<PAGE>
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ___)
Filed by the Registrant [ X ] [ ] Confidential - For Use of the Commission
Filed by a Party other than the Registrant [ ] Only (as permitted by Rule
14a-6(e)(2))
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:
____________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
____________________________________________________________________
(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):
____________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
____________________________________________________________________
(5) Total fee paid:
____________________________________________________________________
[ ] 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:
____________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
____________________________________________________________________
(3) Filing Party:
____________________________________________________________________
(4) Date Filed:
____________________________________________________________________
<PAGE>
SUN MICROSYSTEMS, INC.
----------------
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholders:
We cordially invite you to attend our 2000 Annual Meeting of Stockholders
to be held on Wednesday, November 8, 2000 at 10:00 a.m. (registration will
begin at 9:00 a.m.) in the Auditorium at Sun's Santa Clara campus, located at
4030 George Sellon Circle, Santa Clara, California. For your convenience, we
have included a map on the back page of this Proxy Statement. 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 3,600,000,000 shares to
7,200,000,000 shares;
3. Vote on an amendment to Sun's 1990 Long-Term Equity Incentive Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 7,000,000 shares of Common Stock to an aggregate of
282,800,000 shares;
4. Vote on an amendment to Sun's Bylaws to increase the range of the number
of directors to serve on Sun's Board of Directors to no less than six
(6) nor more than eleven (11), with the exact number to be set by the
Board within such range from time to time; 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 12, 2000 may attend and vote at the meeting. If you cannot attend
the meeting, you may vote by telephone or using 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.
We look forward to seeing you at the meeting.
Sincerely,
Michael H. Morris
Senior Vice President, General
Counsel and Secretary
Palo Alto, California
October 2, 2000
Please vote by telephone or using 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>
SUN MICROSYSTEMS, INC.
----------------
PROXY STATEMENT
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
Our Board of Directors is soliciting proxies for the 2000 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 2000
Annual Report to Stockholders, will be mailed to stockholders on or about
October 2, 2000. 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 $7,500 for its services and will reimburse Skinner & Co., Inc. for
certain out-of-pocket expenses estimated to be not more than $15,000. 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 may vote at the meeting?
A: The Board set September 12, 2000 as the record date for the meeting. All
stockholders who owned Sun Common Stock on September 12, 2000 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 12, 2000, approximately 1,609,456,130
shares of Sun Common Stock were outstanding.
Q: How many votes do you need to hold the meeting?
A: 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.
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 by telephone or using the
Internet.
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;
. Amendment to the 1990 Long-Term Equity Incentive Plan; and
. Amendment to the Bylaws.
<PAGE>
Q: What is the voting requirement to approve each of the proposals?
A: For the election of Directors, the eight (8) individuals receiving the
highest number of "FOR" votes will be elected. You may give each candidate
one vote for each share of Common Stock you hold; you may cumulate your
votes and give one candidate a number of votes equal to the number of
Directors (eight) to be elected, multiplied by the number of shares you
hold; or you may distribute your votes among as many candidates as you
wish. However, you may not cast votes for more than eight (8) Directors. If
you wish to cumulate your votes at the meeting, you must notify the
Secretary of Sun that you intend to cumulate votes before the voting on the
election of Directors takes place. You may only cumulate votes for
candidates who have been nominated to the Board of Directors before the
voting begins. To be passed, Proposals II and IV require the affirmative
"FOR" vote of a majority of the shares of Sun Common Stock outstanding and
entitled to vote on September 12, 2000. To be passed, Proposal III requires
the affirmative "FOR" vote of a majority of the shares present at the
meeting and entitled to vote.
Q: How are votes counted?
A: In the election of Directors, you may vote "FOR" all of the nominees or
your vote may be "WITHHELD" with respect to one or more of the nominees.
