<PAGE> 1
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
COMMISSION ONLY
Filed by the Registrant [X] [ ] CONFIDENTIAL -- FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
Filed by a Party other than the RULE 14a-6(e)(2))
Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SUN MICROSYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
REGISTRANT
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
SUN MICROSYSTEMS, INC.
------------------------
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We cordially invite you to attend our 1999 Annual Meeting of Stockholders
of Sun Microsystems, Inc. The meeting will be held on Wednesday, November 10,
1999 at 10:00 a.m. (registration will begin at 9:00 a.m.), at 10 Network Circle
(Building 10), Willow Road at Bayfront Expressway, Menlo Park, California. At
the meeting we will:
1. Elect the Board of Directors;
2. Vote on an amendment to Sun's Restated Certificate of Incorporation to
increase the number of shares of Common Stock, par value $0.00067 per
share, which Sun is authorized to issue from 1,800,000,000 shares to
3,600,000,000 shares;
3. Vote on amendments to the 1990 Long-Term Equity Incentive Plan to: (i)
increase the number of shares of Common Stock reserved for issuance
thereunder by 37,000,000 shares of Common Stock to an aggregate of
275,800,000 shares and (ii) extend the term of the plan to October 15,
2010; and
4. Vote on a shareholder proposal to amend Sun's Bylaws to require that the
Board of Directors' Chairperson be an Independent Director; and
5. Transact any other business as may properly come before the meeting.
Stockholders who owned Sun stock at the close of business on Tuesday,
September 14, 1999 may attend and vote at the meeting. If you cannot attend the
meeting, you may vote over the telephone or the Internet as instructed on the
enclosed Proxy Card or by mailing the Proxy Card in the enclosed postage-prepaid
envelope. Any stockholder attending the meeting may vote in person, even though
he or she has already returned a Proxy Card.
You will notice that this year we have changed the format of the Proxy
Statement to make it easier to understand. The Securities and Exchange
Commission is encouraging companies to write documents for investors in plain
English and we support this effort. As in previous years, the exhibition of our
latest products and technologies will be open before and after the meeting.
We look forward to seeing you at the meeting.
Sincerely,
Michael H. Morris
Vice President, General Counsel and
Secretary
Palo Alto, California
October 1, 1999
PLEASE VOTE OVER THE TELEPHONE OR THE INTERNET AS INSTRUCTED ON THE ENCLOSED
PROXY CARD OR COMPLETE, SIGN AND DATE THE PROXY CARD AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
SUN MICROSYSTEMS, INC.
------------------------
PROXY STATEMENT
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
Our Board of Directors is soliciting proxies for the 1999 Annual Meeting of
Stockholders. This Proxy Statement contains important information for you to
consider when deciding how to vote on the matters brought before the meeting.
Please read it carefully. Please note that none of the share-related data in
this Proxy Statement is adjusted to take into account the proposed Stock Split
described in Proposal II below.
Voting materials, which include the Proxy Statement, Proxy Card and 1999
Annual Report to Stockholders, will be mailed to stockholders on or about
October 1, 1999. Our principal executive offices are located at 901 San Antonio
Road, Palo Alto, California 94303. Our telephone number is (650) 960-1300.
Sun will pay the costs of soliciting proxies from stockholders. We have
hired Skinner & Co., Inc. to help us solicit proxies from brokers, bank nominees
and other institutional owners. We expect to pay Skinner & Co., Inc. a fee of
approximately $7,500 for its services and will reimburse Skinner & Co., Inc. for
certain out-of-pocket expenses estimated to be not more than $12,000. We may
also reimburse brokerage firms and other persons representing beneficial owners
of shares for their expenses in forwarding the voting materials to the
beneficial owners. Directors, officers and regular employees may solicit proxies
on behalf of Sun, without additional compensation, personally or by telephone.
We are soliciting proxies electronically through the Internet from stockholders
who are employees of Sun or who previously requested to receive proxy materials
electronically through the Internet.
QUESTIONS AND ANSWERS
Q: Who can vote at the meeting?
A: The Board set September 14, 1999 as the record date for the meeting. All
stockholders who owned Sun Common Stock on September 14, 1999 may attend and
vote at the meeting. Each stockholder is entitled to one vote for each share
of Common Stock held on all matters to be voted on other than the election of
Directors. On September 14, 1999, approximately 780,552,918 shares of Sun
Common Stock were outstanding.
Q: How many votes do you need to hold the meeting?
A: Shares are counted as present at the meeting if you:
- are present and vote in person at the meeting; or
- have properly submitted a proxy card or voted over the telephone or the
Internet.
A majority of Sun's outstanding shares as of the record date must be present
at the meeting in order to hold the meeting and conduct business. This is
called a quorum.
Q: What proposals will be voted on at the meeting?
A: There are four proposals scheduled to be voted on at the meeting:
- Election of the Board of Directors;
- Amendment to the Restated Certificate of Incorporation;
- Amendments to the 1990 Long-Term Equity Incentive Plan; and
- A Shareholder Proposal.
Q: What is the voting requirement to approve each of the proposals?
A: For the election of directors, the seven (7) individuals receiving the
highest number of "FOR" votes will be elected. You may give each candidate
one vote for each share you hold or you may cumulate your votes and give one
candidate a number of votes equal to the number of directors (seven) to be
elected multiplied
1
<PAGE> 4
by the number of shares you hold or you can distribute your votes among as
many candidates as you wish. However, you cannot cast votes for more than
seven directors. If you wish to cumulate your votes, you must notify Sun that
you intend to cumulate votes before the voting on the election of Directors
takes place. You can only cumulate votes for candidates who have been
nominated to the Board of Directors before the voting begins. Proposal II
requires the affirmative "FOR" vote of a majority of the shares of
outstanding Sun Common Stock on September 14, 1999 and entitled to vote.
Proposals III and IV require the affirmative "FOR" vote of a majority of the
shares present at the meeting and entitled to vote.
Q: How are votes counted?
A: You may vote either "FOR" or "AGAINST" each nominee for the Board of
Directors. You may vote "FOR," "AGAINST" or "ABSTAIN" on the other proposals.
If you abstain from voting on the other proposals, it has the same effect as
a vote against. If you just sign your Proxy Card with no further
instructions, your shares will be counted as a yes vote "FOR" each Director,
"FOR" the amendment to the Restated Certificate of Incorporation, "FOR" the
amendments to the 1990 Long-Term Equity Incentive Plan and "AGAINST" the
Shareholder Proposal. If you do not vote and you hold your shares in a
brokerage account in your broker's name (this is called "street name"), your
shares will not be counted in the tally of the number of shares cast "FOR,"
"AGAINST" or "ABSTAIN" on any proposal where your broker does not have
discretionary authority to vote, and therefore will have the effect of
reducing the number of shares needed to approve any of those items. However,
these shares may be counted for the purpose of establishing a quorum for the
meeting. Voting results are tabulated and certified by our transfer agent,
Boston EquiServe L.P.
Q: How can I vote my shares in person at the meeting?
A: Shares held directly in your name as the stockholder of record may be voted
in person at the meeting. If you choose to do so, please bring the enclosed
Proxy Card or proof of identification to the meeting. If you hold your shares
in street name, you must request a legal proxy from your stockbroker in order
to vote at the meeting.
Q: How can I vote my shares without attending the meeting?
A: Whether you hold shares directly as a stockholder of record or beneficially
in street name, you may vote without attending the meeting. You may vote by
granting a proxy or, for shares held in street name, by submitting voting
instructions to your broker or nominee. In most cases, you will be able to do
this over the telephone, the Internet or by mail. Please refer to the summary
instructions included on your Proxy Card. For shares held in street name, the
voting instruction card will be included by your broker or nominee.
BY TELEPHONE OR THE INTERNET -- If you have telephone or Internet
access, you may submit your proxy from anywhere in the world by
following the "Vote by Telephone" or "Vote by Internet" instructions on
the Proxy Card.
BY MAIL -- You may do this by signing your Proxy Card or, for shares
held in street name, by following the voting instruction card included
by your broker or nominee and mailing it in the enclosed, postage
prepaid envelope. If you provide specific voting instructions, your
shares will be voted as you have instructed.
Q: How can I change my vote after I return my proxy?
A: You may revoke your proxy and change your vote at any time before the final
vote at the meeting. You may do this by signing a new Proxy Card with a later
date, voting by telephone or on the Internet as instructed above (your latest
telephone or Internet proxy is counted) or by attending the meeting and
voting in person. Attending the meeting will not revoke your proxy unless you
specifically request it.
Q: What is Sun's voting recommendation?
A: Our Board of Directors recommends that you vote your shares "FOR" each of the
nominees to the Board, "FOR" the amendment to the Restated Certificate of
Incorporation, "FOR" the amendments to the 1990 Long-Term Equity Incentive
Plan and "AGAINST" the Shareholder Proposal.
Q: Where can I find the voting results of the meeting?
A: The preliminary voting results will be announced at the meeting. The final
results will be published in our quarterly report on Form 10-Q for the second
quarter of fiscal 2000.
2
<PAGE> 5
PROPOSAL I
ELECTION OF DIRECTORS
GENERAL
We currently have seven members on our Board of Directors. Proxy holders
will vote for the seven nominees listed below. If any nominee is unable or
declines to serve as a Director, the current Board will designate the proxies
for such nominee to fill the vacancy. If additional individuals are nominated
for election as a Director, the vote for the nominees will be determined by the
proxy holders. The term of office of each person elected as a Director will
continue until the next meeting or until his or her successor has been elected
and qualified.
NOMINEES
The names of the nominees, their ages as of September 14, 1999, and certain
other information about them are set forth below:
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
--------------- --- -------------------- --------------
<S> <C> <C> <C>
Scott G. McNealy..... 44 Chairman of the Board of Directors and Chief 1982
Executive Officer, Sun Microsystems, Inc.
James L. Barksdale... 56 Managing Partner, The Barksdale Group, an 1999
investment and advisory group
L. John Doerr........ 48 General Partner/Managing Director, Kleiner Perkins 1982
Caufield & Byers, a venture capital investment firm
Judith L. Estrin..... 44 Chief Technology Officer, Senior Vice President, 1995
Cisco Systems, Inc., a networking company
Robert J. Fisher..... 45 Executive Vice President and Director, The Gap, 1995
Inc. and President, Gap Division, The Gap, Inc., a
retail clothing company
Robert L. Long....... 62 Independent Management Consultant 1988
M. Kenneth Oshman.... 59 Chairman of the Board of Directors, President and 1988
Chief Executive Officer, Echelon Corporation, a
provider of control network technologies
</TABLE>
Except as set forth below, each of the nominees has been engaged in his or
her principal occupation set forth above during the past five years. There is no
family relationship between any Director and any executive officer of Sun.
JAMES L. BARKSDALE
Mr. Barksdale has been Managing Partner of The Barksdale Group since April
1999. He was President and Chief Executive Officer of Netscape Communications
Corporation from January 1995 until March 1999, when Netscape was acquired by
America Online, Inc. From January 1992 to January 1995, Mr. Barksdale served as
President and Chief Operating Officer of AT&T Wireless Services (formerly McCaw
Cellular Communications, Inc.), a cellular telecommunications company. Mr.
Barksdale is also a Director of 3Com Corporation, The Robert Mondavi
Corporation, Liberate Technologies, Federal Express Corporation, HomeGrocer.com,
Respond.com, Inc. and America Online, Inc.
L. JOHN DOERR
Mr. Doerr is also a Director of Excite@Home, Amazon.com, Inc.,
HomeStore.com, Inc., Drugstore.com, Inc., Intuit, Inc., Healtheon Corporation
and Epicor Software Corporation. He is also a member of the Compensation
Committee of Excite@Home, Amazon.com, Inc., HomeStore.com, Inc., Drugstore.com,
Inc., Healtheon Corporation and Epicor Software Corporation.
3
<PAGE> 6
JUDITH L. ESTRIN
Ms. Estrin has served as Chief Technology Officer, Senior Vice President,
Cisco Systems, Inc., since April 1998. She served as the President and Chief
Executive Officer of Precept Software, Inc. from March 1995 to April 1998. From
September 1994 to March 1995, Ms. Estrin was a computer industry consultant.
From October 1993 to September 1994, Ms. Estrin was the Chief Executive Officer
of Network Computing Devices, Inc., a supplier of X-terminals and PC-to-UNIX
connectivity software. Ms. Estrin is also a Director of Federal Express
Corporation and The Walt Disney Company.
ROBERT J. FISHER
Mr. Fisher has served as Executive Vice President, The Gap, Inc. and
President, Gap Division since April 1997. From November 1995 to April 1997, he
served as Executive Vice President and Chief Operating Officer of The Gap, Inc.
From July 1993 to November 1995, he served as Executive Vice President and Chief
Financial Officer of The Gap, Inc. Mr. Fisher is also on the Board of Directors
of The Gap, Inc.
ROBERT L. LONG
Mr. Long retired from Eastman Kodak Company in December 1991 and is
currently an independent management consultant.
M. KENNETH OSHMAN
Mr. Oshman is also a Director of Echelon Corporation and Knight-Ridder,
Inc.
BOARD MEETINGS AND COMMITTEES
The board held six meetings in 1999. Each Director attended at least 75% of
the Board and Committee Meetings during 1999, except for Mr. Doerr who attended
67% of the meetings held by the Board and 50% of the meetings held by the
Compensation Committee. The Board has an Audit Committee, Compensation Committee
and Nominating Committee. Each committee is described as follows:
<TABLE>
<CAPTION>
NAME OF COMMITTEES FUNCTIONS OF THE NUMBER OF MEETINGS
AND MEMBERS COMMITTEES IN FISCAL 1999
------------------ ---------------- ------------------
<S> <C> <C>
AUDIT
Robert L. Long* - recommends to the Board the selection of 6
James L. Barksdale independent auditors
Judith L. Estrin - approves the services performed by the
A. Michael Spence(1) independent auditors
- reviews and evaluates the accounting policies
and its system of internal accounting controls
COMPENSATION
L. John Doerr* - reviews and approves the executive compensation 4
Robert J. Fisher policies
M. Kenneth Oshman - administers the employee stock option and stock
purchase plans
NOMINATING
M. Kenneth Oshman* - reviews and makes recommendations regarding
candidates for service on the Board
- considers nominees recommended by 0
stockholders(2)
</TABLE>
- ---------------
* Chairman
(1) Mr. Spence resigned from the Board of Sun effective August 31, 1999.
