-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BIMvhl1D09SRTp4NMyEoJXSZdh26FG+7Sz0ty7JIQATIVneXRddpmCza5YLfw9Ht 7RqFxvCfFmzJTHmQeU03+w== 0001095811-01-001355.txt : 20010223 0001095811-01-001355.hdr.sgml : 20010223 ACCESSION NUMBER: 0001095811-01-001355 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC CENTRAL INDEX KEY: 0000709519 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942805249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15086 FILM NUMBER: 1543290 BUSINESS ADDRESS: STREET 1: 901 SAN ANTONIO RD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6509601300 MAIL ADDRESS: STREET 1: 901 SAN ANTONIO ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 f68457ore10-q.txt FORM 10-Q PERIOD ENDED DECEMBER 31, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2000 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission file number: 0-15086 --------------- SUN MICROSYSTEMS, INC. (Exact Name of registrant as specified in its charter) DELAWARE 94-2805249 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 901 SAN ANTONIO ROAD, PALO ALTO, CA 94303 (Address of principal executive offices with zip code) (650) 960-1300 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS OUTSTANDING AT DECEMBER 31, 2000 Common Stock - $0.00067 par value 3,259,867,598 2 INDEX
PAGE ---- COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 31 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 33 Item 4 - Submission of Matters to a Vote of Security Holders 33 Item 5 - Other Information 34 Item 6 - Exhibits and Reports on Form 8-K 35 SIGNATURES 36
2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in millions, except per share amounts)
Three Months Ended Six Months Ended ---------------------------- --------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net revenues: Products $ 4,317 $ 2,997 $ 8,660 $ 5,665 Services 798 557 1,500 1,035 ---------- ---------- ---------- ---------- Total net revenues 5,115 3,554 10,160 6,700 Cost of sales: Cost of sales - products 2,153 1,370 4,306 2,578 Cost of sales - services 518 349 980 654 ---------- ---------- ---------- ---------- Total cost of sales 2,671 1,719 5,286 3,232 ---------- ---------- ---------- ---------- Gross margin 2,444 1,835 4,874 3,468 Operating expenses: Research and development 497 398 987 755 Selling, general and administrative 1,236 941 2,478 1,835 Purchased in-process research and development 71 - 71 4 ---------- ---------- ---------- ---------- Total operating expenses 1,804 1,339 3,536 2,594 ---------- ---------- ---------- ---------- Operating income 640 496 1,338 874 Gain on sale of investments 1 - 1 - Interest income, net 91 32 166 61 ---------- ---------- ---------- ---------- Income before income taxes 732 528 1,505 935 Provision for income taxes 309 174 572 310 ---------- ---------- ---------- ---------- Net income $ 423 $ 354 $ 933 $ 625 ========== ========== ========== ========== Net income per common share - basic $ 0.13 $ 0.11 $ 0.29 $ 0.20 ========== ========== ========== ========== Net income per common share - diluted $ 0.12 $ 0.10 $ 0.27 $ 0.19 ========== ========== ========== ========== Shares used in the calculation of net income per common share -basic 3,229 3,148 3,217 3,139 ========== ========== ========== ========== Shares used in the calculation of net income per common share -diluted 3,430 3,382 3,433 3,368 ========== ========== ========== ==========
See accompanying notes. 3 4 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions)
December 31, June 30, 2000 2000 ---------- ---------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,403 $ 1,849 Short-term investments 737 626 Accounts receivable, net 3,215 2,690 Inventories 792 557 Deferred tax assets 808 673 Prepaid expenses and other current assets 785 482 ---------- ---------- Total current assets 7,740 6,877 Property, plant and equipment, net of accumulated depreciation of $1,796 and $1,597 as of December 31 and June 30, respectively 2,382 2,095 Long-term investments 5,302 4,496 Intangible assets, net 2,110 205 Other assets, net 546 479 ---------- ---------- $ 18,080 $ 14,152 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 2 $ 7 Accounts payable 1,219 924 Accrued payroll-related liabilities 621 751 Accrued liabilities and other 1,718 1,366 Deferred revenues and customer deposits 1,454 1,289 Income taxes payable 134 422 ---------- ---------- Total current liabilities 5,148 4,759 Long-term debt and other obligations 2,183 2,084 Total stockholders' equity 10,749 7,309 ---------- ---------- $ 18,080 $ 14,152 ========== ==========
See accompanying notes. 4 5 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in millions)
Six Months Ended December 31, December 26, 2000 1999 ---------- ---------- Cash flows from operating activities: Net income $ 933 $ 625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 445 357 Tax benefits from employee stock plans 621 261 Purchased in-process research and development 71 4 Gain on sale of investments (1) - Changes in operating assets and liabilities: Accounts receivable, net (516) 278 Inventories (233) (251) Other current and long-term assets (462) (210) Accounts payable 292 (83) Other current and long-term liabilities 106 183 ---------- ---------- Net cash provided by operating activities 1,256 1,164 ---------- ---------- Cash flows from investing activities: Purchases of investments (5,646) (4,199) Proceeds from sales and maturities of investments 4,676 2,534 Acquisition of property, plant and equipment (572) (432) Acquisition of spare parts and other assets (54) (45) Payments for acquisitions, net of cash acquired (24) (75) ---------- ---------- Net cash used in investing activities (1,620) (2,217) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt - 1,500 Decrease in borrowings and other obligations (15) (18) Proceeds from issuance of common stock, net 124 32 Acquisition of treasury stock (311) (389) Proceeds from employee stock purchase plans 120 138 ---------- ---------- Net cash (used in) provided by financing activities (82) 1,263 ---------- ---------- Net (decrease) increase in cash and cash equivalents (446) 210 Cash and cash equivalents, beginning of period 1,849 1,101 ---------- ---------- Cash and cash equivalents, end of period $ 1,403 $ 1,311 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 56 $- ========== ========== Income taxes $ 331 $ 226 ========== ==========
See accompanying notes. 5 6 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) (in millions)
Six Months Ended ---------------------------- December 31, December 26, 2000 1999 ------------ ------------ Supplemental schedule of non-cash investing activities: In conjunction with the Company's acquisitions, liabilities were assumed as follows: Fair value of net assets acquired $ 2,055 $ 84 Cash paid for assets (29) (75) Stock issued and vested options assumed (2,024) (1) ---------- ---------- Liabilities assumed $ 2 $ 8 ========== ==========
See accompanying notes. 6 7 SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS Sun Microsystems, Inc. ("Sun" or the "Company") is a provider of products, services, and support solutions for building and maintaining network computing environments. Sun sells scalable computer systems, high-speed microprocessors, and a line of high-performance software for operating networks, computing equipment, and storage products. Sun also provides a full range of services including support, education, and professional services. The Company markets its products primarily to business, government, and education customers and operates in various product segments across geographically diverse markets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year Sun's first three quarters in fiscal 2001 end on October 1, December 31 and April 1 (in fiscal 2000 the quarters ended on September 26, December 26 and March 26). The fourth quarter ends on June 30. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform with the current year presentation. On December 5, 2000, the Company effected a two-for-one split of its common stock paid in the form of a stock dividend. All share and per share data herein has been adjusted to reflect the split for all periods presented. While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated balance sheet as of June 30, 2000 has been derived from the audited consolidated balance sheet as of that date. The information included in this report should be read in conjunction with the Company's Annual Report on Form 10-K for fiscal 2000. 7 8 Derivative Financial Instruments The Company uses derivatives to moderate the financial market risks of its business operations. Derivative products, such as forward and option contracts, are used to hedge the foreign currency market exposures underlying certain assets and liabilities and forecasted transactions with customers and vendors. The Company also enters into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. The Company's accounting policies for these instruments are based on its designation of such instruments as hedging transactions. An instrument is designated as a hedge based in part on its effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. The Company records all derivatives on the balance sheet at fair value. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other comprehensive income (OCI) in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period. For currency forward contracts, effectiveness is measured by using the forward-to-forward rate compared to the underlying economic exposure. For currency option contracts, effectiveness is measured on an intrinsic basis using only the current forward rate and the strike price for both the currency option contract (either put or call option) and the underlying transaction. All time value and volatility changes are deemed ineffective and are immediately recognized in earnings. For interest rate swap agreements, the Company assumes no ineffectiveness as each interest rate swap meets the short-cut method conditions required under Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" (see Note 5, "Derivative Financial Instruments"). Computation of Net Income Per Common Share Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist primarily of stock options. Recent Pronouncements In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In October 2000, the SEC issued additional written guidance to further supplement SAB 101. Accordingly, Sun is continuing to evaluate the potential impact of SAB 101 on the Company's results of operations and financial position. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2001. 8 9 3. BUSINESS COMBINATIONS Purchase Combinations The Company completed several acquisitions in fiscal 2001 that were accounted for under the purchase method of accounting. See the Company's Form 10-Q for the quarterly period ended on October 1, 2000 for information on acquisitions completed during the first quarter of fiscal 2001. The Company completed two acquisitions in the second quarter of fiscal 2001, as discussed below. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or a year-to-date aggregate basis. The Company calculates amounts allocated to in-process research and development (IPRD) using established valuation techniques in the high-technology industry and expenses such amounts in the quarter that the related acquisition was consummated if technological feasibility of the in-process technology has not been achieved and no alternate future uses have been established. Research and development costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on the Company's future results of operations or cash flows. The Company computed its valuations of IPRD for the acquisitions discussed in the following paragraphs using a discounted cash flow analysis on the anticipated income stream to be generated by the IPRD with consideration given to the in-process technology's stage of completion. The excess purchase price over the estimated value of the net tangible assets and IPRD was allocated to various intangible assets, consisting primarily of developed technology and goodwill, as well as other intangible assets, such as customer base, trade name or trademark, and assembled workforce. The value of developed technology was based upon future discounted cash flows related to the existing products' projected income streams. The value of the customer base was determined based upon the value of existing relationships and the expected revenue streams. The value of the assembled workforce was based upon the cost to replace that workforce. Intangible assets, including goodwill, are being amortized on a straight line basis over periods not exceeding five years. On November 7, 2000, the Company acquired all of the interest in grapeVINE Technologies, LLC (a U.S. limited liability company organized under the laws of Delaware) (grapeVINE), from grapeVINE Australia Pty. Ltd., a wholly-owned subsidiary of grapeVINE Technologies, Ltd. (an Australian corporation) for total cash consideration of $9.4 million. grapeVINE is a producer of collaborative knowledge management software. This transaction was accounted for as a purchase, with the excess of the purchase price over the estimated fair value of the net tangible assets being allocated to various intangible assets, including goodwill ($7.6 million), developed technology ($1.0 million), assembled workforce ($0.3 million) and in-process research and development ($0.5 million). On December 7, 2000, the Company acquired Cobalt Networks, Inc. and its wholly-owned subsidiaries (Cobalt) in a stock-for-stock merger. Cobalt is a provider of server appliances for Internet Service Providers, Application Service Providers, and small-to medium-sized businesses. Under the terms of the merger agreement, each share of Cobalt common stock was converted into the right to receive one share of Sun's common stock. The Company issued approximately 30.5 million shares at a value of $58.302 per share in exchange for all of Cobalt's outstanding common stock, assumed all of Cobalt's 5.6 million outstanding options at an estimated fair value of $283.0 million, and incurred $2.0 million in acquisition costs, resulting in an aggregate purchase price of approximately $2,061.0 million. This transaction was accounted for as a purchase, with the excess of the purchase price over the estimated fair value of the net tangible assets ($93.9 million) being allocated primarily to various intangible assets, including goodwill ($1,690.0 million), developed technology ($93.5 million), customer base ($41.9 million), assembled workforce ($10.7 million), trade name 9 10 ($5.9 million) and in-process research and development ($70.8 million). In addition, $54.3 million of the purchase price was allocated to deferred compensation, which represents the pro-rata portion of the intrinsic value of Cobalt's unvested options assumed at the date of the acquisition. 4. BALANCE SHEET DETAILS Inventories are comprised of the following (in millions):
December 31, 2000 June 30, 2000 ----------------- ------------- Raw materials $ 339 $ 169 Work in process 109 82 Finished goods 344 306 ---------- ---------- $ 792 $ 557 ========== ==========
Long-term investments are comprised of the following (in millions):
December 31, 2000 June 30, 2000 ----------------- ------------- Long-term investments: Marketable securities $ 4,882 $ 3,961 Strategic equity investments 420 535 ---------- ---------- Total $ 5,302 $ 4,496 ========== ==========