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 the proposal. If you just sign your Proxy Card with no further
instructions, your shares will be counted as a vote "FOR" each Director and
"FOR" the amendments to the Restated Certificate of Incorporation, the 1990
Long-Term Equity Incentive Plan and the Bylaws. 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 on Proposal III if your broker does not have
discretionary authority to vote, and therefore may have the effect of
reducing the number of shares needed to approve that item. However, with
respect to Proposals II and IV, because your broker will not have
discretionary authority to vote on these proposals if you do not instruct
your broker how to vote, your failure to direct the vote will have the
effect of a vote "AGAINST". These shares, however, may be counted for the
purpose of establishing a quorum for the meeting. Voting results are
tabulated and certified by our transfer agent, EquiServe Limited
Partnership.
Q: How may 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 attend the meeting, please bring
the enclosed Proxy Card or proof of identification for entrance to the
meeting. If you hold your shares in street name, you must request a legal
proxy from your stockbroker in order to attend and 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 stockbroker or nominee. In most cases, you will be
able to do this by telephone, using 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
stockbroker 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
stockbroker 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.
2
<PAGE>
Q: How can I change my vote after I return my Proxy Card?
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 using 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 and "FOR" the amendments to the Restated
Certificate of Incorporation, the 1990 Long-Term Equity Incentive Plan and
the Bylaws.
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 2001.
3
<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
General
We currently have eight (8) members on our Board of Directors. Proxy
holders will vote for the eight (8) nominees listed below. If any nominee is
unable or declines to serve as a Director, the current Board will designate a
nominee to fill the vacancy. If you want to nominate an individual for
election as a Director, the vote for such nominee shall be determined by the
proxy holders. The term of office of each person elected as a Director will
continue until the next annual meeting of stockholders or until his or her
successor has been elected and qualified.
Nominees(1)
The names of the nominees, their ages as of September 12, 2000, and certain
other information about them are set forth below:
<TABLE>
<CAPTION>
Name of Nominee Age Principal Occupation Director Since
--------------- --- -------------------- --------------
<C> <C> <S> <C>
Scott G. McNealy.... 45 Chairman of the Board of Directors 1982
and Chief Executive Officer, Sun
Microsystems, Inc.
James L. Barksdale.. 57 Managing Partner, The Barksdale 1999
Group, an investment and advisory
group
L. John Doerr....... 49 General Partner/Managing Director, 1982
Kleiner Perkins Caufield & Byers, a
venture capital investment firm
Judith L. Estrin.... 45 Chief Executive Officer, Packet 1995
Design, Inc., an IP services
technologies company
Robert J. Fisher.... 46 Member, Board of Directors, The Gap, 1995
Inc., a retail clothing company
Robert L. Long...... 63 Independent Management Consultant 1988
M. Kenneth Oshman... 60 Chairman of the Board of Directors, 1988
President and Chief Executive
Officer, Echelon Corporation, a
provider of control network
technologies
Naomi O. Seligman... 67 Senior Partner, Ostriker von Simson, 1999
Inc., an e-commerce consulting firm
</TABLE>
----------
(1) Except as set forth below, each nominee 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.
Scott G. McNealy
Mr. McNealy is a Founder of Sun and has served as Chairman of the Board of
Directors and Chief Executive Officer since April 1999. He was Chairman of the
Board of Directors, President and Chief Executive Officer from December 1984
until April 1999, as President and Chief Operating Officer from February 1984
until December 1984 and as Vice President of Operations from February 1982
until February 1984. Mr. McNealy has served as a Director of the Company since
the incorporation of the Company in February 1982. He is also a Director of
General Electric Company.
4
<PAGE>
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.). Mr. Barksdale is also a Director of
America Online, Inc., Federal Express Corporation, Liberate Technologies,
Palm, Inc., The Robert Mondavi Corporation and Webvan Group, Inc.
L. John Doerr
Mr. Doerr is also a Director of Amazon.com, Inc, Drugstore.com, Inc.,
FreeMarkets, Inc., Handspring, Inc., Healtheon/Web MD Corporation,
HomeStore.com, Inc., Intuit, Inc. and Martha Stewart Living Omnimedia.
Judith L. Estrin
Ms. Estrin has served as Chief Executive Officer, Packet Design, Inc.,
since April 2000. From April 1998 to April 2000, she served as Chief
Technology Officer, Senior Vice President, Cisco Systems, Inc. She served as
the President and Chief Executive Officer of Precept Software, Inc. from March
1995 to April 1998.
