-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kxgOroMrXXNSjHNznUCoN7WTvtn9sgIlT6ifADKc0rC1/MNWwyOjsnRAaEDnJ5sp BfLbAHAFjG4qutH9Y3J4+A== 0000891618-94-000198.txt : 19940930 0000891618-94-000198.hdr.sgml : 19940930 ACCESSION NUMBER: 0000891618-94-000198 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC CENTRAL INDEX KEY: 0000709519 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 942805249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15086 FILM NUMBER: 94550405 BUSINESS ADDRESS: STREET 1: 2550 GARCIA AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 BUSINESS PHONE: 4159601300 MAIL ADDRESS: STREET 1: 2550 GARCIA AVENUE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1100 10-K 1 FORM 10-K REGISTRATION STATEMENT 1 - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 2550 GARCIA AVENUE (415) 960-1300 MOUNTAIN VIEW, CA 94043-1100 (REGISTRANT'S TELEPHONE NUMBER, (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING AREA CODE) INCLUDING ZIP CODE)
------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK COMMON SHARE PURCHASE RIGHTS ------------------------ 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of September 7, 1994, was approximately $2,082,000,000 based upon the last sale price reported for such date on the NASDAQ National Market System. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive. The number of shares of the Registrant's Common Stock outstanding as of September 7, 1994 was 94,793,483. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Parts of the Annual Report to Stockholders for the fiscal year ended June 30, 1994 are incorporated by reference into Items 1, 5, 6, 7, 8 and 14 hereof. Parts of the Proxy Statement for the 1994 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 hereof. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL Sun Microsystems, Inc. ("Sun" or the "Company") is a leading supplier of enterprise computing products that feature networked workstations and servers that store, process and distribute information. The Company's computer systems are used for many demanding commercial and technical applications. Sun has differentiated itself from its competitors by its commitment to the distributed computing model and the UNIX operating system, its rapid innovation and its open systems architecture. The Company's objective is to be a leading provider of open technologies for general purpose distributed computing. The Sun implementations of its hardware and software products conform with the Scalable Processor Architecture ("SPARC") Compliance Definition ("SCD") standard established by SPARC International, Inc. The SCD currently includes the SPARC microprocessor (based on RISC technology originally developed by Sun but now widely licensed); the UNIX operating system (originally developed by American Telephone and Telegraph Company ("AT&T")) as implemented and extended as the Solaris software environment including UNIX; OpenWindows (including X11/NeWS, OpenFonts and the OPEN LOOK graphical user interface); and ONC/NFS, Sun's open systems distributed computing environment and distributed computing file system. Sun, which operates in a single industry segment, conducts its business through several operating entities and divisions organized around the Company's principal areas of added value. The individual businesses generally operate independently within their charter, but with the common strategic vision of being a leading force in the open systems information technology marketplace. Sun believes this organizational structure allows it to more efficiently focus on its customers and the products, channels and markets necessary to serve them. As of July 1, 1994, Sun's primary operating businesses are Sun Microsystems Computer Company ("SMCC"), SunSoft, Inc. ("SunSoft"), SPARC Technology Business ("STB"), SunService and SunExpress, Inc. ("SunExpress"). SMCC, a division and principal operating business of the Company, is responsible for designing, manufacturing, selling and supporting the workstations and servers incorporating SPARC microprocessor technology and other key technologies used in enterprise computing. These workstations and servers are offered with the Solaris software environment, licensed by SMCC from SunSoft. SunSoft develops, markets, supplies and supports Solaris, the leading UNIX system software environment. SunSoft offers the Solaris operating environment primarily through OEM resellers, including SMCC. SunSoft also offers integrated solutions for network computing environments, professional software developers, enterprise management and PC desktop integration. Through its business units, SunSoft supplies to the Company's installed base and to other vendors value-added hardware and software based on the SCD and other UNIX interface standards. STB designs and develops high performance SPARC microprocessors as well as enabling - - - --------------- Sun, the Sun Logo, Sun Microsystems, SunExpress, SunSoft, SunService, Catalyst, NFS, ONC, ONC+, OpenFonts, OpenWindows, Solaris, SunLink, SunOX, PC-NFS, SolarNet, SunPC, SunSoft Workshop, Solstice, Wabi, DOS Windows, JumpStart and X11/NeWS are trademarks, registered trademarks or service marks of Sun Microsystems, Inc. All SPARC trademarks, including SuperSPARC and the SCD Compliant logo, are trademarks or registered trademarks of SPARC International, Inc. SPARCserver, SPARCclassic, SPARCstation, SPARCcenter, SPARCstorage and microSPARC are licensed exclusively to Sun Microsystems, Inc. Products bearing SPARC trademarks are based upon an architecture developed by Sun Microsystems, Inc. UNIX is a registered trademark in the United States and other countries, exclusively licensed through X/Open Company, Ltd. OPEN LOOK and NetWare are registered trademarks of Novell, Inc. Interactive is a trademark of Interactive Systems Corporation. Legato Networker is a registered trademark of Legato Systems, Inc. PowerPC is a trademark of International Business Machines Corporation. Macintosh is a registered trademark of Apple Computer, Inc. MS-DOS is a registered trademark of Microsoft Corporation. All other product or service names mentioned herein are trademarks of their respective owners. 1 3 technologies such as chipsets and circuit boards for SMCC and third-party customers. SunService is a leading service organization for Solaris and SPARC platforms, providing worldwide post-sale service and support to end users of Sun products. SunExpress offers easy ordering and quick delivery of accessories, spare parts, options, software and third party products to end users of SPARC systems and Solaris software. SunExpress' goal is to be a leading worldwide supplier of aftermarket products for the SPARC and Solaris computing environments by offering competitive prices and the highest quality services to customers using innovative direct marketing technology. The combination of Sun's hardware and software implementations have attracted a large number of software vendors to port their applications to Sun platforms, including an increasing number of vendors of commercial applications. The availability of such third-party software contributes to the Company's leadership position in enterprise computing as well as the increasing size of Sun's installed base and the success of its developer assistance programs. The Company actively works with or belongs to industry-wide standardization organizations such as X/Open Company (Ltd.), SPARC International, Inc., the Object Management Group, the Open Software Foundation, UniForum, American National Standards Institute ("ANSI"), ASC X3 and the IEEE, the X Consortium, ECMA and the International Organization for Standardization. The Company also promotes cross industry standardization initiatives such as COSE and SPEC 1170. PRODUCTS Sun believes that customers are increasingly demanding computer systems that do not limit them to any one vendor's proprietary technology. To respond to customer needs, Sun has been a proponent of the open systems strategy based on industry standards such as POSIX, X/OPEN and the SCD. The benefits to users and software developers of systems, whose vendors adhere to these industry standards, are that their products offer compatibility, interoperability, portability, upgradeability and scaleability. Sun's open systems architecture protects existing customer investments while providing customers with new, innovative technology to allow them to be competitive in their own market. Sun has developed and generally licenses to third parties the SPARC microprocessor architecture, numerous ASIC components and the Solaris software environment and certain of the components of that environment, including the ONC networking products, NFS file system software (the standard for sharing files across heterogeneous systems), SunOS (the Sun implementation of the UNIX operating system) and its OpenWindows environment. SYSTEMS SMCC, as the business responsible for the development of Sun's integrated computing systems, focuses on continuing to improve the features, functionality, quality, competitiveness and price/performance of the Company's systems. Sun's workstations span the range from low-cost X-terminals to high-performance color graphics systems. Its multiprocessing servers can provide various resources, including filesharing, system administration and database and network management. As a filesharing resource, a server enables users to access data distributed across multiple storage devices and networks. The current desktop workstation line includes the low-end SPARCclassic X, the low-end color SPARCclassic, the entry level SPARCstation 5, the high-performance SPARCstation 10 series, and the high performance SPARCstation 20 series of MP-ready uniprocessor and multiprocessor systems. The SPARCclassic X computer is the only X-terminal to feature a low-cost, plug-and-play upgrade to a SPARC workstation, so that users can continue to maximize their current investment as their computing needs evolve. The SPARCclassic is a low priced, fully configured color workstation. Based on the 50 Mhz microSPARC processor, this compact desktop system is designed to satisfy users who demand a low-cost color system that still offers high performance and networking. 2 4 The SPARCstation 5, introduced in March 1994, is the Company's entry level, accelerated graphics workstation and is the industry's lowest priced 24-bit color system. Based on the microSPARC II processor, it allows up to two internal 3.5 inch disks and an internal CD ROM. The SPARCstation 10 series, with multiprocessing capabilities, is built around the super-scalar SuperSPARC chip. Its modular design provides an easy, cost-effective upgrade path to higher performance microprocessors. The SPARCstation 10 series, providing up to 512 megabytes of main memory, is designed for users who require fast application performance and the benefits of multiprocessing. The SPARCstation 20 series, introduced in March 1994, represents Sun's line of highest performance workstations and offers a combination of high-end workstation performance and functionality at a low price. Available in both uniprocessor and multiprocessor versions, the SPARCstation 20 line achieves higher performance from the use of 50 MHz (in entry level systems) and 60MHz (in higher performance versions) SuperSPARC processors, as well as high performance motherboards and ASICs. Designed for users needing more specialized graphics power, the SPARCstation 20, available in six versions, features a broad complement of graphics computing capabilities, such as 24-bit color and built-in imaging acceleration. The Company offers a wide range of servers from the SPARCclassic server, a low-cost entry server for small workgroups, to the SPARCcenter 2000, a high-end, enterprise-wide computing solution. Midrange servers include the SPARCserver 20 and the SPARCserver 1000. These servers are balanced, high-performance multipurpose platforms that are designed for fast input-output and distributed computing. They can also function as computational servers for technical applications such as simulation and analysis for electrical and mechanical CAD. These systems offer a range of main memory and hard disk storage configurations, as well as ease of expandability. The SPARCserver 20, introduced in March 1994, is a competitively priced RISC-based multiprocessing UNIX server with a modular design that provides workgroup users with an easy upgrade path to future processor technologies. The SPARCserver 1000 is a powerful, scalable, versatile, upgradeable and affordable departmental UNIX server in an extremely compact package. The SPARCcenter 2000 is Sun's high-end server for the data center and the enterprise. Based on up to 20 60MHZ SPARC microprocessors, the SPARCcenter 2000 delivers competitive results in NFS file server performance, system computational performance and multi-user throughput. In March 1994, Sun introduced the SPARCstorage Array Model 100 Series, a new storage subsystem utilizing RAID technology, Sun's affordable, high availability disk storage subsystem. SYSTEM SOFTWARE The system software environment is a critical component of enterprise computing. SunSoft continues to focus on developing Solaris (an open client-server UNIX system software environment for SPARC, Intel and other volume platforms) as the Company believes it derives competitive advantage from its over ten years experience with operating system software. With the integration in late fiscal 1994 of the businesses which formerly comprised SunTechnology Enterprises, SunSoft became the single entity within Sun focused on delivering software solutions for the enterprise, rightsizing and network computing. Its independent business units and their associated products are as follows: Solaris Products -- Solaris Products is responsible for the development and marketing of all desktop, workgroup and enterprise server Solaris software environment products for SPARC, x86, Pentium and PowerPC platforms. Solaris is the industry's leading 32-bit UNIX software environment for enterprise-wide distributed computing environments. The Solaris software environment offers connectivity and interoperability among hardware platforms from other vendors, ease of application development and availability of over 9,000 products from third-party software and hardware developers. Solaris Products also includes the newly formed INTERACTIVE group, overseeing development and marketing of INTERACTIVE UNIX operating system products. Networking Products -- Networking products are central to Sun's open systems architecture. These products provide networking capabilities that make distributed resources easily accessible by workstations, servers and other computing devices on a network. This business provides products that integrate heterogeneous corporate, department, local and remote network resources into company-wide information systems. The 3 5 business is committed to continued leadership in marketing and evolving open industry networking standards and technologies including emerging areas such as the Internet. Products include ONC+/NFS on all platforms including Solaris, DCE for Solaris, the SunLink family of WAN and connectivity products and SolarNet, PC-NFS and NetWare compatibility for integrating PCs into enterprise networks. Developer Products -- Developer Products designs and markets productivity tools for professional software developers and is a worldwide volume leader of programming tools for UNIX. It provides a powerful, comprehensive software development environment to enable the development of next-generation, network- based, client/server applications. Products include SunSoft WorkShop for C, C++, FORTRAN and Ada, integrated suites of tools for individuals and teams of software developers that support the rapid development of single and mutithreaded applications, and software developer kits for developers of Solaris applications. Enterprise Management Products -- Enterprise Management Products provides solutions for managing Global 2000 enterprise network computing environments and assists these organizations in reducing the total cost of administering their Information Technology resources. The product line features SunNet Manager, the industry's leading network management platform, Solstice, SunSoft's next-generation enterprise management platform, and a complete line of system administration and management tools, including JumpStart and Legato Networker. PC Desktop Integration Products -- PC Desktop Integration Products is dedicated to giving UNIX users the power to run productivity applications written for non-UNIX environments, including MS-DOS, DOS Windows and Macintosh. Products include Wabi, SunPC, the Macintosh Application Environment and Merge, which enable UNIX users to leverage their investment in other platforms. SALES, DISTRIBUTION AND MARKETING Each of the Company's businesses has responsibility for sales, distribution and marketing of its products. SMCC distributes its products through the channels described below, as well as through SunExpress. SunSoft offers off-the-shelf software products on an OEM basis to hardware manufacturers, including SMCC. Sun also supplies follow-on and peripheral products to its end user installed base through SMCC, independent distributors and resellers and SunExpress. SunExpress, whose offerings support the strategies of Sun and its constituent businesses, is chartered with providing an efficient telemarketing channel for delivery of nonsystem products based on the SPARC architecture and other UNIX products. STB provides high performance microprocessors to both SMCC and third party customers. SMCC sells to and supports its customers worldwide through a combination of direct and indirect channels and maintains a presence in major commercial and technical markets. Distribution channels include: a direct sales force selling to named accounts and numerous indirect channels, including commercial systems integrators (CSIs) who sell large commercial projects requiring substantial analysis, design, development and implementation; master resellers (MRs) who supply product and provide product marketing and technical support services to SMCC's numerous smaller Value Added Resellers (VARs); OEMs who integrate the Company's products with other hardware and software; VARs who provide added value in the form of software packages, proprietary software development, high-end networking integration, training, installation and support; and independent distributors who primarily cover markets in which Sun does not have a direct presence. Over time, the Company expects that systems revenues from these indirect channels will continue to increase in proportion to direct channel revenues. Sales to or through C. Itoh Technoscience Co. Ltd., Fujitsu, Ltd. and Toshiba Corporation together represent a significant portion of Sun's revenues in Japan. The growth and management of these reseller channels is important to the future revenues and profitability of the Company. SMCC's direct systems sales force serves business enterprises, educational institutions, software vendors, governments, and other strategic accounts. The Company has approximately 80 sales offices in the United States and approximately 65 sales offices in 26 other countries. In addition, it uses independent distributors in approximately 100 countries, sometimes in concert with other resellers and direct sales operations. 4 6 Revenues from outside the United States, including those from end users, resellers and distributors, constituted approximately 51%, 49% and 50% of net revenues in fiscal 1994, 1993 and 1992, respectively. Direct sales made in countries outside of the United States are generally priced in local currencies and are, therefore, subject to currency exchange fluctuations. The net impact of currency fluctuations on net revenues and operating results cannot be precisely measured as the Company's product mix and pricing change over time in various markets, partially in response to currency movements. To minimize currency exposure gains and losses, the Company borrows funds in local currencies, utilizes forward exchange contracts and foreign currency options, and promotes natural hedges by purchasing components in local currencies whenever feasible. Sun's sales to overseas customers are made under export licenses that must be obtained from the United States Department of Commerce. Protectionist trade legislation in either the United States or other countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect Sun's ability to sell or to manufacture in international markets. See Note 6 of Notes to Consolidated Financial Statements incorporated by reference for additional information concerning sales to foreign customers and industry segments. The Company's marketing activities include advertising in technical computer publications and the business press, periodic direct mailings to customers and prospects and attendance at trade shows. Sun maintains a customer resource program, Sunergy, that includes live interactive satellite broadcasts and provides electronic access to newsletters and technical information. Sun also sponsors a series of seminars to specific resellers, university customers, end users and government customers and prospects designed to familiarize attendees with the capabilities of the Sun product line. The Company's Catalyst support program promotes the development and support of third-party application software and hardware packages for the Solaris software environment for systems based on SPARC and x86. Currently, more than 9,000 software and hardware products are available for the Solaris software environment to address many of the requirements of engineering, scientific, technical and commercial users. Sun has made significant strides in the past two years in working with independent software vendors to aggressively transition software applications from the original Solaris operating environment to the Solaris 2 platform. Of the more than 9,000 products available, more than 3,000 are ported to the SPARC Solaris 2.X environment and more than 400 to the Solaris x86 environment. Supported application areas include EDA, Mechanical Design, AEC, CASE, earth resources, industrial automation, database and document image management. Supported markets include electronics, computers, aerospace, automotive, finance, telecommunications, government and education. In addition to marketing through third-party suppliers, the Company lists Catalyst packages in a reference catalog for its customers, demonstrates Catalyst packages at its sales offices and at regional and national trade shows and distributes Catalyst promotional literature through its sales offices. Sun believes a continued increase in the number of integrated commercial and technical solutions will be important in achieving significant sales of its systems to commercial users and in maintaining its commitment to the technical sector. Sun's order backlog at June 30, 1994 was approximately $338 million, as compared with approximately $160 million at June 30, 1993. The backlog level at June 30, 1994 reflects strong demand for the Company's most recently introduced products, the SPARCstation 5 and the SPARCstation 20. The lower June 30, 1993 backlog level was impacted to some extent by generally weaker economies in several of the Company's international markets. Backlog only includes orders for which a delivery schedule within six months has been specified by the customer. Because of the possibility of customer order delays, changes in delivery schedules or cancellation of orders, Sun's backlog at any particular date may not be indicative of actual net revenues for any succeeding period. CUSTOMER SERVICE AND SUPPORT The Company's service organization, SunService, is focused on providing customers with a full range of post-sale support. The field support organization includes software and hardware engineers who, along with third-party service providers, deliver a full range of system support. The customer education organization provides technical software, maintenance, system administration and end-user courses. 5 7 The Company offers a warranty for parts and labor on its systems, generally for one year from date of sale. SunService maintains and services the products on a contractual basis after the initial product warranty has expired. Warranty and post-warranty services are provided from its 130 direct sales offices and 22 solutions centers in the United States and overseas. Investments in field personnel and spare parts to meet the service requirements of the growing installed base are being supplemented by partnerships with third-party service providers. These organizations provide installation and support services under contract with Sun, thereby facilitating an expansion of geographical coverage while reducing the Company's investment in fixed resources. Generally, large resellers and distributors will provide installation, customer training, customer service and support for products they sell. PRODUCT DEVELOPMENT The Company's research and product development programs are intended to sustain and enhance its competitive position by incorporating the latest worldwide advances in hardware, software, microprocessor, graphics, networking and data communications technologies. Sun's product development efforts, conducted within each of its businesses, are currently focused on increasing the price/performance of its systems, improving its system software platforms and developing advanced workstation architectures, application-specific integrated circuits and software for networking and distributed computing, including the high-performance implementation of existing standards and the development of new technology standards where none exist. Sun works closely with third parties and also licenses from them development software that is ported to run on its hardware products. Sun conducts research and development worldwide through facilities in the United States, Canada, France, Japan and Ireland. Research and development expenses were approximately $455 million, $445 million and $382 million in fiscal 1994, 1993 and 1992, respectively. In recent years, Sun's research and development efforts have focused increasingly on Solaris software and SPARC CPUs. Sun believes that in the future software will provide significant competitive differentiation. Sun currently devotes substantial resources to the development of workgroup software, networking and data communications, video, graphics, object technology and the software development environment. MANUFACTURING AND SUPPLY The Company's manufacturing operations consist primarily of printed circuit board assembly and final assembly, test and quality control of materials and components. Sun has manufacturing facilities in California and Scotland and distribution facilities in the Netherlands and Japan. The Company has continued its efforts to simplify its manufacturing process by reducing the diversity of its system configurations, increasing the standardization of components across product types and establishing local sources of supply in major geographies. 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 certain monitors and on Fujitsu Limited (Fujitsu) and Texas Instruments Incorporated (TI) for certain implementations of SPARC 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 adversely affect Sun's operating results. Certain other components, especially memory integrated circuits such as DRAMs and VRAMs, have from time to time been subject to industrywide shortages. During the fourth quarter of fiscal 1994, the Company experienced supply constraints on certain memory devices and expects such constraints to continue into fiscal 1995. In addition, suppliers of certain components, including color monitors and custom silicon parts, require long lead times. Accordingly, it can be difficult to plan inventory levels of components to consistently meet Sun's manufacturing requirements. The Company is increasingly dependent on the ability of its suppliers to develop and deliver advanced components required for the timely introduction of new products. The production of 6 8 sufficient quantities of advanced components on a timely basis entails both design risk and manufacturing risk. The Company has experienced some component shortages in the past that have adversely affected operating results and have caused delays in new product introductions and shipments. Accordingly, the inability to secure enough components to build products, including new products, in the quantities and configurations required, or to produce, test and deliver sufficient products to meet demand in a timely manner, would adversely affect the Company's operating results. The computer systems offered by Sun generally are the result of both hardware and software development, so that delays in software development can delay the Company's ability to ship new hardware products. In addition, adoption of a new release of an operating system, such as the Solaris 2 software environment, typically requires effort on the part of the customer as well as software porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays in adoption of a new release of an operating system by customers can limit the acceptability of hardware products tied to that release. In either situation, the future operating results of the Company could be adversely affected. COMPETITION The market for the Company's products is intensely competitive and subject to continuous, rapid technological change, short product life cycles and frequent product performance improvements and price reductions. Due to the breadth of Sun's product line and the scalability of client/server computing, the Company competes in many areas of the computer market across a broad spectrum of customers. The requirements of those customers and the basis of competition varies widely depending on the market area and types of users. Sun's traditional customer base is in the technical and scientific markets where it competes primarily with Hewlett-Packard Company (HP), Digital Equipment Corporation (DEC) and Silicon Graphics, Inc. (SGI). Competition in this segment is based primarily on system performance, price/performance, availability of application software, robustness of the software development environment, system expandability and upgradability, adherence to standards, graphics features and performance and product quality and reliability. Since 1992, Sun has been making significant inroads into commercial markets both with large enterprises who are downsizing and distributing their computer resources, as well as with smaller companies who are upsizing their networks. In downsizing opportunities, Sun's competition tends to come from International Business Machines (IBM) and HP, as well as other mini and mainframe computer suppliers such as Unisys and Data General. In these situations, competition is based on price/performance, capabilities and stability of the systems software, product quality and reliability, ease of system operation and administration, service and support, applications and middleware availability, database performance, global marketing and distribution capabilities, and corporate reputation and name recognition. In upsizing opportunities and sales for the commercial desktop, competition tends to come from personal computer manufacturers such as Apple Computer, Inc. and Compaq Computer Corporation. The competition for these opportunities is heavily biased toward price, availability of application software, ease of use, software development tools, networking capabilities and product delivery. Sun has also encouraged the proliferation of its SPARC technology as a standard in the computer marketplace by licensing much of the technology and promoting open interfaces to the Solaris operating environment, as well as by offering microprocessors and enabling technologies to third party customers. As a result, several licensees also offer SPARC/Solaris based products that compete directly with Sun's products primarily in this area. The Company expects that the markets for its products and technology, as well as its competitors within such markets, will continue to change as the rightsizing trend shifts customer buying patterns to distributed systems employing multiple platform networks. Raw microprocessor performance is a highly visible element of the competitive landscape and Sun expects to see continued performance improvements in microprocessor technology and products introduced by Intel Corporation and Motorola, Inc. Such products, coupled with enhanced operating systems software from Microsoft Corporation and other competitors, are expected to continue to provide competitive pressure throughout the Company's product range. While many factors affect 7 9 a customer's buying decision, Sun's future operating results will depend, in part, on its ability to compete in these technologies. PATENTS AND LICENSES Sun currently holds a number of U.S. and foreign patents relating to various aspects of its products and technology. While the Company believes that patent protection is important, it also believes that patents are of less competitive significance than such factors as innovative skills and technological expertise. As is common in the computer industry, the Company has from time to time been notified that it may be infringing certain patents and other intellectual property rights of others, although no material litigation has arisen out of any of these claims. Several pending claims are in various stages of evaluation. The Company is evaluating the desirability of entering into licensing agreements in certain of these cases. Based on industry practice, the Company believes that in most cases any necessary licenses or other rights could be obtained on commercially reasonable terms. However, no assurance can be given that licenses can be obtained on acceptable terms or that litigation will not occur. The failure to obtain necessary licenses or other rights, or litigation arising out of such claims, could have a material adverse effect on the Company's operations. Sun has entered into separate patent exchange agreements with IBM, Cray Research, Inc. (Cray) and Fujitsu. Under each agreement, the parties grant to each other non-exclusive, worldwide rights to patents in their respective patent portfolios. These agreements cover patents issued or applied for during certain limited periods as specified in the agreements. The agreements with Cray and Fujitsu are royalty free. The agreement with IBM requires Sun to make annual payments through July 1995. These payments have not been and are not expected to be material to Sun's financial position. In March 1990, Texas Instruments Incorporated (TI) alleged that a substantial number of the Company's products infringe certain of TI's patents. Based on its discussions with TI, the Company believes that it will be able to negotiate a license agreement with TI, if necessary, and that the outcome of this matter will not have a material adverse effect on Sun's financial position. EMPLOYEES As of June 30, 1994, Sun employed approximately 13,300 people. The Company's future operating results will depend on its ability to continue to broaden and develop senior management and to attract and retain skilled employees, and on the ability of its management and key employees to manage growth successfully through the enhancement of management information systems and financial controls. None of Sun's employees are represented by a labor union in the United States. ITEM 2. PROPERTIES Sun conducts its worldwide operations using a combination of leased and owned facilities. The Company believes that, while it currently has sufficient facilities to conduct its operations during fiscal 1995, it will continue to lease and acquire owned facilities throughout the world as its business requires. Properties owned by the Company consist of an approximately 260,000 square foot facility on approximately 10 acres in Palo Alto, California; an approximately 227,000 square foot facility on approximately 30 acres in Linlithgow, Scotland; an approximately 30,000 square foot facility on approximately 2.5 acres in Bagshot, England; and approximately 90 acres in Newark, California. In addition, Sun is committed to purchase in the first half of fiscal 1995 an approximately 439,000 square foot facility on approximately 27 acres in Menlo Park, California, which is currently leased by the Company. The facility will be occupied beginning in the first quarter of fiscal 1995. Sun leases approximately 165 sales and service offices throughout the world aggregating about 2.1 million square feet. Sun also leases approximately 3 million square feet for its research and development and manufacturing facilities, primarily in Milpitas, Sunnyvale and Mountain View, California and Chelmsford, Massachusetts. In addition, Sun leases approximately 28 acres in Menlo Park, California with 8 10 approximately 596,000 square feet under construction with an estimated completion date of the second quarter of fiscal 1997. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 9 11 EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth certain information regarding the executive officers of the Company as of September 7, 1994:
NAME AGE POSITION ---- --- -------- Scott G. McNealy 39 Chairman of the Board of Directors, President and Chief Executive Officer, Sun Microsystems, Inc. Kenneth M. Alvares 50 Vice President, Human Resources, Sun Microsystems, Inc. Richard B. Barker 44 Vice President and Corporate Treasurer, Sun Microsystems, Inc. Patrick J. Deagman 46 Vice President, Finance, Information Resources and Operations, SunSoft, Inc. Lawrence W. Hambly 48 President, SunService Masood A. Jabbar 44 Vice President, Chief Financial Officer Sun Microsystems Computer Company William N. Joy 39 Vice President, Research and Development; Sun Microsystems, Inc. Michael E. Lehman 44 Vice President, Chief Financial Officer Sun Microsystems, Inc. William G. Marr 47 Vice President, North American and Australian Field Operations, Sun Microsystems Computer Company Michael H. Morris 46 Vice President, General Counsel and Corporate Secretary, Sun Microsystems, Inc. Rajesh H. Parekh 41 Vice President, Engineering, Sun Microsystems Computer Company William J. Raduchel 48 Vice President, Corporate Planning and Development and Chief Information Officer, Sun Microsystems, Inc. George Reyes 40 Vice President, Corporate Controller, Sun Microsystems, Inc. Joseph P. Roebuck 58 Vice President, Worldwide Field Operations, Sun Microsystems Computer Company J. Phillip Samper 60 President, Sun Microsystems Computer Company Eric E. Schmidt 39 Vice President, Chief Technology Officer, Sun Microsystems, Inc. John C. Shoemaker 51 Vice President, Worldwide Operations, Sun Microsystems Computer Company Chester J. Silvestri 45 President, SPARC Technology Business Dorothy A. Terrell 49 President, SunExpress, Inc. Kevin J.F. Walsh 52 Vice President, Finance and Planning, Worldwide Operations, Sun Microsystems Computer Company Edward J. Zander 47 President, SunSoft, Inc.
Mr. McNealy is a founder of the Company and has served as Chairman of the Board of Directors, President and Chief Executive Officer since December 1984, as President and Chief Operating Officer from February 1984 to December 1984 and as Vice President of Operations from February 1982 to February 1984. Mr. McNealy has served as a director of the Company since the incorporation of Sun in February 1982. Mr. Alvares has served as Vice President, Human Resources of the Company since June 1992. From 1990 to June 1992, he served as Vice President, Human Resources, Nichols Institute. He held various positions at Frito-Lay, Inc. from 1984 to 1990, including Vice President of Personnel from 1987 to 1990. 10 12 Mr. Barker has served as Vice President and Corporate Treasurer since October 1992. From July 1992 to October 1992, he served as Vice President, European Corporate Functions of the Company. From January 1990 to June 1992, he served as Vice President, European Finance and from January 1986 to December 1989, he served as Director, European Finance for the Company. Mr. Deagman has served as Vice President, Finance, Information Resources and Operations of SunSoft, Inc. since July 1993. From July 1991 to June 1993, he served as Director, Finance, Information Resources and Operations of SunSoft, Inc. From October 1990 to June 1991, he served as Director, Worldwide Operations, Finance and Business Planning. Prior to joining Sun, from November 1988 to September 1990, Mr. Deagman served as Vice President and Chief Financial Officer of Xerox Imaging Systems, a subsidiary of Xerox Corporation. Mr. Hambly has served as President, SunService, a division of the Company, since July 1993. From July 1991 to July 1993, he served as Vice President, Marketing of Sun Microsystems Computer Company (formerly Sun Microsystems Computer Corporation). From July 1988 to July 1991, he served as President of Sun Microsystems Federal, Inc. From April 1983 to July 1988, he served in various sales management capacities at the Company, most recently as Vice President, Western Area Sales. Mr. Jabbar has served as Vice President, Finance and Chief Financial Officer of Sun Microsystems Computer Company since June 1994. From July 1992 until June 1994, Mr. Jabbar served as Vice President, Finance and Planning, Worldwide Field Operations of Sun Microsystems Computer Company. From June 1991 to June 1992, he served as Vice President, Finance and Administration, United States Field Operations for Sun Microsystems Computer Company and from October 1990 to June 1991, he served as Director, Finance and Administration, United States Field Operations for the Company. From October 1989 to October 1990, he served as Director of United States Field Marketing for the Company. From April 1988 to October 1989, he served as United States Sales and Service Controller for the Company. From December 1986 to April 1988 he served as United States and Intercontinental Sales Controller for the Company. Mr. Joy has served as Vice President, Research and Development of the Company since August 1983. Mr. Lehman has served as Vice President and Chief Financial Officer since February 1994. From June 1990 until February 1994, Mr. Lehman served as Vice President and Corporate Controller of the Company. From September 1989 to June 1990, he served as Director of Finance and Administration of Sun Microsystems of California, Ltd., one of the Company's Hong Kong subsidiaries. He served as Assistant Corporate Controller of the Company from September 1988 to August 1989 and as External Reporting Manager from August 1987 to August 1988. Mr. Marr has served as Vice President, North American and Australian Field and Operations of Sun Microsystems Computer Company since April 1992. From July 1991 to April 1992, he served as Vice President and General Manager of SunPics, currently a business of Sun Microsystems Computer Company. From July 1990 to June 1991 he served as Vice President of Purchasing for the Company and from December 1987 to June 1990, he served as Central Area Sales Vice President for the Company. Mr. Morris has served as Vice President, General Counsel and Corporate Secretary of the Company since October 1987. From July 1986 to October 1987, he was General Counsel and Secretary of U.S. Telecenters Corporation. Mr. Parekh has served as Vice President, Engineering for Sun Microsystems Computer Company since July 1993. From September 1992 to July 1993, he served as Vice President, Advanced Workstations and Graphics for Sun Microsystems Computer Company. Prior to joining the Company, from September 1982 to May 1992, he served in various positions, including Vice President and General Manager, Personal Systems and Corporate Vice President Advanced Technology for Silicon Graphics, Inc. ("SGI"). From May 1992 to September 1992, he was employed by SGI as an independent consultant. Mr. Raduchel has served as Vice President, Corporate Planning and Development and as Chief Information Officer of the Company since July 1991. In addition, from July 1991 to June 1992, he served as Vice President, Human Resources (acting). From June 1989 to July 1991, he served as Vice President and 11 13 Chief Financial Officer of the Company; he was also acting Chief Information Officer of the Company from November 1990 to July 1991. From October 1988 to June 1989, he served as Vice President, Corporate Planning and Development. From 1985 to 1988, he served as Vice President of Document Systems in the Strategic Business Office of Xerox Corporation. Mr. Reyes has served as Corporate Controller of the Company since April 1994. From April 1992 to March 1994, Mr. Reyes served as Audit Director for the Company. From April 1991 to April 1992, he was Director of Finance for the Company's ICON operations. From June 1989 to April 1991, he served as Assistant Controller. From July 1988 to June 1989, Mr. Reyes was the Controller of the Company's General Systems Group. From March 1988 to June 1988, Mr. Reyes served as the Company's Marketing Controller. Mr. Roebuck has served as Vice President, Worldwide Field Operations of Sun Microsystems Computer Company since April 1992. From November 1988 to April 1992, he served as Vice President, United States Field Operations, Sun Microsystems Computer Company and from January 1986 to November 1988, he served as Vice President of Sales for the Company. Mr. Samper joined Sun in February 1994 as President, Sun Microsystems Computer Company. Prior to that time, from August 1992 to February 1994, Mr. Samper served as a General Partner of Sterling Partners, L.P. From February 1991 to August 1992, he was a private investor and consultant. From June 1990 to February 1991, Mr. Samper served as President and Chief Executive Officer of Kinder-Care Learning Centers, Inc., a child care center operating company. Prior to that, he served Eastman Kodak for 28 years, most recently as Vice Chairman and Executive Officer from 1986 to 1989. From October 1991 to February 1994, Mr. Samper also served as a director on the Company's Board of Directors. Mr. Schmidt has served as Chief Technology Officer of the Company since February 1994. From July 1991 to February 1994, Mr. Schmidt served as President of Sun Technology Enterprises, Inc., formerly a subsidiary of the Company. From July 1988 to July 1991, he served as Vice President of the Company's General Systems Group. From May 1985 to July 1988, he served as Vice President and General Manager, Software Products Division for the Company. Mr. Shoemaker has served as Vice President, Worldwide Operations of Sun Microsystems Computer Company since July 1993. From June 1992 to July 1993 he served as Vice President, U.S. Operations of Sun Microsystems Computer Company. From May 1990 to February 1993, he also served as Vice President, Finance and Planning, Worldwide Operations (on an acting basis since July 1992). He served as Vice President (Acting), Materials, Worldwide Operations from October 1991 to June 1992. From March 1989 to March 1990, he served as Senior Vice President, Electronic Printing Worldwide Marketing, Xerox Corporation. From December 1986 to March 1989, he served as Vice President and General Manager, Document Systems Business, Xerox Corporation. Mr. Silvestri has served as President, SPARC Technology Business since February 1994. From August 1992 to February 1994, Mr. Silvestri served as Vice President, SPARC Sales. Prior to joining Sun, from December 1986 to August 1992, he served as Vice President and General Manager, Technology Products for MIPS Computer Systems, Inc., later acquired by SGI. Ms. Terrell has served as President of SunExpress, Inc. since August 1991. She held various positions at Digital Equipment Corporation from 1976 to 1991, including Group Manager, Application Specific Interconnect and Packaging in 1991, Manufacturing Manager from 1988 to 1991 and Resource Development Manager, Corporate Manufacturing from 1987 to 1988. Mr. Walsh has served as Vice President, Finance and Planning, Worldwide Operations for Sun Microsystems Computer Company since February 1993. From February 1993 to February 1994, Mr. Walsh also served as Corporate Controller for Sun Microsystems Computer Company. Prior to joining the Company, from June 1990 to January 1993, he served as Chief Operating Officer of Spatial Technology Inc. From 1985 to May 1990, he served as Vice President, Finance for Schlumberger Technologies, Inc. Mr. Zander has served as President of SunSoft, Inc. since July 1991. From October 1987 to July 1991, he served as Vice President of Corporate Marketing of the Company. 12 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to page 28 and the inside back cover of Sun's 1994 Annual Report to Stockholders. At September 7, 1994 there were 4,738 stockholders of record. The following is a summary of all sales of the Company's Common Stock by the Company's executive officers who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended June 30, 1994:
NUMBER OF OFFICER DATE PRICE SHARES SOLD ------- ------- -------- ----------- Melia, Kevin...................... 4/26/94 $22.50 814 Reyes, George..................... 5/31/94 $20.8125 1,600 Wozniak, Curt..................... 5/27/94 $21.065 20,000
ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the information included under the caption "Historical Financial Review" on page 10 of Sun's 1994 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to pages 11 through 14 of Sun's 1994 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to pages 15 through 27 of Sun's 1994 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company is incorporated by reference from "Election of Directors" in Sun's 1994 Proxy Statement for the Company's 1994 Annual Meeting of Stockholders. Current executive officers of the Registrant found under the caption "Executive Officers of the Registrant" in Part I hereof is also incorporated by reference into this Item 10. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the section entitled "Executive Compensation" in Sun's 1994 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the section entitled "Information Concerning Solicitation and Voting -- Record Date and Share Ownership" and "Security Ownership of Management" in Sun's 1994 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the sections entitled "Executive Compensation -- Summary Compensation Table", "Certain Transactions With Management" and "Employment Contracts and Change-In-Control Arrangements" in Sun's 1994 Proxy Statement. 14 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial statements that are incorporated herein by reference to the following in Sun's 1994 Annual Report to Stockholders: Consolidated Statements of Income for each of the three years in the period ended June 30, 1994 (page 15). Consolidated Balance Sheets at June 30, 1994 and 1993 (page 16). Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1994 (page 17). Consolidated Statement of Stockholders' Equity for each of the three years in the period ended June 30, 1994 (page 18). Notes to Consolidated Financial Statements (pages 19 through 26). Report of Ernst & Young LLP, Independent Auditors (page 27). The Company's 1994 Annual Report to Stockholders is not deemed filed as part of this report except for those parts specifically incorporated herein by reference. 2. Financial statement schedules:
PAGE SCHEDULE TITLE ---- --------- ----- S-1 I Marketable Securities -- Other Investments S-2 II Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties S-5 VIII Valuation and Qualifying Accounts S-6 IX Short-Term Borrowings
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. 3. EXHIBITS:
EXHIBIT NUMBER DESCRIPTION --------- ----------- 3.1(2) Amended and Restated Certificate of Incorporation of Registrant. 3.2(10) Bylaws of Registrant, as amended. 3.3(9) Certificate of Amendment of the Restated Certificate of Incorporation of Registrant. 4.1(6) Indenture between Registrant and Harris Trust and Savings Bank, Trustee, covering $135,000,000 of 6 3/8% Debentures (including form of Debenture) due October 15, 1999. 4.3(10) First Amended and Restated Common Shares Rights Agreement dated December 14, 1990, between Registrant and The First National Bank of Boston. 4.4(12) Amendment dated as of October 28, 1991 to the First Amended and Restated Common Shares Rights Agreement dated December 14, 1990. 4.5(13) Second Amendment dated as of August 5, 1992 to the First Amended and Restated Common Shares Rights Agreement dated December 14, 1990.
15 17
EXHIBIT NUMBER DESCRIPTION --------- ----------- 10.1(1) Technology Transfer Agreement dated February 27, 1982, for the purchase by the Registrant of certain technology for cash, and related Assumption Agreement dated February 27, 1982. 10.3(1) Form of Founders' Restricted Stock Purchase Agreement. 10.8(1) Registration Rights Agreement dated as of November 26, 1984. 10.8A(1) Amendment to Registration Rights Agreement. 10.9(3) Registrant's 1982 Stock Option Plan, as amended, and representative forms of Stock Option Agreement. 10.10(3) Registrant's Restricted Stock Plan, as amended, and representative form of Stock Purchase Agreement. 10.11(11) Registrant's 1984 Employee Stock Purchase Plan, as amended. 10.21(1) License Agreement dated July 26, 1983, by and between Registrant and The Regents of the University of California. 10.22(1) Software Agreement effective as of April 1, 1982 by and between Registrant and American Telephone and Telegraph Company, and Supplemental Agreement dated effective as of May 28, 1983. 10.48(3) Registrant's 1987 Stock Option Plan and representative form of Stock Option Agreement. 10.50(5) Amended and Restated Term Loan Agreement dated June 7, 1989 between the Registrant, The First National Bank of Boston, Security Pacific National Bank and The First National Bank of Boston, as agent for the banks. 10.51(5) First Amendment to Amended and Restated Term Loan Agreement dated September 22, 1989. 10.56(5) Building Loan Agreement dated May 11, 1989, between Sun Microsystems Properties, Inc. and the Toyo Trust and Banking Company, Limited, New York Branch and the related Promissory Note; First Deed of Trust, Assignment of Leases, Rents and Other Income and Security Agreement; Guaranty of Payment; Guaranty of Completion (Sun Microsystems Properties, Inc.); Guaranty of Completion (Sun Microsystems, Inc.); Shortfall Agreement and Indemnity. 10.57(5) Note and Warrant Purchase Agreement dated September 26, 1989, between the Registrant, The Ohio National Life Insurance Company, Principal Mutual Life Insurance Company, Pruco Life Insurance Company, The Prudential Life Insurance Company of America, Prudential Property and Casualty Insurance Company and Teachers Insurance and Annuity Association of America and related Common Stock Purchase Warrant. 10.59(6) Second Amendment to Amended and Restated Term Loan Agreement dated as of October 26, 1989. 10.60(7) Note and Warrant Purchase Agreement dated December 15, 1989, between the Registrant and Metropolitan Life Insurance Company and related Common Stock Purchase Warrant. 10.61(7) Note and Warrant Purchase Agreement dated December 15, 1989, between the Registrant and Allstate Life Insurance Company, Modern Woodmen of America, The Ohio National Life Insurance Company, The Western and Southern Life Insurance Company, Western-Southern Life Insurance Company and Keystone Provident Life Insurance Company and related Common Stock Purchase Warrant.