(2) If you want to recommend a nominee to the Nominating Committee for
consideration, you must submit your recommendation in writing to the
President or Secretary of Sun at our principal executive offices.
4
<PAGE> 7
DIRECTOR COMPENSATION
During fiscal 1999, each Board of Director was paid $1,750 per month and
was reimbursed for his or her travel expenses. In addition, the Chairperson of
each committee was paid $1,500 for each meeting he or she attended. Beginning in
November 1999, each member of the Board will receive $1,000 for each Board
meeting they attend, $1,000 for each Committee meeting they attend and an
additional $1,000 per meeting attended where they preside as Chairperson.
Nonemployee Directors participate in Sun's 1988 Directors' Stock Option
Plan. In August 1999, the Board amended this plan to (i) eliminate adjustments
to the number of shares granted to the nonemployee Directors if Sun effects a
forward stock split, stock dividend or similar transaction that increases the
number of Sun's shares issued and outstanding without any consideration paid to
Sun and (ii) reduce the number of shares granted to nonemployee Directors as
described in the next two sentences. Under the Plan, as amended, each
nonemployee Director who is a partner, officer or director of an entity having
an equity investment in Sun is automatically granted a nonstatutory stock option
to purchase 10,000 shares of Common Stock of Sun on the date he or she becomes a
Director. Each nonemployee Director who is not, on the date of his or her
appointment to the Board, affiliated with an entity having an equity investment
in Sun, is automatically granted a nonstatutory stock option to purchase 20,000
shares of Common Stock on the date he or she becomes a Director of Sun.
Following each nonemployee Director's initial appointment, each such Director is
automatically granted a nonstatutory stock option to purchase 10,000 shares of
Common Stock of Sun on the date of each annual meeting of stockholders, if such
nonemployee Director is re-elected to serve on the Board and he or she has
served on the Board for at least six months. Prior to the August amendment, each
nonemployee Director was entitled to receive an initial automatic option grant
of 40,000 shares upon joining the Board, if he or she was a partner, officer or
director of an entity having an equity investment in Sun, or 60,000 shares if he
or she was not an affiliate of a Sun investor and a subsequent automatic option
grant of 40,000 shares at each annual meeting that the nonemployee Director was
re-elected as long as he or she had served on the Board for six months or more.
The exercise price of each option granted under this plan equals the fair market
value of Sun's Common Stock on the date of grant. Options granted pursuant to
this plan terminate after five years, vest at a rate of 25% per year and can
only be exercised while the optionee is a Director of Sun or within six months
after the Director's service terminates due to death or disability or within
ninety days after the optionee ceases to serve as a Director of Sun for any
other reason.
During fiscal year 1999, each of the nonemployee Directors of Sun, with the
exception of Mr. Barksdale, was granted an option to purchase 40,000 shares of
Sun's Common Stock, at an exercise price of $31.47 per share. Upon becoming a
Director of Sun, Mr. Barksdale was granted an option to purchase 30,000 shares
of Sun's Common Stock at an exercise price of $58.44 per share. The
aforementioned grants were made prior to the August 1999 amendment described
above. During fiscal year 1999, Messrs. Doerr, Long and Spence exercised options
to purchase an aggregate of 134,540 shares of Sun's Common Stock at exercise
prices ranging from $3.08 to $9.75 per share, for an aggregate net realized gain
of $4,808,333 based on the closing price of Sun's Common Stock on the date of
exercise as reported on The Nasdaq Stock Market.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At June 30, 1999, the Compensation Committee consisted of Messrs. Doerr,
Fisher and Oshman. In June 1996, Sun entered into a Limited Partnership
Agreement ("Agreement") with KPCB Java Associates L.P., a California limited
partnership, as general partner ("KPCB"), and certain other limited partners
(the "Partnership"). Pursuant to the Agreement, Sun agreed to make capital
contributions of $16,000,000 to the Partnership and, in addition, pay a
management fee to KPCB VIII Associates, L.P., a California limited partnership
and a general partner of KPCB Java ("KPCB VIII"), equal to $320,000 on an annual
basis (the "Management Fee"). Mr. Doerr, a Director of Sun, was a member of the
Compensation Committee during the fiscal year ended June 30, 1999 and is a
General Partner of KPCB VIII.
5
<PAGE> 8
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows how much Sun Common Stock is owned as of
September 14, 1999 by each Director, each executive officer named in the Summary
Compensation Table and all Directors and executive officers as a group. As of
September 14, 1999, we are not aware of any stockholders owning 5% or more of
Sun's Common Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES RIGHT TO OUTSTANDING
NAME OWNED(1) ACQUIRE(2) SHARES
---- ---------- ---------- -----------
<S> <C> <C> <C>
Scott G. McNealy......................................... 14,327,422 3,447,200 2.27%
Edward J. Zander(3)...................................... 86,575 1,218,000 *
William N. Joy........................................... 89,375 1,449,400 *
Michael E. Lehman........................................ 24,759 244,000 *
William J. Raduchel(5)................................... 16,000 0 *
James L. Barksdale....................................... 0 0 *
L. John Doerr............................................ 639,624 140,000 *
Judith L. Estrin......................................... 0 220,000 *
Robert J. Fisher......................................... 64,400 220,000 *
Robert L. Long........................................... 53,384 100,000 *
M. Kenneth Oshman........................................ 690,800 110,000 *
All current Directors and executive officers as a group
(34) persons(4)........................................ 16,839,413 10,658,376 3.48%
</TABLE>
- ---------------
* Less than 1%.
(1) Excludes shares that may be acquired through option exercises.
(2) Shares that can be acquired through stock option exercises within 60 days.
(3) Includes 2,800 shares held by minor children.
(4) Includes 3,321 shares and options exercisable into 1,800 shares within 60
days held by minor children and spouse.
(5) Mr. Raduchel resigned his employment with Sun effective September 13, 1999.
6
<PAGE> 9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows compensation information for Sun's Chief
Executive Officer and the next four most highly compensated executive officers
for the last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -------------------------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND BONUS STOCK AWARDS OPTIONS LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY(1) ($)(1)(2) ($)(3) (#)(4) PAYOUTS ($) ($)(6)
------------------ ---- --------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott G. McNealy........... 1999 $116,154 $3,622,500 -- 100,000 -- 5,583
Chairman of the Board 1998 698,846 998,760 -- 800,000 $1,209,608(4) 3,446
of Directors and Chief 1997 650,000 1,916,850 -- 600,000 386,943(5) 6,000
Executive Officer
Edward J. Zander........... 1999 750,000 1,630,125 -- 500,000 -- 7,553
President and Chief 1998 665,192 522,467 $1,020,296 400,000 333,676(4) 6,400
Operating Officer 1997 550,000 527,134 -- 260,000 179,120(5) 6,000
William N. Joy............. 1999 398,519 471,393 1,199,750 570,000 -- 6,496
Founder and Chief 1998 344,538 187,593 -- 130,000 222,451(4) 2,653
Scientist 1997 324,519 231,752 -- 300,000 -- 6,400
Michael E. Lehman.......... 1999 600,000 869,400 -- 100,000 -- 6,400
Vice President, Corporate 1998 496,019 302,185 -- 200,000 311,424(4) 6,400
Resources and Chief 1997 380,000 364,202 -- 170,000 60,894(5) 6,000
Financial Officer
William J. Raduchel(7)..... 1999 400,000 581,149 -- 75,000 -- 6,400
Chief Strategy Officer 1998 391,288 229,480 -- 150,000 278,063(4) 6,400
1997 370,000 354,617 -- 150,000 71,648(5) 6,000
</TABLE>
- ---------------
(1) Mr. McNealy elected to defer 50% of his salary from July 1997 through
December 1997, 80% of his salary from January 1998 through June 1998 and
100% of his FY'98 bonus, 20% of his FY'99 salary and 100% of his FY'99 bonus
until he retires, as defined in Sun's Non-Qualified Deferred Compensation
Plan; Mr. Joy elected to defer 80% of his salary from October 1997 to June
1998, 100% of his FY'98 bonus, 60% of his FY'99 salary and 100% of his FY'99
bonus until he retires, as defined in Sun's Non-Qualified Deferred
Compensation Plan; Mr. Lehman elected to defer $50,000 of his FY'98 bonus
until he retires, as defined in Sun's Non-Qualified Deferred Compensation
Plan; Mr. Zander elected to defer 100% of his FY'98 bonus until January
2007. For a description of the Non-Qualified Deferred Compensation Plan, see
"Report of Compensation Committee of the Board on Executive
Compensation -- Long-Term Incentives -- Deferred Compensation Plan."
(2) Amount includes bonus' earned in fiscal year 1999 and paid in fiscal year
2000.
(3) The value of a restricted stock award is determined by multiplying the
number of shares by the closing price on the date of grant and subtracting
any consideration paid.
As of June 30, 1999, 2,041,914 shares of Sun's restricted Common Stock were
outstanding, having an aggregate value of $140,628,476. As of June 30, 1999,
Mr. Zander held 50,000 shares of restricted Common Stock having an aggregate
value of $3,446,875, which shares are subject to Sun's Repurchase Option,
which expires as to 25,000 of such shares on July 12, 2000 and as to the
remaining 25,000 shares on January 12, 2003; Mr. Joy held 50,000 shares of
restricted Common Stock having an aggregate value of $3,446.875, which
shares are subject to Sun's Repurchase option, which expires as to 25,000 of
such shares on February 12, 2001 and as to the remaining 25,000 shares on
August 12, 2003. For purposes of this footnote, the aggregate value of
shares of restricted Common Stock held by an executive officer is calculated
using the closing price of Sun's Common Stock as reported on June 30, 1999
on The Nasdaq Stock Market, less any consideration paid. Additionally, Sun's
"Repurchase Option," referenced above, refers to Sun's option to repurchase
shares of the restricted Common Stock at the original purchase price paid by
the executive officer upon termination of the officer's employment before
the applicable vesting dates. All of the above executive officers will
receive the same dividends on all shares of restricted
7
<PAGE> 10
Common Stock as received by all other stockholders of Sun; however, Sun has
never paid and does not currently anticipate paying any cash dividends in
the foreseeable future.
(4) This dollar amount reflects the amount earned by such executive officer in
connection with the vesting of certain Book Value Units ("BVUs") granted to
the officer under the 1990 Long-Term Equity Incentive Plan. These BVUs were
granted in December 1990, became fully vested on July 1, 1998 and are
payable in cash only. The BVUs accrue value based on Sun's reported fiscal
year end earnings per share amounts. The amount listed was the value
attributable to the fully-vested BVUs on September 15, 1998. These BVUs
continue to accrue value until exercised. As of September 14, 1999, the
value attributable to these BVUs was $1,627,679 for Mr. McNealy, $299,335
for Mr. Joy, $419,060 for Mr. Lehman, $374,169 for Mr. Raduchel and $449,003
for Mr. Zander. An executive officer may exercise all or a portion of his or
her BVUs until the end of the permitted exercise period, which is August 31,
2000. The executive officers are under no obligation to exercise the units
immediately, however, any units not exercised by August 31, 2000 will be
automatically paid.
(5) Amount stated reflects the earned payment of certain "EPS Growth Awards"
granted in November 1991 by Sun to certain key employees, including
executive officers. These EPS Growth Awards were payable in cash only and
were valued based on Sun achieving certain financial results over the course
of two performance periods (the two and one-half year period that began on
the date of grant and ended June 30, 1994 and the three-year period
thereafter which ended June 30, 1997), and were paid on September 12, 1997.
(6) Amounts stated reflect contributions made by Sun to such executive officer's
account under Sun's 401(k) Plan, and for Messrs. McNealy and Zander $1,153
for reimbursement of taxes paid.
(7) Mr. Raduchel resigned his employment with Sun effective September 13, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the stock option grants made to the executive
officers named in the Summary Compensation Table during the last fiscal year:
OPTIONS GRANTED IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(1)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(4)(5) DATE 5%($) 10%($)
---- ---------- ---------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Scott G. McNealy............. 100,000(2) 0.47% $50.1250 4/20/09 $ 3,844,615 $ 9,090,975
Edward J. Zander............. 500,000(3) 2.32% 50.1250 4/20/09 19,223,073 45,454,873
William N. Joy............... 70,000(2) 0.33% 23.9375 8/12/08 1,060,918 2,681,862
500,000(3) 2.32% 50.1250 4/20/09 19,223,073 45,454,873
Michael E. Lehman............ 100,000(2) 0.47% 50.1250 4/20/09 3,844,615 9,090,975
William J. Raduchel.......... 75,000(2) 0.35% 50.1250 4/20/09 2,883,461 6,818,231
</TABLE>
- ---------------
(1) Potential realizable value assumes that Sun's Common Stock appreciates at
the annual rate shown (compounded annually) from the date of grant until the
option expires. These numbers are calculated based on the Securities and
Exchange Commission's requirements and do not represent an estimate by Sun
of future stock price growth.
(2) Stock options have a ten year term and vest at a rate of 20% per year. See
also "Employment Contracts and Change-In-Control Arrangements."
(3) Stock options have a ten year term and vest at a rate of 33 1/3% per year on
the third, fourth and fifth anniversary of the option grant date. See also
"Employment Contracts and Change-In-Control Arrangements."
