-----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, HO+32citqzbZM3UtrmTaZP1/vU+NYqDUmf6m2rNHRoXjBiIs0HMATDWcSdC/kCR3 pnWcpEsknK5IvW7nn/hcMg== 0000891618-99-001999.txt : 19990506 0000891618-99-001999.hdr.sgml : 19990506 ACCESSION NUMBER: 0000891618-99-001999 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990505 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: 99610484 BUSINESS ADDRESS: STREET 1: 901 SAN ANTONIO RD 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 FORM 10-Q FOR THE PERIOD ENDED MARCH 28, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 28, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission file number:0-15086 SUN MICROSYSTEMS, INC. (Exact Name of registrant as specified in its charter) 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 MARCH 28, 1999 Common Stock - $0.00067 par value 773,862,552 2 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 7 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 29 Item 5 - Other Information 29 Item 6 - Exhibits and Reports on Form 8 - K 31 Item 7A - Quantitative and Qualitative Disclosures about Market Risk 32 SIGNATURES 33
2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
March 28, June 30, 1999 1998 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 707,403 $ 822,267 Short-term investments 1,291,438 476,185 Accounts receivable, net 2,211,592 1,845,765 Inventories 311,842 346,446 Deferred tax assets 380,113 371,841 Other current assets 398,553 285,021 ----------- ----------- Total current assets 5,300,941 4,147,525 Property, plant and equipment, at cost 2,669,308 2,257,228 Accumulated depreciation and amortization (1,163,260) (956,616) ----------- ----------- 1,506,048 1,300,612 Other assets, net 702,285 262,925 ----------- ----------- $ 7,509,274 $ 5,711,062 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 17,560 $ 7,169 Accounts payable 720,742 495,603 Accrued liabilities 1,468,270 1,166,491 Income taxes payable 239,700 188,641 Other current liabilities 352,258 264,967 ----------- ----------- Total current liabilities 2,798,530 2,122,871 Deferred income taxes and other obligations 299,598 74,563 Total stockholders' equity 4,411,146 3,513,628 ----------- ----------- $ 7,509,274 $ 5,711,062 =========== ===========
See accompanying notes. 3 4 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended ----------------------- ----------------------- March 28, March 29, March 28, March 29, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net revenues: Products $2,526,612 $2,067,282 $7,067,470 $6,077,162 Services 409,416 293,646 1,144,182 832,613 ---------- ---------- ---------- ---------- Total net revenues 2,936,028 2,360,928 8,211,652 6,909,775 ---------- ---------- ---------- ---------- Cost and expenses: Cost of sales-products 1,170,043 933,499 3,279,780 2,792,127 Cost of sales-services 226,481 168,137 680,291 508,573 Research and development 323,144 252,770 909,906 734,616 Selling, general and administrative 803,852 672,606 2,263,043 1,984,549 Purchased in-process research and development 28,700 -- 120,700 162,284 ---------- ---------- ---------- ---------- Total costs and expenses 2,552,220 2,027,012 7,253,720 6,182,149 Operating income 383,808 333,916 957,932 727,626 Interest income, net 22,355 12,366 58,016 33,134 ---------- ---------- ---------- ---------- Income before income taxes 406,163 346,282 1,015,948 760,760 Provision for income taxes 144,960 114,273 379,784 270,886 ---------- ---------- ---------- ---------- Net income $ 261,203 $ 232,009 $ 636,164 $ 489,874 ========== ========== ========== ========== Net income per common share - basic $ 0.34 $ 0.31 $ 0.83 $ 0.66 ========== ========== ========== ========== Net income per common share - diluted $ 0.32 $ 0.29 $ 0.79 $ 0.62 ========== ========== ========== ========== Shares used in the calculation of net income per share - basic 769,982 749,048 763,170 746,974 ========== ========== ========== ========== Shares used in the calculation of net income per share - diluted 823,490 789,274 809,756 788,644 ========== ========== ========== ==========
See accompanying notes. 4 5 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine Months Ended ------------------------ March 28, March 29, 1999 1998 ----------- --------- Cash flows from operating activities: Net income $ 636,164 $ 489,874 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization 450,102 292,446 Tax benefit of options exercised 165,633 106,399 Purchased in-process research and development 120,700 162,284 Net increase in accounts receivable (357,817) (7,025) Net decrease in inventories 35,237 (32,657) Net increase in accounts payable 223,021 15,353 Net increase in other current and non-current assets (443,037) (114,747) Net increase in other current and non-current liabilities 655,058 54,002 ----------- --------- Net cash provided from operating activities 1,485,061 965,929 ----------- --------- Cash flows from investing activities: Acquisition of property, plant and equipment (512,623) (571,379) Acquisition of spare parts and other assets (90,377) (84,918) Payments for acquisitions, net of cash acquired (130,300) (227,655) Acquisition of short-term investments (1,528,960) (460,278) Sale of short-term investments 443,080 252,916 Maturities of short-term investments 251,829 318,116 ----------- --------- Net cash used by investing activities (1,567,351) (773,198) ----------- --------- Cash flows from financing activities: Issuance of common stock, net 125,338 58,872 Acquisition of treasury stock (218,679) (224,002) Proceeds from employee stock purchase plans 58,540 61,905 Net proceeds (reduction) of short-term borrowings and other obligations 2,227 (92,911) ----------- --------- Net cash used by financing activities (32,574) (196,136) ----------- --------- Net decrease in cash and cash equivalents (114,864) (3,405) ----------- --------- Cash and cash equivalents, beginning of period 822,267 660,170 ----------- --------- Cash and cash equivalents, end of period $ 707,403 $ 656,765 =========== =========
5 6 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited) (in thousands)
Nine Months Ended ---------------------- March 28, March 29, 1999 1998 -------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 628 $ 388 Income taxes $ 82,002 $ 55,503 Supplemental schedule of non-cash investing activities: Stock issued in conjunction with an acquisition $144,483 -- Fair value of assets acquired $305,242 $284,294 Cash paid for assets $134,895 $233,111 Liabilities assumed $ 25,864 $ 51,183
See accompanying notes. 6 7 SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sun Microsystems, Inc. ("Sun" or the "Company") and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to current year presentation. While the interim financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting of normal recurring accruals) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The information included in this report should be read in conjunction with the 1998 Annual Report to Stockholders which is incorporated by reference in the Company's 1998 Form 10-K . The Company announced a two-for-one stock split on January 21, 1999, effected in the form of a stock dividend, and paid at the close of business April 8, 1999 to stockholders of record on March 18, 1999. All earnings per share amounts, references to common stock, and stockholders' equity amounts have been restated as if the stock dividend had occurred as of the earliest period presented. INVENTORIES (IN THOUSANDS)
March 28, 1999 June 30, 1998 -------------- ------------- Raw materials $ 97,316 $ 92,197 Work in process 37,363 58,765 Finished goods 177,163 195,484 -------- -------- $311,842 $346,446 ======== ========
INCOME TAXES The Company accounts for income taxes under the liability method of Statement of Financial Accounting Standards No. 109. The provision for income taxes during the interim periods considers anticipated annual income before taxes, earnings of foreign subsidiaries permanently invested in foreign operations, and other differences. RECENT PRONOUNCEMENTS The Company adopted SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" effective July 1, 1998. The adoption of SOP 98-1 did not have a material effect on the Company's consolidated financial position or operating results. 7 8 In June 1998, Financial Accounting Standard No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for all fiscal years beginning after June 15, 1999. FAS 133 requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. The Company will comply with the requirements of FAS 133 in fiscal year 2000. The Company does not expect the adoption will be material to the Company's financial position or results of operations. COMPREHENSIVE NET INCOME As of July 1, 1998, the Company adopted Financial Accounting Standards No. 130 ("FAS 130") , "Reporting Comprehensive Income." FAS 130 establishes new rules for the reporting and display of comprehensive net income and its components, however, it has no impact on the Company's net income or stockholders' equity. FAS 130 requires foreign currency translation adjustments and changes in fair value of available for sale securities, which prior to adoption were reported in stockholders' equity, to be included in comprehensive income. The components of comprehensive net income, net of tax, are as follows:
Three Months Ended Nine Months Ended ----------------------- ----------------------- March 28, March 29, March 28, March 29, 1999 1998 1999 1998 --------- --------- --------- --------- Net income $ 261,203 $ 232,009 $ 636,164 $ 489,874 Change in unrealized gain (loss) on available for sale securities 1,839 5,681 (18,798) 15,273 Change in cumulative translation adjustment (7,253) (11,283) (5,052) (12,905) --------- --------- --------- --------- Comprehensive net income $ 255,789 $ 226,407 $ 612,341 $ 492,242 ========= ========= ========= =========
ACQUISITIONS The Company completed four acquisitions during each of the nine months ended March 28, 1999 and March 27, 1998 which were all accounted for under the purchase method of accounting. Pro forma results of operations have not been presented for any of the acquisitions because the effects of these acquisitions were not material to the Company on either an individual or an aggregate basis. The results of operations of each acquisition are included in the Company's consolidated statements of income from the date of each acquisition and were not material to the Company on either an individual or an aggregate basis. The Company calculated amounts allocated to in-process research and development ("IPRD") using established valuation techniques in the high technology industry and expensed such amounts in the quarter that each such acquisition was consummated because technological feasibility of the in-process technologies so acquired had not been achieved and no alternative future uses had been established. The income approach Sun utilized gave consideration to relevant market size and growth factors, expected industry trends, the nature and timing of new product introductions by Sun and its competitors, individual product sales cycles and the estimated life of each product's underlying technology. 8 9 The Company allocated the excess purchase price over the estimated value of the net tangible assets acquired to various intangible assets, consisting primarily of developed technology and goodwill, as well as other goodwill-like assets, including customer base and assembled workforce. The values assigned to developed technologies related to each acquisition were based upon future discounted cash flows related to the existing products' projected income streams. The values of the customer bases were determined based upon the value of existing relationships and the expected revenue stream. The values of the assembled workforces were based upon the cost to replace those workforces. Amounts allocated to goodwill, developed technology, and other intangibles are amortized on a straight-line basis over periods ranging from two to five years. On August 28, 1998, the Company completed its acquisition of NetDynamics, Inc. ("NetDynamics"), a company conducting development, engineering and testing activities associated with the completion of a new enterprise application platform product. Sun acquired all of the outstanding capital stock of NetDynamics by means of a merger transaction pursuant to which all the shares of NetDynamics capital stock were converted into the right to receive shares of Sun common stock based upon an agreed-upon exchange ratio which was calculated using an agreed-upon average market price for Sun common stock. The Company issued 2,746,785 shares of Sun common stock (with a fair market value of $48.26875 per share) as consideration for the acquisition. Additionally Sun issued approximately 568,000 stock options in exchange for NetDynamics stock options previously outstanding, including approximately 172,000 Sun options in exchange for vested NetDynamics stock options, with terms similar to Sun stock options. The fair value of the Sun stock options exchanged for rights to vested NetDynamics stock options at the time of the acquisition was included as part of the purchase price. The excess purchase price over the estimated fair value of net tangible assets has been allocated to various intangible assets, primarily consisting of developed technology ($20 million), goodwill ($36.2 million), customer base ($10 million) and assembled workforce ($2 million). In addition to the intangible assets acquired, an $80 million charge representing the write-off of IPRD was recorded. On September 28, 1998, the Company completed its acquisition of i-Planet, Inc. ("i-Planet"), a company conducting development, engineering and testing activities associated with the completion of a new Java(TM) technology based remote Internet access product. Sun acquired all of the outstanding capital stock of i-Planet by means of a merger transaction pursuant to which all the shares of i-Planet capital stock were converted into the right to receive cash for total consideration of $30 million, including $1.2 million associated with vested stock options. The excess purchase price over the estimated fair value of net tangible assets has been allocated to various intangible assets, primarily consisting of developed technology of $3.3 million and various goodwill and goodwill-like assets totaling $18.3 million. In addition to the intangible assets acquired, an $8.4 million charge representing the write-off of IPRD was recorded. On October 16, 1998, the Company completed its acquisition of Beduin Communications Incorporated ("Beduin"), a company conducting development engineering and testing activities associated with the completion of a suite of smart device products. Sun acquired all of the outstanding capital stock of Beduin by means of a share purchase transaction pursuant to which all the shares of Beduin capital stock were converted into the right to receive cash for total consideration of $8.4 million. The excess purchase price over the estimated fair value of net tangible assets has been allocated to various intangible assets, primarily consisting of developed technology of $3.1 million and various goodwill and goodwill-like assets totaling $1.4 million. In addition to the intangible assets acquired, a $3.6 million charge was recorded, representing the write-off of IPRD. On January 22, 1999, the Company acquired all of the outstanding capital stock of Maxstrat Corporation ("Maxstrat"), by means of a merger transaction pursuant to which all of the shares of Maxstrat capital stock were converted into the right to receive cash for total consideration of $101.5 million, net of cash received of $18.7 million and including $2.5 million associated with vested stock options. The excess purchase price over the estimated fair value of net tangible assets has been allocated to various intangible assets, primarily 9 10 consisting of developed technology of $8.6 million and goodwill and goodwill-like assets totaling $61.5 million. In addition to the intangible assets acquired, the Company