16 18
EXHIBIT NUMBER DESCRIPTION --------- ----------- 10.62(8) Credit Agreement dated as of April 4, 1990, between the Registrant; Citibank N.A.; Bank of America National Trust and Savings Association; The First National Bank of Boston; Barclays Bank PLC; Security Pacific National Bank; Morgan Guaranty Trust Company of New York; Morgan Bank (Delaware); Algemene Bank Nederland N.V.; The Fuji Bank, Limited; Mitsui Taiyo Kobe Bank, Limited; and the Bank of California, N.A. 10.63(8) Third Amendment to Amended and Restated Term Loan Agreement dated as of April 3, 1990. 10.64(9) Registrant's 1988 Directors' Stock Option Plan and representative form of Stock Option Agreement. 10.65(11) Registrant's 1990 Employee Stock Purchase Plan. 10.66(11) Registrant's 1990 Long-Term Equity Incentive Plan and representative form of agreement. 10.68(11) First Amendment to Credit Agreement dated as of June 25, 1991. 10.69(11) Fourth Amendment to Amended and Restated Term Loan Agreement dated June 27, 1991. 10.73(11) Representative form of letter dated June 25, 1991 between the Registrant and the insurance companies who are parties to the Note and Warrant Purchase Agreements dated September 26, 1986 and December 15, 1989. 10.74(11) Software Distribution Agreement dated January 28, 1991 by and between the Registrant and UNIX System Laboratories, Inc. 10.75(14) Promissory Notes from Kenneth Alvares to the Registrant dated June 10, 1992 and July 13, 1992. 10.77(16) Lease Agreement between BNP Leasing Corporation and Registrant, effective as of September 25, 1992. 10.79(16) Amendments to Note and Warrant Purchase Agreement dated May 26, 1993. 10.80 Promissory note from Chester Silvestri to the Registrant dated December 30, 1992. 10.81 Notice of Exercise and Irrevocable Subscription Agreement dated July 26, 1994 between Lawrence W. Hambly and the Registrant. 10.82 Revolving Credit Agreement dated June 1, 1994, between the Registrant; Citicorp USA, Inc.; Bank of America National Trust and Savings Association; ABN AMRO Bank N.V; The First National Bank of Boston; Barclays Bank PLC; Morgan Guaranty Trust Company of New York; The Fuji Bank Limited, San Francisco Agency; The Bank of California, N.A.; The Sakura Bank, Limited, San Francisco Agency; Banque Nationale de Paris; Bayerische Vereinsbank AG, Los Angeles Agency; The Industrial Bank of Japan, Limited, San Francisco Agency; Swiss Bank Corporation. 10.83 Receivables Purchase Agreement dated as of August 5, 1994 among the Registrant, SunExpress, Inc., Sun Microsystems Federal, Inc., SunSoft, Inc., J.P. Morgan Delaware and Morgan Guaranty Trust Company of New York. 11.0 Statement of computation of earnings per share. 13.0 1994 Annual Report to Stockholders (to be deemed filed only to the extent required by the instructions to exhibits for reports on Form 10-K). 22.0 Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 24.0 Power of Attorney (see page 20). 27.0 Financial Data Schedule.
17 19 - - - --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-2897), which became effective March 4, 1986. (2) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1987. (3) Incorporated by reference to Exhibits 19.1, 19.3 or 19.4, filed as Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 25, 1987. (4) Incorporated by reference to an exhibit filed as an exhibit to the Registrant's Report on Form 8-K filed on January 11, 1988. (5) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989. (6) Incorporated by reference to Exhibits 19.0 and 19.3 filed as exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 1989. (7) Incorporated by reference to Exhibits 19.0 and 19.1 filed as exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 29, 1989. (8) Incorporated by reference to Exhibits 19.0 and 19.1 filed as exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1990. (9) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (10) Incorporated by reference to Exhibits 3.1 and 4.1 filed as exhibits to the Registrant's Report on Form 8-K filed on December 28, 1990. (11) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (12) Incorporated by reference to Exhibit 4.0 filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 1991. (13) Incorporated by reference to Exhibit 3 filed as an exhibit to the Registrant's Form 8 Amendment No. 3 to Registration Statement on Form 8-A filed on September 16, 1992. (14) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. (15) Incorporated by reference to Exhibit 19.0 filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 25, 1992. (16) Incorporated by reference to identically numbered exhibits filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 18 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. SUN MICROSYSTEMS, INC. Registrant September 27, 1994 By: /s/ MICHAEL E. LEHMAN ------------------------------------ Michael E. Lehman Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott G. McNealy and Michael E. Lehman jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include the Chief Executive Officer, the Chief Financial Officer and Corporate Controller and a majority of the Board of Directors, on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ SCOTT G. McNEALY Chairman of the Board of September 27, 1994 - - - ------------------------------------------------ Directors, President and (Scott G. McNealy) Chief Executive Officer (Principal Executive Officer) /s/ MICHAEL E. LEHMAN Vice President and Chief September 27, 1994 - - - ------------------------------------------------ Financial Officer (Michael E. Lehman) (Principal Financial Officer) /s/ GEORGE REYES Vice President and September 27, 1994 - - - ------------------------------------------------ Corporate Controller (George Reyes) (Principal Accounting Officer) /s/ L. JOHN DOERR Director September 27, 1994 - - - ------------------------------------------------ (L. John Doerr) /s/ WILLIAM RANDOLPH HEARST III Director September 27, 1994 - - - ------------------------------------------------ (William Randolph Hearst III)
19 21
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT L. LONG Director September 27, 1994 - - - ------------------------------------------------ (Robert L. Long) /s/ M. KENNETH OSHMAN Director September 27, 1994 - - - ------------------------------------------------ (M. Kenneth Oshman) /s/ A. MICHAEL SPENCE Director September 27, 1994 - - - ------------------------------------------------ (A. Michael Spence)
20 22 SCHEDULE I SUN MICROSYSTEMS, INC. MARKETABLE SECURITIES -- OTHER INVESTMENTS YEAR ENDED JUNE 30, 1994 (IN THOUSANDS, EXCEPT SHARE AMOUNT)
NAME OF ISSUER/ NUMBER OF TITLE OF EACH ISSUE SHARES AMOUNT(1) ------------------- --------- --------- Auction Market Preferred Stock.................................. 55,959 $271,543 Municipal Obligations........................................... 162,318 Commercial Paper................................................ 11,427 Tax-exempt Commercial Paper..................................... 3,591 -------- $448,879 ========
- - - --------------- (1) Stated at cost, which approximates market. No individual security or group of securities of an issuer exceeds 2% of total assets of the Company. S-1 23 SCHEDULE II SUN MICROSYSTEMS, INC. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING AMOUNTS END OF NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED PERIOD -------------- ---------- --------- --------- ---------- Year Ended June 30, 1994: Kenneth Alvares: Interest-free note receivable secured by stock due in 1997......................... $300 $ -- $ -- $300 Interest-free note receivable secured by real property due in 1997................. $375 $ -- $ -- $375 ---- ----- ----- ---- $675 $ -- $ -- $675 ==== ===== ===== ==== Mel Friedman: 8.57% notes receivable secured by real property due in 1994...................... $150 $ -- $ -- $150 ==== ===== ===== ==== Chester Silvestri: Interest-free unsecured note receivable due in 1995................................... $120 $ -- $ -- $120 ==== ===== ===== ====
S-2 24 SCHEDULE II (CONTINUED) SUN MICROSYSTEMS, INC. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING AMOUNTS END OF NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED PERIOD -------------- ---------- --------- --------- ---------- Year Ended June 30, 1993: Kenneth Alvares: Interest-free note receivable secured by stock due in 1997......................... $300 $ -- $ -- $300 Interest-free note receivable secured by real property due in 1997................. $ -- $375 $ -- $375 ---- ---- ---- ---- $300 $375 $ -- $675 ==== ==== ==== ==== Mel Friedman: 8.57% notes receivable secured by real property due in 1994...................... $300 $ -- $150 $150 ==== ==== ==== ==== Jessie Mobley: 9.38% notes receivable secured by real property due in 1994...................... $200 $ -- $200 $ -- ==== ==== ==== ==== Dennis M. Ohryn: 8.25% notes receivable secured by real property due in 1992...................... $200 $ -- $200 $ -- 8.38% note receivable secured by real property due in 1992...................... 30 -- 30 -- 8.99% note receivable secured by real property due in 1993...................... 70 -- 70 -- ---- ---- ---- ---- $300 $ -- $300 $ -- ==== ==== ==== ====
S-3 25 SCHEDULE II (CONTINUED) SUN MICROSYSTEMS, INC. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING AMOUNTS END OF NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED PERIOD -------------- ---------- ---------- ---------- ---------- Year Ended June 30, 1992: Kenneth Alvares: Interest-free note receivable secured by stock due in 1997................................ $ -- $300 $ -- $300 ==== ==== ==== ==== Mel Friedman: 8.57% notes receivable secured by real property due in 1994....................... $300 $ -- $ -- $300 ==== ==== ==== ==== Leonard B. Hughes: 8.25% notes receivable secured by real property due in 1992....................... $176 $ -- $176 $ -- ==== ==== ==== ==== Jessie Mobley: 9.38% notes receivable secured by real property due in 1994....................... $200 $ -- $ -- $200 ==== ==== ==== ==== Dennis M. Ohryn: 8.25% notes receivable secured by real property due in 1992....................... $200 $ -- $ -- $200 8.38% note receivable secured by real property due in 1992................................ 30 -- -- 30 8.99% note receivable secured by real property due in 1993................................ 70 -- -- 70 ---- ---- ---- ---- $300 $ -- $ -- $300 ==== ==== ==== ==== Edward J. Zander: 8.62% note receivable secured by real property due in 1993................................ $174 $ -- $174 $ -- ==== ==== ==== ====
S-4 26 SCHEDULE VIII SUN MICROSYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND DEDUCTION/ END OF DESCRIPTION OF PERIOD EXPENSES WRITEOFF PERIOD ----------- ---------- ---------- ----------- ---------- Year ended June 30, 1992: Accounts receivable allowances............. $58,985 $ 71,380 $ 81,668 $48,697 ======= ======== ========= ======= Year ended June 30, 1993: Accounts receivable allowances............. $48,697 $ 89,027 $ 86,262 $51,462 ======= ======== ========= ======= Year ended June 30, 1994: Accounts receivable allowances............. $51,462 $167,281 $138,898 $79,845 ======= ======== ========= =======
S-5 27 SCHEDULE IX SUN MICROSYSTEMS, INC. SHORT-TERM BORROWINGS (IN THOUSANDS)
MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT AVERAGE BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE CATEGORY OF AGGREGATE END OF INTEREST DURING THE DURING THE DURING THE SHORT-TERM BORROWING PERIOD RATE PERIOD PERIOD(A) PERIOD(B) --------------------- ---------- --------- ------------ ------------ ------------- Year ended June 30, 1992: Payable to others for borrowings...... $91,284 7.6% $ 91,284 $48,007 8.0% ======= === ======== ======= === Year ended June 30, 1993: Payable to others for borrowings...... $90,890 5.4% $140,451 $94,595 6.5% ======= === ======== ======= === Year ended June 30, 1994: Payable to others for borrowings...... $78,687 3.0% $ 90,890 $55,415 7.6% ======= === ======== ======= ===
- - - --------------- (A) Calculated on average monthly borrowings (B) Calculated by dividing interest on short-term borrowings during the year by average short-term borrowings S-6 EX-10.80 2 PROMISSORY NOTE DECEMBER 30, 1992 1 EXHIBIT 10.80 Sun Microsystems, Inc. 2550 Garcia Avenue Mountain View, CA 94043-1100 415 960-1300 PROMISSORY NOTE $120,000.00 Mountain View, California December 30, 1992 In installments as stated in the Note, for value received, Chester Silvestri and Irene Silvestri (hereinafter collectively referred to as "Borrower") hereby promise to pay to Sun Microsystems, Inc., a Delaware corporation ("Lender") or order, at its offices at 2550 Garcia Avenue, Mountain View, California, or at such other place as Lender may from time to time designate in writing, the principal sum of One Hundred Twenty Thousand Dollars ($120,000.00) on the following terms: 1. PAYMENT: The principal due pursuant to this Note shall be paid in full on or before July 30, 1994 in lawful money of the United States. This Note shall bear no interest; however, Borrower acknowledges that the federal, state and local tax authorities may impute interest and that any tax(es) on such imputed interest shall be the sole obligation of Borrower. This Note may be prepaid at any time. 2. DEFAULT AND ACCELERATION: A. Full Acceleration: Unless otherwise prohibited by law, upon the occurrence of any of the following events, the Holder of this Note shall have the option, without demand or notice, to declare the entire balance of principal of this Note to be immediately due and payable: (i) Borrower defaults in the payment of principal when due pursuant to the terms hereof or defaults in the performance of any obligation of Borrower or other agreement (including any amendment, modification or extension thereof) which may hereafter be executed by Borrower for the purpose of securing this Note; (ii) Thirty (30) days after (a) Lender is notified that Chester Silvestri is terminating his employment with Lender, or (b) Lender terminates Chester Silvestri's employment for cause. For purposes of this Note, the term "cause" shall mean Chester Silvestri's misfeasance, malfeasance or misconduct, dishonesty or gross negligence in connection with his employment or such other conduct that reflects adversely upon the Lender. B. Partial Acceleration: (i) In the event that Chester Silvestri dies or is disabled for a period of more than six months, principal due hereunder shall be accelerated and (50%) fifty percent of the principal shall be paid in twelve (12) equal monthly installments, (i) with the first such monthly payment due, in the event of his death, on the date ninety (90) days after his death, and, in the event of his disability, on the date which is six (6) months from the date that Chester Silvestri becomes disabled, and (ii) the successive monthly payments being due each month thereafter on the first day of each such month. The remaining fifty percent (50%) of the principal shall be due in a balloon payment on the first day of the thirteenth month following the date of the first payment made pursuant to this accelerated payment schedule. NOTWITHSTANDING THE FOREGOING, IN NO EVENT SHALL THE FOREGOING PAYMENT SCHEDULE EXTEND THE DUE DATE OF THIS NOTE BEYOND JULY 30, 1994 AT WHICH TIME ANY UNPAID BALANCE SHALL BE DUE AND PAYABLE IN FULL. -1- 2 3. ATTORNEY'S FEES: In the event of any default hereunder, Borrower hereby promises to pay all costs of collection, including reasonable attorney's fees incurred by Lender hereof on account of such collection, whether or not suit is filed hereon. 4. WAIVER: The waiver by Lender hereof of any breach of or default under any terms, covenant or condition contained herein or in any of the agreements referred to above shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of or default under the same or any other such term, covenant or condition. 5. NO USURY: Borrower hereby represents and warrants that at no time shall the proceeds of the indebtedness evidenced hereby be used "primarily for personal, family, or household purposes" as that term is defined and used in Article XV of the California Constitution (as amended from time to time). 6. GENERAL PROVISIONS: This Note shall be goverened by and construed in accordance with the laws of the State of California. The makers, guarantors and endorsers of this Note hereby severally waive presentment for payment, protest and demand, notice of notice of protest, demand and dishonor and nonpayment of this Note, and consent that Lender may extend the time for payment or otherwise modify the terms of payment or any part of the whole of the debt evidenced by this Note, at the request of any person liable hereon, and such consent shall not alter nor diminish the liability of any person. Borrower hereby waives the defense of the statute of limitations in any action of this Note to the extent permitted by law. The terms of this Promissory Note constitute the entire agreement and understanding between the parties and supersede all previous communications, representations or agreements, whether written or oral, with respect to the subject matter hereof. AS BORROWER: /s/ CHESTER SILVESTRI ------------------------------------ /s/ IRENE N. SILVESTRI ------------------------------------ -2- EX-10.81 3 STOCK OPTION EXERCISE NOTICE & IRREV SUB AGREE 1 EXHIBIT 10.81 SUN MICROSYSTEMS, INC. STOCK OPTION EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT ATTN: STOCK ADMINISTRATOR LADIES AND GENTLEMEN: I, Larry Hambly, irrevocably elect to exercise my option to purchase an aggregate of 16,000 shares of common stock at an exercise price of $18.00 per share (the "Shares") of Sun Microsystems, Inc. (the "Company") under and pursuant to the Nonstatutory Stock Option Agreement(s) attached as Exhibit A hereto and incorporated herein by this reference (the "Option Agreements") granted to me by the Company pursuant to the Company's 1982 Incentive Stock Option Plan, 1987 Stock Option Plan, 1988 Directors' Stock Option Plan and/or 1990 Long#Term Equity Incentive Plan. I agree to make full payment of the option exercise price for the Shares within the fifteen day period following the date on which the Company's General Counsel notifies me, together with the other directors and/or executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, that the trading window governed by the Company's insider trading policy is open. I further agree that payment of the exercise price shall be (1) in cash, (2) by tender of stock of the Company having a fair market value not less than the option exercise price and held by me for at least six (6) months prior to the their tender, or (3) by such other consideration as may have been approved by the Board of Directors of the Company at the time these options were granted as specified in the applicable Option Agreement. In addition, I will make adequate provision for federal and state income tax withholding obligations of the Company, if any, which arise by virtue of my exercise, in whole or in part, of these options. I represent and agree that the Shares are being acquired by me in accordance with and subject to the terms, provisions and conditions of the Option Agreements, to all of which I hereby expressly assent. In addition, I acknowledge that my obligations hereunder are secured pursuant to the terms of that certain Security Agreement executed simultaneously herewith. These agreements shall bind and inure to the benefit of my heirs, legal representatives, successors and assigns. I UNDERSTAND THAT THIS EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT MAY NOT BE REVOKED, ALTERED, AMENDED OR TERMINATED. I FURTHER ACKNOWLEDGE THAT THE MARKET VALUE OF THE SHARES RECEIVED ON EXERCISE OF THE OPTIONS MAY DECREASE IN VALUE, AND REGARDLESS OF ANY SUCH DECREASE I WILL BE LIABLE UNDER ALL CIRCUMSTANCES FOR PAYMENT OF THE FULL EXERCISE PRICE, WITHOUT EXCEPTION. I HAVE ALSO BEEN 2 ADVISED TO CONSULT MY TAX ADVISOR CONCERNING THE EXERCISE OF THE SUBJECT OPTIONS AND THE ADVISABILITY OF ENTERING INTO ANY TAX OR OTHER ELECTIONS IN CONNECTION THEREWITH. My address of record is: 100 Mt. Hamilton Avenue Los Altos, CA 94022 and my Social Security Number is: ###-##-#### Very truly yours, /s/ LAWRENCE W. HAMBLY The undersigned, being the spouse of the optionee exercising the options set forth above, does hereby acknowledge that the undersigned has read and is familiar with the provisions of the above Stock Option Exercise Notice and Irrevocable Subscription Agreement and the Option Agreements, and the undersigned hereby agrees to such Agreements and joins in them to the extent, if any, that the agreement and joinder of the undersigned may be necessary. Date: July 26, 1994 Receipt of the above is hereby acknowledged. By: /s/ ANNE B. HAMBLY Dated: July 26, 1994 2 3 Exercise of Stock Options EXHIBIT A SECURITY AGREEMENT This Security Agreement is made as of July 26, 1994 between Sun Microsystems, Inc., a Delaware corporation (the "Pledgee"), Larry Hambly and Anne B. Hambly (collectively, "Pledgor") and the Secretary of the Pledgee ("Pledgeholder"). RECITALS Pursuant to Pledgor's election to enter into that certain Stock Option Exercise and Irrevocable Subscription Agreement (the "Subscription Agreement"), between Pledgor and Pledgee, and Pledgor's election to pay for such shares pursuant to the terms of such Subscription Agreement, Pledgor has purchased 16,000 shares of Pledgee's Common Stock (the "Shares") at a price of 18.00 per share, for a total purchase price of $288,000.00 ("Purchase Price"). NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of Shares to Pledgor under the Subscription Agreement, Pledgor, pursuant to the Commercial Code of the State of Delaware, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number(s) - - - ---------, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Pledgeholder, who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Purchase Price, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Subscription Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the Purchase Price secured hereby, together with interest thereon, at the time and in the manner provided in the Subscription Agreement. (b) Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Subscription Agreement or providing any additional collateral as may be necessary to comply with such regulations. 4 Exercise of Stock Options 3. Voting Rights. During the term of this pledge and so long as all payments are made as they become due under the terms of the Subscription Agreement, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of this pledge, subscription warrants or other rights or options shall be issued in connection with the pledged Shares, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor and issued with respect to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Subscription Agreement and this Security in the event: (a) Payment of Purchase Price shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Subscription Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate full payment of Pledgor's obligations pursuant to the Subscription Agreement upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue his remedies under the Delaware Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge the pledged Shares held by Pledgeholder hereunder upon full payment by Pledgor pursuant to the terms of the Subscription Agreement. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes 2 5 Exercise of Stock Options an assignment for the benefit of creditors, the entire amount due under the Subscription Agreement shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" /s/ LAWRENCE W. HAMBLY /s/ ANNE B. HAMBLY Address: "PLEDGEE" SUN MICROSYSTEMS, INC. a Delaware corporation By: /s/ MICHAEL H. MORRIS Title: Vice President, General Counsel & Corporate Secretary "PLEDGEHOLDER" /s/ MICHAEL H. MORRIS Corporate Secretary
3 EX-10.82 4 CREDIT AGREEMENT DATED JUNE 1, 1994 1 EXHIBIT 10.82 U.S. $150,000,000 CREDIT AGREEMENT Dated as of June 1, 1994, among SUN MICROSYSTEMS, INC. as Borrower and THE LENDERS NAMED HEREIN as Lenders and CITICORP USA, INC. as Agent 2 Table of Contents Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms . . . . . . . . . . . . . 1 SECTION 1.02. Computation of Time Periods . . . . . . . . . . 11 SECTION 1.03. Accounting Terms . . . . . . . . . . . . . . . 11 ARTICLE II AMOUNTS AND TERMS OF ADVANCES SECTION 2.01. The A Advances . . . . . . . . . . . . . . . . 11 SECTION 2.02. Making the A Advances . . . . . . . . . . . . . 12 SECTION 2.03. The B Advances . . . . . . . . . . . . . . . . 13 SECTION 2.04. Fees . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.05. Reduction of the Commitments . . . . . . . . . 17 SECTION 2.06. Repayment of A Advances . . . . . . . . . . . . 17 SECTION 2.07. Interest on A Advances . . . . . . . . . . . . 17 SECTION 2.08. Notes . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.09. Interest Rate Determination . . . . . . . . . . 18 SECTION 2.10. Sharing of Payments, Etc . . . . . . . . . . . 19 SECTION 2.11. Prepayments of A Advances . . . . . . . . . . . 19 SECTION 2.12. Increased Costs . . . . . . . . . . . . . . . . 20 SECTION 2.13. Illegality . . . . . . . . . . . . . . . . . . 21 SECTION 2.14. Payments and Computations . . . . . . . . . . . 21 SECTION 2.15. Taxes . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Condition Precedent to Initial Advances . . . . 24 SECTION 3.02. Conditions Precedent to Each A Borrowing . . . . . . . . . . .. . . . . . . . 25 SECTION 3.03. Conditions Precedent to Each B Borrowing . . . . . . . . . . . . . . . . . . 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower . . . . . . . . . . . . . . . . . . 26 ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants . . . . . . . . . . . . . 30 SECTION 5.02. Negative Covenants . . . . . . . . . . . . . . 36 i 3 Page ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default . . . . . . . . . . . . . . . 42 SECTION 6.02. Mandatory Prepayment; Event of Early Termination . . . . . . . . . . . . . . . . . . 44 ARTICLE VII THE AGENT SECTION 7.01. Authorization and Action . . . . . . . . . . . 45 SECTION 7.02. Agent's Reliance, Etc . . . . . . . . . . . . . 45 SECTION 7.03. CUSA and Affiliates . . . . . . . . . . . . . . 46 SECTION 7.04. Lender Credit Decision . . . . . . . . . . . . 46 SECTION 7.05. Indemnification . . . . . . . . . . . . . . . . 46 SECTION 7.06. Successor Agent . . . . . . . . . . . . . . . . 47 ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. . . . . . . . . . . . . . . . 47 SECTION 8.02. Notices, Payments, Etc. . . . . . . . . . . . . 48 SECTION 8.03. No Waiver; Remedies . . . . . . . . . . . . . . 48 SECTION 8.04. Costs and Expenses . . . . . . . . . . . . . . 49 SECTION 8.05. Right of Set-off . . . . . . . . . . . . . . . 50 SECTION 8.06. Binding Effect . . . . . . . . . . . . . . . . 51 SECTION 8.07. Assignments and Participations . . . . . . . . 51 SECTION 8.08. Governing Law . . . . . . . . . . . . . . . . . 54 SECTION 8.09. Headings . . . . . . . . . . . . . . . . . . . 54 SECTION 8.10. Execution in Counterparts . . . . . . . . . . . 54 SECTION 8.11. Confidentiality . . . . . . . . . . . . . . . . 54 SECTION 8.12. Termination . . . . . . . . . . . . . . . . . . 55 SCHEDULE I . . . . . . . . . . . . . . . . . . . . . . . . . . 58 EXHIBITS EXHIBIT A-l FORM OF A NOTE EXHIBIT A-2 FORM OF B NOTE EXHIBIT B-1 NOTICE OF A BORROWING EXHIBIT B-2 NOTICE OF B BORROWING EXHIBIT C ASSIGNMENT AND ACCEPTANCE EXHIBIT D OPINION OF WILSON, SONSINI, GOODRICH & ROSATI EXHIBIT E COVENANT COMPLIANCE CERTIFICATE EXHIBIT F LIENS EXHIBIT G SUBSIDIARIES EXHIBIT H RESPONSIBLE OFFICERS ii 4 CREDIT AGREEMENT Dated as of June 1, 1994 SUN MICROSYSTEMS, INC., a Delaware corporation (the "Borrower"), the Lenders listed on the signature pages hereof, and CITICORP USA, INC., a Delaware corporation ("CUSA"), as agent (the "Agent") for the Lenders hereunder, agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "A Advance" means an advance by a Lender to the Borrower as part of an A Borrowing and refers to an Alternate Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of A Advance. "A Borrowing" means a borrowing consisting of simultaneous A Advances of the same Type made by each of the Lenders pursuant to Section 2.01. "A Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the A Advances made by such Lender. "Adjusted EBIT" means, for any accounting period, net income (or net loss) plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) gross interest expense, (b) income tax expense and (c) rent expense under leases of real and personal property (excluding, however, from the determination of such rent expense, taxes and normal and customary operating expenses passed on to the Borrower for reimbursement pursuant to the terms of such real property leases whether denominated under such leases as "rent", "additional rent" or otherwise, but only to the extent that such operating expenses are actually incurred and passed through to the Borrower), in each case determined in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Advance" means an A Advance or a B Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. 1 5 "Alternate Base Rate" means, for any period (including a period consisting of a single day), a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the highest of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; or (b) 1/2 of one percent per annum above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if any such date is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by the Agent on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by the Agent from three New York certificate of deposit dealers of recognized standing selected by the Agent, in either case adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent; or (c) for any day, 1/2 of one percent per annum above the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Alternate Base Rate Advance" means an A Advance which bears interest as provided in Section 2.07(a). "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of an Alternate Base Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of a B Advance, the office of such Lender notified by such Lender to the Agent as its Applicable Lending Office with respect to such B Advance. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee reasonably acceptable to the Agent and reasonably consented to by the Borrower, in substantially the form of Exhibit C hereto. 2 6 "B Advance" means an advance by a Lender to the Borrower as part of a B Borrowing resulting from the auction bidding procedure described in Section 2.03. "B Borrowing" means a borrowing consisting of B Advances made at or about the same time by each of the Lenders whose offer to make one or more B Advances as part of such borrowing has been accepted by the Borrower under the auction bidding procedure described in Section 2.03. "B Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from a B Advance made by such Lender. "B Reduction" has the meaning specified in Section 2.01. "Borrowing" means an A Borrowing or a B Borrowing. "Business Day" means a day of the year other than a Saturday, Sunday or other day on which banks are not required or authorized to close in New York City or San Francisco, California and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London, England interbank market. "Change of Control Event" means the occurrence of the following: (i) any corporation or Person, or a group of related corporations or Persons, shall acquire (a) beneficial ownership in excess of 50% of the outstanding Voting Stock of the Borrower or (b) all or substantially all of the assets of the Borrower, or (ii) a majority of the Board of Directors of the Borrower is, at any time, composed of persons other than (a) persons who were members of such Board on the date of this Agreement, (b) successors to such persons elected or nominated in the ordinary course of business, and (c) any person who has served as a member of such Board for at least the prior 12 months. "Citibank" means Citibank, N.A., a national banking association. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Commitment" has the meaning specified in Section 2.01. "consolidated" refers to the consolidation of the accounts of the Borrower and its Subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the consolidated financial statements referred to in Section 4.01(e). 3 7 "Consolidated Tangible Net Worth" means the excess of consolidated total assets over consolidated total liabilities, consolidated total assets and consolidated total liabilities each to be determined on a consolidated basis for the Borrower in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e), excluding, however, from the determination of consolidated total assets (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) all unamortized debt discount and expense, (iii) asset, liability, contingency and other appropriate reserves, including reserves for depreciation and for deferred income taxes, (iv) treasury stock, (v) any write-up in the book value of any asset resulting from a revaluation thereof subsequent to June 30, 1993, (vi) the book value of investments in Persons that are not Subsidiaries (unless the same are readily marketable), and (vii) any items not included in clauses (i) through (vi) above which are treated as intangibles in conformity with generally accepted accounting principles. "Debt" of any Person means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services (excluding ordinary trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (v) all obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities or property, (vi) any reimbursement obligations of such Person to the issuer of a letter of credit or similar instrument, (vii) all indebtedness or obligations of others secured by a lien on any asset of such Person, whether or not such indebtedness or obligations are assumed by such Person (to the extent of the value of the asset), (viii) any reimbursement obligation of such Person or other arrangement of whatever nature having the effect of assuring or holding harmless any other Person against loss with respect to any real property owned by such other Person, including, without limitation, assuring or guaranteeing that such other Person shall receive a specified amount in connection with the conveyance of such real property, (ix) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (viii) above, and (x) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. Notwithstanding any provision herein to the contrary, no obligations of any Person (whether such obligations be direct or indirect, contingent or otherwise) under the Receivables Purchase Agreement or any similar agreement or arrangement shall be "Debt" 4 8 for purposes of this Agreement; provided that the foregoing exclusion shall not apply to obligations of any such Person pursuant to the indemnity or reimbursement provisions contained in the Receivables Purchase Agreement (including, without limitation, indemnities for breaches of representations and warranties, and those set forth in Article VIII, Section 9.03(b) and Section 10.06 thereof) or any similar agreement or arrangement and to fees and expenses payable pursuant to the Receivables Purchase Agreement or any similar agreement or arrangement to the extent that any such obligations are required to be recorded as liabilities on such Person's balance sheet under generally accepted accounting principles. "Default" means any event which, with the passage of time or the giving of notice or both, would (if not cured within any applicable cure period) constitute an Event of Default. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment, or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any Person who for purposes of Title IV of ERISA is a member of the Borrower's controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Code, and the regulations promulgated and rulings issued thereunder. "ERISA Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations promulgated thereunder (other than a Reportable Event not subject to the provision for thirty (30) day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Borrower or any Subsidiary from a Plan during a 5 9 plan year in which it was a "substantial employer" as defined in Section 4001(a) (2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v) any other event or condition which would constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Eurodollar Margin" means, on any day, with respect to any Eurodollar Rate Advance made or outstanding on such day, an interest rate per annum equal at all times to (i) .25% for each day during a Level I Period; (ii) .25% for each day during a Level II Period; (iii) .275% for each day during a Level III Period; (iv) .30 for each day during a Level IV Period; and (v) .50 for each day during a Level V Period. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same A Borrowing, an interest rate per annum determined by the Agent to be (a) the arithmetic mean (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such arithmetic mean is not such a multiple) of the rates notified to the Agent at which deposits in U.S. dollars are offered by the principal office of each of the Eurodollar Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to the respective Eurodollar Reference Bank's (or its Affiliate's) Eurodollar Rate Advance comprising part of such A Borrowing and for a period equal to such Interest Period, divided by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage (as defined below) for such Interest Period. The "Eurodollar Rate Reserve Percentage" for the Interest Period for each Eurodollar Rate Advance comprising part of the same A Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding 6 10 One Billion Dollars with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period. "Eurodollar Rate Advance" means an A Advance which bears interest as provided in Section 2.07(b). "Eurodollar Reference Banks" means the principal London offices of Citibank, Bank of America National Trust and Savings Association and ABN AMRO Bank N.V. and each such other bank as may be approved pursuant to Section 8.07(i). "Events of Default" has the meaning specified in Section 6.01. "Excess Interest in Receivables" means the extent to which (i) any ownership interest, security interest or other interest of any third party in the accounts receivable of the Borrower and its Subsidiaries, exceeds (ii) the aggregate amount advanced by such third party in respect of the purchase of such interest (net of amounts received by such third party from the collection of such accounts receivable). "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fixed Charges" means, for any accounting period, the sum, without duplication, of (i) gross interest expense during such period, plus (ii) scheduled amortization of principal in respect of all Debt during such period (but excluding any required principal payment in respect of any obligation that is a "bullet" payment, i.e., the entire amount thereof is due in full at maturity without any amortizing payments prior to said maturity), plus (iii) amortization of debt discount (but excluding from this clause (iii) and clause (i) above noncash amortization of debt discount if the maturity of the obligation so discounted is no earlier than December 31, 1998 pursuant to the terms and conditions of the instruments and agreements creating such debt discount), plus (iv) rent expense under leases of real and personal property during such period (excluding, however, from the determination of such rent expense, taxes and normal and customary operating expenses passed on to the Borrower for reimbursement pursuant to the terms of such real property 7 11 leases whether denominated under such leases as "rent", "additional rent" or otherwise, but only to the extent that such operating expenses are actually incurred and passed through to the Borrower). "Interest Period" means, for each A Advance comprising part of the same A Borrowing, the period commencing on the date of such A Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be (a) 30, 60, 90 or 180 days in the case of an Alternate Base Rate Advance, and (b) 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, in each case as the Borrower may, upon notice received by the Agent in accordance with Section 2.02, select; provided, however, that: (i) the Borrower may not select any Interest Period which ends after the then existing Termination Date; (ii) Interest Periods commencing on the same date for A Advances comprising part of the same A Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lenders" means the lenders listed on the signature pages hereof and each assignee that shall become a party hereto pursuant to Sections 8.07(a) or (b). "Level I Period" means a period of time, which may consist of a single day, during which the long-term senior unsecured debt of the Borrower is rated: (i) A- or better by S&P or (ii) A3 or better by Moody's. "Level II Period" means a period of time other than a Level I Period, which may consist of a single day, during which the long-term senior unsecured debt of the Borrower is rated: (i) BBB+ by S&P or (ii) Baa1 by Moody's. "Level III Period" means a period of time other than a Level I Period or a Level II Period, which may consist of a single day, during which the long-term senior unsecured debt of the Borrower is rated: (i) BBB by S&P or (ii) Baa2 by Moody's. "Level IV Period" means a period of time other than a Level I Period, a Level II Period or a Level III Period, which may consist of a single day, during which the long-term senior unsecured debt of the Borrower is rated: (i) BBB- by S&P, or (ii) Baa3 by Moody's. 8 12 "Level V Period" means a period of time other than a Level I Period, a Level II Period, a Level III Period or a Level IV Period, which may consist of a single day, during which the long-term senior unsecured debt of the Borrower is (i) rated lower than BBB- by S&P and rated lower than Baa3 by Moody's (or rated lower than the level indicated for either S&P or Moody's if unrated by the other), or (ii) unrated by both S&P and Moody's for whatever reason. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). Customary bankers' rights of set-off arising by operation of law or by contract in connection with working capital facilities, lines of credit, term loans and letter of credit facilities and other contractual arrangements entered into with banks in the ordinary course of business are not "Liens" for the purposes of this Agreement. "Majority Lenders" means at any time Lenders holding at least 51% of the then aggregate unpaid principal amount of the A Advances then outstanding or, if no such principal amount is then outstanding, then either (i) if the Commitments have not been terminated or there are no B Advances outstanding, Lenders having at least 51% of the Commitments, or (ii) if the Commitments have been terminated and there are B Advances outstanding, Lenders holding at least 51% of the then aggregate unpaid principal amount of the B Advances then outstanding. "Moody's" means Moody's Investors Service, Inc., or its successors. "Note" means an A Note or a B Note. "Notice of A Borrowing" has the meaning specified in Section 2.02(a). "Notice of B Borrowing" has the meaning specified in Section 2.03(a). "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means at any time an employee pension benefit plan which is covered under Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by the Borrower or any Subsidiary for employees of the Borrower or any Subsidiary or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any Subsidiary is then 9 13 making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Receivables Purchase Agreement" means that certain Receivables Purchase Agreement dated as of June 27, 1991, as amended by that certain Amendment to Receivables Purchase Agreement dated May 29, 1992, among the Borrower, the Subsidiary Sellers as identified and defined therein, the Purchasers as identified and defined therein and J.P. Morgan Delaware, as agent, as in effect on the date hereof (a copy of which has been furnished to each Lender listed on the signature pages hereof pursuant to Section 3.01), without giving effect to any subsequent amendments or waivers (other than any such amendments or waivers which add new Subsidiary Sellers as parties to such agreement or which remove any Subsidiary Seller as a party), unless such amendment or waiver has been consented to by the Majority Lenders. "Register" has the meaning specified in Section 8.07(c). "Responsible Financial Officer" means the chief financial officer, the controller, the treasurer or any assistant treasurer of the Borrower. "Responsible Officer" means the individuals occupying the executive offices of the Borrower described in Exhibit H hereto and any successors to the offices held by the individuals identified therein, and the individuals occupying any other executive offices of the Borrower which at any time have the authority, functions and responsibilities as the offices described in Exhibit H. "Restricted Subsidiary" means, at any point in time, any Subsidiary having total assets of $100,000 or more as of the end of its most recent fiscal year or annual gross revenues of $1,000,000 or more during its most recent fiscal year. "S&P" means Standard and Poor's Ratings Group, or its successors. "Subsidiary" means any corporation of which the Borrower and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors. "Termination Date" means June 1, 1997 or the earlier date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01. "Transfer" means, with respect to any asset, to sell, lease, transfer or otherwise dispose of such asset. "Voting Stock" of any Person means any shares of stock of such Person whose holders are entitled under ordinary 10 14 circumstances to vote for the election of directors of such Person (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "wholly owned Subsidiary" means any Subsidiary all of the outstanding capital stock (other than directors' qualifying shares and shares issued to satisfy local ownership requirements) of which is owned, directly or indirectly, by the Borrower. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The A Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make A Advances to the Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an aggregate amount not to exceed at any time the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.05 (such Lender's "Commitment"), provided that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the B Advances then outstanding and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being a "B Reduction"). Each A Borrowing shall be in an aggregate amount not less than $15,000,000 or an integral multiple of $1,000,000 in excess thereof (or, with respect to an A Borrowing comprised of Alternate Base Rate Advances, such lesser amount as shall equal the then unborrowed amount of the aggregate Commitments), and shall consist of A Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.11(b) and reborrow under this Section 2.01. 11 15 SECTION 2.02. Making the A Advances. (a) Each A Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on (x) the date of a proposed A Borrowing comprised of Alternate Base Rate Advances, and (y) the third Business Day prior to the date of a proposed A Borrowing comprised of Eurodollar Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof (and in any event not later than the same day) by telecopier, telex or cable. Each such notice of an A Borrowing (a "Notice of A Borrowing") shall be by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such A Borrowing, (ii) Type of A Advances comprising such A Borrowing, (iii) aggregate amount of such A Borrowing, and (iv) Interest Period for each such A Advance. Each Lender shall, before 12:00 Noon (New York City time) on the date of such A Borrowing, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02(b), in same day funds, such Lender's ratable portion of such A Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Agent's aforesaid address. (b) Each Notice of A Borrowing shall be irrevocable and binding on the Borrower. In the case of any A Borrowing which the related Notice of A Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of A Borrowing for such A Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the A Advance to be made by such Lender as part of such A Borrowing when such A Advance, as a result of such failure, is not made on such date. (c) Unless the Agent shall have received notice from a Lender prior to the date of any A Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such A Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such A Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to A Advances comprising such A Borrowing and (ii) in 12 16 the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's A Advance as part of such A Borrowing for purposes of this Agreement, and the interest payable thereon shall be allocated such that the Agent shall receive (from a combination of the sum, if any, paid to the Agent by such Lender pursuant to clause (ii) of the preceding sentence and any interest payment made by the Borrower) an amount equal to interest on such A Advance at the interest rate applicable thereto from the date the corresponding amount was made available by the Agent to the Borrower as contemplated by this Section 2.02(c) to and including the date such amount is repaid to the Agent by such Lender, and such Lender shall receive the balance of the interest payments made by the Borrower with respect to such Advance in accordance with the provisions of this Agreement. (d) The failure of any Lender to make the A Advance to be made by it as part of any A Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its A Advance on the date of such A Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the A Advance to be made by such other Lender on the date of any A Borrowing. SECTION 2.03. The B Advances. (a) Each Lender severally agrees that the Borrower may make B Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 30 days prior to the Termination Date in the manner set forth below; provided that, following the making of each B Borrowing, the aggregate amount of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Lenders (computed without regard to any B Reduction). (i) The Borrower may request a B Borrowing under this Section 2.03 by delivering to the Agent, by telecopier, telex or cable, confirmed immediately in writing, a notice of a B Borrowing (a "Notice of B Borrowing"), in substantially the form of Exhibit B-2 hereto, specifying the date and aggregate amount of the proposed B Borrowing, the maturity date for repayment of each B Advance to be made as part of such B Borrowing (which maturity date (x) may not be earlier than the date occurring 7 days after the date of such B Borrowing or later than 180 days after the date of such B Borrowing or the Termination Date, whichever occurs first, if the Borrower shall specify in the Notice of B Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum, or (y) shall be 1, 2, 3, 4, 5 or 6 months after the date of such B Borrowing (but in no event later than the Termination Date) if the Borrower shall instead specify in the Notice of B Borrowing the basis to be used by the Lenders in determining the rates of interest to be offered by them), the interest payment date or dates relating thereto, whether the proposed B Borrowing shall bear interest at a fixed or fluctuating rate per annum and, if a fluctuating rate is so specified, the basis to be used by the Lenders in determining the 13 17 rate of interest to be offered by them, and any other terms to be applicable to such B Borrowing, not later than 11:00 A.M. (New York City time) (A) at least one Business Day prior to the date of the proposed B Borrowing, if the Borrower shall specify in the Notice of B Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum and (B) at least four Business Days prior to the date of the proposed B Borrowing, if the Borrower shall instead specify in the Notice of B Borrowing the basis to be used by the Lenders in determining the rates of interest to be offered by them. The Agent shall in turn promptly notify each Lender of each request for a B Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of B Borrowing. (ii) Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more B Advances to the Borrower as part of such proposed B Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Agent (which shall give prompt notice thereof to the Borrower) before 10:00 A.M. (New York City time) (A) on the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B) three Business Days before the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (B) of paragraph (i) above, of the minimum amount and maximum amount of each B Advance which such Lender would be willing to make as part of such proposed B Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender's Commitment), the rate or rates of interest therefor and such Lender's Applicable Lending Office with respect to such B Advance; provided that if the Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 9:00 A.M. (New York City time) on the date on which notice of such election is to be given to the Agent by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Agent, before 10:00 A.M. (New York City time) on the date on which notice of such election is to be given to the Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any B Advance as part of such B Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any B Advance as part of such proposed B Borrowing. (iii) The Borrower shall, in turn, (A) before 11:00 A.M. (New York City time) on the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B) before 12:00 Noon (New York City time) three Business Days before the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (B) of paragraph (i) above, either (x) cancel such B Borrowing by giving the Agent notice to that effect, or 14 18 (y) accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving notice to the Agent of the amount of each B Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Agent on behalf of such Lender for such B Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such B Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Agent notice to that effect; provided that acceptance of offers may only be made on the basis of ascending interest rates specified by the Lenders pursuant to paragraph (ii) above. (iv) If the Borrower notifies the Agent that such B Borrowing is cancelled pursuant to paragraph (iii)(x) above, the Agent shall give prompt notice thereof to the Lenders and such B Borrowing shall not be made. (v) If offers are made by two or more Lenders with the same specified rate of interest for a greater aggregate principal amount than the amount in respect of which offers are accepted for any B Borrowing, the principal amount of B Advances in respect of which such offers are accepted shall be allocated by the Agent among such Lenders as nearly as possible (in such multiples of $1,000,000 as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers. Determinations by the Agent of the amounts of B Advances shall be conclusive in the absence of manifest error. (vi) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, the Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such B Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by the Borrower, and (B) each Lender that is to make a B Advance as part of such B Borrowing, of the amount of each B Advance to be made by such Lender as part of such B Borrowing. Each Lender that is to make a B Advance as part of such B Borrowing shall, before 12:00 noon (New York City time) on the date of such B Borrowing specified in the notice received from the Agent pursuant to clause (A) of the preceding sentence, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02(b) such Lender's portion of such B Borrowing, in same day funds. Upon satisfaction of the applicable conditions set forth in Article III and after receipt by the Agent of such funds, the Agent will make such funds available to the Borrower at the Agent's aforesaid address. Promptly after each B Borrowing the Agent will notify each Lender of the amount of the B Borrowing, the consequent B Reduction and the dates upon which such B Reduction commenced and will terminate. 