(4) The exercise price and tax withholding obligations may be paid in cash and,
subject to certain conditions or restrictions, by delivery of already owned
shares, pursuant to a subscription agreement or pursuant to a
8
<PAGE> 11
cashless exercise procedure under which the optionee provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit
to Sun, out of the sale proceeds, an amount equal to the exercise price plus
all applicable withholding taxes.
(5) Options were granted at an exercise price equal to the fair market value of
Sun's Common Stock, as determined by the closing price reported on The
Nasdaq Stock Market on the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table shows stock option exercises and the value of
unexercised stock options held by the executive officers named in the Summary
Compensation Table during the last fiscal year.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES ACQUIRED FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
NAME ON EXERCISE(#) VALUE REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Scott G. McNealy...... 0 $ 0.00 3,087,200/1,940,000 $193,764,046/102,033,752
Edward J. Zander...... 242,920 10,150,782 1,142,000/1,408,000 70,556,659/58,935,376
William N. Joy........ 0 0.00 1,419,400/1,606,000 88,930,313/72,984,377
Michael E. Lehman..... 232,000 8,583,680 148,000/690,000 8,125,875/34,747,938
William J. Raduchel... 302,048 9,361,729 160,000/609,000 9,219,063/31,758,563
</TABLE>
- ---------------
(1) Market value of underlying securities at exercise date or fiscal year end,
as the case may be, minus the exercise price.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Sun currently has no employment contracts with any of Sun's executive
officers. Sun did adopt an executive management group change-of-control plan in
October 1990 and has entered into "change-of-control" agreements with each of
the executive officers named in the Summary Compensation Table. Certain
immaterial changes were made to these agreements in November 1996. Each officer
is eligible to receive, if his employment is terminated within one year
following a change-of-control of Sun, other than for just cause (as defined),
death, disability (as defined), retirement or resignation other than for good
reason (as defined), an amount equal to two and one-half times his or her annual
compensation (or, in the case of Mr. McNealy, an amount equal to three times his
annual compensation), continuation of health benefits and group term life
insurance for twenty-four months thereafter and the acceleration of vesting for
all options held. For purposes hereof, "annual compensation" means wages, salary
and incentive compensation for the calendar year immediately preceding the year
in which the above-described severance payment becomes payable. In addition,
pursuant to the terms of these agreements, a "change-of-control" includes (i) a
merger or acquisition of Sun resulting in a 50% or greater change in the total
voting power of Sun immediately following such transaction, or (ii) certain
changes in the majority composition of the Board of Directors during a thirty-
six month period, not initiated by the Board of Directors. Additionally, under
Sun's Non-Qualified Deferred Compensation Plan, in the event of a participant's
death, while the participant is an employee, a participant's beneficiaries are
entitled to receive an amount (not to exceed $3,000,000) equal to the
participant's account balance plus two times the amount of compensation the
participant deferred under the plan. See "Report of Compensation Committee of
the Board on Executive Compensation" for a description of the Non-Qualified
Deferred Compensation Plan.
9
<PAGE> 12
CERTAIN TRANSACTIONS WITH MANAGEMENT
In September 1998, Michael A. Murray, received an interest-free loan from
Sun in the amount of $100,000, payable in full on or before July 31, 2003. This
loan was made for the purchase of his residence. As of fiscal year end, the
entire $100,000 amount remained outstanding.
As part of the executive management group change-of-control plan, Sun
entered into individual change-of-control agreements with each of its corporate
executive officers, in addition to the executive officers named in the Summary
Compensation Table, containing substantially the same terms as the
change-of-control agreements described under the heading "Employment Contracts
and Change-In-Control Arrangements."
Sun also adopted the Executive Change of Control Severance Plan ("Severance
Plan") in June 1990. This Severance Plan was amended in November 1996, renamed
the Vice President Change of Control Plan and currently covers all employees who
are Vice Presidents of Sun (and are not otherwise covered above). The Severance
Plan provides that in the event that any such individual is terminated within
one year after the date of any "change-of-control," other than for just cause
(as defined), death, voluntary retirement at or after age 65, total or permanent
disability or resignation other than for good reason (as defined), such
individual is entitled to two times his or her annual compensation, continuation
of health benefits, group term life insurance for twenty-four months and the
acceleration of vesting for all options held. For purposes of this Severance
Plan, a "change-of-control" is defined similarly as described under the heading
"Employment Contracts and Change-In-Control Arrangements."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Sun believes that during fiscal year 1999, all filings with the Securities
and Exchange Commission of its officers, directors and 10% stockholders complied
with requirements for reporting ownership and changes in ownership of Sun's
Common Stock pursuant to Section 16(a) of the Securities Exchange Act of 1934,
except that William N. Joy filed one Form 4 with respect to a distribution of
455 shares received by Mr. Joy after the applicable deadline.
10
<PAGE> 13
REPORT OF COMPENSATION COMMITTEE
OF THE BOARD ON EXECUTIVE COMPENSATION
The following is the Report of the Compensation Committee of Sun describing
the compensation policies and rationale applicable to Sun's executive officers.
This information shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission nor shall this information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent that Sun specifically incorporates it by reference into a filing.
COMPENSATION PHILOSOPHY
Sun's philosophy in setting its compensation policies for executive
officers is to maximize stockholder value over time. The Compensation Committee
sets Sun's compensation policies applicable to the executive officers, including
the Chief Executive Officer, and evaluates the performance of such officers. The
Committee strongly believes that executive compensation should be directly
linked to continuous improvements in corporate performance and increases in
stockholder value and has adopted the following guidelines for compensation
decisions:
- Provide a competitive total compensation package that enables Sun to
attract and retain key executive talent.
- Align all pay programs with Sun's annual and long-term business
strategies and objectives.
- Provide variable compensation opportunities that are directly linked to
the performance of Sun and that link executive reward to stockholder
return.
The Committee also believes that it is in the best interests of
stockholders for Sun's executive officers (as well as for the members of the
Board of Directors and certain other individuals) to own Sun stock. During
fiscal 1999, the Committee established stock ownership guidelines, applicable to
these covered individuals, reflecting the Committee's expectations as to the
number of shares of Sun's Common Stock such individuals should hold depending on
their position.
COMPONENTS OF EXECUTIVE COMPENSATION
The Compensation Committee focuses primarily on the following three
components in forming the total compensation package for its executive officers:
- Base Salary
- Annual Incentive Bonus
- Long-Term Incentives
BASE SALARY
The Committee intends to compensate its executive officers, including the
Chief Executive Officer, competitively within the industry. In order to evaluate
Sun's competitive position in the industry, the Compensation Committee reviews
and analyzes the compensation packages, including base salary levels, offered by
other high technology companies, including companies in the S&P Computers
(Hardware) Index as shown in the Performance Graph below. In addition, the
Committee, together with the Board of Directors, will also subjectively evaluate
the level of performance of each executive officer, including Mr. McNealy, in
order to determine current and future appropriate base pay levels. In prior
years, for the Chief Executive Officer, the Committee targeted the lower-end of
the base salary range determined by its aforementioned competitive analysis,
giving more significant emphasis to annual bonus and longer-term incentives for
Mr. McNealy's total compensation package. In this regard, over the last three
fiscal years the Committee has tied a substantial portion of Mr. McNealy's
compensation to his annual bonus. In particular, for fiscal 1999, the Committee
reduced Mr. McNealy's base salary to $100,000, such that his annual bonus
comprised the
11
<PAGE> 14
vast majority of his annual compensation. This focus has allowed the Committee
to directly compensate Mr. McNealy for corporate performance, while ultimately
paying Mr. McNealy competitively by industry standards. See "Annual Incentive
Bonus" below. With respect to the other corporate executive officers of Sun, the
Committee has targeted the higher end of the industry competitive base salary
range, linking a lesser (yet still significant) portion of these executives'
total compensation to an annual bonus. See "Annual Incentive Bonus" below. The
Committee also emphasizes longer-term compensation incentives for these
executives as it believes that these longer-term incentives help motivate the
executives to better achieve Sun's corporate performance goals, thereby more
directly contributing to stockholder value.
ANNUAL INCENTIVE BONUS
During the fiscal year, the executive officers of Sun were eligible for a
target annual incentive bonus, calculated by the Committee as a percentage of
the officers' base salary, under the terms of Sun's Section 162(m) Executive
Officer Performance-Based Bonus Plan (the "Section 162(m) Plan"). All corporate
executive officers, other than Mr. McNealy, were eligible for target bonuses
ranging from 42% to 150% of their base salary, depending on their position. Mr.
McNealy was eligible for a target bonus of 2500% of his base salary. During the
last fiscal year, bonuses awarded under the Section 162(m) Plan to the executive
officers, including Mr. McNealy, were calculated based on the achievement by Sun
of certain earnings per share ("EPS") and revenue goals and certain corporate
performance goals based on business, operations and management objectives and,
additionally, certain customer quality and satisfaction goals set by the
Committee at the beginning of the fiscal year. The successful completion of
these goals was measured objectively in accordance with a scoring system
assigned to each goal by the Committee. The EPS and revenue targets, as well as
the corporate performance goals and the customer quality and satisfaction goals
are all based on confidential information and are competitively sensitive to Sun
as they are derived from Sun's internal projections and business plan. At fiscal
year end, the Committee calculated a bonus multiplier (the "Year-End
Multiplier") based on a comparison of Sun's actual performance with respect to
these corporate, quality, EPS and revenue measures against the relevant targets
for fiscal 1999. This multiplier can range from zero to a maximum multiplier of
two. At June 30, 1999, the Committee calculated a Year-End Multiplier applicable
to executive officers (including the Chief Executive Officer) of 1.449. This
multiplier may be different for certain officers, whose performance is also
measured by specific business unit or function goals. Mr. McNealy's annual bonus
of $3,622,500 reflects his targeted bonus amount multiplied by the Year-End
Multiplier. Elements of Sun's financial performance for fiscal year 1999 that
directly affected Mr. McNealy's bonus calculation (as well as the bonus
calculation for the other officers) included revenue growth of 20% compared with
fiscal year 1998, and earnings per share of $1.42 for fiscal year 1999 compared
with $1.15 for the previous fiscal year (exclusive of one time items reported
for fiscal years 1998 and 1999).
LONG-TERM INCENTIVES
OPTIONS AND RESTRICTED STOCK. The Committee provides Sun's executive
officers with long-term incentive through grants of stock options and, in some
cases, restricted stock. The Committee is responsible for determining who should
receive the grants, when the grants should be granted, the exercise price per
share and the number of shares to be granted. The Committee considers grants of
options to executive officers during each fiscal year. The Committee made no
other long-term performance awards during the last fiscal year. Long-term
incentive awards are granted based on individual or corporate performance as
determined by the Committee.
The Committee believes that stock options provide Sun's executive officers
with the opportunity to purchase and maintain an equity interest in Sun and to
share in the appreciation of the value of the stock. The Committee believes that
stock options directly motivate an executive to maximize long-term stockholder
value. The options also utilize vesting periods in order to encourage key
employees to continue to be employed by Sun. All options to executive officers
to date have been granted at the fair market value of Sun's Common Stock on the
date of the grant. The Committee considers the grant of each option
subjectively, considering factors such as the individual performance of
executive officers and competitive compensation packages in the industry. Mr.
McNealy's option grants are also determined by the Committee. For fiscal year
1999, the
12
<PAGE> 15
Committee reduced the number of options granted to Mr. McNealy when compared to
option grants in previous fiscal years. The Committee took this action in light
of Mr. McNealy's request that the Committee grant a greater number of options to
other key executives, such as Mr. Zander and Mr. Joy. The Committee viewed the
increased grants, including the vesting schedule, to Mr. Joy and Mr. Zander as
beneficial performance incentives. See "Summary Compensation Table" regarding
vesting schedules.
The Committee also makes restricted stock awards which can be similarly
beneficial to executives as the value of the award increases with an increasing
stock price. The use of restricted stock has been primarily limited within the
last several fiscal years to specific cases in which a newly hired senior
executive receives a grant in order to replace vested benefits and/or an equity
position at a prior employer, to award an executive officer for extraordinary
performance or to aid in retention. During the last fiscal year, the Committee
granted to Mr. Joy 50,000 shares of restricted stock at a purchase price of
$.005 per share in connection with his promotion to Chief Scientist. For
information regarding the valuation and vesting of this restricted stock award,
see "Summary Compensation Table."
DEFERRED COMPENSATION PLAN. In June 1995, the Committee approved another
component of Sun's executive compensation program, the Non-Qualified Deferred
Compensation Plan (the "Deferred Plan"). The Committee last amended the Deferred
Plan on December 16, 1998. The Deferred Plan is a voluntary, non-tax qualified,
deferred compensation plan available to Board of Director members, executive
officers and other members of Sun management, and enables such individuals to
save for retirement by deferring a portion of their current compensation. Under
the Deferred Plan, participants are entitled to defer compensation until
termination of service with Sun or other specified dates. Participants may elect
to have their deferred amounts credited with earnings based on various
investment choices made available by the Committee for this purpose.
Participants' dependents are also eligible to receive a pre-retirement death
benefit. The purpose of this Deferred Plan is to encourage participants to
remain in the service of Sun as benefits of the Deferred Plan increase over
time.
DISCUSSION OF COMPENSATION IN EXCESS OF $1 MILLION PER YEAR
The Committee has considered the implications of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), enacted under the
Revenue Reconciliation Act of 1993. This Section precludes a public corporation
from taking a tax deduction for individual compensation in excess of $1 million
for its Chief Executive Officer or any of its four other highest-paid officers.
This Section also provides for certain exemptions to this limitation,
specifically compensation that is performance based within the meaning of
Section 162(m).
In order to qualify compensation derived by executive officers from stock
options as performance-based compensation, as contemplated by the Internal
Revenue Service, certain amendments to the 1990 Long-Term Equity Incentive Plan
were submitted to and approved by the requisite stockholders at Sun's 1994
Annual Meeting of Stockholders.