recorded a $28.7 million charge, representing the write-off of IPRD. The Company completed four acquisitions during the nine months ended March 27, 1998. On November 24, 1997, the Company completed its acquisition of Encore Computer Corporation's Storage Products Business ("Encore") for total consideration of $186.2 million. Encore was conducting development and engineering activities associated with its Intershare and DASD-NET products (the "Encore Products") for the computer mainframe/open systems storage market. The acquired technology of the Encore Products will facilitate the Company's efforts to develop a high-end "intelligent" storage product, which can be modified to address the low-end storage market. On October 21, 1997 the Company completed its acquisition of Chorus Systems, S.A. ("Chorus") for total consideration of $26.5 million. Chorus was conducting development, engineering and testing activities associated with certain software products which will allow the Company to create a robust product line leveraging the Java programming language, including a tool set and flash file system, as well as embedded operating systems. On September 22, 1997, the Company completed its acquisition of Integrity Arts, Inc. ("Integrity Arts"), a company developing a smart card Application Programming Interface ("API"), for total consideration of $30.2 million. An API defines the concepts, terms and structures of a software platform that can be followed by application designers and architects and describes application functionality, data management principles, communication principles, and network infrastructure. Integrity Arts was also developing the related smart card and terminal run-time software modules, software development tools, card application architectures, and data security software. On August 22, 1997, the Company completed its acquisition of Diba, Inc. ("Diba") for total consideration of $29.7 million. Diba was conducting development and engineering activities associated with the completion of a consumer information appliance which will offer improved performance and efficiency by allowing processing of software applications at either the local area network located in the consumer's home or at another location. SUN MICROSYSTEMS, INC. AND AMERICA ONLINE, INC. STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT On November 23, 1998, Sun and America Online, Inc. ("AOL") entered into a Strategic Alliance consisting of several agreements between the parties, including a Strategic Development and Marketing Agreement ("SDMA"). The SDMA became effective on March 17, 1999 in accordance with its terms upon the consummation of AOL's acquisition of Netscape Communications, Inc. ("Netscape"). Under terms of the SDMA, AOL and Sun committed to collaboratively develop, market and sell client and server software and collaboratively develop an AOL specific Java environment that will enable AOL services to be accessed through a variety of hardware devices. The SDMA provides that over a three year period, AOL will develop and market, together with Sun, client software and network application and server software based in part on the Netscape code, on Sun code and technology, and on certain AOL services features to business enterprises. In addition, AOL and Sun have agreed to coordinate their sales efforts and share revenues with respect to designated collaboratively developed client software and network application and server software and associated services. Under the terms of the SDMA, Sun has committed that the total revenue earned by AOL from certain existing Netscape contracts, the sale or license of certain AOL and Netscape software and services, the sale or license of certain collaboratively developed software products and services and the license to Sun to distribute commercially existing Netscape software will not be less than $312 million, $330 million and $333 million in the first, second and third years of the SDMA's three year term, respectively; for these purposes a portion of the total revenue is determined as a percentage of the gross margin or net of sales commissions earned by Sun. In addition, Sun will pay to AOL approximately $275 million in licensing and other fees in connection with licenses granted to Sun by AOL. 10 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth items from the Condensed Consolidated Statements of Income as a percentage of total net revenues:
Three Months Ended Nine Months Ended -------------------- --------------------- March 28, March 29, March 28, March 29, 1999 1998 1999 1998 ----- ----- ----- ----- Net revenues: Products 86.1% 87.6% 86.1% 88.0% Services 13.9 12.4 13.9 12.0 ----- ----- ----- ----- Total net revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost of sales: Products 39.9 39.6 39.9 40.4 Services 7.7 7.1 8.3 7.4 ----- ----- ----- ----- Total cost of sales 47.6 46.7 48.2 47.8 ----- ----- ----- ----- Gross margin 52.4 53.3 51.8 52.2 Research and development 11.0 10.7 11.1 10.6 Selling, general and administrative 27.4 28.5 27.6 28.7 Purchased in-process research and development 1.0 0.0 1.5 2.3 ----- ----- ----- ----- Operating income 13.1 14.1 11.7 10.5 Interest income, net 0.7 0.3 0.7 0.5 ----- ----- ----- ----- Income before income taxes 13.8 14.4 12.4 11.0 Provision for income taxes 4.9 4.9 4.7 3.9 ----- ----- ----- ----- Net income 8.9% 9.5% 7.7% 7.1% ===== ===== ===== =====
The following sections contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below, specifically those contained in "Future Operating Results" identify important factors that could cause actual results over the next few quarters to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, adverse changes in general economic conditions, including adverse changes in the specific markets for the Company's products, adverse business conditions, decreased or lack of growth in the computing industry, adverse changes in customer order patterns, increased competition, lack of acceptance of new products, pricing pressures, lack of success in technological advancements, risks associated with foreign operations (including the downturn of 11 12 economic trends and unfavorable currency movements in the Asia Pacific and Latin American marketplaces), risks associated with the Company's efforts to comply with Year 2000 requirements, risks associated with the Company's new business practices, processes and information systems. RESULTS OF OPERATIONS NET REVENUES Net revenues were $2,936 million for the third quarter of fiscal 1999 and $8,211.7 million for the first nine months of fiscal 1999, representing increases of 24.4% and 18.8%, respectively, over the corresponding periods of fiscal 1998. Sun's products net revenues were $2,526.6 million for the third quarter of fiscal 1999, an increase of $459.3 million or 22.2% over the third quarter of fiscal 1998. Net product revenues were $7,067.5 million for the nine months ended March 28, 1999, an increase of $990.3 million or 16.3% over the corresponding period of fiscal 1998. Substantially all of the growth in products revenues for the quarter ended March 28, 1999 resulted from strong demand for Sun's enterprise and workgroup servers, and to a lesser extent from increased revenues generated by Sun's storage products. More than half of the growth in products revenues for the nine month period ended March 28, 1999 resulted from strong demand for workgroup servers and to a lesser extent, the Company's low-end desktop and storage products. The growth in products revenue in both the quarter and year to date periods was partially offset by a decline in high-end desktop product volumes as the result of a shift in customer purchasing patterns towards low-end desktop products and workgroup servers. Sun's services net revenues were $409.4 million for the third quarter of fiscal 1999, an increase of $115.8 million or 39.4% over the third quarter of fiscal 1998. Net revenues from services were $1,144.2 million for the nine months ended March 28, 1999, an increase of $311.6 million or 37.4% over the corresponding period of fiscal 1998. The increases in services revenues are primarily the result of a shift in product mix toward premium priced contracts and a larger installed product base due to increased product unit sales, as well as increased revenues associated with Sun's professional and educational services. Domestic net revenues increased by 22% and 17.3 % in the third quarter and first nine months of fiscal 1999, respectively. International net revenues (including United States exports) grew 26.7% and 20.4% in the third quarter and first nine months of fiscal 1999, respectively, compared with the corresponding periods of fiscal 1998. In US dollars, European net revenues increased 23.6% and 26.9%, Rest of World (ROW) net revenues increased 26.8% and 16%, and Japanese net revenues increased 35% and 9.2%, in the third quarter and first nine months of fiscal 1999, respectively, when compared with the corresponding periods of fiscal 1998. The increases in Europe and the ROW are due to demand for Sun's network computing products and services. For the quarter ended March 28, 1999, demand was particularly strong in Germany and certain southern European countries, while relatively unchanged in the United Kingdom and certain Northern European countries in relation to the prior year's comparable period. For the nine months ended March 28, 1999, Sun experienced continued growth on a year over year basis in all European regions, with the strongest growth in Germany and Southern Europe. Although Sun has experienced US dollar revenue growth in the European marketplace on both a year over year and quarter over quarter basis in relation to the prior year's comparable periods, there can be no assurance that such trends will continue. In particular, if capital spending declines in certain countries or industries as the result of Year 2000 spending concerns or other economic factors, the Company's result from operations and cash flows could be adversely impacted. The Company attributes the increase in Japanese revenues in the third quarter and nine months ended March 28, 1999 primarily to increased demand within the region for Sun's products, rather than a sign of strengthening in the Asian economies. Sun remains cautious with regard to the Japanese market and does not expect the current Japanese macroeconomic trends to change significantly or materially in the near term. The foregoing is a forward-looking statement that is subject to risks and uncertainties, and actual results may differ materially from those set forth in such statement as the result of 12 13 a number of factors. In particular, if the Japanese economy significantly worsens in a quarter or declines over an extended period of time, the Company's results from operations and cash flows could be adversely affected. A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. As a result, the Company's results could be significantly adversely affected by factors such as changes in foreign currency exchange rates or economic conditions in the foreign markets in which the Company distributes its products. The Company is primarily exposed to changes in exchange rates on the Japanese yen, British pound sterling, French franc and German mark. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar, and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect the Company's consolidated sales and gross margins as expressed in U.S. dollars. To mitigate the short-term effect of changes in currency exchange rates on the Company's non-US dollar-based sales, product procurement, and operating expenses, the Company regularly hedges its net non-U.S. dollar-based exposures by entering into foreign exchange forward and option contracts to hedge transactions. Currently, hedge contracts do not extend beyond three months. Given the short-term nature of the Company's foreign exchange forward and options contracts, the Company's exposure to risk associated with currency market movement on these instruments is not material. GROSS MARGIN Total gross margin was 52.4% for the third quarter of fiscal 1999 and 51.8% for the first nine months of fiscal 1999, compared with 53.3% and 52.2%, respectively, for the corresponding periods of fiscal 1998. Products gross margin was 53.7% in the third quarter of fiscal 1999 and 53.6% for the first nine months of fiscal 1999, compared with 54.8% and 54.1 %, respectively, for the corresponding periods of fiscal 1998. The decreases in the products gross margin for the third quarter and first nine months of fiscal 1999 reflect the effects of increased volumes of lower margin low-end desktop products and certain workgroup servers. These decreases in products gross margin are partially offset by an increased volume of higher margin richly configured enterprise servers and a reduction in manufacturing costs. There could be a further downward impact upon products gross margins as the result of continued shifts in customer purchasing patterns towards low-end desktop products and workgroup servers. Services gross margin was 44.7% for the third quarter of fiscal 1999 and 40.5% for the first nine months of fiscal 1999, compared with 42.7% and 38.9%, respectively, for the corresponding periods of fiscal 1998. The increases in services gross margin for the third quarter and first nine months of fiscal 1999 reflect increased market penetration in Enterprise datacenter accounts, an overall shift in service contract product mix toward premium priced contract offerings resulting from a larger installed base of high-end server products, increased enrollment in training courses, increased utilization of customer training facilities, continued growth in professional services, and increased economies of scale in certain geographic markets. The quarter over quarter increase in services gross margin was greater than the year over year increase, partially due to further realization of benefits related to infrastructure investments by the Company in its services business in fiscal 1998 and early fiscal 1999. There can be no assurance that services gross margins will continue to grow at a rate consistent with rates previously realized. The Company continuously evaluates the competitiveness of its product offerings. These evaluations could result in repricing actions in the near term. Sun's future operating results would be adversely affected if such 13 14 repricing actions were to occur and the Company were unable to mitigate the resulting margin pressure by maintaining a favorable mix of systems, software, service, and other products and by achieving component cost reductions, operating efficiencies and increasing volumes. RESEARCH AND DEVELOPMENT Research and development (R&D) expenses increased to $323.1 million in the third quarter of fiscal 1999, compared with $252.8 million for the third quarter of fiscal 1998. R&D expenses were $909.9 million for the first nine months of fiscal 1999, compared with $734.6 million for the corresponding period of fiscal 1998. As a percentage of total net revenues, R&D expenses were 11.0% and 11.1% for the third quarter and first nine months of fiscal 1999, respectively, compared with 10.7 % and 10.6% for the third quarter and first nine months of fiscal 1998, respectively. Both the dollar and percentage increase in R&D expenses in the third quarter and first nine months of fiscal 1999 over the corresponding periods in fiscal 1998 primarily reflects increased expenditures focused on the development of a broad line of scaleable hardware products, including servers, workstations and storage technologies, software products which utilize the Java (TM) platform, Solaris (TM) operating environment software and SPARC (TM) microprocessors. The remaining increase in R&D expenses is due to further development of products acquired through acquisitions and increased compensation and compensation related costs due primarily to higher levels of R&D staffing. The increase in R&D expenses reflects the Company's belief that to maintain its competitive position in a market characterized by rapid rates of technological advancement, the Company must continue to invest significant resources in new systems, software products and microprocessor development, as well as enhancements to existing products. The Company continues to expect the level of R&D expenses to remain at approximately 11% of revenue for fiscal 1999. The foregoing is a forward-looking statement that is subject to risks and uncertainties and actual results could differ materially from those set forth in such statement as a result of a number of factors. In particular, the Company's costs of product development and related compensation expenses could increase. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses increased to $803.9 million in the third quarter of fiscal 1999, compared with $672.6 million for the third quarter of fiscal 1998. SG&A expenses were $2,263 million for the first nine months of fiscal 1999, compared with $1,984.5 million for the corresponding period of fiscal 1998. As a percentage of total net revenues, SG&A expenses decreased to 27.4% and 27.6% for the third quarter and first nine months of fiscal 1999, respectively, from 28.5% and 28.7%, for the third quarter and first nine months of fiscal 1998, respectively. Overall SG&A spending increased by approximately $131.2 million or 19.5% in the third quarter of fiscal 1999 in comparison with the same period of fiscal 1998. For the nine month period ended March 28, 1999, overall SG&A spending increased by approximately $278.5 million or 14% in comparison to the corresponding period of fiscal 1998. The dollar increases in fiscal 1999 are primarily attributable to increased compensation and compensation related expenses resulting from higher levels of headcount, principally in the sales organization, annual salary adjustments and to a lesser extent marketing costs related to promotional programs and increased goodwill amortization expense resulting from several acquisitions. The dollar increase for the nine months ended March 28, 1999 also reflects investments aimed at improving Sun's own business processes. The Company expects to continue to hire personnel, although at a lower rate than in fiscal 1998, to further expand its demand creation programs and support organizations. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT The following paragraphs contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements regarding the Company's expectations, including percentage of completion, expected product release dates, dates for which the Company expects to begin generating benefits from projects, expected product capabilities and product life cycles, costs and efforts to 14 15 complete projects, growth rates, projected revenue and expense information used by the Company to calculate discounted cash flows and discount rates. These forward-looking statements involve risks and uncertainties, and the cautionary statements including those set forth below and in "Future Operating Results" identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statement. Such factors include but are not limited to, delays in the development of in-process technologies or the release of products into the market, the complexity of the technology, the Company's ability to successfully manage product introductions, lack of customer acceptance, competition and changes in technological trends, and market or general economic conditions. In addition, there can be no assurance that any of the new products discussed below will be completed, that such products will meet either technological or commercial success or that the Company will receive any economic benefit from such products as a result of delays in the development of the technology, the complexity of the technology, changes in customer needs, or for other reasons, including those described above. Purchased in-process research and development ("IPRD") of $28.7 million and $120.7 million in the third quarter and first nine months of fiscal 1999, respectively, represent the write-off of purchased IPRD associated with the Company's acquisitions of Maxstrat Corporation ("Maxstrat") in the third quarter of fiscal 1999, i-Planet, Inc. ("i-Planet") and Beduin Communications, Inc. ("Beduin") in the second quarter of fiscal 1999, and NetDynamics in the first quarter of fiscal 1999 (collectively the "Acquired Companies"). A description of the acquired IPRD, including the assumptions made by the Company in its valuation analysis, as well as the status of the efforts to date related to the acquired IPRD for each of the Acquired Companies, has been set forth below. Additionally, Sun has provided updated information concerning the status of IPRD technology acquired prior to fiscal 1999. Also see the Acquisitions footnote to the condensed consolidated financial statements. Purchased IPRD of $162.3 million in the first nine months of fiscal 1998 represents the write-off of purchased IPRD associated with the Company's acquisitions of Chorus Systems S.A. ("Chorus"), and the storage products business of Encore Computer Corporation ("Encore") in the second quarter of fiscal 1998 and Diba, Inc. ("Diba") and Integrity Arts, Inc. ("Integrity Arts") in the first quarter of fiscal 1998. In response to recent actions and comments from the Securities and Exchange Commission regarding its views on the application of valuation methodologies to purchased IPRD, the Company has expanded its disclosures related to acquisitions involving IPRD charges for each of the Acquired Companies. The Company believes it is in compliance with all of the rules and related guidance as they currently exist. However, there can be no assurance that the Commission will not seek to reduce the amount of purchased IPRD previously expensed by the Company. This would result in the restatement of previously filed financial statements of the Company and could have a material adverse impact on financial results for periods subsequent to acquisitions. Overall Valuation of IPRD The Company calculated amounts allocated to IPRD using established valuation techniques in the high technology industry and expensed such amounts in the quarter that each such acquisition was consummated because technological feasibility had not been achieved and no alternative future uses had been established. The valuation technique utilized gave consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by Sun and its competitors, individual product sales cycles, and the estimated life of each product's underlying technology. The Company assigned values to developed technologies related to each acquisition based upon future discounted cash flows related to each of the existing product's projected income stream. The discount rates used in the present value calculations were generally derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that were known 15 16 at the date of each acquisition. The Company does not expect to achieve a material amount of expense reductions or synergies, therefore the valuation assumptions do not include significant anticipated cost savings. Status of IPRD technology acquired prior to fiscal 1999 With respect to the Company's acquisitions completed in the three years ended June 30, 1998, with the exception of Encore and IMP which are discussed separately below, management believes that the projections the Company used in performing its valuations with respect to each acquisitions are still valid, in all material respects, however, there can be no assurance that the projected results will be achieved. Management expects to continue the development of each project and believes that there is a reasonable chance of successfully completing such development efforts. However, there is risk associated with the completion of the in-process projects and there can be no assurance that any project will meet with either technological or commercial success. Failure to successfully develop and commercialize these in-process projects would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. As of March 28, 1999 and for the three and nine months then ended, the impact upon the Company's consolidated results of operations or financial position with respect to the success or lack thereof related to any acquisition, individually or in aggregate, is not considered material, except as discussed below. The Company acquired Encore, a company which was conducting development and engineering activities associated with its Intershare and DASD-NET products (the "Encore Products") on November 24, 1997. Sun anticipated that completion of the Encore Products would help the Company establish a viable position in the computer mainframe/open systems storage market. In addition, Encore's current products and technology would help facilitate efforts to develop a high end "intelligent" storage product, which can also be modified to address the low-end storage market. As of the date of the acquisition, the release of the Encore products was expected to commence in fiscal 1999, at which time the Company expected to generate economic benefits from the value of the development associated with the IPRD. At the acquisition date, Encore needed to perform substantial development efforts before reaching technological feasibility. These efforts include converting the box-system architecture to a storage-area-network, developing an alternative to the interconnect technology used by Encore which will provide the price and performance required to compete within the market place, and resolving several design issues during the porting phase of development. As of March 28, 1999, the Company had made progress on the development efforts related to the Encore Products that were underway as of the acquisition date and approximately $19 million of the estimated total cost to complete of $30 million had been incurred. Although the research and development effort is behind schedule, the total expected cost to complete the IPRD technology acquired from Encore has not increased nor is it expected to exceed the original anticipated cost to complete the development efforts. As of March 28, 1999, the Company has delayed its expected release of the Encore Products from the third quarter of fiscal 1999 until the second half of fiscal 2000. The Company has experienced this delay in the realization of benefits related to the acquired technology as the result of increased complexities associated with the completion of the project. The impact of the delay in completion of the Encore Products has resulted in a net shortfall from the Company's original projections of approximately $40 million on Sun's consolidated results of operations for the three and nine month periods ended March 28, 1999. This amount reflects a shortfall in Sun's original plan assumptions with regard to the technologies acquired from Encore only and does not reflect any offsetting benefits the Company may have achieved from its overall business plan, including those resulting from a reallocation of resources among alternative development projects. Although the realization of benefits related to the Encore Products has been delayed, the Company is actively developing the acquired technology and expects over the long term to realize benefits associated with the Encore Products which are consistent with the initial acquisition strategy. 16 17 Regarding the acquisition of IMP, management's original projections included a planned introduction date of late calendar 1997 for IMP's fault tolerant computers based on Sun's UltraSPARC (TM) microprocessors. As of March 28, 1999, the introduction date was delayed as a result of increased complexities surrounding the development efforts which had not been identified as of the acquisition date and is expected during the fourth quarter of fiscal 1999. The delay with respect to IMP's technology does not reflect any offsetting benefits the Company may have achieved from modifications to its overall business plan, including those resulting from a reallocation of resources among alternative development projects. The total expected cost to complete the IPRD technology acquired from IMP has increased an additional $6 million to approximately $30 million as of March 28, 1999, and approximately $27 million had been incurred. The impact of the delayed release of the product based upon IMP's IPRD technology is not considered material to the consolidated results of operations or financial position of Sun for the quarter or nine months ended March 28, 1999. Fiscal 1999 Acquisitions The Company completed four acquisitions during the nine months ended March 28, 1999. Included below are further details regarding the nature of technology acquired, the valuation assumptions utilized, and the status of the IPRD related such acquisitions. NetDynamics, Inc. IPRD Overview- NetDynamics At the acquisition date (August 28, 1998), NetDynamics was conducting development, engineering, and testing activities associated with the completion of a new enterprise application platform product scheduled to be released in mid calendar 1999. It is anticipated that this new product offering ("NetDynamics New Product Offering") will employ a new server-side component model, based on the Enterprise JavaBeans (TM) ("EJB") architecture, which will allow business logic to reside in the middle tier of the enterprise computing model independent of the client presentation layer and independent of legacy and database systems. This architecture is significantly different than the business logic architecture in NetDynamics' existing product offering which is tightly integrated with the presentation interface. The EJB architecture will allow for the development of more robust and scaleable applications with improved reusability, better connectivity to a wide variety of data sources, and a more-industry standard interface through the use of Java enterprise application programming interfaces. Other new features include significant security enhancements and performance improvements and the addition of new platform adaptor components for legacy systems integration. At the acquisition date, NetDynamics was approximately 60% complete with the development of the NetDynamics New Product Offering and substantial progress had been made in the areas of specifications, design, and implementation. Remaining efforts necessary to complete the NetDynamics New Product Offering related primarily to coding, testing, and addressing additional implementation issues. Valuation Analysis- NetDynamics The value of the IPRD technology was computed using a discounted cash flow analysis on the anticipated income stream of the related product sales. The discounted cash flow analysis was based upon management's forecast of future revenues, cost of revenues and operating expenses related to the product and technology acquired from NetDynamics which are intended to be utilized in the Company's future enterprise application platform products. Total projected revenue for NetDynamics increased at a compound growth rate of approximately 30% from fiscal 1999 through 2008. Revenues are expected to peak in fiscal 2000 and decline 17 18 thereafter, as new product technologies are expected to be introduced by the Company. These projections are based on management's estimates of market size and growth, expected trends in technology, and the expected timing of new product introductions. Operating expenses used in the valuation analysis include: (i) cost of goods sold, (ii) SG&A expenses, and (iii) R&D expenses. Selected operating expense assumptions were based on an evaluation of NetDynamics' overall business model, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics. Cost of revenues (expressed as a percentage of revenue) for the IPRD averages 18% over the projection period. SG&A (expressed as a percentage of revenue) for the IPRD, averages 34% over the projection period. Maintenance R&D related to the IPRD was estimated to be approximately 1% of revenue over the projection period. The discount rate selected for the IPRD was 20%. In the selection of the appropriate discount rate, consideration was given to