15 19 (b) Each B Borrowing shall be in an aggregate amount not less than $15,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each B Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above. (c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03, provided that a B Borrowing shall not be made within two Business Days of the date of any other B Borrowing. (d) The Borrower shall repay to the Agent for the account of each Lender which has made a B Advance, or each other holder of a B Note, on the maturity date of each B Advance (such maturity date being that specified by the Borrower for repayment of such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i) above), the then unpaid principal amount of such B Advance. The Borrower shall have no right to prepay any principal amount of any B Advance unless, and then only on the terms, specified by the Borrower for such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i) above, and provided that the Borrower shall be obligated to reimburse each Lender whose B Advance has been prepaid by the Borrower in respect thereof pursuant to Section 8.04(b). (e) The Borrower shall pay interest on the unpaid principal amount of each B Advance from the date of such B Advance to the date the principal amount of such B Advance is repaid in full, at the rate of interest for such B Advance specified by the Lender making such B Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the maturity date specified by the Borrower for such B Advance and on each other interest payment date or dates specified by the Borrower for such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i) above; provided, however, that if the maturity date of the B Advances comprising a B Borrowing is more than 90 days after the date of such B Borrowing, then interest shall be payable on each day which occurs at intervals of 90 days after the date of such B Borrowing; provided, further, that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times (i) from such due date to the applicable maturity date, to 2% per annum above the interest rate otherwise payable with respect to such B Advance hereunder, and (ii) from and after the applicable maturity date, to 2% per annum above the Alternate Base Rate in effect from time to time. 16 20 SECTION 2.04. Fees. (a) Facility Fee. The Borrower agrees to pay to the Agent, for the account of each Lender, a facility fee on the daily average amount of such Lender's Commitment (including both the portion thereof that is used and the portion thereof that is unused) from the date hereof in the case of each Lender listed on the signature pages hereof and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date, payable in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment, commencing June 30, 1994, and on the Termination Date, at the rate of (i) .125% per annum during each Level I Period, (ii) .15% per annum during each Level II Period, (iii) .175% per annum during each Level III Period, (iv) .20% per annum during each Level IV Period and (v) .25% per annum during each Level V Period. (b) Agent's Fees. The Borrower agrees to pay to the Agent certain fees for its role hereunder and in connection with the execution and delivery hereof in the amounts and at the times described in one or more letter agreements between the Borrower and the Agent dated on or about the date hereof, as the same may be amended, modified, supplemented or replaced from time to time by the mutual agreement of the Borrower and the Agent. In addition to the foregoing fees, the Borrower shall pay to the Agent an auction fee of $2,500 in respect of and at the time each Notice of B Borrowing is delivered to the Agent. All such fees shall be for the sole account and benefit of the Agent. SECTION 2.05. Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders, provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the B Advances then outstanding and provided, further, that each partial reduction shall be in the aggregate amount of $25,000,000 or an integral multiple of $1,000,000 in excess thereof. SECTION 2.06. Repayment of A Advances. The Borrower shall repay the principal amount of each A Advance made by each Lender on the last day of the Interest Period for such A Advance. SECTION 2.07. Interest on A Advances. The Borrower shall pay interest on the unpaid principal amount of each A Advance made by each Lender from the date of such A Advance until such principal amount shall be paid in full, at the following rates per annum and at the following times: (a) Alternate Base Rate Advances. If such A Advance is an Alternate Base Rate Advance, a rate per annum equal at all times to the Alternate Base Rate in effect from time to time, 17 21 payable quarterly on the last day of each March, June, September, and December and on the date such Alternate Base Rate Advance shall be paid in full; provided that any amount of principal or interest which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to 2% per annum above the Alternate Base Rate in effect from time to time. (b) Eurodollar Rate Advances. If such A Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such A Advance to the sum of the Eurodollar Rate for such Interest Period plus the applicable Eurodollar Margin, payable on the last day of such Interest Period and, if such Interest Period is longer than three (3) months, at intervals of three (3) months after the first day thereof; provided that any amount of principal or interest which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times (i) from such due date to the last day of the applicable Interest Period, to 2% per annum above the interest rate otherwise payable with respect to such A Advance hereunder, and (ii) from and after the last day of the applicable Interest Period, to 2% per annum above the Alternate Base Rate in effect from time to time. SECTION 2.08. Notes. The obligation of the Borrower to repay the A Advances made to the Borrower by each Lender hereunder shall be further evidenced by an A Note in favor of such Lender in the form and substance of Exhibit A-1 attached hereto. The obligation of the Borrower to repay the B Advances made to the Borrower by any Lender shall be evidenced by a B Note in favor of such Lender in the form and substance of Exhibit A-2 attached hereto. SECTION 2.09. Interest Rate Determination. (a) The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a) or (b). (b) If the Majority Lenders shall, at least one Business Day before the date of any requested A Borrowing comprised of Eurodollar Rate Advances, notify the Agent that the Eurodollar Rate for Eurodollar Rate Advances comprising such A Borrowing will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such A Borrowing, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon the right of the Borrower to select Eurodollar Rate Advances for such A Borrowing or any subsequent A Borrowing shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and each A Advance 18 22 comprising such A Borrowing shall be an Alternate Base Rate Advance. SECTION 2.10. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the A Advances made by it (other than pursuant to Section 2.12 or 2.15) in excess of its ratable share of payments on account of the A Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the A Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.10 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.11. Prepayments of A Advances. (a) The Borrower shall have no right to prepay any principal amount of any A Advances other than as provided in subsection (b) below. (b) The Borrower may, upon at least two Business Days' notice, or in the case of A Borrowings comprised of Alternate Base Rate Advances notice given not later than 11:00 A.M. (New York City time) one Business Day prior to the proposed date of prepayment, to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the A Advances comprising part of the same A Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, and (y) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b). (c) Except as provided in Section 2.03(d), the Borrower shall have no right to prepay any principal amount of any B Advance. 19 23 SECTION 2.12. Increased Costs. (a) If, after the date hereof, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon written demand by such Lender (with a copy of such demand to the Agent), which demand must be made no later than the date that is one year after the date on which the Commitments have been terminated and all sums owing hereunder have been paid in full, pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. It shall be assumed, for the purpose of computing amounts to be paid by the Borrower to CUSA pursuant to this Section 2.12(a), that the making, funding or maintaining by CUSA of any Advance hereunder has been by Citibank. (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects the amount of capital to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, upon written demand by such Lender (with a copy of such demand to the Agent), which demand must be made no later than the date that is one year after the date on which the Commitments have been terminated and all sums owing hereunder have been paid in full, the Borrower shall immediately pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital is allocable to the existence of such Lender's commitment to lend hereunder. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. It shall be assumed, for the purpose of computing amounts to be paid by the Borrower to CUSA pursuant to this Section 2.12(b), that the making, funding or maintaining by CUSA of any Advance hereunder has been by Citibank. (c) Each Lender agrees that if the Borrower is required to make any payments to such Lender upon demand therefor pursuant to Sections 2.12(a) or (b) such Lender shall use reasonable efforts to select an alternative Applicable Lending 20 24 Office which would avoid the need thereafter for making such demand; provided, however, that no Lender shall be obligated to select an alternative Applicable Lending Office if such Lender determines in its reasonable discretion that (i) as a result of such selection such Lender would be in violation of any applicable law, regulation, treaty or directive of any central bank or other governmental authority, or (ii) such selection would be otherwise disadvantageous to such Lender. SECTION 2.13. Illegality. (a) Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon. (b) Each Lender agrees that if it determines, or if a central bank or other governmental authority asserts, that it is unlawful for such Lender to make, fund or maintain Eurodollar Rate Advances hereunder, such Lender shall use reasonable efforts to select an alternative Eurodollar Lending Office to perform its obligations hereunder to make, fund or maintain Eurodollar Rate Advances; provided, however, that no Lender shall be obligated to select an alternative Eurodollar Lending Office if such Lender determines in its reasonable discretion that (i) as a result of such selection such Lender would be in violation of any applicable law, regulation, treaty or directive of any central bank or other governmental authority, or (ii) such selection would be otherwise disadvantageous to such Lender. SECTION 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Agent at its address referred to in Section 8.02(b) in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or facility fees ratably (other than amounts payable pursuant to Section 2.03, 2.12 or 2.15) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and 21 25 under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against (i) any or all of the Borrower's accounts with such Lender or (ii) in the event any such payment is not made to CUSA when due, any or all of the Borrower's accounts with Citibank or any other Affiliate of CUSA (and the Borrower hereby authorizes Citibank and each such Affiliate to permit such charge), any amount so due. (c) All computations of interest based on the Alternate Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of interest on B Advances prior to the maturity date applicable thereto and of facility fees shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder and under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or facility fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate. 22 26 SECTION 2.15. Taxes. (a) All payments by the Borrower hereunder shall be made without set-off or counterclaim and free and clear of and without deduction on account of restrictions or conditions of any nature now or hereafter imposed or levied by the United States or any political subdivision thereof, except as specifically provided to the contrary in Section 2.15(b), unless the Borrower is required by law to make such deductions. If any such obligation is imposed upon the Borrower with respect to any amount payable by it hereunder, it will pay to each affected Lender, on the date on which such amount becomes due and payable hereunder, such additional amount as shall be necessary to enable such Lender to receive the same net amount which it would have received on such due date had no such obligation been imposed upon the Borrower. (b) Each payment to be made by the Borrower hereunder to any Lender shall be made free and clear of and without deduction or withholding for or on account of any tax imposed by any governmental or taxing authority of or in the United States unless the Borrower is required to make such a payment subject to the deduction or withholding of such tax, in which case the Borrower will pay to each affected Lender, on the date on which such amount becomes due and payable hereunder, such additional amount as shall be necessary to enable such Lender to receive the same net amount which it would have received on such due date had no such obligation been imposed upon the Borrower; provided, however, that the Borrower shall not be required to pay any additional amount on account of any tax of, or imposed by, the United States, pursuant to this Section 2.15(b), to any Lender and shall be entitled to deduct and withhold such tax if such Lender (i) shall have failed to submit a valid United States Internal Revenue Service Form 1001 or any successor form thereto ("Form 1001") relating to such Lender and entitling it to a complete exemption from deduction or withholding on all amounts to be received by such Lender, including fees, pursuant to this Agreement, or a valid United States Internal Revenue Service Form 4224 or any successor form thereto ("Form 4224") relating to such Lender and entitling it to receive all amounts, including fees, pursuant to this Agreement, without deduction or withholding, or a statement conforming to the requirements of United States Treasury Regulation 1.1441-5(b), or (ii) shall have failed to submit such form or other statement which it is required to deliver pursuant to Section 2.15(c) hereof. (c) Prior to the date of the initial Borrowing in the case of each Lender listed on the signature pages hereof, and on the date of the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender, each Lender agrees that it will deliver to the Borrower either (i) a statement, in duplicate, conforming to the requirements of United States Treasury Regulation Section 1.1441-5(b), or (ii) if it is not incorporated under the laws of the United States or a state thereof, two duly completed copies of Form 1001 or 4224, or successor applicable forms, as the case may be, certifying that such Lender is entitled to receive payments under this Agreement 23 27 without deduction or withholding of any United States federal income taxes. Subject to any change in applicable laws or regulations, each Lender which delivers to the Borrower a Form 1001 or 4224, or successor applicable forms, pursuant to the provisions of this Section 2.15(c), further undertakes to deliver to the Borrower, upon request by the Borrower, two further copies of said Form 1001 or 4224, or successor applicable forms, on or before the date that any such form expires or becomes obsolete certifying that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.15 shall survive the termination of this Agreement, the termination of the Commitments and the payment in full of the Notes. (e) Each Lender agrees that if the Borrower is required to increase any amounts payable to such Lender under Sections 2.15(a) or 2.15(b), such Lender shall use reasonable efforts to select an alternative Applicable Lending Office which would not result in such increased payment by the Borrower to such Lender; provided, however, that no Lender shall be obligated to select an alternative Applicable Lending Office if such Lender determines in its reasonable discretion that (i) as a result of such selection such Lender would be in violation of any applicable law, regulation, treaty or directive of any central bank or other governmental authority, or (ii) such selection would be otherwise disadvantageous to such Lender. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Condition Precedent to Initial Advances. The effectiveness of the Commitment of each Lender is subject to the condition precedent that the Agent shall have received the following, in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender: (a) The Notes payable to the order of the Lenders, respectively. (b) This Agreement executed by the Borrower, the Agent and each of the Lenders. (c) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. 24 28 (d) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder. (e) A favorable opinion of Wilson, Sonsini, Goodrich & Rosati, special counsel for the Borrower, substantially in the form attached hereto as Exhibit D, , and covering such other matters as any Lender through the Agent may reasonably request. (f) Evidence that the obligations of the lenders and agent (including commitments to make advances thereunder) under that certain Credit Agreement dated as of October 9, 1992 among the Borrower, the lenders thereunder and CUSA, as agent for the lenders thereunder, as amended, have been terminated and all unpaid principal and interest thereunder and all other amounts then payable by the Borrower thereunder have been paid in full (or will be paid in full by application of the proceeds of the initial Borrowing hereunder). (g) A copy of the Receivables Purchase Agreement as in effect on June 27, 1991, and that certain Amendment to Receivables Purchase Agreement dated May 29, 1992, together with a certificate of the Secretary or an Assistant Secretary of the Borrower which shall include a statement that the Receivables Purchase Agreement has not been further amended, modified or supplemented in any respect. (h) A favorable opinion of Steefel, Levitt & Weiss, counsel for the Agent. SECTION 3.02. Conditions Precedent to Each A Borrowing. The obligation of each Lender to make an A Advance on the occasion of each A Borrowing (including the initial A Borrowing) shall be subject to the further conditions precedent that (i) the Agent shall have received the written confirmatory Notice of A Borrowing with respect thereto and (ii) on the date of such A Borrowing (a) the following statements shall be true (and each of the giving of the applicable Notice of A Borrowing and the acceptance by the Borrower of the proceeds of such A Borrowing shall constitute a representation and warranty by the Borrower that on the date of such A Borrowing such statements are true): (1) The representations and warranties contained in Section 4.01 are correct on and as of the date of such A Borrowing, before and after giving effect to such A Borrowing and to the application of the proceeds therefrom, as though made on and as of such date (except to the extent such representations or warranties specifically relate to an earlier date, in which case they shall be true and correct as of such date), 25 29 (2) No Default or Event of Default has occurred and is continuing, or would result from such A Borrowing or from the application of the proceeds therefrom, and (3) The aggregate amount of such A Borrowing and all other Borrowings to be made on the same day hereunder is within the aggregate amount of the unused Commitments of the Lenders, and (b) if the Agent or any Lender has any reason to believe that any of the conditions set forth in this Section 3.02 shall not be satisfied on the date of such A Borrowing, then the Agent shall have received such other approvals, opinions or documents as the Agent or such Lender through the Agent may reasonably request. SECTION 3.03. Conditions Precedent to Each B Borrowing. The obligation of each Lender which is to make a B Advance on the occasion of a B Borrowing (including the initial B Borrowing) to make such B Advance as part of such B Borrowing shall be subject to the further conditions precedent that (i) the Agent shall have received the written confirmatory Notice of B Borrowing with respect thereto, and (ii) on the date of such B Borrowing the following statements shall be true (and each of the giving of the applicable Notice of B Borrowing and the acceptance by the Borrower of the proceeds of such B Borrowing shall constitute a representation and warranty by the Borrower that on the date of such B Borrowing such statements are true): (a) The representations and warranties contained in Section 4.01 are correct on and as of the date of such B Borrowing, before and after giving effect to such B Borrowing and to the application of the proceeds therefrom, as though made on and as of such date (except to the extent such representations or warranties specifically relate to an earlier date, in which case they shall be true and correct as of such date), (b) No Default or Event of Default has occurred and is continuing, or would result from such B Borrowing or from the application of the proceeds therefrom, and (c) The aggregate amount of such B Borrowing and all other Borrowings to be made on the same day hereunder is within the aggregate amount of the unused Commitments of the Lenders. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the 26 30 jurisdiction indicated at the beginning of this Agreement. Each Subsidiary is duly organized and validly existing under the laws of the jurisdiction in which it is incorporated and is in good standing under the laws of such jurisdiction except where the failure to so be in good standing (i) in the case of Restricted Subsidiaries, is remedied within a reasonable time period after a Responsible Officer has knowledge of any such failure, and (ii) such failure will not have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. The Borrower and each Restricted Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) any law or contractual restriction binding on or affecting the Borrower. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The audited consolidated balance sheet of the Borrower as at June 30, 1993, and the related consolidated audited statements of income and stockholders' equity of the Borrower for the fiscal year then ended, copies of which have been furnished to each Lender, fairly present in all material respects the consolidated financial condition of the Borrower as at such date and the consolidated results of the operations of the Borrower for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied except as noted therein, and since June 30, 1993, there has been no material adverse change in the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. (f) Except as disclosed to the Agent and the Lenders in that certain letter dated May 27, 1994 from the Borrower to the Agent, there is no pending or, to the knowledge of any Responsible Officer of the Borrower, threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which (i) is reasonably likely to be adversely determined and such adverse 27 31 determination would likely have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole, or (ii) purports to affect the legality, validity or enforceability of this Agreement or any Note. (g) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. (h) The Borrower and each of its Restricted Subsidiaries has met its minimum funding requirements under ERISA with respect to all of its Plans and has not incurred any material liability to the Pension Benefit Guaranty Corporation under ERISA in connection with any such Plan. No ERISA Termination Event has occurred and is continuing with respect to any Plan. (i) The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (j) Except as disclosed to the Agent and the Lenders in that certain letter dated May 27, 1994 from the Borrower to the Agent, the Borrower and its Restricted Subsidiaries, to the best knowledge of the Responsible Officers, have obtained the right to use all patents, trademarks, service-marks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, or could obtain the same on terms and conditions not materially adverse to the Borrower and its Restricted Subsidiaries and their operations taken as a whole, that are necessary for the operation of their respective businesses as presently conducted and for the operation of businesses described to the Lenders in writing as proposed to be conducted. (k) The Borrower has and each of its Subsidiaries has good and indefeasible title to all material properties, assets and rights of every type and nature now purported to be owned by it (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by Section 5.02(a). All leases material to the conduct of the respective businesses of the Borrower and its Subsidiaries as currently conducted are valid and subsisting and are in full force and effect. (l) The Borrower has and each of its Restricted Subsidiaries has filed all Federal, State and other tax returns which, to the best knowledge of the Borrower, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good 28 32 faith by appropriate proceedings and for which adequate reserves have been established in accordance with generally accepted accounting principles and except where (i) nonpayment thereof will not have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or of the Borrower and its Subsidiaries taken as a whole, and (ii) either (A) the aggregate unpaid amount thereof is less than $1,000,000, or (B) the unpaid amount thereof shall be paid in full promptly upon the Borrower or the Restricted Subsidiary owing the same obtaining knowledge of the delinquency thereof, together with any penalties payable as a result of such delinquency. (m) Neither the Borrower nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. Neither the execution nor delivery of this Agreement or the Notes, nor fulfillment of nor compliance with the terms and provisions hereof or thereof will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Borrower or any of its Restricted Subsidiaries pursuant to, the charter or by-laws of the Borrower or any of its Restricted Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Borrower or any of its Restricted Subsidiaries is subject. (n) The documents, certificates and written statements furnished by any Responsible Officer to the Agent or any Lender pursuant to any provision of this Agreement or any other agreement, document or instrument delivered to the Agent or any Lender pursuant hereto or in connection herewith, taken together with all such other documents, certificates and written statements, do not contain any untrue statement of a material fact or omit any material fact necessary to make the statements made therein, taken together, in light of the circumstances under which they were made, not misleading. It is recognized by the Agent and the Lenders that projections and forecasts provided by or on behalf of the Borrower, although reflecting the Borrower's good faith projections or forecasts based on methods and data which the Borrower believes to be reasonable and accurate, are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may (and are likely to) differ from the projected or forecasted results. (o) Listed on Exhibit G attached hereto are all of the Subsidiaries of the Borrower as of the date of this Agreement, identifying which of the Subsidiaries constitute Restricted Subsidiaries as of the date of this Agreement. All of the issued 29 33 and outstanding shares (other than shares of any foreign Subsidiary required by applicable local law to be issued to directors of such foreign Subsidiary or shares of foreign Subsidiaries issued to Persons to satisfy local ownership requirements imposed by applicable local law) of the capital stock of each Subsidiary owned by the Borrower or any Subsidiary are duly issued and outstanding, fully paid and non-assessable and are free and clear of any Lien. (p) In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of its properties, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that Environmental Laws are not likely to have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any amount payable hereunder or under any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially adversely affect the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. (b) Payment of Taxes and Claims. Pay, and cause each of its Restricted Subsidiaries to pay, all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty accrues thereon or 30 34 immediately upon any determination that any interest is due thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of its properties or assets; provided that no such tax, assessment, charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such accrual or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made therefor; provided, further, that the Borrower shall not be deemed to have breached this Section 5.01(b) on account of the failure to pay any such tax, assessment, charge or claim if (i) nonpayment thereof will not have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Restricted Subsidiaries taken as a whole, and (ii) either (A) the aggregate unpaid amount thereof is less than $1,000,000, or (B) the unpaid amount thereof shall be paid in full promptly upon the Borrower or the Restricted Subsidiary owing the same obtaining knowledge of the delinquency thereof, together with any penalties payable as a result of such delinquency. (c) Maintenance of Properties; Insurance; Books and Records. Maintain or cause to be maintained, and cause each of its Restricted Subsidiaries to maintain or cause to be maintained: (i) to the extent consistent with good business practices, in good repair, working order and condition all properties material to the continued conduct of the business of the Borrower and its Subsidiaries taken as a whole, and from time to time will make or cause to be made all necessary repairs, renewals and replacements thereof; (ii) with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Restricted Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations ("Industry Standards"), provided that the Borrower and its Restricted Subsidiaries may self insure to the extent, and only to the extent, consistent with Industry Standards; and (iii) proper books of record and account in accordance with generally accepted accounting principles consistently applied. (d) Corporate Existence, etc. At all times preserve and keep in full force and effect its corporate existence, and corporate rights and franchises material to its business, and those of each of its Restricted Subsidiaries, except as otherwise specifically permitted by Sections 5.02(b), 5.02(d)or 5.02(e), and will qualify, and cause each of its Restricted Subsidiaries to qualify, to do business in any jurisdiction where the failure to do so (i) is remedied within a reasonable time period after a Responsible Officer has knowledge of any such failure, and (ii) will not have a material adverse effect on the business, 31 35 financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole, provided that the corporate existence of any Subsidiary may be terminated if, in the good faith judgment of the Board of Directors of the Borrower, such termination is in the best interests of the Borrower and is not disadvantageous to the Lenders. (e) Reporting Requirements. Furnish to the Lenders: (i) as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower as of the end of such quarter and consolidated unaudited statements of income, stockholders' equity and cash flow of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in comparative form figures for the corresponding period in the preceding fiscal year, in the case of such statements of income, stockholders' equity and cash flow, and figures at the end of the preceding fiscal year in the case of such balance sheet, all in reasonable detail, in accordance with generally accepted accounting principles consistently applied (except as noted therein and subject to normal year-end adjustments), and certified in a manner reasonably acceptable to the Majority Lenders by a Responsible Financial Officer of the Borrower; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower as of the end of such fiscal year and consolidated statements of income, stockholders' equity and cash flow of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such fiscal year, setting forth in comparative form figures for the preceding fiscal year, all in reasonable detail, in accordance with generally accepted accounting principles consistently applied (except as noted therein), and certified in a manner reasonably acceptable to the Majority Lenders by independent public accountants of recognized national standing reasonably acceptable to the Majority Lenders; (iii) together with the financial statements furnished in accordance with subdivisions (i) and (ii) of this Section 5.01(e) except as noted with respect to clause (d) hereof, a certificate of a Responsible Financial Officer of the Borrower in the form of Exhibit E attached hereto (a) representing and warranting that no Event of Default or Default has occurred and is continuing (or, if such an Event of Default or Default has occurred, stating the nature thereof and the action which the Borrower proposes to take with respect thereto), (b) setting forth a schedule containing the information and calculations with respect to 32 36 the Borrower's compliance with Sections 5.01(h), 5.01(i) and 5.02(h), (c) stating that the representations and warranties contained in Section 4.01 are true and correct on and as of the date of such certificate as though made on and as of such date (except to the extent such representations or warranties specifically relate to an earlier date, in which case they shall be true and correct as of such date), and (d) only as to the financial statements furnished in accordance with subdivision (ii) of this Section 5.01(e), setting forth all changes, if any, to Exhibit G since the date of the previous certificate furnished to the Lenders hereunder; provided that the Borrower may, if no Advance is outstanding and no other amount payable hereunder or under the Notes is then unpaid, elect not to submit the statement otherwise required pursuant to the foregoing clause (c) so long as such statement is made at least once each calendar year; (iv) as soon as possible and in any event within five days after a Responsible Officer or a Responsible Financial Officer knows or has reason to know of the occurrence of any Default that is not an Event of Default (provided, with respect to any such Default, at the time of such Default any Advance is outstanding or any other amount payable hereunder or under the Notes shall remain unpaid) and any Event of Default, a statement of a Responsible Financial Officer of the Borrower setting forth details of such Event of Default or Default and the action which the Borrower has taken and proposes to take with respect thereto; (v) promptly after the same are sent, copies of all financial statements and reports which the Borrower sends to its shareholders generally; and promptly after the same are filed, copies of all final registration statements on Form S-1, S-2, S-3 or S-4 (without exhibits unless specifically requested) or their successor forms relating to offerings of debt or equity by the Borrower and copies of all reports on Form 10-K, Form 10-Q and Form 8-K or their successor forms (without exhibits unless specifically requested) which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or similar governmental entity; (vi) as soon as practicable and in any event (a) within 30 days after any Responsible Officer or any Responsible Financial Officer knows or has reason to know that any ERISA Termination Event described in clause (i) of the definition of ERISA Termination Event with respect to any Plan has occurred and (b) within 10 days after any Responsible Officer or any Responsible Financial Officer knows or has reason to know that any other ERISA Termination Event with respect to any Plan has occurred, a statement of a Responsible Financial Officer of the Borrower describing such ERISA Termination Event and the action, if any, which 33 37 the Borrower or such ERISA Affiliate proposes to take with respect thereto; (vii) promptly upon receipt thereof, a copy of each other summary report in its final form submitted to the Borrower or any Restricted Subsidiary for delivery to, or which is actually delivered to, the Board of Directors of the Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or any Restricted Subsidiary; (viii) promptly after a Responsible Officer or a Responsible Financial Officer knows or has reason to know thereof, notice of all actions, suits and proceedings before any court or governmental authority or instrumentality affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f), and promptly after any material adverse development or change in the status of any such continuing action, suit or proceeding, notice of such development or change; (ix) promptly after a Responsible Officer or a Responsible Financial Officer knows or has reason to know thereof, notice of any violation of any Environmental Law that is reported or reportable by the Borrower or any of its Subsidiaries to any federal, state or local environmental agency that could be reasonably expected to have a material adverse effect on the business, financial condition, assets, properties or operations of the Borrower or the Borrower and its Subsidiaries taken as a whole; (x) (a) promptly after any termination of the Commitment (as such term is defined in the Receivables Purchase Agreement) pursuant to Section 6.01 of the Receivables Purchase Agreement as a result of a Termination Event (as such term is defined in the Receivables Purchase Agreement), notice of such termination; (b) promptly after any change in the Collection Agent pursuant to Sections 9.01 and 9.04 of the Receivables Purchase Agreement (other than designation of a Collection Agent affiliated with the Borrower), notice of such change; (c) at least three (3) Business Days prior to the effectiveness of any consent by the Borrower to any sale by a Purchaser (as such term is defined in the Receivables Purchase Agreement) of any of the Purchaser's rights or obligations under the Receivables Purchase Agreement pursuant to Section 10.08(c) of the Receivables Purchase Agreement, notice of such proposed sale or assignment; (d) promptly after the execution and delivery thereof, copies of all amendments to the Receivables Purchase Agreement, whether or not the consent thereto of the Lenders is required hereunder; and (e) notice of events comparable to those described in the immediately preceding clauses (a), (b), (c) and (d) under any other agreement or 34 38 arrangement similar to the Receivables Purchase Agreement or the transactions provided for therein; and (xi) such other information respecting the condition or operations, financial or otherwise (including, without limitation, information pertaining to any change in accounting principles adopted by the Borrower or any of its domestic Subsidiaries (or any of its foreign Subsidiaries if such change in accounting principles would have a material effect on the financial condition, operating performance or cash flow of the Borrower and its Subsidiaries taken as a whole) during any fiscal year of the Borrower and the effect thereof on the financial condition, operating performance or cash flow of the Borrower and its Subsidiaries taken as a whole), of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. (f) Inspection of Property. Permit any employee of, or independent financial, legal, environmental or other professional consultant or advisor (other than a Person that is or is affiliated with a direct competitor of the Borrower) retained by, the Agent or any of the Lenders or any agents or representatives thereof, at the Agent's or such Lender's expense, to visit and inspect any of the properties of the Borrower and its Subsidiaries, to examine the corporate books and financial records of the Borrower and its Subsidiaries and make copies thereof or extracts therefrom (except that the Borrower, as to any information certified by the Borrower as constituting trade secrets or other proprietary information of a non-financial nature, in a certificate delivered to the Agent or Lender who has requested copies or extracts of such information, may in its discretion refuse to allow such copies or extracts to be made) and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Borrower or its independent public accountants (and by this provision the Borrower authorizes such accountants to discuss with any Person so designated the affairs, finances and accounts of the Borrower and its Subsidiaries, whether or not the Borrower is present), all at such reasonable times and as often as the Agent or any Lender may reasonably request, in each case as to matters reasonably related to this Agreement or the transactions contemplated hereby or the interests of the Agent or the Lenders hereunder. (g) Use of Proceeds. The proceeds of all Advances shall be used for general corporate purposes, including, without limitation, the retirement of Debt. Notwithstanding any other term or provision set forth in this Agreement, no portion of any Advance may be used to initiate or participate in the acquisition of a controlling interest in the Voting Stock or assets of any corporation unless such acquisition is made with the consent of such corporation and does not otherwise violate the terms and provisions of this Agreement. 35 39 (h) Debt to Consolidated Tangible Net Worth Ratio. Maintain a ratio of (A) consolidated Debt of the Borrower, to (B) Consolidated Tangible Net Worth of not more than .45 to 1.00. (i) Fixed Charge Ratio. Maintain (i) as of the last day of the first fiscal quarter of each fiscal year of the Borrower a ratio of (A) Adjusted EBIT of the Borrower determined on a consolidated basis for the twelve (12) month period ending on such date, to (B) consolidated Fixed Charges of the Borrower for the twelve (12) month period ending on such date, of not less than 1.25 to 1.00; and (ii) as of the last day of the second, third and fourth fiscal quarters of each fiscal year of the Borrower a ratio of (A) Adjusted EBIT of the Borrower for the twelve (12) month period ending on such date, to (B) consolidated Fixed Charges of the Borrower for the twelve (12) month period ending on such date, of not less than 1.50 to 1.00, in each case determined on a consolidated basis. SECTION 5.02. Negative Covenants. So long as any amount payable hereunder or under any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Majority Lenders: (a) Liens, Excess Interest in Receivables, Etc. (i) Create, assume or suffer to exist, or permit any Subsidiary to create, assume or suffer to exist, any Lien upon any of its property or assets, whether now owned or hereafter acquired , or any Excess Interest in Receivables, except (A) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings, (B) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances of credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use of such property or assets in the operation of its business, (C) Liens existing on the property or assets of the Borrower or any Subsidiary on the date of this Agreement and set forth on Exhibit F, (D) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Borrower or a wholly owned Subsidiary, (E) any Lien created to secure the purchase price or cost of construction, or to secure Debt incurred to pay the purchase price or cost of construction, of any property acquired by the Borrower or any Subsidiary after the date hereof or any improvements to real 36 40 property constructed by or for the account of the Borrower or any Subsidiary after the date hereof, provided that (x) any such Lien shall be confined solely to the item or items of property so acquired or constructed (and any theretofore unimproved real property on which such improvements are located), and (y) any such Lien shall be created concurrently with or within twelve months following the acquisition of such property or the completion of construction of improvements thereon, (F) Liens (other than Liens on any Excess Interest in Receivables) created in Pool Accounts (as defined in the Receivables Purchase Agreement) pursuant to and in accordance with the terms of the Receivables Purchase Agreement or in other accounts receivable of the Borrower under any similar agreement or arrangement permitted hereunder, (G) Liens existing on property including the proceeds thereof and accessions thereto acquired by the Borrower or any Subsidiary (including Liens on assets of any corporation at the time it becomes a Subsidiary, unless such Lien was created in contemplation of such corporation becoming a Subsidiary), (H) Liens which constitute rights of set-off of a customary nature or bankers' Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with arrangements entered into with banks in the ordinary course of business, including rights of set-off created pursuant to or by virtue of this Agreement and the Notes, (I) leases or subleases and license and sublicenses granted to others in the ordinary course of the Borrower's or any Subsidiary's business not interfering in any material respect with the business of the Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor or licensor under any lease or license, (J) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 6.01(i), and Liens to secure appeal bonds, supersedeas bonds and other similar Liens arising in connection with court proceedings (including, without limitation, surety bonds and letters of credit) or any other instrument serving a similar purpose; provided, however, that the total amount secured by Liens described in this subsection (J) may not exceed at any time 5% of Consolidated Tangible Net Worth (plus Liens so described that are permitted in accordance with Section 5.02(a)(ii) below), 37 41 (K) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not interfering in any material respect with the ordinary conduct of the business of the Borrower and its Subsidiaries taken as a whole, (L) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods, and (M) any Lien renewing, extending, or refunding any Lien permitted under clauses (A) through (L), inclusive, of this Section 5.02(a), provided that the principal amount secured is not increased and that such Lien is not extended to other property (other than pursuant to its original terms). (ii) Notwithstanding the provisions contained in subdivision (i) of this Section 5.02(a), in addition to the permitted Liens described above, the Borrower and its Subsidiaries, or any of them, may create, assume or suffer to exist other Liens and Excess Interest in Receivables if, after giving effect thereto and to the retirement of any Debt which is concurrently being retired, the aggregate of (A) the total amount of Debt then secured by such Liens, and (B) the total amount of Excess Interest in Receivables then existing, does not exceed 10% of Consolidated Tangible Net Worth; provided, however, if the aggregate of (A) the total amount of Debt then secured by such Liens, and (B) the total amount of Excess Interest in Receivables then existing, exceeds 10% of Consolidated Tangible Net Worth, no Event of Default shall occur hereunder provided the Borrower simultaneously therewith makes or causes to be made effective provision whereby the indebtedness evidenced by this Agreement and the Notes will be secured by such Liens (pursuant to documentation in form and substance reasonably satisfactory to the Agent and the Majority Lenders) equally and ratably with any and all other Debt thereby secured so long as such other Debt shall be so secured. (b) Merger and Consolidation. Merge into or consolidate with or into a corporation, or permit any Subsidiary to do so, except that (i) any Subsidiary may merge or consolidate with any other Subsidiary and any Subsidiary may merge into the Borrower, (ii) the Borrower may merge or consolidate with any other corporation provided that (A) either (1) the Borrower shall be the continuing or surviving corporation, or (2) the successor corporation shall be a solvent corporation organized under the laws of any State of the United States of America with a financial condition at least equal to that of the Borrower at the time of such merger or consolidation, and such corporation shall 38 42 expressly assume in writing all of the obligations of the Borrower under this Agreement and under the Notes, including all covenants herein and therein contained which assumption shall not otherwise violate any term, condition or provision of this Agreement or the Notes, and such successor shall be substituted for the Borrower with the same effect as if it had been named herein as a party hereto, and (B) immediately after giving effect to such merger or consolidation, no Default or Event of Default shall have occurred, (iii) a Subsidiary may merge into or consolidate with a corporation in connection with such corporation becoming a Subsidiary or being combined with any existing Subsidiary, and (iv) provided that the disposition of such Subsidiary is not otherwise prohibited under the terms of this Agreement (including pursuant to Section 5.02(d)(ii) below), any Subsidiary may merge into or consolidate with a corporation, if after giving effect to such merger or consolidation, neither such Subsidiary nor such corporation is a Subsidiary. (c) Change in Nature of Business. Make, or permit any Subsidiary to make, any material change in the nature of its business as carried on at the date hereof; provided, however, that the Borrower and its Subsidiaries may enter into businesses which are appropriate extensions of or are reasonably related or incidental to the current businesses of the Borrower and its Subsidiaries. (d) Maintenance of Ownership of Subsidiaries. Sell or otherwise dispose of any shares of capital stock of any Subsidiary or permit any Subsidiary to issue, sell or otherwise dispose of any shares of its capital stock or the capital stock of any other Subsidiary, except (i) to the Borrower or another Subsidiary; (ii) that all shares of stock of any Subsidiary at the time owned by the Borrower or any Subsidiary may be sold as an entirety for a consideration which represents the fair value (as determined in good faith by the Board of Directors of the Borrower) at the time of sale of the shares of stock so sold, provided that after giving effect to the sale thereof the sum of (A) the total assets of all Subsidiaries whose stock is so sold pursuant to this clause (ii) after the date of this Agreement, plus (B) the total assets of all Subsidiaries that have been merged into or consolidated with a corporation pursuant to clause (iv) of Section 5.02(b) after the date of this Agreement, does not exceed 15% of the consolidated total assets of the Borrower; (iii) shares of stock of any Subsidiary may be sold if, after giving effect to such sale, such Subsidiary shall continue to be a Subsidiary; and (iv) shares of stock of any foreign Subsidiary may be issued to directors of such foreign Subsidiary to satisfy director ownership requirements imposed by applicable local 39 43 law and shares of stock of foreign Subsidiaries may be issued to Persons to the extent necessary to satisfy local ownership requirements imposed by applicable local law. (e) Sales, Etc. of Assets. Transfer, or permit any Subsidiary to Transfer any assets, if after giving effect to such Transfer the sum of (1) the total assets as to which there has been a Transfer not permitted by clauses (i) or (ii) of this Section 5.02(e) after the date of this Agreement, plus (2) the total assets of all Subsidiaries whose stock is sold pursuant to clause (ii) of Section 5.02(d) after the date of this Agreement, plus (3) the total assets of all Subsidiaries that have been merged into or consolidated with a corporation pursuant to clause (iv) of Section 5.02(b) after the date of this Agreement, would exceed 20% of the consolidated total assets of the Borrower, except that: (i) any Subsidiary may Transfer any of its assets to the Borrower or to another Subsidiary and the Borrower may Transfer assets to a wholly-owned Subsidiary that had been transferred to the Borrower from a Subsidiary after the date of this Agreement; and (ii) the provisions of this Section 5.02(e) shall not apply to (A) any Transfer made in the ordinary course of business, (B) any Transfer of obsolete assets, (C) any Transfer by the Borrower or any Subsidiary of assets (but not of all or substantially all of its assets) if such Transfer is made pursuant to a plan to replace the assets subject to such Transfer and such replacement occurs no later than six (6) months after the Transfer (or, if replacement is not reasonable by such date, binding commitments to construct and/or acquire replacement assets shall have been entered into no later than six (6) months after the Transfer and such replacement shall occur within a reasonable period of time, which shall in no event exceed eighteen (18) months), or (D) the sale of notes, leases and accounts receivable pursuant to and in accordance with the terms of the Receivables Purchase Agreement or any similar agreement or arrangement permitted under Section 5.02(f) by Sun Microsystems Federal, Inc., Sun Microsystems Finance, Inc., SunSoft, Inc., Sun Technology Enterprises, Inc., SunExpress, Inc. or any other Subsidiary which is or becomes a party to the Receivables Purchase Agreement or any such other agreement or arrangement. (f) Sale of Receivables. Sell with recourse, or discount or otherwise sell for less than the face value thereof, or sell with or without recourse for consideration other than cash, or permit any Subsidiary to sell with recourse, or discount or otherwise sell for less than the face value thereof, or sell with or without recourse for consideration other than cash, any of its notes or accounts receivable; provided, that the foregoing restrictions shall not apply to (i) any license or sale of products or services in the ordinary course of business where 40 44 payment for such transactions is made by credit card, provided that the fees and discounts incurred by the Borrower or the Subsidiary in connection therewith shall not exceed the normal and customary fees and discounts incurred for general credit card transactions through major credit card issuers, (ii) the delivery and endorsement to banks in the ordinary course of business by the Borrower or any of its Subsidiaries of promissory notes received in payment of trade receivables, where delivery and endorsement are made prior to the date of maturity of such promissory notes, and the retention by said banks of normal and customary fees and discounts therefor, provided such practice is usual and customary in the country where such activity occurs, and (iii) any sale of notes or accounts receivable (or interests therein) so long as (A) the Borrower or the Subsidiary selling such notes or accounts receives, at the time of the sale, cash consideration of at least (x) with respect to sales under the Receivables Purchase Agreement, the amount determined in accordance with the provisions thereof, and (y) with respect to all other sales, 90% of the aggregate face amount of the notes or accounts receivable (or portions thereof) so sold, and (B) after giving effect to such sale, the outstanding face amount which remains owing from the respective trade debtors under all such notes or accounts receivable sold does not exceed at any time an amount equal to the greater of (1) $250,000,000 or (2) 15% of Consolidated Tangible Net Worth. (g) Amendment of Receivables Purchase Agreement. Agree to (i) any amendment to the Receivables Purchase Agreement that amends Section 5.09 of the Receivables Purchase Agreement or the definition of "Permitted Subordinated Interest" (as such term is defined in the Receivables Purchase Agreement) in a manner which would impair the ability of the Borrower and its Subsidiaries pursuant to such Section (as written without giving effect to such amendment) to sell, assign or otherwise dispose of, or create or suffer to exist, any Permitted Subordinated Interest with respect to their interests in any Pool Assets (as such term is defined in the Receivables Purchase Agreement) and the proceeds thereof; provided, however, that the foregoing shall in no way limit the application of the definition of "Receivables Purchase Agreement" as set forth in Section 1.01, or (ii) enter into any other agreement pertaining to the sale of accounts receivable of the Borrower unless such other agreement permits the Borrower to grant to the Lenders a security interest in the Borrower's accounts receivable on terms no less favorable to the Lenders than those contained in the Receivables Purchase Agreement. (h) Subsidiary Debt. Permit any Subsidiary organized under the laws of any State of the United States of America to create, incur, assume or suffer to exist any Debt if, after giving effect thereto and to the concurrent repayment of any other Debt, the aggregate Debt of all such Subsidiaries will exceed $120,000,000. 