Robert J. Fisher
Mr. Fisher has served as a Director of The Gap, Inc. since November 1999.
From April 1997 to November 1999 he served as Executive Vice President, The
Gap, Inc. and President, Gap Division. 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.
M. Kenneth Oshman
Mr. Oshman is also a Director of Echelon Corporation and Knight-Ridder,
Inc.
Naomi O. Seligman
Ms. Seligman is also a Director of Dun & Bradstreet, Exodus Communications,
Inc., Martha Stewart Living Omnimedia and Ventro Corporation.
5
<PAGE>
Board Meetings and Committees
The Board held seven (7) meetings in fiscal 2000. Each Director attended at
least 75% of the Board and Committee meetings held during fiscal year 2000,
except for Mr. Doerr who attended 70% of the aggregate number of meetings held
by the Board and 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 2000
------------------ ---------------- ------------------
<C> <S> <C>
Audit(1)
Robert L. Long* . Recommends to the Board the 6
James L. Barksdale selection of independent auditors
Judith L. Estrin . approves the services performed by
Naomi O. Seligman the independent auditors
. assists the Board in reviewing and
evaluating Sun's accounting
policies, internal control and
financial reporting practices
Compensation
L. John Doerr* . reviews and approves the executive 3
Robert J. Fisher compensation 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 0
. considers nominees recommended by
stockholders(2)
</TABLE>
* Chairman
(1) The Audit Committee has adopted a charter. Sun's securities are listed on
The Nasdaq Stock Market and are governed by its listing standards. All the
members of the Audit Committee meet the independence standards of Rule
4200(a)(15) of the National Association of Securities Dealers' listing
standards.
(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.
Director Compensation
During fiscal 2000, non-employee members of the Board were paid $1,000 for
each Board meeting they attended, with the exception of Messrs. Doerr and
Fisher, $1,000 for each Committee meeting they attended and an additional
$1,000 per meeting attended where they presided as Chairperson.
Non-employee Directors participate in Sun's 1988 Directors' Stock Option
Plan. Under the plan, each non-employee 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 non-employee 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 non-employee
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 non-employee Director
is re-elected to serve on the Board and he or she has served on the Board for
at least six months. 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.
6
<PAGE>
During fiscal year 2000, each of the non-employee Directors of Sun, with
the exception of Mr. Barksdale and Ms. Seligman, was granted an option to
purchase 20,000 shares of Sun's Common Stock, at an exercise price of $56.5938
per share. Upon becoming Directors of Sun, Ms. Seligman and Mr. Barksdale were
granted options to purchase 10,000 and 60,000 shares of Sun's Common Stock,
respectively, at exercise prices of $73.4375 and $29.2188 per share,
respectively. During fiscal year 2000, Messrs. Doerr, Long, Oshman and Ms.
Estrin exercised options to purchase an aggregate of 152,000 shares of Sun's
Common Stock at exercise prices ranging from $2.05 to $4.88 per share, for an
aggregate net realized gain of $8,929,280 based on the closing price of Sun's
Common Stock on the dates of exercise as reported on The Nasdaq Stock Market.
Compensation Committee Interlocks and Insider Participation
At June 30, 2000, 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 Java"), 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, 2000 and is a General Partner/Managing Director of KPCB VIII.
7
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows how much Sun Common Stock is owned as of
September 12, 2000 by each Director, each executive officer named in the
Summary Compensation Table and all Directors and executive officers as a
group. As of September 12, 2000, 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......................... 27,837,597 7,984,544 2.23%
Edward J. Zander(3)...................... 123,630 2,502,000 *
William N. Joy........................... 186,548 3,870,800 *
Michael E. Lehman........................ 50,203 304,000 *
Lawrence W. Hambly....................... 263,443 1,730,000 *
James L. Barksdale....................... 0 15,000 *
L. John Doerr............................ 1,359,248 225,000 *
Judith L. Estrin......................... 320,000 25,000 *
Robert J. Fisher......................... 384,400 145,000 *
Robert L. Long........................... 96,206 145,000 *
M. Kenneth Oshman........................ 1,301,600 225,000 *
Naomi O. Seligman........................ 0 0 *
All current Directors and executive
officers as a group (27 persons)(3)(4).. 33,441,068 20,161,392 3.33%
</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 6,560 shares held by Mr. Zander's minor children.