Sun's weighted average cost of capital ("WACC"), as well as other factors, including the useful life of the technology, profitability levels of the technology, the uncertainty of technology advances that are known at this time, and the stage of completion of the technology. The discount rate utilized for the IPRD was determined to be greater than Sun's WACC due to the fact that the technology had not yet reached technological feasibility as of the date of the valuation. The value of the IPRD reflects the relative value and contribution of the acquired research and development. The Company gave consideration to the R&D's stage of completion, the complexity of the work completed to date, the difficulty completing the remaining development, costs already incurred, and the projected cost to complete the project in determining the value assigned to IPRD. Comparison to Actual Results - NetDynamics As of March 28, 1999, the NetDynamics New Product Offering had been completed for a total cost of approximately $4.7 million, compared to the planned total cost of $5.7 million. The NetDynamics New Product Offering was available for release in late March of 1999. Sun expects to begin to realize the benefits of the NetDynamics acquired technology at the end of the fourth quarter of fiscal 1999, based upon general customer purchasing patterns in the software industry. Through this date, no significant adjustments have been made in the economic assumptions or expectations which underlie the Company's acquisition decision and related purchase accounting. Given the uncertainties of the commercialization process, no assurance can be given that deviations from these estimates will not occur. Management believes there is a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, as there is risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, complexity of technology and growing competitive pressures, there can be no assurance that any project will meet with commercial success. Failure to successfully commercialize these in-process projects would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. MAXSTRAT Corporation IPRD Overview - Maxstrat At the acquisition date (January 22, 1999), Maxstrat Corporation ("Maxstrat") was conducting development, engineering, and testing activities associated with the completion of a new modular mass data storage system product family ("Noble Product Offering") scheduled to be released in mid-calendar 1999. The Noble Product Offering utilizes Fibre Channel, a fiber optic technology 18 19 designed for mass storage devices requiring very high bandwidth. Using optical fiber to connect devices, each Fibre Channel Arbitrated Loop ("FC-AL") supports full-duplex data transfer rates of 100 mbps. Multiple FC-AL's increase the redundancy and availability of the system. If an FC-AL fails, another automatically takes over to keep the traffic flow consistent and predictable. At the acquisition date, Maxstrat had made substantial progress in the areas of specifications, design, and implementation. Remaining efforts necessary to complete the Noble Product Offering relate primarily to coding, testing, and addressing additional implementation issues. The Company anticipates that the Noble Product Offering will be complete by the end of the Company's first quarter of fiscal 2000, after which the Company expects to begin generating economic benefits from the value of the completed development associated with the IPRD. Expenditures to complete the Noble Product Offering are expected to total approximately $8 million in fiscal 1999 and fiscal 2000. Valuation Analysis - Maxstrat The value of the IPRD technology was computed using a discounted cash flow analysis on the anticipated income stream of the related product sales. The discounted cash flow analysis was based upon management's forecast of future revenues, cost of revenues and operating expenses related to the product and technology acquired from Maxstrat which are intended to be utilized in the Company's future enterprise application platform products. Total projected revenue for Maxstrat increased at a compound growth rate of approximately 30% from fiscal 1999 through 2008. Revenues are expected to peak in fiscal 2003 and decline thereafter, as new product technologies are expected to be introduced by the Company. These projections are based on management's estimates of market size and growth, expected trends in technology, and the expected timing of new product introductions. Operating expenses used in the valuation analysis include: (i) cost of goods sold, (ii) SG&A expenses, and (iii) R&D expenses. Selected operating expense assumptions were based on an evaluation of Maxstrat's overall business model, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics. Cost of revenues (expressed as a percentage of revenue) for the IPRD averages 50% over the projection period. SG&A (expressed as a percentage of revenue) for the IPRD, averages 20% over the projection period. Maintenance R&D related to the IPRD was estimated to be approximately 2% of revenue over the projection period. The discount rate selected for the IPRD was 25%. In the selection of the appropriate discount rate, consideration was given to Sun's WACC, as well as other factors, including the useful life of the technology, profitability levels of the technology, the uncertainty of technology advances that are known at this time, and the stage of completion of the technology. The discount rate utilized for the IPRD was determined to be greater than Sun's WACC due to the fact that the technology had not yet reached technological feasibility as of the date of the valuation. The value of the IPRD reflects the relative value and contribution of the acquired research and development. The Company gave consideration to the R&D's stage of completion, the complexity of the work completed to date, the difficulty completing the remaining development, costs already incurred, and the projected cost to complete the project in determining the value assigned to IPRD. Comparison to Actual Results - Maxstrat At March 28, 1999, significant progress had been made on the development related to the Noble Product Offering that was underway as of the acquisition date. In general, the Company believes that research and development efforts associated with the Noble Product Offering are consistent with management's plans at the 19 20 time the Maxstrat acquisition occurred. The Company is continuing to invest in the development of new technologies that were underway at the consummation of the Maxstrat acquisition. Approximately $1.4 million of the planned total cost to complete of $8.0 million had been incurred as of March 28, 1999. Through this date, no significant adjustments have been made in the economic assumptions or expectations which underlie the Company's acquisition decision and related purchase accounting. The Company is continuing its development efforts related to the IPRD technology acquired. These development efforts are advancing at a rate consistent with management's expectations. Given the uncertainties of the development process, no assurance can be given that deviations from these estimates will not occur. Management expects to continue the development of each project and believes that there is a reasonable chance of successfully completing such development. However, as there is risk associated with the completion of the in-process projects due to the remaining efforts to achieve technological feasibility, rapidly changing customer needs, complexity of technology and growing competitive pressures, there can be no assurance that any project will meet with either technological or commercial success. Failure to successfully develop and commercialize these in-process projects would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. IPRD Overview - i-Planet At the acquisition date (September 28, 1998), i-Planet was conducting development, engineering and testing activities associated with the completion of a new Java (TM) technology-based remote Internet access product scheduled to be released in early calendar year 1999. It is anticipated that this new product offering ("i-Planet (TM) New Product Offering") will be designed to allow cost-effective, secure, and ubiquitous internet access for applications such as remote access to corporate intranets, supply chain management and commerce applications. At the acquisition date, i-Planet was performing development efforts in the areas of specifications, design, and implementation. Remaining efforts necessary to complete the i-Planet New Product Offering relate primarily to coding, testing, and addressing additional implementation issues. The Company anticipates that the i-Planet New Product Offering will be completed and released in May 1999, after which the Company expects to begin generating economic benefits from the value of the completed development associated with the IPRD. Approximately $1.8 million of the planned total costs to complete the i-Planet New Product Offering of $6 million had been incurred at March 28, 1999. Through this date, no significant adjustments have been made in the economic assumptions or expectations which underlie the Company's acquisition decision and related purchase accounting. IPRD Overview - Beduin At the acquisition date (October 15, 1998), Beduin was conducting development, engineering, and testing activities associated with the completion of a suite of products ("Beduin New Product Offerings") which included the Lifestyle Manager Personal Information Manager ("PIM") (a next generation PIM targeted at smart devices incorporating Java technology), and "email client" (a next generation email client specialized to take advantage of the benefits of these smart devices). The Lifestyle PIM and the email client are scheduled to be released in the second quarter of calendar year 1999. The Company anticipates that these Beduin New Product Offerings will provide the core functionality for smart devices incorporating Java technology and enable more efficient communication, regardless of time, location or type of device. These Beduin New Product Offerings are designed to integrate and synchronize communications and data processing systems, enabling communications across time and space. 20 21 At the acquisition date, Beduin was performing development efforts and substantial progress had been made in the areas of specifications, design, and implementation. Remaining efforts necessary to complete the Beduin New Product Offerings relate primarily to coding, testing, and addressing additional implementation issues. The Company anticipates that the Beduin New Product Offerings will be complete during the fourth quarter of the Company's fiscal year ending June 30, 1999, after which the Company expects to begin generating economic benefits from the value of the completed development associated with the IPRD. The Company continues to expect that the total costs to complete the Beduin New Product Offerings will approximate $1 million. Valuations of IPRD - i-Planet and Beduin Forecasts of future results that management believes are likely to occur were the basis for assigning value to IPRD. For the i-Planet and Beduin acquisitions, the values assigned to IPRD were determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from each project, excluding the cash flows related to the portion of each project that was incomplete at the acquisition date, and discounting the resulting net cash flows to their present value. Each of these forecasts were based upon future discounted cash flows, taking into account the state of development of each in-process project, the cost to complete that project, the expected income stream, the life cycle of the product ultimately developed, and the risks associated with successful development and commercialization of each project. Projected future net cash flows attributable to the in-process technology, assuming successful development of such technologies, were discounted to their present value using a discount rate which was derived based on the Company's estimated WACC plus a risk premium to account for the inherent uncertainty surrounding the successful completion of each project and the associated estimated cash flows. The discount rates used in valuing the net cash flows from each purchased in-process technology were 25% for the i-Planet acquisition and 40% for the Beduin acquisition. These discount rates are higher than the Company's WACC due to the inherent uncertainties in the estimates described above, including the uncertainty surrounding the successful development of the purchased in-process technologies, the useful life of such technologies, the profitability levels of such technology and the uncertainty of technological advances that are unknown at this time. The estimates utilized in the valuation of the IPRD charges are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Given the uncertainties of the development process, no assurance can be given that deviations from these estimates will not occur. Management expects to continue the development of each project and believes that there is a reasonable chance of successfully completing such development. However, as there is risk associated with the completion of the in-process projects due to the remaining efforts to achieve technological feasibility, rapidly changing customer needs, complexity of technology and growing competitive pressures, there can be no assurance that any project will meet with either technological or commercial success. Failure to successfully develop and commercialize these in-process projects would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. INTEREST INCOME, NET Net interest income was $22.4 million for the third quarter and $58.0 million for the first nine months of fiscal 1999, compared with $12.4 million and $33.1 million, respectively for the corresponding periods in fiscal 1998. The increases in 1999 are primarily the result of higher interest earnings due to a larger average portfolio of cash and short-term investments. 