Marketable securities consist primarily of corporate bonds, floating-rate notes, and asset-backed and mortgage-backed securities with original maturities greater than one year from the balance sheet date. Strategic equity investments consist of marketable strategic equity securities and preferred stock and other strategic equity holdings. Marketable strategic equity securities represent equity holdings in public companies. Preferred stock and other strategic equity holdings represent equity holdings in nonpublic companies and investments in venture capital funds. Marketable securities and marketable strategic equity securities are considered available-for-sale and are reported at fair value with changes in unrealized gains and losses, net of applicable taxes, recorded in stockholders' equity. Gross unrealized gains and losses related to the marketable strategic equity securities were $19 million as of December 31, 2000 ($210 million as of June 30, 2000). Preferred stock and other strategic equity holdings are carried at the lower of cost or net realizable value due to their illiquid nature. Realized gains and losses for all investments are calculated based on the specific identification method. 10 11 5. DERIVATIVE FINANCIAL INSTRUMENTS On July 1, 2000, the Company adopted SFAS 133 which requires that all derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of a particular hedge, must be recognized currently in earnings. Upon adoption on July 1, 2000, the cumulative transition adjustment was insignificant. Foreign Exchange Exposure Management. The Company has significant international sales and purchase transactions in foreign currencies and continues its policy of hedging forecasted and actual foreign currency risk with purchased currency options and forward contracts that expire within 12 months. These derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. In accordance with SFAS 133, hedges related to anticipated transactions are designated and documented at the inception of the respective hedge as cash flow hedges and evaluated for effectiveness quarterly. As the terms of the forward contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative instrument reported as a component of OCI in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Option contract effectiveness is calculated by comparing the intrinsic value of the instrument to any degradation of the anticipated transaction against the forward adjusted strike price with the effective portion of changes in fair value accumulated in OCI. Any residual change in fair value of the instruments, including option time value or other ineffectiveness are recognized immediately in Selling, general and administrative expense. Ineffectiveness in the first half of fiscal 2001 is not significant. To meet SFAS 133 entity hedging requirements and to protect U.S. dollar margins, U.S. dollar functional subsidiaries hedge foreign currency revenues and non-U.S. dollar functional subsidiaries selling in foreign currencies hedge U.S. dollar inventory purchases. OCI associated with hedges of foreign currency sales is recognized in Revenue upon shipment and OCI related to inventory purchases is recognized in Cost of sales upon shipment. All values reported in OCI at December 31, 2000 will be reclassified to earnings within 12 months. Additionally, the Company enters into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of monetary assets and liabilities in a non-functional currency. Changes in the fair value of these fair value hedges (as defined in SFAS 133) are recognized in Selling, general and administrative expense immediately as an offset to the changes in the fair value of the assets or liability being hedged. Interest Rate Risk Management. The Company is exposed to interest rate risk from both investments and debt. The Company offsets the risk in variable rate interest earnings from investments by converting the existing fixed rate debt (with maturities of 3 years, 5 years, 7 years, and 10 years) of $1.5 billion into variable rate debt with 12 fixed-to-variable interest rate swaps. The Company assumes no ineffectiveness as each interest rate swap meets the short-cut method conditions required under SFAS 133 for fair value hedges of debt instruments. Accordingly, no gains or losses were recorded in income relative to the Company's underlying interest rate swaps. 11 12 Accumulated Derivative Gains or Losses. The following table summarizes activity in OCI related to derivatives held by Sun during the period from July 1, 2000 through December 31, 2000 (in millions): Cumulative effect of adopting SFAS 133 $- Increase in fair value of derivatives 53 Gains reclassified from OCI, net, into: Revenues (37) Cost of sales (9) ---------- Accumulated derivative gain, December 31, 2000 $ 7 ========== 6. COMPREHENSIVE INCOME The components of comprehensive income, net of related taxes, are as follows (in millions):
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net income $ 423 $354 $933 $ 625 Change in unrealized value of investments, net (126) 383 (76) 390 Change in unrealized fair value of derivative instruments (10) - 7 - Translation adjustments (13) 2 (19) (5) ---------- ---------- ---------- ---------- Comprehensive income $ 274 $739 $845 $1,010 ========== ========== ========== ==========
The components of accumulated other comprehensive income, net of related taxes, are as follows (in millions):
December 31, 2000 June 30, 2000 ----------------- ------------- Unrealized gain on investments, net $ 49 $125 Unrealized gains on derivative instruments 7 - Cumulative translation adjustments (69) (50) ---------- ---------- Accumulated other comprehensive income $(13) $ 75 ========== ==========
12 13 7. NET INCOME PER COMMON SHARE The following table presents the calculation of basic and diluted earnings per share (in millions, except per share amounts):
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net income $ 423 $ 354 $ 933 $ 625 ========== ========== ========== ========== Denominator: Weighted average common shares - basic 3,229 3,148 3,217 3,139 Effect of dilutive securities (primarily stock options) 201 234 216 229 ---------- ---------- ---------- ---------- Weighted average common shares - diluted 3,430 3,382 3,433 3,368 ========== ========== ========== ========== Net income per common share - basic $ 0.13 $ 0.11 $ 0.29 $ 0.20 ========== ========== ========== ========== Net income per common share - diluted $ 0.12 $ 0.10 $ 0.27 $ 0.19 ========== ========== ========== ==========
8. OPERATING SEGMENTS Sun designs, manufactures, markets, and services network computing systems and software solutions that feature networked desktops and servers. The Company is organized by various product groups. The following product groups are the only reportable segments under the criteria of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information": (1) System Products and Network Storage and (2) Enterprise Services. Products in the System Products and Network Storage segment include a broad range of desktop systems, servers, storage, and network switches, incorporating the UltraSPARC (TM) processors and Solaris(TM) Operating Environment. In the Enterprise Services segment, the Company provides a full range of services and support to existing and new customers, including education, professional services, and systems integration. Effective July 1, 2000, Sun consolidated its sales and manufacturing functions into organizations known as the Global Sales Operations (GSO) and Worldwide Operations (WWOPS), respectively. The GSO manages most of the Company's field sales organizations and all field marketing organizations. Sales generated through the sales and marketing efforts of the GSO are recorded as revenues by the various product groups. Operating expenses (primarily sales and marketing) related to the GSO are not allocated to the product groups and, accordingly, are included under the Other segment. WWOPS manages all operations, supply chain and purchasing functions. WWOPS manufacturing costs are allocated as cost of sales to the various product groups. 13 14 The following table presents revenues, interdivision revenues, and operating income (loss) for the Company's segments. The Other segment consists of certain operating product groups, which did not meet the requirements for a reportable segment as defined by SFAS 131, such as Sun's Software Systems Group, and other miscellaneous functions, such as Corporate and the GSO.
Three Months Ended: System Products and Enterprise Network Storage Services Other Total ------------------- ---------- ---------- ---------- DECEMBER 31, 2000 Revenues $3,834 $798 $ 483 $5,115 Interdivision revenues - 118 (118) - Operating income (loss) 1,465 170 (995) 640 DECEMBER 26, 1999 Revenues $2,739 $557 $ 258 $3,554 Interdivision revenues - 95 (95) - Operating income (loss) 1,062 115 (681) 496
Six Months Ended: System Products and Enterprise Network Storage Services Other Total ------------------- ---------- ---------- ---------- DECEMBER 31, 2000 Revenues $7,779 $1,500 $ 881 $10,160 Interdivision revenues - 226 (226) - Operating income (loss) 3,024 295 (1,981) 1,338 DECEMBER 26, 1999 Revenues $5,266 $1,035 $ 399 $ 6,700 Interdivision revenues - 177 (177) - Operating income (loss) 2,068 198 (1,392) 874
9. SUBSEQUENT EVENTS On December 3, 2000, the Company entered into an agreement to acquire HighGround Systems, Inc. (HighGround) in a stock-for-stock merger. HighGround, a privately-held company, is a leading developer of storage resource management software for open systems. Under the terms of the merger agreement, the Company will issue approximately 7.9 million shares of its common stock and assume approximately 2.4 million stock options and warrants (after giving effect to the two-for-one stock split effected December 5, 2000) in exchange for all of HighGround's outstanding capital stock, options and warrants, resulting in an aggregate purchase price of approximately $400 million. The closing of the acquisition is subject to remaining regulatory approvals, HighGround stockholder approval and other customary closing conditions. The transaction will be accounted for as a purchase and the purchase price will be allocated to tangible assets and identified intangible assets, with any excess being allocated to goodwill. On February 1, 2001, the Company entered into an agreement to acquire LSC, Incorporated (LSC) in a stock-for-stock merger. LSC is a privately-held company which designs, develops, and supports high performance file systems and data storage software. Under the terms of the merger agreement, the Company will issue up to approximately 1.7 million shares of its common stock and assume approximately 0.7 million stock options and warrants in exchange for all of LSC's outstanding capital stock, options and warrants, resulting in an 14 15 aggregate purchase price of approximately $74 million. The closing of the acquisition is subject to regulatory approvals, LSC shareholder approval and other customary closing conditions. The transaction will be accounted for as a purchase and the purchase price will be allocated to tangible assets and identified intangible assets, with any excess being allocated to goodwill. 15 16 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements relating to our expectations regarding product mix trends, our expectations to invest in our services business, our expectations that products gross margins will be affected by product mix, component costs, market conditions and new product introductions, our products and services gross margins expectations for the remainder of fiscal year 2001, our continuous evaluation of the competitiveness of our product and service offerings and any possible repricing actions, our plans to increase research and development spending on a dollar basis during the remainder of fiscal 2001 and research and development expenses as a percentage of net revenues, our expectations relating to selling, general and administrative expenses on a dollar basis during the remainder of fiscal 2001 and as a percentage of net revenues and our continual investment in efforts to achieve additional operating efficiencies and review and improvement of our business processes and our focus on our cost structure, our expectations to continue hiring personnel in certain areas and the rate of such hiring activities, our expected effective income tax rate for the remainder of fiscal 2001, our expectations to continue leveraging our operating EBITDA on our cost structure, our belief that we have sufficient capital to meet our requirements for at least the next twelve months, and as set forth in the section entitled "Purchased in-process research and development": statements regarding our expectations that we will not achieve a material amount of expense reductions or synergies from our acquisitions, our beliefs regarding realization of expected economic return from acquired in-process technology and resulting or related products, general availability of certain products and our ability to continue making substantial progress in the development and commercialization of acquired technologies. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in "Risk Factors," identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, increased competition, adverse changes in general economic conditions in the U.S. and internationally, including adverse changes in the specific markets for our products, adverse business conditions, adverse changes in customer order patterns, lack of acceptance of new products, pricing pressures, lack of success in technological advancements, risks associated with foreign operations, failure to reduce costs or improve operating efficiencies, our ability to attract, hire and retain key and qualified employees, and risks associated with acquiring companies. With respect to risks related to purchased in-process research and development, we cannot assure you that any new technologies will be developed into products, that such products will achieve either technological or commercial success, or that we will receive any economic benefit from such products as a result of delays in the development of the technology or release of such products into the market, the complexity of the technology, our ability to successfully manage product introductions, lack of customer acceptance, competition and changes in technological trends, and fluctuations in market or general economic conditions. 16 17 ' RESULTS OF OPERATIONS NET REVENUES (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------- ------- ------ ------- ------- ------- Products net revenue $ 4,317 $ 2,997 44.0% $ 8,660 $ 5,665 52.9% Percentage of total net revenues 84.4% 84.3% 85.2% 84.6% Services net revenue $ 798 $ 557 43.3% $ 1,500 $ 1,035 44.9% Percentage of total net revenues 15.6% 15.7% 14.8% 15.4% Total net revenues $ 5,115 $ 3,554 43.9% $10,160 $ 6,700 51.6%
Products net revenue Products net revenue is comprised of revenue generated from the sales of our scalable computer systems and storage, high-speed microprocessors, and our line of high-performance software for operating network computing equipment. For the second quarter of fiscal 2001, products net revenue increased by $1,320 million, or 44.0% to $4,317 million, over the corresponding period of fiscal 2000. For the first half of fiscal 2001, products net revenue increased by $2,995 million, or 52.9% to $8,660 million, over the corresponding period of fiscal 2000. Growth in enterprise and workgroup server product lines accounted for more than 60% of the total increase in products net revenue in the second quarter and first half of fiscal 2001. In addition, increased revenues generated by our storage products, network service provider and iPlanet offerings also contributed to our increase in products net revenue. As a result of the strong demand for our servers, desktop system revenue as a percentage of products net revenue has declined for the three and six months ended December 31, 2000, as compared to the corresponding periods of fiscal 2000. We expect these product mix trends to continue through the remainder of fiscal 2001. Services net revenue Services net revenue is comprised of revenue generated from the sales of a full range of services, including support, education, and professional services. For the second quarter of fiscal 2001, services net revenue increased by $241 million, or 43.3% to $798 million, over the corresponding period of fiscal 2000. For the first half of fiscal 2001, services net revenue increased by $465 million, or 44.9% to $1,500 million, over the corresponding period of fiscal 2000. The increase in services net revenue is primarily the result of: (1) a continuing shift towards premium service and support contracts generated from a larger installed base of high-end server products and an overall shift in customer expectations to higher levels of support; (2) a larger base of product units related to the increase in product unit sales and installations; and (3) an increase in revenues associated with our educational and professional services. 17 18 Net revenues by geographic area (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------- ------- ------ ------- ------- ------- Domestic $ 2,438 $ 1,822 33.8% $ 5,137 $ 3,506 46.5% Percentage of net revenues 47.7% 51.3% 50.6% 52.3% International $ 2,677 $ 1,732 54.6% $ 5,023 $ 3,194 57.3% Percentage of net revenues 52.3% 48.7% 49.4% 47.7% Total net revenues $ 5,115 $ 3,554 43.9% $10,160 $ 6,700 51.6%
Domestic net revenues increased by 33.8% and 46.5% in the second quarter and first half of fiscal 2001, respectively, over the corresponding periods of fiscal 2000. In December 2000, we experienced an unexpected and significant decline in U.S. demand primarily for our products. We cannot assure you that this decline in U.S. demand will not continue to affect future operating results. In U.S. dollars, international net revenues increased by 54.6% and 57.3% in the second quarter and first half of fiscal 2001, respectively, over the corresponding periods of fiscal 2000. The revenue growth in international net revenues is primarily due to continued strong demand for our network computing products and services. To a lesser degree, the increase in international revenues is due to our expanded presence in numerous emerging countries. We experienced revenue growth in all European, Middle Eastern, African (EMEA) and rest of world (ROW) regions during the second quarter and first six months of fiscal 2001, as compared to the corresponding periods of fiscal 2000. The United Kingdom, Germany, Northern Europe, and Japan regions accounted for more than 50% of the total increase in international net revenues for the second quarter and first half of fiscal 2001. Fluctuations in exchange rates reduced total net revenues in the second quarter of fiscal 2001 by approximately 8% due to the impact of exchange rate movements. This reduction was principally driven by weakness in the Euro, the British pound and to a lesser extent the Japanese yen. Although we have experienced U.S. dollar revenue growth in the domestic and international marketplaces on a year-over-year basis, we cannot assure you that such trends will continue. In particular, if capital spending declines in certain countries or any such countries experience changes in their economic environment, our results of operations and cash flows could suffer. 18 19 GROSS MARGIN (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change -------- -------- -------- -------- ------ -------- Products gross margin $ 2,164 $ 1,627 33.0% $ 4,354 $3,087 41.0% Percentage of products net revenues 50.1% 54.3% 50.3% 54.5% Services gross margin $ 280 $ 208 34.6% $ 520 $ 381 36.5% Percentage of services net revenues 35.1% 37.3% 34.7% 36.8% Total gross margin $ 2,444 $ 1,835 33.2% $ 4,874 $3,468 40.5% Percentage of net revenues 47.8% 51.6% 48.0% 51.8%