(4) Includes 15,000 shares held by Sun's Executive Vice President and Chief
Human Resources Officer, Mr. Beveridge's children and spouse.
8
<PAGE>
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
------------------------ ------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($)(1) ($)(1)(2) ($) ($)(3) (#) ($)(4) ($)(5)
------------------ ---- -------- ---------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott G. McNealy........ 2000 $103,846 $4,767,500 -- 500,000 -- $6,923
Chairman of the 1999 116,154 3,622,500 -- 200,000 -- 5,583
Board of Directors and 1998 698,846 998,760 -- 1,600,000 -- 3,446
Chief Executive Officer
Edward J. Zander........ 2000 778,846 2,145,375 -- 200,000 -- 6,800
President and 1999 750,000 1,630,125 -- 1,000,000 -- 7,553
Chief Operating Officer 1998 665,192 522,467 $1,020,296 800,000 -- 6,400
William N. Joy.......... 2000 433,654 808,761 -- 100,000 -- 6,846
Co-Founder and 1999 398,519 471,393 1,199,750 1,140,000 -- 6,496
Chief Scientist 1998 344,538 187,593 -- 260,000 -- 2,653
Michael E. Lehman....... 2000 623,077 1,144,200 -- 550,000 -- 6,800
Executive Vice 1999 600,000 869,400 -- 200,000 -- 6,400
President, 1998 496,019 302,185 -- 400,000 -- 6,400
Corporate Resources and
Chief Financial Officer
Lawrence W. Hambly...... 2000 429,423 515,361 $132,062(6) -- 100,000 -- 7,142
Executive Vice 1999 394,462 380,550 -- 220,000 -- 6,286
President, 1998 374,654 281,363 -- 240,000 -- 5,399
Enterprise Services
</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. Zander elected to defer 100% of his FY'98 bonus
until January 2007; 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 and 60% of his FY'00
salary and 100% of his FY'00 salary 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. Hambly elected to defer 28% of
his salary from July 1997 through December 1997, $53,657 of his salary
from January 1998 through June 1998, 33% of his FY'99 salary and 33% of
his FY'00 salary until he retires, as defined in Sun's Non-Qualified
Deferred Compensation Plan. 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 bonuses earned in fiscal year 2000 and paid in fiscal year
2001.
(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, 2000, 3,226,381 shares of Sun's restricted Common Stock were
outstanding, having an aggregate value of $293,399,022. As of June 30,
2000, Mr. Zander held 100,000 shares of restricted Common Stock having an
aggregate value of $9,093,750, which shares are subject to Sun's Repurchase
Option, which expired as to 50,000 of such shares on July 12, 2000 and as
to the remaining 50,000 shares will expire on January 12, 2003; Mr. Joy
held 100,000 shares of restricted Common Stock having an aggregate value of
$9,093,750, which shares are subject to Sun's Repurchase option, which
expires as to
9
<PAGE>
50,000 of such shares on February 12, 2001 and as to the remaining 50,000
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, 2000 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 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) Executive officers were granted certain Book Value Units ("BVUs") under
the 1990 Long-Term Equity Incentive Plan. These BVUs were granted in
December 1990, became fully vested on July 1, 1998 and were payable in
cash only. The BVUs accrued value based on Sun's reported fiscal year end
earnings per share amounts. These BVUs continued to accrue value until
exercised. As of August 31, 2000, the value attributed to these BVUs was
$2,227,316 for Mr. McNealy, $409,610 for Mr. Joy, $614,415 for Mr. Zander,
$573,442 for Mr. Lehman and $409,610 for Mr. Hambly. An executive officer
was permitted to exercise all or a portion of his or her BVUs until the
end of the permitted exercise period, which was August 31, 2000. The
executive officers were under no obligation to exercise the units,
however, any units not exercised by August 31, 2000 were automatically
paid.
(5) Amounts stated reflect contributions made by Sun to such executive
officer's account under Sun's 401(k) Plan.