21 22 INCOME TAXES The Company's effective income tax rate was 33% for the third quarter and first nine months of fiscal 1999, before tax charges of $10.9 million resulting from a write-off of IPRD associated with the acquisition of Maxstrat in the third quarter of fiscal 1999, $3.2 million resulting from a write-off of IPRD associated with the acquisition of i-Planet in the second quarter of fiscal 1999 and $30.4 million resulting from a write-off of IPRD associated with the acquisition of NetDynamics in the first quarter of fiscal 1999. The effective tax rate including such charges for the third quarter and nine months ended March 28, 1999 was 35.7% and 37.4%, respectively. The Company's effective income tax rate for the third quarter and nine months ended March 29, 1998 was 33% before a tax charge of $19.8 million resulting from a write-off of IPRD associated with the acquisitions of Diba Inc. and Integrity Arts, Inc. in the first quarter of fiscal 1998. The Company currently expects its effective tax rate to remain at 33% for the balance of fiscal 1999, exclusive of any acquisition-related charges. FUTURE OPERATING RESULTS COMPETITION The markets for Sun's hardware and software products and services are intensely competitive and subject to continuous, rapid technological change, short product life cycles and frequent product performance improvements and price reductions. Due to the breadth of the Company's product lines and the scalability of its products and network computing model, Sun competes principally with Hewlett-Packard Company, International Business Machines Corporation, Compaq Computer Corporation, Silicon Graphics, Inc. and EMC Corporation, in many segments of the network computing market across a broad spectrum of customers. The Company expects the markets for its products, technologies, and services, as well as its competitors within such markets, will continue to change as the rightsizing trend shifts customer buying patterns to network-based systems which often employ solutions from multiple vendors. Competition in these markets will also continue to intensify as Sun and many of its competitors aggressively position themselves to benefit from this shifting of customer buying patterns and demand. The Company is also facing competition from certain systems manufacturers, including Dell Computer Corporation and certain of its competitors listed above, whose products are based on microprocessors from Intel Corporation coupled with Windows NT operating system software from Microsoft Corporation. These products demonstrate the viability of certain networked personal computer solutions and have increased the competitive pressure, particularly in the Company's workstation and lower-end server product lines. Finally, the timing of introductions of new products and services by Sun's competitors may negatively impact the future operating results of the Company, particularly when such introductions occur in periods leading up to the Company's introduction of its own new enhanced products. The Company expects this pressure to continue and intensify throughout the balance of fiscal 1999. While many other technical, service and support capabilities affect a customer's buying decision, the Company's future operating results will depend, in part, on its ability to compete with these technologies. PRODUCT DEVELOPMENT The Company's future operating results will depend to a considerable extent on its ability to rapidly and continuously develop, introduce, and deliver in quantity new systems, software, and service products, as well as new microprocessor technologies, that offer its customers enhanced performance at competitive prices. The development of new high-performance computer products, such as the Company's recent development of the UltraSPARC (TM) microprocessor is a complex and uncertain process requiring high levels of innovation from the Company's designers and suppliers, as well as accurate anticipation of customer requirements and technological trends. Once a hardware product is developed, the Company must rapidly bring such products to volume manufacturing, a process that requires accurate forecasting of volumes, mix of products and configurations, among other things, in order to achieve acceptable yields and costs. Future operating results 22 23 will depend to a considerable extent on the Company's ability to closely manage product introductions in order to minimize unfavorable patterns of customer orders, to reduce levels of older inventory and to ensure that adequate supplies of new products can be delivered to meet customer demand. The ability of the Company to match supply and demand is further complicated by the Company's need to adjust prices to reflect changing competitive market conditions as well as the variability and timing of customer orders with respect to the Company's older products. As a result, the Company's operating results could be materially adversely affected if the Company is not able to correctly anticipate the level of demand for the mix of products. Because the Company is continuously engaged in this product development, introduction, and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. MANUFACTURING AND SUPPLY Sun uses many standard parts and components in its products and believes there are a number of competent vendors for most parts and components. However, a number of important components are developed by and purchased from single sources due to price, quality, technology or other considerations. In some cases, those components are available only from single sources. In particular, Sun is dependent on Sony Corporation for various monitors and on Texas Instruments Incorporated for different implementations of SPARC (TM) microprocessors. Certain custom silicon parts are designed by and produced on a contractual basis for Sun. The process of substituting a new producer of such parts could materially adversely affect Sun's operating results. Some suppliers of certain components, including color monitors and custom silicon parts, require long lead times such that it can be difficult for the Company to plan inventory levels of components to consistently meet demand for Sun's products. Certain other components, especially memory integrated circuits such as DRAMs, SRAMs, and VRAMs, have from time to time been subject to industry wide shortages. Future shortages of components could negatively affect the Company's ability to match supply and demand, and therefore could materially adversely impact the Company's future operating results. The Company is increasingly dependent on the ability of its suppliers to design, manufacture, and deliver advanced components required for the timely introduction of new products. The failure of any of these suppliers to deliver components on time or in sufficient quantities, or the failure of any of the Company's own designers to develop advanced innovative products on a timely basis, could result in a material adverse impact on the Company's operating results. The inability to secure enough components to build products, including new products, in the quantities and configurations required, or to produce, test and deliver sufficient products to meet demand in a timely manner, would materially adversely affect the Company's net revenues and operating results. To secure components for development, production, and introduction of new products, the Company frequently makes advanced payments to certain suppliers and often enters into noncancelable purchase commitments with vendors early in the design process. Due to the variability of material requirement specifications during the design process, the Company must closely manage material purchase commitments and respective delivery schedules. In the event of a delay or flaw in the design process, the Company's operating results could be materially adversely affected due to the Company's obligations to fulfill such noncancelable purchase commitments. SALES, DISTRIBUTION AND MARKETING Generally, the computer systems sold by Sun, such as products based on UltraSPARC processors, are the result of hardware and software development, such that delays in the software development can delay the ability of the Company to ship new hardware products. In addition, adoption of a new release of an operating system may require effort on the part of the customer and porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays by customers in adopting a new release of an operating system can limit the acceptability of hardware products tied to that release. Such delays could materially adversely affect the future operating results of the Company. 23 24 A significant portion of the Company's revenues is derived from international sales and is therefore subject to inherent risks related thereto, including the general economic and political conditions in each country, currency exchange rate fluctuations, the effect of the tax structures of various jurisdictions, changes to and compliance with a variety of foreign laws and regulations, trade protection measures and import and export licensing requirements. There can be no assurance that the economic crisis and currency issues currently being experienced in certain parts of Asia will not have an adverse effect on the Company's revenue or revenue growth rates in the future. The impact of any of the foregoing factors could have a material adverse effect on the Company's future financial condition and operating results. Seasonality also affects the Company's operating results, particularly in the first and third quarter of each fiscal year. In addition, the Company's operating expenses are increasing as the Company continues to expand its operations, and future operating results will be adversely affected if revenues do not increase accordingly. Additionally, the Company plans to continue to evaluate and, when appropriate, make acquisitions of complementary technologies, products or businesses. As part of this process, the Company will continue to evaluate the changing value of its assets, and when necessary, make adjustments thereto. Acquisitions may involve amortization of acquired intangible assets in periods following such acquisitions. In addition, acquisition transactions are accompanied by a number of risks, including, among other things, those associated with integrating operations, personnel, and technologies acquired, and the potential for unknown liabilities of the acquired business. One customer accounted for more than 10% of revenues in fiscal 1998. Any termination by a significant customer of its relationship with the Company or material reduction in the amount of business such a customer does with the Company could materially adversely effect the Company's business, financial condition or operating results. BUSINESS PRACTICES, PROCESSES AND INFORMATION SYSTEMS In order to remain competitive in a rapidly changing industry, the Company is continually improving and changing its business practices, processes, and information systems. In this regard, during fiscal 1999 the Company implemented a number of new business practices and a series of related information systems across the enterprise that affect numerous operational and financial systems and processes. Although the systems were operational during the third quarter of fiscal 1999, these systems will be further tested in the fourth quarter to the extent that the Company experiences higher volumes of orders and shipments as it has typically experienced during these periods. In addition, the Company expects to continue its efforts to optimize usage of systems capabilities, enhance user skills surrounding system features, and reduce runtime errors. However, there can be no assurance that the system will be able to support the increased volume of activities expected at the Company's fiscal year end. The time period in which the new business practices and related information systems will be fully tested and leveraged are forward-looking statements subject to risks and uncertainties, and actual results may differ materially from those set forth above as a result of a number of risk factors. In particular, the ability to fully leverage systems capabilities are subject to a number of risks, including the complexity of the new systems themselves and the need for substantial and comprehensive employee training in connection with the adoption of such new business practices and information systems. While the Company has tested these new systems and processes in advance of their implementation and continues to monitor the systems and processes ability to support increased volumes of transactions, there are inherent limitations in the Company's ability to simulate a full-scale operating environment in advance of actual transaction volumes. Any increase in the volume of orders and shipments of products during the last quarter of the fiscal year may have a material adverse effect on the Company's business and operating results, if the systems and processes are unable to support the increased volume of activity. In addition, to the extent that the Company encounters problems with these new systems 24 25 and practices that prevent or limit their full utilization, there could be a material adverse impact on the Company's operating results. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As the Year 2000 approaches, these code fields will need to be able to distinguish years beginning with "19" from those beginning with "20." As a result, in less than a year, computer systems and/or software products used by many companies may need to be upgraded to comply with such Year 2000 requirements. The Company is currently expending resources to review its products and services, as well as its internal use software in order to identify and modify those products, services and systems that are not Year 2000 compliant. The Company believes that the vast majority of these costs are not incremental to the Company but represent a reallocation of existing resources and include regularly scheduled system upgrades and maintenance. In addition, the Company is working to make custom coding enhancements to its internal systems (described in the above paragraphs) so that such systems will be Year 2000 compliant by the end of fiscal year 1999. Although the Company believes that the costs associated with the aforementioned Year 2000 efforts are not material, the Company currently estimates that such costs will be approximately $37 million, of which approximately $17 million has been spent to date. The aforementioned costs are estimates due in large part to the fact that the Company does not separately track the internal labor costs associated with Year 2000 compliance, unless such costs are incurred by individuals devoted primarily to Year 2000 compliance efforts. These cost estimates do not include any potential costs related to any customer or other claim. In addition, these cost estimates are based on the current assessment of the ongoing activities described above, and are subject to change as the Company continuously monitors these activities. The Company believes any modifications deemed necessary will be made on a timely basis and does not believe that the cost of such modifications will have a material adverse effect on the Company's operating results. The Company currently expects the aforementioned evaluation of its products, services, and systems and any remediation necessary will be completed by the end of fiscal year 1999. As of March 28, 1999, the Company has not identified any items or areas which would require significant remediation efforts. The Company's expectations as to the extent and timeliness of any modifications required in order to achieve Year 2000 compliance and the costs related thereto are forward-looking statements subject to risks and uncertainties. Actual results may vary materially as a result of a number of factors, including, among others, those described in this section. There can be no assurance however, that the Company will be able to successfully modify on a timely basis such products, services and systems to comply with Year 2000 requirements, which failure could have a material adverse effect on the Company's operating results. The Company has established a program to assess whether certain of its products are Year 2000 compliant. Under the program, the Company is in the process of performing tests on its products listed on the Company's price lists. To monitor this program and to help customers evaluate their Year 2000 issues the Company has created a web site at http://sun.com/y2000/cpl.html which identifies the following categories: products that were released Year 2000 compliant; products that require modifications to be Year 2000 compliant; products under review; products that are not Year 2000 compliant and need to be replaced with a Year 2000 compliant product; source code products that could be modified and implemented without Sun's review; and products that do not process or manipulate date data or have no date-related technology. This list is periodically updated as analysis of additional products is completed. Based on the Company's assessment to date, most newly introduced products and services of the Company are Year 2000 compliant, however, there can be no assurance that the Company's current products do not contain undetected errors or defects associated with Year 2000 functions that may result in material costs to the Company. In addition, some of the Company's customers are running products that are not Year 2000 25 26 compliant and will require an upgrade or other remediation to become Year 2000 compliant. The Company provides limited warranties as to Year 2000 compliance on certain of its products and services. Except as specifically provided for in the limited warranties, the Company does not believe it is legally responsible for costs incurred by customers to achieve Year 2000 compliance. The Company has been taking steps to identify affected customers, raise customer awareness related to noncompliance of the Company's