-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AK67W/EMhxuJF395C+iqZLMEbo/gyjNvSMHphTqwDHgBb4CIBnEzjAiPFqxCFxmF hXtK6+vb8D66K26YnRyK6Q== 0000950005-97-000914.txt : 19971114 0000950005-97-000914.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950005-97-000914 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC CENTRAL INDEX KEY: 0000709519 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942805249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15086 FILM NUMBER: 97714418 BUSINESS ADDRESS: STREET 1: 901 SAN ANTONIO ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6509601300 MAIL ADDRESS: STREET 1: 901 SAN ANTONIO ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q
(Mark One) __X__Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 28, 1997 or _____Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission file number:0-15086 SUN MICROSYSTEMS, INC. (Exact Name of registrant as specified in its charter) Delaware 94-2805249 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 901 San Antonio Road Palo Alto, CA 94303 (Address of principal executive offices with zip code) Registrant's telephone number, including area code: (650) 960-1300 N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES___X__ NO______ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES______ NO______ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at September 28, 1997 Common Stock - $0.00067 par value 374,630,828
INDEX PAGE COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 13 Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8 - K 17 SIGNATURES 18 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 28, June 30, 1997 1997 ------------ ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 513,845 $ 660,170 Short-term investments 473,544 452,590 Accounts receivable, net 1,450,709 1,666,523 Inventories 466,868 437,978 Deferred tax assets 293,159 286,720 Other current assets 277,921 224,469 ----------- ----------- Total current assets 3,476,046 3,728,450 Property, plant and equipment, at cost 1,760,844 1,658,341 Accumulated depreciation and amortization (882,166) (858,448) ----------- ----------- 878,678 799,893 Other assets, net 192,973 168,931 ----------- ----------- $ 4,547,697 $ 4,697,274 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 24,242 $ 100,930 Accounts payable 428,402 468,912 Accrued liabilities 824,858 963,012 Other current liabilities 299,812 316,184 ----------- ----------- Total current liabilities 1,577,314 1,849,038 Long-term debt and other obligations 120,488 106,299 Total stockholders' equity 2,849,895 2,741,937 ----------- ----------- $ 4,547,697 $ 4,697,274 =========== =========== See accompanying notes 3 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) Three Months Ended ------------------ September 28, September 29, 1997 1996 ---------- ---------- Net revenues $2,098,604 $1,859,019 Cost and expenses: Cost of sales 1,027,434 972,101 Research and development 222,618 186,268 Purchased in-process research and development 52,184 -- Selling, general and administrative 615,493 524,666 ---------- ---------- Total costs and expenses 1,917,729 1,683,035 Operating income 180,875 175,984 Interest income, net 10,571 5,472 ---------- ---------- Income before income taxes 191,446 181,456 Provision for income taxes 83,013 58,006 ---------- ---------- Net income $ 108,433 $ 123,390 ========== ========== Net income per common and and common - equivalent share $ 0.27 $ 0.32 ========== ========== Common and common-equivalent shares used in the calculation of net income per share 395,099 390,116 ========== ========== See accompanying notes. 4 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three Months Ended ------------------ September 28, September 29, 1997 1996 ------------- ------------- Cash flow from operating activities: Net income $ 108,433 $ 123,390 Adjustments to reconcile net income to operating cash flows: Depreciation, amortization and other non-cash items 86,803 86,887 Tax benefit of options exercised 56,626 7,655 Other non-cash items 52,184 -- Net decrease (increase) in accounts receivable 215,814 (88,817) Net increase in inventories (28,890) (928) Net (decrease) increase in accounts payable (40,510) 20,072 Net increase in other current and non-current assets (61,277) (35,988) Net decrease in other current and non-current liabilities (164,839) (44,119) --------- --------- Net cash provided from operating activities 224,344 68,152 --------- --------- Cash flow from investing activities: Acquisition of property, plant and equipment (161,817) (94,890) Acquisition of spare parts and other assets (33,962) (8,119) Payment for acquisitions (55,200) -- Acquisition of short-term investments (211,042) (17,157) Maturities of short-term investments 190,274 270,196 --------- --------- Net cash (used by) provided from investing activities (271,747) 150,030 --------- --------- Cash flow from financing activities: Issuance of common stock, net 31,594 8,595 Acquisition of treasury stock (79,745) (271,344) Proceeds from employee stock purchase plans 23,204 17,141 Reduction of short - term borrowings, net (76,688) (4,238) Proceeds from and reduction of long - term borrowings and other 2,713 (36,445) --------- --------- Net cash used by financing activities (98,922) (286,291) --------- --------- Net decrease in cash and cash equivalents $(146,325) $ (68,109) ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 160 $ 4,189 Income taxes $ 29,411 $ 46,524 See accompanying notes.