Products gross margin Products gross margin was 50.1% and 50.3% in the second quarter and first half of fiscal 2001, respectively, as compared to 54.3% and 54.5% for the corresponding periods in fiscal 2000. Most of the products gross margin decline is due to the increased cost of various components. For the remainder of fiscal 2001, we expect products gross margin will continue to be affected by product mix, component costs, market conditions and new product introductions. During the second half of fiscal 2001, we expect products gross margin to be in a similar range, or improve slightly to what we reported for the first half of fiscal 2001. Services gross margin Services gross margin was 35.1% and 34.7% in the second quarter and first half of fiscal 2001, respectively, as compared to 37.3% and 36.8% for the corresponding periods in fiscal 2000. The decrease in services gross margin is primarily due to the impact of: (1) increased expenditures for both fixed and variable costs in supporting infrastructures; (2) capital and operating expenditures related to acquisition and deployment of service delivery technologies and processes; and (3) increasing field service delivery headcount to support increased customer service expectations and expected future growth in the services business. We expect to continue investing in our services business by hiring field service delivery employees, increasing availability of spare parts inventory to improve customer service response time, and evaluating other infrastructure-related initiatives. We are currently expecting our services gross margin to remain in the mid-30% range for the remainder of fiscal 2001. We continuously evaluate the competitiveness of our product and service offerings. These evaluations could result in repricing actions in the near term. Our future operating results would be adversely affected if we reduced prices and we were unable to mitigate the resulting margin pressure by maintaining a favorable mix of systems, software, service, and other products, or if we were unsuccessful in achieving component cost reductions, operating efficiencies, and increasing volumes. 19 20 OPERATING EXPENSES (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------ ------ ------ ------ ------ ------ Research and development $ 497 $ 398 24.9% $ 987 $ 755 30.7% Percentage of net revenues 9.7% 11.2% 9.7% 11.3% Selling, general and administrative $1,236 $ 941 31.3% $2,478 $1,835 35.0% Percentage of net revenues 24.2% 26.5% 24.4% 27.4% Purchased in-process research and development $ 71 - 100% $ 71 $ 4 1675.0% Percentage of net revenues 1.4% - 0.7% 0.1%
Research and development expenses Research and development (R&D) expenses, as a percentage of net revenues, decreased to 9.7% in the second quarter and first half of fiscal 2001 from 11.2% and 11.3% in the corresponding periods of fiscal 2000. The relative decline was the result of the increase in net revenues. The dollar increase in R&D expenses reflects our continued development of a broad line of scalable and reliable systems, including servers, workstations, storage technologies, and SPARC(TM) microprocessors, as well as software products which utilize the Java(TM) platform, Solaris Operating Environment software, and Jini (TM) connection technology. Furthermore, R&D expenses have increased due to additional development of products acquired through acquisitions and increased compensation and compensation-related costs related to higher levels of R&D staffing. The increases in R&D spending reflect our belief that to maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in new systems, software, and microprocessor development, as well as continue to enhance existing products. All R&D is expensed as incurred. We are planning to continue to increase our R&D spending on a dollar basis during the remainder of fiscal 2001, but expect R&D expenses for fiscal 2001 to continue to be in the 9% to 10% range of annual net revenues. Selling, general and administrative expenses Selling, general, and administrative (SG&A) expenses, as a percentage of net revenues, decreased to 24.2% and 24.4% in the second quarter and first half of fiscal 2001, respectively, from 26.5% and 27.4% in the corresponding periods of fiscal 2000, as a result of higher revenues and operating efficiencies. The dollar increase in SG&A expenses is primarily attributable to: (1) increased headcount, principally in the global sales organization; (2) higher average employee compensation; (3) increased commissions and bonuses; and (4) increased marketing costs related to promotional programs. We also made additional investments aimed at improving our internal business processes for the remainder of fiscal 2001, and therefore, expect SG&A expense to increase in dollars as compared to fiscal 2000. We plan on continuing to invest in efforts to achieve additional future operating efficiencies through the continual review and improvement of business processes. In addition, we expect to continue to hire sales and marketing personnel as well as financial service and support personnel. However, we anticipate hiring at a slower rate for the remainder of fiscal 2001 and will continue to focus on our cost structure, gradually decreasing our level of SG&A expenses, as a percentage of total net 20 21 revenues, on a year-over-year basis (excluding the impact of intangible asset and deferred compensation amortization for mergers and acquisitions). Purchased in-process research and development expenses Overview In the second quarter of fiscal 2001, we acquired (1) grapeVINE Technologies, LLC (grapeVINE) and (2) Cobalt Networks, Inc. and its wholly-owned subsidiaries (Cobalt). Purchased in-process research and development expenses (IPRD) of $71.3 million in the first half of fiscal 2001 represents the write-off of in-process technologies associated with our acquisitions of grapeVINE ($0.5 million) and Cobalt ($70.8 million). Purchased IPRD of $4.0 million in the first half of fiscal 2000 represents the write-off of in-process technologies associated with our acquisitions of Star Division Corporation (Star Division) and certain assets and liabilities of Star Division Software-Entwicklung und Vertriebs GmbH (Star Company), a related party of Star Division. All of these business combinations are known collectively as "Acquired Companies." At the date of each acquisition noted above, the projects associated with the IPRD efforts had not yet reached technological feasibility and the IPRD had no alternative future uses. Accordingly, these amounts were expensed on the respective acquisition dates of each of the Acquired Companies. Also, see Note 3 of "Notes to Condensed Consolidated Financial Statements (Unaudited) - Business Combinations". See "Purchased In-Process Research and Development," in our Annual Report on Form 10-K for fiscal 2000 for additional discussion on our valuation of IPRD, overview of purchased IPRD and overall status of IPRD and intangible assets acquired during fiscal 2000, 1999, and 1998. Valuation of IPRD We used independent third-party sources to calculate the amounts allocated to IPRD. In calculating IPRD, the independent third party used established valuation techniques accepted in the high-technology industry. These calculations gave consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by us and our competitors, individual product sales cycles, and the estimated lives of each of the products' underlying technology. The value of the IPRD reflects the relative value and contribution of the acquired research and development. We gave consideration to the R&D's stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the projected cost to complete the project in determining the value assigned to IPRD. The values assigned to developed technologies related to each acquisition were based upon discounted cash flows related to the existing products' projected income stream. Elements of the projected income stream included revenues, cost of sales (COS), SG&A expenses, and R&D expenses. The discount rates used in the present value calculations were generally derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that are known at the date of each acquisition. Since each acquired entity's IPRD is unique, the discount rate, revenue, COS, R&D and SG&A assumptions used varied on a case-by-case basis. We did not expect to achieve a material amount of expense reductions or synergies, therefore the valuation assumptions did not include significant anticipated cost savings. 21 22 Valuation Assumptions The following table summarizes the significant assumptions underlying the valuations related to the IPRD for the six months ended December 31, 2000 (dollars in millions, except percentages):
--PERCENTAGE OF REVENUE-- ESTIMATED COST TO COMPLETE PERCENTAGE AVERAGE ACQUIRED TECHNOLOGY AT COMPLETE AT REVENUE COMPANY/ TIME OF TIME OF GROWTH AVG. AVG. AVG. DISCOUNT BUSINESS IPRD ACQUISITION ACQUISITION RATE COS SG&A R&D RATE USED ------- ------------- ----------- ------- ------- ------- ------- -------- Cobalt $ 70.8 $ 1.5 67% 50% 49% 28% 1% 22% ------- ------- ------- ------- ------- ------- ------- ------- grapeVINE $ 0.5 $ 0.3 83% 10% 18% 48% 1% 23% ------- ------- ------- ------- ------- ------- ------- -------
Overview of Significant Purchased IPRD in the six months ended December 31, 2000 Included below are further details regarding the nature of the significant amounts of purchased technology acquired during the six months ended December 31, 2000. Given the uncertainties of the commercialization process, we cannot assure you that deviations from our estimates will not occur. We believe there is a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, there is risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, complexity of technology and growing competitive pressures. Therefore, we cannot assure you that any project will meet with commercial success. Failure to successfully commercialize an in-process project would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of our intangible assets acquired may become impaired. On December 7, 2000, we acquired all of the outstanding capital stock of Cobalt in a stock-for-stock transaction valued at approximately $2,061.0 million. This transaction was accounted for as a purchase, with the purchase price being allocated to tangible assets, intangible assets, and IPRD. At the acquisition date, Cobalt was engaged in development activity associated with development of its Cobalt(TM) RaQ XTR, Qube ML and CacheRaQ server appliance products as well as related software. As of the acquisition date, Cobalt had made substantial progress in the areas of product definition, architecture design and coding. Remaining efforts necessary to complete these server appliance products relate primarily to additional coding, testing and implementation. We released certain general availability versions of these products in late January 2001 and will continue releasing general availability versions of the remaining products through March 2001, at which time the Company expects to begin to realize economic benefits associated with these server appliance products. Overall Status of Business Combinations Prior to Fiscal 2001 With respect to acquisitions completed prior to fiscal 2001, we believe that the projections we used in performing our valuations for each acquisition are still valid in all material respects; however, we cannot assure you that the projected results will be achieved. We continue to make substantial progress related to the development and commercialization of acquired technologies. Although we have experienced delays in the completion of certain of our development efforts and their related commercialization, the expected total costs to complete such technologies have not materially increased, individually or in the aggregate. We periodically evaluate our product development timeline and modify our overall business plan in response to various factors. 22 23 Modifications to our business plan include the reallocation of resources among various alternative development projects. The impact of delays in the realization of economic benefits related to acquired technologies, individually or in the aggregate, has not been material to our overall consolidated financial position or results of operations as of and for the quarter ended December 31, 2000. INTEREST INCOME, NET (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------ ------ ------ ------ ------ ------ Interest income, net $ 91 $ 32 184.4% $ 166 $ 61 172.1% Percentage of net revenues 1.8% 0.9% 1.6% 0.9%
The increase in interest income (net of interest expense) of 184.4% and 172.1% in the second quarter and first half of fiscal 2001, as compared to the corresponding periods in fiscal 2000, is primarily due to higher average balances of cash and marketable securities, partially offset by interest expense related to our issuance of the $1.5 billion of unsecured debt securities in August 1999. Our interest income and expenses are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents and marketable securities. In addition, to mitigate the impact of fluctuations in U.S. interest rates on our fixed-rate unsecured debt securities, we have entered into interest rate swap transactions so that the interest associated with these debt securities effectively becomes variable. INCOME TAXES (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------ ------ ------ ------ ------ ------ Provision for income taxes $ 309 $ 174 77.6% $ 572 $ 310 84.5% Percentage of income before income taxes 42.2% 33.0% 38.0% 33.2%
Our effective tax rate was 42.2% and 38.0% for the second quarter and first half of fiscal 2001, as compared to 33.0% and 33.2% for the corresponding periods a year ago. The change in our effective tax rate is primarily due to the nondeductibility of certain accounting charges associated with our merger and acquisition activities, such as IPRD and goodwill. Excluding these accounting charges, our effective tax rate was 33.6% for the second quarter and first half of fiscal 2001 as compared to 32.1% for the corresponding periods in fiscal 2000. The remaining increase in the effective tax rate is primarily due to proportionately greater forecasted earnings in higher tax rate jurisdictions. We currently expect our effective tax rate will be approximately 33.6% for the remainder of fiscal 2001. This excludes the impact of accounting charges associated with our merger and acquisition activities. Our expected rate is based on current tax law and current estimates of earnings, and is subject to change. While our effective tax rate under generally accepted accounting principles for the remainder of fiscal 2001 is expected to be 23 24 approximately 36.3%, this rate may change upon the completion of new mergers and acquisitions, such as the pending acquisitions of HighGround Systems, Inc. (HighGround) and LSC, Incorporated (LSC), or changes in the amount of goodwill amortization we recognize. OPERATING EBITDA (dollars in millions)
Three Months Ended Six Months Ended December 31, December 26, December 31, December 26, 2000 1999 Change 2000 1999 Change ------ ------ ------ ------ ------ ------ Operating EBITDA $ 948 $ 666 42.3% $ 1,854 $ 1,235 50.1% Percentage of net revenues 18.5% 18.7% 18.2% 18.4%
