<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3571 94-2404110
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
1 INFINITE LOOP
CUPERTINO, CALIFORNIA 95014
(408) 996-1010
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
NANCY R. HEINEN
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
APPLE COMPUTER, INC.
1 INFINITE LOOP
CUPERTINO, CALIFORNIA 95014
(408) 996-1010
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
LARRY W. SONSINI FRANK S. BAYLEY BARTLEY C. DEAMER
MARTIN W. KORMAN MAURICE L. HOO DANIEL D. MEYERS
BRIAN C. ERB BAKER & MCKENZIE MCCUTCHEN, DOYLE, BROWN &
BERNARD J. CASSIDY TWO EMBARCADERO CENTER, 24TH FLOOR ENERSEN, LLP
WILSON SONSINI GOODRICH & ROSATI SAN FRANCISCO, CALIFORNIA 94111 THREE EMBARCADERO CENTER,
PROFESSIONAL CORPORATION (415) 576-3000 18TH FLOOR
650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94111
PALO ALTO, CALIFORNIA 94304 (415) 393-2000
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon consummation of the Acquisition described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
<S> <C> <C> <C> <C>
6,504,065
Common Stock, no par value......... shares $15.375 $100,000,000 $29,500
</TABLE>
(1) The shares of Common Stock to be registered consist of shares to be issued
to Power Computing Corporation ("Power Computing") in consideration of the
sale by Power Computing to the Registrant of substantially all of Power
Computing's assets. By the terms of the governing purchase agreement between
Power Computing and the Registrant, the number of shares to be issued cannot
be finally determined until the date of such acquisition, and the number of
shares to be issued is therefore currently an estimate.
(2) The offering price of the shares of Common Stock is estimated at $15.375 per
share pursuant to Rule 457(c) based on the last reported sales price of the
Common Stock as reported on Nasdaq National Market on December 9, 1997
solely for the purpose of computing the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
POWER COMPUTING CORPORATION
December , 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Power Computing Corporation ("Power") to be held at 11:00
a.m., local time, on , at 4500 Trammell Crow Center, 2001 Ross
Avenue, Dallas, Texas 75201 (Tel: (214) 978-3000). I hope that you will be
present or represented by proxy at this important meeting.
At the Special Meeting, you will be asked to approve the sale of
substantially all of the assets of Power (the "Acquisition") to Gravenstein,
Inc., a Delaware corporation ("Gravenstein") and a wholly owned subsidiary of
Apple Computer, Inc., a California corporation ("Apple"), pursuant to the terms
and conditions set forth in an Asset Purchase Agreement dated as of August 29,
1997 (the "Acquisition Agreement") by and among Power, Gravenstein and Apple.
Consummation of the Acquisition is subject to satisfaction of certain
conditions, including the approval of the Acquisition Agreement by Power's
stockholders.
In addition, you will be asked to approve the dissolution and liquidation of
Power subsequent to the consummation of the Acquisition by adopting a Plan of
Dissolution and Complete Liquidation of Power Computing Corporation (the "Plan
of Liquidation"), pursuant to which a liquidating trust will be created for the
benefit of Power's stockholders in accordance with an Agreement and Declaration
of Trust (the "Trust Agreement").
The Board of Directors (the "Board") of Power has determined that the
Acquisition Agreement is fair to, and in the best interests of, Power and its
stockholders, and has approved the Acquisition Agreement. The Board unanimously
recommends that you vote FOR the approval of the Acquisition Agreement. In
addition, the Board has approved the Plan of Liquidation and the Trust
Agreement, and unanimously recommends you vote FOR the approval of the Plan of
Liquidation.
The accompanying Notice of Special Meeting and Prospectus/Proxy Statement
describe the Acquisition, the Plan of Liquidation and the Trust Agreement in
greater detail and provide specific information concerning the Special Meeting.
Please read these materials carefully. It is important that you be represented
at the Special Meeting, even if you are not able to attend in person. The
affirmative vote of holders of at least a majority of Series A Preferred Stock,
and at least a majority of Series B Preferred Stock, each voting as a separate
class, and the affirmative vote of holders of at least a majority of the
outstanding shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock of Power, all voting together as a single class, is required to
approve and adopt the Acquisition Agreement and the Plan of Liquidation.
Consequently, a failure to vote or abstentions will have the same effect as a
vote against the Acquisition Agreement and the Plan of Liquidation.
Please mark, sign and date your proxy card and return it promptly in the
enclosed, postage-paid envelope even if you plan to attend the Special Meeting
in person. This will not prevent you from voting in person at the Special
Meeting, but will assure that your vote is counted if you are unable to attend.
On behalf of the Board of Directors, we urge you to vote FOR approval of the
Acquisition Agreement and the Plan of Liquidation.
Yours sincerely,
STEPHEN S. KAHNG
Chairman of the Board and
Chief Executive Officer
<PAGE>
POWER COMPUTING CORPORATION
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ,
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders (the
"Special Meeting") of Power Computing Corporation, a Delaware corporation
("Power"), will be held on , , at 11:00 a.m., local time, at
4500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201 (Tel: (214)
978-3000) the following purposes:
1. To consider and act upon proposals to approve the following:
(i) the sale of substantially all of the assets of Power (the
"Acquisition") to Gravenstein, Inc., a Delaware corporation
("Gravenstein") and a wholly owned subsidiary of Apple Computer, Inc., a
California corporation ("Apple"), pursuant to the terms and conditions
set forth in an Asset Purchase Agreement dated as of August 29, 1997 (the
"Acquisition Agreement") by and among Power, Gravenstein and Apple; and
(ii) the dissolution and liquidation of Power subsequent to the
consummation of the Acquisition, and the adoption of a Plan of
Dissolution and Complete Liquidation of Power Computing Corporation (the
"Plan of Liquidation") pursuant to which a liquidating trust (the
"Liquidating Trust") will be created for the benefit of Power's
stockholders in accordance with an Agreement and Declaration of Trust
(the "Trust Agreement").
2. To transact such other business as may properly come before the
Special Meeting and any adjournment or postponement thereof.
Copies of the Acquisition Agreement, the Plan of Liquidation and the Trust
Agreement are included as Appendices A, B and C, respectively, to the
accompanying Prospectus/Proxy Statement.
The affirmative vote of holders of at least a majority of Series A Preferred
Stock $.01 par value per share, and at least a majority of Series B Preferred
Stock, $.01 par value per share, each voting as a separate class, and the
affirmative vote of holders of at least a majority of the outstanding shares of
Common Stock, $.01 par value per share, Series A Preferred Stock, Series B
Preferred Stock of Power, all voting together as a single class, is required to
approve and adopt the Acquisition Agreement and the Plan of Liquidation.