5 SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sun Microsystems, Inc. ("Sun" or the "Company") and its wholly - owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to current year presentation. While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting of normal recurring accruals) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The information included in this report should be read in conjunction with the 1997 Annual Report to Stockholders which is incorporated by reference in the Company's 1997 Form 10-K (as amended on Form 10-K/A). INVENTORIES (in thousands) September 28, 1997 June 30, 1997 ------------------ ------------- Raw materials $250,951 $236,900 Work in process 58,706 50,577 Finished goods 157,211 150,501 -------- -------- $466,868 $437,978 ======== ======== INCOME TAXES The Company accounts for income taxes under the liability method of Statement of Financial Accounting Standards No. 109. The provision for income taxes during the interim periods considers anticipated annual income before taxes, earnings of foreign subsidiaries permanently invested in foreign operations, and other differences. STOCK SPLIT The Company effected a two-for-one stock split (effected in the form of a stock dividend), to stockholders of record as of the close of the business on November 18, 1996. Share and per-share amounts presented have been adjusted to reflect the stock dividend. RECENT PRONOUNCEMENTS In 1997, Financial Accounting Standards No. 128 (FAS 128), "Earnings per Share," was issued and is effective for interim and annual periods ending after December 15, 1997. The impact is expected to result in an increase in primary earnings per share of $.02 for the quarters ended September 28, 1997 and September 29, 1996. 6 ACQUISITIONS On August 22, 1997, the Company acquired all of the outstanding stock of Diba, Inc. for $25,000,000 in cash. The transaction was accounted for as a purchase and, on this basis, the excess purchase price over the estimated fair value of net tangible assets has been allocated, based upon an independent third-party valuation, to various intangible assets, primarily consisting of purchased in-process research and development and goodwill. In connection with this acquisition, purchased in-process research and development of $22,300,000, associated with products which had not achieved technological feasibility and for which no alternative uses have been established by the Company, was written off. Intangible assets, including goodwill, are being amortized over three years. The results of operations of Diba, Inc. from the date of acquisition through September 28, 1997 are included in the Company's consolidated statement of income and were not material to the Company. On September 22, 1997, the Company acquired all of the outstanding stock of Integrity Arts, Inc. for $30,200,000 in cash. The transaction was accounted for as a purchase and, on this basis, the excess purchase price over the estimated fair value of net tangible assets has been allocated, based upon an independent third-party valuation, to various intangible assets, primarily consisting of purchased in-process research and development and goodwill. In connection with this acquisition, purchased in-process research and development of approximately $29,900,000, associated with products which had not achieved technological feasibility and for which no alternative uses have been established by the Company, was written off. Intangible assets, including goodwill, are being amortized over three years. The results of operations of Integrity Arts, Inc. from the date of acquisition through September 28, 1997 are included in the Company's consolidated statement of income and were not material to the Company. SUBSEQUENT EVENTS On October 16, 1997, the Company filed a Registration Statement with the Securities and Exchange Commission relating to the registration for public offering of senior and subordinated debt securities and common stock with an aggregate initial public offering price of up to $1,000,000,000. On October 24, 1997, the Registration Statement became effective, so that the Company may now choose to offer, from time to time, the securities and common stock pursuant to Rule 415 in one or more separate series, in amounts, at prices and on terms to be set forth in the prospectus contained in the Registration Statement and in one or more supplements to the prospectus. On October 21, 1997, the Company acquired substantially all of the assets and liabilities of Chorus Systems S.A. and its wholly-owned subsidiaries for approximately $26,500,000 in cash. The transaction will be accounted for as a purchase and, on this basis, the excess purchase price over the estimated fair value of net tangible assets will be allocated, based on an independent third-party valuation, to various intangible assets, primarily consisting of purchased in-process research and development and goodwill. Purchased in-process research and development of approximately $13 million, associated with products which had not achieved technological feasibility and for which no alternative uses have been established by the Company, will be written off. 