older products and encourage such customers to migrate to current products or product versions. It is possible that the Company may experience increased expenses in addressing migration issues for such customers or customer dissatisfaction as a result of Year 2000 issues, which may have a material adverse effect on the Company's operating results. The Company also faces risks to the extent that suppliers of products, services and systems purchased by the Company and others with whom the Company transacts business on a worldwide basis do not have business systems or products that comply with Year 2000 requirements. To the extent that Sun is not able to test technology provided by third party hardware or software vendors, Sun is in the process of obtaining Year 2000 compliance certifications from each of its major vendors that their products and internal systems, as applicable, are Year 2000 compliant. In the event any such third parties cannot timely provide the Company with products, services or systems that meet the Year 2000 requirements, the Company's operating results could be materially adversely affected. Furthermore, a reasonably likely worst case scenario would be if one of the Company's major vendors experienced a material disruption in business, which caused the Company to experience a material disruption in business, such a disruption would have a material adverse effect on the Company's business, financial condition and operating results. Should either the Company's internal systems or the internal systems, products or services of one or more of the Company's major vendors fail to achieve Year 2000 compliance, the Company's business, financial position or results of operations could be materially adversely affected. The Company is currently developing contingency plans to deal with potential Year 2000 problems related to its internal systems and products and services provided by outside vendors and expects these plans to be complete by the end of fiscal year 1999. Although the Company believes that the cost of Year 2000 modifications for both internal use software and systems, as well as the Company's products are not material, there can be no assurance that various factors relating to the Year 2000 compliance issues will not have a material adverse effect on the Company's business, operating results or financial position. For example, a significant amount of litigation may arise out of Year 2000 compliance issues and there can be no assurance as to the extent the Company may be affected by any such litigation. Even though the Company does not believe that it is legally responsible for its customer's Year 2000 compliance obligations, it is unclear whether different governments or governmental agencies may decide to allocate liability relating to Year 2000 compliance to the Company without regard to specific warranties or warranty disclaimers. Such allocation of liability could have a materially adverse effect on the Company's financial condition and results of operations in any given quarter. Furthermore, it is unknown how customer spending patterns may be impacted by Year 2000 issues. As customers focus on preparing their businesses for the Year 2000, capital budgets may be spent on remediation efforts, potentially delaying the purchase and implementation of new systems, thereby creating less demand for the Company's products and services. These as well as other factors could have a material adverse effect on the Company's revenues or operating results. EURO COMPLIANCE Eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro and adopted the Euro as their common legal currency effective for the initial implementation date of January 1, 1999. The Euro trades on currency exchanges and is available for non-cash transactions, while the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During the transition period, cash-less payments can be made in the Euro and parties can elect to pay for goods and services and transact business 26 27 using either the Euro or the legacy currency. Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies. The Company has expended and continues to expend resources to review and modify its products to support the Euro's requirements, determine pricing strategies in the new economic environment, analyze the legal and contractual implications for contracts, evaluate system capabilities, and ensure banking vendors can support the Company's operations with respect to Euro transactions for the initial implementation as of January 1, 1999 and during the transition period through to January 1, 2002 and thereafter. The Company does not expect that the introduction and use of the Euro will materially affect the Company's foreign exchange and hedging activities, expects that modifications will be made to its business operations and systems, as necessary, on a timely basis and does not believe that the cost of such modifications will have a material adverse impact on the Company's operating results. The Company's expectations as to the extent and timeliness of modifications required to accommodate the conversion to Euro transactions is a forward-looking statement subject to risks and uncertainties. Actual results may vary materially, as a result of a number of factors, including among others, those described in this paragraph. There can be no assurance that the Company will be able to complete such modifications to comply with Euro requirements, which could have a material adverse effect on the Company's operating results. In addition, the Company faces risks to the extent that vendors upon whom the Company relies and their suppliers are unable to make appropriate modifications to support Euro transactions. The Company has not yet completed its evaluation of the impact of the Euro upon its functional currency designations. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition strengthened as of March 28, 1999 when compared with June 30, 1998. During the first nine months of fiscal 1999, cash flows from operating activities generated $1,485.1 million in cash and cash equivalents. Non-cash expenses affecting cash provided by operating activities in the first nine months of fiscal 1999 included depreciation and amortization expense of $450.1 million, tax benefits of options exercised of $165.6 million and charges for IPRD of $120.7 million in connection with the acquisitions of NetDynamics, Maxstrat, i-Planet and Beduin. Favorably impacting cash provided by operations were increases in accounts payable and other liabilities of $223 million and $655.1 million, respectively, which reflect the timing of payments for inventory and other items. Offsetting these items, accounts receivable increased $357.8 million which reflects an increase in revenue and days sales outstanding. Additionally, other current assets increased due to the timing of payments for insurance and other taxes. Other long-term assets increased primarily due to an increase in intangible assets in connection with the acquisitions of NetDynamics. and Maxstrat, as well as a license acquired in connection with the Sun/AOL transaction as described in the footnotes to the condensed consolidated financial statements. The Company's investing activities used $1,567.4 million of cash in the first nine months of fiscal 1999, an increase of $794.2 million from the prior year's comparable period. The increase resulted primary from increased acquisitions of short-term investments during the first nine months of fiscal 1999, as compared with the prior year's period. Also included in investing activities is capital spending for real estate development, as well as capital additions to support increased headcount, primarily in the Company's engineering, services and marketing organizations. The Company's financing activities used $32.6 million of cash in the first nine months of fiscal 1999, a decrease of $163.6 million from the prior year's comparable period. The decrease is primarily due to an 27 28 increase in stock issuances during the first nine months of fiscal 1999 and a reduction in short-term borrowings for the first nine months of fiscal 1998. At March 28, 1999, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $1,998.8 million and a revolving credit facility with banks aggregating $500 million, which was available subject to compliance with certain covenants. Additionally, on October 16, 1997, the Company filed a Registration Statement with the Securities and Exchange Commission relating to the registration for public offering of senior and subordinated debt securities and common stock with an aggregate initial public offering price of up to $1 billion. On October 24, 1997, the Registration Statement became effective, so that the Company may now choose to offer, from time to time, the securities pursuant to Rule 415 in one or more separate series, in amounts, at prices and on terms to be set forth in the prospectus contained in the Registration Statement and in one or more supplements to the prospectus. The Company believes that the liquidity provided by existing cash and short-term investment balances and the borrowing arrangements described above will be sufficient to meet the Company's capital requirements through fiscal 2000. However, the Company believes the level of financial resources is a significant competitive factor in its industry and may choose at any time to raise additional capital through debt or equity financing to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. (C) Sun, Sun Microsystems, the Sun Logo, Java, Java Card, Solaris, Enterprise JavaBeans, i-Planet and NetDynamics are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and other countries. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. in the United States and other countries. Products bearing SPARC trademarks are based upon an architecture developed by Sun Microsystems, Inc. 28 29 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On October 7, 1997, the Company filed suit against Microsoft Corporation in the United States District Court for the Northern District of California alleging breach of contract, trademark infringement, false advertising, unfair competition, interference with prospective economic advantage and inducing breach of contract. The Company filed an amended complaint on October 14, 1997. Microsoft Corporation filed its answer, affirmative defenses and counterclaims to the amended complaint. The counterclaims include breach of contract, breach of the covenant of good faith and fair dealing, violation of the California Business & Professions Code and declaratory judgment. The Company believes that the counterclaims are without merit and/or that the Company has affirmative defenses and intends vigorously to defend itself with respect thereto. On March 24, 1998 the United States District Court judge ruled in favor of the Company granting a preliminary injunction directing Microsoft Corporation to cease using the Company's Java Compatible Logo(TM) on Microsoft products that failed to pass the applicable test suites from Sun. In addition, on May 12, 1998, the Company filed a second amended complaint alleging copyright infringement by Microsoft and motions requesting further preliminary injunctive relief directed against the planned release by Microsoft of additional products that failed to pass the applicable test suites from Sun. The Court held hearings and arguments on such motions on September 8, 9, and 10, 1998. On November 17, 1998, the District Court issued an Order granting, in substantial part, Sun's request for preliminary injunctions. On December 15, 1998 Microsoft filed notice of its intent to appeal the District Court's Order and on December 18, 1998 Microsoft filed Motions with the District Court to extend the time for compliance with the Order and to clarify or modify the Order. On December 29, 1998 the District Court issued a further Order directing the parties to schedule a settlement conference with respect to certain issues before a designated Magistrate or mutually selected individual. On January 13, 1999, Microsoft filed an appeal to the District Court's Order issued on November 17, 1998. On January 22, 1999, Sun and Microsoft filed numerous motions for summary judgment with the District Court. The Company believes that the outcome of this matter will not have a material adverse impact on Sun's financial condition, results of operations or cash flows in any given fiscal year. ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of the Company's Common Stock by the Company's executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended March 28, 1999:
OFFICER/ DATE PRICE NUMBER OF DIRECTOR SHARES SOLD ==================================================================== William T. Agnello 1/27/99 $52.9978 28,000 Alan E. Baratz 1/27/99 $53.8438 136,000
29 30 1/27/99 $52.6875 40,000 Lawrence W. Hambly 1/29/99 $54.9375 20,000 2/23/99 $52.4375 20,000 2/23/99 $53.4375 20,000 Masood A. Jabbar 1/29/99 $55.1375 100,000 James Judson 1/27/99 $52.2188 19,200 Michael E. Lehman 1/27/99 $53.4375 112,000 2/16/99 $51.1425 40,000 2/16/99 $51.1425 20,000 Robert L. Long 1/27/99 $52.3282 40,000 Marc L. Loupe 2/23/99 $52.1250 2,300 John S. McFarlane 1/29/99 $54.3125 18,000 Stephen T. McGowan 1/27/99 $53.8750 12,000 Scott G. McNealy 2/8/99 $50.8125 19,800 Michael H. Morris 1/27/99 $53.7188 6,000 M. Kenneth Oshman 2/1/99 $55.3433 320,000 Alton D. Page 1/29/99 $54.3125 10,000 Gregory M. Papadopoulos 2/18/99 $47.3750 8,000 2/22/99 $50.0227 8,000 2/23/99 $52.5703 8,000 Marissa Peterson 2/25/99 $51.2692 42,400 Frank A. Pinto 2/3/99 $55.0000 98,000 2/3/99 $55.0313 2,000 Michael L. Popov 1/27/99 $53.7500 47,000 William J. Raduchel 2/11/99 $52.5000 47,348 2/23/99 $52.6275 47,352 2/23/99 $51.6896 47,348 George Reyes 1/27/99 $53.0000 20,000
30 31 Edward Saliba 2/1/99 $55.0000 43,200 Janpieter T. Scheerder 1/27/99 $52.5943 68,400 John C. Shoemaker 2/1/99 $54.9390 12,000 2/1/99 $54.9600 8,000 2/8/99 $51.9963 14,000 2/8/99 $51.9650 2,000 2/23/99 $52.3786 36,000 A. Michael Spence 1/27/99 $53.8438 30,000 Kevin Walsh 1/28/99 $54.0313 36,800 Edward J. Zander 1/27/99 $52.4219 40,000 2/8/99 $50.1193 24,000 2/8/99 $52.0625 24,000 2/23/99 $53.1052 20,800 2/23/99 $52.8750 20,000
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 3.3 Registrant's Certificate of Amendment of the Restated Certificate of Incorporation filed March 17, 1999. 3.4(1) Registrant's Amended Certificate of Designations filed March 17, 1999. 4.9(1) Registrant's Amendment to Second Amended and Restated Shares Rights Agreement dated April 14, 1999. 10.84 Registrant's Non-Qualified Deferred Compensation Plan, as amended December 16, 1998. 10.87 Registrant's Equity Compensation Acquisition Plan, as amended November 11, 1998. 27.0 Financial Data Schedule for the period ended March 28, 1999.
(1) Incorporated by reference to the Registrant's Registration Statement on Form 8-A/A Amendment filed on April 15, 1999. 31 32 b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended March 28, 1999. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk disclosures set forth in the 1998 Form 10-K have not changed significantly through the quarter ended March 28, 1999. 32 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman ------------------------ Michael E. Lehman Vice President, Corporate Resources and Chief Financial Officer /s/ George Reyes -------------------- George Reyes Vice President and Corporate Controller, Chief Accounting Officer Dated: May 5, 1999 33 34 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.3 Registrant's Certificate of Amendment of the Restated Certificate of Incorporation filed March 17, 1999. 3.4(1) Registrant's Amended Certificate of Designations filed March 17, 1999. 4.9(1) Registrant's Amendment to Second Amended and Restated Shares Rights Agreement dated April 14, 1999. 10.84 Registrant's Non-Qualified Deferred Compensation Plan, as amended December 16, 1998. 10.87 Registrant's Equity Compensation Acquisition Plan, as amended November 11, 1998. 27.0 Financial Data Schedule for the period ended March 28, 1999.