Consequently, a failure to vote or abstentions will have the same effect as a
vote against the Acquisition Agreement and the Plan of Liquidation. Only holders
of record of outstanding shares of Power's Common Stock and Series A Preferred
Stock and Series B Preferred Stock as of the close of business on December ,
1997 (the "Record Date") will be entitled to receive notice of, and to vote at,
the Special Meeting and at any adjournment or postponement thereof, with each
share of Common Stock, Series A Preferred Stock and Series B Preferred Stock
entitling its holder to one vote. On the Record Date, there were outstanding and
entitled to vote shares of the Company's Common Stock, 5,000,000 shares
of Series A Preferred Stock and 4,100,000 shares of Series B Preferred Stock.
Certain stockholders of the Company who are affiliates of Power, who in the
aggregate beneficially owned approximately 4,022,500 shares of the Company's
Common Stock, or approximately % of the outstanding Common Stock, as of the
Record Date, 4,337,500 shares of the Company's Series A Preferred Stock, or
approximately 86.75% of the outstanding Series A Preferred Stock, as of the
Record Date, and 337,500 shares of the Company's Series B Preferred Stock, or
approximately 8.23% of the outstanding Series B Preferred Stock, as of the
Record Date, have entered into agreements to vote all of their shares of Power's
Common Stock, Series A Preferred Stock and Series B Preferred Stock,
respectively, for the approval of the Acquisition Agreement.
<PAGE>
Pursuant to a shareholder voting agreement dated April 27, 1995, as directed
by holders of at least 70% of the shares subject to such agreement, stockholders
holding an additional 1,189,160 shares of Power's Common Stock, or approximately
% of the outstanding Common Stock, as of the Record Date, 662,500 shares of
Power's Series A Preferred Stock, or approximately 13.25% of the outstanding
Series A Preferred Stock, as of the Record Date, and 65,000 shares of Power's
Series B Preferred Stock, or approximately 1.59% of the outstanding Series B
Preferred Stock, as of the Record Date, will also vote in favor of approving the
Acquisition.
THE BOARD OF DIRECTORS OF POWER COMPUTING CORPORATION HAS UNANIMOUSLY
APPROVED THE TERMS OF THE ACQUISITION AGREEMENT AND THE PLAN OF LIQUIDATION, AND
THE TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS THAT POWER'S STOCKHOLDERS
VOTE TO APPROVE THE ACQUISITION AND THE PLAN OF LIQUIDATION, AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
Under the Delaware General Corporation Law, Power's stockholders are not
entitled to appraisal, dissenters' or similar rights in connection with the
Acquisition. See "The Acquisition--Dissenters' Rights" in the accompanying
Prospectus/Proxy Statement.
Round Rock, Texas
,
By order of the Board of Directors
JOHN W. TEETS
SECRETARY
YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, WHETHER OR NOT
YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. THE
ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING. YOUR PROXY MAY BE
REVOKED AT ANY TIME BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER DATED
PROXY WITH RESPECT TO THE SAME SHARES, BY FILING WITH THE SECRETARY OF POWER
COMPUTING CORPORATION A WRITTEN REVOCATION BEARING A LATER DATE, OR BY ATTENDING
AND VOTING AT THE SPECIAL MEETING.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997.
APPLE COMPUTER, INC.
PROSPECTUS
REGARDING THE ISSUANCE OF SHARES
OF APPLE COMMON STOCK
POWER COMPUTING CORPORATION
PROXY STATEMENT
This Prospectus/Proxy Statement constitutes a prospectus of Apple Computer,
Inc., a California corporation ("Apple"), with respect to shares of common stock
of Apple, no par value ("Apple Common Stock"), to be issued in connection with
the acquisition (the "Acquisition") of certain assets of Power Computing
Corporation, a Delaware company ("Power"), by Gravenstein, Inc., a Delaware
corporation ("Gravenstein") and a wholly-owned subsidiary of Apple, pursuant to
the terms and conditions of the Asset Purchase Agreement dated August 29, 1997
(the "Acquisition Agreement") by and among Apple, Gravenstein and Power.
This Prospectus/Proxy Statement is also being furnished to stockholders of
Power (the "Power Stockholders") in connection with the solicitation of proxies
by the Board of Directors of Power (the "Power Board") for use at the Special
Meeting of the stockholders of Power (the "Special Meeting"), including any and
all adjournments or postponements thereof, to be held on , , at
11:00 a.m., local time, at 4500 Trammell Crow Center, 2001 Ross Avenue, Dallas,
Texas 75201 (Tel: (214) 978-3000).
This Prospectus/Proxy Statement and the accompanying form of proxy are first
being mailed to the Power Stockholders on , .
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY THE POWER STOCKHOLDERS IN EVALUATING THE
PROPOSALS TO BE VOTED ON AT THE SPECIAL MEETING AND THE ACQUISITION OF THE
SECURITIES OFFERED HEREBY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF APPLE OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS DECEMBER , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
SUMMARY................................................................... 3
The Companies........................................................... 3
Special Meeting of Power Stockholders................................... 3
Risk Factors............................................................ 4
The Acquisition......................................................... 4
Tax Considerations and Risks............................................ 6
Accounting Treatment.................................................... 7
Regulatory Approvals.................................................... 7
Comparison of Stockholder Rights........................................ 7
Power's Plan of Liquidation............................................. 7
Recommendation of Power Board of Directors.............................. 8
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF POWER....................... 9
APPLE COMMON STOCK MARKET PRICE DATA...................................... 10
RISK FACTORS.............................................................. 11
No Assurance of Distribution to Power Stockholders...................... 11
Failure to Consummate the Acquisition--Repayment of Loan, Finality of
Releases and Loss or Amendment of Licenses............................ 11
Treatment of the Acquisition under the Internal Revenue Code............ 12
Sale of Non-Macintosh Based Business.................................... 13
Risks Relating to an Investment in Apple Common Stock................... 13
THE SPECIAL MEETING....................................................... 22
General................................................................. 22
Purpose of the Special Meeting.......................................... 22
Record Date............................................................. 22
Vote Required........................................................... 22
Voting and Revocation of Proxies........................................ 23
Solicitation of Proxies................................................. 23
Recommendation of Power Board of Directors.............................. 24
THE ACQUISITION........................................................... 25
Background of the Acquisition........................................... 25
Negotiations with Apple and Deliberations of the Power Board............ 25
Reasons for the Power Board's Decision; Factors Considered.............. 26
Consideration of Other Financing and Sale Proposals..................... 27
The Acquisition Agreement............................................... 28
Apple Licenses.......................................................... 33
The Apple Loan.......................................................... 33
Tax Considerations and Risks............................................ 34
Accounting Treatment.................................................... 36
Regulatory Approvals.................................................... 36
Stock Ownership following the Acquisition............................... 36
Resale of Apple Common Stock............................................ 36
Listing................................................................. 37
Interest of Power Board and Management in the Acquisition............... 37
Dissenters' Rights...................................................... 37
The Power Stockholders' Voting Agreements............................... 37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PLAN OF LIQUIDATION AND THE LIQUIDATING TRUST............................. 39
The Plan of Liquidation................................................. 39
Assets, Liabilities and Contingencies of Power.......................... 39
Liquidation Preference.................................................. 40
Terms of the Trust Agreement............................................ 40
Certain Federal Income Tax Consequences................................. 40
COMPARISON OF RIGHTS OF HOLDERS OF POWER COMMON STOCK AND PREFERRED STOCK
AND APPLE COMMON STOCK.................................................. 41
BUSINESS OF POWER......................................................... 52
SELECTED FINANCIAL INFORMATION OF POWER................................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF POWER..................................................... 56
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF POWER............. 61
MANAGEMENT AND EXECUTIVE COMPENSATION OF POWER............................ 64
Directors and Executive Officers of Power............................... 64
Resignations............................................................ 65
Employment Agreements................................................... 66
Executive Incentive Program............................................. 66
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 67
EXPERTS................................................................... 68
LEGAL MATTERS............................................................. 68
FINANCIAL STATEMENTS OF POWER............................................. F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS......................... F-2
Annex A-- Asset Purchase Agreement........................................