(6) Amount stated reflects $70,000 for relocation and household expenses;
$59,151 for taxes paid in connection with such relocation and household
expenses; and $2,911 in benefits paid in connection with a Sun sales
conference.
Option Grants in Last Fiscal Year
The following table shows the stock option grants made to the executive
officers named in the Summary Compensation Table during the last fiscal year:
Options Granted in Fiscal Year 2000
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise or Option Term(1)
Granted in Fiscal Base Price Expiration -----------------------
Name (#) Year ($/Sh)(4)(5) Date 5%($) 10%($)
---- ---------- ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Scott G. McNealy........ 500,000(2) 0.80% $80.0000 4/12/10 $25,155,785 $63,749,698
Edward J. Zander........ 200,000(2) 0.32 80.0000 4/12/10 10,062,314 25,499,879
William N. Joy.......... 100,000(2) 0.16 80.0000 4/12/10 5,031,157 12,749,940
Michael E. Lehman....... 400,000(3) 0.64 42.7188 9/08/09 10,746,250 27,233,106
150,000(2) 0.24 80.0000 4/12/10 7,546,736 19,124,910
Lawrence W. Hambly...... 100,000(2) 0.16 80.0000 4/12/10 5,031,157 12,749,940
</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.
10
<PAGE>
(2) Stock options have a ten year term and vest at a rate of 20% per year
commencing on the first anniversary of the option grant date. 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
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 2000
and Fiscal 2000 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End(#) at Fiscal Year-End($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Scott G. McNealy........ 229,856 $19,968,740 7,264,544/3,060,000 $633,038,329/215,714,910
Edward J. Zander........ 500,000 33,266,365 2,520,000/2,400,000 217,768,879/168,124,697
William N. Joy.......... 0 0.00 4,110,800/2,040,000 359,487,138/145,391,328
Michael E. Lehman....... 512,000 38,855,224 244,000/1,470,000 19,455,432/ 95,244,199
Lawrence W. Hambly...... 540,144 33,808,185 1,650,000/ 780,000 143,423,802/ 56,735,480
</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 adopted an executive management group change-of-control plan in
October 1990 and 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 the employee's
11
<PAGE>
account balance plus a supplemental survivor benefit equal to two times the
amount of compensation the participant deferred under the plan, not to exceed
$3,000,000. See "Report of Compensation Committee of the Board on Executive
Compensation" for a description of the Non-Qualified Deferred Compensation
Plan.
Certain Transactions with Management
In November 1999, Patricia C. Sueltz, Executive Vice President, Software
Systems Group, received a loan from Sun in the amount of $850,000, payable in
full on or before December 1, 2004, at an interest rate of 6.02%. This loan
was made for the purchase of her residence in connection with her job related
relocation. As of fiscal year end, the entire $850,000 amount remained
outstanding.
In December 1999, Frank A. Pinto, Sun's former Vice President, Worldwide
Sales, Computer Systems, received an interest-free loan from Sun in the amount
of $104,195, payable in full on or before June 30, 2000. As of fiscal year
end, the entire loan amount was repaid to Sun. Mr. Pinto terminated his
employment with Sun effective August 31, 2000.
In September 1998, Michael A. Murray, Vice President, Finance and
Administration, Enterprise Services, 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 in connection with his job
related relocation. 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 and 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 2000, 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.
12
<PAGE>
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 2000, 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 positions.
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. For fiscal years 2000 and 1999, Mr. McNealy's base salary was
$103,846 and $116,154,
13
<PAGE>
respectively, such that his annual bonus comprised the 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 fiscal year 2000, 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 100% to 150% of their base salary, depending on their
positions. Mr. McNealy was eligible for a target bonus of 2500% of his base
salary. During fiscal year 2000, 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 fiscal year 2000.