Operating EBITDA represents earnings before interest, income taxes, depreciation, amortization (including amortization of stock-based compensation), and other non-operating items, such as gain on sale of investments and IPRD. We believe that operating EBITDA is a useful measure of operating performance which provides focus on business fundamentals that track critical longer term trends. Though operating EBITDA as a measure of performance is significantly more cash-like, it is not intended to represent, nor does it represent, cash flows for the period, or funds available for dividends, reinvestment or other discretionary uses. Operating EBITDA has been presented as a useful supplement, not as a substitute, for measures of performance prepared and presented in accordance with generally accepted accounting principles. During the second quarter and first half of fiscal 2001, operating EBITDA as a percentage of net revenues has remained essentially flat as compared to the corresponding periods in fiscal 2000. Despite the decline in total gross margin as a percentage of net revenues in the second quarter and first half of fiscal 2001, our operating EBITDA has remained consistent due to our ability to grow revenues without incurring proportionate increases in operating expenses. We are continuing to focus on improving this leverage on our cost structure. 24 25 LIQUIDITY AND CAPITAL RESOURCES (dollars in millions)
December 31, 2000 June 30, 2000 Change ----------------- ------------- ------ Cash, cash equivalents, and investments $7,442 $6,971 6.8% Percentage of total assets 41.2% 49.3% Days sales outstanding (DSO) 57 48 Inventory turns 14.2 17.5
Six Months Ended December 31, 2000 December 26, 1999 Change ----------------- ----------------- ------ Net cash provided by operating activities $1,256 $1,164 7.9% Net cash used in investing activities ($1,620) ($2,217) 26.9% Net cash (used in) provided by financing activities ($82) $1,263 (106.5%)
At December 31, 2000, cash, cash equivalents and investments increased $471 million from June 30, 2000. The increase in the six months ended December 31, 2000 is due to cash flows generated from operating activities of $1,256 million, which represents our principal source of cash. Cash flows provided by operating activities were generated primarily from net income as adjusted for income tax benefits from employee stock plans and depreciation and amortization, which were partially offset by decreases in working capital. The cash flows provided by operating activities were offset by the following investing and financing activities: (1) capital spending of $572 million for real estate development and equipment additions to support increased headcount, primarily in our services, engineering and marketing organizations and (2) acquisition of treasury stock for $311 million. The decrease in working capital was primarily generated by increases in accounts receivable (net) and inventory. Accounts receivable (net) increased to $3,215 million at December 31, 2000 from $2,690 million at June 30, 2000. The increase in accounts receivable (net) and DSO are primarily due to increased revenues and the timing of payments by customers. Inventory increased to $792 million at December 31, 2000 from $557 million at June 30, 2000. The increase in inventory and decline in inventory turns is primarily due to Sun's decision to carry more inventory to better meet customer demand and provide better customer service. We have a $500 million revolving credit facility ("Facility") with a syndicate of commercial banks. The Facility is available subject to compliance with certain covenants, with which we are currently in compliance. No amounts were outstanding under the Facility at December 31, 2000. We currently have effective shelf registration statements on file with the Securities and Exchange Commission that permit us to offer up to $4.0 billion of debt securities and common and preferred stock in one or more separate series, in amounts, at prices, and on terms to be set forth in the prospectus contained in these registration statements and in one or more supplements to the prospectus. On August 4, 1999, we issued $1.5 billion in unsecured debt securities in four tranches (the "Senior Notes") under these registration statements. The Senior Notes are due at various times between August 2002 and August 2009. We believe that the liquidity provided by existing cash, cash equivalents, and investments, along with the borrowing arrangements described above and cash generated from operations, will provide sufficient capital to meet our requirements for at least the next twelve months. We believe the level of financial resources is a significant competitive factor in our industry and we may choose at any time to raise additional capital through debt or equity financing to strengthen our financial position, facilitate growth, and provide us with additional flexibility to take advantage of business opportunities that may arise. 25 26 RISK FACTORS IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER CUSTOMER ORDERS, REDUCED REVENUES, REDUCED MARGINS, REDUCED LEVELS OF PROFITABILITY, AND LOSS OF MARKET SHARE. We compete in the hardware and software products and services markets. These markets are intensely competitive. If we fail to compete successfully in these markets, the demand for our products would decrease. Any reduction in demand could lead to a decrease in the prices of our products, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share. These competitive pressures could adversely affect our business and operating results. Our competitors are some of the largest, most successful companies in the world. They include Hewlett-Packard Company (HP), International Business Machines Corporation (IBM), Compaq Computer Corporation (Compaq), and EMC Corporation (EMC). Our future competitive performance depends on a number of factors, including our ability to: continually develop and introduce new products and services with better prices and performance than those offered by our competitors; offer a wide range of products and solutions from small single-processor systems to large complex enterprise-level systems; offer solutions to customers that operate effectively within a computing environment that includes hardware and software from multiple vendors; offer products that are reliable and that ensure the security of data and information; create products for which third party software vendors will develop a wide range of applications; and offer high quality products and services. We also compete with systems manufacturers and resellers of systems based on microprocessors from Intel Corporation (Intel) and Windows operating system software from Microsoft Corporation (Microsoft). These competitors include Dell Computer Corporation (Dell), HP, and Compaq, in addition to Intel and Microsoft. This competition creates increased pressure, including pricing pressure, on our workstation and lower-end server product lines. We expect this competitive pressure to intensify considerably during fiscal year 2001, with the anticipated releases of new software products from Microsoft and new microprocessors from Intel. The computer systems that we sell are made up of many products and components, including workstations, servers, storage products, microprocessors, the Solaris Operating Environment and other software products. In addition, we sell some of these components separately and as add-ons to installed systems. If we are unable to offer products and services that compete successfully with the products and services offered by our competitors or that meet the complex needs of our customers, our business and operating results could be adversely affected. In addition, if in responding to competitive pressures, we are forced to lower the prices of our products and services and we are unable to reduce our component costs or improve operating efficiencies, our business and operating results would be adversely affected. Over the last several years, we have invested significantly in our storage products business with a view to increasing the sales of these products both on a stand-alone basis to customers using the systems of our competitors, and as part of the systems that we sell. The intelligent storage products business is intensely competitive. EMC is currently the leader in this market. To the extent we are unable to penetrate this market and compete effectively, our business and operating results could be adversely affected. In addition, we will be making significant investments to develop, market, and sell software products under our alliance with America Online, Inc. (AOL) and have agreed to significant minimum revenue commitments. These alliance products are targeted at the e-commerce market and are strategic to our ability to successfully compete in this market. If we are unable to successfully compete in this market, our business and operating results could be adversely affected. 26 27 THE PRODUCTS WE MAKE ARE VERY COMPLEX AND IF WE ARE UNABLE TO RAPIDLY AND SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, WE WILL NOT BE ABLE TO SATISFY CUSTOMER DEMAND. We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products that our customers choose to buy. If we are unable to develop new products, our business and operating results could be adversely affected. We must quickly develop, introduce, and deliver in quantity new, complex systems, software, and hardware products and components. These include products we plan to introduce later in fiscal 2001 which incorporate our new UltraSPARC(TM) III architecture, the Solaris Operating Environment, our Sun StorEdge(TM) storage products, and other software products, such as those products under development or to be developed under our alliance with AOL. The development process for these complicated products is very uncertain. It requires high levels of innovation from both our product designers and our suppliers of the components used in our products. The development process is also lengthy and costly. If we fail to accurately anticipate our customers' needs and technological trends, or are otherwise unable to complete the development of a product on a timely basis, we will be unable to introduce new products into the market on a timely basis, if at all, and our business and operating results would be adversely affected. In addition, the successful development of software products under our alliance with AOL depends on many factors, including our ability to work effectively within the alliance on complex product development and any encumbrances on the licensed technology that may arise from time to time may prevent us from developing, marketing, or selling these alliance software products. If we are unable to successfully develop, market, or sell the alliance software products or other software products, our business and operating results could be adversely affected. Software and hardware products such as ours may contain known as well as undetected errors, and these defects may be found following introduction and shipment of new products or enhancements to existing products. Although we attempt to fix errors that we believe would be considered critical by our customers prior to shipment, we may not be able to detect or fix all such errors, and this could result in lost revenues and delays in customer acceptance, and could be detrimental to our business and reputation. The manufacture and introduction of our new hardware and software products is also a complicated process. Once we have developed a new product we face several challenges in the manufacturing process. We must be able to manufacture new products in high enough volumes so that we can have an adequate supply of new products to meet customer demand. We must be able to manufacture the new products at acceptable costs. This requires us to be able to accurately forecast customer demand so that we can procure the appropriate components at optimal costs. Forecasting demand requires us to predict order volumes, the correct mixes of our software and hardware products, and the correct configurations of these products. We must manage new product introductions like the introduction of our new UltraSPARC III architecture during fiscal 2001, so that we can minimize the impact of customers delaying purchases of existing products in anticipation of the new product release. We must also try to reduce the levels of older product and component inventories to minimize inventory write-offs. Additionally, we may decide to adjust prices of our existing products during this process in order to try to increase customer demand for these products. If we are introducing new products at the same time or shortly after the price adjustment, this will complicate our ability to anticipate customer demand for our new products. If we are unable to timely develop, manufacture, and introduce new products in sufficient quantity to meet customer demand at acceptable costs, or if we are unable to correctly anticipate customer demand for our new and existing products, our business and operating results could be materially adversely affected. 27 28 OUR RELIANCE ON SINGLE SOURCE SUPPLIERS COULD DELAY PRODUCT SHIPMENTS AND INCREASE OUR COSTS. We depend on many suppliers for the necessary parts and components to manufacture our products. There are a number of vendors producing the parts and components that we need. However, there are some components that can only be purchased from a single vendor due to price, quality, or technology reasons. For example, we depend on Sony for various monitors, and on Texas Instruments for our SPARC microprocessors. If we were unable to purchase the necessary parts and components from a particular vendor and we had to find a new supplier for such parts and components, our new and existing product shipments could be delayed, severely affecting our business and operating results. OUR FUTURE OPERATING RESULTS DEPEND ON OUR ABILITY TO PURCHASE A SUFFICIENT AMOUNT OF COMPONENTS TO MEET THE DEMANDS OF OUR CUSTOMERS. We depend heavily on our suppliers to timely design, manufacture, and deliver the necessary components for our products. While many of the components we purchase are standard, we do purchase some components, specifically color monitors and custom memory integrated circuits such as static random access memories (SRAMS) and video random access memories (VRAMS), that require long lead times to manufacture and deliver. Long lead times make it difficult for us to plan component inventory levels in order to meet the customer demand for our products. In addition, in the past, we have experienced shortages in certain of our components (specifically dynamic random access memories (DRAMS) and SRAMS). If a component delivery from a supplier is delayed, if we experience a shortage in one or more components, or if we are unable to provide for adequate levels of component inventory, our new and existing product shipments could be delayed and our business and operating results could be adversely affected. SINCE WE ORDER OUR COMPONENTS (AND IN SOME CASES COMMIT TO PURCHASE) FROM SUPPLIERS IN ADVANCE OF RECEIPT OF CUSTOMER ORDERS FOR OUR PRODUCTS WHICH INCLUDE THESE COMPONENTS, WE FACE A SUBSTANTIAL INVENTORY RISK. As part of our component inventory planning, we frequently pay certain suppliers well in advance of receipt of customer orders. For example, we often enter into noncancelable purchase commitments with vendors early in the manufacturing process of our microprocessors to make sure we have enough of these components for our new products to meet customer demand. Because the design and manufacturing process for these components is very complicated it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the production of the components for which we have previously committed to pay. We also face the risk of ordering too many components, or conversely, not enough components, since the orders are based on the forecasts of customer orders rather than actual orders. If we cannot change or be released from the noncancelable purchase commitments, we could incur significant costs from the purchase of unusable components, due to a delay in the production of the components or as a result of inaccurately predicting component orders in advance of customer orders. Our business and operating results could be adversely affected as a result of these increased costs. DELAYS IN PRODUCT DEVELOPMENT OR CUSTOMER ACCEPTANCE AND IMPLEMENTATION OF NEW PRODUCTS AND TECHNOLOGIES COULD SERIOUSLY HARM OUR BUSINESS. Generally, the computer systems we sell to customers incorporate hardware and software products that we sell, such as UltraSPARC microprocessors, the Solaris Operating Environment and Sun StorEdge storage products. Any delay in the development of the software and hardware included in our systems could delay our shipment of these systems. Delays in the development and introduction of our products may occur for various reasons. For example, delays in software development could delay shipments of related new hardware products. 