- ---------- (1) Incorporated by reference to the Registrant's Registration Statement on Form 8-A/A Amendment filed on April 15, 1999. EX-3.3 2 REGISTRANT'S CERTIFICATE OF AMENDMENT 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF SUN MICROSYSTEMS, INC. Michael E. Lehman and Michael H. Morris, certify that: 1. They are the Vice-President, Corporate Resources and Chief Financial Officer and Vice President, General Counsel and Secretary, respectively, of Sun Microsystems, Inc., a Delaware corporation (the "Corporation"). 2. That Section (a) of Article 4 of the Restated Certificate of Incorporation of the Corporation now reads: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is Nine Hundred Fifty Million (950,000,000), of which Nine Hundred Forty Million (940,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." is amended to read as follows: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is One Billion Eight Hundred Ten Million (1,810,000,000), of which One Billion Eight Hundred Million (1,800,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." 3. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the required vote of stockholders in accordance with Section 242 of the Delaware Corporations Code. The total number of outstanding shares of Common Stock of the Corporation is 385,583,263. No shares of Preferred Stock are outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. We further declare under penalty of perjury under the laws of the State of Delaware that the matters set forth in the foregoing Certificate of Amendment are true and correct of our own knowledge. 1 2 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and the Certificate of Amendment to be signed by Michael E. Lehman, Vice President, Corporate Resources and Chief Financial Officer and attested by Michael H. Morris, Vice President, General Counsel and Secretary this 17th day of March, 1999. SUN MICROSYSTEMS, INC. [Corporate Seal] /s/ MICHAEL E. LEHMAN ----------------------------------- Michael E. Lehman /s/ MICHAEL H. MORRIS ----------------------------------- ATTEST: Michael H. Morris 2 EX-10.84 3 NON-QUALIFIED DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.84 SUN MICROSYSTEMS, INC. U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN Amended as of December 16, 1998 1 2 TABLE OF CONTENTS
Page 1. Purpose ..................................................................4 2. Definitions...............................................................4 3. Eligibility ..............................................................6 4. Election to Participate in Plan...........................................6 5. Accounts..................................................................7 6. Deferral Increments and Growth............................................7 7. Earnings or Losses on Accounts............................................7 8. Certain In-Service Account Distributions..................................8 9. Statements................................................................8 10. Form and Time of Payment of Accounts......................................8 11. Effect of Death of Participant............................................9 12. General Duties of Trustee................................................10 13. Withholding Taxes........................................................10 14. Participant's Unsecured Rights...........................................10 15. Non-assignability of Interests...........................................11 16. Limitation of Rights.....................................................11 17. Administration of the Plan...............................................11 18. Amendment or Termination of the Plan.....................................11 19. Choice of Law and Claims Procedure.......................................12 20. Execution and Signature..................................................12
2 3 SUN MICROSYSTEMS, INC. U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN AMENDED AS OF DECEMBER 16, 1998 Sun Microsystems, Inc. (the "Company"), acting on behalf of itself and its U.S. subsidiaries, initially adopted the Sun Microsystems, Inc. U.S. Non-Qualified Deferred Compensation Plan (the "Plan"), effective July 1, 1995. RECITALS 1. The Company maintains the Plan, a deferred compensation plan for the benefit of a select group of management or highly compensated employees of the Company as well as members of the Company's Board of Directors. 2. Under the Plan, the Company is obligated to pay vested accrued benefits to Plan Participants and their Beneficiary or Beneficiaries from the Company's general assets. 3. The Company intends to enter into an agreement (the "Trust Agreement") with a person or persons, including an entity, who shall serve as trustee (the "Trustee") under an irrevocable trust, to be used in connection with the Plan (the "Trust"). 4. The Company intends to make contributions to the Trust so that such contributions will be held by the Trust and invested, reinvested and distributed, all in accordance with this Plan and the Trust Agreement. 5. The Company intends that amounts contributed to the Trust and the earnings thereon shall be used by the Trustee to satisfy the liabilities of the Company under the Plan with respect to each Plan Participant for whom an Account has been established and such utilization shall be in accordance with the procedures set forth herein. 6. The Company intends that the Trust be a "grantor trust" with the principal and income of the Trust treated as assets and income of the Company for federal and state income tax purposes. 7. The Company intends that the assets of the Trust shall at all times be subject to the claims of the general creditors of the Company as provided in the Trust Agreement. 8. The Company intends that the existence of the Trust shall not alter the characterization of the Plan as "unfunded" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be construed to provide income to Plan Participants under the Plan prior to actual payment of the vested accrued benefits hereunder. NOW THEREFORE, the Company does hereby adopt this amended and restated Plan as follows and does also hereby agree that the Plan shall be structured, held and disposed of as follows: 3 4 1. Purpose: The Plan provides Participants an opportunity to defer payment of a portion of: - Employee salary and incentive bonus/commissions (for Sales Vice Presidents and Directors); - Employee annual bonus awards; and - Board of Directors retainer payments. 2. Definitions: (a) Account means a bookkeeping account established pursuant to Section 5(a) for Compensation that is subject to a Participant's deferral election. (b) Beneficiary means the person or persons designated by the Participant or by the Plan under Section 11(b) to receive payment of the Participant's Account in the event of the Participant's death. (c) Board means the Board of Directors of the Company, as constituted from time to time. (d) Committee means the Benefits Plan Committee, appointed by the Board from time to time. (e) Company means Sun Microsystems, Inc. and its U.S. subsidiaries. (f) Compensation means: (i) The amount of the Eligible Employee's base salary paid by the Company or one of its U.S. subsidiaries; and (ii) The amount paid by the Company or one of its U.S. subsidiaries to an Eligible Employee as an annual corporate bonus award and any other bonus/incentive award that is approved by the Committee as earnings that can be deferred under the Plan (some incentive/bonus awards will not be eligible for deferral); and (iii) For Sales Vice Presidents and Directors, incentive bonus/commissions; and (iv) In the case of an Eligible Board Member, the amount of his or her director's fees from the Company, which includes only retainer payments. Compensation does not include directors' expense reimbursements or meeting fees. For purposes of the foregoing, Compensation as described in clauses (i), (ii) and (iii) shall be eligible for deferral only to the extent such amounts are otherwise subject to U.S. payroll reporting and withholding. (g) Election Period means: 4 5 (i) Generally June of each year; and (ii) For newly hired vice presidents, at the sole discretion of the Benefits Plan Committee, may be eligible to enroll within thirty (30) days of hire. (iii) With respect to the Plan Restatement, September, 1997. (h) Eligible Board Member means a member of the Board (other than a member who is also an Eligible Employee). (i) Eligible Employee means an officer of the Company or other common-law employee of the Company or one of its U.S. subsidiaries. (j) Participant means an Eligible Board Member or an Eligible Employee who has elected to defer Compensation. (k) Plan means this Sun Microsystems, Inc. U.S. Non-Qualified Deferred Compensation Plan, as amended from time to time. (l) Plan Restatement means the amendment and restatement of the Plan as approved by the Board on August 13, 1997. (m) Plan Restatement Effective Date means October 1, 1997. (n) Retirement Date means the first day of the month coinciding with or next day following the Participant's termination of employment following the earlier of his or her: (i) 65th birthday; (ii) 60th birthday if the Participant has 5 years of Service; (iii) 55th birthday if the Participant has 10 years of Service; or (iv) 20th year anniversary of Service. (o) Service means: (i) Employment as a common-law employee of the Company or one of its subsidiaries; or (ii) Period served as an elected Board Member. A Participant's Service shall be determined by the Committee in its sole discretion. (p) Total Disability means that the Participant is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which may result in Participant's death, or condition which lasts, or may last, a continuous period 5 6 of not less than twelve consecutive months. Total Disability shall be determined by the Committee in its sole discretion. (q) Unforeseeable Emergency means a severe financial hardship to the Participant resulting from: (i) Sudden or unexpected illness or accident of either the Participant or dependent of same; or (ii) Loss of the Participant's property due to casualty or other extraordinary and unforeseeable circumstances beyond the control of the Participant. Hardship shall not constitute an unforeseeable Emergency under the Plan to the extent that it is, or may be, relieved by: (i) Reimbursement or compensation, by insurance or otherwise; or (ii) Liquidation of the Participant's assets to the extent that the liquidation of such assets would not itself cause severe financial hardship. An Unforeseeable Emergency under the Plan does not include: (i) Sending a child to college; or (ii) Purchasing a home, per Rev. Proc. 95-64. (r) Year means the Company's fiscal year unless otherwise noted. 3. Eligibility: Participation in the Plan is limited to Eligible Board Members, and Eligible Employees, who are eligible to participate in the Plan if: (a) He or she is subject to U.S. income and social security taxes and not covered under a non-U.S. retirement plan; (b) He or she is an officer, or his or her position is approved as a director level, or higher; or (c) He or she has been designated expressly as an Eligible Employee by the Committee. If a Participant receives a distribution described in Section 10(c), the Participant shall be ineligible to participate in the Plan for the balance of the Plan Year in which the distribution occurs and the following Plan Year. 4. Election to Participate in Plan: (a) Deferral Election. A Participant may elect to participate in the Plan by 6 7 filing a written "Deferred Compensation Election Form" with the Company during any Election Period. Such election applies to applicable Compensation paid in payroll periods commencing after the close of the Election Period. A new election must be made for each Election Period. The Participant shall specify any amount subject to the limits described in Section 6(a). This can be expressed as a fixed dollar amount or as a percentage. (b) Election Form. All deferral elections under this Section 4 shall be made in a manner prescribed for this purpose by the Committee. 5. Accounts: (a) Establishment of Account. The Company shall establish an Account for each Participant who duly files a Deferred Compensation Election Form. (b) Credits to Account. A Participant's Account shall be credited with an amount equal to the percentage of each Compensation payment which would have been payable currently to the Participant but for the terms of the Deferred Compensation Election Form. Deferred Compensation for Participants shall be credited to the Participant's Account as of the first day of the month in which such deferred amounts would otherwise be paid to the Participant. (c) Vesting. Participants shall at all times be 100% vested in their deferrals under the Plan and all earnings allocable thereto. 6. Deferral Increments and Growth: (a) The minimum deferral per year will be determined by the Committee. (b) The Participant who is an Eligible Employee may elect to defer (less any withholding requirements). (i) Up to 100% of any eligible annual bonus award; and (ii) Up to 60% of base salary and incentive awards/commissions. (c) The Participant who is an Eligible Board Member may elect to defer (less any withholding requirements), up to 100% of their retainer payments (to be credited to the account quarterly). 7. Earnings or Losses on Accounts: (a) General Rule. Subject to Section 7(c) below, the amount in a Participant's Account shall be adjusted for gain or loss on the last day of each month based on the performance of the investment options selected by the Participant in accordance with Section 7(b). Gain or loss shall be computed as if all amounts credited to the Account pursuant to Section 5(b) were credited as of the first day of the month, and all amounts withdrawn from the Account were withdrawn on the first day of the month. 7 8 (b) Designation of Investment Indices by the Committee. The Committee shall specify two or more investment funds that shall serve as benchmarks for the investment performance of amounts credited to the Accounts. Accounts shall be adjusted to reflect the gain or loss, net of any allocable costs or expenses, such accounts would experience had they actually been invested in the specified funds at the relevant times. The Committee may vary the available investment funds from time to time, but not more frequently than quarterly. Subject to Section 7(c), a Participant may select his or her investment options for new deferrals and contributions, or for amounts already credited to his or her Account, once per calendar quarter effective as of the first day of the following quarter using such form or forms as the Committee may specify. (c) Pre-Plan Restatement Accounts. Notwithstanding anything in this Section 7 to the contrary, the balance in each Account as of the Plan Restatement Date shall be credited quarterly to reflect interest earned on the deferral in an amount determined by the Committee; provided, however, that Participants may elect to have earnings and losses on such Accounts credited instead in accordance with Section 7(a) and (b) after the Plan Restatement Date. Any such election shall be made prior to the Plan Restatement Date in such form and subject to such other terms and conditions as the Committee shall specify. 8. Certain In-Service Account Distributions. (a) After Completion of Two Years of Plan Participation. Each Participant may elect in his or her Deferred Compensation Election Form to have one or more distributions of a specified percentage or dollar amount of his or her Account, not more frequently than once in a Plan Year, commencing in his or her third year of participation, provided that the Participant has not terminated his or her Service with the Company. A Participant may delay once or cancel such distribution at any time prior to the date which is one year prior to the calendar year in which the originally scheduled distribution would take place, but such election is otherwise irrevocable. (b) Previously Scheduled In-Service Distributions. Elections in effect prior to the Plan Restatement Date for in-service distributions prior to January 1, 2000 shall remain in full force and effect. 