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 June 30, 2000, 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 year
2000. This multiplier can range from zero to a maximum multiplier of two. At
June 30, 2000, the Committee calculated a Year-End Multiplier applicable to
executive officers (including the Chief Executive Officer) of 1.907. 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 $4,767,500 reflects his targeted bonus amount multiplied by the Year-
End Multiplier. Elements of Sun's financial performance for fiscal year 2000
that directly affected Mr. McNealy's bonus calculation (as well as the bonus
calculation for the other officers) included revenue growth of 33% compared
with fiscal year 1999, and earnings per share of $1.02 for fiscal year 2000
compared with $.70 for fiscal year 1999 (excluding gains on the sale of equity
investments for fiscal year 2000 and acquisition-related charges for fiscal
years 2000 and 1999).
Long-Term Incentives
Options and Restricted Stock. The Committee provides Sun's executive
officers with long-term incentive awards 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 made, the exercise
price per share and the number of shares to be granted. The Committee
considers grants of long-term incentive awards to executive officers during
each 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
14
<PAGE>
individual performance of executive officers and competitive compensation
packages in the industry. Mr. McNealy's option grants are also determined by
the Committee. Mr. McNealy also has authority to grant stock options from time
to time to certain individuals, subject to certain guidelines prescribed by
the Committee.
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. For fiscal year 2000, there
were no restricted stock awards made to the executives named in the Summary
Compensation Table. For information regarding the valuation and vesting of
restricted stock awards, 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 stockholders and approved by the requisite stockholder
vote 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 best interests of Sun and Sun's stockholders.
L. John Doerr
Robert J. Fisher
M. Kenneth Oshman
15
<PAGE>
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, 1995 and ending on June 30, 2000. 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>
6/95 6/96 6/97 6/98 6/99 6/00
<S> <C> <C> <C> <C> <C> <C>
SUN MICROSYSTEMS, INC. 100 243 307 358 1,136 3,000
S & P 500 100 126 170 221 271 291
S & P COMPUTERS (HARDWARE) 100 112 171 241 433 562
</TABLE>
*$100 INVESTED ON 6/30/95 IN STOCK OR INDEX INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEARS ENDING JUNE 30.
16
<PAGE>
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 3,600,000,000 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 August 16, 2000, 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 3,600,000,000
shares to a total of 7,200,000,000 shares. The text of the Amendment is set
forth as Exhibit A to this Proxy Statement. On August 16, 2000, the Board of
Directors also 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 5, 2000 to stockholders of record on November 9, 2000 (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 12, 2000, Sun had approximately 1,609,456,130 shares of
Common Stock outstanding and approximately 453,372,841 shares reserved for
issuance under Sun's Employee Stock Plans, of which, approximately 218,104,814
shares are covered by outstanding options and approximately 235,268,027 shares
are available for grant or purchase. Therefore, Sun's total share requirement
prior to the Stock Split is 2,062,828,971 shares (the "Share Requirement"). In
addition, as of September 12, 2000, 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 were 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 such prospectuses. 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 7,000,000 shares as
described in more detail in Proposal III. In the event stockholder approval of
this proposal and Proposal III is obtained, following the effectiveness of the
Amendment and the Stock Split, the Share Requirement would increase to
4,139,657,942 and, accordingly, Sun would have a total of 3,060,342,058
authorized and unissued shares remaining available pursuant to its
Certificate.
17
<PAGE>
Purpose of the Proposed Amendment
The Board of Directors believes that it is in Sun's and Sun's stockholders'
best interests 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, Board approved acquisitions, 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 other 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.
18
<PAGE>
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 and April
2000 (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 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 amendments were filed on April 15, 1999 and April 27,
2000 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.
PROPOSAL III
AMENDMENT TO 1990 LONG-TERM EQUITY INCENTIVE PLAN
General
The stockholders are being asked to approve an amendment to Sun's 1990
Long-Term Equity Incentive Plan ("1990 Incentive Plan") in order to increase
the number of shares reserved for issuance thereunder by 7,000,000 shares of
Common Stock to an aggregate of 282,800,000 shares. 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. On November 10, 1999, at the 1999 Annual Meeting of Stockholders,
the number of shares reserved for issuance under the 1990 Incentive Plan was
increased to 275,800,000.
19
<PAGE>
As of September 12, 2000, 154,773,075 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
207,499,825 shares were outstanding and 181,209,487 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 $47.81. Additionally, as of
September 12, 2000, 8,811,725 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 2,873,508 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. The Board is
proposing to increase the number of shares reserved under the 1990 Incentive
Plan by 7,000,000 to 282,800,000 shares.