28 29 In addition, if customers decided to delay the adoption and implementation of new releases of our Solaris Operating Environment this could also delay customer acceptance of new hardware products tied to that release. Adopting a new release of an operating environment requires a great deal of time and money for a customer to convert its systems to the new release. The customer must also work with software vendors who port their software applications to the new operating system and make sure these applications will run on the new operating system. As a result, customers may decide to delay their adoption of a new release of an operating system because of the cost of a new system and the effort involved to implement it. Such delays in product development and customer acceptance and implementation of new products could adversely affect our business. IF WE ARE UNABLE TO CONTINUE GENERATING SUBSTANTIAL REVENUES FROM INTERNATIONAL SALES OUR BUSINESS COULD BE ADVERSELY AFFECTED. Currently, approximately half of our revenues come from international sales. Our ability to sell our products internationally is subject to the following risks: general economic and political conditions in each country could adversely affect demand for our products and services in these markets; currency exchange rate fluctuations could result in lower demand for our products, as well as currency translation losses; changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions; trade protection measures and import and export licensing requirements subject us to additional regulation and may prevent us from shipping products to a particular market, and increase our operating costs. WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER OF REASONS. Future operating results will continue to be subject to quarterly fluctuations based on a wide variety of factors, including: SEASONALITY. Our sequential quarterly operating results usually fluctuate downward in the first quarter of each fiscal year when compared to the immediately preceding fourth quarter. INCREASES IN OPERATING EXPENSES. Our operating expenses will continue to increase as we continue to expand our operations. Our operating results could suffer if our revenues do not increase at least as fast as our expenses. ACQUISITIONS/ALLIANCES. If, in the future, we acquire technologies, products, or businesses, or we form alliances with companies requiring technology investments or revenue commitments (such as our alliance with AOL), we will face a number of risks to our business. The risks we may encounter include those associated with integrating or comanaging operations, personnel, and technologies acquired or licensed, and the potential for unknown liabilities of the acquired or combined business. Also, we will include amortization expense of acquired intangible assets in our financial statements for several years following these acquisitions. Our business and operating results on a quarterly basis could be adversely affected if our acquisition or alliance activities are not successful. SIGNIFICANT CUSTOMERS. Sales to a single customer accounted for approximately 19% and 15% of our fiscal 2000 and 1999 net revenues, respectively. The major customer revenues in fiscal 2000 and 1999 were primarily generated by two subsidiaries of an international organization: (1) a reseller (16% and 14% of net revenues in 2000 and 1999, respectively), acquired by the international organization in fiscal 1999; and (2) a finance/leasing company (3% and 1% of net revenues in fiscal 2000 and 1999, respectively). Revenue is generated with the finance/leasing company whenever a Sun customer elects to lease equipment; in such cases, Sun sells the equipment to the leasing company. Our business could suffer if these customers or any other 29 30 significant customer terminated its business relationship with us or significantly reduced the amount of business it did with us. OUR ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS. We intend to continue to make investments in companies, products, and technologies, either through acquisitions or investment alliances. For example, we have purchased several companies in the past and have also formed alliances, including our alliance with AOL. Acquisitions and alliance activities often involve risks, including: difficulty in assimilating the acquired operations and employees; difficulty in managing product codevelopment activities with our alliance partners; retaining the key employees of the acquired operation; disruption of our ongoing business; inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; and lacking the experience to enter into new markets, products, or technologies. Failure to manage these alliance activities effectively and to integrate entities or assets that we acquire could affect our operating results or financial condition. WE DEPEND ON KEY EMPLOYEES AND FACE COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our employees are vital to our success, and our key management, engineering, and other employees are difficult to replace. We generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The expansion of high technology companies in Silicon Valley and Colorado, as well as many other cities, has increased demand and competition for qualified personnel. We may not be able to attract, assimilate, or retain highly qualified employees in the future. These factors could adversely affect our business. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS. Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A substantial portion of our facilities, including our corporate headquarters and other critical business operations, are located near major earthquake faults. In addition, many of our facilities are located on filled land and, therefore, may be more susceptible to damage if an earthquake occurs. We do not carry earthquake insurance and do not self insure for earthquake-related losses. Our facilities in the State of California, including our corporate headquarters and other critical business operations, are currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of our affected facilities. In addition, we do not carry business interruption insurance or carry financial reserves against business interruptions arising from earthquakes or intentional electrical blackouts. If a business interruption occurs, our business could be seriously harmed. OUR MARKETABLE STRATEGIC EQUITY SECURITIES ARE SUBJECT TO EQUITY PRICE RISK AND THEIR VALUE MAY FLUCTUATE. From time to time, we make equity investments for the promotion of business and strategic objectives with publicly traded and non-publicly traded companies. The market price and valuation of the securities that we hold in these companies may fluctuate due to market conditions and other circumstances over which we have little or no control. Many of the companies in which we have invested have experienced significant volatility in their stock prices. We typically do not attempt to reduce or eliminate this equity price risk, through hedging or similar techniques, and market price and valuation fluctuations could impact our financial results. To the extent 30 31 that the fair value of these securities was less than our cost over an extended period of time, our net income would be reduced. Also, refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and equity security prices. To mitigate some of these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. All of the potential changes noted below are based on sensitivity analyses performed on our financial position at December 31, 2000. Actual results may differ materially. Interest Rate sensitivity Our investment portfolio consists primarily of fixed income instruments with an average duration of less than 1.50 years. The primary objective of our investments in debt securities is to preserve principal while maximizing yields, without significantly increasing risk. These available-for-sale securities are subject to interest rate risk and will decrease in value if market interest rates increase. The sensitivity analysis applied to this investment portfolio was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 150 basis points (BPS). The hypothetical 150 BPS increase in interest rates would result in an approximate $104 million decrease in the fair value of our investments in debt securities as of December 31, 2000. We also entered into various interest-rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest associated with the Senior Notes effectively becomes variable and thus matches the variable interest rate associated with our cash and marketable securities. Foreign Currency Exchange Risk The majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, since a portion of our operations consists of manufacturing and sales activities outside of the U.S., we enter into transactions in other currencies, primarily the Japanese yen, the British pound and the Euro. We enter into foreign exchange forward and option contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. The gains or losses on the forward and option contracts are largely offset by gains or losses on the underlying transactions and, consequently, a sudden or significant change in foreign exchange rates is not expected to have a material impact on future net income or cash flows. Based on our foreign currency exchange instruments outstanding at December 31, 2000, we estimate a maximum potential one-day loss in fair value of approximately $26 million, using a Value-at-Risk (VAR) model. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. We used a Monte Carlo simulation type model that valued foreign currency instruments against a thousand randomly generated market price paths. Anticipated transactions, firm commitments, receivables, and accounts payable denominated in foreign currencies were excluded from the model. The VAR model is a risk estimation tool, and as such is not intended to represent actual losses in fair value that will be incurred by us. Additionally, as we utilize foreign currency instruments for hedging anticipated and firmly committed transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying exposure. Foreign currency fluctuations did not have a material impact on our results of operations and financial position for the first six months of fiscal 2001. Also, refer to Note 5 of "Notes to Condensed Consolidated Financial Statements (Unaudited) Derivative Financial Instruments" for additional discussion. 31 32 Euro Conversion On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the Euro. The transition period for the introduction of the Euro ends June 30, 2002. Issues facing us as a result of the introduction of the Euro include converting information technology systems, reassessing currency risk, negotiating and amending licensing agreements and contracts, and processing tax and accounting records. We continue to address these issues and do not currently expect the Euro conversion to have a material effect on our financial conditions or results of operations. Equity Security Price Risk We are exposed to price fluctuations on the marketable portion of equity securities included in our portfolio of strategic investments. These investments are generally in companies in the high-technology industry sector, many of which are small capitalization stocks. We typically do not attempt to reduce or eliminate the market exposure on these securities. A 20% adverse change in equity prices would result in an approximate $32 million decrease in the fair value of our available-for-sale marketable strategic equity securities as of December 31, 2000. At December 31, 2000, three equity securities represented approximately $89 million of the total reported fair value of the marketable strategic equity securities of $158 million. Also, refer to Note 4 of "Notes to Condensed Consolidated Financial Statements (Unaudited) Balance Sheet Details" for additional discussion on Sun's marketable strategic equity securities. 32 33 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On January 23, 2001, Sun and Microsoft Corporation agreed to settle the litigation initiated by Sun on October 7, 1997 regarding Sun's Java technology. Under the terms of the settlement agreement, Microsoft agreed to pay Sun $20 million and to terminate its license of the Java technology. In addition, Microsoft was permanently enjoined from using Sun's JAVA COMPATIBLE(TM) trademark and Sun agreed to grant Microsoft a new limited and conditional license to continue shipping, essentially as is, its currently shipping implementations of the 1.1.4 version of the Java technology. This new license covers only the products that already contain the 1.1.4 version of the Java technology and successor versions of those products, and lasts for seven years. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 8, 2000, the Annual Meeting of Stockholders of the Company was held in Santa Clara, California. The share numbers contained in this Item 4 do not reflect the Company's two-for-one stock dividend paid on December 5, 2000. The results of voting of the 1,385,693,540 shares of common stock represented at the meeting or by proxy are described below. An election of directors was held with the following individuals being elected to the Board of Directors of the Company:
Name Shares Voted For Votes Withheld - ---- ---------------- -------------- Scott G. McNealy 1,376,034,949 9,658,591 James L. Barksdale 1,375,702,034 9,991,506 L. John Doerr 1,176,883,446 208,810,094 Judith L. Estrin 1,376,015,015 9,678,525 Robert J. Fisher 1,375,977,343 9,716,197 Robert L. Long 1,375,976,455 9,717,085 M. Kenneth Oshman 1,375,992,992 9,700,548 Naomi O. Seligman 1,374,184,942 11,508,598
The eight nominees who received the highest number of votes (all of the above individuals) were elected to the Board of Directors. The stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 3,600,000,000 to 7,200,000,000 shares. There were 1,371,316,107 votes cast for the amendment, 9,531,256 votes cast against the amendment, 4,846,177 abstentions and no broker non-votes. The stockholders approved an amendment to the Company's 1990 Long-Term Equity Incentive Plan in order to increase the number of shares of common stock authorized for issuance thereunder by 7,000,000 shares of common stock to an aggregate of 558,600,000 shares. There were 837,990,961 votes cast for the amendment, 541,210,871 votes cast against the amendment, 6,491,708 abstentions and no broker non-votes. The stockholders approved an amendment to the Company's Bylaws in order to increase the number of directors to serve on the Company's Board of Directors to no less than six (6) nor more than eleven (11), with the exact number to be set by the Board within such range from time to time. There were 938,006,556 votes cast for the 33 34 amendment, 6,327,436 votes cast against the amendment, 4,987,985 abstentions and 436,371,563 broker non-votes. ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of our common stock by our executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended December 31, 2000 (the numbers below do not reflect Sun's two-for-one stock dividend paid on December 5, 2000):
OFFICERS AND DATE OF NUMBER OF DIRECTORS TRANSACTION PRICE SHARES SOLD - ------------ ----------- --------- --------------------- Judith L. Estrin 10/24/00 $118.3048 298,000 sale H. William Howard 10/24/00 $119.1875 40,000 same-day-sale William N. Joy 11/27/00 $87.1625 150,000 same-day-sale 11/28/00 $84.7531 60,800 same-day-sale 11/28/00 $85.4750 100,000 same-day-sale 11/28/00 $84.7531 39,200 same-day-sale 11/28/00 $83.8417 150,000 same-day-sale 11/30/00 $73.9375 100,000 same-day-sale 11/30/00 $76.0141 200,000 same-day-sale Michael E. Lehman 10/31/00 $105.0000 128,000 same-day-sale M. Kenneth Oshman 10/24/00 $121.0141 300,000 same-day-sale Gregory M. Papadopoulos 11/1/00 $108.9375 40,000 same-day-sale 11/2/00 $108.0000 20,000 same-day-sale Michael L. Popov 11/1/00 $107.0000 48,000 same-day-sale Janpieter T. Scheerder 11/7/00 $111.2798 42,000 same-day-sale John C. Shoemaker 10/24/00 $120.0000 24,000 same-day-sale 11/7/00 $110.4793 48,000 same-day-sale Patricia C. Sueltz 11/2/00 $109.0000 20,000 same-day-sale
34 35 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.2 Registrant's Bylaws, as amended November 8, 2000. 3.5 Certificate of Amendment of Registrant's Restated Certificate of Incorporation filed November 8, 2000. 3.6(1) Amended Certificate of Designations filed December 20, 2000. 10.66 Registrant's 1990 Long-Term Equity Incentive Plan, as amended on August 16, 2000. (1) Incorporated by reference to Exhibit 2.2 to Amendment No. 9 to Registrant's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on December 20, 2000. (b) Reports on Form 8-K The Company filed a report on Form 8-K with the Securities and Exchange Commission on December 8, 2000, announcing its completion of the acquisition of Cobalt Networks, Inc. 35 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman --------------------------------------------- Michael E. Lehman Executive Vice President, Corporate Resources and Chief Financial Officer (Principal Financial Officer) /s/ Michael L. Popov --------------------------------------------- Michael L. Popov Vice President and Corporate Controller (Chief Accounting Officer) Dated: February 14, 2001 36 37 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.2 Registrant's Bylaws, as amended November 8, 2000. 3.5 Certificate of Amendment of Registrant's Restated Certificate of Incorporation filed November 8, 2000. 3.6(1) Amended Certificate of Designations filed December 20, 2000. 10.66 Registrant's 1990 Long-Term Equity Incentive Plan, as amended on August 16, 2000. (1) Incorporated by reference to Exhibit 2.2 to Amendment No. 9 to Registrant's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on December 20, 2000.