Additionally, with respect to other forms of compensation granted by this
Committee to such executive officers, the Committee approved the Section 162(m)
Performance-Based Executive Bonus Plan and submitted this Plan to stockholders
for the purpose of qualifying bonus payments to executives under Section 162(m),
thereby preserving the deductibility of such payments. Stockholder approval of
this Plan was obtained at Sun's 1995 Annual Meeting of Stockholders. The
Committee, however, reserves the right to award compensation to its executives
in the future that may not qualify under Section 162(m) as deductible
compensation. The Committee will, however, continue to consider all elements of
the cost to Sun of providing such compensation, including the potential impact
of Section 162(m).
SUMMARY
The Compensation Committee believes that its executive compensation
philosophy serves the interests of Sun and Sun's stockholders.
L. John Doerr
Robert J. Fisher
M. Kenneth Oshman
13
<PAGE> 16
PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the stockholders of Sun's Common Stock with the
cumulative return of the S&P 500 Index and the S&P Computers (Hardware) Index
for the period commencing June 30, 1994 and ending on June 30, 1999. The
information contained in the performance graph shall not be deemed "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference into any future filing under
the Securities Act or Exchange Act, as amended, except to the extent that Sun
specifically incorporates it by reference into such filing. The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
<TABLE>
<CAPTION>
SUN MICROSYSTEMS, S & P COMPUTERS
INC. S & P 500 (HARDWARE)
----------------- --------- ---------------
<S> <C> <C> <C>
6/94 100 100 100
6/95 235 126 166
6/96 571 159 186
6/97 722 214 285
6/98 842 279 400
6/99 2672 342 718
</TABLE>
- ---------------
* $100 invested on 6/30/94 in stock or index including reinvestment of
dividends. Fiscal year endings shown above on June 30.
14
<PAGE> 17
PROPOSAL II
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
INTRODUCTION
Sun's Restated Certificate of Incorporation, as currently in effect (the
"Certificate"), authorizes Sun to issue up to 1,800,000,000 shares of Common
Stock (the "Common Stock"), par value $0.00067 per share, and 10,000,000 shares
of Preferred Stock, (the "Preferred Stock"), par value $0.001 per share. On
September 17, 1999, Sun's Board of Directors approved an amendment to the
Certificate (the "Amendment") in order to increase the number of shares of
Common Stock authorized for issuance under the Certificate by 1,800,000,000
shares to a total of 3,600,000,000 shares. The text of the Amendment is set
forth as Exhibit A to this Proxy Statement. On September 17, 1999, the Board of
Directors approved a two-for-one stock split (to be effected in the form of a
stock dividend), subject to obtaining stockholder approval of the Amendment. If
the stockholders approve the Amendment, Sun will then effect the two-for-one
stock split (in the form of a stock dividend), to be paid on December 7, 1999 to
stockholders of record on November 11, 1999 (the "Stock Split"). If the
Amendment is adopted, it will become effective upon the filing of the Amendment
with the Delaware Secretary of State.
PROPOSED STOCK SPLIT
In connection with the Stock Split, each holder of shares of Sun's Common
Stock would receive one additional share for each share held. In addition, the
number of shares of Common Stock reserved for issuance or subject to outstanding
options granted under Sun's employee stock plans (the "Employee Stock Plans")
would increase by 100% (and the exercise prices of outstanding options would
correspondingly decrease by 50%). Stockholders are not being asked to vote on
the Stock Split, but the Stock Split will not take place unless the authorized
number of shares of Common Stock is increased as described in this proposal.
Without this increase in authorized shares, Sun would not have enough authorized
but unissued shares of Common Stock to double the number of its outstanding
shares (including shares granted or reserved for issuance under its Employee
Stock Plans) as a result of the Stock Split.
CURRENT USE OF SHARES
As of September 14, 1999, Sun has approximately 780,552,918 shares of
Common Stock outstanding and approximately 225,047,168 shares reserved for
issuance under Sun's Employee Stock Plans, of which, approximately 105,077,376
are covered by outstanding options and approximately 119,969,792 are available
for grant or purchase. Therefore, Sun's total share requirement prior to the
Stock Split is 1,005,600,086 shares (the "Share Requirement"). In addition, as
of September 14, 1999, 10,000,000 shares of Common Stock were set aside for
issuance with respect to the possible conversion of Sun's authorized but
unissued shares of Preferred Stock. Sun has two shelf registration statements on
file with the Securities and Exchange Commission relating to the registration
for public offering of senior and subordinated debt securities and common and
preferred stock with an aggregate initial public offering price of up to
$2,500,000,000 remaining and available for issuance thereunder. These shelf
registration statements have been declared effective by the Securities and
Exchange Commission, one on October 24, 1997 and one on July 14, 1999. Sun may
choose to offer, from time to time, the debt securities and common and preferred
stock in one or more separate series, in amounts, at prices and on terms to be
set forth in the prospectus contained in the registration statements and in one
or more supplements to the prospectus. In connection with Sun's proposed
acquisition of Forte Software, Inc., Sun filed a registration statement on Form
S-4, registering up to 24,500,000 shares of Common Stock to be issued to holders
of Forte Common Stock upon exchange of their Forte shares. In addition, Forte
options outstanding as of August 23, 1999 would convert into approximately
1,407,000 shares of Sun Common Stock upon the closing of the acquisition. Sun
also wishes to increase the number of shares of its Common Stock reserved for
issuance under its 1990 Long-Term Equity Incentive Plan by 37,000,000 shares as
described in more detail in Proposal III. In the event stockholder approval of
this proposal and Proposal III is obtained and assuming the proposed Forte
acquisition closes, following the effectiveness of the Amendment and the Stock
Split, the Share Requirement would increase to 2,137,014,172 and, accordingly,
Sun would have a total of 1,462,985,828 authorized and unissued shares remaining
available pursuant to its Certificate.
15
<PAGE> 18
PURPOSE OF THE PROPOSED AMENDMENT
The Board of Directors believes that it is in Sun's best interest to
declare the Stock Split in order to lower the per share market price of Sun's
Common Stock and increase its trading activity and broaden the marketability of
Sun's Common Stock. The proposed Amendment would be necessary in order to ensure
that there is a sufficient number of authorized shares of Common Stock to effect
the Stock Split and to have a sufficient number of shares of Common Stock
available for future issuances. As noted above, the Board of Directors has
approved the Stock Split subject to the approval of the Amendment.
The Board of Directors also believes that the availability of additional
authorized but unissued shares of Common Stock will provide Sun with the
flexibility to issue Common Stock for other proper corporate purposes which may
be identified in the future. Such future activities may include, without
limitation, raising equity capital, adopting additional Employee Stock Plans or
reserving additional shares for issuance under its existing Employee Stock
Plans, and making additional acquisitions through the use of stock. Other than
with respect to the foregoing Stock Split, the proposed Forte acquisition, the
amendment to the 1990 Long-Term Equity Incentive Plan and as permitted or
required under Sun's existing Employee Stock Plans, and outstanding options, the
Board of Directors has no immediate plans, understandings, agreements, or
commitments to issue additional shares of Common Stock for any purposes.
The Board of Directors believes that the proposed increase in the
authorized Common Stock will make a sufficient number of shares available,
taking into account the Stock Split, should Sun decide to use its shares for one
or more of such previously mentioned purposes or otherwise. Sun reserves the
right to seek a further increase in authorized shares from time to time in the
future as considered appropriate by the Board of Directors.
POSSIBLE EFFECTS OF THE PROPOSED AMENDMENT
If the stockholders approve the proposed Amendment, the Board of Directors
may cause the issuance of additional shares of Common Stock without further vote
of the stockholders of Sun, except as provided under Delaware corporate law or
under the rules of any national securities exchange on which shares of Common
Stock of Sun are then listed. Under Sun's Certificate, Sun's stockholders do not
have preemptive rights to subscribe to additional securities which may be issued
by Sun, which means that current stockholders do not have a prior right to
purchase any new issue of capital stock of Sun in order to maintain their
proportionate ownership of Sun's Common Stock. In addition, if the Board of
Directors elects to issue additional shares of Common Stock, such issuance could
have a dilutive effect on the earnings per share, voting power and shareholdings
of current stockholders.
In addition to the corporate purposes discussed above, the proposed
Amendment could, under certain circumstances, have an anti-takeover effect,
although this is not the intent of the Board of Directors. For example, it may
be possible for the Board of Directors to delay or impede a takeover or transfer
of control of Sun by causing such additional authorized shares to be issued to
holders who might side with the Board in opposing a takeover bid that the Board
of Directors determines is not in the best interests of Sun and our
stockholders. The Amendment therefore may have the effect of discouraging
unsolicited takeover attempts. By potentially discouraging initiation of any
such unsolicited takeover attempts, the proposed Amendment may limit the
opportunity for Sun's stockholders to dispose of their shares at the higher
price generally available in takeover attempts or that may be available under a
merger proposal. The proposed Amendment may have the effect of permitting Sun's
current management, including the current Board of Directors, to retain its
position, and place it in a better position to resist changes that stockholders
may wish to make if they are dissatisfied with the conduct of Sun's business.
However, the Board of Directors is not aware of any attempt to take control of
Sun and the Board of Directors has not presented this proposal with the intent
that it be utilized as a type of anti-takeover device.
Sun adopted a Common Shares Rights Agreement in April 1989, which was
amended, restated and renamed the Second Amended and Restated Shares Rights
Agreement in February 1998 and subsequently amended in April 1999 (the "Rights
Agreement"). The Rights Agreement is designed to protect stockholders from
proposed takeovers and other abusive takeover tactics, which the Board of
Directors believes are not in
16
<PAGE> 19
the best interest of stockholders, by providing stockholders with certain rights
to acquire capital stock of Sun or of an acquiring entity upon the occurrence of
certain events. A copy of the Rights Agreement was filed (as amended and
restated) on February 13, 1998 and a copy of the subsequent amendment was filed
on April 15, 1999 with the Securities and Exchange Commission. Although the
Rights Agreement provides for the issuance of Sun's Preferred Stock in the event
rights become exerciseable under the terms of the Rights Agreement, Sun may,
under certain circumstances, be required to issue a substantial number of shares
of Common Stock. A failure to have a sufficient number of shares available could
result in a delay or failure of implementation of the Rights Agreement. An
increase in the authorized number of shares of Common Stock could therefore make
a change in control of Sun more difficult by facilitating the operation of the
Rights Agreement.
EFFECT OF THE STOCK SPLIT
No change in total stockholders' equity will result from the Stock Split.
The amount of capital represented by the outstanding shares of Common Stock will
be increased by $0.00067 for each share issued to effect the Stock Split and
Sun's retained earnings will be reduced by the same amount. After the Stock
Split, purchases and sales of Common Stock by an individual stockholder may be
subject to higher brokerage charges and applicable stock transfer taxes than on
a pre-split transaction of equivalent market value, due to the greater number of
shares of Common Stock involved after the Stock Split. In addition, Sun will
incur certain expenses in connection with the Stock Split, such as the cost of
preparing and delivering to stockholders new certificates representing
additional shares.
Sun has been advised that, based on current tax law, the Stock Split should
not result in any gain or loss for federal income tax purposes. The tax basis of
every share held before the Stock Split will be allocated between the two shares
held as a result of the distribution, and the holding period of the new shares
will include the holding period of the shares with respect to which they were
issued. The laws of jurisdictions other than the United States may impose income
taxes on the issuance of the additional shares and stockholders subject to such
laws are urged to consult their tax advisers.
As noted above, the Stock Split is contingent on stockholder approval of
the Amendment, but stockholders are not being asked to vote on the Stock Split.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION.
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<PAGE> 20
PROPOSAL III
AMENDMENTS TO 1990 LONG-TERM EQUITY INCENTIVE PLAN
GENERAL
The stockholders are being asked to approve amendments to Sun's 1990
Long-Term Equity Incentive Plan ("1990 Incentive Plan") in order to (i) increase
the number of shares reserved for issuance thereunder by 37,000,000 shares of
Common Stock to an aggregate of 275,800,000 shares and (ii) extend the duration
of the 1990 Incentive Plan by ten (10) years to October 15, 2010. The 1990
Incentive Plan was adopted by the Board of Directors on October 16, 1990,
approved by the stockholders on December 13, 1990 and a total of 79,200,000
shares were reserved for issuance thereunder. On November 2, 1994, the number of
shares reserved for issuance under the 1990 Incentive Plan was increased to
106,000,000 shares at the 1994 Annual Meeting of Stockholders. On November 1,
1995, the number of shares reserved for issuance under the 1990 Incentive Plan
was increased to 202,800,000 shares at the 1995 Annual Meeting of Stockholders.
At the 1998 Annual Meeting of Stockholders the number of shares reserved for
issuance under the 1990 Incentive Plan was increased to 238,800,000.
As of September 14, 1999, 61,810,562 shares of Common Stock were available
for issuance under the 1990 Incentive Plan (exclusive of the increase in shares
subject to stockholder approval at this meeting). Options to purchase 99,843,809
shares were outstanding and 74,414,085 shares of Common Stock had been issued
upon the exercise of options granted under the 1990 Incentive Plan at an average
exercise price per share of $26.25. Additionally, as of September 14, 1999,
3,078,600 restricted shares of Common Stock have been issued and sold ("Stock
Purchase Rights"), at purchase prices of $0.00067 or $0.01 per share, of which
899,400 shares were subject to Sun's repurchase option.
The 1990 Incentive Plan authorizes the Board of Directors, or its
committee, to grant incentive and nonstatutory stock options as well as Stock
Purchase Rights, stock appreciation rights (in connection with options) and
long-term performance awards. The provisions of these options, rights and awards
are outlined below. The 1990 Incentive Plan is structured to allow the Board of
Directors or its committee broad discretion in creating employee equity
incentives in order to assist Sun in attracting, retaining and motivating the
best available talent for the successful conduct of our business. The Board of
Directors believes the remaining shares under the 1990 Incentive Plan are
insufficient to accomplish these purposes. In addition, the 1990 Incentive Plan
currently terminates in October 2000. Therefore, the Board is proposing to (i)
increase the number of shares reserved under the 1990 Incentive Plan by
37,000,000 to 275,800,000 shares and (ii) extend the duration of the 1990
Incentive Plan to October 15, 2010.