41 45 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) the Borrower shall fail to pay (i) any principal of any Advance when the same becomes due and payable; or (ii) any interest on any Advance or any fees payable hereunder within five (5) Business Days after the same becomes due; or (iii) any other amounts payable hereunder within thirty (30) days of the date of invoice or written demand therefor; or (b) any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (c) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Sections 5.01(h),5.01(i), 5.02(b), 5.02(c), 5.02(d), 5.02(e), 5.02(g) or 5.02(h); or (d) the Borrower shall fail to perform or observe any term, covenant or agreement contained in this Agreement (other than those covered by the other clauses of this Section 6.01) on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent at the request of any Lender; or (e) (i) the Borrower or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any Debt which is outstanding in a principal amount of at least $10,000,000 in the aggregate (but excluding Debt outstanding hereunder) of the Borrower or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument; but only if the effect of such failure to pay, event or condition is to accelerate the maturity of such Debt; or any such Debt shall be declared by the creditor to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (ii) any event shall occur or condition shall exist under any 42 46 agreement or instrument relating to any Debt of the Borrower or any of its Subsidiaries outstanding in a principal amount in excess of $50,000,000 in the aggregate and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to permit the acceleration by the creditor of, the maturity of such Debt; or (f) the Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of thirty (30) consecutive days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) any order, judgment or decree is entered in any proceedings against the Borrower or any Restricted Subsidiary decreeing the dissolution of the Borrower or such Restricted Subsidiary and such order, judgment or decree remains unstayed and in effect for more than sixty (60) consecutive days; or (h) any order, judgment or decree is entered in any proceedings against the Borrower or any Restricted Subsidiary decreeing a split-up of the Borrower or such Restricted Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Restricted Subsidiary whose assets represent a substantial part, of the consolidated assets of the Borrower (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Restricted Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Borrower (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than sixty (60) consecutive days; or 43 47 (i) a final judgment or order for the payment of money in an amount (not covered by insurance) which exceeds $10,000,000 shall be rendered against the Borrower or any of its Subsidiaries and, prior to the payment in full of the amount thereof, either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of thirty (30) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (j) any ERISA Termination Event that the Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States district court of a trustee to administer any Plan shall have occurred and be continuing for thirty (30) days after written notice shall have been given to the Borrower by the Agent, or any Plan shall be terminated, or a trustee shall be appointed by an appropriate United States district court to administer any Plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that if an Event of Default specified in Section 6.01(f) shall occur or in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any of its subsidiaries under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. SECTION 6.02. Mandatory Prepayment; Event of Early Termination. Notwithstanding anything to the contrary contained herein, in the event that a Change of Control Event shall occur with respect to the Borrower, the Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, 44 48 whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENT SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the amounts payable hereunder and under the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee of any Note as the holder thereof until the Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon 45 49 any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. CUSA and Affiliates. With respect to its Commitment and the Advances made by it and the Notes issued to it, CUSA shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include CUSA in its individual capacity. CUSA and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its Subsidiaries and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if CUSA were not the Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts outstanding under the A Notes then held by each of them (or if no A Advances are at the time outstanding or if any A Notes are held by Persons which are not Lenders, ratably according to the respective amounts of their Commitments), from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement, provided that no Lender shall be liable for any portion of such claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees, court costs and all other reasonable litigation expenses, including, but not limited to, expert witness fees, document copying expenses, exhibit preparation, courier expenses, postage, and communication expenses) incurred by the Agent in connection with the 46 50 preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. SECTION 7.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Agent, which successor Agent shall (if no Event of Default then exists) be subject to the approval of the Borrower not to be unreasonably withheld. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within twenty (20) days after the retiring Agent's giving of notice of resignation, then the Borrower may appoint a successor Agent, which successor Agent shall be subject to the approval of the Majority Lenders not to be unreasonably withheld. If no successor Agent shall have been so appointed by the Borrower, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $300,000,000 or an Affiliate thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01, 3.02 or 3.03, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of 47 51 principal of, or interest on, the Advances or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or the number of Lenders which shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement. SECTION 8.02. Notices, Payments, Etc. (a) All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2550 Garcia Avenue PAL 1-211, Mountain View, California 94043, Attention: Treasurer, with a copy to the attention of General Counsel at the same address (but with the following mail stop substituted: PAL 1-521); if to any Lender specified on Schedule I, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address c/o Citicorp North America, Inc. at Citicorp Center, One Sansome Street, Suite 2710, San Francisco, California 94104, Attention: J. Kevin Nater; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall, (i) when telecopied, telegraphed, telexed or cabled, be effective when telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, (ii) when sent by an overnight (next day) courier service, be effective on the Business Day after the date when delivered to such service, and (iii) when mailed, be effective on the fifth Business Day after the date deposited in the mails, except that notices and communications to the Agent pursuant to Article II or VII shall not be effective until received by the Agent, and any notice of default which is given to the Borrower only by means of telecopier shall not be effective until such telecopy is received by the Borrower. (b) All payments made or funds delivered to the Agent hereunder shall be made or delivered to the Agent at its Domestic Lending Office or at such other address as the Agent may designate from time to time in a written notice to the other parties. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or 48 52 the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to pay on written demand all reasonable costs and expenses incurred by the Agent in connection with the preparation, execution, delivery, administration, modification and amendment and syndication of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on written demand all reasonable costs and expenses, if any (including, without limitation, reasonable counsel fees, court costs, and all other reasonable litigation expenses, including, but not limited to, expert witness fees, document copying expenses, exhibit preparation, courier expenses, postage, communication expenses and other expenses, specifically including reasonable allocated costs of in-house counsel), incurred by the Agent and the Lenders in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement, the Notes and the other documents to be delivered hereunder, and agrees to save the Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If any payment of principal of any Eurodollar Rate Advance or B Advance is made other than on the last day of the Interest Period for such A Advance or the applicable maturity date for such B Advance, as the case may be, as a result of a payment pursuant to Section 2.13 or acceleration of the maturity of the Advances pursuant to Section 6.01 or for any other reason, the Borrower shall, upon written demand by any Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. Upon the Borrower's written request, any Lender demanding compensation under this Section 8.04(b) shall furnish to the Borrower a summary statement as to the method of calculation of any such losses, costs or expenses. (c) The Borrower agrees to indemnify, protect, defend and hold harmless the Agent and each Lender and each of their 49 53 Affiliates and their respective officers, directors, employees, agents, advisors and representatives (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits, costs, disbursements and expenses (including, without limitation, reasonable fees and expenses of counsel, including but not limited to court costs and all other reasonable litigation expenses including, but not limited to, expert witness fees, document copying expenses, exhibit preparation, courier expenses, postage, and communication expenses) that may be incurred by or asserted against any Indemnified Party, in each case arising out of or in connection with or by reason of, or in connection with the preparation for a defense of, any investigation, litigation, proceeding or settlement arising out of, related to or in connection with (i) this Agreement or the transactions contemplated by this Agreement or the use of any proceeds of the Advances, (ii) the Advances, the Borrowings or the Commitments, (iii) the failure of the Borrower or any of its Subsidiaries to comply fully with any and all Environmental Laws applicable to it, or (iv) any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or substantially all of the assets of any Person (including, without limitation, the Borrower), whether or not an Indemnified Party is a party thereto and whether or not the transactions contemplated hereby are consummated, except to the extent such claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits, costs, disbursements and expenses are found in a final, nonappealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party. If an Indemnified Party settles, compromises or accepts a default judgment on any claim, demand or cause of action for which it is otherwise entitled to indemnification by the Borrower hereunder without the Borrower's prior written consent, which consent shall not be unreasonably withheld or delayed, the Borrower shall be relieved of the obligation hereunder to indemnify and hold harmless such Indemnified Party with respect to such settlement, compromise or default judgment. If an Indemnified Party appeals any judgment or award for which it is otherwise entitled to indemnification by the Borrower without the Borrower's prior written consent, which consent shall not be unreasonably withheld or delayed, Borrower shall be relieved of the obligation hereunder to indemnify and hold harmless such Indemnified Party with respect to any incremental claim, damage, loss, liability, obligation, penalty, action, judgment, suit, cost, disbursement or expense arising out of such appeal. (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 8.04 shall survive the termination of this Agreement, the termination of the Commitments and the payment in full of the Notes. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and 50 54 (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Advances and all other amounts payable under this Agreement to be forthwith due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. The Borrower hereby authorizes CUSA, in accordance with the provisions of this Section 8.05, to so set-off and apply any and all such deposits held and other indebtedness owing by Citibank or any other Affiliate of CUSA to or for the credit or the account of the Borrower and hereby authorizes Citibank and each such Affiliate to permit such set-off and application by CUSA. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Lender that such Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may assign to one or more banks or other financial institutions all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the A Advances owing to it and the A Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement (other than any B Advances or B Notes), (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 and shall be an integral multiple of $1,000,000, (iii) each such assignment shall be to an assignee reasonably acceptable to the Agent and consented to by the Borrower, which consent shall not be unreasonably withheld; provided, however, that the consent of the Borrower shall not be 51 55 required with respect to any such assignment by CUSA to Citibank or any other Affiliate of CUSA of any Advance made by CUSA or any such assignment by any other Lender to an Affiliate of such Lender of any Advance made by such Lender, and (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any A Note or Notes subject to such assignment and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. 52 56 (c) The Agent shall maintain at its address referred to in Section 8.02(a) a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the A Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee acceptable to the Agent and reasonably consented to by the Borrower together with any A Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (e) Each Lender may assign to one or more banks or other entities any B Note or Notes held by it. (f) A Lender may at any time grant participations to one or more banks or other entities in or to all or any part of its rights and obligations under this Agreement or any Borrowings hereunder without the consent of the Borrower or the Agent; provided, however, that (i) the Borrower and the Agent shall be entitled to continue to deal solely with the granting Lender regarding notices, payments, payment instructions and any other matters arising pursuant to this Agreement; (ii) the granting Lender's obligations under this Agreement shall remain unchanged and the granting Lender shall remain solely responsible for the performance thereof, and (iii) the granting Lender shall remain the holder of its Note(s) for all purposes under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Lender will not agree, without the consent of the participant, to any modification, amendment or waiver of any provision of this Agreement described in clauses (b), (c) or (d) of Section 8.01, or to the release of any Lien that may at any time be created to secure any obligations owing to the Agent and/or the Lenders hereunder or under the Note. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant 53 57 to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree, pursuant to Section 8.11, to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender. (h) Notwithstanding anything else contained herein, each Lender may assign, as collateral or otherwise, any of its rights (including, without limitation, rights to payments of principal or interest) under this Agreement to any Federal Reserve Bank without notice to or the consent of the Borrower or the Agent and without any requirement that the assignee assume any obligations of such Lender hereunder. (i) If any Eurodollar Reference Bank or its Lender Affiliate assigns its Notes to an unaffiliated institution, the Agent shall, in consultation with the Borrower and with the consent of the Majority Lenders, appoint another bank to act as a Eurodollar Reference Bank hereunder, and pending such appointment, the Eurodollar Rate shall be determined on the basis of the remaining Eurodollar Reference Bank(s). SECTION 8.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. SECTION 8.09. Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. SECTION 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 8.11. Confidentiality. In accordance with normal procedures regarding proprietary information supplied by customers, each of the Lenders agrees to keep confidential and to cause its employees, agents and representatives to keep confidential information relating to the Borrower or any Subsidiary received pursuant to or in connection with this Credit Agreement and the transactions contemplated hereby, provided that nothing herein shall be construed to prevent the Agent or any Lender from disclosing such information (i) upon the order of any court or administrative agency, (ii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Agent or such Lender, (iii) which has been publicly disclosed, (iv) which has been lawfully obtained by any of the Lenders from a Person other than the Borrower or any Subsidiary, the Agent or any other Lender, or (v) to any participant in or 54 58 assignee of, or prospective participant in or assignee of, all or any part of the rights and obligations of such Agent or such Lender under this Agreement or any Advances hereunder (provided that such participant or assignee, or prospective participant or assignee, agrees to comply with the confidentiality requirements set forth in this Section 8.11). SECTION 8.12. Termination. Except as otherwise provided in this Agreement and the Notes and the other agreements and instruments executed pursuant hereto, all rights and obligations hereunder and thereunder shall terminate when all amounts payable under this Agreement, the Notes and such other agreements shall have been paid in full and no Lender shall have any Commitment hereunder; provided, however, that notwithstanding the foregoing the Borrower shall remain liable for all of its obligations hereunder and thereunder to indemnify or reimburse the Agent and the Lenders, including, without limitation, pursuant to the provisions of Sections 2.12, 2.15 and 8.04 hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SUN MICROSYSTEMS, INC. By: ______________________________ Name: ________________________ Title: _______________________ CITICORP USA, INC., as Agent By: ______________________________ Vice President Commitment Lenders $15,000,000 CITICORP USA, INC. By: _______________________________ Title: Vice President 55 59 $11,250,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: _________________________________ Title: __________________________ $11,250,000 ABN AMRO BANK N.V SAN FRANCISCO INTERNATIONA BRANCH By: _________________________________ Title: __________________________ By: _________________________________ Title: __________________________ $11,250,000 THE FIRST NATIONAL BANK OF BOSTON By: _________________________________ Title: __________________________ By: _________________________________ Title: __________________________ $11,250,000 BARCLAYS BANK PLC By: _________________________________ Title: __________________________ $11,250,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: _________________________________ Title: ___________________________ $11,250,000 THE FUJI BANK, LIMITED, SAN FRANCISCO AGENCY By: _________________________________ Title: __________________________ $11,250,000 THE BANK OF CALIFORNIA, N.A. By: _________________________________ Title: __________________________ 56 60 $11,250,000 THE SAKURA BANK, LIMITED, SAN FRANCISCO AGENCY By: _________________________________ Title: __________________________ $11,250,000 BANQUE NATIONALE DE PARIS By: _________________________________ Title: __________________________ $11,250,000 BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY By: _________________________________ Title: __________________________ By: _________________________________ Title: __________________________ $11,250,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED, SAN FRANCISCO AGENCY By: _________________________________ Title: __________________________ $11,250,000 SWISS BANK CORPORATION By: _________________________________ Title: __________________________ ____________ $150,000,000 Total of the Commitments [2394.AGRE]E19883 57 61 EXHIBIT A-l FORM OF A NOTE U.S.$___________ Dated: _______, 19__ FOR VALUE RECEIVED, the undersigned, SUN MICROSYSTEMS, INC., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _______________________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below) the principal amount of each A Advance (as defined in the Credit Agreement) made by the Lender to the Borrower pursuant to the Credit Agreement on the last day of the Interest Period (as defined in the Credit Agreement) for such A Advance and otherwise in accordance with the provisions of the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each A Advance from the date of such A Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Citicorp USA, Inc., as Agent, at its account with Citibank, N.A., 399 Park Avenue, New York, New York 10043, in same day funds, or at such other address or account as the Agent may designate from time to time in a written notice to the Borrower. Each A Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Promissory Note is one of the A Notes referred to in, and is entitled to the benefits of, the Credit Agreement dated as of June 1, 1994 (the "Credit Agreement"), among the Borrower, the Lender and certain other lenders parties thereto, and Citicorp USA, Inc., as Agent for the Lender and such other lenders. The Credit Agreement, among other things, (i) provides for the making of the A Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such A Advance being further evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. A-1-1 62 The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California. SUN MICROSYSTEMS, INC., a Delaware corporation By:___________________________________________ Name:_________________________________________ Title:________________________________________ A-1-2 63 A NOTE GRID A-1-3 64 EXHIBIT A-2 FORM OF B NOTE Dated: _________, 19__ FOR VALUE RECEIVED, the undersigned, SUN MICROSYSTEMS, INC., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _______________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below), the principal amount of each B Advance (as defined in the Credit Agreement) made by the Lender to the Borrower pursuant to the Credit Agreement on the maturity date of such B Advance as is specified in the related Notice of B Borrowing (as defined in the Credit Agreement) delivered by the Borrower pursuant to Section 2.03(a)(i) of the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each B Advance from the date of such Advance until such principal amount is paid in full, at such interest rates and payable at such times as are specified pursuant to the provisions of Section 2.03 thereof. Both principal and interest are payable in lawful money of the United States of America to Citicorp USA, Inc., as Agent, at its account with Citibank, N.A., as Agent, at 399 Park Avenue, New York, New York 10043, in same day funds, or at such other address or account as the Agent may designate from time to time in a written notice to the Borrower. Each B Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of the principal hereof shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Promissory Note is one of the B Notes referred to in, and is entitled to the benefits of, the Credit Agreement dated as of June 1, 1994 (the "Credit Agreement"), among the Borrower, the Lender and certain other lenders parties thereto, and Citicorp USA, Inc., as Agent for the Lender and such other lenders. The Credit Agreement, among other things, (i) provides for the making of B Advances by the Lender, in its sole discretion, to the Borrower from time to time pursuant to the provisions of the Credit Agreement, the indebtedness of the Borrower resulting from each such B Advance being further evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. The Borrower shall have no right to A-2-1 65 prepay any principal amount hereof except upon the terms and conditions specified pursuant to the Credit Agreement. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California. SUN MICROSYSTEMS, INC., a Delaware corporation By:___________________________________________ Name:_________________________________________ Title:________________________________________ A-2-2 66 B NOTE GRID A-2-3 67 EXHIBIT B-1 NOTICE OF A BORROWING Citicorp USA, Inc., as Agent for the Lenders parties to the Credit Agreement referred to below Citicorp Center One Sansome Street, Suite 2710 [Date] San Francisco, California 94104 Attention: _____________________ Gentlemen: The undersigned, Sun Microsystems, Inc., refers to the Credit Agreement, dated as of June 1, 1994 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests an A Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such A Borrowing (the "Proposed A Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed A Borrowing is __________, 19__. (ii) The Type of A Advances comprising the Proposed A Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed A Borrowing is $_______________. (iv) The Interest Period for each A Advance made as part of the Proposed A Borrowing is [____ days] [____ month[s]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed A Borrowing: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed A Borrowing and to the application of the proceeds therefrom, as though made on and as of such date (except to the extent such representations or warranties specifically relate to B-1-1 68 an earlier date, in which case they shall be true and correct as of such date); (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed A Borrowing or from the application of the proceeds therefrom; and (C) the aggregate amount of the Proposed A Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders. Very truly yours, SUN MICROSYSTEMS, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ B-1-2 69 EXHIBIT B-2 NOTICE OF B BORROWING Citicorp USA, Inc., as Agent for the Lenders parties to the Credit Agreement referred to below Citicorp Center One Sansome Street, Suite 2710 [Date] San Francisco, California 94104 Attention: _______________________ Gentlemen: The undersigned, Sun Microsystems, Inc., refers to the Credit Agreement, dated June 1, 1994 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests a B Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such B Borrowing (the "Proposed B Borrowing") is requested to be made: (A) Date of B Borrowing _________________________ (B) Amount of B Borrowing _________________________ (C) Maturity Date _________________________ (D) Interest Rate Basis _________________________ (E) Interest Payment Date(s) _________________________ (F) _______________________ _________________________ (G) _______________________ _________________________ (H) _______________________ _________________________
The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed B Borrowing: (a) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed B Borrowing and to the application of the proceeds therefrom, as though made on and as of such date (except to the extent such representations or warranties specifically relate to an earlier date, in which case they shall be true and correct as of such date); B-2-1 70 (b) no Default or Event of Default has occurred and is continuing, or would result from the Proposed B Borrowing or from the application of the proceeds therefrom; and (c) the aggregate amount of the Proposed B Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders. The undersigned hereby confirms that the Proposed B Borrowing is to be made available to it in accordance with Section 2.03(a)(vi) of the Credit Agreement. Very truly yours, SUN MICROSYSTEMS, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ B-2-2 71 EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated __________ ___, 19__ Reference is made to the Credit Agreement dated as of June 1, 1994 (the "Credit Agreement") among Sun Microsystems, Inc., a Delaware corporation (the "Borrower"), the Lenders (as defined in the Credit Agreement) and Citicorp USA, Inc., as Agent for the Lenders (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. _______________ (the "Assignor") and _______________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof (other than in respect of B Advances) which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement (other than in respect of B Advances), including, without limitation, such interest in the Assignor's Commitment and the A Advances owing to the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the A Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants as of the Effective Date (as defined below) that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any liens or encumbrances; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) except as stated in clause (i) of this Paragraph 2, makes no representation or warranty of any kind relating to the Borrower or the Credit Agreement. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, C-1 72 independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; and (v) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof. [Note: the following sentence is included only if the Assignee is organized under the laws of a jurisdiction outside the United States: The Assignee attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such taxes at a rate reduced by an applicable tax treaty] [Note: the following sentence is included if the Assignee is organized under the laws of a jurisdiction within the United States: The Assignee attaches a statement conforming to the requirements of United States Treasury Regulation 1.1441-5(b)]. 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date the Agent shall make all payments under the Credit Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment and other fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. C-2 73 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. C-3 74 EXHIBIT C Schedule 1 to Assignment and Acceptance Dated _______, 19__ Section 1. Percentage Interest: _________% Section 2. Assignee's Commitment: $_________ Aggregate Outstanding Principal Amount of A Advances owing to the Assignee: $_________ Assignor's Retained Commitment: $_________ Section 3. Effective Date: _____, 19__ [NAME OF ASSIGNOR] By:______________________________ Title:___________________________ [NAME OF ASSIGNEE] By: _____________________________ Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office [Address] Consented to this ___ day of ________________, 19__ C-4 75 SUN MICROSYSTEMS, INC., By: __________________________ Name: ________________________ Title: _______________________ Accepted this _______ day of ________________, 19__ CITICORP USA, INC. By:____________________________ Vice President C-5 76 EXHIBIT E COVENANT COMPLIANCE CERTIFICATE Citicorp USA, Inc. as Agent for the Lenders parties to the Credit Agreement referred to below Citicorp Center One Sansome Street, Suite 2710 San Francisco, California 94111 Attention: _______________________ Gentlemen: I, the undersigned, the _________________________ of Sun Microsystems, Inc., do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to Section 5.01(e)(iii) of that certain Credit Agreement dated as of June 1, 1994 (the "Credit Agreement", the terms defined therein being used herein as therein defined) among Sun Microsystems, Inc. (the "Borrower"), certain Lenders parties thereto and Citicorp USA, Inc., as Agent for such Lenders. 2. Schedule 1 attached hereto sets forth financial data and computations evidencing the Borrower's compliance with certain covenants of the Credit Agreement, all of which data and computations are complete, true and correct. 3. No Default or Event of Default under the Credit Agreement has occurred and is continuing. 4. The representations and warranties set forth in Section 4.01 of the Credit Agreement are true and correct as of the date hereof as though made on and as of the date hereof (except to the extent such representations or warranties specifically relate to an earlier date, in which case they shall be true and correct as of such date). 5. Schedule 2 attached hereto describes all changes in Exhibit G to the Credit Agreement that have not been reflected on previous certificates furnished pursuant to Section 5.01(e)(iii) of the Credit Agreement. [This Paragraph 5 is given only annually, with year-end financial statements.] E-1 77 Executed this ____ day of _____________, 19__. ____________________________________ Name:_______________________________ Title:______________________________ E-2 78 Schedule 1 To Compliance Certificate For the _________ Ended ____________, 19_ I. SECTION 5.01(h): Debt to Consolidated Tangible Net Worth A. Total Debt: $___________ B. Consolidated total assets: $___________ C. Consolidated total liabilities: $___________ D. Intangibles and other exclusions (if any): $___________ E. Consolidated Tangible Net Worth (B - C - D): $___________ F. Ratio of A to E: ____ to 1.00 G. Maximum ratio: .45 to 1.00 II. SECTION 5.01(i): Fixed Charge Ratio A. Adjusted EBIT for previous 12 months: $___________ B. Fixed Charges for previous 12 months: $___________ C. Ratio of A to B: ___ to 1.00 D. Minimum ratio: 1.25 to 1.00* .50 to 1.00** III. SECTION 5.02(h): Subsidiary Debt A. U.S. Subsidiary Debt: $___________ B. Maximum U.S. Subsidiary Debt: $120,000,000 * applicable to the twelve month period ending on the last day of the first fiscal quarter of any fiscal year of the Borrower ** applicable to the twelve month periods ending on the last day of the second, third or fourth fiscal quarters of any fiscal year of the Borrower E-3 79 Schedule 2 Set forth below are all changes in the information contained in Exhibit G to the Credit Agreement that have not been reflected on a previous Schedule 2: [List all changes; if there are none, so indicate] E-4 80 EXHIBIT F LIENS 1. The First Deed of Trust, Assignment of Leases, Rents and Other Income and Security Agreement dated as of May 11, 1989 in the amount of $40,000,000 covering the real property located at San Antonio Road, Palo Alto, California ( the "Palo Alto Property") among Sun Microsystems Properties, Inc. ("Grantor"), Chicago Title Insurance Company ("Trustee"), and The Toyo Trust and Banking Company, Limited, New York Branch ("Beneficiary"). 2. UCC-1 Financing Statement dated May 11, 1989 under which Grantor grants to Beneficiary a security interest in all personal property which is owned by Grantor and located at the Palo Alto Property. 2 81 EXHIBIT G SUN MICROSYSTEMS, INC. SUBSIDIARIES
DATE PLACE OF NAME INCORPORATED INCORPORATION - - - ------------------------------------------------------------- --------------- ------------ Sun Microsystems of California, Inc. April 1982 California Solaris Corporation April 1983 California * Sun Microsystems Ltd December 1984 U.K. Sun Microsystems Europe, Inc. March 1984 California Sun Microsystems GmbH April 1984 Germany Sun Microsystems France, S.A. September 1984 France Sun Microsystems Federal, Inc. October 1984 California Sun Microsystems (Barbados), Ltd. December 1984 Barbados Sun Microsystems of Canada, Inc. February 1985 Canada Nihon Sun Microsystems K.K. March 1986 Japan Sun Microsystems Nederland B.V. June 1986 netherlands Sun Microsystems Oy October 1990 Finland Sun Microsystems Australia Pty. Ltd. July 1986 Australia Sun Microsystems (Schweiz) A.G. June 1987 Switzerland Sun Microsystems of California, (Hong Kong) Ltd. June 1987 Hong Kong Sun Microsystems Italia S. p.A. July 1987 Italy Sun Microsystems of California (Services), Ltd. July 1987 Hong Kong Sun Microsystems AB September 1987 Sweden Sitka Corporation March 1988 California Sun Microsystems (NZ) Ltd. December 1988 New Zealand Sun Microsystems Holdings Ltd November 1988 Wales Sun Microsystems Iberica S.A. January 1989 Spain Sun Microsystems Ireland, Ltd. March 1993 Ireland * Sun Microsystems Scotland Ltd January 1989 U.K. Sun Microsystems Benelux B.V. February 1989 Netherlands Unisol Corporation February 1989 Japan Sun Microsystems Properties, Inc. March 1989 California sun Microsystems Europe Properties, Ltd. June 1992 California Sun Microsystems Technology Pty. Ltd. May 1989 Australia Sun Microsystems Finance, Inc. August 1989 California Sun Acquisitions, Inc. September 1990 California Sun Microsystems Laboratories, Inc. February 1991 California Sun Technology Enterprises, Inc. February 1991 California SunExpress, Inc. March 1991 California SunExpress International, Inc. August 1992 California SunSoft, Inc. March 1991 California SunSoft International, Inc. June 1993 California SunSoft Subsidiary, Inc. July 1987 Delaware Sun Microsystems Computer Corporation March 1991 California Sun Microsystems Intercontinental Operations April 1992 California Sun Microsystems Management Services April 1992 California Sun Microsystems do Brasil Industria e Comercio Ltda. February 1991 Brazil Sun Microsystems de Mexico, S.A. de C.V. January 1992 Mexico Sun Microsystems de Venezuela, S.A. May 1992 Venezuela Sun Microsystems Belgium January 1991 Belgium Sun Microsystems International B.V. June 1991 Netherlands Sun Microsystems Scotland B.V. June 1991 Scotland Sun Microsystems Korea Ltd. December 1990 Korea Sutherland, Sproull & Associates, Inc. March 1991 California * First Person, Inc. July 1992 California Sun Microsystems Distributions International Inc. December 1991 California
* non -- Restricted Subsidiary 82 EXHIBIT H RESPONSIBLE OFFICERS
NAME OF PERSON OCCUPYING EXECUTIVE OFFICE OFFICE AT CLOSING - - - ------------------------------------------------- ------------------------------ President-CEO Scott McNealy V.P., Chief Financial Officer Michael Lehman V.P., Chief Technical Officer Bill Joy V.P., General Counsel & Secretary Michael H. Morris V.P., Treasurer Richard Barker V.P. Corporate Planning & Development William Raduchel
3 EX-10.83 5 RECEIVABLES PURCHASE AGREEMENT - AUGUST 5, 1994 1 EXHIBIT 10.83 EXECUTED COPY RECEIVABLES PURCHASE AGREEMENT dated as of August 5, 1994 among SUN MICROSYSTEMS, INC. and THE SUBSIDIARY SELLERS LISTED HEREIN, as Sellers The PURCHASERS Listed Herein and J. P. MORGAN DELAWARE as Agent 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS Section 1.01. Defined Terms . . . . . . . . . . . . . . 1 Section 1.02. Accounting Terms and Determinations . . . 16 Section 1.03. UCC Terms . . . . . . . . . . . . . . . . 16 ARTICLE II PURCHASES AND SALES Section 2.01. Agreement to Purchase . . . . . . . . . . 17 Section 2.02. Sales Procedures. . . . . . . . . . . . . 17 Section 2.03. Participation Percentage. . . . . . . . . 18 Section 2.04. Discount Calculations . . . . . . . . . . 18 Section 2.05. Loss Reserve. . . . . . . . . . . . . . . 20 Section 2.06. Settlement Statement. . . . . . . . . . . 20 Section 2.07. Commitment Fees; Termination or Reduction of Commitment. . . . . . . . . 20 Section 2.08. Failure to Sell . . . . . . . . . . . . . 21 Section 2.09. Payments. . . . . . . . . . . . . . . . . 21 Section 2.10. Rate Basis. . . . . . . . . . . . . . . . 21 Section 2.11. No Recourse; Seller Liability . . . . . . 21 Section 2.12. No Assumption of Obligations. . . . . . . 22 Section 2.13. Repurchase of Pool Participation. . . . . 22 Section 2.14. Additional State Income Taxes . . . . . . 22 ARTICLE III CONDITIONS TO PURCHASES Section 3.01. All Purchase Dates. . . . . . . . . . . . 23 Section 3.02. First Purchase Date . . . . . . . . . . . 23 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence and Power . . . . . . 24 Section 4.02. Corporate and Governmental Authorization; Contravention. . . . . . . 25 Section 4.03. Binding Effect. . . . . . . . . . . . . . 25 Section 4.04. Perfection. . . . . . . . . . . . . . . . 25 Section 4.05. Accuracy of Information . . . . . . . . . 25
3 ARTICLE V COVENANTS Section 5.01. Maintenance of Records. . . . . . . . . . 26 Section 5.02. Protection of Participating Interests of Purchasers. . . . . .. . . . . . . . . 26 Section 5.03. Performance of Contracts. . . . . . . . . 27 Section 5.04. Furnishing of Account Information; Inspection of Records. . . . . . . . . . 27 Section 5.05. Maintenance of Qualification and Credit Policies. . . . . . . . . . . 29 Section 5.06. Modification of Accounts. . . . . . . . . 29 Section 5.07. Supplemental Opinions of Counsel. . . . . 29 Section 5.08. Maintenance of Ownership. . . . . . . . . 30 Section 5.09. No Disposition. . . . . . . . . . . . . . 30 Section 5.10. File Search Reports . . . . . . . . . . . 30 Section 5.11. Financial Information . . . . . . . . . . 30 Section 5.12. Conduct of Business and Maintenance of Existence. . . . . . . . . . . . . . . 32 Section 5.13. Minimum Tangible Net Worth. . . . . . . . 33 Section 5.14. Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . 33 Section 5.15. Use of Proceeds . . . . . . . . . . . . . 33 ARTICLE VI TERMINATION OF COMMITMENT Section 6.01. Termination Events. . . . . . . . . . . . 34 Section 6.02. Notice of Parent. . . . . . . . . . . . . 36 ARTICLE VII THE AGENT Section 7.01. Appointment and Authorization . . . . . . 36 Section 7.02. Agent and Affiliates. . . . . . . . . . . 37 Section 7.03. Action by Agent . . . . . . . . . . . . . 37 Section 7.04. Consultation with Experts . . . . . . . . 37 Section 7.05. Liability of Agent. . . . . . . . . . . . 37 Section 7.06. Indemnification . . . . . . . . . . . . . 38 Section 7.07. Credit Decision . . . . . . . . . . . . . 38 Section 7.08. Successor Agent . . . . . . . . . . . . . 38 Section 7.09. Agent's Fees. . . . . . . . . . . . . . . 38 ARTICLE VIII SELLERS' INDEMNITIES Section 8.01. Breach of Warranty or Agreement . . . . . 39
4 Section 8.02. Tax Indemnification . . . . . . . . . . . 40 Section 8.03. Increased Cost and Reduced Return . . . . 40 Section 8.04. Notice to Parent. . . . . . . . . . . . . 42 Section 8.05. Expenses Included . . . . . . . . . . . . 42 ARTICLE IX ADMINISTRATION, SERVICING AND COLLECTION OF POOL ACCOUNTS Section 9.01. Appointment of Collection Agent . . . . . 42 Section 9.02. Collection of Pool Accounts . . . . . . . 43 Section 9.03. Rebates, Refunds, Credits and Other Adjustments. . . . . . . . . . . . . . . 43 Section 9.04. Change of Collection Agent. . . . . . . . 44 Section 9.05. Remittance of Collections; Reinvestment . 45 Section 9.06. Holding of Proceeds Pending Settlements . . . . . . . . . . . . . . . 49 Section 9.07. Servicing Fee . . . . . . . . . . . . . . 49 Section 9.08. Compensation of Successor Collection Agent. . . . . . . . . . . . . 49 Section 9.09. Termination of Collection Agency. . . . . 49 Section 9.10. Responsibilities of Agent and Purchasers. . . . . . . . . . . . . . . . 50 Section 9.11. Lockboxes . . . . . . . . . . . . . . . . 50 ARTICLE X MISCELLANEOUS Section 10.01. Term of Agreement. . . . . . . . . . . . 51 Section 10.02. No Waivers . . . . . . . . . . . . . . . 51 Section 10.03. Notices. . . . . . . . . . . . . . . . . 51 Section 10.04. Counterparts; Effectiveness. . . . . . . 51 Section 10.05. Amendments . . . . . . . . . . . . . . . 52 Section 10.06. Expenses; Documentary Taxes; Litigation Indemnity . . . . . . . . . . 52 Section 10.07. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial . . . . . . . . . . . . . . . 53 Section 10.08. Successors and Assigns; Participations; Novation . . . . . . . . 53 Section 10.09. Confidentiality. . . . . . . . . . . . . 55 Section 10.10. Termination by Seller. . . . . . . . . . 56 Section 10.11. Effect on 1991 Agreement . . . . . . . . 56
5 ARTICLE XI GUARANTY Section 11.01. The Guaranty . . . . . . . . . . . . . . 56 Section 11.02. Guaranty Unconditional . . . . . . . . . 56 Section 11.03. Discharge only upon Payment in Full; Reinstatement in Certain Circumstances. . . . . . . . . . . . . . 57 Section 11.04. Waiver by the Parent . . . . . . . . . . 58 Section 11.05. Subrogation. . . . . . . . . . . . . . . 58 EXHIBITS Exhibit A - Form of Assignment Exhibit B - Form of Perfection Certificate Schedule 4(A) - Description of Collateral Schedule 5 - Schedule of Filings Exhibit C-1 - Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, Counsel for the Sellers Exhibit C-2 - Form of Opinion of Counsel for the Agent Exhibit D-1 - Government Contracts Exhibit D-2 - Form of Government Contract Assignment Exhibit D-3 - Form of Notice of Assignment Exhibit E - Certain Obligors Exhibit F - Lockbox Banks, Lockbox Account Numbers and Lockboxes Exhibit G - Form of Lockbox Letter
6 RECEIVABLES PURCHASE AGREEMENT AGREEMENT dated as of August 5, 1994 among SUN MICROSYSTEMS, INC., the SUBSIDIARY SELLERS listed on the signature pages hereof, the PURCHASERS listed on the signature pages hereof and J.P. MORGAN DELAWARE, as Agent. RECITALS WHEREAS, each Seller in the ordinary course of its business generates trade and/or retail or consumer receivables resulting from the sale of goods or services to its customers; WHEREAS, the Sellers may from time to time sell to the Purchasers undivided percentage ownership interests in such receivables pursuant to and in accordance with the terms hereof; WHEREAS, the Purchasers may from time to time purchase from the Sellers undivided percentage ownership interests in such receivables pursuant to and in accordance with the terms hereof; and WHEREAS, the Purchasers may in the future decide to sell, assign or otherwise dispose of undivided interests in their ownership interests pursuant to and in accordance with the terms hereof. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. The following terms, as used herein, have the following meanings: "Account" means any right of a Seller to payment in Dollars for goods which have been sold, licensed, leased or otherwise disposed of, or for services which have been or are to be rendered, by or on behalf of such Seller. Each such right evidenced by or arising under a separate Contract (including a separate invoice) shall constitute a separate Account. "Accounting Period" means each fiscal month of the Sellers during the term of this Agreement. 7 "Affiliate" means with reference to the Parent (or, if such term is used with reference to any other Person, such other Person) (the "Controlled Person") (i) any Person that directly, or indirectly through one or more intermediaries, controls the Controlled Person (a "Controlling Person") or (ii) any Person (other than the Controlled Person or a Subsidiary of the Controlled Person or, in the case of any Subsidiary of the Parent, the Parent) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means J.P. Morgan Delaware, in its capacity as agent for the Purchasers hereunder, and its successors in such capacity. "Agreement" means this Receivables Purchase Agreement, as the same may be amended from time to time. "Applicable Discount Rate" has the meaning set forth in Section 2.04. "Applicable Margin" has the meaning set forth in Section 2.04. "Assignment" means an instrument of assignment creating a Participating Interest, substantially in the form of Exhibit A hereto. "Average Prime Rate" means, with respect to any Discount Period, the sum of the Prime Rates in effect on each day from and including the first day of such Discount Period to but not including the last day thereof, divided by the number of such days. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Business Day" means a day (i) other than a Saturday, Sunday or other day on which commercial banks in New York City or Wilmington, Delaware or San Francisco, California are authorized by law to close and (ii) on which commercial banks are open for international business (including dealings in Dollar deposits) in London. "Collection Agent" means the Person from time to time appointed as Collection Agent pursuant to Section 9.01. 2 8 "Collections" means all amounts received in payment of any amount owed by the related Obligor in respect of any Pool Account or applied to any amount owed in respect of any Pool Account. Collections shall include all amounts payable by the Sellers pursuant to Section 9.03. "Commitment" means the amount of $125,000,000, or the several agreements of the Purchasers to purchase Participating Interests in Pool Accounts from time to time hereunder, as the context may require. "Commitment Percentage" means, as to any Purchaser, the percentage equivalent of a fraction the numerator of which is the "Committed Amount" set forth opposite its name on the signature pages hereof and the denominator of which is $125,000,000. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Parent in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Tangible Net Worth" means the excess of consolidated total assets over consolidated total liabilities, consolidated total assets and consolidated total liabilities each to be determined on a consolidated basis for the Parent in accordance with generally accepted accounting principles, excluding, however, from the determination of consolidated total assets (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) all unamortized debt discount and expense, (iii) asset, liability, contingency and other appropriate reserves, including reserves for depreciation and for deferred income taxes, (iv) treasury stock, (v) any write-up in the book value of any asset resulting from a revaluation thereof subsequent to June 30, 1993, (vi) the book value of investments in Persons that are not Subsidiaries (unless the same are readily marketable), and (vii) any items not included in clauses (i) through (vi) above which are treated as intangibles in conformity with generally accepted accounting principles. "Contract" means an agreement between the related Seller and the Obligor on an Account or, in the case of an Account arising on open account terms, the invoice evidencing such Account, in either case pursuant to which such Obligor shall be obligated to make payments in the amounts and at the times set forth therein. 3 9 "Credit Agreement" means the Credit Agreement dated as of June 1, 1994 among the Parent, the banks listed on the signature pages thereof and Citicorp USA Inc., as agent for such banks, a true and correct copy of which as in effect on the date hereof has heretofore been furnished to each Purchaser by the Parent, as amended by First Amendment to Credit Agreement thereto dated as of August 5, 1994 and as the same may be further amended from time to time. "Current Purchase Price" has the meaning set forth in Section 2.02. "Debt" of any Person means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services (excluding ordinary trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (v) all obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities or property, (vi) any reimbursement obligations of such Person to the issuer of a letter of credit or similar instrument, (vii) all indebtedness or obligations of others secured by a Lien on any asset of such Person, whether or not such indebtedness or obligations are assumed by such Person (to the extent of the value of the asset), (viii) any reimbursement obligation of such Person or other arrangement of whatever nature having the effect of assuring or holding harmless any other Person against loss with respect to any real property owned by such other Person, including, without limitation, assuring or guaranteeing that such other Person shall receive a specified amount in connection with the conveyance of such real property, (ix) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (viii) above, and (x) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Defaulted Account" means at any time an Account (i) under which any amount remains unpaid for more than 90 days after the date for payment stated in the related invoice, (ii) as to which the related Obligor is at such time the subject of bankruptcy, insolvency or similar proceedings or (iii) as to which a reserve for bad debt has been specifically provided or on which an estimated or actual bad debt has been incurred or which has become 4 10 uncollectible as a consequence of a circumstance or event relating to the creditworthiness of the related Obligor, in each case as determined in accordance with the related Seller's usual practice. "Determination Date" means each Business Day from and including the first Purchase Date to and including the Termination Date. "Discount" means at any date an amount accruing (or accrued) in respect of the Unrecovered Purchase Price for each day from and including the first day of each Discount Period to but not including the last day thereof (or such date) at the Applicable Discount Rate. "Discount Period" means, (i) in respect of the portion of the Unrecovered Purchase Price outstanding on the first day of any Settlement Period (after giving effect to any purchases and/or settlements on such date), the period from the first day of such Settlement Period to and including the first day of the next succeeding Settlement Period and (ii) in respect of the portion of the Unrecovered Purchase Price attributable to any purchase during any Settlement Period, the period from and including the related Purchase Date to and including the first day of the next succeeding Settlement Period. "Discount Reserve" means, at any date, an amount equal to the sum of (i) accrued Discount at such date plus (ii) an amount equal to the product of (x) the Unrecovered Purchase Price at such date times (y) the Prime Rate + 1% at such date times (z) a fraction the numerator of which is the number of days in the Estimated Liquidation Period and the denominator of which is 360. "Dollars" means lawful currency of the United States. "Effective Date" means the date on which this Agreement becomes effective in accordance with Section 10.04. "Eligible Account" means at any time an Account arising in the ordinary course of business of the related Seller: (a) which complies with all applicable legal requirements, including, without limitation, all laws, rules, regulations and orders of any governmental or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, 5 11 (b) which constitutes an "account" as defined in the Uniform Commercial Code as in effect in the jurisdiction whose law governs the perfection of the Purchasers' ownership interests therein, (c) which, together with the related Contract, constitutes a legal, valid and binding irrevocable payment obligation of the related Obligor in accordance with its terms, subject to no dispute, claim for offset, counterclaim or other defense (except to the extent that the amount of such dispute, offset or counterclaim has theretofore been subtracted from the Unpaid Balance of such Account in the calculation of the Net Eligible Account Balance), (d) which is payable in the United States in Dollars, (e) as to which the related Obligor, or a guarantor providing a full and unconditional guaranty in respect of such account, is a Qualifying Obligor and, if such Account arises under a Government Contract, such Government Contract is a Qualifying Government Contract; provided that this clause (e) need not be met as to any Account payment of which is supported by a letter of credit, bank guarantee or similar arrangement, (f) as to which an invoice has been issued and which is payable by the related Obligor not later than 60 days after the date of such invoice, (g) which is not a Defaulted Account, and (h) as to which the Seller has good and marketable title, free and clear of any Title Defect (other than the Participating Interests and any Permitted Subordinated Interest). "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, 6 12 chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Parent and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Parent, are treated as a single employer under Section 414 of the Internal Revenue Code. "Estimated Liquidation Period" means, at any Determination Date, the period from and including such Determination Date to but not including the Settlement Date which follows such Determination Date by at least 35 days (or such greater number of days as the Agent may specify by notice to the Parent, the Collection Agent (if other than the Parent) and the Purchasers as more accurately representing the weighted average life of the Pool Accounts at such time). "Facility Office" means, as to each Purchaser, its office, branch or affiliate located at its address set forth on the signature pages hereof, or such other office, branch or affiliate of such Purchaser as it may hereafter designate as its Facility Office by notice to the Parent and the Agent. "Government Contract" means a Contract in respect of which the related Obligor is a federal governmental entity or agency. "Indemnitee" has the meaning set forth in Section 8.01. "Ineligible Account" has the meaning set forth in Section 5.04(a). "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "License Account" means at any date any Account or portion of an Account in respect of licenses by any Seller of intellectual property rights of such Seller. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any 7 13 jurisdiction). Customary bankers' rights of set-off arising by operation of law or by contract in connection with working capital facilities, lines of credit, term loans and letter of credit facilities and other contractual arrangements entered into with banks in the ordinary course of business are not "Liens" for the purposes of this Agreement. "Lockbox" means a post office box or other mailing location identified on Exhibit F hereto maintained by a Lockbox Bank pursuant to a Lockbox Letter for the purpose of receiving payments made by the Obligors for subsequent deposit into a related Lockbox Account, or such other post office box or mailing location as the Parent may identify as such to the Agent from time to time. "Lockbox Account" means a demand deposit account maintained with a Lockbox Bank pursuant to a Lockbox Letter for the purpose of depositing payments made by the Obligors. "Lockbox Bank" means a bank identified on Exhibit F hereto or such other bank as the Parent may identify as such to the Agent from time to time. "Lockbox Letter" means a letter relating to a Lockbox Account which is in compliance with Section 9.11 hereof and in substantially the form attached hereto as Exhibit G or otherwise in form and substance satisfactory to the Agent, which has been executed and delivered by the Parent to a Lockbox Bank. "Lockbox Transfer Letter" means a letter from the Agent to a Lockbox Bank substantially in the form of Annex I to Exhibit G hereto. "Loss Ratio" means at any date the percentage obtained by dividing (i) the sum (or difference) of (x) gross bad debt write-offs and (y) the net increase (or decrease) in bad debt reserves by (ii) the sum (or difference) of (x) the gross cash receipts and (y) the net increase (or decrease) in the cash-in-advance accounts, in each case for Pool Accounts and for the period of twelve consecutive Accounting Periods most recently ended on or prior to such date. "Loss Reserve" means an amount determined in accordance with Section 2.05. "Loss Reserve Percentage" means at any date the greater of (i) 10% or (ii) a percentage equal to five times the Loss Ratio as at the last day of the Accounting Period most recently ended twelve or more Business Days prior to such date. 8 14 "Majority Purchasers" means Purchasers having Commitment Percentages aggregating at least 66 2/3%. "Material Debt" means any Debt of the Parent or a Subsidiary of the Parent which is outstanding in a principal amount of at least $25,000,000 in the aggregate. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Net Eligible Account Balance" means (i) the sum of the aggregate Unpaid Balances of all Eligible Accounts minus (ii) (x) the amount by which total License Accounts otherwise included in Eligible Accounts as estimated on the most recent Settlement Statement exceeded $30,000,000 and (y) the amount by which total Service Accounts otherwise included in Eligible Accounts as estimated on the most recent Settlement Statement exceeded $30,000,000. "Net Reinvestment Gain" has the meaning set forth in Section 9.05. "Net Reinvestment Loss" has the meaning set forth in Section 9.05. "1991 Receivables Purchase Agreement" means the Receivables Purchase Agreement dated as of June 27, 1991 among the Parent, the Subsidiary Sellers listed on the signature pages thereof, the Purchasers listed on the signature pages thereof and J.P. Morgan Delaware, as Agent, as amended. "New Purchaser" has the meaning set forth in Section 10.08. "Notice of Sale" has the meaning set forth in Section 2.02. "Obligor" means the Person obligated under any Pool Account or any related Contract, and "related Obligor" means, when used with respect to any Contract or any Pool Account, the Obligor thereunder. 9 15 "Parent" means Sun Microsystems, Inc., a Delaware corporation, and its successors. "Participant" has the meaning set forth in Section 10.08(b). "Participating Interest" means an undivided percentage ownership interest of a Purchaser, to the extent of its Commitment Percentage, in and to the Pool Participation. "Participation Percentage" means at any time the applicable percentage most recently determined by the Collection Agent pursuant to Section 2.03. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Subordinated Interest" means any lien on or other security interest in the Sellers' Residual Interest that is expressly made subordinate to the rights of the Purchasers and the obligations of the Sellers and the Parent under this Agreement, as it may from time to time be amended, renewed, extended, increased or refinanced (for purposes of this definition, the "Agreement"), pursuant to a written agreement whereby the holder of such interest agrees to provisions no less favorable to the Purchasers than the following: (i) acknowledging the rights of (x) the parties hereunder to renew, extend, increase, modify, amend, accelerate, compromise, supplement, terminate, exchange, waive or release in whole or in part any of the rights or obligations of the parties hereunder (including any increase in the amount of the Participation Percentage, Unrecovered Purchase Price or Applicable Discount Rate) or with respect to the Pool Assets, and to reduce, diminish or otherwise amend in any respect the Sellers' Residual Interest and (y) the Purchasers and the Agent to exercise or refrain from exercising any and all rights, remedies and powers granted by or in connection with this Agreement or any other agreements relating hereto (including termination of the Collection Agent and appointment of a substitute Collection Agent) and otherwise to take any action with or with respect to the Parent, the Sellers, the Collection Agent and the Pool Assets, all at such times and from time to time and in such manner as the Purchasers and the Agent may in their sole discretion determine, and all without notice to or consent from any holder of such Permitted Subordinated Interest; 10 16 (ii) acknowledging that any action taken pursuant to clause (i) above or any change in the Sellers' Residual Interest by operation of the terms of this Agreement may have the effect of reducing, diminishing, impairing or otherwise altering the Permitted Subordinated Interest, and that any such reduction, diminution, impairment or alteration shall, without notice or consent, be binding on each holder of the Permitted Subordinated Interest; and (iii) subordinating all right of enforcement and satisfaction of the Permitted Subordinated Interest to payment of the Participating Interests and all other amounts owing to the Purchasers hereunder, and agreeing that, until such Participating Interests shall have been satisfied in full and the Commitment shall have been terminated, the holder of such Permitted Subordinated Interest will not exercise or attempt to exercise any rights, remedies or powers or to take any other action with respect to the Permitted Subordinated Interest against the Parent, the Sellers, the Collection Agent or the Pool Assets. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pool Account" means all Accounts other than each Account that has been designated as an Ineligible Account (as defined in Section 5.04(a)) in accordance with Section 5.04(a); provided that on and after the Termination Date, the term "Pool Account" shall refer only to those accounts which were Pool Accounts as of the Termination Date. "Pool Assets" means all of the following, whether now owned or hereafter acquired or coming into existence, wherever located: (i) all Pool Accounts outstanding at the opening of business on the related Determination Date, (ii) all rights of ownership with respect thereto, including without limitation any direct or indirect security therefor or guaranty thereof, any repossessed, returned or rejected goods relating thereto held by the Seller, any related 11 17 insurance or letter of credit and any other form of direct or indirect recourse in respect thereof, (iii) all Collections, (iv) all Records and (v) all proceeds of the foregoing. "Pool Participation" means an undivided ownership interest to the extent of the Participation Percentage determined from time to time in and to the Pool Assets. "Potential Termination Event" means any condition or event which with the giving of notice or lapse of time or both would, unless cured or waived, become a Termination Event. "Prime Rate" means the rate of interest publicly announced by J.P. Morgan Delaware in Wilmington, Delaware from time to time as its "prime rate". "Purchase Date" means each date on which the Purchasers purchase initial or incremental Participating Interests, as designated by the Parent in a Notice of Sale. "Purchaser" means each financial institution listed on the signature pages hereof, and its successors and permitted assigns, and "Purchasers" means all of the foregoing. "Purchasers' Collection Amount" means the amount of Unrecovered Purchase Price plus the Discount with respect thereto. "Qualifying Government Contract" means (i) any Government Contract under which the aggregate amounts payable by the related Obligor do not exceed $5,000,000 and (ii) any other Government Contract (A) which is set forth in Exhibit D-1 hereto (or in a supplement to Exhibit D-1 delivered by the Parent to the Purchasers with respect to such Government Contract at least 15 days prior to any purchase and sale hereunder as to which Pool Accounts arising thereunder are to be treated as Eligible Accounts) and (B) as to which the related Seller shall have delivered to the Agent a duly executed instrument of assignment substantially in the form of Exhibit D-2 and a duly completed (but unacknowledged) notice of assignment substantially in the form of Exhibit D-3, in each case with such modifications as may be necessary or advisable in order to comply with any law applicable to transactions with the related Obligor. "Qualifying Obligor" means an Obligor which (i) is not the Parent or any of the Parent's Subsidiaries or Affiliates, (ii) has not, within the three year period ending on the date of determination, been the related 12 18 Obligor on any Account which constituted a Defaulted Account by reason of clause (ii) or (iii) of the definition thereof, (iii) is located in the United States and (iv) has not been designated by notice to the Parent from the Agent at the request of the Majority Purchasers (which request shall be made upon a good faith determination that such Obligor is or may be insufficiently creditworthy at such time) as an unacceptable Obligor for purposes of this Agreement; provided that the aggregate Unpaid Balance of Pool Accounts included in the calculation of any Net Eligible Account Balance as to which any one Obligor (or a Subsidiary or Affiliate of such Obligor) is the related Obligor shall be limited (in inverse chronological order) to the extent necessary so as not to exceed (x) 10% of the Net Eligible Account Balance, as to any Obligor set forth in Part 1 of Exhibit E hereto or (y) 5% of the Net Eligible Account Balance, as to any Obligor set forth in Part 2 of Exhibit E hereto, so long as the Agent has not given the Parent notice that, in the reasonable judgment of the Majority Purchasers, there has been a material adverse change in the creditworthiness of any such Obligor, or (z) 3% of the Net Eligible Account Balance, in the case of any other Obligor. Exhibit E may be amended or supplemented from time to time with the consent (after good faith consideration of any proposals for any such amendment or supplement made by the Parent) of the Majority Purchasers. "Records" means all Contracts and other documents, books, records and other information (including without limitation tapes, discs, punch cards and related property and rights) of the Sellers maintained by the Sellers with respect to Pool Accounts and the related Obligors. "Reference Bank" means Morgan Guaranty Trust Company of New York, and any additional or substitute Reference Bank or Banks appointed by the Parent and the Agent with the consent of Majority Purchasers. "Regulatory Change" has the meaning set forth in Section 8.03. "Reinvestment Period" means the period from and including the first Purchase Date to but not including the Termination Date. "Responsible Financial Officer" means the chief financial officer, the controller, the treasurer or any assistant treasurer of the Parent. "Responsible Officer" means the individuals occupying the executive offices of the president - chief executive officer, vice president - chief financial officer, vice president - chief technical officer, vice president - 13 19 general counsel and secretary, vice president - treasurer, and vice president - corporate planning and development of the Parent and any successors to such offices, and the individuals occupying any other executive offices of the Parent which at any time have the authority, functions and responsibilities as such offices. "Seller" means each of the Parent and the Subsidiary Sellers; and "related Seller" means, with reference to any Pool Account, the Seller originating such Pool Account. "Sellers' Residual Interest" means (i) an undivided ownership interest to the extent of a percentage equal to 100% minus the Participation Percentage determined from time to time in and to the Pool Assets and (ii) amounts (if any) to be paid to the Sellers pursuant to Sections 9.05 and 10.01. "Service Account" means at any date any Account or portion of any Account that arose for performance of services not yet rendered. "Settlement Date" means the twelfth Business Day (or, in the case of January and July, the seventeenth Business Day) following the last day of each Accounting Period (or such other day of the month as to which the Parent and the Agent may from time to time agree). "Settlement Period" means (i) initially, the period from and including the first Purchase Date to and excluding the first Settlement Date, and (ii) thereafter, each period from and including each Settlement Date to and excluding the next succeeding Settlement Date. "Settlement Statement" means a monthly settlement statement prepared by the Collection Agent in form and substance reasonably satisfactory to the Purchasers. "Special Account" means Account No. 230-47-534 at J.P. Morgan Delaware, an account in the name of Agent. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Parent (or, if such term is used with reference to any other Person, by such other Person). "Subsidiary Seller" means each of the Persons listed as a "Subsidiary Seller" of the Parent listed on the signature pages hereof, and their respective successors. 14 20 "Temporary Cash Investment" means any Investment in (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper rated at least A-1 by Standard & Poor's Corporation and P-1 by Moody's Investors Service, Inc., (iii) time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company which is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits aggregating at least $250,000,000 or (iv) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified in clause (iii) above, provided in each case that such Investment matures within one year from the date of acquisition thereof. "Termination Date" means the earlier of (a) August 5, 1997 and (b) the date on which the Commitment shall have been terminated pursuant to Section 2.07 or 6.01. "Termination Event" has the meaning set forth in Section 6.01. "Title Defect" means, as to any asset of any Person, any lien, encumbrance, security interest or other right, claim or charge (other than unasserted banker's rights of offset) with respect to such asset which may be asserted by any other Person. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including its fifty States and the District of Columbia, but excluding its territories and possessions. "Unpaid Balance" means, in relation to any Account at any date, all amounts posted by the related Seller in its records in accordance with its customary accounting procedures as being payable by the related Obligor under such Account at such date (net of any discount, rebate, refund, credit or other adjustment reflected as being available to or for the benefit of the related Obligor under such Account at such date). 15 21 "Unrecovered Purchase Price" means, at any date, the excess, if any, of (i) the sum of all Current Purchase Prices paid to the Parent for the account of the Sellers on or prior to such date for the Participating Interests over (ii) the aggregate amount received by the Agent and applied with respect thereto on or prior to such date pursuant to Section 9.05. "Unused Commitment" means, at any date, the excess, if any, of the Commitment over the Unrecovered Purchase Price at such date. "Utilization Limit" means, at any date, an amount equal to the least of the following amounts: (i) the Commitment at such date and (ii) an amount such that, if the Unrecovered Purchase Price equalled such amount, the Participation Percentage at such date would equal 100%. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Parent's independent public accountants) with the audited consolidated financial statements of the Parent and its Consolidated Subsidiaries filed with the Parent's Report on Form 10-K filed with the Securities and Exchange Commission for fiscal year 1993 or, if later, the most recent such statements delivered to the Purchasers pursuant to Section 5.11; provided that, if the Parent notifies the Agent that the Parent wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Parent that the Majority Purchasers wish to amend Article V for such purpose), then the Parent's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Parent and the Majority Purchasers. SECTION 1.03. UCC Terms. Terms not otherwise defined herein which are defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York shall, unless the context otherwise requires, have the meanings set forth therein. 16 22 ARTICLE II PURCHASES AND SALES SECTION 2.01. Agreement to Purchase. Upon the basis of the Sellers' representations and warranties contained in Article IV and pursuant to Section 3.01 hereof and subject to the terms and conditions of this Agreement, the Sellers may at their option sell to the Purchasers, and each Purchaser severally agrees to purchase from the Sellers, on any Purchase Date during the period from the Effective Date to but not including the Termination Date, initial and incremental Participating Interests to the extent that, after giving effect to such purchase and to any contemporaneous settlement pursuant to Section 2.06, such Purchaser's Commitment Percentage of the Unrecovered Purchase Price does not exceed its Commitment Percentage of the Commitment. Notwithstanding the foregoing, on the initial Purchase Date, the Purchasers shall make such purchase from the Sellers and from the Purchasers under and as defined in the 1991 Receivables Purchase Agreement by directing to the Agent under the 1991 Receivables Purchase Agreement such portion of the Current Purchase Price paid hereunder as will, together with other amounts provided by the Sellers, be sufficient to pay to the Purchasers under and as defined in the 1991 Receivables Purchase Agreement all Unrecovered Purchase Price and Accrued Discount thereunder, in each case, as defined therein, with any balance of the Current Purchase Price paid hereunder to be paid to the Sellers hereunder. SECTION 2.02. Sales Procedures. (a) The Parent shall designate each Purchase Date by at least three Business Days' notice to the Agent (a "Notice of Sale"), setting forth: (i) the proposed Purchase Date, which shall be a Business Day, and (ii) the aggregate amount to be paid by the Purchasers on such Purchase Date for the initial or incremental Participating Interests to be sold on such Purchase Date (the "Current Purchase Price"), which shall be an aggregate amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such sale may be for a Current Purchase Price equal to the maximum amount permitted to be sold in compliance with Sections 2.01 and 3.01(d)). (b) As soon as practicable after receipt of a Notice of Sale, the Agent shall notify each Purchaser of the contents thereof and of such Purchaser's ratable share of the Current Purchase Price. Upon receipt of a Notice of 17 23 Sale by the Agent, such Notice of Sale shall not be revocable by the Parent or any Seller. (c) Not later than 12:00 noon (Wilmington, Delaware time) on each Purchase Date, each Purchaser shall make available its ratable share of the Current Purchase Price, in Dollars in immediately available funds, at the office of the Agent referred to in Section 10.03. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied or expressly waived, the Agent will make the funds so received from the Purchasers promptly available to the Parent for the account of the Sellers. SECTION 2.03. Participation Percentage. The Participation Percentage for each day, applicable for purposes of computations under this Agreement on such day (and for all purposes of this Agreement until determination of a new Participation Percentage on the next succeeding Determination Date, if any), shall be an amount for each Determination Date determined in accordance with the following formula (rounded to four decimal places): PP = UPP + DR + LR ------------- NEAB PP = Participation Percentage UPP = Unrecovered Purchase Price at such Determination Date (giving effect to any purchase and/or settlement on such date) DR = Discount Reserve at such Determination Date LR = Loss Reserve at such Determination Date NEAB = Net Eligible Account Balance at such Determination Date provided that the Participation Percentage shall not, in any event, exceed 100%; provided further that the Participation Percentage shall be for each day after the Termination Date until (x) the date on which the Purchasers' Collection Amount is zero and all other amounts payable hereunder to the Agent and the Purchasers have been paid in full, as calculated on the Termination Date, and (y) thereafter, zero. SECTION 2.04. Discount Calculations. (a) The Agent shall determine the Applicable Discount Rate for each Discount Period and shall promptly notify the Parent, the Collection Agent and each Purchaser of each Applicable Discount Rate so determined by it. 18 24 Subject to subsection (b) below, the "Applicable Discount Rate" for any Discount Period is the sum of the Applicable Margin plus the applicable Adjusted London Interbank Offered Rate. The "Applicable Margin" for any Discount Period is 1.40%. The "Adjusted London Interbank Offered Rate" applicable to any Discount Period is a rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage as of the first day of such Discount Period. The "London Interbank Offered Rate" applicable to any Discount Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in Dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Business Days before the first day of such Discount Period in an amount approximately equal to the Commitment Percentage of such Reference Bank of the Unrecovered Purchase Price as of the first day of such Discount Period and for a period of time comparable to such Discount Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the London Interbank Offered Rate is determined or any category of extensions of credit or other assets which includes extensions of credit by a non-United States office of any Purchaser to United States residents). (b) If prior to the first day of any Discount Period: (i) the Agent is advised by the Reference Banks that deposits in Dollars (in the applicable amounts) are not being offered to the Reference Banks in the London interbank market for such Discount Period; or (ii) any Purchaser shall notify the Agent that, as a result of a Regulatory Change, it is unlawful or impossible for such Purchaser to fund its Participating 19 25 Interest in the London interbank market for such Discount Period; the Agent shall forthwith give notice thereof to the Parent, the Collection Agent and the Purchasers, and the Applicable Discount Rate for such Discount Period shall be the Average Prime Rate plus 1% for such Discount Period. SECTION 2.05. Loss Reserve. The Loss Reserve for each day, applicable for purposes of computations under this Agreement on such day (and for all purposes of this Agreement until determination of a new Loss Reserve on the next succeeding Determination Date, if any), shall be an amount for each Determination Date determined in accordance with the following formula: ( (UPP + DR) ) LR = LRP X ( -------------) ( (1 - LRP) ) LR = Loss Reserve at such Determination Date UPP = Unrecovered Purchase Price at such Determination Date LRP = Loss Reserve Percentage at such Determination Date DR = Discount Reserve at such Determination Date SECTION 2.06. Settlement Statement. At least three Business Days prior to each Settlement Date, the Collection Agent shall deliver to the Agent a duly completed Settlement Statement. Such Settlement Statement shall be accompanied by such information as the Agent or any Purchaser may reasonably request for the purpose of effecting an accounting and settlement hereunder on such Settlement Date. SECTION 2.07. Commitment Fees; Termination or Reduction of Commitment. (a) The Sellers shall pay commitment fees to the Agent for the account of the Purchasers ratably in proportion to their Commitment Percentages in arrears on each March 31, June 30, September 30 and December 31 prior to the Termination Date and on the Termination Date. Such commitment fees shall accrue for each day from and including the Effective Date to but excluding the Termination Date at the rate of .175 of 1% per annum on the Unused Commitment. 20 26 (b) The Parent may, upon at least three Business Days' notice to the Agent, terminate at any time, or reduce from time to time by an amount of $10,000,000 or any larger multiple thereof, the amount of the Commitment. SECTION 2.08. Failure to Sell. If for any reason sales are not consummated on a Purchase Date after notice has been given to the Purchasers in accordance with Section 2.02(b), other than any such sale which is not consummated because a Purchaser has failed to make available its ratable share of the Current Purchase Price despite the satisfaction of all applicable conditions specified in Article III, the Sellers shall reimburse each Purchaser on demand for any resulting loss or expense incurred by it (or by any existing or prospective participant in its Participating Interest), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties in order to fund its Participating Interest, provided that such Purchaser shall have delivered to the Parent a certificate prepared in good faith and setting forth in reasonable detail its calculation of the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. In determining such amount, such Purchaser may use any reasonable averaging and attribution methods. SECTION 2.09. Payments. Each payment to be made to the Agent hereunder shall be made not later than 12:00 Noon (Wilmington, Delaware time) on the required payment date in Dollars in immediately available funds at the office of the Agent referred to in Section 10.03. The Agent will promptly distribute to each Purchaser in like funds its ratable share of each such payment received by the Agent for the account of the Purchasers. Overdue payments shall bear interest, payable on demand, accruing from the date payment thereof was due to the date of payment thereof, at a rate per annum for each day equal to the sum of 2% plus the Prime Rate for such day. SECTION 2.10. Rate Basis. Discount and commitment fees hereunder shall be computed on the basis of the actual number of days elapsed or to elapse (including the first day but excluding the last day of any relevant period) in a year of 360 days. SECTION 2.11. No Recourse; Seller Liability. Each sale of Participating Interests hereunder shall be made without recourse to the Sellers (including the Parent under Article XI). Each such sale shall be made pursuant to and in reliance upon the warranties and agreements on the part of the Sellers contained in this Agreement. All obligations of the Sellers or any of them contained in this Agreement shall be the joint and several obligation of each Seller. 21 27 Each Seller other than the Parent hereby irrevocably appoints the Parent as its agent hereunder and authorizes the Parent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Parent by the terms hereof, together with all such powers as are reasonably incidental thereto. Each such Seller shall be bound by any action taken by the Parent as its agent hereunder. SECTION 2.12. No Assumption of Obligations. No obligation or liability to any Obligor under any Account or Contract is assumed by the Agent or any Purchaser hereunder or under any Assignment and any such assumption is hereby expressly disclaimed. SECTION 2.13. Repurchase of Pool Participation. If the Parent shall have requested, the Parent may on any Settlement Date after the Termination Date repurchase the Purchasers' aggregate Pool Participation at such date at a price equal to the Purchasers' Collection Amount at such date; provided that the Purchasers' Collection Amount at such date is not more than the lesser of (x) $10,000,000 or (y) an amount equal to 10% of the largest Purchasers' Collection Amount outstanding at any time under this Agreement. Such repurchase shall be without recourse, representation or warranty except as to the absence of encumbrances created by the Purchasers. On or after such repurchase, the Purchasers shall, at the Parent's expense and upon the Parent's payment therefor, take all actions reasonably requested by the Parent to fully effectuate such repurchase. SECTION 2.14. Additional State Income Taxes. If any tax, fee or similar charge measured by net income or profits is imposed on or with respect to any payment for the account of any Purchaser provided for in this Agreement by any State or political subdivision thereof (other than a jurisdiction in which such Purchaser's principal executive office or Facility Office is located), the Sellers shall cooperate with the Purchasers to mitigate the effect of such tax, fee or similar charge. If the Purchaser determines that, notwithstanding any such action, the result of any of the foregoing is to increase the cost to such Purchaser of purchasing its Participating Interest or to reduce the amount of any sum received or receivable by such Purchaser under this Agreement, by an amount deemed by such Purchaser in good faith to be material, then, upon 30 days written notice from the Agent (with the consent of all the Purchasers) to the Parent, the Commitment shall terminate. 22 28 ARTICLE III CONDITIONS TO PURCHASES The obligation of each Purchaser to purchase an initial or incremental Participating Interest on any Purchase Date is subject to the satisfaction of such of the following conditions as shall not have been expressly waived in writing by the Agent with the consent of the Majority Purchasers: SECTION 3.01. All Purchase Dates. In the case of each Purchase Date: (a) receipt by the Agent of a Notice of Sale as required by Section 2.02; (b) the fact that, immediately before and after giving effect to the purchases and sales on such Purchase Date, no Termination Event and no Potential Termination Event shall have occurred and be continuing; (c) the fact that the representations and warranties of the Sellers contained in Article IV of this Agreement shall be true and correct on and as of such Purchase Date; and (d) the fact that, immediately after giving effect to the purchases and sales on such Purchase Date, the Unrecovered Purchase Price shall not exceed the Utilization Limit. Each Notice of Sale hereunder shall be deemed to be a representation and warranty by the Sellers as of the related Purchase Date as to the facts specified in clauses (b), (c) and (d) of this Section. SECTION 3.02. First Purchase Date. In the case of the first Purchase Date, receipt by the Agent of: (a) for the account of each Purchaser, a duly executed Assignment in the form of Exhibit A hereto dated on or before such Purchase Date; (b) an opinion of Wilson, Sonsini, Goodrich & Rosati, counsel for the Sellers, substantially in the form of Exhibit C-1 hereto and covering such additional matters relating to the transactions contemplated hereby as the Majority Purchasers may reasonably request; 23 29 (c) an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit C-2 hereto and covering such additional matters relating to the transactions contemplated hereby as the Majority Purchasers may reasonably request; (d) a perfection certificate, substantially in the form of Exhibit B, duly completed and having annexed thereto all schedules and exhibits contemplated thereby, signed by the chief financial officer and the chief legal officer of the Parent; (e) the arrangement fee described in the fee letter with J.P. Morgan Delaware dated the Effective Date; (f) payment in full of all amounts payable under the 1991 Receivables Purchase Agreement; (g) a Settlement Statement for the Accounting Period ended not less than 12 Business Days prior to the initial Purchase Date; and (h) receipt by the Agent of all documents it may reasonably request relating to the existence of the Sellers, the corporate authority for and the validity of this Agreement and the Assignments, and any other matters relevant hereto, all in form and substance satisfactory to the Agent. The documents referred to in this Section shall be delivered to the Agent no later than the first Purchase Date. The opinions and certificate referred to in clauses (b), (c) and (d) above shall be dated the first Purchase Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Sellers represent and warrant that: SECTION 4.01. Corporate Existence and Power. Each Seller is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Each Seller is duly qualified as a foreign corporation and is licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers and in which the failure 24 30 so to qualify or be licensed, as the case may be, in the aggregate, could reasonably be expected to have a material adverse effect on the business, financial position or results of operations of the Parent and its consolidated Subsidiaries taken as a whole. SECTION 4.02. Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by each Seller of this Agreement and the Assignments are within such Seller's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (except as contemplated by Section 4.04) and do not contravene in any material respect any provision of applicable law or regulation, or contravene, or constitute a default under, the certificate of incorporation or by-laws of such Seller or of any judgment, injunction, order, decree, Debt agreement or instrument or any other material agreement or instrument binding upon the Parent or any of its Subsidiaries or result in the creation or imposition of any lien, pledge, charge, security interest or encumbrance of any kind (except the security interests created hereunder) on any asset of the Parent or any of its Subsidiaries. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of each Seller enforceable in accordance with its terms except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by equitable principles of general applicability. Each Assignment, when executed and delivered in accordance with this Agreement, will constitute a valid and effective assignment of the Participating Interest identified therein. SECTION 4.04. Perfection. On or prior to each Purchase Date, all financing statements and other documents required to be recorded or filed in order to perfect and protect the Participating Interests against all creditors of and purchasers from each Seller will have been duly filed in each filing office necessary for such purpose and all filing fees and taxes, if any, payable in connection with such filings will have been paid in full. SECTION 4.05. Accuracy of Information. All information heretofore furnished by any Seller in writing to the Agent or any Purchaser for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by any Seller in writing to the Agent or any Purchaser will be, true and accurate in all material respects or based on reasonable estimates on the date as of which such information is stated or certified. 25 31 ARTICLE V COVENANTS The Sellers agree with the Agent and the Purchasers that, unless compliance is expressly waived in accordance with Section 10.05 hereof: SECTION 5.01. Maintenance of Records. (a) Subject to Section 9.04(a), the Sellers shall maintain all such Records as may be necessary or advisable for the administration, servicing and collection of all Pool Accounts (including, without limitation, duplicate records and/or system redundancy so as to enable the reconstruction of essential records in the event of any reasonably foreseeable casualty) . (b) Subject to Section 9.04(a), the Sellers shall hold in trust for the Purchasers all Records, and shall maintain and mark the appropriate Records as necessary to indicate that the Purchasers have an interest in the Pool Accounts. SECTION 5.02. Protection of Participating Interests of Purchasers. (a) The Sellers shall, from time to time, do and perform any and all acts and execute any and all documents (including, without limitation, the execution, amendment or supplementation of any financing statements and continuation statements for filing under the provisions of the Uniform Commercial Code of any applicable jurisdiction and of any documents appropriate for filing under the provisions of applicable law to perfect and protect the Participating Interests in any jurisdiction in which the Uniform Commercial Code is not in effect, the execution, amendment or supplementation of any instrument of transfer, the giving of notice of the Participating Interests to any Obligor and the making of notations in the Records) as may be necessary, or as may be reasonably requested by the Agent, in order to effect the purposes of this Agreement and the sale of Participating Interests hereunder and to protect the Participating Interests against all Persons whomsoever; provided that nothing in this Section 5.02(a) shall prohibit the granting of any Permitted Subordinated Interest. (b) No Seller shall change its name, identity or corporate structure (within the meaning of section 9-402(7) of any applicable enactment of the Uniform Commercial Code) unless the Parent shall have (i) given the Agent at least 30 days' prior notice thereof and (ii) delivered an opinion of counsel with respect thereto in accordance with Section 5.07. 26 32 (c) No Seller shall relocate its chief executive office unless the Parent shall have (i) given the Agent at least 30 days' prior notice thereof and (ii) in the case of any relocation of such chief executive office to a place outside of the State of California, delivered an opinion of counsel with respect thereto in accordance with Section 5.07. (d) Each Seller shall at all times maintain its chief executive office within a jurisdiction in the United States (i) other than the States of Florida, Maryland, Minnesota and Tennessee and (ii) in which article 9 of the Uniform Commercial Code (1972 or later revision) is in effect. (e) To the fullest extent permitted by applicable law, the Agent shall be permitted to sign and file financing and continuation statements with respect to the Participating Interests and amendments thereto without any Seller's execution thereof. The Agent will promptly send to the Parent copies of any such documents so signed and filed; provided that no failure by the Agent to send such copies to the Parent shall affect the validity or effectiveness of any such document. SECTION 5.03. Performance of Contracts. Each Seller shall at all times observe and perform, or cause to be observed and performed, all contractual undertakings and other legal obligations owed by it to each Obligor that is the related Obligor on a Pool Account (except for such immaterial failures to perform that could not, in the aggregate, reasonably be expected to affect, and do not affect, the obligations of such Obligor), and, subject to Section 5.06, shall do nothing to impair the rights of the Purchasers in and to the Pool Accounts; provided that nothing in this Section 5.03 shall prohibit the granting of any Permitted Subordinated Interest. SECTION 5.04. Furnishing of Account Information; Inspection of Records. (a) Each Seller shall maintain for each Determination Date a list of Accounts of such Seller which are not included in the calculation of the Net Eligible Account Balance by virtue of the fact that they are not Eligible Accounts (such accounts for any Determination Date, the "Ineligible Accounts"). On each Settlement Date, each Seller, or the Collection Agent on behalf of each Seller, shall prepare and make available a list identifying the Obligor and Unpaid Balance for each Pool Account as of the last day of the Accounting Period then most recently ended, a calculation of the Net Reinvestment Gain or Net Reinvestment Loss then payable, and an estimate of the Unpaid Balances of License Accounts and Service Accounts, and shall furnish to the Agent and each Purchaser a summary 27 33 statement of such information in form acceptable to the Purchasers and, within three Business Days after any request therefor, a copy of the listing of Pool Accounts, and the related Obligors and Unpaid Balances. (b) Each Seller shall furnish to the Agent and each Purchaser, within five Business Days after the Termination Date and on each Settlement Date thereafter and within eight Business Days after written request therefor by the Agent at the request of either Purchaser (based upon a good faith concern for protection of such Purchaser's interests hereunder), a written report, signed by the chief financial officer or a treasurer or assistant treasurer of such Seller, containing, with respect to each Participating Interest (itemized for each Obligor), (x) a list of all Pool Accounts, together with, for each Pool Account, the Unpaid Balance thereof and all Collections, charge-offs, write-offs, discounts or other adjustments with respect thereto since the date of the last such report delivered to such Purchaser pursuant to this clause (b), an aging of all Pool Accounts and such other information as the Agent or any Purchaser may reasonably request, all as of the last day of the Accounting Period then most recently ended (or, if after a written request, as of the third Business Day after the date of such request); and (y) an analysis and explanation of significant variances, if any, between actual Collections by each Seller of Pool Accounts during the Accounting Period then most recently ended and historical collections experience of such Seller. (c) The Collection Agent is, and shall at all times remain, capable of determining on each Determination Date the Participation Percentage for such Determination Date. To mitigate the administrative cost to the Collection Agent of performing its duties under this Agreement, the parties acknowledge that the Collection Agent need not determine the Participation Percentage for any Determination Date, provided that (x) at the opening of business on (i) each Purchase Date, (ii) the Termination Date (and each Business Day thereafter) and (iii) any Business Day on which the Unrecovered Purchase Price shall exceed the Utilization Limit (using, in determining such Participation Percentage, the Net Eligible Account Balance as of the close of business of the immediately preceding Determination Date), (y) on each Settlement Date, as of the last day of the Accounting Period then most recently ended, and (z) on the eighth Business Day after a written request from the Purchaser or the Agent, as of the opening of business of the Determination Date occurring three Business Days after such request, the Collection Agent shall determine the Participation Percentage for such day and promptly notify the Parent, the Agent and each Purchaser thereof. 28 34 (d) Each Seller shall furnish to the Agent and each Purchaser from time to time such additional information with respect to the Pool Accounts as the Agent or any Purchaser may reasonably request. (e) Each Seller shall permit representatives of the Agent or any Purchaser from time to time during its normal business hours and upon reasonable notice to inspect, audit and make copies of any and all Records. SECTION 5.05. Maintenance of Qualification and Credit Policies. Each Seller shall maintain all of its rights, powers and privileges material to its ability to conduct business in all jurisdictions in which any Obligor on any Pool Account of such Seller is located, on which may be conditioned the ability of the Seller to commence or maintain legal proceedings against such an Obligor in the courts of such jurisdiction, except, in the case of any jurisdiction in which Obligors of an immaterial amount of the Pool Accounts are located that may be satisfied or obtained without significant penalty at the time any such legal proceeding is sought to be commenced or maintained. No Seller shall change in any material respect its credit extension and administration policies and procedures from those heretofore described to the Purchasers in any manner that could adversely affect the rights of the Purchasers hereunder. No Seller shall change its current practices with respect to the recognition of estimated or actual loss on Pool Accounts in any manner which would materially affect the incidence of Defaulted Accounts. SECTION 5.06. Modification of Accounts. No Seller shall modify the terms of any Pool Account without the prior written consent of the Majority Purchasers; provided that, while acting as Collection Agent, the Parent may modify the terms of any Pool Account in accordance with Sections 9.01, 9.02 and 9.03. SECTION 5.07. Supplemental Opinions of Counsel. Not more than six months nor less than 15 days prior to each date on which any Seller proposes to take any action contemplated by Section 5.02(b) or (c), the Parent shall, to the extent required by such Sections, at its cost and expense, cause to be delivered to the Purchasers an opinion of counsel (which may be an opinion of in-house counsel), satisfactory to the Agent, to the effect that all financing statements and amendments or supplements thereto, continuation statements and other documents required to be recorded or filed in order to perfect the Participating Interests, for a period, specified in such opinion, against all creditors of and purchasers from any Seller have been filed in each filing office necessary for such purpose and 29 35 that all filing fees and taxes, if any, payable in connection with such filings have been paid in full. SECTION 5.08. Maintenance of Ownership. Except as a result of any transaction consummated in accordance with the proviso of Section 5.14, the Parent shall at all times retain direct or indirect ownership, free and clear of any Title Defect, of all outstanding shares of capital stock (except directors' qualifying shares) of each other Seller. SECTION 5.09. No Disposition. No Seller shall sell, assign or otherwise dispose of, or create or suffer to exist any Title Defect (other than the Participating Interests and any Permitted Subordinated Interest) with respect to, its interest in any Pool Account and the proceeds thereof. SECTION 5.10. File Search Reports. Not later than 60 days after Effective Date, the Parent shall furnish to the Agent file search reports from the Uniform Commercial Code filing officer in each of the relevant jurisdictions confirming the filing of the financing statements required in connection with this Agreement. SECTION 5.11. Financial Information. The Parent will deliver to each of the Purchasers: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Parent, a consolidated balance sheet of the Parent and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by Ernst & Young or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Parent, the unaudited consolidated balance sheet of the Parent and its Consolidated Subsidiaries as of the end of such quarter, and consolidated unaudited statements of income and cash flow of the Parent and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in comparative form the figures for the corresponding portion in the immediately preceding fiscal year, in the case of such statements of income and cash flow, and figures for the 30 36 preceding fiscal year in the case of such balance sheet, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by a Responsible Financial Officer of the Parent; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Responsible Financial Officer of the Parent (i) stating whether any Termination Event or Potential Termination Event existed on the date of such financial statements and, if any Termination Event or Potential Termination Event then exists, stating the nature thereof and the action which the Parent is taking or proposes to take with respect thereto and (ii) setting forth in reasonable detail the calculations required to establish whether the Parent was in compliance with the requirements of Section 5.13 on the date of such financial statements; (d) within five days after any Responsible Officer or Responsible Financial Officer obtains knowledge of any Termination Event or Potential Termination Event, if such Termination Event or Potential Termination Event is then continuing, a certificate of a Responsible Financial Officer of the Parent setting forth the details thereof and the action which the Parent is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Parent generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly after the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) (other than the exhibits thereto unless requested by any Purchaser) which the Parent shall have then filed with the Securities and Exchange Commission; (g) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the 31 37 PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution of more than $500,000 to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Parent setting forth details as to such occurrence and action, if any, which the Parent or applicable member of the ERISA Group is required or proposes to take; and (h) from time to time such additional information regarding the consolidated financial position or business of the Parent and its Subsidiaries as the Agent, at the request of any Purchaser, may reasonably request. SECTION 5.12. Conduct of Business and Maintenance of Existence. The Parent shall not make, nor permit any Subsidiary to make, any material change in the nature of its business as carried on at the date hereof; provided, however, that the Parent and its Subsidiaries may enter into businesses which are appropriate extensions of or are reasonably related or incidental to the current businesses of the Parent and its Subsidiaries. The Parent shall at all times preserve and keep in full force and effect its corporate existence, and rights and franchises material to its business, and those of each Seller, except as otherwise specifically permitted by Sections 5.08 and 5.14, and will qualify, and cause each of its Subsidiaries to qualify, to do business in any jurisdiction where the failure to do so would have a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Parent or the Parent and its Subsidiaries taken as a whole. 32 38 SECTION 5.13. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than $1,000,000,000. SECTION 5.14. Consolidations, Mergers and Sales of Assets. Neither the Parent nor any other Seller will (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly (in a single transaction or series of transactions), all or substantially all of its assets to any other Person, provided that (i) any Seller (other than the Parent) may merge or consolidate with, or transfer all or substantially all of its assets to, any other Subsidiary of the Parent and any Seller may merge into, or transfer all or substantially all of its assets to, the Parent, (ii) the Parent may merge or consolidate with any other corporation provided that either (1) the Parent shall be the continuing or surviving corporation, or (2) the successor corporation shall be a solvent corporation organized under the laws of any State of the United States of America with a financial condition at least equal to that of the Parent at the time of such merger or consolidation, and such corporation shall expressly assume in writing all of the obligations of the Parent under this Agreement, including all covenants herein contained, and such successor shall be substituted for the Parent with the same effect as if it had been named herein as a party hereto, and (iii) a Seller may merge into or consolidate with a corporation in connection with such corporation becoming a Subsidiary of the Parent or being combined with any existing Subsidiary of the Parent; provided further that in the case of any of (i), (ii) and (iii), (x) measures satisfactory to the Agent have been implemented so as to assure that the Accounts and the collections thereon will not be commingled with any other accounts receivable and the collections thereon, (y) immediately after and giving effect to such transaction, no Termination Event or Potential Termination Event shall have occurred and be continuing, and (z) such transaction shall not result in a material adverse change in the nature or credit quality of the Pool Accounts, as reasonably determined by the Agent. SECTION 5.15. Use of Proceeds. The proceeds of the purchases of Participating Interests and the reinvestment of the Collections thereof will be used by the Sellers for general corporate purposes. None of such proceeds will be used in violation of any applicable law or regulation. 