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth items from the Condensed Consolidated Statements of Income as a percentage of net revenues: Three Months Ended, ------------------- September 28, September 29, 1997 1996 ---- ---- Net revenues 100.0% 100.0% Cost of sales 49.0 52.3 ----- ----- Gross margin 51.0 47.7 Research and development 10.6 10.0 Purchased in-process research and development 2.5 -- Selling, general and administrative 29.3 28.2 ----- ----- Operating income 8.6 9.5 Interest income, net 0.5 0.3 ----- ----- Income before income taxes 9.1 9.8 Provision for income taxes 3.9 3.2 ----- ----- Net income 5.2% 6.6% ===== ===== The following sections contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties such that actual results may vary materially. Certain factors that may affect the Company's results and financial condition over the next few quarters are discussed under the caption "future operating results" below. Other factors that may affect such results and financial condition are set forth in the Company's 1997 Annual Report to Stockholders which is incorporated by reference in the Company's Form 10-K (as amended on Form 10-K/A). RESULTS OF OPERATIONS Net revenues Net revenues were $2.099 billion for the first quarter of fiscal 1998, representing an increase of 12.9% over the corresponding period of fiscal 1997. The growth in revenues resulted primarily from strong demand for work group, enterprise and departmental servers, high-end desktop systems and from high-end storage products. The remaining increase 8 reflects growth in revenues from other Sun businesses, primarily service. The 12.9% revenue growth in the first quarter of fiscal 1998 was lower than the corresponding 25.2% revenue growth rate experienced in the first quarter of fiscal 1997 due mainly to a smaller backlog entering the quarter, coupled with the impacts of foreign currency fluctuations and weaker demand in certain geographies as described below. Domestic net revenues increased by 16.5% while international net revenues (including United States exports) grew 9.1% in the first quarter of fiscal 1998 compared with the corresponding period of fiscal 1997. In U.S. dollars, European net revenues increased 5.8%, Japanese net revenues increased 10.3%, and net revenues in rest of world increased 14.9% in the first quarter of fiscal 1998 when compared with the corresponding periods of fiscal 1997. These increases are due primarily to continued strengthening of the markets in Japan, Italy, Belgium and France. The increases in U.S. dollar revenues are net of the foreign currency impact of a strengthening in the U.S. dollar within our major markets, particularly Japan and Europe. The foreign currency impact was partially offset by pricing actions taken by the Company. The Company also experienced weakening demand in other parts of Europe, Southeast Asia and Latin America. The Company generally manages currency exposure through the use of simple, short-term forward foreign exchange and currency option contracts, the objective of which is to minimize the impact of currency fluctuations on the results of operations. As the Company utilizes projected data to establish its forward exchange and currency exchange contracts, variances which result from forecasting differences and the extent of currency movement during the quarter could have a material adverse effect on the results of operations and cash flows. Gross margin Gross margin was 51.0% for the first quarter of fiscal 1998, compared with 47.7% for the corresponding period of fiscal 1997. The increase in the gross margin reflects the effects of increased revenues generated from higher margin servers, desktop and storage options, as well as continued decreases in costs of key components, including CPUs and memory. The factors described above resulted in a favorable impact on gross margin for the first quarter of fiscal 1998. The Company continuously evaluates the competitiveness of its product offerings. These evaluations could result in repricing actions in the near term. Sun's future operating results would be adversely affected if such repricing actions were to occur and the Company were unable to mitigate the resulting margin pressure by maintaining a