Annex B-- Power Computing Corporation Liquidating Trust...................
Annex C-- Power Computing Corporation Plan of Dissolution and Complete
Liquidation......................................................
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Apple is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60601-2511. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Apple's Common Stock is quoted on
the Nasdaq National Market ("Nasdaq"), and such reports, proxy statements and
other information can also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
Apple has filed with the SEC a registration statement on Form S-4 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information,
reference is hereby made to the Registration Statement. Copies of the
Registration Statement and the exhibits and schedules thereto may be inspected,
without charge, at the offices of the SEC, or obtained at prescribed rates from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, copies of the Registration Statement
may be obtained from the Commission's World Wide Web site at http://www.sec.gov.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY APPLE OR POWER. NEITHER THE DELIVERY HEREOF
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROSPECTUS/PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
OFFERED BY THIS PROSPECTUS/PROXY STATEMENT WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
All information contained or incorporated by reference in this
Prospectus/Proxy Statement relating to Apple and Gravenstein has been supplied
by Apple and all such information contained herein relating to Power has been
supplied by Power. Apple and Gravenstein bear no liability or responsibility for
the accuracy of, or omissions related to, the information contained or
incorporated by reference herein relating to Power, including without limitation
all information relating to the Plan of Dissolution and Complete Liquidation of
Power Computing Corporation and all matters relating thereto. Power bears no
liability or responsibility for the accuracy of, or omissions related to, the
information contained or incorporated by reference herein relating to Apple or
Gravenstein.
1
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are attached hereto as annexes and are incorporated
by reference in this Prospectus/Proxy Statement:
A. Asset Purchase Agreement by and among Apple Computer, Inc.,
Gravenstein, Inc. and Power Computing Corporation dated as of August 29,
1997 (the "Acquisition Agreement").
B. Plan of Dissolution and Complete Liquidation of Power Computing
Corporation (the "Plan of Liquidation").
C. Agreement and Declaration of Trust (the "Trust Agreement").
The following documents previously filed by Apple with the SEC (file no.
000-10030) are incorporated by reference in this Prospectus/Proxy Statement:
1. Apple's Annual Report on Form 10-K for the fiscal year ended September
26, 1997.
2. The description of Apple's capital stock contained in Apple's
Registration Statement filed on Form 8-A, dated October 30, 1981 and the
description of the Common Share Purchase Rights contained in its
Registration Statement filed on Form 8-A, dated May 15, 1989.
All documents filed by Apple pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of the filing of this Registration Statement
of which this Prospectus/Proxy Statement forms a part and prior to the Special
Meeting shall be deemed to be incorporated by reference in this Prospectus/Proxy
Statement and to be a part hereof from the dates of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus/Proxy Statement to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus/Proxy Statement.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (WITHOUT
EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE WITHOUT CHARGE UPON REQUEST. REQUESTS FOR DOCUMENTS SHOULD BE DIRECTED
TO POWER COMPUTING CORPORATION, CORPORATE SECRETARY'S OFFICE, 2400 SOUTH
INTERSTATE 35, ROUND ROCK, TEXAS 78681 (TELEPHONE: (512) 246-7807). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY SUCH
REQUEST SHOULD BE MADE BY , .
2
<PAGE>
SUMMARY
THE FOLLOWING CONTAINS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS/PROXY STATEMENT. THIS SUMMARY DOES NOT CONTAIN A COMPLETE
STATEMENT OF ALL MATERIAL ELEMENTS OF THE PROPOSALS TO BE VOTED ON AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS/ PROXY STATEMENT AND IN THE INFORMATION AND DOCUMENTS ANNEXED
HERETO.
THE COMPANIES
APPLE COMPUTER, INC. Apple designs, manufactures and markets
microprocessor-based personal computers and related personal computing and
communicating solutions for sale primarily to education, home, business and
government customers. Substantially all of Apple's net sales to date have been
derived
from the sale of personal computers from its Apple Macintosh line of computers
and related software and peripherals. Apple operates in one principal industry
segment across geographically diverse marketplaces.
Apple was incorporated under the laws of the State of California on January
3, 1977. Apple's principal executive offices are located at 1 Infinite Loop,
Cupertino, California, 95014 and its telephone number is (408) 996-1010.
GRAVENSTEIN, INC. Gravenstein is a corporation recently organized by Apple
for the purpose of effecting the Acquisition. Gravenstein has no material assets
and has not engaged in any activities except in connection with the Acquisition.
Gravenstein's executive offices are located at 1 Infinite Loop, Cupertino,
California 95014, and its telephone number is (408) 996-1010.
POWER COMPUTING CORPORATION. Power is a direct marketer of personal
computers. Power develops, and manufactures, sells and supports a broad line of
Macintosh-compatible desktop computer systems and has made limited shipments of
Wintel personal computers. Power sells its products directly to customers.
Power was incorporated under the laws of the State of Delaware on November
19, 1993. Power's principal executive offices are located at 2400 South
Interstate 35, Round Rock, Texas 78681 and its telephone number is (512)
246-7807.