37 EX-3.2 2 f68457orex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 BYLAWS OF SUN MICROSYSTEMS, INC. (As adopted on December 14, 1990 and amended as of November 8, 2000) 1 2 TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES ......................................................... 5 1.1 REGISTERED OFFICE ............................................................ 5 1.2 OTHER OFFICES ................................................................ 5 ARTICLE II - STOCKHOLDERS ............................................................. 5 2.1 PLACE OF MEETINGS ............................................................ 5 2.2 ANNUAL MEETING ............................................................... 5 2.3 SPECIAL MEETING .............................................................. 6 2.4 NOTICE OF STOCKHOLDERS' MEETINGS ............................................. 7 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE ................................. 7 2.6 QUORUM ....................................................................... 7 2.7 ADJOURNED MEETING; NOTICE .................................................... 8 2.8 CONDUCT OF BUSINESS .......................................................... 8 2.9 WAIVER OF NOTICE ............................................................. 8 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ...................... 8 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS .................. 9 2.12 VOTING ....................................................................... 10 2.13 PROXIES ...................................................................... 10 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE ........................................ 11 2.15 INSPECTORS OF ELECTION ....................................................... 11 ARTICLE III - DIRECTORS ............................................................... 11 3.1 POWERS ....................................................................... 11 3.2 NUMBER OF DIRECTORS .......................................................... 11 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS ...................... 12 3.4 RESIGNATION AND VACANCIES .................................................... 12 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ..................................... 13 3.6 REGULAR MEETINGS ............................................................. 13 3.7 SPECIAL MEETINGS; NOTICE ..................................................... 14 3.8 QUORUM ....................................................................... 14 3.9 WAIVER OF NOTICE ............................................................. 14 3.10 CONDUCT OF BUSINESS .......................................................... 14 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ............................ 14 3.12 FEES AND COMPENSATION OF DIRECTORS ........................................... 15 3.13 APPROVAL OF LOANS TO OFFICERS ................................................ 15 3.14 REMOVAL OF DIRECTORS ......................................................... 15 ARTICLE IV - COMMITTEES ............................................................... 15 4.1 COMMITTEES OF DIRECTORS ...................................................... 15
2 3 4.2 COMMITTEE MINUTES ............................................................ 16 4.3 MEETINGS AND ACTION OF COMMITTEES ............................................ 16 ARTICLE V - OFFICERS .................................................................. 16 5.1 GENERAL MATTERS .............................................................. 16 5.2 APPOINTMENT OF OFFICERS ...................................................... 17 5.3 SUBORDINATE OFFICERS ......................................................... 17 5.4 REMOVAL AND RESIGNATION OF OFFICERS .......................................... 17 5.5 VACANCIES IN OFFICES ......................................................... 17 5.6 CHAIRMAN OF THE BOARD ........................................................ 17 5.7 CHIEF EXECUTIVE OFFICER ...................................................... 17 5.8 PRESIDENT .................................................................... 18 5.9 VICE PRESIDENTS .............................................................. 18 5.10 SECRETARY .................................................................... 18 5.11 CHIEF FINANCIAL OFFICER ...................................................... 18 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ............................... 19 5.13 AUTHORITY AND DUTIES OF OFFICERS ............................................. 19 ARTICLE VI - INDEMNITY ................................................................ 19 6.1 THIRD PARTY ACTIONS .......................................................... 19 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION ................................ 19 6.3 SUCCESSFUL DEFENSE ........................................................... 20 6.4 DETERMINATION OF CONDUCT ..................................................... 20 6.5 PAYMENT OF EXPENSES IN ADVANCE ............................................... 20 6.6 INDEMNITY NOT EXCLUSIVE ...................................................... 20 6.7 INSURANCE INDEMNIFICATION .................................................... 20 6.8 THE CORPORATION .............................................................. 21 6.9 EMPLOYEE BENEFIT PLANS ....................................................... 21 6.10 INDEMNITY FUND ............................................................... 21 6.11 INDEMNIFICATION OF OTHER PERSONS ............................................. 21 6.12 SAVINGS CLAUSE ............................................................... 21 6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES .................. 22 ARTICLE VII - RECORDS AND REPORTS ..................................................... 22 7.1 MAINTENANCE AND INSPECTION OF RECORDS ........................................ 22 7.2 INSPECTION BY DIRECTORS ...................................................... 22 7.3 ANNUAL STATEMENT TO STOCKHOLDERS ............................................. 22 ARTICLE VIII - GENERAL MATTERS ........................................................ 23 8.1 CHECKS ....................................................................... 23 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS ............................. 23 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES ....................................... 23 8.4 SPECIAL DESIGNATION ON CERTIFICATES .......................................... 23 8.5 LOST CERTIFICATES ............................................................ 24
3 4 8.6 CONSTRUCTION; DEFINITIONS .................................................... 24 8.7 DIVIDENDS .................................................................... 24 8.8 FISCAL YEAR .................................................................. 24 8.9 SEAL ......................................................................... 24 8.10 TRANSFER OF STOCK ............................................................ 24 8.11 STOCK TRANSFER AGREEMENTS .................................................... 25 8.12 REGISTERED STOCKHOLDERS ...................................................... 25 8.13 NOTICES ...................................................................... 25 ARTICLE I - AMENDMENTS ................................................................ 25
4 5 BYLAWS OF SUN MICROSYSTEMS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of the stockholders of this corporation shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in these Bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder proposal to be presented at an annual meeting must be delivered to the secretary of the corporation at the corporation's principal executive offices not less than 60 or more than 90 calendar days prior to the first anniversary of the date that the corporation first mailed its proxy statement to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the first anniversary date of the previous year's annual meeting, notice by the stockholder to be timely must be received no later than the close 5 6 of business on the tenth day following the day on which public announcement of the date of such annual meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of director in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) (the "Exchange Act") and Rule 14a-11 thereunder (or any successor thereto) (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and such beneficial owner, and (ii) the class and number of shares for the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding any provision herein to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2. For purposes of Section 2.2 and 3.3 of these Bylaws "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by any executive officer of the corporation, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing to the secretary of the corporation, and shall set forth (a) as to each person whom such person or persons propose to nominate for election or reelection as a director at such meeting all information relating to such proposed nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto)(including such proposed nominee's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business to be taken the meeting, a brief description of such business, the reasons for conducting such business and any material interest in such business of the person or persons calling such meeting and the beneficial owners, if any, on whose behalf such meeting is called; and (c) as to the person or persons calling such meeting and the beneficial owners, if any, on whose behalf the meeting is called (i) the name and address of such persons, as they appear on the corporation's books, and of such beneficial owners, and (ii) 6 7 the class and number of shares of the corporation which are owned beneficially and of record by such persons and such beneficial owners. No business may be transacted at such special meeting otherwise than specified in such notice or by or at the direction of the corporation's board of directors. The corporation's secretary shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time reasonably requested by the person or persons who called the meeting, not less than 60 nor more than 90 days after the receipt of the request. If the notice is not given within 20 days after the receipt of a valid request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. Only such business shall be conducted at a special meeting of stockholders called by action of the board of directors as shall have been brought before the meeting pursuant to the corporation's notice of meeting. This Section 2.3 may not be amended to eliminate the right of one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at a special meeting of stockholders to call such a special meeting of stockholders, unless holders of at least seventy-five percent of the shares entitled to vote thereon approve such an amendment. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the General Corporation Law of Delaware or the certificate of incorporation of the corporation). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes entitled to take action with respect to that vote on that matter, present in person or by proxy, shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, those 7 8 present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting, except as otherwise required by law. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS Such person as the board of directors may have designated or, in the absence of such a person, any executive officer of the corporation, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or able to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation at its registered office in Delaware, its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the date the earliest dated consent is delivered to the corporation, a written consent or consents signed by a sufficient number of holders to take action are 8 9 delivered to the corporation in the manner prescribed in the first paragraph of this section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall neither precede nor be more than ten (10) days after the date upon which such resolution is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such noticed is received, adopt a resolution fixing the record date. If the board of directors has not fixed a record date within such time, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in the manner prescribed in the first paragraph of Section 2.10 of these Bylaws. If the board of directors has not fixed a record date within such time and prior action by the board 9 10 of directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Each stockholder shall have one (1) vote for every share of stock entitled to vote that is registered in his or her name on the record date for the meeting (as determined in accordance with Section 2.11 of these Bylaws), except as otherwise provided herein or required by law. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these Bylaws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or provided herein, all other matters shall be determined by a majority of the votes cast affirmatively or negatively. 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written or electronic proxy, filed in accordance with the procedure established for the meeting or taking of action in writing, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 2.13 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. An electronic proxy (which may be transmitted via telephone, e-mail, the Internet or such other electronic means as the Board 10 11 of Directors may determine from time to time) shall be deemed executed if the Company receives an appropriate electronic transmission from the stockholder or the stockholder's attorney-in-fact along with a pass code or other indentifier which reasonably establishes the stockholder or the stockholder's attorney-in-fact as the sender of such transmission. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.15 INSPECTORS OF ELECTION The corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be no less than six (6) or more than eleven (11). The exact number of directors shall be eight (8), until changed, within the limits specified above, by a Bylaw amending this Section 3.2, duly adopted by the board of directors 11 12 or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by an adopted amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Nominations for election to the board of directors of the corporation at an annual meeting of stockholders may be made by the board or on behalf of the board by a nominating committee appointed by the board, or by any stockholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board, shall be made by notice in writing received by the secretary of the corporation at the corporation's principal executive offices not less than 60 or more than 90 calendar days prior to the first anniversary of the date that the corporation first mailed its proxy statement to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the first anniversary date of the previous year's annual meeting, notice by the stockholder to be timely must be received no later than the close of business on the tenth day following the day on which public announcement (as defined in Section 2.2) of the date of such annual meeting is first made. Such notice shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee, (iii) the number of shares of stock of the corporation beneficially owned by each such nominee and by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934. The chairman of the annual meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure. If such determination and declaration is made, the defective nomination shall be disregarded. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary 12 13 of the corporation. When one or more directors so resigns and the resignation is effective at a future date, only a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these Bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled only by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors shall be held at such place or places, on such 13 14 date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of each regular meeting shall not be required. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by any executive officer of the corporation, or by one-third of the directors then in office (rounded up to the nearest whole number) and shall be held at a place, on a date and at a time as such officer or such directors shall fix. Notice of the place, date and time of special meetings, unless waived, shall be given to each director by mailing written notice not less than two (2) days before the meeting or by sending a facsimile transmission of the same not less than two (2) hours before the time of the holding of the meeting. If the circumstances warrant, notice may also be given personally or by telephone not less than two (2) hours before the time of the holding of the meeting. Oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 CONDUCT OF BUSINESS At any meeting of the board of directors, business shall be transacted in such order and manner as the board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING 14 15 Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.12 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these Bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.13 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.14 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as shareholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the 15 16 business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, a supplemental resolution of the board of directors, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.11 (action without a meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 GENERAL MATTERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a chief executive officer, one or more vice presidents, one or more assistant 16 17 secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the board of directors may from time to time determine. Officers appointed by the board of directors shall constitute executive officers of the corporation. Officers appointed by the president or chief executive officer shall be subordinate officers, unless otherwise specified by the board of directors. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors if such officer was appointed by the board of directors, or by such other person as appointed by the board of directors to fill such vacancy. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. If there is no chief executive officer or president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws. 5.7 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at 17 18 all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these Bylaws. 5.8 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board or the chief executive officer, if there be such officers, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these Bylaws. 5.9 VICE PRESIDENTS In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president and chief executive officer. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these Bylaws, the president, chief executive officer or the chairman of the board. 