favorable mix of systems, software, service, and other products and by achieving component cost reductions, operating efficiencies and increasing volumes. Research and development Research and development (R&D) expenses were $222.6 million in the first quarter of fiscal 1998, compared with $186.3 million for the corresponding period of fiscal 1997. As a percentage of net revenues, R&D expenses increased to 10.6% for the first quarter of fiscal 1998 from 10.0% in the corresponding period of fiscal 1997. The dollar increase in the first quarter of fiscal 1998 over the corresponding period in fiscal 1997 primarily reflects increased expenditures focused on the development of hardware and software products which utilize the Java architecture. The remaining increase in R&D expenses is due primarily to continued development of ULTRASparc systems, storage products, further development of products acquired through acquisitions, and increased compensation due primarily to higher levels of R&D staffing. 9 Selling, general and administrative Selling, general and administrative (SG&A) expenses were $615.5 million in the first quarter of fiscal 1998 compared with $524.7 million for the same period of fiscal 1997. As a percentage of net revenues, SG&A expenses increased to 29.3% in the first quarter of fiscal 1998 from 28.2% in the corresponding period of fiscal 1997. The dollar increase in fiscal 1998 is primarily attributable to increased compensation resulting from higher levels of headcount (principally in the sales organization) in addition to marketing costs related to demand creation programs. The increase is also due to costs incurred in connection with the Company's ongoing efforts to improve business processes and cycle times. The Company expects to continue to hire personnel to further expand its demand creation programs and service support. Purchased in-process research and development Purchased in-process research and development represents the write-off of purchased in-process research and development associated with the Company's acquisitions of Diba, Inc. and Integrity Arts, Inc. The Company expects an additional in-process research and development write-off of approximately $13 million in connection with the acquisition of Chorus Systems S.A. and its wholly-owned subsidiaries. Interest income, net Net interest income was $10.6 million for the first quarter of fiscal 1998, compared with $5.5 million in net interest income for the corresponding period in fiscal 1997. The increase in 1998 is primarily the result of higher interest earnings due to a larger average portfolio of cash and short-term investments. Income taxes The Company's effective income tax rate for the first quarter of fiscal 1998 was 33% before a $19.8 million tax charge resulting from a non-recurring write-off of in-process research and development associated with the acquisitions of Diba, Inc. and Integrity Arts, Inc. The effective income tax rate for the first quarter of fiscal 1998 including these acquisition-related charges was 43.4%. The effective tax rate for the first quarter of fiscal 1997 was 32%. The increase in the overall effective tax rate to 33% for fiscal 1998 is attributable to an increase in anticipated worldwide earnings without offsetting tax credits or other tax savings. FUTURE OPERATING RESULTS The market for Sun's products and services is intensely competitive and subject to continuous, rapid technological change, short product life cycles and frequent product performance improvements and price reductions. Due to the breadth of the Company's product lines and the scalability of its products and network computing model, Sun competes in many segments of the network computing market across a broad spectrum of customers. The Company expects the markets for its products and technologies, as well as its competitors within such markets, will continue to change as the rightsizing trend shifts customer buying patterns to network based systems which often employ solutions from multiple vendors. Competition in these markets will also continue to intensify as Sun and its competitors, principally Hewlett-Packard Corporation, International Business Machines Corporation, Digital Equipment Corporation, and Silicon Graphics, Inc., aggressively position themselves to benefit from this shifting of customer buying patterns and demand. The Company is also facing competition from these competitors, as well as other systems manufacturers, such as Compaq Computer Corporation and Dell Computer Corporation, with respect to products based on microprocessors from Intel Corporation coupled with Windows NT operating system software from Microsoft Corporation. These products demonstrate the viability of certain networked personal computer solutions and have increased the competitive pressure, particularly in the Company's workstation and lower-end server product lines. Finally, the timing of introductions of new products and services by Sun's