SPECIAL MEETING OF POWER STOCKHOLDERS
GENERAL. A Special Meeting of Power Stockholders (the "Special Meeting")
will be held on , , at 11:00 a.m., local time, at 4500 Trammell
Crow Center, 2001 Ross Avenue, Dallas Texas 75201 (Tel: (214) 978-3000).
PURPOSE OF THE SPECIAL MEETING. The purpose of the Special Meeting is to
approve (i) the Acquisition and the Acquisition Agreement; and (ii) the Plan of
Liquidation, pursuant to which the Liquidating Trust will be created for the
benefit of the Power Stockholders under the Trust Agreement.
RECORD DATE. Only Power Stockholders of record at the close of business on
December , 1997 (the "Record Date") are entitled to notice of, and to vote at,
the Special Meeting.
VOTE REQUIRED. Approval of the Acquisition and the Plan of Liquidation
requires the affirmative vote of holders of at least a majority of the Power
Series A Preferred Stock, and at least a majority of the Power Series B
Preferred Stock, each voting as a separate class, and the affirmative vote of
holders of at least a majority of the outstanding shares of Common Stock, Series
A Preferred Stock and Series B Preferred Stock of Power, all voting together as
a single class.
Two affiliate stockholders of Power, namely 4C Ventures L.P. and Stephen S.
Kahng, have entered into Voting Agreements relating to an aggregate of
approximately 4,022,500 shares of Power Common Stock, 4,337,500 shares of Power
Series A Preferred Stock, and 337,500 shares of Power Series B Preferred Stock,
representing approximately 66.89% of the shares of Power Common Stock, 86.75% of
the shares of Power Series A Preferred Stock, and 8.23% of the shares of Power
Series B Preferred Stock, representing 57.17%
3
<PAGE>
of outstanding Power Common Stock and Power Preferred Stock voting together,
pursuant to which they have (i) agreed to vote their shares of Power Common
Stock and Power Preferred Stock in favor of the Acquisition Agreement, (ii)
granted irrevocable proxies to Apple to vote such shares accordingly, and (iii)
agreed not to sell their shares prior to the earlier of (x) the termination of
the Acquisition Agreement, or (y) the Special Meeting.
In addition, pursuant to a shareholder voting agreement dated April 27,
1995, as directed by holders of at least 70% of the shares subject to such
agreement, stockholders holding an additional 1,189,160 shares of Power's Common
Stock, or approximately 20.44% of the outstanding Common Stock, as of the Record
Date, 662,500 shares of Power's Series A Preferred Stock, or approximately
13.25% of the outstanding Series A Preferred Stock, as of the Record Date, and
65,000 shares of Power's Series B Preferred Stock, or approximately 1.59% of the
outstanding Series B Preferred Stock, as of the Record Date, will also vote in
favor of approving the Acquisition. See "The Power Stockholder Special Meeting--
Vote Required."
VOTING AND REVOCATION OF PROXIES. Shares of Power Common Stock, Power
Series A Preferred Stock and Power Series B Preferred Stock which are
represented by a properly executed proxy received prior to the vote at the
Special Meeting will be voted at the Special Meeting in accordance with the
directions on the proxy cards, unless such proxies are revoked in the manner set
forth herein in advance of such vote. See "The Power Stockholder Special
Meeting--Voting and Revocation of Proxies."
RECOMMENDATION OF POWER BOARD OF DIRECTORS. The Power Board has unanimously
approved the Acquisition Agreement and the Plan of Liquidation, and believes
that the terms of the Acquisition Agreement and the Plan of Liquidation are fair
to, and that the sales of assets pursuant to such agreements are in the best
interest of, Power and the Power Stockholders and unanimously recommends that
the Power Stockholders vote FOR approval and adoption of the Acquisition
Agreement and the Plan of Liquidation.
RISK FACTORS
Power Stockholders should carefully consider certain risk factors in
evaluating the Acquisition, the Plan of Liquidation and the Trust Agreement. See
"Risk Factors."
THE ACQUISITION
PROCEEDS TO POWER STOCKHOLDERS. EVEN IF THE POWER STOCKHOLDERS APPROVE THE
ACQUISITION AND THE ACQUISITION CLOSES, THERE IS NO ASSURANCE THAT ANY APPLE
COMMON STOCK WILL BE DISTRIBUTED TO THE POWER STOCKHOLDERS. SEE "RISK
FACTORS--NO ASSURANCE OF DISTRIBUTION TO POWER STOCKHOLDERS," "--TREATMENT OF
THE ACQUISITION UNDER THE INTERNAL REVENUE CODE" AND "PLAN OF LIQUIDATION AND
THE LIQUIDATING TRUST--THE PLAN OF LIQUIDATION."
THE ACQUISITION AGREEMENT. Power, Gravenstein and Apple entered into the
Acquisition Agreement on August 29, 1997, under which Gravenstein agreed to
purchase substantially all of the assets of Power, which include all Mac OS and
other licenses from Apple to Power, Power's customer list and related data, all
of Power's intellectual property related to Mac-compatible products (excluding
trademarks, service marks, trade names and Web addresses, sites or domain names)
and additional assets to be agreed upon. At the closing of the Acquisition (the
"Closing"), Gravenstein will deliver shares of Common Stock of Apple with a
value of $100 million (based on the average last sales prices of Apple Common
Stock over the five consecutive trading days ending on the trading day two days
prior to the Closing) plus the value of additional assets to be determined up to
an aggregate of $25 million, less the principal amount outstanding (and accrued
interest) at the Closing on a revolving loan promissory note in the principal
amount of $25 million (the "Loan") from Power to Apple evidencing a loan from
Apple to Power.
4
<PAGE>
The Closing of the Acquisition is conditioned on, among other things, the
expiration of the Hart-Scott-Rodino waiting period and the absence of other
governmental or court action regarding the transaction. See "The
Acquisition--Regulatory Approvals." In addition, the Power Stockholders must
approve the transaction.
Contemporaneously with the execution of the Acquisition Agreement, Power and
Apple entered into certain other agreements, including (i) mutual Releases (the
"Releases"), pursuant to which Power released Apple (the "Power Release") from
all liability up to the date of the Releases, including any liability that Apple
might have under its license agreements with Power, and Apple released Power
(the "Apple Release") from all liability up to the date of the Releases, (ii) an
amendment (the "Omnibus Amendment") to the licenses then in effect between Apple
and Power to make certain adjustments to the terms of such licenses for the
period from execution of the Acquisition Agreement to the Closing and in the
event that the Acquisition is not consummated, (iii) a post-closing operating
agreement (the "Post-Closing Operating Agreement") that sets forth the terms of
the relationship that would exist between Apple and Power if and when the
Acquisition is consummated, and (iv) the Loan, pursuant to which Apple made
available to Power a revolving line of credit in the amount of $25 million. Each
of these agreements is attached as an exhibit to the Acquisition Agreement in
Annex 1 hereto. Power stockholders are urged to read each of these agreements in
its entirety, and all references herein to the Acquisition Agreement and/ or the
above-mentioned agreements are qualified by reference to the full text of those
agreements, which are incorporated herein by reference.
