agreement and Plan of Merger
between AOL and Odyssey.
21.8 COLLABORATIVE DEVELOPMENT ACTIVITY means all activities
contemplated under this Agreement to be conducted under Collaborative
Development Work Plans relating to the development of certain software
packages comprising those components of the Product Suites that are to
be developed collaboratively by the parties.
21.9 COLLABORATIVE DEVELOPMENT WORK PLANS shall have the meaning
specified in Section 5.3.5.
21.10 COLLABORATIVE MARKETING AND SALES ACTIVITY means all activities
contemplated under this Agreement related to collaborative marketing and
sales of the Product Suites, including all activities under the
Marketing and Sales Plans
21.11 COLLABORATIVE SOFTWARE means all software developed through
Collaborative Development Activity, including without limitation the OEM
Communicator Client, the Third Party Communicator Client, the New
Browser and the Network Application and Server Software. Collaborative
Software does not include the Netcenter, the AOL
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
40
<PAGE> 41
Distributed Communicator Client, the AOL Service Components, the AOL
Service Offerings, or the Sun Systems Platform. Collaborative Software
does not include the Existing Netscape Software except to the extent
that such Existing Netscape Software is modified or enhanced through
Collaborative Development Activity to create a derivative work based on
such Existing Netscape Software.
21.12 DESIGNATED COLLABORATIVE SOFTWARE means the Collaborative Software
other than the Third Party Communicator Client.
21.13 DESIGNATED PRODUCTS shall have the meaning specified in Section
14.7.1.
21.14 DEPUTY LEAD EXECUTIVES for collaborative development activity
shall have the meaning specified in Section 5.3.
21.15 DEPUTY LEAD EXECUTIVE for collaborative marketing and sales
activity shall have the meaning specified in Section 5.4.
21.16 EC(2) shall have the meaning specified in Section 1.0.
21.17 EXECUTIVE REPRESENTATIVE shall have the meaning specified in
Section 5.1.
21.18 EXISTING NETSCAPE SOFTWARE means all Netscape client and server
software (including without limitation development tools, tests and
other development components) in existence as of the Closing Date, and
any maintenance upgrades and new releases of such software, if any,
which were already in progress at Netscape, provided such upgrades or
releases are completed and either scheduled to be commercially released
by AOL or actually released by AOL within a period of three (3) months
following the Closing Date. Existing Netscape Software does not include
any software developed pursuant to Collaborative Development Activity
contemplated under this Agreement and does not include the Third Party
Communicator Client or AOL Distributed Communicator Client.
21.19 EXISTING NETSCAPE SOFTWARE UPGRADES means all updates,
modifications, enhancements and new releases of the Existing Netscape
Software, if any, which AOL elects to develop based on the Existing
Netscape Software, which AOL develops outside of Collaborative
Development Activities and that therefore do not constitute
Collaborative Software pursuant to this Agreement.
21.20 GROSS MARGIN means gross revenues booked by a party in connection
with the sale and or licensing of software and/or Associated Services
less (a) such party's Cost of Goods associated with such software and/or
Associated Services and (b) sales commissions paid by such party in
connection with the sale or licensing of such software and/or Associated
Services. For purposes of this definition, "Cost of Goods" means, with
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
41
<PAGE> 42
respect to software, costs of goods calculated in accordance with
Generally Accepted Accounting Principles. For purposes of this
definition, "Cost of Goods" means, with respect to Associated Services,
all personnel and associated costs of providing such services,
calculated in accordance with generally accepted accounting principles.
21.21 JAVA PLATFORM means the Java Virtual Machine and, with respect to
any particular level or implementation of Java technology, such as, by
way of example, the Java Development Kit or Personal Java, those Java
classes required in the Sun specification for such level or
implementation of the Java Platform technology.
21.22 JRE shall have the meaning specified in Section 3.6.
21.23 LEAD EXECUTIVES for collaborative development shall have the
meaning specified in Section 5.3.
21.24 LEAD EXECUTIVE for collaborative marketing and sales shall have
the meaning specified in Section 5.4.