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 12, 2000, there were over 36,000 employees and
5,300 consultants eligible to receive awards under the 1990 Incentive Plan.
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.
20
<PAGE>
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, an 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, plus
applicable withholding taxes, 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 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 an 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 12, 2000.
21
<PAGE>
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 fiscal
year 2000.
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.
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 422 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.
22
<PAGE>
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. 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 an NSO.
However, upon the exercise of an 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, 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 an
NSO.
Stock Appreciation Rights
A recipient will not recognize any taxable income in connection with the
grant of an SAR in connection with a stock option. On exercise of an 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 an
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.
23
<PAGE>
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.
Deductibility of Executive Compensation
Special rules limit the deductibility of compensation paid to Sun's Chief
Executive Officer and next four most highly compensated executive officers.
Under Section 162(m) of the Code, the annual compensation paid to each of
these executives may not be deductible to the extent that it exceeds $1
million. However, Sun is able to preserve the deductibility of compensation
over $1 million if the conditions of Section 162(m) are met. The 1990
Incentive Plan has been designed to permit it certain stock options granted
under the 1990 Incentive Plan to satisfy the conditions of Section 162(m).
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 fiscal year 2000. As of September 12, 2000, the fair market value of
Sun's Common Stock was $114.3125 per share, which was the closing sale price
reported by The Nasdaq Stock Market. The following table sets forth
information with respect to the grant of options to the executive officers
named in the Summary Compensation Table, to all current executive officers as
a group and to all other employees as a group during fiscal year 2000:
24
<PAGE>
AMENDED PLAN BENEFITS
1990 INCENTIVE PLAN
<TABLE>
<CAPTION>
Securities Average
Underlying Weighted
Options Exercise Price
Granted Per Share
Name of Individual (#) ($/sh)
------------------ ---------- --------------
<S> <C> <C>
Scott G. McNealy...................................... 500,000 $80.0000
Chairman of the Board of Directors and
Chief Executive Officer
Edward J. Zander...................................... 200,000 $80.0000
President and Chief Operating Officer
William N. Joy ....................................... 100,000 $80.0000
Co-Founder and Chief Scientist
Michael E. Lehman..................................... 400,000 $42.7188
Executive Vice President, Corporate 150,000 $80.0000
Resources and Chief Financial Officer
Lawrence W. Hambly.................................... 100,000 $80.0000
Executive Vice President, Enterprise Services
All current executive officers as a group............. 3,307,000 $ 70.35
All other employees as a group........................ 57,060,409 $ 68.96
</TABLE>
Management recommends a vote "FOR" the Amendment to the 1990 Long-Term
Equity Incentive Plan.
PROPOSAL IV
AMENDMENT TO THE BYLAWS
Article III, Section 3.2 of Sun's Bylaws, as amended, currently provides
that the number of directors shall be a minimum of five (5) and a maximum of
nine (9), with the exact number of directors to be fixed from time to time
within such range by the Board of Directors or stockholders. The Board of
Directors currently consists of eight (8) members. The Board of Directors
recommends an amendment to the Bylaws that would change the range of the
number of directors to a minimum of six (6) and a maximum of eleven (11).
Text of Proposed Amendment to Bylaws
If Proposal IV is approved by the stockholders, Article III, Section 3.2 of
Sun's Bylaws will be amended in its entirety to read as follows:
"3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be no less than six (6) or
more than eleven (11). The exact number of directors shall be eight (8), until
changed, within the limits specified above, by a Bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by an adopted amendment to this
Bylaw duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
reducing the number or the minimum number of directors to a number less than
five (5) cannot be adopted if the votes cast against its adoption at a meeting
of the shareholders, or the shares not consenting in the case of action by
written consent, are equal to more than sixteen and two-thirds percent (16
2/3%) of the outstanding shares entitled to vote thereon. No amendment may
change the stated maximum number of authorized directors to a number greater
than two (2) times the stated minimum number of directors minus one (1).
25
<PAGE>
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires."