9. Statements: Quarterly, and/or at intervals determined by the Committee, the Company shall prepare and deliver to each Participant a statement listing the amount credited to such Account as of the applicable date. 10. Form and Time of Payment of Accounts: (a) Timing and Method of Distribution of Accounts. In the event of a Participant's termination of Service on or after his or her Retirement Date, distribution of the value of the Participant's Account balance shall be made as soon as practicable after such termination consistent with the form of distribution specified on the Participant's Deferred Compensation Election Form. Available forms shall include either a lump sum payment or a series of installments. Accounts subject to installment payouts shall continue to be adjusted for gains or losses in the same manner as active Accounts. Notwithstanding the foregoing, the Participant who is receiving an installment payout on or after his or her Retirement Date may 8 9 request a lump sum distribution of such Participant's Account. Any such lump sum distribution shall be at the sole discretion of the Committee, and shall be reduced by a penalty equal to ten percent (10%) of the amount otherwise distributable, which penalty shall be forfeited to the Company. A Participant may modify his or her elected form of distribution (i.e., lump sum or installments) at any time prior to the date that is three years before his or her first post-employment distribution. If a Participant modifies his or her elected form of distribution but his or her first post-employment distribution is less than three years following the date of the modification election, his or her prior elected form of distribution shall apply. If the Participant terminates his or her service with the Company prior to his or her Retirement Date, (other than on account of death), he or she shall receive the value of his or her Account in one lump sum payment as soon as practicable after such termination. If a Participant elects a distribution date prior to termination of Service, the distribution will be paid as soon as reasonably practicable in a lump sum after such distribution date. (b) Disability or Emergency. In the event of Participant's Total Disability or Unforeseeable Emergency, and upon application by such Participant, the Committee may determine at its sole discretion that payment of all, or part, of such Participant's Account shall be made in a different manner, or on an earlier date than the time or times specified in Subsection (a) above. Payments due to Participant's Total Disability or Unforeseeable Emergency shall be permitted only to the extent reasonably required to satisfy the Participant's need. (c) Early Distribution Penalty. Upon application by a Participant, the Committee may determine at its sole discretion that payments from such Participant's Account shall be made in a different manner, or on an earlier date than the time or times specified in Subsection (a) above. All distributions under this Subsection (c) shall be reduced by a penalty equal to 10 percent (10%) of the amount otherwise distributable. The penalty is forfeited to the Company. A Participant who receives a distribution under this Subsection (c) is ineligible to participate in the Plan for the balance of the Plan Year in which the distribution occurs and the following Plan Year. 11. Effect of Death of Participant: (a) Distributions. In the event of a Participant's death while an Eligible Employee or Eligible Board Member (except in the case of a Participant's suicide during the first two years of their participation in the Plan), the Participant's Account balance, together with an amount equal to two times the sum of (i) the Participant's actual deferrals under the Plan after the Plan Restatement Effective Date (exclusive of earnings), plus (ii) the Participant's actual deferrals under the Plan before the Plan Restatement Effective Date (exclusive of earnings) to the extent such deferrals are scheduled to be distributed on or after January 1, 2000, shall be distributed to the Participant's Beneficiary. Notwithstanding the foregoing, the amount to be determined pursuant to this paragraph (a), shall not exceed Three Million Dollars ($3,000,000). In the event of (i) a Participant's death while no longer an Eligible Employee or Eligible Board Member (as applicable), or (ii) a Participant's suicide during the first two years of their participation in the Plan, the Account balance, if any, shall be distributed to the Participant's 9 10 Beneficiary. Any distributions pursuant to this paragraph shall be made to the Beneficiary in three annual installments or, at the request of the Beneficiary and subject to the Committee's approval, in a single lump sum, commencing in either case as soon as reasonably practicable after the Participant's death. If installment payments are made, the remaining account balance (during the period of the installment payouts) shall cease to be credited with earnings on the investment chosen by the deceased Participant, and instead shall be credited with earnings based on a fixed rate of interest. (b) Beneficiary Designation. Upon enrollment in the Plan, each Participant shall file a prescribed form with the Company naming a person or persons as the Beneficiary who will receive distributions payable under the Plan in the event of the Participant's death. If the Participant does not name a Beneficiary, or if none of the named Beneficiaries is living at the time payment is due, then the Beneficiary shall be: (i) The spouse of the deceased Participant; or (ii) The living children of the deceased Participant, in equal shares, if no spouse of the Participant is living; or (iii) The estate of the Participant if neither spouse nor children of Participant are living. The Participant may change the designation of a Beneficiary at any time in accordance with procedures established by the Committee. Designations of a Beneficiary, or an amendment or revocation thereof, shall be effective only if made in the prescribed manner and received by the Company prior to the Participant's death. 12. General Duties of Trustee: (a) Trustee Duties. The Trustee shall manage, invest and reinvest the Trust Fund as provided in the Trust Agreement. The Trustee shall collect the income on the Trust Fund, and make distributions therefrom, all as provided in this Plan and in the Trust Agreement. (b) Company Contributions. While the Plan remains in effect, the Company shall make contributions to the Trust Fund at least once each year. As soon as practicable after the close of each Plan Year, the Company shall make an additional contribution to the Trust Fund to the extent that previous contributions to the Trust Fund for the current Plan Year are less than total future liabilities (other than death benefits) created with respect to Participants' Accounts as of the close of the current Plan Year. Contributions to the Trust Fund are based on liabilities created with respect to Participants' Accounts on and after the Plan Restatement Effective Date. The Trustee shall not be liable for any failure by the Company to provide contributions sufficient to pay all accrued benefits under the Plan in accordance with the terms of this Plan. 13. Withholding Taxes: All distributions under the Plan shall be subject to reduction in order to reflect withholding tax obligations imposed by law. 14. Participant's Unsecured Rights: The Account of any Participant, and such 10 11 Participant's right to receive distributions from his or her Account, shall be considered an unsecured claim against the general assists of the Company; such Accounts are unfunded bookkeeping entries. The Company considers the Plan to be unfunded for tax purposes and for purposes of Title I of ERISA. No Participant shall have an interest in, or make claim against, any specified asset of the Company pursuant to the Plan. 15. Non-assignability of Interests: The interest of a Participant under the Plan is not subject to option nor assignable by either voluntary or involuntary assignment or by operation of law, including without limitation to: bankruptcy, garnishment, attachment or other creditor's process. Any act in violation of this Section 15 shall make the Plan void. 16. Limitation of Rights: (a) Bonuses. Nothing in this Plan shall be construed to give any Eligible Employee any right to be granted a bonus award. (b) Employment Rights. Neither the Plan nor deferral of any Compensation, nor any other action taken pursuant to the Plan, shall constitute, or be evidence of, any agreement or understanding, express or implied, that the Company or any of its subsidiaries will employ an Eligible Employee for any period of time, in any position at any particular rate of compensation. The Company and its subsidiaries reserve the right to terminate an Eligible Employee's Service at any time for any reason, except as otherwise expressly provided in a written employment agreement. 17. Administration of the Plan: The Plan shall be administered by the Committee. The Committee shall have full power and authority to administer, interpret, establish procedures for administering the Plan, prescribe forms, and take any and all necessary actions in connection with the Plan. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. The Committee may appoint a plan administrator or any other agent and delegate to them such powers and duties in connection with the administra- tion of the Plan as the Committee may from time to time prescribe. In the event that any Participants are found to be ineligible, that is, not members of a select group of management or highly compensated employees, according to a determination made by the U.S. Department of Labor, the Committee shall take whatever steps it deems necessary, in its sole discretion, to equitably protect the interests of the affected Participants. 18. Amendment or Termination of the Plan: The Board may amend, suspend, or terminate the Plan at any time; provided, however, that no such action shall reduce a Participant's Account under the Plan without the Participant's written consent. In the event of termination of the Plan, the Accounts of Participants shall continue to be credited with earnings until distributed pursuant to Section 10, unless the Board prescribes an earlier time or different manner for the payment of such Accounts. Without limiting the generality of the foregoing, termination of the Plan following Change in Control shall constitute an event giving rise to distribution of Accounts. In such event, the Company shall pay all Account balances in a lump sum or in annual installments over three years (with earnings), in its discretion, to Participants and Beneficiaries of deceased Participants; and all deferrals and payment of benefits except as provided above shall cease. For purposes of this Plan, the term "Change in Control" shall mean the purchase or 11 12 acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, where the approval by the stockholders of the Company or a reorganization, merger or consolidation, in each case with respect to which persons who are stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the Company's assets. 19. Choice of Law and Claims Procedure: (a) Choice of Law. The validity, interpretation, construction and performance of the Plan shall be governed by ERISA, and, to the extent that they are not preempted, by the laws of the State of California, excluding California's choice-of-law provisions. (b) Claims and Review Procedure. In accordance with the regulations of the U.S. Secretary of Labor, the Committee shall: (i) Provide adequate notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied. Specific reasons for such denial must be presented in a clear and precise manner intended to be easily understood by such Participant or Beneficiary, and (ii) Afford a reasonable opportunity for a full and fair review before the Board to any Participant or Beneficiary whose claim for benefits has been denied. 20. Execution and Signature: To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name hereto: SUN MICROSYSTEMS, INC. By: ---------------------------------------- Authorized Company Officer 12 EX-10.87 4 EQUITY COMPENSATION ACQUISITION PLAN 1 EXHIBIT 10.87 SUN MICROSYSTEMS, INC. EQUITY COMPENSATION ACQUISITION PLAN (AMENDED AS OF NOVEMBER 11, 1998) 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to eligible Employees and Consultants, and - to promote the success of the Company's business. Nonstatutory Stock Options and Stock Purchase Rights may be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means Sun Microsystems, Inc., and any entity that is directly or indirectly controlled by the Company, or any entity in which the Company has a significant equity interest, as determined by the Administrator. (h) "Consultant" means any person, including an advisor, engaged by the Company to render services and who is compensated for such services, provided that the term "Consultant" shall not include any person who is also an officer or Director of Sun Microsystems, Inc. (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. 1 2 (k) "Employee" means any person employed by the Company other than any person who is an officer or Director of Sun Microsystems, Inc. (l) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) the last reported sale price of the Common Stock of the Company on the NASDAQ National Market System or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices, or (ii) if such Common Stock shall then be listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (iii) if such Common Stock shall not be quoted on such National Market System nor listed or admitted to trading on a national securities exchange, then the average of the closing bid and asked prices, as reported by The Wall Street Journal for the over-the-counter market, or (iv) if none of the foregoing is applicable, then the Fair Market Value of a share of Common Stock shall be determined by the Board in its discretion. (m) "Nonstatutory Stock Option" means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement or of the Restricted Stock Purchase Agreement. (o) "Option" means a stock option granted pursuant to the Plan. (p) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (q) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (r) "Optionee" means an Employee or Consultant who holds an outstanding Option or Stock Purchase Right. (s) "Plan" means this Equity Compensation Acquisition Plan. (t) "Restricted Stock" means shares of Common Stock acquired pursuant to 2 3 a grant of Stock Purchase Rights under Section 11 below. (u) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (v) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (w) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 3,620,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). In addition, if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Administration. The Plan shall be administered by (i) the Board or (ii) a Committee designated by the Board, which Committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(l) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase 3 4 Rights or any combination thereof, are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (ix) to modify or amend each Option or Stock Purchase Right (subject to Section 15(b) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options; (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xi) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. If otherwise eligible, an Employee or Consultant who has been granted an Option or Stock Purchase Right may be granted additional Options or Stock Purchase Rights. Notwithstanding anything to the contrary contained in the Plan, Option and Stock Purchase Rights may not be granted to officers or Directors under this Plan. 6. Limitations. Neither the Plan nor any Option or Stock Purchase Right shall confer 4 5 upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. 7. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect until terminated under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (viii) any combination of the foregoing methods of payment. 5 6 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment. Upon termination of an Optionee's status as an Employee or Consultant (other than as a result of the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time from the date of such termination as is determined by the Administrator and, unless determined otherwise by the Administrator, only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status from 6 7 Consultant to Employee or Employee to Consultant, the Optionee's status as an Employee or Consultant shall not automatically terminate solely as a result of such change in status. (c) Disability of Optionee. Upon termination of an Optionee's status as an Employee or Consultant as a result of the Optionee's Disability, the Optionee may exercise his or her Option, but only within six (6) months or such time period as the Administrator shall specify from the date of such termination, and, unless determined otherwise by the Administrator, only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the deceased Optionee's Option by bequest or inheritance may exercise the Option, but only within six (6) months or such time period as the Administrator shall specify following the date of death, and, unless determined otherwise by the Administrator, only to the extent that the Optionee was entitled to exercise it at the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). To the extent that Optionee was not entitled to exercise an Option at the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid (which price shall not be less than the par value of the Company's Common Stock, as adjusted from time to time, and the minimum price permitted by the Delaware General Corporation Law), and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase 7 8 Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. An Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common 8 9 Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right will be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation (the "Successor Corporation"), unless the Successor Corporation refuses to assume or substitute for the Option or Stock Purchase Right, in which case the Optionee shall have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option or Stock Purchase Right is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option or Stock Purchase Right shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the 9 10 merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely Common Stock of the Successor Corporation, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely Common Stock of the Successor Corporation equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock 10 11 Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Liability of Company. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 11 EX-27.0 5 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUN-30-1999 JUL-01-1998 MAR-28-1999 707,403 1,291,438 2,211,592 0 311,842 5,300,941 2,669,308 1,163,260 7,509,274 2,798,530 0 0 0 0 4,411,146 7,509,274 7,067,470 8,211,652 3,279,780 3,960,071 3,293,649 0 0 1,015,948 379,784 636,164 0 0 0 636,164 0.83 0.79 EPS HAS BEEN RESTATED TO REFLECT A 2:1 STOCK SPLIT WHICH WAS PAID ON APRIL 8, 1999.
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