SUMMARY OF THE 1990 INCENTIVE PLAN
PURPOSE
The purpose of the 1990 Incentive Plan is to provide an additional
incentive to eligible employees and consultants whose present and potential
contributions are important to the continued success of Sun, to afford them an
opportunity to acquire a proprietary interest in Sun and to enable Sun to enlist
and retain in its employ the best available talent for the successful conduct of
its business.
ELIGIBILITY
Officers, consultants and other employees of Sun and its subsidiaries and
affiliates whom the Board deems to have the potential to contribute to the
future success of Sun shall be eligible to receive awards under the 1990
Incentive Plan. As of September 14, 1999, there were over 29,000 employees and
5,000 consultants eligible to receive awards under the 1990 Incentive Plan.
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<PAGE> 21
ADMINISTRATION
The 1990 Incentive Plan is administered by the Board of Directors or a
committee appointed by the Board (for the purposes of this plan description,
"Board" shall mean either the Board or a committee appointed by the Board). All
questions of interpretation or application of the 1990 Incentive Plan are
determined in the sole discretion of the Board or its committee, and its
decisions are final and binding upon all participants. Members of the Board who
are eligible employees are permitted to participate in the 1990 Incentive Plan,
but may not vote on any matter affecting the administration of the 1990
Incentive Plan or the grant of any option or other award pursuant to the 1990
Incentive Plan. No member of the Board who is eligible to participate in the
1990 Incentive Plan may be a member of the committee appointed to administer the
1990 Incentive Plan. Members of the Board receive no additional compensation for
their services in connection with the administration of the 1990 Incentive Plan,
other than the compensation received for attending meetings of the Compensation
Committee as described in "Election of Directors -- Director Compensation."
STOCK OPTIONS
The 1990 Incentive Plan permits the granting of non-transferable stock
options that either are intended to qualify as ISOs or are not intended to so
qualify NSOs.
Except for NSOs granted by the Board under Sun's Special Reserve (as
defined below), the option exercise price for each share covered by an option
must be equal to or greater than the fair market value of a share of Common
Stock on the date of grant of such option. However, a NSO granted by the Board
to an employee in lieu of reasonable salary or compensation may be granted at an
exercise price less than the fair market value of Sun's Common Stock on the date
of grant (but no less than 85% of such fair market value). Provided, further,
that in the case of an ISO, the price shall be in no event less than 100% of the
fair market value of a share of Common Stock at the time such option is granted.
In August 1995, the Board established a number of shares equal to 3% of the
total number of shares reserved for issuance under the 1990 Incentive Plan at
any one time (such number to include all increases approved by the stockholders
subsequent to such date) which may be granted free of the specific restrictions
referenced herein (the "Special Reserve"). Therefore, notwithstanding the
paragraph above, the Board may grant NSOs at exercise prices less than the fair
market value of Sun's Common Stock on the date of grant (without limitation)
subject to Sun's Special Reserve.
The term of each option will be fixed by the Board but may not exceed ten
years from the date of grant in the case of ISOs. The Board will determine the
time or times each option may be exercised. Options may be made exercisable in
installments, and the exercisability of options may be accelerated by the Board.
The exercise price of options granted under the 1990 Incentive Plan,
including applicable withholding, must be paid in full by cash, check,
promissory note, Common Stock with a fair market value on the exercise date
equal to the aggregate exercise price of the options or delivery of an
irrevocable subscription agreement. The Board has authorized as payment the
delivery of a properly executed exercise notice and irrevocable instructions to
a broker to promptly deliver to Sun the amount of sale or loan proceeds required
to pay the exercise price. The Board may also authorize payment by any
combination of the foregoing methods.
Under the 1990 Incentive Plan, in the event of termination of an optionee's
employment or consultancy for any reason, including retirement, an option may
thereafter be exercised (to the extent it was exercisable on the date of
termination or as otherwise set forth in the terms of the option) within such
time period as is determined by the Board (which shall be no more than 90 days
in the case of an ISO), subject to the stated term of the option. If the Board
has determined that an employee was discharged for just cause, such employee
shall have no further rights under the 1990 Incentive Plan. If an optionee's
employment or consultancy is terminated by reason of the optionee's death, the
option will be exercisable for such period following death as is determined by
the Board subject to the stated term of the option.
The granting of stock options under the 1990 Incentive Plan by the Board is
subjective and is dependent upon, among other things, an employee's individual
performance. See "Participation in the 1990 Incentive
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<PAGE> 22
Plan." Therefore, future option grants to executive officers or employees under
the 1990 Incentive Plan are not determinable. The 1990 Incentive Plan does
however limit the number of shares subject to an option that may be granted to
any employee in any one fiscal year to 1,200,000 shares, except with respect to
a newly hired employee who may also receive a one-time grant of up to 1,600,000
shares upon acceptance of employment with Sun.
STOCK APPRECIATION RIGHTS
The Board may also grant non-transferable Stock Appreciation Rights
("SARs") in conjunction with related options, entitling the holder upon exercise
to receive an amount in any combination of cash or Common Stock (as determined
by the Board) equal in value to the excess of the fair market value of the
shares covered by such SAR on the date of exercise over the aggregate exercise
price of the related option for such shares. The exercise of a SAR will result
in cancellation of the related option or, conversely the exercise of the related
option will result in cancellation of the SAR. No SARs had been granted under
the 1990 Incentive Plan as of September 14, 1999.
STOCK PURCHASE RIGHTS
The Board may grant participants Stock Purchase Rights to purchase stock
either alone, in addition to, or in tandem with other awards under the 1990
Incentive Plan and/or cash awards made outside of the 1990 Incentive Plan (at a
price of not more than $0.00067 per share, the par value of Sun's Common Stock,
in the case of participants who are subject to Section 16(b) of the Exchange
Act) for limited periods of up to 60 days under such terms, conditions and
restrictions as the Board may apply. Other than Stock Purchase Rights granted
under the Special Reserve, the stock so purchased will be subject to Sun's
repurchase option exercisable upon the voluntary or involuntary termination of
employment of the employee. The repurchase option applicable to shares of stock
so granted (other than shares granted under the Special Reserve) shall lapse as
to not more than 50% of the shares subject to the Stock Purchase Right on a date
not earlier than 2-1/2 years from the date of grant and as to the remaining
shares on a date not earlier than 5 years from the date of grant. Stock Purchase
Rights granted from the Special Reserve shall be subject to such vesting
restrictions as determined in the discretion of the Board.
The granting of Stock Purchase Rights under the 1990 Incentive Plan by the
Board is subjective and is tied to an employee's individual performance. Such
rights are most commonly granted to new key employees and, less frequently, to
executive officers to reward extraordinary performance or to aid in retention.
See "Report of Compensation Committee of the Board on Executive Compensation."
Therefore, future grants of Stock Purchase Rights to any employee under the 1990
Incentive Plan are not determinable.
LONG-TERM PERFORMANCE AWARDS
The Board may also grant long-term performance awards under the 1990
Incentive Plan ("Long-Term Performance Awards") either alone or in tandem with
other awards granted under the 1990 Incentive Plan and/or awards made outside of
the 1990 Incentive Plan. Such awards are bonus awards that shall be payable in
cash or Common Stock and shall be based on Sun, subsidiary and/or individual
performance factors or upon such other criteria as the Board may deem
appropriate. Performance factors may vary from participant to participant, group
to group, and period to period.
No Long-Term Performance Awards were granted to any employee during the
last fiscal year.
DEFERRALS UNDER THE PLAN
The Board may also permit participants to elect to defer receipt of
benefits under the 1990 Incentive Plan or make automatic deferrals. The Board
may also provide and determine the amount of any deemed earnings for amounts
deferred under the 1990 Incentive Plan.
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<PAGE> 23
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS AND OTHER EVENTS
The Board is authorized to make appropriate adjustments in connection with
outstanding awards under the 1990 Incentive Plan to reflect stock dividends,
stock splits and similar events. In the event of a merger, liquidation or
similar event, the Board in its discretion may provide for substitution or
adjustment in, or may accelerate or adjust such awards.
AMENDMENT AND TERMINATION
The Board may amend, alter or discontinue the 1990 Incentive Plan at any
time, but such amendment, alteration or discontinuation shall not adversely
affect any stock options, SARs, Stock Purchase Rights, or Long-Term Performance
Awards then outstanding under the 1990 Incentive Plan, without the participant's
consent. Subject to the specific terms of the 1990 Incentive Plan described
above, the Board may accelerate any award or option or waive any conditions or
restrictions pertaining to such award or option at any time. In addition, to the
extent necessary to comply with Rule 16b-3 under the Exchange Act or Section
422A of the Code (or any other applicable law or regulation), Sun shall obtain
stockholder approval of any 1990 Incentive Plan amendment in such a manner and
to such a degree as is required.
CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION
The following is only a brief summary of the effect of federal income
taxation upon the recipient and Sun under the 1990 Incentive Plan based upon the
Code. This summary does not purport to be complete and does not discuss the
income tax laws of any municipality, state or country outside of the United
States in which an optionee may reside.
STOCK OPTIONS
If an option granted under the 1990 Incentive Plan is an ISO, the optionee
will recognize no income upon grant of the ISO and will incur no tax liability
due to the exercise unless the optionee is subject to the alternative minimum
tax. Sun will not be allowed a deduction for federal income tax purposes as a
result of the exercise of an ISO regardless of the applicability of the
alternative minimum tax. Upon the sale or exchange of the shares at least two
years after grant of the ISO and one year after exercise by the optionee, any
gain (or loss) will be treated as long-term capital gain (or loss). If these
holding periods are not satisfied, the optionee will recognize ordinary income
equal to the difference between the exercise price and the lower of the fair
market value of the stock at the date of the option exercise or the sale price
of the stock. A different rule for measuring ordinary income upon such premature
disposition may apply if the optionee is subject to Section 16 of the Exchange
Act. Sun will be entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Any gain (or loss) recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income will be characterized as capital gain (or loss).
All options that do not qualify as ISOs are taxed as NSOs. An optionee will
not recognize any taxable income at the time he or she is granted a NSO.
However, upon the exercise of a NSO, the optionee will recognize ordinary income
measured by the excess of the then fair market value of the shares over the
option price. In certain circumstances, where the shares are subject to a
substantial risk of forfeiture when acquired or where the optionee is subject to
Section 16 of the Exchange Act, the date of taxation may be deferred unless the
optionee files an election with the Internal Revenue Service under Section 83(b)
of the Code. The income recognized by an optionee who is also an employee of Sun
will be subject to tax withholding by Sun by payment in cash or out of the
current earnings paid to the optionee. Upon resale of such shares by the
optionee, any difference between the sales price and the exercise price, to the
extent not recognized as ordinary income as provided above, will be treated as
capital gain (or loss). Sun will be entitled to a tax deduction in the same
amount as the ordinary income recognized by the optionee with respect to shares
acquired upon exercise of a NSO.
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<PAGE> 24
STOCK APPRECIATION RIGHTS
A recipient will not recognize any taxable income in connection with the
grant of a SAR in connection with a stock option. On exercise of a SAR, the
recipient will generally recognize ordinary income in the year of exercise in an
amount equal to the difference between the exercise price (if any) of the SAR
and the fair market value of the SAR (computed with reference to the Common
Stock of Sun) at the time of exercise. If the recipient is an employee, such
amount will be subject to withholding by Sun. As a general rule, Sun will be
entitled to a tax deduction in the amount and at the time the recipient
recognizes ordinary income with respect to the SAR.
If the recipient receives shares of Common Stock of Sun upon exercise of a
SAR, the tax consequences on purchase and sale of such shares will be the same
as those discussed above for NSOs.
STOCK PURCHASE RIGHTS
Stock Purchase Rights will generally be subject to the tax consequences
discussed above for NSOs.
LONG-TERM PERFORMANCE AWARDS
A recipient generally will not recognize any taxable income in connection
with the grant of a Long-Term Performance Award. At the time the performance
award vests (unless a Section 83(b) election is timely filed at the time of
grant), the recipient will generally recognize ordinary income in an amount
equal to the fair market value of the award (computed with reference to the
Common Stock of Sun) at the time of vesting. If the recipient is an employee,
any amount included in income will be subject to withholding by Sun. As a
general rule, Sun will be entitled to a tax deduction in the amount and at the
time the recipient recognizes ordinary income with respect to the Long-Term
Performance Award included as ordinary income by the recipient.
CAPITAL GAINS
Capital gains are grouped and netted by holding periods. Net capital gains
on assets held for twelve months or less is currently taxed at the individual's
highest federal ordinary income tax rate. Net capital gains on assets held for
more than 12 months is currently taxed at a maximum federal rate of 20%. Capital
losses are allowed in full against capital gains and up to $3,000 against other
income.
PARTICIPATION IN THE 1990 INCENTIVE PLAN
The grant of options, SARs, Stock Purchase Rights, stock bonus awards and
Long-Term Performance Awards under the 1990 Incentive Plan to employees,
including the executive officers named in the Summary Compensation Table, is
subject to the discretion of the Board. As of the date of this Proxy Statement,
there has been no determination by the Board with respect to future awards under
the 1990 Incentive Plan. Accordingly, future awards are not determinable.