Purpose of the Proposed Amendment
The Board of Directors believes that this proposed amendment to the Bylaws
will enable the Board to take timely advantage of the availability of well-
qualified candidates for appointment to the Board, in particular, candidates
from outside Sun whose skills and experience will benefit Sun. The Board of
Directors has no current plans to increase the size of the Board.
Management recommends a vote "FOR" the Amendment to the Bylaws.
26
<PAGE>
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, 2001. 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 2001 Annual Meeting of Stockholders you must deliver a copy of your
proposal to Sun's Secretary at our principal executive offices at 901 San
Antonio Road, Palo Alto, California 94303 no later than June 4, 2001.
If you intend to present a proposal at Sun's 2001 Annual Meeting, but you
do not intend to have it included in our 2001 Proxy Statement, you must
deliver a copy of your proposal to Sun's Secretary at our principal executive
offices listed above no later than August 2, 2001 and no earlier than July 3,
2001. If the date of Sun's 2001 Annual Meeting of Stockholders is more than 30
calendar days before or after the date of our 2000 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 2001 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 2, 2000
27
<PAGE>
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 Executive Vice President, Corporate Resources and Chief
Financial Officer and Senior 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 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 at
$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 Seven Billion Two
Hundred Ten Million (7,210,000,000), of which Seven Billion Two Hundred
Million (7,200,000,000) 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
1,609,456,130. 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.
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, Executive Vice President, Corporate Resources and Chief Financial
Officer and attested by Michael H. Morris, Senior Vice President, General
Counsel and Secretary this th day of November, 2000.
SUN MICROSYSTEMS, INC.
[Corporate Seal]
Michael E. Lehman
ATTEST:
Michael H. Morris
A-1
<PAGE>
SUN MICROSYSTEMS, INC.
1990 LONG-TERM EQUITY INCENTIVE PLAN
(Amended as of August 16, 2000)
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.
1
<PAGE>
(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
2
<PAGE>
282,800,000 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;
(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);
3
<PAGE>
(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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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
8
<PAGE>
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.
9
<PAGE>
(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
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
Map and Driving Directions to Sun's Santa Clara Campus
[MAP]
From San Francisco, going south:
Take 101 South;
Take San Tomas/Montague Expressway east exit;
Turn right on ramp to Lafayette Street;
Drive 0.3 miles and turn right into Sun's Santa Clara campus.
From San Jose, going north:
Take 101 North;
Take San Tomas/Montague Expressway east exit;
Turn right on ramp to Lafayette Street;
Drive 0.3 miles and turn right into Sun's Santa Clara campus.
<PAGE>
APPENDIX
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SUN MICROSYSTEMS, INC.
2000 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 2, 2000, 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 2000 Annual Meeting of Stockholders to be held on
Wednesday, November 8, 2000, 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.) in the
Auditorium at Sun's Santa Clara campus, located at 4030 George Sellon Circle,
Santa Clara, 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, THE AMENDMENT TO THE 1990 LONG-TERM EQUITY
INCENTIVE PLAN, THE AMENDMENT TO THE BYLAWS 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 & 4.
<PAGE>
1. ELECTION OF BOARD OF DIRECTORS:
Nominees: Scott G. McNealy; James L. Barksdale; L. John Doerr; Judith L.
Estrin; Robert J. Fisher; Robert L. Long; M. Kenneth Oshman; Naomi O. Seligman
FOR [ ] AGAINST [ ]
______________________________________
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 3,600,000,000 shares to 7,200,000,000
shares;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. AMENDMENT TO THE 1990 LONG-TERM EQUITY INCENTIVE PLAN:
Proposal to approve an amendment to Sun's 1990 Long-Term Equity Incentive Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 7,000,000 shares of Common Stock to an aggregate of 282,800,000
shares;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. AMENDMENT TO THE BYLAWS:
Proposal to amend Sun's Bylaws to increase the range of the number of directors
to serve on Sun's Board of Directors to no less than six (6) nor more than
eleven (11), with the exact number to be set by the Board within such range from
time to time;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
and, in their discretion, upon such other 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 __________________________
Signature: _________________________ Date __________________________