ESCROW OF CONSIDERATION. Apple Common Stock having a value of $15 million
(based on an average historical price) to be issued to Power at the Closing will
be held in escrow (the "Escrow Shares") in order to satisfy, at least in part,
any indemnification claims made by Apple against Power pursuant to the
provisions of the Indemnification and Escrow Agreement. Apple Common Stock
having a value of $3 million (based on an average historical price) will be
released from such escrow on the last day of each of the third, sixth and ninth
month following the Closing, and the balance of the Escrow Shares will be
released from escrow on the one-year anniversary of the Closing, provided that
Apple does not, in its reasonable judgment, deem it necessary to hold such
shares in escrow to satisfy any unsatisfied indemnification claim. Power may
procure the earlier release of the Escrow Shares by depositing cash or cash
equivalents of equal value with the Escrow Agent. See "The Acquisition--The
Acquisition Agreement-- Indemnification and Escrow."
NEGATIVE FACTORS CONSIDERED BY THE POWER BOARD. In approving the
Acquisition, the Power Board considered, among others, the following risks,
uncertainties and possible negative consequences: (i) the risk that the benefits
(including without limitation tax benefits) sought in the Acquisition will not
be obtained, (ii) the risk that the Acquisition will not be consummated, (iii)
the potential adverse effect of the public announcement of the Acquisition on
Power's sales, customer relations, operating results and ability to retain
employees, to consummate the Acquisition and to wind down and dissolve, and (iv)
the fluctuation in trading price of Apple Common Stock. The Power Board
determined that the potential benefits of the Acquisition outweighed the risks
inherent in the transaction.
CONSIDERATION OF OTHER FINANCING PROPOSALS. Prior to entering into the
Acquisition Agreement, Power unsuccessfully sought to finance its working
capital requirements through an initial public offering of its common stock and
a private placement of its equity securities. In addition, prior to August 29,
1997, Stephen S. Kahng, Power's Chairman of the Board and Chief Executive
Officer, approached a number of potential investors in Power, but none made a
firm proposal or entered into serious negotiations with Power. Pacific Century
Group ("PCG") from Hong Kong expressed an interest in acquiring Power; however,
it did not make a formal proposal to Power until after Power had entered into
the Acquisition Agreement. See "The Apple Transaction--Consideration of Other
Financing and Sale Proposals."
STOCK OWNERSHIP FOLLOWING THE ACQUISITION. Holders of Power Common Stock
and Power Preferred Stock will continue to hold such shares following the
consummation of the Acquisition, and, except for the
5
<PAGE>
Escrow Shares, Power will hold the shares of Apple Common Stock delivered at the
closing of the Acquisition with a value of the sum of $100,000,000 plus an
amount equivalent to the value of the Additional Assets, less any amount of
principal outstanding and/or interest due or accrued under the Loan, based on
the average closing price of such shares on the five trading days prior to the
Closing (the "Average Price"). See "The Acquisition--Stock Ownership Following
the Acquisition."
RESALE OF APPLE COMMON STOCK. The shares of Apple Common Stock issued to
Power and as may be distributed to Power Stockholders or the Liquidating Trust
after consummation of the Acquisition will have been registered under the
Securities Act. Such shares may be freely traded without restriction by the
Liquidating Trust and those Power Stockholders who are not deemed to be
"affiliates" of Power or Apple, as that term is defined in the rules of the
Securities Act. Shares of Apple Common Stock received by Power, the Liquidating
Trust and Power Stockholders who are deemed to be affiliates of Power or Apple
may be resold as permitted by Rule 145 under the Securities Act or as otherwise
permitted under the Securities Act. See "The Acquisition--Resale of Apple Common
Stock."
LISTING. Apple Common Stock trades on Nasdaq under the symbol "AAPL." Apple
intends to apply to have the Apple Common Stock issued to Power pursuant to the
Acquisition Agreement included in the Nasdaq Stock Market upon consummation of
the Acquisition. See "The Acquisition--Listing."
DISSENTERS' RIGHTS. Under the Delaware General Corporation Law, the Power
Stockholders are not entitled to appraisal, dissenters' or similar rights in
connection with the Acquisition.
THE POWER STOCKHOLDERS VOTING AGREEMENTS. Two affiliate stockholders of
Power, namely 4C Ventures L.P. and Stephen S. Kahng, have entered into voting
agreements (the "Voting Agreements") relating to an aggregate of approximately
4,022,500 shares of Power Common Stock, 4,337,500 shares of Power Series A
Preferred Stock, and 337,500 shares of Power Series B Preferred Stock,
representing approximately 66.89% of the shares of Power Common Stock, 86.75% of
the shares of Power Series A Preferred Stock, and 8.23% of the shares of Power
Series B Preferred Stock, representing 57.17% of outstanding Power Common Stock
and Power Preferred Stock voting together, pursuant to which they have (i)
agreed to vote their shares of Power Common Stock and Power Preferred Stock in
favor of the Acquisition Agreement, (ii) granted irrevocable proxies to Apple to
vote such shares accordingly, and (iii) agreed not to sell their shares prior to
the earlier of (x) the termination of the Acquisition Agreement, or (y) the
Special Meeting. See "The Power Stockholder Special Meeting--Vote Required" and
"The Acquisition--The Power Stockholders' Voting Agreements."
TAX CONSIDERATIONS AND RISKS
As a general matter, Power recognizes taxable gain or loss on any sale of
assets equal to the difference between the basis of such assets and the sum of
money and the fair market value of the property received in exchange for such
assets. Power and Apple intend to treat the Acquisition as a tax-free
reorganization under Section 368(a)(1)(C) of the Internal Revenue Code (the
"Code") for U.S. federal income tax purposes. If the Acquisition so qualifies,
Power will not recognize taxable gain upon the receipt of the Apple Common
Stock. However, for the Acquisition to qualify as a tax-free reorganization, the
Acquisition must satisfy certain requirements. See "The Acquisition--Tax
Considerations and Risks." No IRS ruling or opinion of counsel has been sought
in connection with the Acquisition. EACH POWER STOCKHOLDER SHOULD CONSULT WITH
HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER
OF THE ACQUISITION AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
6
<PAGE>
ACCOUNTING TREATMENT
The Acquisition will be accounted for by Power as a sale of assets. See "The
Acquisition--Accounting Treatment."