Non-employee Directors are not eligible to participate in the 1990 Incentive
Plan. No SARs or Long-Term Performance Awards were granted during the last
fiscal year. As of September 14, 1999, the fair market value of Sun's Common
Stock was $85.375 per share, which was the closing sale price reported by The
Nasdaq Stock Market. The following table sets forth information with
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<PAGE> 25
respect to the grant of options to the executive officers named in the Summary
Compensation Table, to all current executive officers as a group and to all
other employees as a group during the last fiscal year:
AMENDED PLAN BENEFITS
1990 INCENTIVE PLAN
<TABLE>
<CAPTION>
SECURITIES UNDERLYING AVERAGE WEIGHTED EXERCISE
NAME OF INDIVIDUAL OPTIONS GRANTED(#) PRICE PER SHARE($/SH)
------------------ --------------------- -------------------------
<S> <C> <C>
Scott G. McNealy...................................... 100,000 $50.1250
Chairman of the Board of Directors and Chief
Executive Officer
Edward J. Zander...................................... 500,000 $50.1250
President and Chief Operating Officer
William N. Joy........................................ 70,000 $23.9375
Founder and Chief Scientist......................... 500,000 $50.1250
Michael E. Lehman..................................... 100,000 $50.1250
Vice President, Corporate Resources and Chief
Financial Officer
William J. Raduchel................................... 75,000 $50.1250
Chief Strategy Officer
All current executive officers as a group............. 2,375,000 $ 45.31
All other employees as a group........................ 17,327,080 $ 45.42
</TABLE>
MANAGEMENT RECOMMENDS A VOTE "FOR" THE AMENDMENTS TO THE 1990 LONG-TERM
EQUITY INCENTIVE PLAN.
PROPOSAL IV
SHAREHOLDER PROPOSAL
The Trust for the International Brotherhood of Electrical Workers' Pension
Benefit Fund, 1125 Fifteenth Street, N.W., Washington, D.C. 20005, owner of
75,384 shares of Sun's Common Stock (as of the date of the submission) has
submitted the following proposal:
SHAREHOLDER PROPOSAL CONCERNING INDEPENDENT CHAIRPERSON OF THE BOARD OF
DIRECTORS
BE IT RESOLVED: That the stockholders of Sun Microsystems (the Company)
recommend that the Board of Directors take steps necessary to amend the
Company's Bylaws to require that the Board's Chairperson be an Independent
Director. For purposes of this proposal, the stockholders further recommend that
the term "Independent Director" means a director who (i) has not been employed
by the Company in an executive capacity within the last five years; (ii) is not,
and is not affiliated with a company that is, an advisor or consultant to the
Company; (iii) is not affiliated with a significant customer or supplier of this
Company; (iv) has no personal services contract(s) with the Company; (v) is not
affiliated with a not-for-profit entity that receives significant contributions
from the Company; (vi) within the last five years, has not had any business
relationship with the company (other than service as a director) for which the
Company has been required to make disclosure under the Regulation S-K of the
Securities and Exchange Commission; (vii) is not employed by a public company at
which an executive officer of the Company serves as a director; (viii) has not
had a relationship described in (i) through (vii) above with any affiliate of
the Company; and (ix) is not a member of the immediate family of any person
described in (i) through (viii) above. This provision may only be amended by the
affirmative vote of a majority of the holders of the outstanding common stock of
the company.
SHAREHOLDER'S SUPPORTING STATEMENT
How important is the Board of Directors: As a trust fund with approximately
1,000,000 participants, as owner of some 75,384 shares of the Company's stocks,
the Pension Benefit Fund (PBF) believes that the Board -- and most particularly
its Chairperson -- is of paramount importance. This is why we are sponsoring
this proposal which urges the Board to amend the Company's Bylaws so that the
Board's leader will be a person who is independent of the Company and its
officers. Through this proposal, we seek to promote strong, objective leadership
on the Board.
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A Board of Directors must formulate corporate policies and monitor
management's implementations of their policies. The Chairperson is responsible
for leading the Board in these tasks and ensuring that directors are given the
information necessary to perform their duties. In our view, when the Board's
Chairperson is also an officer, employee or otherwise closely related to the
Company's management, it is difficult to objectively perform this monitoring and
evaluation function. We believe that an independent Chairperson would best
ensure that the interests of stockholders are served, rather than the interest
of management.
The benefits of independent directors are generally well accepted. The New
York Stock Exchange, for example, requires that at least two members of the
board of a listed company, and all members of the company's audit committee,
must meet the Exchange's standards of independence. The Investment Company Act
of 1940 (the Law that governs the activities of investment companies) also
includes an independent director provision, generally requiring investment
company boards to be comprised of at least 40 percent "disinterested" directors.
OPPOSING STATEMENT FROM THE BOARD OF DIRECTORS OF SUN
The Board of Directors opposes this proposal for the following reasons:
The Board of Directors believes that Sun is best served by having the Chief
Executive Officer serve as Chairman of the Board to act as a bridge between the
Board and the operating organization and to provide critical leadership for our
strategic initiatives. Sun's past success supports our current leadership
structure.
The Chief Executive Officer has also served as Chairman of the Board since
December 1984. Since this date, Sun's annual revenues have increased from
$38.860 million as of June 30, 1984 to $11.726 billion as of June 30, 1999,
which is an average annual growth rate of 72%. Since June 30, 1984, Sun's
earnings per share has experienced an average annual growth rate of 58%
(excluding all one-time charges). Since Sun's initial public offering on March
4, 1986, the per share price of our stock as traded on The Nasdaq Stock Market
has increased 6,788% (based on the closing price reported by The Nasdaq Stock
Market on 6/30/99) and our market capitalization has increased from $419.9
million to $53.5 billion on June 30, 1999 (based on the closing price reported
by The Nasdaq Stock Market on 6/30/99). Our number of employees has also
increased from 1,223 at March 4, 1986 to 29,669 at June 30, 1999.
Our results during fiscal 1999 are impressive as well. As of the fiscal
year ended June 30, 1999, compared to the fiscal year ended June 30, 1998, Sun's
annual revenues grew from $9.791 billion to $11.726 billion (or 20%) and our
earnings per share grew from $1.15 per share to $1.42 per share, or 23%
(adjusted to reflect the recent stock dividend paid on April 8, 1999 and
excluding all one-time charges). In addition, our stock price appreciated from
$21.72 per share to $68.88 per share, or 217%, (based on closing prices reported
by The Nasdaq Stock Market on 6/30/98 and 6/30/99, respectively) and our market
capitalization grew from $16.4 billion to $53.5 billion (based on the closing
prices reported by The Nasdaq Stock Market on 6/30/98 and 6/30/99,
respectively).
The Board of Directors feels that Sun's success under the current structure
speaks for itself. We also recognize the importance of having independent,
non-management directors. Currently, except for the Chairman & Chief Executive
Officer, none of the directors is an officer or employee of Sun. Notably, all of
the members on our Nominating, Audit and Compensation Committees are independent
members of the Board. The Compensation Committee evaluates the performance of
our executive officers, including the Chief Executive Officer, and establishes
compensation plans for these officers that are directly linked to continuous
improvements in corporate performance and increases in stockholder value. Our
Board of Directors and the Nominating Committee are committed to an extremely
high quality and diverse membership of the Board. Our Board consists of a highly
effective combination of individuals with a variety of relevant industry
knowledge, business insight, professional expertise, personal experience,
historical perspective and independent judgment. These independent Board
members, together with Mr. McNealy serving as Chairman and Chief Executive
Officer, have provided Sun with the high quality, objective leadership necessary
for Sun's success. We believe our current structure will continue to provide
such leadership.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE ABOVE SHAREHOLDER
PROPOSAL.
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NOTICE OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the consolidated financial statements for the fiscal year
ending June 30, 2000. Ernst & Young LLP has served as Sun's independent auditors
since 1982. The Board of Directors, in its discretion, may direct appointment of
new independent auditors at any time during the year, if the Board of Directors
feels that such a change would be in the best interests of Sun and our
stockholders. We expect representatives of Ernst & Young LLP to attend the
Annual Meeting, have the opportunity to make a statement if they desire to do
so, and be available to answer appropriate questions.
OTHER MATTERS
We do not know of any other matters to be submitted to the stockholders at
the Annual Meeting. If any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of proxy
to vote the shares they represent as the Board of Directors may recommend.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
If you want us to consider including a proposal in our Proxy Statement for
our 2000 Annual Meeting of Stockholders you must deliver a copy of your proposal
to Sun's Secretary at our principal executive office at 901 San Antonio Road,
Palo Alto, California 94303 no later than June 5, 2000.
If you intend to present a proposal at Sun's 2000 Annual Meeting, but you
do not intend to have it included in our 2000 Proxy Statement, you must deliver
a copy of your proposal to Sun's Secretary at our principal executive office
listed above no later than August 2, 2000 and no earlier than July 3, 2000. If
the date of Sun's 2000 Annual Meeting is more than 30 calendar days before or
after the date of our 1999 Annual Meeting, your notice of a proposal will be
timely if we receive it by the close of business on the tenth day following the
day we publicly announce the date of the 2000 Annual Meeting. If we do not
receive notice of your proposal within this time frame, our management will use
its discretionary authority to vote the shares it represents as the Board of
Directors may recommend.
THE BOARD OF DIRECTORS
Dated: October 1, 1999
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<PAGE> 28
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
SUN MICROSYSTEMS, INC.
Michael E. Lehman and Michael H. Morris, certify that:
1. They are the Vice President, Corporate Resources and Chief Financial
Officer and Vice President, General Counsel and Secretary, respectively, of Sun
Microsystems, Inc., a Delaware corporation (the "Corporation").
2. That Section (a) of Article 4 of the Restated Certificate of
Incorporation of the Corporation now reads:
"The Corporation is authorized to issue two classes of shares designated
"Common Stock" and "Preferred Stock". The total number of shares which
the Corporation shall have authority to issue is One Billion Eight
Hundred Ten Million (1,810,000,000), of which One Billion Eight Hundred
Million (1,800,000,000) shall be Common Stock with a par value of
$0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock
with a par value of $0.001 per share."
is amended to read as follows:
"The Corporation is authorized to issue two classes of shares designated
"Common Stock" and "Preferred Stock". The total number of shares which
the Corporation shall have authority to issue is Three Billion Six
Hundred Ten Million (3,610,000,000), of which Three Billion Six Hundred
Million (3,600,000,000) shall be Common Stock with a par value of
$0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock
with a par value of $0.001 per share."
3. The foregoing Certificate of Amendment of the Restated Certificate of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing Certificate of Amendment of the Restated Certificate of
Incorporation has been duly approved by the required vote of stockholders in
accordance with Section 242 of the Delaware Corporations Code. The total number
of outstanding shares of Common Stock of the Corporation is 780,552,918. No
shares of Preferred Stock are outstanding. The number of shares voting in favor
of the amendment equaled or exceeded the vote required. The percentage vote
required was more than 50% of the outstanding Common Stock.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in the foregoing Certificate of Amendment
are true and correct of our own knowledge.
A-1
<PAGE> 29
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and the Certificate of Amendment to be signed by Michael E.
Lehman, Vice President, Corporate Resources and Chief Financial Officer and
attested by Michael H. Morris, Vice President, General Counsel and Secretary
this 11th day of November, 1999.
SUN MICROSYSTEMS, INC.
<TABLE>
<S> <C>
[Corporate Seal]
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Michael E. Lehman
ATTEST:
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Michael H. Morris
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SUN MICROSYSTEMS, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Sun Microsystems, Inc., hereby
acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy
Statement, each dated October 1, 1999, and hereby appoints Scott G. McNealy and
Michael H. Morris or either of them, proxies and attorneys-in-fact, with full
power to each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at Sun's 1999 Annual Meeting of Stockholders to be
held on Wednesday, November 10, 1999, and at any adjournment(s) or
postponement(s) thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if personally present on the following
matters. The meeting will begin at 10:00 a.m. (registration will begin at 9:00
a.m.) at Sun's Menlo Park offices at 10 Network Circle (Building 10), Willow
Road at Bayfront Expressway, Menlo Park, California.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ELECTION OF DIRECTORS, THE AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION AND THE AMENDMENTS TO THE 1990 LONG-TERM EQUITY
INCENTIVE PLAN, AGAINST THE SHAREHOLDER PROPOSAL RELATING TO AN INDEPENDENT
CHAIRPERSON AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME
BEFORE THE MEETING.
THE BOARD RECOMMENDS A VOTE FOR PROPOSALS 1, 2 & 3 AND AGAINST PROPOSAL 4.
1. ELECTION OF DIRECTORS:
NOMINEES: Scott G. McNealy; James L. Barksdale; L. John Doerr; Judith L. Estrin;
Robert J. Fisher; Robert L. Long; M. Kenneth Oshman;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------
For all nominees except as noted above
2. AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION:
Proposal to approve an amendment to Sun's Restated Certificate of Incorporation
to increase the number of shares of Common Stock, par value $0.00067 per share,
which Sun is authorized to issue from 1,800,000,000 shares to 3,600,000,000
shares;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
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3. AMENDMENTS TO THE 1990 LONG-TERM EQUITY INCENTIVE PLAN:
Proposal to approve amendments to the 1990 Long-Term Equity Incentive Plan to
(i) increase the number of shares of Common Stock reserved for issuance
thereunder by 37,000,000 shares of Common Stock to an aggregate of 275,800,000
shares and (ii) extend the term of the plan to October 15, 2010; and
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. SHAREHOLDER PROPOSAL RELATING TO AN INDEPENDENT CHAIRPERSON:
Shareholder Proposal to amend Sun's Bylaws to require that the Board of
Directors' Chairperson be an Independent Director.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
and, in their discretion, upon such other matter or matters which may properly
come before the Annual Meeting and any adjournment(s) thereof.
(This Proxy should be marked, dated and signed by the stockholder(s) exactly as
his or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW. [ ]
Signature: Date
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Signature: Date
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SUN MICROSYSTEMS, INC.
1990 LONG-TERM EQUITY INCENTIVE PLAN
(AMENDED AS OF AUGUST 11, 1999)
1. Purpose of the Plan. The purpose of the Sun Microsystems, Inc.
1990 Long-Term Equity Incentive Plan is to enable Sun Microsystems, Inc. to
provide an incentive to eligible employees, consultants and Officers whose
present and potential contributions are important to the continued success of
the Company, to afford them an opportunity to acquire a proprietary interest in
the Company, and to enable the Company to enlist and retain in its employ the
best available talent for the successful conduct of its business. It is intended
that this purpose will be effected through the granting of (a) stock options,
(b) stock purchase rights, (c) stock appreciation rights, and (d) long-term
performance awards.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Committee or Committees referred to
in Section 5 of the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be exercised by the
Board.