33 39 ARTICLE VI TERMINATION OF COMMITMENT SECTION 6.01. Termination Events. If any of the following events (herein called "Termination Events") shall have occurred and be continuing: (a) the Sellers shall fail (i) on any Settlement Date, to make any payment reflected in the related Settlement Statement as being payable on such Settlement Date or (ii) to make any other payment hereunder within five days of the due date thereof; (b) any Seller shall fail to observe or perform any covenant contained in Section 5.06, 5.09 or 5.14, or the Parent shall fail to observe or perform any covenant contained in Section 5.08 or 5.13 inclusive; (c) any Seller shall default in the performance of any agreement or undertaking hereunder (other than those covered by clause (a) or (b) above) and such default shall continue for 30 days after written notice thereof has been given to the Parent by the Agent at the request of any Purchaser; (d) any representation, warranty, certification or statement made by any Seller in this Agreement or in any certificate or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Parent or any Subsidiary shall fail to make any payment of principal or interest in respect of any Material Debt when due or within any applicable grace period; (f) an Event of Default under Section 6.01(a), (f), (g) or (h) or with respect to Section 5.01(a), (b), (c), (h) or (i) or 5.02(h) of the Credit Agreement (or in each case any successor provision thereto) shall have occurred and be continuing; or any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or any event or condition shall occur and be continuing which enables (with the giving of notice of acceleration, if required) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) the Loss Ratio as determined at any date shall exceed 4%; 34 40 (h) the Participation Percentage as determined on any date shall exceed 100% (determined for purposes of this Section 6.01(h) without regard to the proviso to Section 2.03); (i) the Parent or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (j) an involuntary case or other proceeding shall be commenced against the Parent or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Parent or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (k) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4210( c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more 35 41 members of the ERISA Group to incur a current payment obligation in excess of $10,000,000; (l) a judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Parent or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (m) (i) any corporation or Person, or a group of related corporations or Persons, shall acquire (a) beneficial ownership in excess of 50% of the outstanding common stock of the Parent or (b) all or substantially all of the assets of the Parent, or (ii) a majority of the Board of Directors of the Parent is, at any time, composed of persons other than (a) persons who were members of such Board on the date of this Agreement, (b) successors to such persons elected or nominated in the ordinary course of business, and (c) any person who has served as a member of such Board for at least the prior 12 months; then, and in any such event, (x) if such event is a Termination Event specified in clause (i) or (j) above with respect to any Seller, automatically the Commitment shall terminate, without any notice to any Seller or any other action by the Agent or any Purchaser, and (y) if such an event is any other Termination Event, the Agent shall, if so instructed by the Majority Purchasers, by notice to the Parent declare the Commitment terminated in which event the Commitment shall thereupon terminate. SECTION 6.02. Notice to Parent. The Agent shall give notice to the Parent under Section 6.01(c) promptly upon being requested to do so by any Purchaser and shall thereupon notify all Purchasers thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Purchaser irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with all such powers as are reasonably incidental thereto. 36 42 SECTION 7.02. Agent and Affiliates. J.P. Morgan Delaware shall have the same rights and powers under this Agreement as any other Purchaser and may exercise or refrain from exercising the same as though it were not the Agent, and J.P. Morgan Delaware and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Parent or any Subsidiary or Affiliate of the Parent as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Termination Event, except as expressly provided in Article VI. Any action taken by the Agent with the consent or at the request of the Majority Purchasers shall be binding upon all Purchasers. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for a Seller), independent public accountants and other experts selected by it and shall not be liable to the Purchasers for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable to any Purchaser for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Majority Purchasers or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any purchase hereunder; (ii) the performance or observance of any of the covenants or agreements of any Seller; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Assignments, the Pool Accounts and related Contracts or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, telecopy, electronic facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. 37 43 SECTION 7.06. Indemnification. Each Purchaser shall, ratably in accordance with its Commitment Percentage, indemnify the Agent (to the extent not reimbursed by the Sellers) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. SECTION 7.07. Credit Decision. Each Purchaser acknowledges that it has, independently and without reliance upon the Agent or any other Purchaser, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Purchaser also acknowledges that it will, independently and without reliance upon the Agent or any other Purchaser, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Purchasers and the Parent. Upon any such resignation, the Parent shall have the right, with the consent of the Majority Purchasers (which consent shall not be unreasonably withheld), to appoint a successor Agent. If no successor Agent shall have been so appointed by the Parent and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. Agent's Fees. The Parent shall pay to the Agent for its own account arrangement and administrative fees as previously agreed between them. 38 44 ARTICLE VIII SELLERS' INDEMNITIES SECTION 8.01. Breach of Warranty or Agreement. The Sellers agree to indemnify the Agent, the Collection Agent (if other than the Parent) and each Purchaser (an "Indemnitee"), and to hold each Indemnitee harmless against, any loss, cost, expense, damage or liability arising out of or resulting from the inaccuracy when made of any representation or warranty made by any Seller in this Agreement or in writing pursuant hereto (including, without limitation, any information set forth in any document delivered by any Seller pursuant hereto), from the failure by any Seller to observe or perform any agreement or undertaking made by it in this Agreement or pursuant hereto; provided that no Indemnitee shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Sellers shall indemnify and hold each Indemnitee harmless against (i) all costs, expenses and liabilities arising out of or resulting from any Pool Account or related Contract not complying with applicable law, including, without limitation, all laws, rules, regulations and orders of any governmental or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, (ii) all costs, expenses, losses, claims and liabilities arising out of or resulting from any action of the Parent in its capacity as Collection Agent in violation of applicable law or otherwise in contravention of the legal rights of any Obligor, (iii) all losses attributable to any inaccuracy in a Net Eligible Account Balance at any time determined hereunder, whether or not such inaccuracy would constitute a breach of the warranties set forth in Section 4.05 or was otherwise within the ability of any Seller to prevent, (iv) all losses (including losses by reason of an Obligor's failure to pay) attributable to any failure or alleged failure to vest and maintain vested in the Purchasers a perfected undivided percentage ownership interest (to the extent of their respective Commitment Percentages) in each and every right, title and interest included or purported to be included in the Pool Participation, free of any Title Defect (other than any Permitted Subordinated Interest) asserted by any Person claiming by, through or under any Seller or any Affiliate of any Seller (including without limitation any such consequence of the commencement of bankruptcy, insolvency or similar proceedings with respect to any Seller or any Affiliate of any Seller), (v) all costs, expenses, losses, claims and liabilities arising out of or resulting from the manufacture, sale, use or ownership of goods or receipt of services which at any time are or 39 45 shall have been the subject of any Pool Account or related Contract and (vi) any obligation or liability of any Seller or any Affiliate of any Seller to any Obligor which any court of competent jurisdiction may determine has been assumed by any Indemnitee. The representations, warranties and indemnities of the Sellers hereunder shall be continuing and shall inure to the benefit of all Indemnitees without regard to any investigation by or knowledge on the part of any Indemnitee. SECTION 8.02. Tax Indemnification. The Sellers agree to pay, and to indemnify, defend and hold harmless each Indemnitee from and against, any taxes which may at any time be asserted in respect of this transaction or the subject matter hereof (including, without limitation, any sales, gross receipts, general corporation, personal property, privilege or license taxes, but not including any taxes imposed upon such Indemnitee with respect to its net income or profits arising out of the transactions contemplated hereby), whether arising by reason of the acts to be performed by the Sellers hereunder or imposed against a Seller, an Affiliate of any Seller, an Indemnitee, the property involved or otherwise. SECTION 8.03. Increased Cost and Reduced Return. (a) If after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Purchaser (or its Facility Office) with any request or directive of general applicability (whether or not having the force of law) of any such authority, central bank or comparable agency (a "Regulatory Change"): (i) shall subject any Purchaser (or its Facility Office) to any tax, duty or other charge with respect to its Participating Interest or its obligations hereunder (other than any franchise tax or any tax imposed on the overall net income of such Purchaser or its Facility Office), or shall change the basis of taxation of payments to any Purchaser (or its Facility Office) of any amounts payable under this Agreement (other than any change in any franchise tax or any tax imposed on the overall net income of such Purchaser or its Facility Office); or (ii) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such 40 46 requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Purchaser (or its Facility Office) or shall impose on any Purchaser (or its Facility Office) or on the London interbank market any other condition affecting its Participating Interest or its obligations hereunder; and the result of any of the foregoing is to increase the cost to such Purchaser (or its Facility Office) of purchasing or holding its Participating Interest, or to reduce the amount of any sum received or receivable by such Purchaser (or its Facility Office) under this Agreement, by an amount deemed by such Purchaser in good faith to be material, then, within 15 days after demand by such Purchaser upon the Parent (with a copy to the Agent), the Sellers shall pay to such Purchaser such additional amount or amounts as will compensate such Purchaser for such increased cost or reduction. (b) If after the date hereof, any Purchaser shall have determined that the adoption of any applicable law, rule or regulation of general applicability regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Purchaser (or its Facility Office) with any request or directive of general applicability regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Purchaser's capital as a consequence of its obligations hereunder to a level below that which such Purchaser could have achieved hereunder but for such adoption, change or compliance (taking into consideration such Purchaser's policies with respect to capital adequacy) by an amount deemed in good faith by such Purchaser to be material, then from time to time, within 15 days after demand by such Purchaser upon the Parent (with a copy to the Agent), the Sellers shall pay to such Purchaser such additional amount or amounts as will compensate such Purchaser for such reduction. (c) Each Purchaser will promptly notify the Parent and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Purchaser to compensation pursuant to this Section. Notwithstanding the foregoing subsections (a) and (b) of this Section, the Parent shall only be obligated to compensate any Purchaser for any amount arising or accruing during (x) any time or period commencing not more than six months prior to the date on which such Purchaser notifies 41 47 the Agent and the Parent that it proposes to demand such compensation and identifies to the Agent and the Parent the statute, regulation or other basis upon which the claimed compensation is or will be based and (y) any time or period during which, because of the retroactive application of such statute, regulation or other basis, such Purchaser did not know that such amount would arise or accrue. SECTION 8.04. Notice to Parent. Each Purchaser will promptly notify the Parent and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Purchaser to compensation pursuant to this Article and will designate a different Facility Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the good faith judgment of such Purchaser, be otherwise disadvantageous to such Purchaser. Any claim for compensation under this Article VIII shall be accompanied by a certificate prepared in good faith by the relevant Purchaser and signed by a responsible officer setting forth in reasonable detail its calculation of the additional amount or amounts to be paid to it hereunder. Such certificate shall be conclusive in the absence of manifest error. In determining such amount, such Purchaser may use any reasonable averaging and attribution methods. SECTION 8.05. Expenses Included. Indemnification under this Article shall include, without limitation, reasonable counsel fees and expenses and other out-of-pocket expenses, including expenses of investigation, to the extent incurred in connection with the matter or transaction giving rise to a claim for indemnification hereunder. ARTICLE IX ADMINISTRATION, SERVICING AND COLLECTION OF POOL ACCOUNTS SECTION 9.01. Appointment of Collection Agent. The administration, servicing and collection of the Pool Accounts shall be the responsibility of the Person from time to time appointed as Collection Agent pursuant to this Section. Until such time, if any, following (i) the occurrence of a Termination Event or (ii) the occurrence and continuance of a Potential Termination Event for 5 Business Days after written notice thereof has been given to the Parent by the Agent at the request of any Purchaser, as the Agent acting upon the instructions of the Majority Purchasers shall notify the Parent of the appointment of a substitute Collection Agent, the Parent is hereby appointed as, and hereby agrees to perform the duties and obligations of, the Collection Agent in accordance with this Agreement. 42 48 With the consent of the Majority Purchasers, the Agent may at any time and from time to time following (i) the occurrence of a Termination Event or (ii) the occurrence and continuance of a Potential Termination Event for 5 Business Days after written notice thereof has been given to the Parent by the Agent at the request of any Purchaser, appoint a substitute Collection Agent (which may be, but need not be, the Agent or a Purchaser or an Affiliate of any of the foregoing) to perform such administrative, servicing and collection functions. The Sellers and each Purchaser, to the extent of their respective interests (if any) in the Pool Accounts, hereby authorize the Collection Agent to exercise as their agent the rights and powers conferred upon the Collection Agent in this Agreement. SECTION 9.02. Collection of Pool Accounts. The Collection Agent shall endeavor, in accordance with all applicable laws and regulations and with reasonable care and diligence (and so long as the Collection Agent is the Parent, each Seller shall (with respect to Pool Accounts of such Seller) cause the Collection Agent to endeavor), to collect or cause to be collected from the Obligor under each Pool Account, as and when due, all amounts payable thereunder; and the Collection Agent may take or permit to be taken such action with respect thereto as it may deem advisable, including resale of any repossessed, returned or rejected goods and rescheduling through extension or otherwise of payments due under any Pool Account if reasonable business judgment indicates such rescheduling would enhance collection results. The Collection Agent shall comply (and so long as the Collection Agent is the Parent, each Seller shall cause the Collection Agent to comply) with all applicable legal requirements in the performance of its administrative, servicing and collection functions hereunder. In the event of a default under any Pool Account, the Collection Agent shall be entitled to sue thereon in the name of the related Seller; provided that the Collection Agent shall be entitled to sue thereon as agent of the Purchasers if and only if the Agent, acting upon the instructions of the Majority Purchasers, consents thereto in writing. Payments from Obligors shall be applied to Pool Accounts or portions thereof as specified by the related Obligor or, in the absence of such specification, first to the Pool Accounts of such Obligor in the chronological order in which the Pool Accounts of such Obligor arose and second to any other Accounts of such Obligor. SECTION 9.03. Rebates, Refunds, Credits and Other Adjustments. (a) The Sellers may grant, or permit to be granted to the Obligor under any Pool Account, any rebate, refund, credit or other adjustment which such Seller in good faith believes is justified. In the event any rebate, refund, credit or other adjustment is granted to the Obligor 43 49 under any Pool Account, the Sellers shall pay to the Collection Agent, on the date on which such adjustment is granted, an amount equal to the amount of such adjustment. For the purposes of this Section, "adjustment" shall not include (i) charge-offs or write-offs of Pool Accounts for uncollectibility or (ii) any discount or other adjustment reflected in the Unpaid Balance of a Pool Account utilized in the calculation of each Net Eligible Account Balance in which such Pool Account is included as an Eligible Account. 50 under any Pool Account, the Sellers shall pay to the Collection Agent,on the date on which such adjustment is granted, an amount equal to the amount of such adjustment. For the purposes of this Section, "adjustment" shall not include (i) charge-offs or write-offs of Pool Accounts for uncollectibility or (ii) any discount or other adjustment reflected in the Unpaid Balance of a Pool Account utilized in the calculation of each Net Eligible Account Balance in which such Pool Account is included as an Eligible Account. (b) The Parent shall pay to the Collection Agent (and each Seller shall cause the Parent to make such payment) an amount equal to the Unpaid Balance of any Pool Account included in the calculation of the Net Eligible Account Balance on any Determination Date if such Pool Account was not an Eligible Account on such Determination Date. Each such payment shall be made within three Business Days of the date on which the state of facts giving rise to the payment obligation under the preceding sentence becomes known to the Parent. SECTION 9.04. Change of Collection Agent. If at any time a substitute Collection Agent for the Parent shall be appointed pursuant to Section 9.01: (a) The Sellers shall deliver to the Collection Agent, and the Collection Agent shall hold in trust for the Sellers and the Purchasers, all such Records as the Collection Agent or the Agent may reasonably request to enforce the rights or protect the interests of the Purchasers hereunder or in the Pool Participation. (b) The Sellers shall, as promptly as practicable thereafter, cause to be transmitted and delivered directly to the Collection Agent, forthwith upon receipt and in the exact form received, cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, for collection) which may be received by it as payment on account or otherwise in respect of any Pool Account. Each Seller hereby grants the Collection Agent an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of such Seller all steps necessary or advisable to endorse, negotiate or otherwise realize on any instrument or other writing in connection with any Pool Account. (c) The Agent shall be entitled to notify any or all of the Obligors to make payment directly to the Collection Agent of amounts payable in respect of any Pool Account. Upon request of the Agent, each related Seller shall so notify such Obligors. Without limiting the generality of the foregoing, the Agent shall, if so 44 51 instructed by the Majority Purchasers, deliver to the Obligor under any Qualifying Government Contract, the related notice of assignment furnished by the related Seller directing that all payments under such Qualifying Government Contract be made to the Collection Agent. SECTION 9.05. Remittance of Collections; Reinvestment. (a) On each Business Day during the Reinvestment Period, the Collection Agent shall (i) subject to subsection (c) below, reinvest, until the next succeeding Settlement Date, the Participation Percentage of Collections received since the next preceding Determination Date, for the account of the Purchasers, in accordance with the Participation Percentage determined pursuant to Section 2.03 as of the opening of business of the next succeeding Determination Date by paying the Participation Percentage of Collections to the Parent for the account of the Sellers and (ii) pay the remainder of Collections to the Parent for the account of the Sellers; provided that, the amount referred to in clause (i) above shall be set aside and held in trust for the Purchasers to the extent that the Unrecovered Purchase Price minus any amounts so held in trust at such date exceeds the Utilization Limit at such date, and shall be so held in trust for the Purchasers until the earlier of (A) the next succeeding Determination Date (if any) when such monies may be reinvested as set forth above without causing the Unrecovered Purchase Price minus any amounts so held in trust (after giving effect to such reinvestment) to exceed the Utilization Limit, on which date such monies shall be so reinvested or (B) the next succeeding Settlement Date falling at least three Business Days after such date, on which date such monies shall be remitted to the Agent for application in accordance with subsection (c) or (d) below. (b) On each Business Day on or after the Termination Date (unless such day is a Settlement Date), the Collection Agent shall set aside and hold in trust from Collections received since the preceding Business Day: (i) for the Collection Agent any accrued and unpaid servicing fee payable by the Parent; and (ii) for the Purchasers the Participation Percentage of such Collections. (c) on each Settlement Date prior to the Termination Date, the Collection Agent shall remit or cause to be remitted to: (i) the Collection Agent the servicing fee then payable by the Purchasers under Section 9.07 or 9.08; and 45 52 (ii) the Agent (and so long as the Collection Agent is the Parent, each Seller shall cause to be remitted to the Agent) the lesser of (x) the Purchasers' Collection Amount and (y) the Participation Percentage of Collections received on or after the next preceding Settlement Date; provided that the portion thereof in excess of Discount (and only such amount) shall continue to be reinvested in accordance with subsection (a) above; provided, further, that the amount remitted pursuant to this clause (ii) shall be reduced by the portion of the servicing fee then payable by the Purchasers and remitted to the Collection Agent pursuant to the preceding clause (i); provided, further, any such amount so remitted to the Collection Agent shall be treated as a remittance to the Agent to be applied in reduction of the Purchasers' Collection Amount. On each Settlement Date on or after the Termination Date, the Collection Agent shall remit or cause to be remitted from the amounts set aside and held in trust pursuant to subsection (b) above to (1) the Collection Agent the servicing fee then payable under Section 9.07 or 9.08; and (2) the Agent (and so long as the Collection Agent is the Parent, each Seller shall cause to be remitted to the Agent) the amount set aside and held in trust for the Purchasers in accordance with subsection (b) above, and the Agent shall apply the same to the Purchasers' Collection Amount, and when the Purchasers' Collection Amount has been reduced to zero, to any other amounts payable hereunder to the Agent and the Purchasers, with any remainder being returned to the Parent for the several accounts of the Sellers; provided that the amounts remitted the Agent pursuant to this clause (2) shall be reduced by the portion of the servicing fee then payable by the Purchasers and remitted to the Collection Agent pursuant to the preceding clause (1); provided, further, that any such amount so remitted to the Collection Agent shall be treated as a remittance to the Agent to be applied to the Purchasers' Collection Amount. (d) The Collection Agent shall promptly remit to the Parent for the respective accounts of the Sellers all Collections not required to be set aside and held in trust for the Collection Agent or the Purchasers in accordance with subsections (a) or (b) above and all other collections on Accounts which do not constitute Collections. 46 53 (e) The Purchasers and the Sellers agree that any reinvestment for the Purchasers' account shall be made at discount rates, priced on a basis comparable to that of the Applicable Discount Rate, that prevail at the time of reinvestment, and in amounts proportionate to the rate at which Collections are actually so reinvested. The parties accordingly agree that, on each Settlement Date, the Parent shall pay to the Purchasers, ratably, any Net Reinvestment Gain, and the Purchasers, ratably, shall pay to the Parent any Net Reinvestment Loss. As used in this Section: "Actual Reinvestment Proceeds" means for any Weekly Period the product of: (i) the aggregate amount of Deemed Collections during such period multiplied by a fraction, determined at the close of business on the last Business Day of the preceding Weekly Period, equal to (x) the Purchasers' Collection Amount at such time divided by (y) the Net Eligible Account Balance at such time; multiplied by (ii) the Reinvestment Discount Rate for such Weekly Period multiplied by seven and divided by 360. "Average Collection Period" for an Accounting Period is equal to the Average Net Eligible Account Balance for the Accounting Period divided by aggregate Collections for the Accounting Period times 30. "Deemed Collections" means, for any Weekly Period, (i) if Seller can calculate the amount of actual Collections for such Weekly Period, such amount, or (ii) otherwise, the amount of actual collections on all Accounts of such Seller, multiplied by (x) the aggregate Unpaid Balances of Pool Accounts of such Seller as of the close of business on the last Business Day of the preceding Weekly Period divided by (y) the aggregate Unpaid Balances of all Accounts of such Seller as of the close of business on the last Business Day of the preceding Weekly Period. "Expected Collections" means for any Weekly Period an amount equal to (i) the Net Eligible Account Balance on the last Business Day of the preceding Weekly Period divided by the Average Collection Period indicated on the most recent Settlement Statement multiplied by (ii) seven. 47 54 "Expected Reinvestment Proceeds" means for any Weekly Period the product of: (i) the aggregate amount of Expected Collections during such period multiplied by a fraction, determined at the close of business on the last Business Day of the preceding Weekly Period, equal to (x) the Purchasers' Collection Amount time divided by (y) the Net Eligible Account Balance at such time; multiplied by (ii) the weighted average Applicable Discount Rate during such Weekly Period (expressed as a rate per annum) multiplied by seven and divided by 360. "Net Reinvestment Gain" means the amount (if any) by which the aggregate Actual Reinvestment Proceeds for all Weekly Periods ended during the related Accounting Period exceeds the aggregate Expected Reinvestment Proceeds for such period. "Net Reinvestment Loss" means the amount (if any) by which the aggregate Expected Reinvestment Proceeds for all Weekly Periods ended during the related Accounting Period exceeds the aggregate Actual Reinvestment Proceeds for such period. "Reinvestment Discount Rate" means for any Weekly Period the average daily Applicable Discount Rate, estimated by the Agent and expressed as a rate per annum, for each day during such Weekly Period, determined on a basis comparable to that on which such Applicable Discount Rate was initially determined but as though such Applicable Discount Rate were established on such day. "Weekly Period" means each period of seven days beginning on a Monday. (f) If and for so long as any of Participation Percentage of Collections are not reinvested pursuant to subsection (a) above and this Agreement has not terminated pursuant to Section 10.01, the Collection Agent shall set aside and hold in trust for the Purchasers such Collections and shall remit to the Agent for distribution to the Purchasers any such amounts not reinvested on the next Settlement Date and shall, until such date, invest such amounts in Temporary Cash Investments as directed by the Agent for the account of the Purchasers. 48 55 SECTION 9.06. Holding of Proceeds Pending Settlements. If at any time the Agent, acting pursuant to the instructions of Majority Purchasers, shall so require by notice to the Collection Agent, then the Participation Percentage of Collections shall be deposited into and collected in the Special Account as promptly as is practicable and in any event within 10 days of initial receipt by the Collection Agent. The Agent alone (to the exclusion of the Collection Agent and the Sellers but subject to instructions from the Majority Purchasers) shall have exclusive power to authorize debits to the Special Account. The Agent shall invest amounts held from time to time in the Special Account in the Temporary Cash Investments designated by the Parent, and any investment income shall be treated as additional Collections. The Agent shall cause all amounts deposited into and collected in the Special Account to be applied in accordance with Section 9.05 (as if the Agent were the Collection Agent). SECTION 9.07. Servicing Fee. The Collection Agent's compensation for performing its responsibility as the Collection Agent hereunder shall be equal for each day to the quotient of (A) the product of (1) 1%, expressed as a decimal, and (2) the Unpaid Balances of all Pool Accounts on such day, divided by (B) 360. The Collection Agent's compensation shall be payable on each Settlement Date for the most recently ended Accounting Period to the Collection Agent by the Parent and by the Purchasers, ratably based on the average Unrecovered Purchase Price, in the case of the Purchasers for such Accounting Period, with the balance paid by the Sellers. SECTION 9.08. Compensation of Successor Collection Agent. In the event a substitute Collection Agent is appointed in accordance with Section 9.01, the servicing fee provided for in Section 9.07 shall be payable to such substitute Collection Agent rather than the Parent, the Sellers shall be obligated to pay all reasonable expenses incurred in effecting the transfer of such functions to such substitute Collection Agent, and any accrued and unpaid servicing fee payable by the Parent may be withheld by the Collection Agent from any amount otherwise payable for the account of the Sellers pursuant to Section 9.05. SECTION 9.09. Termination of Collection Agency. The rights and powers granted to the Collection Agent appointed from time to time under this Agreement shall be irrevocable by the Sellers and the Purchasers (subject to Section 9.01) during the term of this Agreement. Upon termination of this Agreement in accordance with Section 10.01, such appointment shall terminate without further action by any party to this Agreement. Upon such 49 56 termination, the Collection Agent if other than the Parent shall return to the Sellers all Records held by it, and such Collection Agent, the Agent and each Purchaser shall do such further acts and things, and execute such further documents and instruments, at the request and expense of the Sellers, as may be reasonably required to evidence such termination. SECTION 9.10. Responsibilities of Agent and Purchasers. For so long as the Parent is acting as the Collection Agent, neither the Agent nor any Purchaser shall have any obligation to the Sellers to take any action or commence any proceeding to realize upon any Pool Account or to enforce any of its rights or remedies with respect thereto. Thereafter, the Purchasers, severally in proportion to their Commitment Percentages, shall to the extent required by law be responsible to the Sellers for the performance of such functions in a commercially reasonable manner, and shall furnish or cause to be furnished to the Sellers such information as the Parent may reasonably request, including such information as the Sellers need to perform their duties hereunder. SECTION 9.11. Lockboxes. Each Seller hereby agrees (i) to instruct all Obligors to cause all Collections to be mailed directly to a Lockbox; (ii) to use its best efforts to ensure that no funds other than collections on Accounts are mailed to Lockboxes or deposited into related Lockbox Accounts; (iii) to make or cause the Collection Agent to make the necessary bookkeeping entries to reflect Collections on the Records; (iv) to apply or cause the Collection Agent to apply all such Collections as provided in this Agreement; and (v) not to rescind, or amend or modify in any material respect, any term of any Lockbox without the prior written consent of the Agent to such amendment or modification. Each Seller hereby irrevocably authorizes the Agent, during the continuance of any Potential Termination Event or Termination Event, to date and deliver a Lockbox Transfer Letter to each Lockbox Bank and that the Seller shall cooperate fully with the Agent in effecting any such transfer of control. The Sellers agree to deliver to the Agent executed and countersigned Lockbox Letters within 45 days of the first Purchase Date. The Collection Agent shall apply all Collections and all other collections on Accounts deposited into Lockbox Accounts as provided in Section 9.05 and on and after delivery of a Lockbox Transfer Letter the Agent shall apply all such Collections and all other collections on Accounts deposited into Lockbox Accounts as provided in Section 9.05 (as if the Agent were the Collection Agent). 50 57 ARTICLE X MISCELLANEOUS SECTION 10.01. Term of Agreement. This Agreement shall terminate at the earliest time when both (i) the Termination Date shall have occurred and (ii) the Purchasers' Collection Amount shall have been reduced to zero and all other amounts payable hereunder by the Sellers have been paid in full; provided that the provisions of Article VIII and this Article X shall survive termination of this Agreement. Any Collections received after such termination and other collections received on Accounts on or prior to or after such termination and not required to be applied to reduce the Purchasers' Collection Amount to zero shall, upon such termination, be remitted to the Parent for the account of the Sellers. SECTION 10.02. No Waivers. No failure or delay on the part of the Agent or any Purchaser in exercising any power, right or remedy under this Agreement or any Assignment shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.03. Notices. All communications and notices pursuant hereto to any party shall be in writing (including bank wire, telex, telecopy, electronic facsimile transmission or similar writing) and shall be given to any party at its address or telex number set forth on the signature pages hereof or at such other address or telex number as such party may hereafter specify for the purpose of notice to the Parent and the Agent. Each such notice or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, (iii) if given by telecopy or electronic facsimile transmission, when such notice is transmitted to the number specified in this Section and the sender confirms by telephone at the appropriate number the receipt of such notice or (iv) if given by any other means, when received at the address specified in this Section. SECTION 10.04. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when the 51 58 Agent shall have received counterparts hereof signed by all of the parties hereto. SECTION 10.05. Amendments. Any provision of this Agreement may be amended or waived if, but only if, such amendment is in writing and is signed by the Sellers and the Majority Purchasers (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Purchasers, (i) increase or decrease the Commitment Percentage of any Purchaser or subject any Purchaser to any additional obligation, (ii) reduce (directly or indirectly) or change the calculation of the Participation Percentage, the Discount Rate, the Unrecovered Purchase Price or the accrued Discount or any other amount payable to the Purchasers hereunder, (iii) postpone the date fixed for any payment of any amount due to the Purchasers hereunder or the Termination Date, or (iv) change the percentage of the Commitment Percentages or the number of Purchasers required for the Purchasers or any of them to take any action under this Section or any other provision of this Agreement. SECTION 10.06. Expenses; Documentary Taxes; Litigation Indemnity. (a) The Sellers shall pay (i) all reasonable out-of-pocket expenses of the Agent, including reasonable fees and disbursements of Davis Polk & Wardwell, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any default or alleged default hereunder or in connection with the perfection against all third parties of the Participating Interests and (ii) all reasonable out-of-pocket expenses incurred by the Agent or any Purchaser, including fees and disbursements of counsel, in connection with the enforcement of this Agreement. The Sellers shall indemnify the Agent and each Purchaser against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Assignments. (b) The Sellers agree to indemnify each Purchaser and hold each Purchaser harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for any Purchaser (including reasonable allocated costs of in-house counsel) in connection with any investigative, administrative or judicial proceeding, whether or not such Purchaser shall be designated a party thereto) which (i) may be incurred by such Purchaser (or by the Agent in connection with its actions as Agent hereunder), relating to or arising out of this Agreement and (ii) would not have been imposed on, incurred by or asserted against the Purchasers (or Agent) but for its having entered into this Agreement; provided 52 59 that no Purchaser shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct. SECTION 10.07. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This Agreement and each Assignment shall be governed by and construed in accordance with the laws of the State of New York (without regard to any choice of law provisions thereof). Each Seller hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Seller irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Each of the Sellers, the Agent and the Purchasers hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. SECTION 10.08. Successors and Assigns; Participations; Novation. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Seller may assign or transfer any of its rights or obligations under this Agreement without the consent of all Purchasers. (b) Any Purchaser may at any time sell to one or more Persons (each a "Participant") participating interests in its Participating Interest, its Commitment Percentage of the Commitment hereunder or any other interest of such Purchaser hereunder. In the event of any such sale by a Purchaser of a participating interest to a Participant, such Purchaser's obligations under this Agreement shall remain unchanged, such Purchaser shall remain solely responsible for the performance thereof, such Purchaser shall remain the holder of its Participating Interest for all purposes under this Agreement, and the Sellers and the Agent shall continue to deal solely and directly with such Purchaser in connection with such Purchaser's rights and obligations under this Agreement. Any agreement pursuant to which any Purchaser may grant such a participating interest shall provide that such Purchaser shall retain the sole right and responsibility to enforce the obligations of the Sellers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such 53 60 participation agreement may provide that such Purchaser will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of Section 10.05 without the consent of the Participant. Subject to the provisions of subsection (f) of this Section, each Purchaser shall be entitled to obtain (on behalf of the Participants) the benefits of Article VIII with respect to all participations in the Participating Interest of such Purchaser. (c) Any Purchaser may at any time sell to one or more Persons (each a "New Purchaser") all, or a proportionate part of all, of its rights and obligations under this Agreement, and such New Purchaser shall assume all such rights and obligations, pursuant to an instrument executed by such New Purchaser and such transferor Purchaser. Upon (i) such execution of such an instrument, (ii) delivery by the transferor Purchaser of an executed copy thereof, together with notice that the payment referred to in clause (iii) shall have been made, to the Parent, the Agent and each Purchaser and (iii) payment by such New Purchaser to such transferor of an amount equal to the purchase price agreed between such transferor Purchaser and such New Purchaser, such New Purchaser shall for all purposes be a Purchaser party to this Agreement and shall have all the rights and obligations of a Purchaser under this Agreement to the same extent as if it were an original party hereto with a Committed Amount as set forth in such instrument of assumption, and the transferor Purchaser shall surrender such rights and be released from its obligations hereunder to a corresponding extent, and no further consent or action by any Seller, any Purchaser or the Agent shall be required. Upon the consummation of any transfer to a New Purchaser pursuant to this paragraph (c), the transferor Purchaser, the Agent and the Sellers shall make appropriate arrangements so that, if required, a new Assignment is issued to such New Purchaser. (d) The Sellers authorize each Purchaser to disclose to any Participant or New Purchaser (each a "Transferee") and any prospective Transferee any and all information in such Purchaser's possession concerning the Sellers or the Pool Accounts which has been delivered to such Purchaser by them pursuant to this Agreement or which has been delivered to such Purchaser by them in connection with such Purchaser's credit evaluation prior to entering into this Agreement. (e) If pursuant to paragraph (c) of this Section any interest in this Agreement or the Participating Interests is transferred to any New Purchaser which is organized under the laws of any jurisdiction other than the United States of America or any State thereof, the 54 61 transferor Purchaser shall cause such New Purchaser, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Purchaser (for the benefit of the transferor Purchaser, the Agent and the Sellers) that under applicable law and treaties no taxes will be required to be withheld by the Agent, the Sellers or the transferor Purchaser with respect to any payments to be made to such New Purchaser in respect of the Pool Accounts and (ii) to furnish to the transferor Purchaser, the Agent and the Sellers such forms and/or statements in accordance with applicable laws and regulations as may be necessary to verify such exemption from United States federal withholding tax under United States laws and regulations as in effect on the date of such transfer. (f) No Transferee (including for this purpose a different Facility Office of a Purchaser) shall be entitled to receive any greater payment under Article VIII than the transferor Purchaser would have been entitled to receive with respect to the rights assigned, unless such assignment is made by reason of the provisions of Section 8.04 requiring such Purchaser to designate a different Facility Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 10.09. Confidentiality. Each Purchaser and the Agent represent that they will maintain the confidentiality of, and will not use for any purpose other than for exercising, protecting and enforcing their respective rights and interests under this Agreement and the Assignments and in respect of the Participating Interests, any written or oral information, provided under this Agreement by or on behalf of the Sellers that has been identified by its source as confidential (hereinafter collectively called "Confidential Information"), subject to the Agent's and each Purchaser's (i) obligation to disclose any such Confidential Information pursuant to a request or order under applicable laws and regulations or pursuant to a subpoena or other legal process, (ii) right to disclose any such Confidential Information to its bank examiners, affiliates, auditors, counsel and other professional advisors and to other Purchasers, (iii) right to disclose any relevant such Confidential Information in connection with any litigation or dispute involving the Purchasers and any Seller or any of their Subsidiaries and Affiliates, or any Obligor with respect to any Pool Account and (iv) right to provide such information to Participants or New Purchasers and prospective Participants and New Purchasers if (x) such Person agrees in writing to maintain the confidentiality of such information on terms substantially similar to those of this Section 10.09 as if it were a "Purchaser" party hereto and (ii) the Parent receives copies 55 62 of such written agreement prior to the release of such information. Notwithstanding the foregoing, any such information supplied to a Purchaser or a Participant under this Agreement shall cease to be Confidential Information if it is or becomes known to such Purchaser or Participant by other than unauthorized disclosure, or if it becomes a matter of public knowledge. SECTION 10.10. Termination by Seller. Any Seller, other than the Parent, may by notice to the Agent terminate this Agreement as to itself, provided that such termination shall not be effective as to any Accounts of such Seller then outstanding or thereafter arising unless and until measures satisfactory to the Agent are implemented so as to assure that such Accounts and the collections thereon will not be commingled with the Accounts of the other Sellers and the collections thereon. At such time as the termination becomes effective as aforesaid, the Accounts of such Seller will no longer be purchased and sold pursuant hereto. SECTION 10.11. Effect on 1991 Agreement. Upon the first Purchase Date hereunder, the 1991 Agreement will be terminated and of no further force and effect, except that expense and indemnity provisions contained in Article VIII and Section 10.06 thereof, and in Article XI in respect of such provisions, shall survive. ARTICLE XI GUARANTY The obligations of the Sellers hereunder are joint and several. In furtherance and not in limitation of the foregoing, the Parent hereby agrees as follows: SECTION 11.01. The Guaranty. The Parent hereby unconditionally guarantees the full and punctual performance of all obligations of each Subsidiary Seller and (if the Collection Agent is a Subsidiary of the Parent) the Collection Agent under this Agreement. The Subsidiary Sellers and the Collection Agent, so long as it is a Subsidiary of the Parent, are referred to in this Article as the "Guaranteed Parties". Upon failure by any Guaranteed Party to perform any such obligation (including the payment of all amounts), the Parent shall forthwith on demand perform such obligation not so performed (including by payment of any amount not so paid) at the place and in the manner specified in this Agreement. SECTION 11.02. Guaranty Unconditional. The obligations of the Parent hereunder shall be unconditional 56 63 and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any Guaranteed Party under this Agreement, by operation of law or otherwise; (ii) any modification or amendment of or supplement to this Agreement; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any Guaranteed Party under this Agreement; (iv) any change in the corporate existence, structure or ownership of any Guaranteed Party, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Guaranteed Party or its assets or any resulting release or discharge of any obligation of any Guaranteed Party contained in this Agreement; (v) the existence of any claim, set-off or other rights which the Parent may have at any time against any Guaranteed Party, the Agent, any Purchaser or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against any Guaranteed Party for any reason of this Agreement, or any provision of applicable law or regulation purporting to prohibit the payment by any Guaranteed Party of any amount payable by it under this Agreement; or (vii) any other act or omission to act or delay of any kind by any Guaranteed Party, the Agent, any Purchaser or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Parent's obligations hereunder. SECTION 11.03. Discharge only upon Payment in Full; Reinstatement in Certain Circumstances. The Parent's obligations hereunder shall remain in full force and effect until the Commitment shall have terminated and all obligations due and amounts payable by the Parent and each Guaranteed Party under this Agreement shall have been paid in full. If at any time any payment of any amount payable by any Guaranteed Party under this Agreement is rescinded or 57 64 must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of any Guaranteed Party or otherwise, the Parent's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time. SECTION 11.04. Waiver by the Parent. The Parent irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any Guaranteed Party or any other Person. SECTION 11.05. Subrogation. The Parent irrevocably waives any and all rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against a Guaranteed Party with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by a Guaranteed Party in respect thereof. 58 65 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date and year first above written. SUN MICROSYSTEMS, INC. By /s/ Michael E. Lehman Title: Vice President, Chief Financial Officer 910 San Antonio Road Palo Alto, CA 94306 Telephone number: Telex number: SUBSIDIARY SELLERS: SUNEXPRESS, INC. By /s/ Michael E. Lehman Title: Chief Financial Officer 2 Elizabeth Drive Chelmsford, MA 01824 Telephone number: Telex number: SUN MICROSYSTEMS FEDERAL, INC. By /s/ Michael E. Lehman Title: Chief Financial Officer 2650 Park Tower Drive Suite 500 Vienna, VA 22180 Telephone number: Telex number: 66 SUNSOFT, INC. By /s/ Michael E. Lehman Title: Chief Financial Officer 2550 Garcia Avenue Mountain View, CA 94043 Telephone number: Telex number: PURCHASERS: Committed Amount $87,500,000 J.P. MORGAN DELAWARE By /s/ Philip S. Detjens Title: Vice President 902 North Market Street Wilmington, Delaware 19801 Telephone number: Telex number: $37,500,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ David T. Ellis Title: Vice President c/o MORGAN CHRISTIANA CORP. Euro-Loan Servicing Unit Wilmington, Delaware 19801 Telephone number: Telex number: ____________ $125,000,000 AGENT: J.P. MORGAN DELAWARE, as Agent By /s/ Philip S. Detjens Title: Vice President 902 Market Street Wilmington, Delaware 19801 Telephone number: Telex No: 67 EXHIBIT A ASSIGNMENT For value received, in accordance with the Receivables Purchase Agreement dated as of August 5, 1994 (as the same may be amended from time to time, the "Agreement") among the undersigned, the Purchasers named therein and J.P. Morgan Delaware, as Agent, the undersigned do hereby sell, assign and transfer unto [Name of Purchaser] an undivided percentage ownership interest, to the extent of ______% , in and to the Pool Participation (as defined in the Agreement). This Assignment is made without recourse to the undersigned, and upon the warranties and agreements on the part of the undersigned contained in the Agreement. This Assignment is to be governed by and construed in accordance with the Agreement and the laws of the State of New York. IN WITNESS WHEREOF, the undersigned, through their duly authorized officers, have caused this Assignment to be duly executed this __ day of August, 1994. SUN MICROSYSTEMS, INC. By ______________________ Title: [CORPORATE SEAL] Witness: _______________ 68 SUNEXPRESS, INC. By ______________________ Title: [CORPORATE SEAL] Witness: _______________ SUN MICROSYSTEMS FEDERAL, INC. By ______________________ Title: [CORPORATE SEAL] Witness: _______________ SUNSOFT, INC. By ______________________ Title: [CORPORATE SEAL] Witness: _______________ 2 69 EXHIBIT B PERFECTION CERTIFICATE The undersigned, the chief executive officer and chief legal officer of SUN MICROSYSTEMS, INC., a Delaware corporation (the "Parent"), hereby certify with reference to the Receivables Purchase Agreement dated as of August 5, 1994 among the Parent and the other Sellers listed therein, the Purchasers listed therein and J.P. Morgan Delaware, as Agent (terms defined therein being used herein as therein defined), to the Agent and each Purchaser as follows: 1. Locations. (a) The chief executive offices of the Sellers are located at the following respective addresses: Mailing Name Address County State
(b) The following are all the locations where any Seller maintains any Records: Mailing Name Address County State
(c) The following are all the locations of inventory: Mailing Name Address County State
2. Other Names. The following is a list of all names (including trade names or similar appellations) used by any Seller or any of their respective divisions or other business units: Corporate Trade Name Names