REGULATORY APPROVALS
The consummation of the Acquisition is subject to certain regulatory
requirements, including the expiration or termination of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). Apple and Power were informed on December 5, 1997 by
the Federal Trade Commission of the termination of the applicable waiting period
under the HSR Act. See "The Acquisition--Regulatory Approvals."
COMPARISON OF STOCKHOLDER RIGHTS
See "Description of Apple Common Stock--Comparison of Stockholder Rights"
for a summary of the material differences between the rights of Power
Stockholders and the holders of Apple Common Stock by virtue of ownership of
their shares.
POWER'S PLAN OF LIQUIDATION
GENERAL. The Plan of Liquidation provides that upon the Closing, (i) Power
will continue in existence for the sole purpose of winding up its affairs, and
that it shall not thereafter engage in any business activities other than
activities related to the implementation of the Plan of Liquidation; (ii) Power
will establish the Liquidating Trust pursuant to the Trust Agreement, and
designate one or more of its directors as initial trustees and the other
directors as initial members of the advisory committee to the Liquidating Trust;
(iii) Power and the Liquidating Trust shall take all necessary action to settle
and discharge, or otherwise provide for, all of Power's remaining liabilities;
(iv) upon the settlement and discharge of, or other provision for, all of
Power's liabilities, Power and/or the Liquidating Trust shall transfer all of
Power's remaining assets, including the transfer in kind of any shares of Apple
Common Stock then owned by Power, to its stockholders in accordance with their
respective rights and interests (less any assets retained as reasonable
provisions to meet claims, including unasserted, contingent, conditional or
unmatured liabilities or expenses, and specifically set aside for such purpose);
and (v) Power will dissolve as a corporate entity.
The value of the assets of Power to be available for distribution to its
stockholders upon liquidation and dissolution cannot be ascertained at this time
and will depend, among other things, on Power's liabilities and on the market
value from time to time of the shares of Apple Common Stock received by Power at
the Closing and upon distribution of the Escrow Shares to Power pursuant to the
Acquisition Agreement and held by Power until distributed to Power Stockholders
directly or to the Liquidating Trust. After the Closing, Power will not conduct
any ongoing business operations or generate any revenues by reason thereof. See
"Plan of Liquidation and the Liquidating Trust--The Plan of Liquidation."
CERTAIN TAX CONSIDERATIONS. If the Acquisition qualifies as a tax-free
reorganization, in connection with the liquidation Power may distribute to Power
Stockholders, the Liquidating Trust and Power's creditors the Apple Common Stock
received from Apple in the Acquisition without recognizing gain or loss. Even if
the Acquisition qualifies as a tax-free reorganization, to the extent that Power
distributes assets other than such Apple Common Stock to Power Stockholders, the
Liquidating Trust or to Power's creditors, Power will recognize gain or loss
equal to the difference between its basis in such assets and the fair market
value of such assets.
If the Acquisition qualifies as a tax-free reorganization, the Power
Stockholders should not recognize gain or loss upon the receipt of the Apple
Common Stock in connection with the liquidation of Power. However, each Power
Stockholder may be required to recognize a gain to the extent of the amount of
cash
7
<PAGE>
and the fair market value of any other property such stockholder receives
pursuant to the Plan of Liquidation following the Acquisition.
If the Acquisition does not qualify as a tax-free reorganization, Power will
recognize gain or loss on the assets it transfers to Gravenstein equal to the
difference between its basis in the transferred assets and the sum of the money
and the fair market value of the Apple Common Stock received. In addition, Power
will recognize gain or loss on the distribution of the Apple Common Stock to the
Liquidating Trust in connection with the Plan of Liquidation equal to the
difference between Power's basis in such Apple Common Stock and the fair market
value of the Apple Common Stock at the time of the distribution. In such an
event, Power's basis in the Apple Common Stock should equal the fair market
value of the Apple Common Stock at the time Power transfers assets to
Gravenstein in exchange for the Apple Common Stock.
In addition, if the Acquisition does not qualify as a tax-free
reorganization, each Power Stockholder will recognize gain or loss equal to the
difference between such stockholder's basis in the Power Common Stock
surrendered and the sum of the money and the fair market value of the Apple
Common Stock and any other property such stockholder receives pursuant to the
Plan of Liquidation following the Acquisition.
EACH POWER STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE APPLICABILITY AND EFFECT OF
FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
For a more detailed discussion of the federal income tax consequences of the
Acquisition and the Plan of Liquidation, see "The Acquisition--Tax
Considerations and Risks."
RECOMMENDATION OF POWER BOARD OF DIRECTORS
The Power Board (i) has unanimously approved the Acquisition Agreement and
the Plan of Liquidation, (ii) believes that the terms of the Acquisition
Agreement and the Plan of Liquidation are fair to, and that the sales of assets
pursuant to such agreements are in the best interest of, Power and the Power
Stockholders, and (iii) unanimously recommends that the Power Stockholders vote
FOR approval and adoption of the Acquisition Agreement and the Plan of
Liquidation.
8
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF POWER
Power, Gravenstein and Apple entered into the Acquisition Agreement on
August 29, 1997, under which Gravenstein agreed to purchase substantially all of
the assets of Power, which include all Mac OS and other licenses from Apple to
Power, Power's customer list and related data, all of Power's intellectual
property related to Mac-compatible products (excluding trademarks, service
marks, trade names and Web addresses, sites and domain names) and additional
assets to be agreed upon. The Closing of the Acquisition is conditioned on,
among other things, the approval by the Power Stockholders. In addition, Power
seeks the approval of the Power Stockholders of a Plan of Dissolution and
Complete Liquidition, the implementation of which is conditioned on, among other
things, such approval and the consummation of the Acquisition. The financial
statements contained below do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of such uncertainty.