5.10 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these Bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these Bylaws. 5.11 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. 18 19 The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer, president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the Bylaws. 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, any executive officer of this corporation, or any other person designated by the board of directors, shall be authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or that such director or officer is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise (collectively "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall indemnify any person who was or is a party or is threatened to be 19 20 made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an Agent (as defined in Section 6.1) against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. 6.3 SUCCESSFUL DEFENSE To the extent that an Agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the Agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.l and 6.2. Such determination shall be made (1) by the board of directors or the executive committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain on behalf any person who is or was an Agent of the corporation, or is or was serving at the request of the corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such 20 21 capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers, so that any person who is or was a director or Agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 INDEMNITY FUND Upon resolution passed by the board, the corporation may establish a trust or other designated account, grant a security interest or use other means (including, without limitation, a letter of credit), to ensure the payment of certain of its obligations arising under this Article VI and/or agreements which may be entered into between the company and its officers and directors from time to time. 6.11 INDEMNIFICATION OF OTHER PERSONS The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not an agent (as defined in Section 6.1), but whom the corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware or other-wise. The corporation may, in its sole discretion, indemnify an employee, trustee or other agent as permitted by the General Corporation Law of the State of Delaware. The corporation shall indemnify an employee, trustee or other agent where required by law. 6.12 SAVINGS CLAUSE If this article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each agent against expenses (including attorney's fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by 21 22 or in the right of the corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number of class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 22 23 ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertified shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman of or vice-chairman of the board of directors, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case or uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, 23 24 participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law or Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate 24 25 for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its hooks as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 8.13 NOTICES Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery, by mail, postage paid, or by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his last known address as it appears on the books of the corporation. The time when such notice shall be deemed received, if hand delivered, or dispatched, if sent by mail or facsimile, transmission, shall be the time of the giving of the notice. ARTICLE IX AMENDMENTS Any of these Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the board of directors or, with respect to Bylaw amendments placed before the stockholders for approval and except as otherwise provided herein or required by law, by the affirmative vote of the holders of seventy-five percent of the shares of the corporation's stock entitled to vote in the election of directors, voting as one class. 25 EX-3.5 3 f68457orex3-5.txt EXHIBIT 3.5 1 EXHIBIT 3.5 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF SUN MICROSYSTEMS, INC. Michael E. Lehman and Michael H. Morris, certify that: 1. They are the Executive Vice-President, Corporate Resources and Chief Financial Officer and Senior Vice President, General Counsel and Secretary, respectively, of Sun Microsystems, Inc., a Delaware corporation (the "Corporation"). 2. That Section (a) of Article 4 of the Restated Certificate of Incorporation of the Corporation now reads: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is Three Billion Six Hundred Ten Million (3,610,000,000), of which Three Billion Six Hundred Million (3,600,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." is amended to read as follows: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is Seven Billion Two Hundred Ten Million (7,210,000,000), of which Seven Billion Two Hundred Million (7,200,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." 3. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the required vote of stockholders in accordance with Section 242 of the Delaware Corporations Code. The total number of outstanding shares of Common Stock of the Corporation is 1,609,456,130. No shares of Preferred Stock are outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. We further declare under penalty of perjury under the laws of the State of Delaware that the matters set forth in the foregoing Certificate of Amendment are true and correct of our own knowledge. 1 2 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and the Certificate of Amendment to be signed by Michael E. Lehman, Executive Vice President, Corporate Resources and Chief Financial Officer and attested by Michael H. Morris, Senior Vice President, General Counsel and Secretary this 8th day of November, 2000. SUN MICROSYSTEMS, INC. [Corporate Seal] /s/ Michael E. Lehman ------------------------------------ Michael E. Lehman ATTEST: /s/ Michael H. Morris ------------------------------------ Michael H. Morris 2 EX-10.66 4 f68457orex10-66.txt EXHIBIT 10.66 1 EXHIBIT 10.66 SUN MICROSYSTEMS, INC. 1990 LONG-TERM EQUITY INCENTIVE PLAN (AMENDED AS OF AUGUST 16, 2000 AND ADJUSTED FOR A 2-FOR-1 STOCK DIVIDEND PAID DECEMBER 5, 2000) 1. Purpose of the Plan. The purpose of the Sun Microsystems, Inc. 1990 Long-Term Equity Incentive Plan is to enable Sun Microsystems, Inc. to provide an incentive to eligible employees, consultants and Officers whose present and potential contributions are important to the continued success of the Company, to afford them an opportunity to acquire a proprietary interest in the Company, and to enable the Company to enlist and retain in its employ the best available talent for the successful conduct of its business. It is intended that this purpose will be effected through the granting of (a) stock options, (b) stock purchase rights, (c) stock appreciation rights, and (d) long-term performance awards. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means the Committee or Committees referred to in Section 5 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. (d) "Common Stock" means the Common Stock, $0.00067 par value (as adjusted from time to time), of the Company. (e) "Company" means Sun Microsystems, Inc., a corporation organized under the laws of the state of Delaware, or any successor corporation. (f) "Director" means a member of the Board. (g) "Disability" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) the last reported sale price of the Common Stock of the Company on the NASDAQ National Market System or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices, or (ii) if such Common Stock shall then be listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (iii) if such Common Stock shall not be quoted on such National Market System nor listed or admitted to trading on a national securities exchange, then the average of the closing bid and asked prices, as reported by The Wall Street Journal for the over-the-counter market, or (iv) if none of the foregoing is applicable, then the Fair Market Value of a share of Common Stock shall be determined by the Board in its discretion. 2 (j) "Incentive Stock Option" means an Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (k) "Long-Term Performance Award" means an award under Section 10 below. A Long-Term Performance Award shall permit the recipient to receive a cash or stock bonus (as determined by the Committee) upon satisfaction of such performance factors as are set out in the recipient's individual grant. Long-Term Performance Awards will be based upon the achievement of Company, Subsidiary and/or individual performance factors or upon such other criteria as the Committee may deem appropriate. (l) "Nonstatutory Stock Option" means any Option that is not an Incentive Stock Option. (m) "Officer" means an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (n) "Option" means any option to purchase shares of Common Stock granted pursuant to Section 7 below. (o) "Plan" means this 1990 Long-Term Equity Incentive Plan, as hereinafter amended from time to time. (p) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 9 below. (q) "Right" means and includes Stock Appreciation Rights and Stock Purchase Rights granted pursuant to the Plan. (r) "Special Reserve" means a number of shares reserved and available for issuance under the terms of the Plan equal to 3% of the total shares reserved under the Plan as determined by and set forth under Section 4 below as such section may be amended from time to time in accordance with the terms of this Plan. (s) "Stock Appreciation Right" means an award made pursuant to Section 8 below, which right permits the recipient to receive an amount of Common Stock or cash equal in value to the difference between the Fair Market Value of Common Stock on the date of grant of the Option and the Fair Market Value of Common Stock on the date of exercise of the Stock Appreciation Right. (t) "Stock Purchase Right" means the right to purchase Common Stock pursuant to a restricted stock purchase agreement entered into between the Company and the purchaser under Section 9 below. (u) "Subsidiary" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or by a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or by a Subsidiary. In addition, the term "Rule 16b-3", and the term "Performance Period" shall have the meanings set forth in Section 5(a), and Section 10, respectively. 3. Eligible Participants. Any Officer, consultant, or other employee of the Company or of a Subsidiary whom the Committee deems to have the potential to contribute to the future success of the Company shall be eligible to receive awards under the Plan; provided, however, that any Options intended to qualify as Incentive Stock Options shall be granted only to employees of the Company or its Subsidiaries. 4. Stock Subject to the Plan. Subject to Sections 11 and 12, the total number of shares of Common Stock reserved and available for distribution pursuant to the Plan shall be 2 3 1,117,200,000 shares. The shares may be authorized, but unissued, or reacquired Common Stock. Subject to Sections 11 and 12 below, if any shares of Common Stock that have been optioned under an Option cease to be subject to such Option (other than through exercise of the Option), or if any Right, Option or Long-Term Performance Award granted hereunder is forfeited or any such award otherwise terminates prior to the issuance to the participant of Common Stock, the shares (if any) that were reserved for issuance pursuant to such Right, Option or Long-Term Performance Award shall again be available for distribution in connection with future awards or Option grants under the Plan; provided, however, that shares of Common Stock that have actually been issued under the Plan, whether upon exercise of an Option or Right or in satisfaction of a Long-Term Performance Award, shall not in any event be returned to the Plan and shall not become available for future distribution under the Plan. 5. Administration. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of service providers. (ii) Section 162(m). To the extent that a Committee determines it to be desirable to qualify awards granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee consisting solely of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"), the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board, or (B) a Committee, which committee shall be constituted to satisfy applicable securities laws, Delaware corporate law and the Code. (b) Authority. A Committee, if there be one, shall have full power to implement and carry out the Plan, subject to the general purposes, terms, and conditions of the Plan and to the direction of the Board (including the specific duties delegated by the Board to such Committee), which power shall include, but not be limited to, the following: (i) to select the Officers, consultants and other employees of the Company and/or its Subsidiaries to whom Options, Rights and/or Long-Term Performance Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Options, Rights and/or Long-Term Performance Awards, or any combination thereof, are granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or other award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); 3 4 (vi) to determine whether and under what circumstances an Option may be settled in cash or Restricted Stock under Section 7(j) instead of Common Stock; (vii) to determine the form of payment that will be acceptable consideration for exercise of an Option or Right granted under the Plan; (viii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (ix) to reduce the exercise price of any Option or Right; (x) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Rights; and (xi) to allow participants to satisfy withholding tax obligations by electing to have the Company withhold from the shares of Common Stock to be issued upon exercise of an award that number of shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a participant to have shares withheld for this purpose shall be made in such form and under such conditions as the Committee may deem necessary or advisable and shall be subject to the consent or disapproval of the Committee. The Committee shall have the authority to construe and interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 6. Duration of the Plan. The Plan shall remain in effect until terminated by the Board under the terms of the Plan, provided that in no event may Incentive Stock Options be granted under the Plan later than October 15, 2010. 7. Stock Options. The Committee, in its discretion, may grant Options to eligible participants and shall determine whether such Options shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be evidenced by a written Option agreement which shall expressly identify the Option as an Incentive Stock Option or as a Nonstatutory Stock Option, and be in such form and contain such provisions as the Committee shall from time to time deem appropriate. Without limiting the foregoing, the Committee may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options including Options in exchange for the surrender and cancellation of any or all outstanding Options or Rights. Option agreements shall contain the following terms and conditions: (a) Exercise Price; Number of Shares. The exercise price of the Option, which shall be approved by the Committee, must be equal to or greater than the Fair Market Value of the Common Stock at the time the Option is granted; provided, however, that in the case of a Nonstatutory Stock Option, the price may be less than (but no less than 85%) of the Fair Market Value of the Common Stock on the date the Option is granted, if such Option is granted, in the discretion of the Board or Committee, as the case may be, expressly in lieu of a reasonable amount of salary or compensation due the recipient of the Option. In addition, Nonstatutory Stock Options may be granted at an exercise price less than Fair Market Value of the Common 4 5 Stock at the time the Option is granted, provided that such grant is out of and subject to the limitations of the Special Reserve and, provided further, that in the case of an individual subject to Section 16 of the Exchange Act, the exercise price shall be no less than 50% of the Fair Market Value of the Common Stock on the date the Option is granted. The Option agreement shall specify the exercise price and the number of shares of Common Stock to which it pertains. (b) Waiting Period; Exercise Dates; Term. At the time an Option is granted, the Committee will determine the terms and conditions to be satisfied before shares may be purchased, including the dates on which shares subject to the Option may first be purchased. The Committee may specify that an Option may not be exercised until the completion of the waiting period specified at the time of grant. (Any such period is referred to herein as the "waiting period.") At the time an Option is granted, the Committee shall fix the period within which such Option may be exercised, which shall not be less than the waiting period, if any, nor, in the case of an Incentive Stock Option, more than 10 years from the date of grant. (c) Form of Payment. The consideration to be paid for the shares of Common Stock to be issued upon exercise of an Option, including the method of payment, shall be determined by the Committee (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (i) cash, (ii) certified or cashier's check, (iii) promissory note, (iv) other shares of Common Stock (including, in the discretion of the Committee, Restricted Stock) which (x) either have been owned by the optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vi) delivery of an irrevocable subscription agreement for the shares which obligates the option holder to take and pay for the shares not more than 12 months after the date of delivery of the subscription agreement or (vii) any combination of the foregoing methods of payment. (d) Effect of Termination of Employment, Retirement or Death of Employee Participants. In the event that an optionee during his or her lifetime ceases to be an employee of the Company or of any Subsidiary for any reason, including retirement, any Option, including any unexercised portion thereof, which was otherwise exercisable on the date of termination of employment, shall expire within such time period as is determined by the Committee; provided, however, that in the case of an Incentive Stock Option the Option shall expire unless exercised within a period of 90 days from the date on which the optionee ceased to be an employee, but in no event after the expiration of the term of such Option as set forth in the Option agreement. If in any case the Committee shall determine that an employee shall have been discharged for Just Cause (as defined below) such employee shall not thereafter have any rights under the Plan or any Option that shall have been granted to him or her under the Plan. For purposes of this Section, "Just Cause" means the termination of employment of an employee shall have taken place as a result of (i) willful breach or neglect of duty; (ii) failure or refusal to work or to comply with the Company's rules, policies, and practices; (iii) dishonesty; (iv) insubordination; (v) being under the influence of drugs (except to the extent medically prescribed) or alcohol while on duty or on Company premises; (vi) conduct endangering, or likely to endanger, the 5 6 health or safety of another employee; or (vii) conviction of a felony. In the event of the death of an employee optionee, that portion of the Option which had become exercisable on the date of death shall be exercisable by his or her personal representatives, heirs, or legatees within six months or such time period as is determined by the Committee (but in the case of an Incentive Stock Option, in no event after the expiration of the term of such Option as set forth in the Option agreement). In the event of the death of an optionee within one month after termination of employment or service, that portion of the Option which had become exercisable on the date of termination shall be exercisable by his or her personal representatives, heirs, or legatees within six months or such time period as is determined by the Committee (but in the case of an Incentive Stock Option, in no event after the expiration of the term of such Option as set forth in the Option agreement.) In the event that an optionee ceases to be an employee of the Company or of any Subsidiary for any reason, including death or retirement, prior to the lapse of the waiting period, if any, his or her Option shall terminate and be null and void to the extent unvested. (e) Leave of Absence. The employment relationship shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days (or not more than 30 days for unpaid leave), unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing; or (iv) in the case of transfer between locations of the Company or between the Company, its Subsidiaries or its successor. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event shall an Option be exercised after the expiration of the term set forth in the Option agreement. (f) Acceleration of Exercisability or Waiting Period. The Committee may accelerate the earliest date on which outstanding Options (or any installments thereof) are exercisable. (g) Special Incentive Stock Option Provisions. In addition to the foregoing, Options granted under the Plan which are intended to be Incentive Stock Options under Section 422 of the Code shall be subject to the following terms and conditions: (i) Dollar Limitation. To the extent that the aggregate Fair Market Value of the shares of Common Stock with respect to which Options designated as Incentive Stock Options become exercisable for the first time by any individual during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted and (ii) the Fair Market Value of the shares shall be determined as of the time the Option with respect to such shares is granted. (ii) 10% Stockholder. If any person to whom an Incentive Stock Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, the owner of Common Stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, then the following special provisions shall be applicable to the Incentive Stock Option granted 6 7 to such individual: (A) The exercise price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the date of grant; and (B) The Option shall not have a term in excess of five years from the date of grant. Except as modified by the preceding provisions of this Subsection 7(g) and except as otherwise required by Section 422 of the Code, all of the provisions of the Plan shall be applicable to the Incentive Stock Options granted hereunder. (h) Other Provisions. Each Option granted under the Plan may contain such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Committee. (i) Options to Consultants. Options granted to consultants shall not be subject to Sections 7(b) and 7(d) of the Plan, but shall have such terms and conditions pertaining to waiting period (if any), exercise date, and effect of termination of the consulting relationship as the Committee shall determine in each case. (j) Buyout Provisions. The Committee may at any time offer to buy out, for a payment in cash or Common Stock (including Restricted Stock), an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. Any such offer made to an Officer or Director shall comply with the applicable provisions of Rule 16b-3. This provision is intended only to clarify the powers of the Committee and shall not in any way be deemed to create any rights on the part of optionees to receive buyout offers or payments. (k) Limitations on Grants to Employees. Notwithstanding anything to the contrary herein, the following limitations shall apply to grants of Options: (i) No eligible participant shall be granted, in any fiscal year of the Company, Options to purchase more than 4,800,000 shares. (ii) In connection with his or her initial employment, an eligible participant may be granted Options to purchase up to an additional 6,400,000 shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 11. (iv) If an Option is cancelled (other than in connection with a transaction described in Section 12), the cancelled Option will be counted against the limit set forth in this paragraph k. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 8. Stock Appreciation Rights. Stock Appreciation Rights may be granted only in connection with an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to such Stock Appreciation Rights. (a) Exercise of Right. The Stock Appreciation Right shall entitle the optionee to exercise the Right by surrendering to the Company unexercised a portion of the underlying Option as to which Optionee has a right to exercise. The Optionee shall receive in exchange from the Company an amount in cash or Common Stock equal in value to the excess of (x) the 7 8 Fair Market Value on the date of exercise of the Right of the Common Stock covered by the surrendered portion of the underlying Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the underlying Option, as determined in accordance with Section 7(a) above. Notwithstanding the foregoing, the Committee may place limits on the amount that may be paid upon exercise of a Stock Appreciation Right; provided, however, that such limit shall not restrict the exercisability of the underlying Option. (b) Option Cancelled. When a Stock Appreciation Right is exercised, the underlying Option, to the extent surrendered, shall no longer be exercisable. (c) Exercisability Requirement. A Stock Appreciation Right shall be exercisable only when and to the extent that the underlying Option is exercisable and shall expire no later than the date on which the underlying Option expires. (d) In-the-Money Requirement. A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Common Stock covered by the underlying Option exceeds the exercise price of the Common Stock covered by the underlying Option. (e) Incentive Stock Option Requirements. In the event that a Stock Appreciation Right is granted that relates to an Incentive Stock Option, such Right shall contain such additional or different terms as may be necessary under applicable regulations to preserve treatment of the Incentive Stock Option as such under Section 422 of the Code. (f) Form of Payment. The Company's obligation arising upon the exercise of a Stock Appreciation Right may be paid currently or on a deferred basis (with such interest or earnings equivalent as may be determined by the Committee), and may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Committee in its sole discretion may determine. Shares of Common Stock issued upon the exercise of a Stock Appreciation Right shall be valued at the Fair Market Value of the Common Stock as of the date of exercise. 9. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Committee determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of shares of Common Stock that such person shall be entitled to purchase, the price to be paid, which price in the case of individuals subject to Section 16 of the Exchange Act shall not be more than $0.00067 per share (the par value of the Company's Common Stock, as adjusted from time to time, and the minimum price permitted by the Delaware General Corporation Law), and the time within which such person must accept such offer, which shall in no event exceed 60 days from the date the Stock Purchase Right was granted. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Committee. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. The Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness 8 9 of the purchaser to the Company. The repurchase option shall lapse as to not more than 50% of such shares at a date not earlier than 2-1/2 years from the date of grant of the Restricted Stock and as to the remaining shares at a date not earlier than 5 years from the date of grant of the Restricted Stock. The Committee shall exercise its repurchase option in accordance with the above. Notwithstanding the foregoing, with respect to Restricted Stock granted out of and subject to the restrictions of the Special Reserve, the Committee may in its discretion exercise its repurchase option and such repurchase option shall lapse as to such shares at such a rate as the Committee may, in its discretion, determine. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. 10. Long-Term Performance Awards. (a) Awards. Long-Term Performance Awards are cash or stock bonus awards that may be granted either alone, in addition to or in tandem with other awards granted under the Plan and/or awards made outside of the Plan. Long-Term Performance Awards shall not require payment by the recipient of any consideration for the Long-Term Performance Award or for the shares of Common Stock covered by such award. The Committee shall determine the nature, length and starting date of any performance period (the "Performance Period") for each Long-Term Performance Award and shall determine the performance and/or employment factors to be used in the determination of the value of Long-Term Performance Awards and the extent to which such Long-Term Performance Awards have been earned. Shares issued pursuant to a Long-Term Performance Award may be made subject to various conditions, including vesting or forfeiture provisions. Long-Term Performance Awards may vary from participant to participant and between groups of participants and shall be based upon the achievement of Company, Subsidiary and/or individual performance factors or upon such other criteria as the Committee may deem appropriate. Performance Periods may overlap and participants may participate simultaneously with respect to Long-Term Performance Awards that are subject to different Performance Periods and different performance factors and criteria. Long-Term Performance Awards shall be confirmed by, and be subject to the terms of, a written Long-Term Performance Award agreement. (b) Value of Awards. At the beginning of each Performance Period, the Committee may determine for each Long-Term Performance Award subject to such Performance Period the range of dollar values and/or numbers of shares of Common Stock to be issued to the participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Long-Term Performance Award are met. Such dollar values or numbers of shares of Common Stock may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Committee. (c) Adjustment of Awards. Notwithstanding the provisions of Section 19 hereof, the Committee may, after the grant of Long-Term Performance Awards, adjust the performance factors applicable to such Long-Term Performance Awards to take into account changes in the law or in accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances in order to avoid windfalls or hardships. 9 10 (d) Termination. Unless otherwise provided in the applicable Long-Term Performance Award agreement, if a participant terminates his or her employment or his or her consultancy during a Performance Period because of death or Disability, the Committee may in its discretion provide for an earlier payment in settlement of such award, which payment may be in such amount and under such terms and conditions as the Committee deems appropriate. Unless otherwise provided in the applicable Long-Term Performance Award agreement, if a participant terminates employment or his or her consultancy during a Performance Period for any reason other than death or Disability, then such a participant shall not be entitled to any payment with respect to the Long-Term Performance Award subject to such Performance Period, unless the Committee shall otherwise determine in its discretion. (e) Form of Payment. The earned portion of a Long-Term Performance Award may be paid currently or on a deferred basis (with such interest or earnings equivalent as may be determined by the Committee). Payment shall be made in the form of cash or whole shares of Common Stock, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine. (f) Reservation of Shares. In the event that the Committee grants a Long-Term Performance Award that is payable in cash or Common Stock, the Committee may (but need not) reserve an appropriate number of shares of Common Stock under the Plan at the time of grant of the Long-Term Performance Award. If and to the extent that the full amount reserved is not actually paid in Common Stock, the shares of Common Stock representing the portion of the reserve for that Long-Term Performance Award that is not actually issued in satisfaction of such Long-Term Performance Award shall again become available for award under the Plan. If shares of Common Stock are not reserved by the Committee at the time of grant, then (i) no shares shall be deducted from the number of shares available for grant under the Plan at that time and (ii) at the time of payment of the Long-Term Performance Award, only the number of shares actually issued to the participant shall be so deducted. If there are not a sufficient number of shares available under the Plan for issuance to a participant at the time of payment of a Long-Term Performance Award, any shortfall shall be paid by the Company in cash. 11. Recapitalization. In the event that dividends are payable in Common Stock or in the event there are splits, subdivisions, or combinations of shares of Common Stock, the number of shares available under the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares of Common Stock deliverable in connection with any Option, Right or Long-Term Performance Award theretofore granted shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price (where applicable). 12. Reorganization. In case the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or in case the property or stock of the Company is acquired by another corporation, or in case of separation, reorganization, or liquidation of the Company, the Committee, or the board of directors of any corporation assuming the obligations of the Company hereunder, shall, as to outstanding Options, Rights or Long-Term Performance Awards either (a) make appropriate provision for the protection of any such outstanding Options, Rights or Long-Term Performance Awards by the assumption or substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated, or otherwise reorganized corporation which will be issuable in respect to the shares 10 11 of Common Stock, provided that in the case of Incentive Stock Options, such assumption or substitution comply with Section 424(a) of the Code, or (b) upon written notice to the participant, provide that the Option or Right must be exercised within 30 days of the date of such notice or it will be terminated. In any such case, the Committee may, in its discretion, advance the lapse of vesting periods, waiting periods, and exercise dates. 13. Employment or Consulting Relationship. Nothing in the Plan or any award made hereunder shall interfere with or limit in any way the right of the Company or of any Subsidiary to terminate any recipient's employment or consulting relationship at any time, with or without cause, nor confer upon any recipient any right to continue in the employ or service of the Company or any Subsidiary. 14. General Restriction. Each award shall be subject to the requirement that, if, at any time, the Committee shall determine, in its discretion, that the listing, quotation, registration, or qualification of the shares subject to such award upon any securities exchange or quotation system or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, such award or the issue or purchase of shares thereunder, such award may not be exercised in whole or in part unless such listing, quotation, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 15. Rights as a Stockholder. The holder of an Option, Right or Long-Term Performance Award shall have no rights as a stockholder with respect to any shares covered by such Option, Right or Long-Term Performance Award until the date of exercise. Once an Option, Right or Long-Term Performance Award is exercised by the holder thereof, the participant shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her holding is entered upon the records of the duly authorized transfer agent of the Company. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 16. Nonassignability of Awards. No awards made hereunder, including Options, Rights and Long-Term Performance Awards, shall be assignable or transferable by the recipient other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and in no event shall such awards be assigned or transferred in a manner that is inconsistent with the specific Plan provisions relating thereto. The designation of a beneficiary by a participant does not constitute a transfer. During the life of the recipient, an Option, Right or Long-Term Performance Award shall be exercisable only by him or her or by a transferee permitted by this Section 16. 17. Withholding Taxes. Whenever, under the Plan, shares are to be issued in satisfaction of Options, Rights or Long-Term Performance Awards granted hereunder, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever, under the Plan, payments are to be made to participants in cash, such payments shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 18. Nonexclusivity of the Plan. Neither the adoption or amendment of the Plan by the Board, the submission of the Plan or any amendments thereto to the stockholders of the Company 11 12 for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board or the Committee to adopt and implement such additional compensation arrangements as it may deem desirable, including, without limitation, the awarding of cash or the granting of stock options, stock appreciation rights, stock purchase rights or long-term performance awards outside of the Plan, and such arrangements may be either generally applicable to a class of employees or consultants or applicable only in specified cases. 19. Amendment, Suspension, or Termination of the Plan. The Board may at any time amend, alter, suspend, or terminate the Plan, but no amendment, alteration, suspension, or termination shall be made which would impair the rights of any grantee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or under Section 422 of the Code (or any other Applicable Law), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as is required by such Applicable Law. 20. Effective Date of the Plan. The Plan shall become effective upon approval of the Board and shall be subject to stockholder approval within 12 months of adoption by the Board. Options, Rights and Long-Term Performance Awards may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws. 12 -----END PRIVACY-ENHANCED MESSAGE-----