21.25 MARKETING AND SALES PLAN shall have the meaning specified in
Section 5.4.1.
21.26 MC shall have the meaning specified in Section 5.3.1.
21.27 MINIMUM COMMITMENT shall have the meaning specified in Section
4.5.
21.28 NEW BROWSER shall have the meaning specified in Section 2.4.
21.29 NETCENTER means the web site(s) operated and branded by Netscape
as it may change from time to time, but which currently includes web
site hosting, search engine capabilities, free email, and a variety of
content channels covering sports, finance, entertainment and other
topics and service offerings.
21.30 OEM COMMUNICATOR CLIENT shall have the meaning specified in
Section 2.3.
21.31 PRODUCT SUITES means suites of products and services assembled and
marketed pursuant to the Marketing and Sales Plan, which may include the
Third Party Communicator Client, the OEM Communicator Client, the New
Browser, the Network Application and Server Software, and any other
software assembled and marketed pursuant to the Marketing and Sales
Plan, as well as communication services, directory services, commerce
servers, application servers, electronic mail, electronic collaboration
software, web servers, proxy servers and other related software.
21.32 RELEASE means, with respect to any software product, the first
commercially released version of such product and any subsequent
commercially released versions of
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
42
<PAGE> 43
such product incorporating modifications, updates, enhancements,
corrections, patches and/or improvements.
21.33 SDK shall have the meaning specified in Section 2.4.
21.34 SE shall have the meaning specified in Section 5.4.2.
21.35 SOFTWARE LICENSE means a non-exclusive, irrevocable, perpetual,
worldwide, royalty-free license, which (except as otherwise specified in
this Agreement) survives termination of this Agreement, to use, modify,
publish, reproduce, distribute, transmit, display and perform, through
any and all methods and technologies now known or hereafter invented, in
source or binary form, in whole or in part, alone or with other software
or technology including the right to sublicense such rights through
multiple tiers of distribution and being subject only to the provisions
specifically contained in this Agreement on license fees during the term
of this Agreement and permitted fields of use during and after the term
of this Agreement, as applicable.
21.36 SYSTEMS PLATFORM means those platforms comprising software and
hardware on which the Product Suites operate, whether Sun's or a third
party's and shall include, as applicable, Microsoft Windows NT, HP-UX,
IBM AIX and Linux in addition to Sun's software and hardware.
21.37 THIRD PARTY COMMUNICATOR CLIENT shall have the meaning specified
in Section 2.2.
21.38 TLDA means the Technology License and Distribution Agreement
entered into between Sun and AOL concurrently herewith.
21.39 SUN SYSTEMS PLATFORM means the Sun software and Sun hardware on
which the Product Suites operate.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
43
<PAGE> 44
IN WITNESS WHEREOF, the parties have executed this Strategic Development and
Marketing Agreement this 23rd day of November, 1998.
AMERICA ONLINE, INC. SUN MICROSYSTEMS, INC.
By: /s/ DAVID M. COLBURN By: /s/ WILLIAM J. RADUCHEL
-------------------------------- --------------------------------------
David M. Colburn William J. Raduchel
Senior Vice President, Chief Strategy Officer
Business Affairs
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-27-1998
<CASH> 669,862
<SECURITIES> 902,929
<RECEIVABLES> 2,108,237
<ALLOWANCES> 0
<INVENTORY> 363,664
<CURRENT-ASSETS> 4,745,694
<PP&E> 2,593,985
<DEPRECIATION> 1,141,377
<TOTAL-ASSETS> 6,561,520
<CURRENT-LIABILITIES> 2,347,990
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,101,003
<TOTAL-LIABILITY-AND-EQUITY> 6,561,520
<SALES> 4,540,858
<TOTAL-REVENUES> 5,275,624
<CGS> 2,109,737
<TOTAL-COSTS> 2,563,547
<OTHER-EXPENSES> 2,137,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 609,785
<INCOME-TAX> 234,824
<INCOME-CONTINUING> 374,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,961
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.93
</TABLE>