<TABLE>
<CAPTION>
INCEPTION FISCAL YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
(NOV. 19, 1993) JUNE 30, MARCH 31, SEPTEMBER 30,
THROUGH JUNE -------------------- -------------------- --------------------
30, 1994(1) 1995 1996 1996 1997(2) 1996 1997
--------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales....................... $ -- $ 3,046 $ 131,075 $ 82,413 $ 247,207 $ 112,926 $ 161,414
Cost of goods sold.............. -- 2,059 104,408 66,563 194,495 87,959 134,658
------- --------- --------- --------- --------- --------- ---------
Gross profit.................. -- 987 26,667 15,850 52,712 24,967 26,756
Costs and expenses:
Selling, general and
administrative.............. 413 1,602 17,458 10,814 35,544 14,730 33,599
Research and development...... 624 2,366 3,425 2,254 3,962 2,540 4,868
------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.... 1,037 3,968 20,883 13,068 39,506 17,270 38,467
------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations... (1,037) (2,981) 5,784 2,782 13,206 7,697 (11,711)
Interest income (expenses),
other......................... 25 40 (416) (245) (853) (376) (923)
Income (loss) before income
taxes......................... (1,012) (2,941) 5,368 2,537 12,353 7,321 (12,634)
Income taxes (benefit).......... -- -- 462 -- 4,616 2,139 (4,053)
------- --------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (1,012) $ (2,941) $ 4,906 $ 2,537 $ 7,737 $ 5,182 $ (8,581)
------- --------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and
common equivalent share....... $ (0.27) $ (0.57) $ 0.31 $ 0.16 $ 0.46 $ 0.32 $ (1.51)
Weighted average number of
common and common equivalent
shares outstanding............ 3,783 5,199 15,894 15,808 16,670 16,193 5,672
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
JUNE 30
------------------------------- MARCH 31, SEPTEMBER 30,
1994 1995 1996 1997 1997
--------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................................... $ 2,089 $ 8,096 $ 12,612 $ 12,530 $ 4,620
Total assets............................................. 2,521 11,427 49,059 73,884 73,131
Total liabilities........................................ 106 2,942 34,498 51,233 58,900
Stockholders' equity..................................... 2,415 8,485 14,561 22,651 14,231
</TABLE>
- --------------------------
(1) The Company was incorporated in November 1993 and commenced operations in
January 1994. It first shipped products in May 1995.
(2) During 1997 Power changed its fiscal year from the Sunday closest to June 30
to the Sunday closest to March 31. The change in fiscal year was effective
for the year ended March 31, 1997.
10
<PAGE>
APPLE COMMON STOCK MARKET PRICE DATA
Apple's Common Stock is traded on the Nasdaq National Market under the
symbol "AAPL." The following table sets forth, for the calendar quarters
indicated, the high and low closing sale prices of Apple Common Stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
1995
First Quarter.................................................................................. $ 433/4 $ 321/2
Second Quarter................................................................................. $ 48 $ 337/8
Third Quarter.................................................................................. $ 501/8 $ 335/8
Fourth Quarter................................................................................. $ 497/8 $ 3411/16
1996
First Quarter.................................................................................. $ 421/2 $ 317/16
Second Quarter................................................................................. $ 351/2 $ 23
Third Quarter.................................................................................. $ 287/8 $ 195/8
Fourth Quarter................................................................................. $ 25 $ 16
1997
First Quarter.................................................................................. $ 273/4 $ 213/8
Second Quarter................................................................................. $ 231/4 $ 151/8
Third Quarter.................................................................................. $ 197/8 $ 145/8
Fourth Quarter (through December 9, 1997)...................................................... $ 293/4 $ 123/4
</TABLE>
On December 9, 1997, the last reported sale price of the Apple Common Stock
on the Nasdaq National Market was $15 3/8 per share.
11
<PAGE>
RISK FACTORS
POWER STOCKHOLDERS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING
WHETHER TO APPROVE AND ADOPT THE ACQUISITION AGREEMENT, AND SHOULD CONSIDER
THESE RISK FACTORS IN CONJUNCTION WITH THE OTHER INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS/PROXY STATEMENT. THIS
PROSPECTUS/PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW.
NO ASSURANCE OF DISTRIBUTION TO POWER STOCKHOLDERS
If the Power Stockholders approve the Acquisition and the Plan of
Liquidation, and the Acquisition is consummated as described under "The
Acquisition" below, the value of the assets of Power ultimately available for
distribution to the Power Stockholders upon liquidation and dissolution will
depend on, among other things, Power's liabilities (including tax liabilities),
the disposition of its unsold inventory and other assets, and the market value
from time to time of the shares of Apple Common Stock received by Power pursuant
to the Acquisition Agreement.
After the consummation of the Acquisition, Power will not conduct any
ongoing business operations or generate any revenues by reason thereof. The
winding up and dissolution of Power's business may be more difficult or
expensive, or may take longer, than Power's Board and management currently
anticipates. If the market value of the Apple Common Stock declines after the
Closing (which may occur due to or independently of, among other factors, the
market overhang created by the Apple shares held by Power, the Liquidating Trust
and Power Stockholders, or a significant sale of Apple shares by Power, the
Liquidating Trust or Power Stockholders) or if Power or the Liquidating Trust
sells Apple Common Stock at a significant discount, the value of assets of Power
available for distribution to the Power Stockholders will be reduced.
In addition, the holders of Power Series A Preferred Stock have a
liquidation preference of $1.00 per share (or $5,000,000 in the aggregate), and
the holders of Power Series B Preferred Stock have a liquidation preference of
$2.00 per share (or $8,200,000 in the aggregate) (together, the "Liquidation
Preference") in any distribution by Power of its assets to the Power
Stockholders, which must be paid prior to any distribution with respect to Power
Common Stock.
Accordingly, there may be no distributions to the Power Stockholders after
the Closing, and if any distributions do occur, there can be no assurance as to
the timing or amount of such distributions.
FAILURE TO CONSUMMATE THE ACQUISITION--REPAYMENT OF LOAN, FINALITY OF RELEASES
AND LOSS OR AMENDMENT OF LICENSES
Contemporaneously with the execution of the Acquisition Agreement, Power and
Apple entered into certain other agreements, including (i) mutual Releases (the
"Releases"), pursuant to which Power released Apple (the "Power Release") from
all liability up to the date of the Releases, including any liability that Apple
might have under its license agreements with Power (the "Apple Licenses"), and
Apple released Power (the "Apple Release") from all liability up to the date of
the Releases, (ii) an amendment (the "Omnibus Amendment") to the Apple Licenses
then in effect between Apple and Power to make certain adjustments to the terms
of such licenses for the period from execution of the Acquisition Agreement to
the Closing and in the event that the Acquisition is not consummated, (iii) a
post-closing operating agreement (the "Post-Closing Operating Agreement") that
sets forth the terms of the relationship that would exist between Apple and
Power if and when the Acquisition is consummated, and (iv) a note executed by
Power in favor of Apple (the "Revolving Loan Promissory Note"), pursuant to
which Apple made available to Power a revolving line of credit in the amount of
$25 million (the "Loan"). See "The Acquisition--The Apple Loan" and "--The
Acquisition Agreement." Except in certain circumstances, whether or not the
Acquisition closes, Power must repay the Loan, the Releases remain in effect,
12
<PAGE>
and either the effects of the Omnibus Amendment on the Apple Licenses will
become permanent or the Apple Licenses will terminate.