competitors may negatively impact the future operating results of the Company, particularly when such introductions occur in periods leading up to the Company's 10 introduction of its own new enhanced products. The Company expects this pressure to continue and intensify throughout fiscal 1998. While many other technical, service and support capabilities affect a customer's buying decision, the Company's future operating results will depend, in part, on its ability to compete with these technologies. The Company's future operating results will depend to a considerable extent on its ability to rapidly and continuously develop, introduce, and deliver in quantity new systems, software, and service products, as well as new microprocessor technologies, that offer its customers enhanced performance at competitive prices. The development of new high - performance computer products, such as the Company's development of the UltraSPARC microprocessor, is a complex and uncertain process requiring high levels of innovation from the Company's designers and suppliers, as well as accurate anticipation of customer requirements and technological trends. Once a hardware product is developed, the Company must rapidly bring such products to volume manufacturing, a process that requires accurate forecasting of volumes, mix of products and configurations, among other things in order to achieve acceptable yields and costs. Future operating results will depend to a considerable extent on the Company's ability to closely manage product introductions in order to minimize unfavorable patterns of customer orders, to reduce levels of older inventory and to ensure that adequate supplies of new products can be delivered to meet customer demand. The ability of the Company to match supply and demand is further complicated by the Company's need to adjust prices to reflect changing competitive market conditions as well as the variability and timing of customer orders with respect to the Company's older products. As a result, the Company's operating results could be adversely affected if the Company is not able to correctly anticipate the level of demand for the mix of products. Because the Company is continuously engaged in this product development, introduction, and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The Company is increasingly dependent on the ability of its suppliers to design, manufacture, and deliver advanced components required for the timely introduction of new products. The failure of any of these suppliers to deliver components on time or in sufficient quantities, or the failure of any of the Company's own designers to develop advanced innovative products on a timely basis, could result in a significant adverse impact on the Company's operating results. The inability to secure enough components to build products, including new products, in the quantities and configurations required, or to produce, test and deliver sufficient products to meet demand in a timely manner, would adversely affect the Company's net revenues and operating results. To secure components for development, production, and introduction of new products, the Company frequently makes advanced payments to certain suppliers and often enters into noncancelable purchase commitments with vendors early in the design process. Due to the variability of material requirement specifications during the design process, the Company must closely manage material purchase commitments and respective delivery schedules. In the event of a delay or flaw in the design process, the Company's operating results could be adversely affected due to the Company's obligations to fulfill such noncancelable purchase commitments. Generally, the computer systems sold by Sun, such as the UltraSPARC based products, are the result of hardware and software development, such that delays in the software development can delay the ability of the Company to ship new hardware products. In addition, adoption of a new release of an operating system may require effort on the part of the customer and porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays by customers in adopting a new release of an operating system can limit the acceptability of hardware products tied to that release. Such delays could adversely affect the future operating results of the Company. Seasonality also affects the Company's operating results, particularly in the first quarter of each fiscal year. In addition, the Company's operating expenses are increasing as the Company continues to expand its operations, and future operating results will be adversely affected if revenues do not increase accordingly. Additionally, the Company plans to continue to evaluate and, when appropriate, make acquisitions of complimentary technologies, products or businesses. As part of this process, the Company will continue to evaluate the 11 changing value of its assets, and when necessary, make adjustments thereto. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. LIQUIDITY AND CAPITAL RESOURCES Total assets at September 28, 1997 decreased by approximately $150 million from June 30, 1997, due principally to decreases in cash, cash equivalents and short-term investments of $125 million and accounts receivable of $216 million, offset by increases in inventory of $29 million, other current assets of $60 million, property, plant and equipment-net of $79 million and other long-term assets of $24 million. The decrease in accounts receivable reflects the Company's normal seasonal experience, which is lower revenue in the first quarter of fiscal 1998 as compared to the fourth quarter of the prior fiscal year. The increase in inventory also reflects the lower revenue in the first quarter of fiscal 1998 as compared to the fourth quarter of fiscal 1997. Other current assets increased due to the timing of payments for insurance and other taxes. The increase in property, plant and equipment reflects capital spending for real estate development as well as capital additions to support increased headcount, primarily in the Company's engineering, service and marketing organizations. Other long-term assets increased primarily due to an increase in spares inventory. Total current liabilities decreased $272 million from June 30, 1997, due principally to decreases in short-term borrowings of $77 million, accounts payable of $40 million, accrued liabilities of $138 million, and other current liabilities of $17 million. The decrease in short-term borrowings reflect payments related to debt of subsidiaries. The decrease in accounts payable reflects the timing of payments for inventory and other items. Accrued liabilities decreased due to the payment of performance based compensation and commissions, offset by an increase in the employee stock participation program liability. The other current liabilities decrease reflects the decrease in income taxes payable and deferred service revenues. At September 28, 1997, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $987 million and a revolving credit facility with banks aggregating $500 million, which was available subject to compliance with certain covenants. On October 16, 1997, the Company filed a Registration Statement with the Securities and Exchange Commission relating to the registration for public offering of senior and subordinated debt securities and common stock with an aggregate initial public offering price of up to $1,000,000,000. On October 24, 1997, the Registration Statement became effective, so that the Company may now choose to offer, from time to time, the securities and common stock pursuant to Rule 415 in one or more separate series, in amounts, at prices and on terms to be set forth in the prospectus contained in the Registration Statement and in one or more supplements to the prospectus. The Company believes that the liquidity provided by existing cash and short-term investment balances and the offering and borrowing arrangements described above will be sufficient to meet the Company's capital requirements through fiscal 1998. However, the Company believes the level of financial resources is a significant competitive factor in its industry and may choose at any time to raise additional capital through debt or equity financing to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. 12 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On October 7, 1997, the Company filed suit against Microsoft Corporation in the United States District Court for the Northern District of California alleging breach of contract, trademark infringement, false advertising, unfair competition, interference with prospective economic advantage and inducing breach of contract. The Company filed an amended complaint on October 14, 1997. Microsoft Corporation filed its answer, affirmative defenses and counterclaims to the amended complaint. The counterclaims include breach of contract, breach of the covenant of good faith and fair dealing, violation of the California Business & Professions Code and declaratory judgment. The Company believes that the counterclaims are without merit and/or that the Company has affirmative defenses and intends vigorously to defend itself with respect thereto. The Company believes that the outcome of this matter will not have a material adverse impact on Sun's financial position, results of operations or cash flows in any given fiscal year. ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of the Company's Common Stock by the Company's executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended September 28, 1997: OFFICER/ DATE PRICE NUMBER OF DIRECTOR SHARES SOLD ======================================================================= Kenneth M. Alvares 7/23/97 $45.75 10,000 7/23/97 $46.125 10,000 7/23/97 $46.5625 20,000 7/24/97 $46.00 14,000 7/25/97 $47.00 24,000 8/7/97 $49.1146 24,000 8/20/97 $50.7525 8,000 8/20/97 $52.00 6,000 8/20/97 $52.0625 2,000 8/20/97 $52.5625 2,700 8/20/97 $52.50 3,300 Alan E. Baratz 8/5/97 $46.25 20,000 8/6/97 $47.0625 12,000 8/6/97 $47.0625 12,000 Mel Friedman 8/6/97 $47.1875 20,000 8/6/97 $47.1652 28,000 Lawrence W. Hambly 8/6/97 $47.5313 10,000 8/6/97 $48.25 10,000 13 8/6/97 $48.50 10,000 8/7/97 $49.00 10,000 Masood Jabbar 7/25/97 $46.8019 26,000 7/25/97 $46.8641 6,000 7/25/97 $46.8641 3,000 7/25/97 $46.9264 5,000 8/19/97 $50.00 8,000 8/19/97 $49.875 3,658 8/19/97 $49.9375 5,000 8/19/97 $50.00 23,342 8/19/97 $49.875 12,000 8/19/97 $49.875 32,000 8/19/97 $50.00 1,158 8/19/97 $50.00 16,000 Michael E. Lehman 7/23/97 $46.750 20,000 7/23/97 $46.00 10,000 7/23/97 $46.125 10,000 7/28/97 $47.0625 4,000 8/1/97 $45.00 4,000 8/4/97 $45.00 20,000 8/4/97 $44.625 10,000 8/5/97 $46.25 5,000 8/5/97 $46.00 5,000 8/6/97 $47.125 5,000 8/7/97 $48.8125 3,000 8/11/97 $48.4375 4,000 8/11/97 $48.00 4,000 Robert L. Long 8/5/97 $45.5625 10,000 Scott G. McNealy 7/23/97 $46.3670 150,000 7/30/97 $46.313 150,000 8/6/97 $47.9420 150,000 8/13/97 $47.190 150,000 Michael H. Morris 7/23/97 $46.1562 8,000 7/23/97 $46.1562 4,800 8/5/97 $45.875 8,000 8/5/97 $45.875 8,000 8/11/97 $47.50 6,400 Alton D. Page 8/6/97 $47.5625 10,000 William J. Raduchel 7/23/97 $46.0538 35,000 8/1/97 $45.00 8,000 8/1/97 $45.625 10,000 8/1/97 $44.5844 10,000 8/4/97 $44.5625 5,000 14 8/4/97 $45.00 5,000 8/5/97 $46.25 6,000 8/5/97 $46.25 5,000 8/5/97 $46.00 5,000 8/6/97 $47.0625 10,000 8/12/97 $48.0312 5,000 8/13/97 $46.6413 5,000 George Reyes 7/24/97 $46.00 8,000 7/24/97 $46.00 4,000 7/24/97 $46.00 510 8/5/97 $46.00 6,000 8/19/97 $50.00 4,000 Joseph P. Roebuck 8/25/97 $51.750 10,000 8/25/97 $51.50 25,000 8/25/97 $51.750 25,000 Janpieter T. Scheerder 7/23/97 $45.9118 12,000 7/23/97 $45.9118 8,000 7/23/97 $45.9118 14,000 8/1/97 $45.0937 5,200 8/5/97 $46.1875 8,000 8/11/97 $48.8067 48,000 8/19/97 $49.6875 7,200 John Shoemaker 7/23/97 $46.00625 12,000 8/4/97 $44.9556 12,000 8/7/97 $49.7525 12,800 8/13/97 $46.565 13,000 8/13/97 $46.5025 3,000 8/20/96 $52.565 10,000 8/20/97 $52.565 4,000 Chester J. Silvestri 7/25/97 $46.75 10,000 7/25/97 $46.9375 3,000 7/25/97 $46.875 7,000 8/19/97 $48.6875 20,000 8/26/97 $52.00 20,000 Dorothy A. Terrell 7/23/97 $46.6042 30,000 7/23/97 $45.750 10,000 7/23/97 $46.125 10,000 7/25/97 $47.00 12,500 8/7/97 $49.375 14,000 8/19/97 $50.00 16,000 8/19/97 $50.00 16,000 8/20/97 $52.00 6,000 8/20/97 $53.00 6,000 Edward J. Zander 7/23/97 $46.75 20,000 15 7/23/97 $46.00 10,000 7/23/97 $46.125 10,000 8/8/97 $49.625 20,000 8/8/97 $49.50 20,000 16 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 10.93* Integrity Arts, Inc. 1996 Stock Option Plan 11.0 Statement re: Computation of Earnings Per Share 27.0 Financial data for the period ended September 28, 1997 * Incorporated by reference to Exhibit 4.1 filed as an exhibit to the Registrant's Registration Statement on Form S-8 (file no. 333-38163) filed with the Securities and Exchange Commission on October 17, 1997. b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended September 28, 1997. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman --------------------- Michael E. Lehman Vice President and Chief Financial Officer /s/ George Reyes -------------------- George Reyes Vice President and Corporate Controller, Chief Accounting Officer Dated: November 11, 1997 18 EXHIBITS TO REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997 19 EX-11 2 COMPUTATION OF EARNINGS PER SHARE SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS PER SHARE (unaudited) (in thousands, except per share amounts) PRIMARY Three Months Ended, ------------------- September 28, September 29, 1997 1996 -------- -------- Net income $108,433 $123,390 ======== ======== Weighted average common shares outstanding 372,062 367,114 Common - equivalent shares attributable to stock options and warrants 23,037 23,002 -------- -------- Total common and common - equivalent shares outstanding 395,099 390,116 ======== ======== Net income per common and common - equivalent share $ 0.27 $ 0.32 ======== ======== 20 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS PER SHARE (unaudited) (in thousands, except per share amounts) FULLY DILUTED Three Months Ended, ------------------- September 28, September 29, 1997 1996 -------- -------- Net income $108,433 $123,390 ======== ======== Weighted average common shares outstanding 371,648 367,114 Common - equivalent shares attributable to stock options and warrants 23,336 24,212 -------- -------- Total common and common - equivalent shares outstanding 394,984 391,326 ======== ======== Net income per common and common - equivalent share $ 0.27 $ 0.32 ======== ======== 21 EX-27 3 ART 5 FDS FOR 10-Q
5 1000 3-MOS JUN-30-1997 JUN-30-1996 SEP-29-1996 460,745 203,210 1,295,429 126,754 461,842 2,852,835 562,893 793,255 3,622,402 1,489,269 40,000 0 0 73 2,120,165 3,622,402 1,859,019 1,859,019 972,101 1,683,035 0 2,857 2,657 181,456 58,066 123,390 0 0 0 123,390 0.63 0.63
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