70 3. File Search Reports. Attached hereto as Schedule 3(A) is a true copy of a file search report from the Uniform Commercial Code filing officer in each jurisdiction identified in paragraph 1 above with respect to each related name set forth in paragraph 2 above. Attached hereto as Schedule 3(B) is a true copy of each financing statement or other filing identified in such file search reports. 4. UCC Filings Against Seller. A financing statement on Form UCC-1 in substantially the form of Schedule 4(A) hereto duly signed by each Seller has been duly filed in the Uniform Commercial Code filing office in each jurisdiction identified with respect to such Seller in paragraph 1 hereof. 5. Schedule of Filings. Attached hereto as Schedule 5 is a schedule setting forth filing information with respect to the filings described in paragraph 4 above. 6. Filing Fees. All filing fees and taxes payable in connection with the filings described in paragraph 4 above have been paid. IN WITNESS WHEREOF, we have hereunto set our hands this__ day ofAugust, 1994. ___________________________ Title: ___________________________ Title: 2 71 SCHEDULE 4(A) Description of Collateral Box: Accounts, chattel paper, contract rights and general intangibles, and related inventory, equipment and documents, now owned or hereafter acquired. See Exhibit A. Exhibit A: The collateral subject to the security interest includes the following (and an undivided interest in debtor's right, title and interest in the following), whether now owned or hereafter at any time acquired or coming into existence, wherever located: 1. Rights to payment for goods which have been or are to be sold, leased or otherwise disposed of, or for services rendered or to be rendered, including the licensing of intellectual property rights. 2. All rights of ownership with respect thereto, including without limitation any direct or indirect security therefor or guaranty thereof, any repossessed, returned or rejected goods relating thereto, any related insurance or letter of credit and any other form of direct or indirect recourse in respect thereof. 3. All contracts, agreements and invoices and other documents, books, records and other information (including without limitation computer programs, tapes, discs, punch cards, data processing software and related property and rights) relating to the foregoing. 4. All collections and other proceeds of any of the foregoing. 72 SCHEDULE 5 SCHEDULE OF FILINGS Debtor Filing Officer File Number Date of Filing
_____ *Indicate lapse date, if other than fifth anniversary. 73 EXHIBIT C-1 OPINION OF WILSON, SONSINI, GOODRICH & ROSATI, COUNSEL FOR THE SELLERS August __, 1994 To the Purchasers and the Agent Referred to Below c/o J.P. Morgan Delaware, as Agent 902 Market Street Wilmington, Delaware 19801 Dear Sirs: We have acted as special counsel to Sun Microsystems, Inc., a Delaware corporation, SunExpress, Inc., a California corporation, Sun Microsystems Federal, Inc., a California corporation and SunSoft, Inc., a California corporation, (each, a "Seller"; and together, the "Sellers", with Sun Microsystems, Inc. sometimes hereinafter referred to as the "Parent") in connection with the Receivables Purchase Agreement, dated as of August 5, 1994 (the "Agreement"), among the Sellers, the Purchasers listed on the signature pages thereof (the "Purchasers") and J.P. Morgan Delaware, as Agent for the Purchasers (the "Agent"). Capitalized terms used herein and defined in the Agreement have the respective meanings given them in the Agreement, unless otherwise defined herein. This opinion is delivered to you pursuant to Section 3.02(b) of the Agreement. In connection with the opinions rendered herein, we have reviewed the following documents: (a) the Agreement; (b) separate UCC-1 Financing Statements executed by each Seller for filing with the Office of the Secretary of State of California (the "California Financing Statements"); (c) separate Assignments, dated as of August __, 1994, executed by each Seller; (d) a perfection certificate, dated as of August __, 1994, substantially in the form of Exhibit B to the Receivables Purchase Agreement (the "Perfection Certificate"), executed by the chief financial officer and chief legal officer of Sun; 74 (e) [list good standing certificates, tax status certificates and other similar documents, as well as telegram or telephonic bringdowns, obtained in conjunction with the closing]; (f) the other documents delivered to you at the closing by the Sellers; and (g) such other documents, instruments and agreements as we have deemed advisable or necessary in connection with the opinion. In addition, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion. The documents listed as items (a) through (d) above are referred to herein collectively as the "Transaction Documents." With your permission and without verification by us, we have assumed the following for the purpose of rendering the opinions set forth herein: A. All signatures on the Transaction Documents and the other instruments we have received for review are genuine, all natural persons who are signatories have the legal capacity to execute and deliver said documents, all documents and instruments submitted to us as originals are authentic and complete, all documents and instruments submitted as copies conform to the original and are complete and accurate, none of the aforesaid documents has been subsequently modified or terminated and one of the rights or obligations under said documents have been waived or released. B. Each Transaction Document has been duly authorized, executed and delivered by each Purchaser and the Agent and each other document or instrument submitted to us for review has been duly authorized, executed and delivered by each party thereto. Each Transaction Document to which a Purchaser or the Agent is a party is the legal, valid and binding obligation of such party, enforceable as to each such party, in accordance with its terms. All signatories to the Transaction Documents executing such documents on behalf of the Purchasers and the Agent have been duly authorized and each of the Purchasers and the Agent is duly organized and validly existing and has the power and authority (corporate or otherwise) to execute, deliver and perform such documents. 2 75 C. Except to the extent expressly covered by our opinion set forth in paragraph 2 below, the execution, delivery and performance of the Transaction Documents or any other documents executed in connection with the Transaction Documents does not violate any restriction, rule, regulation, law, statute, contract or agreement binding upon the parties thereto. D. With respect to our opinion set forth in Paragraph 6 below, the description of the Pool Assets (other than "accounts" as such term is defined in the California Uniform Commercial Code) contained in the California Financing Statements is sufficient, as a factual matter, to enable a subsequent purchaser of such property to identify such Pool Assets (or interests therein) encumbered or deemed encumbered by the Transaction Documents. E. The Perfection Certificate correctly indicates (i) the chief executive office of each Seller and (ii) the location of all records that relate to the Pool Assets. The Sellers have not at any time conducted business under any other name, other than as set forth in the Perfection Certificate. F. With respect to our opinion set forth in Paragraph 5 below, that each Purchaser is a "bona fide purchaser" who purchases its undivided interest in the Pool Assets for good value and without notice of an adverse claim. G. All parties to the Purchase Agreement (other than the Sellers) have filed all required franchise and income tax returns, if any, and paid all required taxes, if any, under the California Revenue and Taxation Code. H. With respect to matters of fact (as distinguished from matters of law), we also have relied upon and assumed that the representations of the Sellers and the other parties set forth in the Transaction Documents and any other certificates, instruments or agreements executed in connection therewith or delivered to us are true, correct, complete and not misleading. As used in this opinion, the expression "to our knowledge," "known to us" or words to similar effect with reference to matters of fact means that during the course of our representation of the Sellers in connection with the Transaction Documents no information has come to the attention 3 76 of the attorneys of our firm involved in this engagement which would give them actual knowledge of the existence or absence of such facts; however, except to the extent expressly set forth above, we have made no independent investigation to determine the existence or absence of such facts, and any limited inquiry undertaken by us during the preparation of this opinion should not be regarded as such an investigation. No inference as to our knowledge of the existence or absence of such facts should be drawn from the fact of our representation of the Sellers. In rendering the opinion set forth in paragraph 3 below, we have not made any independent investigation of court records to determine whether any actions have been filed. Based on the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we advise you that we are of the opinion that: 1. The Parent is a corporation duly incorporated and validly existing as a corporation in good standing under the laws of the State of Delaware, and has all corporate powers required to conduct its business as now conducted. The Parent is duly qualified to do business as a foreign corporation and is in good standing in each of the State of California and the Commonwealth of Massachusetts. Each of the Subsidiary Sellers is a corporation duly incorporated and validly existing as a corporation in good standing under the laws of the State of California, and has all corporate powers required to conduct its business as now conducted. Each of the Subsidiary Sellers is duly qualified to do business as a foreign corporation and is in good standing in the Commonwealth of Massachusetts. 2. The execution, delivery and performance by each Seller of the Transaction Documents to which it is a party in accordance with their terms are within each Seller's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of or filing with, any United States federal, California or Delaware governmental body, agency or official (except as contemplated by the Transaction Documents), and do not contravene, or constitute a default under, the (i) charter or the by-laws of any Seller, (ii) any Reviewed Agreement, (iii) to our knowledge, any provision of applicable law, regulation, injunction, order or decree binding upon the Sellers or (iv) as a result of any provision contained in the Reviewed Agreements, result in the creation or imposition of any lien, pledge, charge, 4 77 security interest or encumbrance on any asset of the Sellers. 3. To our knowledge, there is no action, suit or proceeding pending or overtly threatened in writing against any Seller or before any court or arbitrator or any governmental body, agency or official, except as disclosed in the Parent's filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, which could reasonably be expected to materially and adversely affect the ability of the Sellers to perform their respective obligations under the Transaction Documents or which challenge the validity or enforceability of any Transaction Document or seeks to prevent the consummation of any of the transactions contemplated thereby. 4. The Agreement constitutes a valid and binding agreement of each Seller. 5. The Agreement and the Assignments are sufficient to effect valid transfers to the Purchasers of undivided interests to Sellers' right, title and interest in and to the Pool Assets to the extent of their respective Participating Interests, subject to the effect of (i) provisions of the California Uniform Commercial Code, including Sections 9201 and 1201(37) thereof, which provide that, subject to certain exceptions which we believe are inapplicable to the transactions contemplated by the Transaction Documents, the interest of a purchaser of "accounts" (as such term is defined in the California Uniform Commercial Code) in such "accounts" is a security interest subject to Division 9 of the California Uniform Commercial Code and (ii) applicable laws (including, without limitation, the California Uniform Commercial Code) under which the purported sale of undivided interests in all or a portion of the Pool Assets may be recharacterized as loans made by the Purchasers secured by a security interest in the Participating Interests to the extent of the purported transfer, instead of a valid transfer of Seller's right, title and interest in the Participating Interests. 6. Each California Financing Statement is in adequate and legally sufficient form to perfect a security interest (to the extent the Agreement and Assignments are construed as creating such a security interest in favor of the Agent for the benefit of the Purchasers) in favor of the Agent for the benefit of the Purchasers in the right, title and interest of each Seller in the Pool Participation to the extent the assets included in 5 78 Pool Participation and the Pool Assets are described in such financing statement, and the Pool Assets are located in the State of California and such assets are of a type for which perfection under Division 9 of the California Uniform Commercial Code may occur by the filing of a UCC-1 financing statement with the Secretary of State of the State of California. In this regard, we advise you that, with certain exceptions (none of which we believe are relevant to the Participation Percentage or the assets of the type likely to be included in the Pool Assets), the only office for the filing of UCC-1 financing statements in the State of California is the Office of the Secretary of State, except that a fixture filing with the County Recorder of each county in the State of California in which any collateral that is a fixture is located also must be made in order to perfect a security interest in collateral consisting of fixtures (as such term is defined in the California Uniform Commercial Code). We also call your attention to the necessity of filing continuation statements and modification statements from time to time (for which we assume no responsibility) in order to preserve the perfection of the security interest, and the requirement or advisability of a supplemental filing in order to perfect and maintain the priority of a security interest in certain after acquired collateral, or to correct any filing which has become seriously misleading, and upon the happening of certain other events (including, without limitation, additional advances not pursuant to a commitment, a change in the secured party's or the debtor's name, identity or corporate structure, a change in their respective places of business, or a transfer of the secured party's interest). Notwithstanding any other provision hereof, the opinions hereinabove expressed are subject to the following exceptions, qualifications, limitations and assumptions: We are admitted to practice law in the State of California and express no opinion as to any matter relating to laws of any jurisdiction other than the laws of the State of California, the General Corporation Law of the State of Delaware and the federal laws of the United States as such are in effect on the date hereof. The Agreement and Assignments provide that they are to be governed by and construed in accordance with the laws of the State of New York. We understand that you are relying on the advice of your special counsel, Davis, Polk & Wardwell, with respect to all matters 6 79 of New York law, and we have made no independent examination of the laws of such jurisdiction. Our opinions set forth in paragraphs 4, 5 and 6 are given as if the Agreement and the Assignments and the transactions contemplated thereby are governed by and construed in accordance with the internal substantive laws of the State of California. Our opinions as to the General Corporation Law of the State of Delaware are based solely on our review of the official statutes of the State of Delaware. In addition, we express no opinion as to whether a California court would uphold the selection of the laws of the State of New York to govern the provisions of the Agreement and the Assignments. We express no opinion with respect to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors or secured parties. We express no opinion with respect to the application of the general principles of equity (regardless of whether such remedy is considered in a proceeding in equity or at law), including, but not limited to, (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy, and (ii) concepts of materiality, reasonableness, good faith and fair dealing. We express no opinion with respect to the enforceability of the second or fourth sentence of Section 10.07 of the Agreement. We express no opinion with respect to the effect of laws and judicial decisions (i) which exonerate a surety, if the creditor materially alters the original obligation of the principal without the consent of the surety, if the lender exercises remedies for default that impair the subrogation rights of the surety against the principal, or otherwise takes action which materially prejudices the surety, without obtaining consent of the surety, (ii) relating to waivers or subordination by a surety of its subrogation rights against the principal, its contribution rights, or other common law and statutory protections of a surety, (iii) which limit the liability of the surety to be no greater than the liability of the principal, (iv) which exonerate a surety if a guaranty is not given for fair consideration or reasonably equivalent value, (v) which permit a trustee in bankruptcy to avoid payments made by a principal to a credit or holding insider guarantees of the principal's obligations and (vi) which estop a creditor from enforcing the 7 80 obligations of a surety if the creditor fails to perfect or protect its rights in collateral. Except as set forth in Paragraphs 5 and 6 above, we express no opinion as to (i) the effect of the purported transfer under the Transaction Documents to the Purchasers of the Pool Participation, (ii) any security interest in the Pool Participation or any Pool Assets (or the perfection or ability to realize thereon), or (iii) as to any action by or in respect of or filing with any governmental body, agency or official required to perfect such purported transfer or to create, perfect or realize upon any security interest in the Pool Participation or Pool Assets. With respect to our opinions set forth in Paragraphs 5 and 6 above, we express no opinion as to the effect of the rights of related Obligors, if any, against any Seller, relating to the transactions pursuant to which the Pool Assets have arisen or otherwise, on the rights of the Purchasers and the Agent in the Pool Assets assigned pursuant to the Transaction Documents or the protection afforded the Agent and Purchasers by the filing of the California Financing Statements. We express no opinion as to the effect, if any, of the usury laws of any jurisdiction other than the laws of the State of California. With respect to the application of the usury laws of the State of California, we have assumed (without any independent verification by us) that the Agent and each of the Purchasers is a member of an "exempted class of persons" as such term is used in Section 1 of Article XV of the California Constitution. We express no opinion as to the applicability to, or effect upon, the obligations of Sellers under any of the Transaction Documents or the assignments of interests in Pool Assets, of Section 544, 547 or 548 of the United States Bankruptcy Code, California Civil Code Sections 3439 et seq. or any other federal or state law relating to fraudulent transfers, conveyances and obligations, and preferences or of provisions of the law of the state of organization of any of the Seller's restricting dividends, loans or other distributions by a corporation to or for the benefit of its stockholders. We express no opinion with respect to the effect of California Civil Code Section 1717 and other applicable statutes and judicial decisions 8 81 which provide, among other things, that attorneys' fees must be reasonable and may be granted only to a prevailing party and that a contractual provision for attorneys' fees is deemed to extend to both parties (notwithstanding that such provision by its express terms benefits only one party). We express no opinion with respect to the effect of California Civil Code Section 1698 and similar statutes and federal laws and judicial decisions (i) providing that oral modifications to a contract or waivers of contractual provisions may be enforceable, if the modification was performed, notwithstanding any express provision in the agreement that the agreement may only be modified or an obligation thereunder waived in writing, or (ii) creating an implied agreement from trade practices or course of conduct. We express no opinion as to the effect of statutory and judicial decisions which limit enforcement of an exculpatory or indemnity provision, or realization upon any security provided therefor, (including, without limitation, limitations on the enforcement of provisions which encompass indemnification or exculpation with respect to (a) the negligence or willful misconduct of the party seeking relief or of persons for whom said party is legally responsible, (b) violations of law, or (c) matters found to be contrary to statute or public policy). We express no opinion as to the effect of judicial decisions and statutory law restricting enforcement of certain covenants, acceleration of the repayment date of indebtedness and the availability of specific performance or any other remedy of a lender, if the violation of a covenant is not material, if the value of the collateral is not impaired, if the debtor's ability to repay is not impaired, if enforcement of the covenant or acceleration of the debtor's obligations would be unreasonable, if the action is not undertaken in good faith under the then existing circumstances or is otherwise contrary to applicable laws or judicial precedent, or if a loan document purports to give a lender the right to make a conclusive determination in its sole discretion. We express no opinion with respect to the effect of judicial decisions and statutes which may render unenforceable contractual provisions (i) waiving broadly or vaguely stated rights, statutory protections, unknown future rights, rights of redemption, trial by jury or other common law 9 82 protections of a borrower, (ii) providing that rights or remedies are not exclusive, but that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, (iii) providing that the election of a particular remedy does not preclude recourse to another remedy or (iv) providing that a lender may exercise its remedies without notice to the borrower or a surety. We express no opinion as to the effect of laws and judicial decisions impliedly incorporating the covenant of good faith and fair dealing into loan documents and other contracts and limiting the lender's right to take action, unless it is shown that such action is reasonably necessary for the protection of the lender or the collateral. We express no opinion with respect to the effect of California Civil Code Section 1670.5 and comparable laws and judicial decisions concerning the enforceability of contractual provisions which are unconscionable at the time the contract was made. We express no opinion with respect to the effect of judicial decisions and statutes limiting the enforceability of provisions requiring payment of additional consideration or a higher rate of interest upon late payment, particularly in cases where the additional amount bears no reasonable relation to the damage suffered by the lender or is otherwise held to be a penalty (see e.g., Lazzarechi Inv. Co. v. San Francisco Federal Savings and Loan Assoc. 22 Cal. 3d 303 (1971) and Hellbaum v. Lytton Savings & Loan Association 274 Cal. App. 2nd 456 (1969)). We express no opinion with respect to the effect of (i) the compliance or non-compliance of a Purchaser or the Agent with any federal, state or other law applicable to it, or (ii) the legal or regulatory status or the nature of the business of any Purchaser. We express no opinion with respect to the effect of the unenforceability of any Transaction Document under the laws of any jurisdiction, other than the State of California. We express no opinion with respect to the state of the Sellers' rights in or title to any item included in the Pool Assets. 10 83 We express no opinion with respect to the effect of California Uniform Commercial Code provisions relating to changes in a borrower's or lender's name, identity, corporate structure, or location or to financing statements that become seriously misleading. We express no opinion with respect to any matter or Pool Assets governed by, any compliance or non-compliance with, or any other application of, that body of federal law administered by the Patent and Trademark Office or the Copyright Office of the United States, and the rules and regulations relating thereto, or any other law or judicial decisions relating to patents, copyrights, trademarks, applications of the same, or any other intellectual property right. We express no opinion with respect to the state of the Sellers' rights in or title to any Pool Assets, the priority of any security interest in any Pool Assets over any other interest therein, or the ability of any Purchaser to realize upon any particular Pool Assets in which any other person (other than the Sellers) has an interest. We express no opinion with respect to the enforceability of any provision of the Transaction Documents which purports to impose on the Purchasers or the Agent a standard for care of the Pool Assets and other property in its possession not consistent with California law, which may impose a duty of reasonable commercial care. We express no opinion with respect to any matter concerning perfection or continuation of a security interest in, or the ability of the Purchasers or the Agent to realize upon, any (i) Pool Assets located, or deemed located, in any jurisdiction other than the State of California and (ii) Pool Assets moved (or deemed moved) outside of the State of California at any time. We express no opinion with respect to any matter concerning perfection or continuation of a security interest in, or the ability of the Purchasers or the Agent to realize upon, any pool Assets (or the interest of any party with respect thereto) (i) governed by laws other than solely those of the State of California, (ii) described in or subject to the provisions of California Uniform Commercial Code Section 9104 or 9302, (iii) which are consigned goods or in the possession of the 11 84 issuer of a negotiable document therefor as contemplated by California Uniform Commercial Code Section 9304, (iv) which are instruments within the meaning of the California Uniform Commercial Code Section 9304, (v) consisting of cash, cash equivalents, deposit and deposit accounts, insurance policies, indemnity agreements, chattel paper or documents (as such term is defined in the California Uniform Commercial Code), (vi) which are accounts due from or claims against the United States, or any state or other governmental authority, (vii) which are certificated or uncertificated securities, subject to Division 8 of the California Uniform Commercial Code or other property in which a perfected security interest may be created only by possession, (viii) which are proceeds of any other Pool Assets, including, without limitation, insurance proceeds, (ix) which are subject to a statute, regulation or treaty which provides for a state, national or international registration or evidenced by a state, national or international certificate or a document of title or similar instrument, or (x) which are repossessed, returned or rejected goods relating to Pool Accounts or a guaranty of a Pool Account. We call to your attention that the security interest of the Agent for the benefit of the Purchasers consisting of proceeds is limited to the extent set forth in Section 9306 of the California Uniform Commercial Code. We advise you that the Agent's and Purchasers' rights in the Pool Assets are subject to California Uniform Commercial Code Sections 9501 et seq. Our opinion in paragraph 2 above that the execution, delivery and performance by each Seller of the Transaction Documents to which it is a party do not contravene, or constitute a default under, any applicable law, regulation, judgment, injunction, order or decree is intended to express our opinion that the execution, delivery and performance by each such Seller of the Transaction Documents to which it is a party are neither prohibited by, nor subject such Seller to a fine, penalty or similar sanction that would be materially adverse to the Parent and its subsidiaries, taken as a whole, under, any law or regulation of the State of California, federal law or the Delaware General Corporation Law or, to our knowledge, any judgment, injunction, order or decree of any California or federal governmental entity, body or court, in each case, that a lawyer in the State of California exercising customary professional diligence 12 85 would reasonably recognize to be directly applicable to the transactions contemplated by the Transaction Documents. Our opinion set forth in paragraph 1 above as to due incorporation, valid existence and good standing is based solely on the certificates referenced in Paragraph (e) above (copies of which have been furnished to you), and, to the extent available, telephonic or telegram confirmations of the matters set forth therein. This opinion is rendered based on the facts and circumstances, together with applicable law, existing on the date of this opinion, and express no opinion as to the effect on the Transaction Documents and the rights of the Purchasers under any statute, rule, regulation or other law enacted, of any court decision rendered, or of the conduct of any person, which occurs after the date of this opinion. Moreover, we assume no obligation to advise you or any other person of any change, whether factual or legal, or whether or not material, that may hereafter arise or be brought to our attention after the date hereof. This opinion is intended solely for your benefit in connection with the transactions contemplated by the Transaction Documents. This opinion may not be relied upon by you for any other purpose or relied upon or furnished to any other person without our prior written consent. Very truly yours, WILSON, SONSINI, GOODRICH & ROSATI Professional Corporation 13 86 EXHIBIT A REVIEWED AGREEMENTS* 1. Credit Agreement dated June 1, 1994, between Sun Microsystems, Inc., Bank of America National Trust and Savings Association, ABN Amro Bank N.V. San Francisco International Branch, The First National Bank of Boston, Barclays Bank PLC, Morgan Guaranty Trust Company of New York, The Fuji Bank, Limited, San Francisco Agency, the Bank of California, N.A., The Sakura Bank, Limited, San Francisco Agency, Banque Nationale de Paris, Bayerische Vereinsbank AG, Los Angeles Agency, The Industrial Bank of Japan, Limited, San Francisco Agency, Swiss Bank Corporation, and Citicorp USA, Inc. as agent for the banks, as amended by First Amendment to Credit Agreement, dated as of July __, 1994. 2. Bill of Sale and Agreement, dated February 27, 1982, by VLSI Systems, Inc., a California corporation, and Andreas Bechtolsheim, and Sun Workstation, Inc., a California corporation, and the related Assumption Agreement, dated February 27, 1982, by Sun Workstation, Inc., a California corporation. 3. License Agreement, dated July 26, 1983, by and between The Regents of the University of California and Sun Microsystems, Inc., a California corporation. 4. American Telephone & Telegraph (AT&T) Agreements: A. Software Agreement dated April 24, 1986 between the Company and AT&T Information Systems Inc. B. Sublicensing Agreement dated August 7, 1986 between the Company and AT&T Information Systems Inc. C. Substitution Agreement dated March 2, 1987 between the Company and AT&T Information Systems Inc. 5. Building Loan Agreement, dated May 11, 1989, between Sun Microsystems Properties, Inc. and the Toyo Trust and Banking Company, Limited, New York Branch and the following related documents of even date therewith: Promissory Note; First Deed of Trust, Assignment of Leases, Rents and Other Income and Security Agreement; Guaranty of Payment; Guaranty of Completion (Sun Microsystems, Inc.); Shortfall Agreement and Indemnity. 6. Common Shares Rights Agreement, dated May 15, 1989, between the Company and The First National Bank of Boston, as Rights Agent, as amended by First Amended and 87 Restated Common Shares Rights Agreement, dated December 14, 1989, between the Company and Rights Agent, as amended by Amendment, dated October 28, 1992 to the First Amended and Restated Common Shares Rights Agreement between the Company and Rights Agent and as amended by Second Amendment, dated December 14, 1992, to the First Amended and Restated Shares Rights Agreement between the Company and Rights Agent. 7. Note and Warrant Purchase Agreements: A. Note and Warrant Purchase Agreements, dated September 26, 1989, among the Company and certain purchasers listed on the Purchaser Schedule attached thereto ("Purchasers") providing for the issuance by the Company of $126,000,000 principal amount of 10.55% Senior Notes due September 26, 1996, as amended by Form or Letter dated June 25, 1991 between the Company and Purchasers regarding the Note and Warrant Purchase Agreements, and as further amended by Amendments, dated May 26, 1993, to the Note and Warrant Purchase Agreements between the Company and purchasers identified therein. B. Note and Warrant Purchase Agreements, dated December 15, 1989, among the Company and certain purchasers listed on the Purchaser Schedule attached thereto ("Purchasers") providing for the issuance by the Company of $41,000,000 principal amount of 10.55% Senior Notes due September 26, 1996, as amended by Form of Letter dated June 25, 1991 between the Company and Purchasers regarding the Note and Warrant Purchase Agreements, and as further amended by Amendments, dated May 26, 1993, to the Note and Warrant Purchase Agreements between the Company and purchasers identified therein. C. Note and Warrant Purchase Agreement, dated December 15, 1989, between the Company and Metropolitan Life Insurance Company ("Purchaser") providing for the issuance by the Company of $25,000,000 principal amount of 10.55% Senior Notes due September 26, 1996, as amended by Form of Letter dated June 25, 1991 between the Company and Purchasers regarding the Note and Warrant Purchase Agreements, and as further amended by Amendments, dated May 26, 1993, to the Note and Warrant Purchase Agreements between the Company and purchasers identified therein. 8. Letter from Texas Instruments to the Company, dated March 14, 1990. 2 88 9. Lease Agreements, dated September 25, 1992, between the Company and BNP Leasing Corporation; and the following related documents of even date therewith: Purchase Agreements, dated September 25, 1992, between the Company and BNP Leasing Corporation, Memoranda of Agreements, Environmental Indemnity Agreement, Estoppel Letters. 10. Software License and Distribution Agreement, dated as of January 1, 1994 by and between the Company and UNIX System Laboratories, Inc. 11. Sun Microsystems, Inc. 1992 Incentive Option Plan (as amended and restated on November 7, 1991). 12. Sun Microsystems, Inc. 1987 Stock Option Plan (as amended and restated on November 7, 1991). 13. Sun Microsystems, Inc. 1988 Directors' Stock Option Plan (as adopted by the Board of Directors on January 4, 1988 and amended as of March 1, 1992 and August 11, 1993). 14. Sun Microsystems, Inc. 1990 Long-Term Equity Incentive Plan (as amended and restated as of November 7, 1992). 15. Sun Microsystems, Inc. 1990 Employee Stock Purchase Plan (as amended and restated as of November 7, 1991). 16. Sun Microsystems, Inc. Restricted Stock Plan (as amended and restated on November 1991). _______________ * Reference herein to "Company" or "Sun Microsystems, Inc." with respect to agreements entered into on or prior to June 1987 mean Sun Microsystems, Inc., a California corporation, and after such date, Sun Microsystems, Inc., a Delaware corporation. 3 89 EXHIBIT C-2 OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENT [Closing Date] To the Purchasers and the Agent Referred to Below c/o J.P. Morgan Delaware 902 Market Street Wilmington, Delaware 19801 Dear Sirs: We have participated in the preparation of the Receivables Purchase Agreement (the "Receivables Purchase Agreement") dated as of August 5, 1994, among Sun Microsystems, Inc., a Delaware corporation (the "Parent"), the Subsidiary Sellers listed therein (together with the Parent, the "Sellers"), the Purchasers listed on the signature pages thereof (the "Purchasers") and J.P. Morgan Delaware, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.02(c) of the Receivables Purchase Agreement. Terms defined in the Receivables Purchase Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Parent of the Receivables Purchase Agreement and the Assignments are within its corporate powers and have been duly authorized by all necessary corporate action. 2. The Receivables Purchase Agreement and the Assignments constitute valid and binding agreements of each Seller, in each case enforceable against such Seller in accordance with their respective terms, subject to bankruptcy, fraudulent conveyance, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights and by general equitable principles (regardless of whether the 90 issue of enforceability is considered in a proceeding in equity or at law). We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. Insofar as the foregoing opinion involves matters governed by the laws of the State of California, we have relied, without independent investigation, upon the opinion of Wilson, Sonsini, Goodrich & Rosati, a copy of which has been delivered to you. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent. Very truly yours, 2 91 EXHIBIT D-1 GOVERNMENT CONTRACTS Contract Obligor: Number: Description: Payment terms: Assignment: __ Permitted __ Restricted __ No applicable provision Offset rights: __ Retained __ Waived __ No applicable provision
[To be completed by Sellers.] 92 EXHIBIT D-2 ASSIGNMENT FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer unto J.P. Morgan Delaware all monies due or to become due under [identify Qualifying Government Contract]. IN WITNESS WHEREOF, the undersigned, through its duly authorized officer, has caused this Agreement to be duly executed this __ day of _______, 19__. [RELATED SELLER] By ______________________ Title: [CORPORATE SEAL] Witness: ____________________ 93 EXHIBIT D-3 NOTICE OF ASSIGNMENT TO: ________________ [address to one of the parties specified in FAR 32.802(e)]. This has reference to Contract No. ________ dated ________, entered into between [related Seller], [address], and ___________ [government agency, name of office, and address], for ____________ [describe nature of the contract.] Moneys due or to become due under the contract described above have been assigned to the undersigned under the provisions of the Assignment of Claims Act of 1940, as amended, 31 U.S.C. Section 203, 41 U.S.C. Section 15. A true copy of the instrument of assignment executed by the Contractor on __________ [date], is attached to the original notice. Payments due or to become due under this contract should be made to the undersigned assignee. Please return to the undersigned the three enclosed copies of this notice with appropriate notations showing the date and hour of receipt, and signed by the person acknowledging receipt on behalf of the addressee. Very truly yours, J.P. MORGAN DELAWARE By _________________________ Title: ACKNOWLEDGEMENT Receipt is acknowledged of the above notice and of a copy of the instrument of assignment. They were received at _____ (a.m.) (p.m.) on ________, 19__. ________________________ [signature and title] 94 EXHIBIT E CERTAIN OBLIGORS PART 1: Obligors with up to 10% of the Net Eligible Account Balance AT&T Boeing General Electric University of California US West PART 2: Obligors with up to 5% of the Net Eligible Account Balance American Express Bell Atlantic Bell Communications Eastern Kodak EDS NYNEX Salomon Brothers Xerox
95 EXHIBIT F Lockbox Banks, Lockbox Account Numbers and Lockboxes
Bank Bank Account Name Account Number Lockbox Address Bank of America-Concord Sun Microsystems Inc. - Lockbox 12332-56405 Dept 1489 1850 Gateway Blvd. Lockbox #1489 P.O. Box 61000 Concord, CA San Francisco, CA 94161 Bank of America-Concord Sun Microsystems Inc. - Lockbox 12332-56405 File #56340 1850 Gateway Blvd. Lockbox #56340 Los Angeles, CA 90074-3640 Concord, CA Bank of America-Concord Sun Technology Enterprises Inc. 12331-13463 File #52558 1850 Gateway Blvd. Lockbox #55258 Los Angeles, CA 90074-2558 Concord, CA Bank of America-Concord SunSoft, Inc. 12333-5653 File #72612 1850 Gateway Blvd. Lockbox #72612 San Francisco, CA 94160-2612 Concord, CA Nationsbank Sun Microsystems, Inc. 008-49-778 Drawer CS198330 P.O. Box 4899 Lockbox #CS198330 Atlanta, GA 30384-8330 Atlanta, GA Northern Trust Sun Express Inc. 30162545 P.O. Box 75654 50 S. La Salle St. Lockbox #75654 Chicago, IL 60675-5654 Chicago, IL 60675 Northern Trust Sun Microsystems, Inc. 30262545 P.O. Box 75640 50 S. La Salle St. Lockbox #75640 Chicago, IL 60675-5640 Chicago, IL 60675 Philadelphia National Bank Sun Microsystems, Inc. 0108-7021 P.O. Box 8500 (S-4020) FC 98-2-1, Suite 4330 Lockbox #s-4020 Philadelphia, PA 19178-4020 707 Wilshire Blvd. Los Angeles, CA 90071
96 EXHIBIT G [Letterhead of Sun Microsystems, Inc.] August __, 1994 [Name and Address of Lockbox Bank] Gentlemen: Reference is made to the lockbox account no. __________ maintained with you (the "Account") and the related lockbox. Pursuant to a Receivables Purchase Agreement dated as of August 5, 1994 among us, certain of our subsidiaries and J.P. Morgan Delaware, as Agent, we have assigned to the Agent, for the benefit of the Purchasers (as defined in the Receivables Purchase Agreement) one or more undivided percentage interests in certain of the accounts, chattel paper, instruments or general intangibles (collectively, "Receivables") with respect to which payments are or may hereafter be made to the Account [and the related lockbox]. Except as otherwise provided in this letter agreement, payments to the Account are to be processed in accordance with the standard procedures currently in effect. All service charges and fees with respect to the Account shall continue to be payable by us as under the arrangements currently in effect. Upon your receipt of a letter from the Agent substantially in the form of Annex 1 hereto you are hereby instructed to comply with the terms thereof. By executing this letter agreement, you irrevocably waive and agree not to assert, claim or endeavor to exercise, irrevocably bar and estop yourself from asserting, claiming or exercising, and acknowledge that you have not heretofore received a notice, writ, order or any form of legal process from any other party asserting, claiming or exercising, any right of set-off, banker's lien or other purported form of claim with respect to the Account or any funds from time to time therein. Except for your right to payment of your 97 service charges and fees and to make deductions for returned items, you shall have no rights in the Account or funds therein. You may terminate this letter agreement by canceling the Account maintained with you, which cancellation and termination shall become effective only upon thirty days' prior written notice thereof from you to the Agent. Incoming mail addressed to or wire transfers to the Account received after such cancellation shall be forwarded in accordance with the Agent's instructions. This letter agreement may also be terminated upon written notice to you by the Agent stating that the Receivables Purchase Agreement pursuant to which this letter agreement was obtained is no longer in effect. Except as otherwise provided in this paragraph, this letter agreement may not be terminated or amended without the prior written consent of the Agent. This letter agreement may be executed in any number of counterparts, and by the parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Please acknowledge your agreement to the terms set forth in this letter agreement by signing the two copies of this letter agreement enclosed herewith in the space provided below, sending one such signed copy to the Agent at its address provided below and returning the other signed copy to us. Very truly yours, SUN MICROSYSTEMS, INC. By:______________________ Name:____________________ Title:___________________ 98 [NAME OF LOCK-BOX/BANK] By:______________________ Name:____________________ Title:___________________ Address for notice: Attention:____________________ Telex No.:____________________ (Answerback:__________________) Facsimile No.:________________ 99 ANNEX 1 TO EXHIBIT G [LETTERHEAD OF J.P. MORGAN DELAWARE] ___________ 19,__ Re: Lockbox Transfer Letter Gentlemen: We hereby notify you that control of the post office box or other mailing location located at _______________________ that receives payments made to Sun Microsystems, Inc. or a subsidiary of Sun Microsystems, Inc. (the "Lockbox") and the related lock-box account No. ________ maintained with you (the "Lockbox Account") are hereby transferred to J.P. Morgan Delaware, as Agent, 902 Market Street, Wilmington, Delaware 19801 (the "Agent"). You are hereby irrevocably instructed to make all payments to be made by you out of or in connection with the Lockbox Account directly to J.P. Morgan Delaware, for the account of the Agent, to account No. ________ or otherwise in accordance with the instructions of the Agent. You are hereby irrevocably instructed to disregard any and all previous instructions or agreements, if any, given or made which are or may be inconsistent with this letter, all of which are hereby superseded by this letter. You are also hereby notified that the Agent shall be irrevocably entitled to exercise any and all rights in respect of or in connection with the Lockbox Account, including, without limitation, the right to specify when payments are to be made out of or in connection with the Lockbox Account. The funds deposited into the Lockbox Account will not be subject to deduction, set-off, banker's lien or any other right in favor of any person other than the Agent. Please agree to the terms of, and acknowledge receipt of, this notice by signing in the space provided below on a copy 100 hereof sent herewith and send one signed copy to the Agent, at its address referred to above, Attention of Structured Finance Group. Very truly yours, J.P. MORGAN DELAWARE By:____________________ ____________________ name ____________________ title Agreed and acknowledged: [Lockbox Bank] By:_____________________ Title: EX-11 6 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 SUN MICROSYSTEMS, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY
YEARS ENDED JUNE 30, ---------------------------------- 1994 1993 1992 ---- ---- ---- Net income $195,824 $156,726 $173,313 Weighted average common shares outstanding 95,207 102,329 98,218 Common equivalent shares attributable to the following: Stock options and warrants 1,557 2,796 3,422 -------- -------- -------- Total common and common equivalent shares outstanding 96,764 105,125 101,640 ======== ======== ======== Net income per common and common equivalent share $ 2.02 $ 1.49 $ 1.71 ======== ======== ========
2 EXHIBIT 11 (CONTINUED) SUN MICROSYSTEMS, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FULLY DILUTED
YEARS ENDED JUNE 30, ------------------------------------ 1994 1993 1992 ---- ---- ---- Net income $195,824 $156,726 $173,313 Adjustment for interest assuming conversion of 5 1/4% subordinated debentures, net of taxes (1) - 2,324 6,911 -------- -------- -------- Adjusted net income $195,824 $159,050 $180,224 ======== ======== ======== Weighted average common shares outstanding 95,207 102,329 98,218 Common equivalent shares attributable to the following: Stock options and warrants 1,621 3,037 3,576 Conversion of 5 1/4% subordinated debentures - 1,830 5,400 -------- -------- -------- Total common and common equivalent shares outstanding 96,764 107,196 107,194 ======== ======== ======== Net income per common and common equivalent share $ 2.02 $ 1.48 $ 1.68 ======== ======== ========
(1) The adjustment to common equivalent shares recorded reflects only the period during which the debentures were actually outstanding. EX-13 7 HISTORICAL FINANCIAL REVIEW 1 HISTORICAL FINANCIAL REVIEW EXHIBIT 13.0 SUMMARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, ---------------------------------------------------------------------------------------------------------- (In millions, except 1994 1993 1992 1991 1990 1989 per share amounts) Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net revenues $4,690 100.0 $4,309 100.0 $3,589 100.0 $3,221 100.0 $2,466 100.0 $1,765 100.0 Costs and expenses: Cost of sales 2,753 58.7 2,518 58.4 1,963 54.7 1,758 54.6 1,399 56.7 1,010 57.2 Research and development 455 9.7 445 10.3 382 10.6 356 11.1 302 12.2 234 13.3 Selling, general and administrative 1,205 25.7 1,105 25.7 983 27.4 812 25.2 588 23.9 433 24.5 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total costs and expenses 4,413 94.1 4,068 94.4 3,328 92.7 2,926 90.9 2,289 92.8 1,677 95.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Operating income 277 5.9 241 5.6 261 7.3 295 9.1 177 7.2 88 5.0 Interest income (expense), net 6 0.1 (2) -- (6) (0.2) (11) (0.3) (23) (0.9) (10) (0.6) Litigation settlement -- -- (15) (0.4) ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Income before income taxes 283 6.0 224 5.2 255 7.1 284 8.8 154 6.3 78 4.4 Provision for income taxes 87 1.8 67 1.6 82 2.3 94 2.9 43 1.8 17 1.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Net income $ 196 4.2 $ 157 3.6 $ 173 4.8 $ 190 5.9 $ 111 4.5 $ 61 3.4 Net income per share $ 2.02 $ 1.49 $ 1.71 $ 1.85 $ 1.21 $ 0.76 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Weighted average common and common- equivalent shares outstanding 97 105 102 103 94 85 ====== ====== ====== ====== ====== ======
OPERATING AND CAPITALIZATION DATA
Years Ended June 30, ----------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- Total assets (millions) $ 2,898 $ 2,768 $ 2,672 $ 2,326 $ 1,779 $ 1,269 Long-term debt and other obligations (millions) $ 122 $ 178 $ 348 $ 401 $ 359 $ 145 Current ratio 2.0 2.4 2.6 2.5 2.6 1.9 Long-term debt to equity ratio 0.075 0.11 0.23 0.33 0.39 0.22 Return on average equity 12% 10% 13% 18% 14% 12% Return on average capital 12% 9% 10% 13% 11% 9% Return on average assets 7% 6% 7% 9% 7% 6% Effective income tax rate 33.0% 30.0% 32.0% 33.0% 28.0% 22.0% Average shares and equivalents (thousands) 96,764 105,125 101,640 103,067 94,369 85,161 Book value per outstanding share $ 17.35 $ 16.09 $ 14.85 $ 12.58 $ 10.01 $ 7.88 Revenue units 259,500 255,600 206,200 179,600 118,300 80,700 ======== ======== ======== ======== ======== ======== 10
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth items from Sun's Consolidated Statement of Income as percentages of net revenues:
Years Ended June 30, ------------------------------ 1994 1993 1992 ----- ----- ----- Net revenues 100.0% 100.0% 100.0% Cost of sales 58.7 58.4 54.7 ----- ----- ----- Gross margin 41.3 41.6 45.3 Research and development 9.7 10.3 10.6 Selling, general and administrative 25.7 25.7 27.4 ----- ----- ----- Operating income 5.9 5.6 7.3 Interest income (expense), net 0.1 -- (0.2) Settlement of litigation -- (0.4) -- ----- ----- ----- Income before income taxes 6.0 5.2 7.1 Provision for income taxes 1.8 1.6 2.3 ----- ----- ----- Net income 4.2% 3.6% 4.8% ===== ===== =====