(d) "Common Stock" means the Common Stock, $0.00067 par value
(as adjusted from time to time), of the Company.
(e) "Company" means Sun Microsystems, Inc., a corporation
organized under the laws of the state of Delaware, or any successor corporation.
(f) "Director" means a member of the Board.
(g) "Disability" means a disability, whether temporary or
permanent, partial or total, as determined by the Committee.
(h) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(i) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) the last reported sale price of the Common Stock of
the Company on the NASDAQ National Market System or, if no such reported sale
takes place on any such day, the average of the closing bid and asked prices, or
(ii) if such Common Stock shall then be listed on a
national securities exchange, the last reported sale price or, if no such
reported sale takes place on any such day, the average of the closing bid and
asked prices on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or
(iii) if such Common Stock shall not be quoted on such
National Market System nor listed or admitted to trading on a national
securities exchange, then the average of the closing bid and asked prices, as
reported by The Wall Street Journal for the over-the-counter market, or
(iv) if none of the foregoing is applicable, then the
Fair Market Value of a share of Common Stock shall be determined by the Board in
its discretion.
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(j) "Incentive Stock Option" means an Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(k) "Long-Term Performance Award" means an award under Section
10 below. A Long-Term Performance Award shall permit the recipient to receive a
cash or stock bonus (as determined by the Committee) upon satisfaction of such
performance factors as are set out in the recipient's individual grant.
Long-Term Performance Awards will be based upon the achievement of Company,
Subsidiary and/or individual performance factors or upon such other criteria as
the Committee may deem appropriate.
(l) "Nonstatutory Stock Option" means any Option that is not an
Incentive Stock Option.
(m) "Officer" means an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(n) "Option" means any option to purchase shares of Common
Stock granted pursuant to Section 7 below.
(o) "Plan" means this 1990 Long-Term Equity Incentive Plan, as
hereinafter amended from time to time.
(p) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 9 below.
(q) "Right" means and includes Stock Appreciation Rights and
Stock Purchase Rights granted pursuant to the Plan.
(r) "Special Reserve" means a number of shares reserved and
available for issuance under the terms of the Plan equal to 3% of the total
shares reserved under the Plan as determined by and set forth under Section 4
below as such section may be amended from time to time in accordance with the
terms of this Plan.
(s) "Stock Appreciation Right" means an award made pursuant to
Section 8 below, which right permits the recipient to receive an amount of
Common Stock or cash equal in value to the difference between the Fair Market
Value of Common Stock on the date of grant of the Option and the Fair Market
Value of Common Stock on the date of exercise of the Stock Appreciation Right.
(t) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to a restricted stock purchase agreement entered into between the
Company and the purchaser under Section 9 below.
(u) "Subsidiary" means a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or by a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or by a Subsidiary.
In addition, the term "Rule 16b-3", and the term
"Performance Period" shall have the meanings set forth in Section 5(a), and
Section 10, respectively.
3. Eligible Participants. Any Officer, consultant, or other employee
of the Company or of a Subsidiary whom the Committee deems to have the potential
to contribute to the future success of the Company shall be eligible to receive
awards under the Plan; provided, however, that any Options intended to qualify
as Incentive Stock Options shall be granted only to employees of the Company or
its Subsidiaries.
4. Stock Subject to the Plan. Subject to Sections 11 and 12, the
total number of shares of Common Stock reserved and available for distribution
pursuant to the Plan shall be
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275,800,000 shares. The shares may be authorized, but unissued, or reacquired
Common Stock. Subject to Sections 11 and 12 below, if any shares of Common Stock
that have been optioned under an Option cease to be subject to such Option
(other than through exercise of the Option), or if any Right, Option or
Long-Term Performance Award granted hereunder is forfeited or any such award
otherwise terminates prior to the issuance to the participant of Common Stock,
the shares (if any) that were reserved for issuance pursuant to such Right,
Option or Long-Term Performance Award shall again be available for distribution
in connection with future awards or Option grants under the Plan; provided,
however, that shares of Common Stock that have actually been issued under the
Plan, whether upon exercise of an Option or Right or in satisfaction of a
Long-Term Performance Award, shall not in any event be returned to the Plan and
shall not become available for future distribution under the Plan.
5. Administration.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of service
providers.
(ii) Section 162(m). To the extent that a Committee
determines it to be desirable to qualify awards granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee consisting solely of two or
more "outside directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange
Act ("Rule 16b-3"), the transactions contemplated hereunder shall be structured
to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided
above, the Plan shall be administered by (A) the Board, or (B) a Committee,
which committee shall be constituted to satisfy applicable securities laws,
Delaware corporate law and the Code.
(b) Authority. A Committee, if there be one, shall have full
power to implement and carry out the Plan, subject to the general purposes,
terms, and conditions of the Plan and to the direction of the Board (including
the specific duties delegated by the Board to such Committee), which power shall
include, but not be limited to, the following:
(i) to select the Officers, consultants and other
employees of the Company and/or its Subsidiaries to whom Options, Rights and/or
Long-Term Performance Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Options,
Rights and/or Long-Term Performance Awards, or any combination thereof, are
granted hereunder; (iii) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(iii) to determine the number of shares of Common Stock
to be covered by each such award granted hereunder;
(iv) to approve forms of agreement for use under the
Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option or other award and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Committee shall determine, in
its sole discretion);
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(vi) to determine whether and under what circumstances
an Option may be settled in cash or Restricted Stock under Section 7(j) instead
of Common Stock;
(vii) to determine the form of payment that will be
acceptable consideration for exercise of an Option or Right granted under the
Plan;
(viii) to determine whether, to what extent and under
what circumstances Common Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the election
of the participant (including providing for and determining the amount (if any)
of any deemed earnings on any deferred amount during any deferral period);
(ix) to reduce the exercise price of any Option or
Right;
(x) to determine the terms and restrictions applicable
to Stock Purchase Rights and the Restricted Stock purchased by exercising such
Rights; and
(xi) to allow participants to satisfy withholding tax
obligations by electing to have the Company withhold from the shares of Common
Stock to be issued upon exercise of an award that number of shares having a Fair
Market Value equal to the amount required to be withheld. The Fair Market Value
of the Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined. All elections by a participant to have
shares withheld for this purpose shall be made in such form and under such
conditions as the Committee may deem necessary or advisable and shall be subject
to the consent or disapproval of the Committee.
The Committee shall have the authority to construe and
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan.
6. Duration of the Plan. The Plan shall remain in effect until
terminated by the Board under the terms of the Plan, provided that in no event
may Incentive Stock Options be granted under the Plan later than October 15,
2010.
7. Stock Options. The Committee, in its discretion, may grant Options
to eligible participants and shall determine whether such Options shall be
Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be
evidenced by a written Option agreement which shall expressly identify the
Option as an Incentive Stock Option or as a Nonstatutory Stock Option, and be in
such form and contain such provisions as the Committee shall from time to time
deem appropriate. Without limiting the foregoing, the Committee may, at any
time, or from time to time, authorize the Company, with the consent of the
respective recipients, to issue new Options including Options in exchange for
the surrender and cancellation of any or all outstanding Options or Rights.
Option agreements shall contain the following terms and conditions:
(a) Exercise Price; Number of Shares. The exercise price of the
Option, which shall be approved by the Committee, must be equal to or greater
than the Fair Market Value of the Common Stock at the time the Option is
granted; provided, however, that in the case of a Nonstatutory Stock Option, the
price may be less than (but no less than 85%) of the Fair Market Value of the
Common Stock on the date the Option is granted, if such Option is granted, in
the discretion of the Board or Committee, as the case may be, expressly in lieu
of a reasonable amount of salary or compensation due the recipient of the
Option. In addition, Nonstatutory Stock Options may be granted at an exercise
price less than Fair Market Value of the Common
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Stock at the time the Option is granted, provided that such grant is out of and
subject to the limitations of the Special Reserve and, provided further, that in
the case of an individual subject to Section 16 of the Exchange Act, the
exercise price shall be no less than 50% of the Fair Market Value of the Common
Stock on the date the Option is granted.
The Option agreement shall specify the exercise price and the
number of shares of Common Stock to which it pertains.
(b) Waiting Period; Exercise Dates; Term. At the time an Option
is granted, the Committee will determine the terms and conditions to be
satisfied before shares may be purchased, including the dates on which shares
subject to the Option may first be purchased. The Committee may specify that an
Option may not be exercised until the completion of the waiting period specified
at the time of grant. (Any such period is referred to herein as the "waiting
period.") At the time an Option is granted, the Committee shall fix the period
within which such Option may be exercised, which shall not be less than the
waiting period, if any, nor, in the case of an Incentive Stock Option, more than
10 years from the date of grant.
(c) Form of Payment. The consideration to be paid for the
shares of Common Stock to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Committee (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (i) cash, (ii) certified or cashier's check, (iii)
promissory note, (iv) other shares of Common Stock (including, in the discretion
of the Committee, Restricted Stock) which (x) either have been owned by the
optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the shares as to
which said Option shall be exercised, (v) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale or loan proceeds required to pay the
exercise price, (vi) delivery of an irrevocable subscription agreement for the
shares which obligates the option holder to take and pay for the shares not more
than 12 months after the date of delivery of the subscription agreement or (vii)
any combination of the foregoing methods of payment.
(d) Effect of Termination of Employment, Retirement or Death of
Employee Participants. In the event that an optionee during his or her lifetime
ceases to be an employee of the Company or of any Subsidiary for any reason,
including retirement, any Option, including any unexercised portion thereof,
which was otherwise exercisable on the date of termination of employment, shall
expire within such time period as is determined by the Committee; provided,
however, that in the case of an Incentive Stock Option the Option shall expire
unless exercised within a period of 90 days from the date on which the optionee
ceased to be an employee, but in no event after the expiration of the term of
such Option as set forth in the Option agreement. If in any case the Committee
shall determine that an employee shall have been discharged for Just Cause (as
defined below) such employee shall not thereafter have any rights under the Plan
or any Option that shall have been granted to him or her under the Plan. For
purposes of this Section, "Just Cause" means the termination of employment of an
employee shall have taken place as a result of (i) willful breach or neglect of
duty; (ii) failure or refusal to work or to comply with the Company's rules,
policies, and practices; (iii) dishonesty; (iv) insubordination; (v) being under
the influence of drugs (except to the extent medically prescribed) or alcohol
while on duty or on Company premises; (vi) conduct endangering, or likely to
endanger, the
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health or safety of another employee; or (vii) conviction of a felony. In the
event of the death of an employee optionee, that portion of the Option which had
become exercisable on the date of death shall be exercisable by his or her
personal representatives, heirs, or legatees within six months or such time
period as is determined by the Committee (but in the case of an Incentive Stock
Option, in no event after the expiration of the term of such Option as set forth
in the Option agreement). In the event of the death of an optionee within one
month after termination of employment or service, that portion of the Option
which had become exercisable on the date of termination shall be exercisable by
his or her personal representatives, heirs, or legatees within six months or
such time period as is determined by the Committee (but in the case of an
Incentive Stock Option, in no event after the expiration of the term of such
Option as set forth in the Option agreement.) In the event that an optionee
ceases to be an employee of the Company or of any Subsidiary for any reason,
including death or retirement, prior to the lapse of the waiting period, if any,
his or her Option shall terminate and be null and void to the extent unvested.
(e) Leave of Absence. The employment relationship shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Committee, provided that such
leave is for a period of not more than 90 days (or not more than 30 days for
unpaid leave), unless reemployment upon the expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing; or (iv) in the case of transfer between
locations of the Company or between the Company, its Subsidiaries or its
successor. In the case of any employee on an approved leave of absence, the
Committee may make such provisions respecting suspension of vesting of the
Option while on leave from the employ of the Company or a Subsidiary as it may
deem appropriate, except that in no event shall an Option be exercised after the
expiration of the term set forth in the Option agreement.
(f) Acceleration of Exercisability or Waiting Period. The
Committee may accelerate the earliest date on which outstanding Options (or any
installments thereof) are exercisable.
(g) Special Incentive Stock Option Provisions. In addition to
the foregoing, Options granted under the Plan which are intended to be Incentive
Stock Options under Section 422 of the Code shall be subject to the following
terms and conditions:
(i) Dollar Limitation. To the extent that the aggregate
Fair Market Value of the shares of Common Stock with respect to which Options
designated as Incentive Stock Options become exercisable for the first time by
any individual during any calendar year (under all plans of the Company) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of the preceding sentence, (i) Options shall be taken into account in
the order in which they were granted and (ii) the Fair Market Value of the
shares shall be determined as of the time the Option with respect to such shares
is granted.
(ii) 10% Stockholder. If any person to whom an
Incentive Stock Option is to be granted pursuant to the provisions of the Plan
is, on the date of grant, the owner of Common Stock (as determined under Section
424(d) of the Code) possessing more than 10% of the total combined voting power
of all classes of stock of the Company or of any Subsidiary, then the following
special provisions shall be applicable to the Incentive Stock Option granted
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to such individual:
(A) The exercise price per share of the Common
Stock subject to such Incentive Stock Option shall not be less than 110% of the
Fair Market Value of the Common Stock on the date of grant; and
(B) The Option shall not have a term in excess
of five years from the date of grant.
Except as modified by the preceding provisions of this
Subsection 7(g) and except as otherwise required by Section 422 of the Code, all
of the provisions of the Plan shall be applicable to the Incentive Stock Options
granted hereunder.
(h) Other Provisions. Each Option granted under the Plan may
contain such other terms, provisions, and conditions not inconsistent with the
Plan as may be determined by the Committee.