RESULTS OF OPERATIONS Sun continues to introduce higher performance desktop workstations as well as reduce prices to improve price point and price/performance competitiveness. Component cost reductions, operating efficiencies and increased shipments of higher performance desktop and server products have, to date, significantly offset the effects of repricing actions. Future operating results will depend on additional component cost reductions, further operating efficiencies and the mix of systems, software and other products, which in turn depend in part on the Company's ability to generate higher system, service and software license volumes. A significant and increasing share of revenue is being generated from products that operate exclusively in the Solaris 2 software environment. More than half a million Solaris 2 licenses have been distributed to date, and over 3,000 applications are now ported and available from independent software vendors. Sun's ability to maintain this growth will depend, in part, on the continued acceptance and migration of customers to Solaris 2, as well as the efforts of independent software vendors to develop new, and port existing, application software. Management believes the Company has entered fiscal 1995 in strong financial condition and with a very competitive offering of products, led by the introduction of two new desktop systems in late fiscal 1994, the SPARCstation 5 and SPARCstation 20. Although demand for these new products was strong, the Company experienced supply constraints on certain memory devices in the fourth quarter. These constraints are expected to continue into fiscal 1995. While the Company believes it effectively managed these constraints in the fourth quarter, future operating results could be impacted depending on the availability and cost of memory components during fiscal 1995. (See "Future Operating Results.") NET REVENUES Net revenues increased $381.3 million, or 9%, to $4,689.9 million in fiscal 1994, compared with an increase of $719.7 million, or 20%, in fiscal 1993. Increases in net revenues in fiscal 1994 were primarily driven by higher revenue from memory, storage options and accessories shipped to both installed base customers and to new customers purchasing more richly configured systems. Total unit shipments of systems in fiscal 1994 grew slightly when compared with fiscal 1993. This unit increase resulted primarily from increases in desktop and server system shipments in fiscal 1994, which were offset by reductions in shipments of upgrade units, as more customers opted for the price/performance advantages of new systems. System unit shipments in fiscal 1994 were favorably impacted by the introduction of the SPARCstation 5 and SPARCstation 20, each of which individually shipped more units in its first quarter of introduction than any other workstation in the Company's history. Fiscal 1994 service revenues remained relatively unchanged as a percentage of net revenues when compared with fiscal 1993. 11 3 The increase in net revenues in fiscal 1993 over fiscal 1992 was primarily attributable to increased unit shipments of new systems combined with higher revenue from peripherals and other hardware. The impact of currency fluctuations on net revenues and operating results cannot be precisely measured, because the Company's product mix and pricing change over time in various markets, partially in response to currency movements. Further, the Company's international structure and transaction activity provide a degree of natural hedge where fluctuations in a particular currency result in financial effects that mitigate or tend to offset each other on a consolidated basis. Any remaining material currency exposure is managed through an established hedging program, the objective of which is to minimize the impact of currency fluctuations on results of operations. Compared with fiscal 1993, the dollar strengthened against most major European currencies but weakened against the Japanese yen. Management has estimated that the net impact of currency fluctuations, while slightly unfavorable in fiscal 1994, was not significant in any of the fiscal years in the three-year period ending June 30, 1994. In fiscal 1994 and 1993, domestic net revenues grew 4% and 27%, respectively, while international net revenues (including U.S. exports) grew 14% and 13%, respectively. European net revenues in fiscal 1994 increased 9%, primarily due to the recent strengthening of certain Northern European economies. Net revenues in the Rest of World (primarily Japan) increased by 20% in fiscal 1994, primarily due to the expanding client-server computer markets in Japan, Asia, Latin America and other regions. International operations represented 51% of total net revenues in fiscal 1994, as compared with 49% and 50% in fiscal 1993 and 1992, respectively. GROSS MARGIN Gross margin remained relatively unchanged at 41.3% of net revenues for fiscal 1994, compared with 41.6% for fiscal 1993. Repricing actions, the introduction of low price-point desktop systems, and higher revenues from lower margin peripherals and other hardware resulted in downward gross margin pressure during fiscal 1994. The impact of these factors was somewhat offset by favorable gross margin impacts from increases in shipments of higher performance desktop and server systems with accompanying higher margins, reductions in lower margin upgrade revenues and reductions in component costs. Repricing actions may continue to be initiated in the future to increase shipment volumes for desktop systems, which could result in downward pressure on gross margin. This margin pressure could be mitigated with increased software licensing, server and high performance desktop volumes, as well as component cost reductions and operating efficiencies generated by higher unit volumes. The decline in gross margin for fiscal 1993 when compared with fiscal 1992 resulted primarily from the shift to lower priced desktop systems, start-up costs related to the introduction of the SPARCstation 10 family of products and price reductions on other products. RESEARCH AND DEVELOPMENT Research and development expenses increased $9.3 million, or 2%, in fiscal 1994 to $454.7 million compared with an increase of $63.7 million, or 17%, in fiscal 1993. As a percentage of net revenues, research and development expenses were 9.7%, 10.3% and 10.6% in fiscal 1994, 1993 and 1992, respectively. Research and development spending continued at a substantial level throughout the fiscal 1992 to 1994 period, as the Company invested in specific projects in support of new product introductions. The decline in spending in fiscal 1994 as a percentage of net revenues was primarily attributable to the timing of specific expenses as well as increased concentration of efforts on more cost-effective projects. Sun continues to believe that the market for its products is characterized by rapid rates of technological advancement for hardware and software products, as well as microprocessor technologies. To maintain its competitive position in the industry, the Company expects to continue to invest significant resources in new hardware, software and microprocessor product development, as well as in enhancements to existing products. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $100.9 million, or 9%, in fiscal 1994 to $1,205.4 million compared with an increase of $120.9 million, or 12%, in fiscal 1993. As a percentage of net revenues, these expenses were 25.7% in both fiscal 1994 and 1993, and 27.4% in fiscal 1992. The fiscal 1994 dollar increase primarily reflects investments for additional sales staff and related incentives, increased incentive compensation based on the achievement of specified performance goals and incremental investments for strategic marketing and advertising programs. The increase in fiscal 1993 was primarily for additional sales staff and related incentives, additional marketing staff and increased occupancy costs related to international expansion. INTEREST INCOME (EXPENSE), NET Net interest income increased to $6.1 million in fiscal 1994 from $1.5 million of expense in fiscal 1993 and $6.2 million of expense in fiscal 1992. The increase in net interest income for fiscal 1994 was primarily the result of reduced interest expense on short-term borrowings and long-term debt as a result of scheduled debt repayments. The decrease in interest expense for fiscal 1993 compared with fiscal 1992 was primarily due to the elimination of certain interest expense as a result of the conversion of the Company's subordinated debentures in November 1992, as well as interest savings from scheduled debt repayments. 12 4 SETTLEMENT OF LITIGATION Fiscal 1993 earnings included a charge of $15 million in connection with the settlement of two securities class action lawsuits brought against the Company and certain of its current and former officers by purchasers of the Company's stock and debentures. (See Note 7 to the Consolidated Financial Statements.) INCOME TAXES The effective tax rate for fiscal 1994 was 33% before a one-time credit of $5.9 million resulting from the Omnibus Reconciliation Act of 1993. For fiscal 1993 and 1992 the effective income tax rates were 30% and 32%, respectively. The increase in fiscal 1994 over fiscal 1993 occurred primarily because of the increase in the U.S. statutory rate and the increase in income before taxes without corresponding proportionate changes in tax benefits. The decrease in fiscal 1993 over fiscal 1992 was primarily due to lower taxes on foreign earnings, partially offset by decreased benefits from research and development tax credits as well as from the Company's foreign sales corporation. FUTURE OPERATING RESULTS Sun operates in an industry marked by rapidly changing technology and increasing competition. The Company expects that the markets for its products and technology, as well as its competitors within such markets, will continue to change as the rightsizing trend shifts customer buying patterns to distributed systems employing solutions from multiple vendors. In addition, improvements in hardware and operating system software products introduced, or to be introduced, by competing companies are expected to improve the characteristics of certain networked personal computer solutions. These developments are expected to provide competitive pressure, particularly at the low end of the Company's product range, where customers are more price sensitive and the systems environment is less complex. Therefore, 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 competitive new hardware, software and service products, as well as new microprocessor technologies, that offer its customers enhanced performance at competitive prices. (See "Gross Margin.") The development of new, high-performance computer products is a complex and uncertain process requiring high levels of innovation from both the Company's designers and those of its suppliers, as well as accurate anticipation of customer requirements and technological trends. Once a hardware product is developed, the Company must rapidly bring it into volume manufacturing, a process that requires accurate forecasting of both volumes and configurations, among other things, in order to achieve acceptable yields and costs. 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 could result in a significant adverse impact on the Company's operating results. (See "Results of Operations.") The inability to secure enough components to build products, including new products, in the quantities and configurations required, or to produce, test and deliver sufficient products to meet demand in a timely manner, would adversely affect the Company's net revenues and operating results. The production and introduction of new or enhanced products also requires the Company to make advanced payments, if necessary, under contracts with certain suppliers. In addition, in order to secure components for development of new products, the Company frequently enters into non-cancelable 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 their respective delivery schedules. The Company must also manage the transition from older, displaced products in order to minimize disruptions in customer ordering patterns and excessive levels of older product 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 need to take pricing actions, which may result in the Company not being able to correctly anticipate the demand for the mix of products following those pricing actions. Because the Company is continuously engaged in this product development and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. Generally, the computer systems sold by Sun are the result of both hardware and software development, so that delays in 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, such as the Solaris 2 software environment, typically requires effort on the part of the customer as well as software porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays in adoption of a new release of an operating system by customers and software developers can limit the acceptance of hardware products tied to that release. Such delays could adversely affect the future operating results of the Company. 13 5 The Company's operating results will also be affected by the volume, mix and timing of orders received during a period and by conditions both in the computer industry and in the general economy, such as recessionary periods, political instability, changes in trade policies and fluctuations in interest or currency exchange rates. The Company's customer order backlog at June 30, 1994 was $338 million compared with $160 million and $350 million at June 30, 1993 and 1992, respectively. Backlog levels vary with demand, product availability and the Company's delivery lead times, and are subject to decreases as a result of customer order delays, changes or cancellations. As such, backlog levels may not be a reliable indicator of future operating results. As delivery lead times continue to decrease, the Company must generate a higher percentage of revenue from new order bookings in the same fiscal period. The backlog level at June 30, 1994 reflects strong demand for the Company's newly introduced products, the SPARCstation 5 and the SPARCstation 20. The lower June 30, 1993 backlog level was impacted to some extent by generally weaker economies in several of the Company's international markets. Seasonality also affects the Company's operating results, particularly in the first quarter of each fiscal year. In addition, the Company's operating expenses are increasing as the Company continues to expand its operations, and future operating results will be adversely affected if revenues do not increase accordingly. The Company expects to continue efforts to achieve additional operating efficiencies through the continual review and improvement of business processes and cycle times. In connection with these efforts, the Company is continuously engaged in the process of managing the mix and level of its workforce. LIQUIDITY AND CAPITAL RESOURCES Sun's cash portfolio (cash, cash equivalents and short-term investments) decreased $255.9 million, or 22%, to $882.8 million at June 30, 1994, primarily due to the completion in November 1993 of the planned repurchase of approximately 10 million shares of the Company's common stock. In addition, Sun paid approximately $80 million pursuant to an agreement with Novell, Inc. in fiscal 1994 that, among other things, eliminated substantially all of the Company's royalty obligations for UNIX licensing and released Sun from distribution and licensing restrictions for most of its UNIX operating system products. Accounts receivable increased $225.9 million, or 36%, to $853.0 million at June 30, 1994, due primarily to a 30% increase in net revenues in the month of June 1994 compared with the corresponding period in 1993. Inventories increased $38.7 million, or 15%, to $294.9 million at the end of fiscal 1994, primarily due to a build-up in finished goods to meet increased customer demand and to enable rapid response to shifts in product mix requirements. Accounts payable increased to $363.8 million at the end of fiscal 1994 due to significant inventory receipts in the last weeks of the year in support of new product introductions and increased customer demand. During fiscal 1994, operating activities generated $355.7 million in cash compared with $336.2 million in fiscal 1993, primarily as the result of higher earnings in fiscal 1994. The Company's investing activities used $467.4 million of cash in fiscal 1994, an increase of $286.6 million from the $180.8 million used in fiscal 1993. The increase resulted primarily from the Company investing proportionately more of the fiscal 1994 net operating cash flow in short-term investments and less in cash equivalents. In June 1993, the Board of Directors approved a plan to repurchase up to 10 million shares of the Company's common stock. Repurchases under this program were completed in November 1993 at a total cost of approximately $265 million. At June 30, 1994, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $882.8 million; uncommitted lines of credit available to the Company's international subsidiaries totalling approximately $455 million, of which approximately $376 million was available; and a revolving credit facility with banks aggregating $150 million, all of which was available subject to compliance with certain covenants. In the first half of fiscal 1995, the Company will acquire for cash approximately $80 million in property, plant and equipment as part of the development of new operating facilities. 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 for fiscal 1995. 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 financings to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. 14 6 CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, ----------------------------------------------- (In thousands, except per share amounts) 1994 1993 1992 ---------- ---------- ---------- Net revenues $4,689,892 $4,308,606 $3,588,885 Costs and expenses: Cost of sales 2,752,518 2,518,312 1,962,622 Research and development 454,665 445,356 381,637 Selling, general and administrative 1,205,442 1,104,498 983,573 ---------- ---------- ---------- Total costs and expenses 4,412,625 4,068,166 3,327,832 ---------- ---------- ---------- Operating income 277,267 240,440 261,053 Interest income 27,894 33,327 38,997 Interest expense (21,782) (34,873) (45,178) Settlement of litigation -- (15,000) -- ---------- ---------- ---------- Income before income taxes 283,379 223,894 254,872 Provision for income taxes 87,555 67,168 81,559 ---------- ---------- ---------- Net income $ 195,824 $ 156,726 $ 173,313 ---------- ---------- ---------- Net income per common and common-equivalent share $ 2.02 $ 1.49 $ 1.71 Common and common-equivalent shares used in the calculation of net income per share 96,764 105,125 101,640 ========== ========== ==========
See accompanying notes. 15 7 CONSOLIDATED BALANCE SHEETS
June 30, ----------------------------- (In thousands, except per share amounts) 1994 1993 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 433,937 $ 828,839 Short-term investments 448,879 309,873 Accounts receivable, net of allowances of $79,845 in 1994 and $51,462 in 1993 853,031 627,174 Inventories 294,948 256,275 Deferred tax assets 103,428 121,874 Other current assets 170,870 128,311 ---------- ---------- Total current assets 2,305,093 2,272,346 Property, plant and equipment: Machinery and equipment 672,962 560,660 Furniture and fixtures 49,512 54,629 Leasehold improvements 53,364 59,096 Land and buildings 101,430 100,653 ---------- ---------- 877,268 775,038 Accumulated depreciation and amortization (517,020) (426,656) ---------- ---------- Net property, plant and equipment 360,248 348,382 Other assets, net 232,651 146,901 ---------- ---------- $2,897,992 $2,767,629 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 78,687 $ 90,890 Accounts payable 363,828 270,440 Accrued payroll-related liabilities 159,017 127,156 Accrued liabilities and other 341,891 266,108 Deferred service revenues 72,085 61,120 Income taxes payable 93,930 92,930 Current portion of long-term debt 38,400 38,400 ---------- ---------- Total current liabilities 1,147,838 947,044 Long-term debt and other obligations 121,831 177,802 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, $0.00067 par value, 300,000,000 shares authorized; issued: 106,394,200 shares in 1994 and 106,444,744 shares in 1993 72 72 Additional paid-in capital 1,066,571 1,053,806 Retained earnings 879,135 705,965 Treasury stock, at cost: 12,542,875 shares in 1994 and 4,332,705 shares in 1993 (329,245) (119,052) Currency translation adjustment 11,790 1,992 ---------- ---------- Total stockholders' equity 1,628,323 1,642,783 ---------- ---------- $2,897,992 $2,767,629 ========== ==========
See accompanying notes. 16 8 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, Increase (decrease) in cash and cash equivalents ---------------------------------------------------- (In thousands) 1994 1993 1992 ----------- ----------- ----------- Cash flow from operating activities: Net income $ 195,824 $ 156,726 $ 173,313 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization 248,247 232,354 215,450 Other non-cash items 14,210 26,945 29,007 Net (increase) decrease in operating assets (299,733) (183,046) 44,861 Net increase in operating liabilities 197,196 103,221 45,188 ----------- ----------- ----------- Net cash provided from operating activities 355,744 336,200 507,819 ----------- ----------- ----------- Cash flow from investing activities: Acquisition of property, plant and equipment (213,229) (196,475) (185,577) Acquisition of other assets (115,199) (47,307) (23,911) Acquisition of short-term investments (2,799,408) (2,056,641) (2,311,812) Maturities of short-term investments 2,660,402 2,119,597 2,152,433 ----------- ----------- ----------- Net cash used by investing activities (467,434) (180,826) (368,867) ----------- ----------- ----------- Cash flow from financing activities: Issuance of stock, net of employee repurchases 19,243 42,986 27,899 Acquisition of treasury stock (294,427) (214,883) -- Proceeds from employee stock purchase plans 42,298 38,460 41,829 (Reduction) proceeds of short-term borrowings, net (12,203) (394) 18,250 Reduction of long-term borrowings and other (38,123) (40,013) (519) ----------- ----------- ----------- Net cash (used by) provided from financing activities (283,212) (173,844) 87,459 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (394,902) (18,470) 226,411 ----------- ----------- ----------- Cash and cash equivalents, beginning of year 828,839 847,309 620,898 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 433,937 $ 828,839 $ 847,309 ----------- ----------- ----------- Schedule of non-cash financing activities: Conversion of convertible subordinated debentures $ -- $ 114,890 $ -- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 20,788 $ 33,015 $ 37,261 Income taxes $ 63,267 $ 15,859 $ 84,159 =========== =========== ===========
See accompanying notes. 17 9 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended June 30, 1994 Currency Total (In thousands, Common Stock Additional Retained Treasury Stock Translation Stockholders' except share amounts) Shares Amount Paid-in Capital Earnings Shares Amount Adjustment Equity - - - ------------------------- ----------- ------ --------------- -------- ----------- --------- ----------- ------------- Balances at June 30, 1991 101,408,840 $68 $ 904,966 $486,001 (5,048,999) $(180,449) $ 1,965 $1,212,551 Issuance of stock, net of employee repurchases (216,504) -- (133) (68,812) 3,858,258 137,892 -- 68,947 Net income -- -- -- 173,313 -- -- -- 173,313 Tax benefit and other -- -- 24,033 -- -- -- 6,238 30,271 ----------- --- ---------- -------- ----------- --------- ------- ---------- Balances at June 30, 1992 101,192,336 68 928,866 590,502 (1,190,741) (42,557) 8,203 1,485,082 Issuance of stock, net of employee repurchases 2,470,126 2 44,293 (24,362) 2,178,592 63,770 -- 83,703 Treasury stock purchased -- -- -- -- (7,935,874) (214,883) -- (214,883) Conversion of convertible subordinated debentures 2,782,282 2 57,171 (16,901) 2,615,318 74,618 -- 114,890 Net income -- -- -- 156,726 -- -- -- 156,726 Tax benefit and other -- -- 23,476 -- -- -- (6,211) 17,265 ----------- --- ---------- -------- ----------- --------- ------- ---------- Balances at June 30, 1993 106,444,744 72 1,053,806 705,965 (4,332,705) (119,052) 1,992 1,642,783 Issuance of stock, net of employee repurchases (50,544) -- 377 (22,654) 3,026,633 84,234 -- 61,957 Treasury stock purchased -- -- -- -- (11,236,803) (294,427) -- (294,427) Net income -- -- -- 195,824 -- -- -- 195,824 Tax benefit and other -- -- 12,388 -- -- -- 9,798 22,186 ----------- --- ---------- -------- ----------- --------- ------- ---------- Balances at June 30, 1994 106,394,200 $72 $1,066,571 $879,135 (12,542,875) $(329,245) $11,790 $1,628,323 =========== === ========== ======== =========== ========= ======= ==========
See accompanying notes. 18 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at date of acquisition. Short-term investments consist primarily of auction market preferred stock, commercial paper and tax-exempt securities with original maturities beyond three months and less than twelve months. Presently, the Company carries all cash equivalents and short-term investments at cost, which approximates fair value. Gains and losses are included in investment income in the period they are realized. The cost of all securities sold is based on the specific identification method. In May 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 (FAS 115) "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. Under FAS 115, debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as either available-for-sale or trading and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of stockholders' equity. Unrealized holding gains and losses on securities classified as trading are reported in earnings. The Company will begin application of FAS 115 in the first quarter of fiscal 1995. Application of the new rules will result in an estimated decrease of approximately $1.2 million to stockholders' equity as of July 1, 1994, representing the recognition in stockholders' equity of unrealized depreciation, net of tax effect, for the Company's investments in debt and equity securities determined to be available-for-sale, currently carried at cost. ACCOUNTS RECEIVABLE In June 1991, the Company entered into a three-year agreement to sell, on a revolving basis and with limited recourse, an undivided percentage ownership in a designated pool of accounts receivable, up to a maximum of $100 million. The transaction is fully funded at June 30, 1994. The Company maintains an allowance for doubtful accounts based on the collectibility of all trade accounts receivable, including those sold with recourse. The purchaser has a perfected security interest in the Company's domestic accounts receivable. In August 1994, the Company renewed the agreement for an additional three years, and increased the amount that can be sold to a maximum of $125 million. INVENTORIES Inventories, stated at the lower of cost (first-in, first-out) or market, consist of:
June 30, ----------------------------- (In thousands) 1994 1993 -------- -------- Raw materials $129,784 $134,633 Work in process 35,798 34,974 Finished goods 129,366 86,668 -------- -------- Total $294,948 $256,275 ======== ========
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the shorter of the estimated useful lives of the assets (ranging from one to 25 years) or the applicable lease term. 19 11 OTHER ASSETS Included in other assets are purchased technology rights and other intangibles as well as spare parts, which are being amortized over their estimated useful lives ranging from six months to seven years. CURRENCY TRANSLATION Sun translates the assets and liabilities of international subsidiaries into dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates that approximate those in effect during the period. Gains and losses from currency translation are included in stockholders' equity in the consolidated balance sheets. Currency transaction gains or losses, which are included in the results of operations, are immaterial for all periods presented. OTHER FINANCIAL INSTRUMENTS The Company enters into forward exchange contracts and purchases currency options to hedge certain assets and liabilities denominated in foreign currencies and to hedge certain anticipated but not yet committed transactions. At June 30, 1994 and 1993, the Company had forward exchange contracts and purchased currency options, all having maturities of less than three months, to exchange various foreign currencies (principally yen, pounds sterling and deutschmarks) for U.S. dollars in the gross amount of $717 million and $388 million, respectively. Market value gains and losses on forward exchange contracts are recognized as offsets to the exchange gains or losses on the hedged transactions. Deferred gains and losses from hedging anticipated transactions are recognized in earnings when the transactions occur. The Company has entered into interest rate swap agreements, which expire in 1995, that effectively convert $100 million of variable rate short-term investments to a fixed rate of return. Interest rate differential to be received or paid is recognized over the life of the agreement as an adjustment to interest income. The Company is exposed to credit loss in the event of nonperformance by counterparties on the interest rate swaps and forward exchange contracts, but the Company does not anticipate nonperformance by any of these counterparties. The approximate fair value of these outstanding instruments at June 30, 1994 based on pricing models using current market rates were: currency forward contracts, $1.4 million ($4.7 million at June 30, 1993); interest rate swaps, negative $1.3 million; and currency options, $4.5 million. REVENUE RECOGNITION Sun generally recognizes revenues from hardware and software sales at the time of shipment. Service revenues are recognized ratably over the contractual period or as the services are provided. NET INCOME PER COMMON AND COMMON-EQUIVALENT SHARE Net income per common and common-equivalent share is computed using the weighted average number of common and dilutive common-equivalent shares outstanding. Dilutive common-equivalent shares consist of the incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock method). The 6 3/8% convertible subordinated debentures, which were redeemed in fiscal 1993, were not previously considered common stock equivalents. Fully diluted earnings per share has not been presented because the additional dilution effect is immaterial. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company places its investments with high-credit-quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution and any one type of investment. The Company's receivables are derived primarily from sales of hardware and software products and services to customers in diversified industries as well as to a network of resellers. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary but generally requires no collateral. In fiscal 1994, the Company provided approximately $20 million for doubtful accounts ($8 million and $12 million in 1993 and 1992, respectively). 2. BORROWING ARRANGEMENTS
Long-term debt consists of the following: June 30, ------------------------ (In thousands) 1994 1993 -------- -------- 10.55% senior notes $114,642 $152,694 10.18% mortgage loan 40,000 40,000 -------- -------- 154,642 192,694 -------- -------- Less portion due within one year 38,400 38,400 -------- -------- Long-term debt $116,242 $154,294 ======== ========
20 12 In September and December 1989, the Company signed agreements with a group of insurance companies and received $192 million from the sale of 10.55% senior notes due September 1996 and warrants to purchase 1,294,180 shares of Sun's common stock at $24.80 per share, after, and subject to, further antidilution adjustments. The warrants are currently exercisable and expire in September 1996. The notes are carried net of the fair value of the warrants, which is being amortized on a straight-line basis over the term of the notes. Principal is payable annually in five equal installments, the first of which was paid in September 1992, with interest payable semiannually. As of June 30, 1994, the fair value of the notes was $123.2 million, based on current interest rates. Under the agreements, Sun is required to maintain various financial ratios and is restricted in its ability to pay cash dividends. The Company was in compliance with all covenants at June 30, 1994. The $40 million mortgage loan is secured by real property and a building. Principal is due to the bank at maturity on May 18, 1999, with interest payable semiannually, in arrears. The loan agreement provides for interest at a floating LIBOR rate. However, the bank has an interest rate swap agreement with a third party that results in the Company paying a fixed interest rate of 10.18%. The interest rate swap agreement matures with the loan agreement. As of June 30, 1994, the fair value of the floating rate loan remained at par. The interest rate swap had a negative fair value of $3.7 million, based on current interest rates. Long-term debt maturities are $38.4 million during each of the next three years and $40 million in 1999. In June 1994 the Company negotiated a new $150 million unsecured revolving Credit Agreement with an international group of twelve banks. The agreement expires on June 1, 1997. Any borrowings under this agreement bear interest at a floating rate based on prime, certificates of deposit or Eurodollar rates, at the Company's option. Under the agreement, Sun is required to maintain various financial ratios. Sun was in compliance with all covenants at June 30, 1994. There were no borrowings under this facility at June 30, 1994. At June 30, 1994, Sun's international subsidiaries had uncommitted lines of credit aggregating approximately $455 million, of which approximately $79 million (which approximates fair value) had been drawn. The average interest rate at June 30, 1994 on these borrowings was 3.0%. 3. INCOME TAXES Income before income taxes and provision for income taxes consist of the following:
Years Ended June 30, ------------------------------------------- (In thousands) 1994 1993 1992 -------- -------- -------- Income before income taxes: United States $ 48,736 $129,784 $206,331 Foreign 234,643 94,110 48,541 -------- -------- -------- Total income before income taxes $283,379 $223,894 $254,872 ======== ======== ======== Provision for income taxes: Current: United States federal $ 27,835 $ 37,723 $ 35,637 State 4,420 6,159 11,273 Foreign 59,445 37,901 27,210 -------- -------- -------- Total current 91,700 81,783 74,120 Deferred: United States federal (5,122) (13,507) 12,105 State 5,477 2,515 1,300 Foreign (4,500) (3,623) (5,966) -------- -------- -------- Total deferred (4,145) (14,615) 7,439 -------- -------- -------- Provision for income taxes $ 87,555 $ 67,168 $ 81,559 ======== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
Years Ended June 30, ------------------------------------------- (In thousands) 1994 1993 1992 -------- -------- -------- Deferred tax assets: Inventory valuation and reserves $ 40,745 $ 33,527 $ 37,612 Reserves and other accrued expenses 48,155 42,483 31,234 Net undistributed profits of subsidiaries and foreign loss carryforwards -- 27,127 36,376 Fixed asset basis differences 30,309 23,085 22,784 Compensation not currently deductible 24,122 18,878 12,503 Research and development credit carryover 16,119 -- -- Other 14,279 11,455 11,951 -------- -------- -------- Gross deferred tax assets 173,729 156,555 152,460 Valuation allowance -- (6,274) (10,248) -------- -------- -------- Deferred tax assets 173,729 150,281 142,212 Deferred tax liabilities : Net undistributed profits of subsidiaries (21,690) -- -- Other (5,146) (7,533) (14,079) -------- -------- -------- Deferred tax liabilities (26,836) (7,533) (14,079) -------- -------- -------- Net deferred tax assets $146,893 $142,748 $128,133 ======== ======== ========
21 13 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:
Years Ended June 30, -------------------------------------------- (In thousands) 1994 1993 1992 ------- ------- ------- Expected tax at 35% for 1994, 34% for 1993 and 1992 $99,183 $76,124 $86,656 State income taxes, net of federal tax benefit 6,350 5,725 8,298 Research and development tax credits (4,250) -- (6,674) Foreign Sales Corporation (2,302) (2,921) (7,797) Foreign earnings taxed at higher (lower) rates -- (550) 2,711 Tax advantaged investments (5,502) (5,957) (5,344) Utilization of foreign losses (5,579) (3,974) 229 Other (345) (1,279) 3,480 ------- ------- ------- Provision for income taxes $87,555 $67,168 $81,559 ======= ======= =======
The current federal and state provisions do not reflect the tax savings resulting from deductions associated with the Company's various stock option plans. These savings (in thousands) were $6,455, $18,451 and $18,000 in fiscal 1994, 1993 and 1992, respectively, and were credited to stockholders' equity. 4. COMMITMENTS The Company leases certain facilities and equipment under noncancelable operating leases. The future minimum annual lease payments are approximately $90 million, $67 million, $57 million, $44 million and $35 million for fiscal years 1995, 1996, 1997, 1998 and 1999, respectively, and approximately $61 million in total for years following fiscal 1999. In connection with certain of its facilities leases, the Company has residual value guarantees of approximately $114 million at the end of the respective lease terms in fiscal 1999. Rent expense under noncancelable operating leases was $102 million in fiscal 1994 and $98 million in both fiscal 1993 and 1992. The Company has commitments to acquire, for cash, approximately $80 million of property, plant and equipment in fiscal 1995. 5. STOCKHOLDERS' EQUITY COMMON STOCK In April 1989, the Company's Board of Directors approved a plan, as amended, to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, the Board of Directors declared a dividend distribution of a common share purchase right (a "Right") on each share of the Company's common stock (a "Common Share") outstanding on May 26, 1989 and each Common Share issued thereafter (subject to certain limitations). Upon becoming exercisable, each Right will entitle its holder to purchase one Common Share at an exercise price of $100, subject to adjustment. The Rights are not exercisable or transferable apart from the Common Shares unless certain events occur, including a public announcement that a person or group (an "Acquiring Person") has acquired or obtained the right to acquire 10% or more of the outstanding Common Shares or until the commencement or announcement of an intention to make a tender or exchange offer for 30% or more of the outstanding Common Shares. Unless the Rights are redeemed, in the event that an Acquiring Person acquires 10% or more of the outstanding Common Shares (other than pursuant to a tender offer deemed fair by the Company's Board of Directors), each Right not held by the Acquiring Person will entitle the holder to purchase for the exercise price that number of Common Shares having a market value equal to two times the exercise price. In the event that (i) the Company is acquired in a merger or other business combination in which the Company is not the surviving corporation or in which the Common Shares are exchanged for stock or assets of another entity or (ii) 50% or more of the Company's consolidated assets or earning power are sold, each Right not held by an Acquiring Person will entitle the holder to purchase for the exercise price that number of shares of common stock of the acquiring company having a market value equal to two times the exercise price. The Rights are redeemable, in whole but not in part, at the Company's option, at $0.01 per Right at any time prior to becoming exercisable and in certain other circumstances. The Rights expire on May 25, 1999. 22 14 STOCK OPTION AND INCENTIVE PLANS The Company's 1990 Long-Term Equity Incentive Plan ("1990 Incentive Plan") and other employee stock option plans provide the Board of Directors broad discretion in creating employee equity incentives and authorize it to grant incentive and nonstatutory stock options as well as certain other awards. In addition, these plans provide for issuance to eligible employees of incentive and nonstatutory stock options to purchase common stock at or below fair market value at date of grant. Options expire up to ten years from the date of grant or up to three months following termination of employment or service on the Board, whichever occurs earlier, and are exercisable at specified times prior to such expiration. Under the 1990 Incentive Plan, common stock may also be issued pursuant to stock purchase agreements that grant Sun certain rights to repurchase the shares at their original issue price in the event that the employment of the employee is terminated prior to certain predetermined vesting dates. The above described plans provide that shares of common stock may be sold at less than fair market value, which results in compensation expense to Sun equal to the difference between the fair market value on the date of grant and the purchase price. This expense, which has been immaterial, is recognized over the vesting period of the shares. Sun's 1988 Directors' Stock Option Plan provides for the automatic grant of stock options to non- employee directors at each annual meeting of stockholders and on the date each such person becomes a director. These options are granted at fair market value on the date of grant and have a term of five years. Information with respect to stock option and stock purchase rights activity is as follows:
Outstanding Options/Rights ----------------------------------------------- Shares (In thousands, Available Number except per share amounts) for Grant of Shares Price per Share --------- --------- ---------------- Balances at June 30, 1991 8,393 12,468 $0.00067-$37.00 Grants (1,611) 1,611 $22.875-$34.125 Exercises -- (1,985) $0.01-$33.00 Cancellations 159 (813) $0.01-$33.00 ------ ------ ---------------- Balances at June 30, 1992 6,941 11,281 $0.00067-$37.00 Grants (2,552) 2,552 $0.00067-$34.375 Exercises -- (2,962) $0.00067-$34.125 Cancellations 286 (541) $8.00-$34.125 ------ ------ ---------------- Balances at June 30, 1993 4,675 10,330 $0.00067-$37.00 Additional shares reserved 200 -- -- Grants (5,165) 5,165 $0.00067-$27.625 Exercises -- (1,141) $0.00067-$28.625 Cancellations 833 (930) $0.01-$34.375 ------ ------ ---------------- Balances at June 30, 1994 543 13,424 $0.00067-$37.00 ====== ====== ================
At June 30, 1994 options to purchase approximately 4,692,000 shares were exercisable at prices from $0.00067 to $37.00 with an aggregate exercise price of $108,094,000 (4,119,000 shares at an aggregate price of $88,253,000 at June 30, 1993). At June 30, 1994, the Company retains repurchase rights to 58,500 shares issued pursuant to stock purchase agreements. Pursuant to the Restricted Stock Plan, which expired in fiscal 1992, the Company retains repurchase rights to approximately 266,000 shares. EMPLOYEE STOCK PURCHASE PLANS To provide employees with an opportunity to purchase common stock of Sun through payroll deductions, Sun established the 1990 Employee Stock Purchase Plan. Under this plan, Sun's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the date of enrollment or the date of purchase. Pursuant to this plan, and the Company's 1984 Employee Stock Purchase Plan (which terminated in August 1992), the Company issued approximately 1,875,000, 1,749,000 and 1,836,000 shares of common stock in fiscal 1994, 1993 and 1992, respectively. At June 30, 1994, approximately 2,273,000 shares remain available for future issuance. COMMON STOCK REPURCHASE PROGRAMS In December 1990, the Board of Directors approved systematic common stock repurchase programs related to each of the 1990 Incentive Plan and 1990 Employee Stock Purchase Plan. In fiscal 1994, the Company repurchased 1,396,803 shares at a cost of approximately $34,355,000 under these programs (275,874 shares at a cost of approximately $7,495,000 in 1993). In June 1992, the Board of Directors approved a plan to repurchase up to 7.5 million shares of the Company's common stock during fiscal 1993. Repurchases under this program were completed in May 1993 at a cost of approximately $202,675,000. In June 1993, the Board of Directors approved a plan to repurchase up to 10 million shares of the Company's common stock. Repurchases under this program were completed in November 1993 at a total cost of approximately $264,786,000. When treasury shares are reissued, any excess of the average acquisition cost of the shares over the proceeds from reissuance is charged to retained earnings. 23 15 6. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION Sun, which operates in a single industry segment, designs, manufactures, markets and services client-server computing solutions that feature networked workstations and servers. No customer accounted for 10% or more of net revenues in fiscal 1994, 1993 or 1992. Operations of Sun's overseas subsidiaries consist of sales, service, distribution and manufacturing. Rest of World consists primarily of Japan. Intercompany transfers between geographic areas are accounted for at prices that approximate arm's length transactions. In addition, United States export sales approximated 3.3%, 2.5% and 1.1% of net revenues during fiscal 1994, 1993 and 1992, respectively. Information regarding geographic areas at June 30, 1994, 1993 and 1992, and for each of the years then ended, is as follows:
Geographic Area ---------------------------------------- United Rest of (In thousands) States Europe World Eliminations Total ---------- ---------- ---------- ----------- ---------- June 30, 1994 and for the year then ended: Sales to unaffiliated customers $2,483,166 $1,171,177 $1,035,549 $ -- $4,689,892 Intercompany transfers 968,675 809,331 43,392 (1,821,398) -- ---------- ---------- ---------- ----------- ---------- Net revenues $3,451,841 $1,980,508 $1,078,941 $(1,821,398) $4,689,892 ========== ========== ========== =========== ========== Operating income $ 45,788 $ 157,123 $ 64,339 $ 10,017 $ 277,267 ========== ========== ========== =========== ========== Identifiable assets $2,831,238 $ 964,373 $ 522,355 $(1,419,974) $2,897,992 ========== ========== ========== =========== ========== Liabilities $1,408,070 $ 736,445 $ 432,280 $(1,307,126) $1,269,669 ========== ========== ========== =========== ========== June 30, 1993 and for the year then ended: Sales to unaffiliated customers $2,320,998 $1,099,315 $ 888,293 $ -- $4,308,606 Intercompany transfers 1,162,671 878,516 24,277 (2,065,464) -- ---------- ---------- ---------- ----------- ---------- Net revenues $3,483,669 $1,977,831 $ 912,570 $(2,065,464) $4,308,606 ========== ========== ========== =========== ========== Operating income $ 113,543 $ 41,123 $ 43,747 $ 42,027 $ 240,440 ========== ========== ========== =========== ========== Identifiable assets $2,723,847 $ 775,022 $ 412,067 $(1,143,307) $2,767,629 ========== ========== ========== =========== ========== Liabilities $1,096,486 $ 693,555 $ 355,217 $(1,020,412) $1,124,846 ========== ========== ========== =========== ========== June 30, 1992 and for the year then ended: Sales to unaffiliated customers $1,783,097 $1,007,406 $ 798,382 $ -- $3,588,885 Intercompany transfers 1,744,141 140,873 11,269 (1,896,283) -- ---------- ---------- ---------- ----------- ---------- Net revenues $3,527,238 $1,148,279 $ 809,651 $(1,896,283) $3,588,885 ========== ========== ========== =========== ========== Operating income $ 194,130 $ 14,354 $ 10,564 $ 42,005 $ 261,053 ========== ========== ========== =========== ========== Identifiable assets $2,554,909 $ 413,103 $ 331,988 $ (628,374) $2,671,626 ========== ========== ========== =========== ========== Liabilities $1,005,613 $ 346,002 $ 283,264 $ (448,335) $1,186,544 ========== ========== ========== =========== ==========
24 16 7. CONTINGENCIES In March 1990, Sun received a letter from Texas Instruments Incorporated ("TI") alleging that a substantial number of Sun's products infringe certain of TI's patents. Based on initial discussions with TI, Sun believes that it will be able to negotiate a license agreement with TI and that the outcome of this matter will not have a material adverse impact on Sun's financial position. In the normal course of business, the Company receives and makes inquiries with regard to other possible patent infringement. Where deemed advisable, the Company may seek or extend licenses or negotiate settlements. In February 1993, the Company agreed to settle two class action lawsuits brought by stockholders against the Company and certain of its officers and former officers in the United States District Court for the Northern District of California relating to the results of operations for the fourth quarter of fiscal 1989 and the first quarter of fiscal 1991. In May and June of 1993, the court approved the settlement of these lawsuits. The combined settlement amount of these claims was $30 million, of which half was covered by insurance. The case relating to the fourth quarter of 1989 was settled for $25 million and the case relating to the first quarter of fiscal 1991 was settled for $5 million. The Company recorded a charge to earnings for its second quarter ended December 27, 1992 of $15 million, or $.10 per share, for its portion of the aggregate settlement. In May 1993, the Company agreed to settle two derivative complaints brought by stockholders against certain current and former officers and directors of the Company in the United States District Court for the Northern District of California relating to, among other things, claims of misconduct in connection with the litigation referenced in the preceding paragraph and the settlements thereof and claims of insider trading. The terms of the settlement of these lawsuits, as approved by the court, include certain changes made by Sun in its internal insider trading policies and the payment by Sun of $1.45 million in fees and expenses to the derivative plaintiff's attorneys. 25 17 8. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts) Fiscal 1994 Quarter Ended -------------------------------------------------------------------- June 30 March 27 December 26 September 26 ---------- ---------- ----------- ------------ Net revenues $1,402,736 $1,195,997 $1,130,678 $960,481 Gross margin 561,293 511,700 471,873 392,508 Operating income 111,418 84,757 65,552 15,540 Net income 77,913 57,481 43,824 16,606 Net income per share $ 0.82 $ 0.60 $ 0.46 $ 0.16
Fiscal 1993 Quarter Ended -------------------------------------------------------------------- June 30 March 28 December 27 September 25 ---------- ---------- ----------- ------------ Net revenues $1,260,516 $1,141,342 $1,050,809 $855,939 Gross margin 532,393 458,653 431,614 367,634 Operating income 108,196 71,758 51,615 8,871 Net income 76,137 51,663 24,095 4,831 Net income per share $ 0.72 $ 0.47 $ 0.23 $ 0.05
26 18 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS SUN MICROSYSTEMS, INC. We have audited the accompanying consolidated balance sheets of Sun Microsystems, Inc., as of June 30, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sun Microsystems, Inc., at June 30, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California July 20, 1994 27 19 CORPORATE INFORMATION BOARD OF DIRECTORS SCOTT G. MCNEALY Chairman of the Board of Directors, President and Chief Executive Officer, Sun Microsystems, Inc. L. JOHN DOERR General Partner, Kleiner Perkins Caufield & Byers WILLIAM RANDOLPH HEARST III Editor and Publisher, San Francisco Examiner ROBERT L. LONG Management Consultant M. KENNETH OSHMAN Chairman, President and Chief Executive Officer, Echelon Corporation A. MICHAEL SPENCE Dean, Graduate School of Business, Stanford University OFFICERS SCOTT G. MCNEALY Chairman of the Board of Directors, President and Chief Executive Officer, Sun Microsystems, Inc. KENNETH M. ALVARES Vice President, Human Resources, Sun Microsystems, Inc. RICHARD B. BARKER Vice President and Corporate Treasurer, Sun Microsystems, Inc. PATRICK J. DEAGMAN Vice President, Finance, Information Resources and Operations, SunSoft, Inc. LAWRENCE W. HAMBLY President, SunService MASOOD A. JABBAR Vice President, Finance and Chief Financial Officer, Sun Microsystems Computer Company WILLIAM N. JOY Vice President, Research and Development, Sun Microsystems, Inc. MICHAEL E. LEHMAN Vice President, Chief Financial Officer, Sun Microsystems, Inc. WILLIAM G. MARR Vice President, North American and Australian Field Operations, Sun Microsystems Computer Company MICHAEL H. MORRIS Vice President, General Counsel and Corporate Secretary, Sun Microsystems, Inc. RAJESH H. PAREKH Vice President, Engineering, Sun Microsystems Computer Company WILLIAM J. RADUCHEL Vice President, Corporate Planning and Development and Chief Information Officer, Sun Microsystems, Inc. GEORGE REYES Vice President, Corporate Controller, Sun Microsystems, Inc. JOSEPH P. ROEBUCK Vice President, Worldwide Field Operations, Sun Microsystems Computer Company J. PHILLIP SAMPER President, Sun Microsystems Computer Company ERIC E. SCHMIDT Vice President, Chief Technology Officer, Sun Microsystems, Inc. JOHN C. SHOEMAKER Vice President, Worldwide Operations, Sun Microsystems Computer Company CHESTER J. SILVESTRI President, SPARC Technology Business DOROTHY A. TERRELL President, SunExpress, Inc. KEVIN J. F. WALSH Vice President, Finance and Planning, Worldwide Operations, Sun Microsystems Computer Company EDWARD J. ZANDER President, SunSoft, Inc. STOCK TRADING
PRICE RANGE OF COMMON STOCK ($) TRADING VOLUME (Shares in High Low Close thousands) ----- ----- ----- --------- Fiscal year ended June 30, 1994: First quarter 31.25 24.63 26.38 1,509 Second quarter 29.00 21.13 28.63 1,456 Third quarter 31.38 24.00 27.50 1,323 Fourth quarter 27.75 18.25 20.63 1,377 Fiscal year ended June 30, 1993: First quarter 32.50 24.63 30.75 1,397 Second quarter 36.13 26.38 32.00 1,687 Third quarter 41.00 27.50 28.63 1,840 Fourth quarter 32.63 25.00 29.63 1,618
28 20 ABOUT SUN MANUFACTURING 2 countries International R&D 6 countries INTERNATIONAL SALES, SERVICE AND SUPPORT Approximately 29 countries INTERNATIONAL DISTRIBUTORS Approximately 100 countries STOCK SYMBOL: SUNW STOCK MARKET: The Company's stock trades on the NASDAQ National Market System INFORMATION REQUESTS For annual reports and Form 10-K (available without charge), questions about Sun operations, recent results or historical performance, please contact: Investor Relations, Sun Microsystems Inc. 2550 Garcia Avenue, Mail Stop PAL1-207 Mountain View, CA 94043 Phone: (415) 336-6299 or (800) 801-SUNW Fax: (415) 336-0646 To receive faxed information such as earnings announcements, press releases, historical financial results and product data sheets, please call: (800) FAX-SUNW If you have questions concerning stock certificates, change of address, consolidation of accounts, transfer of ownership or other stock account matters, please contact Sun's stock transfer agent: Bank of Boston, Shareholder Services Box 644, Mail Stop 45-02-09 Boston, MA 02102-0644 Phone: (617) 575-2900 Sun has not declared cash dividends and presently intends to continue this policy. Sun's principalcredit agreements restrict the payment of cashdividends without the consent of its lenders. (C)1994 Sun Microsystems, Inc. All Rights Reserved. Sun, Sun Microsystems, SunSoft, SunService, SunExpress, the logos for these respective companies, Solaris, SunNet Manager, NFS, The Network Is The Computer and Voyager are trademarks, registered trademarks or service marks of Sun Microsystems, Inc. All SPARC trademarks, including SuperSPARC and the SCD Compliant logo, are trademarks or registered trademarks of SPARC International, Inc. SPARCstation, SPARCstorage, SPARCserver, SPARCcenter, UltraSPARC and microSPARC are licensed exclusively to Sun Microsystems, Inc. Products bearing SPARC trademarks are based upon an architecture developed by Sun Microsystems, Inc. UNIX is a registered trademark in the United States and other countries, exclusively licensed through X/Open Company, Ltd. All other product or service names mentioned herein are trademarks of their respective owners. [Picture] Using the popular Mosaic network browsing tool, readers can view an interactive version of this annual report on the Internet. SUN ON THE INTERNET An electronic, interactive version of this annual report is available on the Internet, using NCSA Mosaic.* Related subject matter is linked through hypertext, which allows the reader to peruse thematic material simply by pointing and clicking the mouse button on the computer. Sun's "home page," an electronic storefront, allows users to browse through everything from product information to technical white papers. There are approximately 40,000 accesses of the Sun pages each day. According to many observers, the Internet is the closest equivalent to the "information highway" about which so much is being written. From its beginnings, Sun has relied on the Internet as a key information tool at the same time that Sun technology has played a prominent role in the development of the Internet. Sun has underwritten many important development projects related to the Internet and has been a pioneer in establishing the "net" as a free research database resource. Sun's extensive work -- past, present and future -- in realizing the promise of this information highway reflects the Company's commitment to open, global networking. To locate Sun's home page through Mosaic, use the URL (uniform resource locator) http://www.sun.com. * Mosaic was developed by the National Center for Supercomputing Applications (NCSA), located at the University of Illinois at Urbana-Champaign. EX-22 8 SUN MICROSYSTEMS, INC SUBSIDIARIES 1 EXHIBIT 22 SUN MICROSYSTEMS, INC. SUBSIDIARIES First Person, Inc. Nihon Sun Microsystems, K.K. Nihon SunSoft, K.K. Solaris Corporation Sun Microsystems (Barbados) Ltd. Sun Microsystems (Schweiz) A.G. Sun Microsystems AB Sun Microsystems Australia Pty Ltd. Sun Microsystems Belgium Sun Microsystems Benelux B.V. Sun Microsystems Distributions International, Inc. Sun Microsystems Europe, Inc. Sun Microsystems Europe Properties, Inc. Sun Microsystems Europe Properties, Ltd. Sun Microsystems Federal, Inc. Sun Microsystems France S.A. Sun Microsystems GmbH Sun Microsystems Holdings Limited Sun Microsystems Iberica S.A. Sun Microsystems Intercontinental Operations Sun Microsystems International B.V. Sun Microsystems Ireland Limited Sun Microsystems Italia S.p.A. Sun Microsystems Korea, Ltd. Sun Microsystems Limited Sun Microsystems Management Services Corporation Sun Microsystems Nederland B.V. Sun Microsystems (NZ) Ltd. Sun Microsystems Oy Sun Microsystems Properties, Inc. Sun Microsystems Scotland B.V. Sun Microsystems Scotland Ltd. Sun Microsystems Technology Pty., Ltd. Sun Microsystems de Mexico, S.A. de C.V. Sun Microsystems de Venezuela, S.A. Sun Microsystems do Brasil Industria e Comercio Ltda. Sun Microsystems of California (Services) Ltd. Sun Microsystems of California, Inc. Sun Microsystems of California, Ltd. (Hong Kong) Sun Microsystems of Canada Inc. SunExpress, Inc. SunExpress International, Inc. SunSoft, Inc. SunSoft International, Inc. EX-23.1 9 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Sun Microsystems, Inc. of our report dated July 20, 1994, included in the 1994 Annual Report to Stockholders of Sun Microsystems, Inc. Our audits also included the financial statement schedules of Sun Microsystems, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-1 No. 33-3315 and Forms S-8 Nos. 33-9293, 33-11154, 33-15271, 33-18602, 33-25860, 33-28505, 33-33344, 33-38220 and 33-51129) pertaining to the 1982 Incentive Stock Option Plan, the Restricted Stock Plan, the 1984 Employee Stock Purchase Plan, as amended, the 1987 Stock Option Plan, the 1988 Directors' Stock Option Plan, the 1989 French Stock Option Plan, the 1990 Employee Stock Purchase Plan and the 1990 Long-Term Equity Incentive Plan of Sun Microsystems, Inc. and in the related Prospectuses of our report dated July 20, 1994, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Sun Microsystems, Inc. ERNST & YOUNG LLP Palo Alto, California September 27, 1994 EX-27 10 FINANCIAL DATA SCHEDULES
5 1000 U.S. DOLLARS YEAR JUN-30-1994 JUL-01-1993 JUN-30-1994 1 433,937 448,879 853,031 79,845 294,948 2,305,093 877,268 517,020 2,897,992 1,147,838 116,242 72 0 0 1,628,251 2,897,992 4,689,892 4,689,892 2,752,518 4,412,625 0 20,000 21,782 283,379 87,555 195,824 0 0 0 195,824 2.02 2.02
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