(i) Options to Consultants. Options granted to consultants
shall not be subject to Sections 7(b) and 7(d) of the Plan, but shall have such
terms and conditions pertaining to waiting period (if any), exercise date, and
effect of termination of the consulting relationship as the Committee shall
determine in each case.
(j) Buyout Provisions. The Committee may at any time offer to
buy out, for a payment in cash or Common Stock (including Restricted Stock), an
Option previously granted, based on such terms and conditions as the Committee
shall establish and communicate to the optionee at the time that such offer is
made. Any such offer made to an Officer or Director shall comply with the
applicable provisions of Rule 16b-3. This provision is intended only to
clarify the powers of the Committee and shall not in any way be deemed to create
any rights on the part of optionees to receive buyout offers or payments.
(k) Limitations on Grants to Employees. Notwithstanding
anything to the contrary herein, the following limitations shall apply to grants
of Options:
(i) No eligible participant shall be granted, in any
fiscal year of the Company, Options to purchase more than 1,200,000 shares.
(ii) In connection with his or her initial employment,
an eligible participant may be granted Options to purchase up to an additional
1,600,000 shares which shall not count against the limit set forth in subsection
(i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iv) If an Option is cancelled (other than in
connection with a transaction described in Section 12), the cancelled Option
will be counted against the limit set forth in this paragraph k. For this
purpose, if the exercise price of an Option is reduced, the transaction will be
treated as a cancellation of the Option and the grant of a new Option.
8. Stock Appreciation Rights. Stock Appreciation Rights may be
granted only in connection with an Option, either concurrently with the grant of
the Option or at any time thereafter during the term of the Option. The
following provisions apply to such Stock Appreciation Rights.
(a) Exercise of Right. The Stock Appreciation Right shall
entitle the optionee to exercise the Right by surrendering to the Company
unexercised a portion of the underlying Option as to which Optionee has a right
to exercise. The Optionee shall receive in exchange from the Company an amount
in cash or Common Stock equal in value to the excess of (x) the
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Fair Market Value on the date of exercise of the Right of the Common Stock
covered by the surrendered portion of the underlying Option over (y) the
exercise price of the Common Stock covered by the surrendered portion of the
underlying Option, as determined in accordance with Section 7(a) above.
Notwithstanding the foregoing, the Committee may place limits on the amount that
may be paid upon exercise of a Stock Appreciation Right; provided, however, that
such limit shall not restrict the exercisability of the underlying Option.
(b) Option Cancelled. When a Stock Appreciation Right is
exercised, the underlying Option, to the extent surrendered, shall no longer be
exercisable.
(c) Exercisability Requirement. A Stock Appreciation Right
shall be exercisable only when and to the extent that the underlying Option is
exercisable and shall expire no later than the date on which the underlying
Option expires.
(d) In-the-Money Requirement. A Stock Appreciation Right may
only be exercised at a time when the Fair Market Value of the Common Stock
covered by the underlying Option exceeds the exercise price of the Common Stock
covered by the underlying Option.
(e) Incentive Stock Option Requirements. In the event that a
Stock Appreciation Right is granted that relates to an Incentive Stock Option,
such Right shall contain such additional or different terms as may be necessary
under applicable regulations to preserve treatment of the Incentive Stock Option
as such under Section 422 of the Code.
(f) Form of Payment. The Company's obligation arising upon the
exercise of a Stock Appreciation Right may be paid currently or on a deferred
basis (with such interest or earnings equivalent as may be determined by the
Committee), and may be paid in Common Stock or in cash, or in any combination of
Common Stock and cash, as the Committee in its sole discretion may determine.
Shares of Common Stock issued upon the exercise of a Stock Appreciation Right
shall be valued at the Fair Market Value of the Common Stock as of the date of
exercise.
9. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Committee determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of shares of Common Stock that such person shall be
entitled to purchase, the price to be paid, which price in the case of
individuals subject to Section 16 of the Exchange Act shall not be more than
$0.00067 per share (the par value of the Company's Common Stock, as adjusted
from time to time, and the minimum price permitted by the Delaware General
Corporation Law), and the time within which such person must accept such offer,
which shall in no event exceed 60 days from the date the Stock Purchase Right
was granted. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Committee. Shares purchased
pursuant to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. The Restricted Stock purchase agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or Disability). The purchase price for shares
repurchased pursuant to the Restricted Stock purchase agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness
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of the purchaser to the Company. The repurchase option shall lapse as to not
more than 50% of such shares at a date not earlier than 2-1/2 years from the
date of grant of the Restricted Stock and as to the remaining shares at a date
not earlier than 5 years from the date of grant of the Restricted Stock. The
Committee shall exercise its repurchase option in accordance with the above.
Notwithstanding the foregoing, with respect to Restricted Stock granted out of
and subject to the restrictions of the Special Reserve, the Committee may in its
discretion exercise its repurchase option and such repurchase option shall lapse
as to such shares at such a rate as the Committee may, in its discretion,
determine.
(c) Other Provisions. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Committee in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
10. Long-Term Performance Awards.
(a) Awards. Long-Term Performance Awards are cash or stock
bonus awards that may be granted either alone, in addition to or in tandem with
other awards granted under the Plan and/or awards made outside of the Plan.
Long-Term Performance Awards shall not require payment by the recipient of any
consideration for the Long-Term Performance Award or for the shares of Common
Stock covered by such award. The Committee shall determine the nature, length
and starting date of any performance period (the "Performance Period") for each
Long-Term Performance Award and shall determine the performance and/or
employment factors to be used in the determination of the value of Long-Term
Performance Awards and the extent to which such Long-Term Performance Awards
have been earned. Shares issued pursuant to a Long-Term Performance Award may be
made subject to various conditions, including vesting or forfeiture provisions.
Long-Term Performance Awards may vary from participant to participant and
between groups of participants and shall be based upon the achievement of
Company, Subsidiary and/or individual performance factors or upon such other
criteria as the Committee may deem appropriate. Performance Periods may overlap
and participants may participate simultaneously with respect to Long-Term
Performance Awards that are subject to different Performance Periods and
different performance factors and criteria. Long-Term Performance Awards shall
be confirmed by, and be subject to the terms of, a written Long-Term Performance
Award agreement.
(b) Value of Awards. At the beginning of each Performance
Period, the Committee may determine for each Long-Term Performance Award subject
to such Performance Period the range of dollar values and/or numbers of shares
of Common Stock to be issued to the participant at the end of the Performance
Period if and to the extent that the relevant measures of performance for such
Long-Term Performance Award are met. Such dollar values or numbers of shares of
Common Stock may be fixed or may vary in accordance with such performance or
other criteria as may be determined by the Committee.
(c) Adjustment of Awards. Notwithstanding the provisions of
Section 19 hereof, the Committee may, after the grant of Long-Term Performance
Awards, adjust the performance factors applicable to such Long-Term Performance
Awards to take into account changes in the law or in accounting or tax rules and
to make such adjustments as the Committee deems necessary or appropriate to
reflect the inclusion or exclusion of the impact of extraordinary or unusual
items, events or circumstances in order to avoid windfalls or hardships.
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(d) Termination. Unless otherwise provided in the applicable
Long-Term Performance Award agreement, if a participant terminates his or her
employment or his or her consultancy during a Performance Period because of
death or Disability, the Committee may in its discretion provide for an earlier
payment in settlement of such award, which payment may be in such amount and
under such terms and conditions as the Committee deems appropriate.
Unless otherwise provided in the applicable Long-Term
Performance Award agreement, if a participant terminates employment or his or
her consultancy during a Performance Period for any reason other than death or
Disability, then such a participant shall not be entitled to any payment with
respect to the Long-Term Performance Award subject to such Performance Period,
unless the Committee shall otherwise determine in its discretion.
(e) Form of Payment. The earned portion of a Long-Term
Performance Award may be paid currently or on a deferred basis (with such
interest or earnings equivalent as may be determined by the Committee). Payment
shall be made in the form of cash or whole shares of Common Stock, including
Restricted Stock, or a combination thereof, either in a lump sum payment or in
installments, all as the Committee shall determine.
(f) Reservation of Shares. In the event that the Committee
grants a Long-Term Performance Award that is payable in cash or Common Stock,
the Committee may (but need not) reserve an appropriate number of shares of
Common Stock under the Plan at the time of grant of the Long-Term Performance
Award. If and to the extent that the full amount reserved is not actually paid
in Common Stock, the shares of Common Stock representing the portion of the
reserve for that Long-Term Performance Award that is not actually issued in
satisfaction of such Long-Term Performance Award shall again become available
for award under the Plan. If shares of Common Stock are not reserved by the
Committee at the time of grant, then (i) no shares shall be deducted from the
number of shares available for grant under the Plan at that time and (ii) at the
time of payment of the Long-Term Performance Award, only the number of shares
actually issued to the participant shall be so deducted. If there are not a
sufficient number of shares available under the Plan for issuance to a
participant at the time of payment of a Long-Term Performance Award, any
shortfall shall be paid by the Company in cash.
11. Recapitalization. In the event that dividends are payable in
Common Stock or in the event there are splits, subdivisions, or combinations of
shares of Common Stock, the number of shares available under the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares of Common Stock deliverable in connection with any Option, Right or
Long-Term Performance Award theretofore granted shall be increased or decreased
proportionately, as the case may be, without change in the aggregate purchase
price (where applicable).
12. Reorganization. In case the Company is merged or consolidated
with another corporation and the Company is not the surviving corporation, or in
case the property or stock of the Company is acquired by another corporation, or
in case of separation, reorganization, or liquidation of the Company, the
Committee, or the board of directors of any corporation assuming the obligations
of the Company hereunder, shall, as to outstanding Options, Rights or Long-Term
Performance Awards either (a) make appropriate provision for the protection of
any such outstanding Options, Rights or Long-Term Performance Awards by the
assumption or substitution on an equitable basis of appropriate stock of the
Company or of the merged, consolidated, or otherwise reorganized corporation
which will be issuable in respect to the shares
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of Common Stock, provided that in the case of Incentive Stock Options, such
assumption or substitution comply with Section 424(a) of the Code, or (b) upon
written notice to the participant, provide that the Option or Right must be
exercised within 30 days of the date of such notice or it will be terminated. In
any such case, the Committee may, in its discretion, advance the lapse of
vesting periods, waiting periods, and exercise dates.
13. Employment or Consulting Relationship. Nothing in the Plan or any
award made hereunder shall interfere with or limit in any way the right of the
Company or of any Subsidiary to terminate any recipient's employment or
consulting relationship at any time, with or without cause, nor confer upon any
recipient any right to continue in the employ or service of the Company or any
Subsidiary.
14. General Restriction. Each award shall be subject to the
requirement that, if, at any time, the Committee shall determine, in its
discretion, that the listing, quotation, registration, or qualification of the
shares subject to such award upon any securities exchange or quotation system or
under any state or federal law, or the consent or approval of any government
regulatory body, is necessary or desirable as a condition of, or in connection
with, such award or the issue or purchase of shares thereunder, such award may
not be exercised in whole or in part unless such listing, quotation,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
15. Rights as a Stockholder. The holder of an Option, Right or
Long-Term Performance Award shall have no rights as a stockholder with respect
to any shares covered by such Option, Right or Long-Term Performance Award until
the date of exercise. Once an Option, Right or Long-Term Performance Award is
exercised by the holder thereof, the participant shall have the rights
equivalent to those of a stockholder, and shall be a stockholder when his or her
holding is entered upon the records of the duly authorized transfer agent of the
Company. Except as otherwise expressly provided in the Plan, no adjustment shall
be made for dividends or other rights for which the record date is prior to the
date such stock certificate is issued.
16. Nonassignability of Awards. No awards made hereunder, including
Options, Rights and Long-Term Performance Awards, shall be assignable or
transferable by the recipient other than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder, and in no event shall such awards be assigned or transferred in a
manner that is inconsistent with the specific Plan provisions relating thereto.
The designation of a beneficiary by a participant does not constitute a
transfer. During the life of the recipient, an Option, Right or Long-Term
Performance Award shall be exercisable only by him or her or by a transferee
permitted by this Section 16.
17. Withholding Taxes. Whenever, under the Plan, shares are to be
issued in satisfaction of Options, Rights or Long-Term Performance Awards
granted hereunder, the Company shall have the right to require the recipient to
remit to the Company an amount sufficient to satisfy federal, state, and local
withholding tax requirements prior to the delivery of any certificate or
certificates for such shares. Whenever, under the Plan, payments are to be made
to participants in cash, such payments shall be net of an amount sufficient to
satisfy federal, state, and local withholding tax requirements.
18. Nonexclusivity of the Plan. Neither the adoption or amendment of
the Plan by the Board, the submission of the Plan or any amendments thereto to
the stockholders of the Company
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for approval, nor any provision of the Plan shall be construed as creating any
limitations on the power of the Board or the Committee to adopt and implement
such additional compensation arrangements as it may deem desirable, including,
without limitation, the awarding of cash or the granting of stock options, stock
appreciation rights, stock purchase rights or long-term performance awards
outside of the Plan, and such arrangements may be either generally applicable to
a class of employees or consultants or applicable only in specified cases.
19. Amendment, Suspension, or Termination of the Plan. The Board may
at any time amend, alter, suspend, or terminate the Plan, but no amendment,
alteration, suspension, or termination shall be made which would impair the
rights of any grantee under any grant theretofore made, without his or her
consent. In addition, to the extent necessary and desirable to comply with Rule
16b-3 under the Exchange Act or under Section 422 of the Code (or any
other Applicable Law), the Company shall obtain stockholder approval of any Plan
amendment in such a manner and to such a degree as is required by such
Applicable Law.
20. Effective Date of the Plan. The Plan shall become effective upon
approval of the Board and shall be subject to stockholder approval within 12
months of adoption by the Board. Options, Rights and Long-Term Performance
Awards may be granted and exercised under the Plan only after there has been
compliance with all applicable federal and state securities laws.
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