Apple may terminate the Acquisition Agreement if Power is in material breach
of the Acquisition Agreement and such breach has not been cured within 20
business days of written notice of the breach, or if the Power Stockholders fail
to approve the Acquisition. If the Acquisition Agreement is so terminated, Power
will receive none of the shares of Apple Common Stock and will be obligated to
repay the Loan, the Releases will remain in effect and the Apple Licenses will
terminate.
In addition, Apple may terminate the Acquisition Agreement if the
Acquisition is prohibited by other governmental or court action. Either Apple or
Power may terminate the Acquisition Agreement if the Acquisition does not close
by June 30, 1998 provided that the terminating party (and in the case of Apple,
Gravenstein) is not in material breach of its obligations under the Acquisition
Agreement. In addition, Power may terminate the Acquisition Agreement if Apple
is in material breach of the Acquisition Agreement and such breach has not been
cured within 20 business days of written notice of the breach. In the event of a
termination described in any of the previous three sentences, depending on which
conditions to the Closing of the Acquisition are then satisfied at the time of
termination, (i) Power will not receive any of the shares of Apple Common Stock,
(ii) Power will be obligated to repay the Loan, and (iii) the Apple Licenses
will continue.
As described above, under certain circumstances, (i) the Releases stay in
effect whether or not the Acquisition closes and (ii) Power would not have any
license from Apple at all. Further, since Power learned of the disappointing
operating results for the quarter ended June 30, 1997, and since it executed the
Acquisition Agreement on August 29, 1997, it has taken steps to conserve cash by
winding down its operations. Therefore, even if the Acquisition does not close,
Power will not be in a position to continue manufacturing, marketing and selling
its Macintosh-compatible products as a going concern.
TREATMENT OF THE ACQUISITION UNDER THE INTERNAL REVENUE CODE
Generally, Power recognizes on any sale of assets a taxable gain or loss
equal to the difference between the basis of such assets and the sum of money
and the fair market value of the property received in exchange for such assets.
Power and Apple intend the Acquisition to qualify as a tax-free reorganization
under Section 368(a)(1)(C) of the Code for U.S. federal income tax purposes.
However, for the Acquisition to qualify as a tax-free reorganization, both Apple
and Power and the Acquisition must satisfy certain conditions before and after
the Closing. Also, the sale of any assets by Power outside the Acquisition
remains taxable.
If the Power Stockholders approve the Acquisition and the Acquisition is
consummated, but the Power Stockholders do not approve the Plan of Liquidation,
the Acquisition will not be a tax-free reorganization and the intended tax
benefits as described above will not be available to Power, the Liquidating
Trust or the Power Stockholders. If the Acquisition does not close, Power does
not receive any Apple stock unless Apple pays Power the Reinstatement Payment.
The Reinstatement Payment is taxable and in such event the Acquisition would not
be treated as a tax-free reorganization.
There can be no assurance that the IRS will not assert that the Acquisition
does not qualify as a tax-free reorganization. If the Acquisition does not
qualify as a tax-free reorganization, Power would recognize gain or loss on the
assets it transfers to Gravenstein equal to the difference between its basis in
the transferred assets and the sum of the money and the fair market value of the
Apple Common Stock received. In addition, each Power Stockholder would recognize
gain or loss equal to the difference between such stockholder's basis in the
Power Common Stock surrendered and the sum of the money and the fair market
value of the Apple Common Stock and any other property such stockholder receives
pursuant to the Plan of Liquidation following the Acquisition. See "The
Acquisition--Tax Considerations and Risks."
13
<PAGE>
SALE OF NON-MACINTOSH BASED BUSINESS
Power is seeking to sell its remaining assets, including the trade name
"Power Computing" and certain assets related to its Wintel business, as a going
concern. However, there is no assurance that such sale can be accomplished.
RISKS RELATING TO AN INVESTMENT IN APPLE COMMON STOCK
VARIABILITY OF OPERATING RESULTS
Apple's future operating results and financial condition are dependent upon
Apple's ability to successfully develop, manufacture, and market technologically
innovative products in order to meet dynamic customer demand patterns, and are
also dependent upon its ability to effect a change in marketplace perception of
Apple's prospects, including the viability of the Macintosh platform. Inherent
in this process are a number of factors that Apple must successfully manage in
order to achieve favorable future operating results and a favorable financial
condition. Potential risks and uncertainties that could affect Apple's future
operating results and financial condition include, among other things, continued
competitive pressures in the marketplace and the effect of any reaction by Apple
to such competitive pressures, including pricing actions by Apple; the
availability of key components on terms acceptable to Apple; Apple's ability to
supply products in certain categories; Apple's ability to supply products free
of latent defects or other faults; Apple's ability to make timely delivery to
the marketplace of technological innovations, including its ability to continue
to make timely delivery of planned enhancements to the current Mac OS and to
make timely delivery of a new and substantially backward-compatible operating
system; Apple's ability to successfully integrate NeXT technologies, processes
and employees with those at Apple; Apple's ability to successfully implement its
strategic direction and restructuring actions, including reducing its
expenditures; Apple's ability to attract, motivate and retain employees,
including a new Chief Executive Officer; the effects of significant adverse
publicity; the availability of third-party software for particular applications;
and the impact on Apple's sales, market share and gross margins as a result of
Apple winding down its Mac OS licensing program.
RESTRUCTURING OF OPERATIONS
During 1996, Apple began to implement certain restructuring actions aimed at
reducing its cost structure, improving its competitiveness, and restoring
sustainable profitability. During 1997, Apple announced and began to implement
supplemental restructuring actions, including significant headcount reductions,
to meet the foregoing objectives. There are several risks inherent in Apple's
efforts to transition to a new cost structure. These include the risk that Apple
will not be able to reduce expenditures quickly enough to restore sustainable
profitability and the risk that cost-cutting initiatives will impair Apple's
ability to innovate and remain competitive in the computer industry.
Implementation of this restructuring involves several risks, including the
risk that by simplifying and modifying its product line Apple will increase its
dependence on fewer products, potentially reduce overall sales, and increase its
reliance on unproven products and technology. Another risk of the restructuring
is that by increasing the proportion of Apple's products to be manufactured
under outsourcing arrangements, Apple could lose control of the quality or
quantity of the products manufactured and distributed, or lose the flexibility
to make timely changes in production schedules in order to respond to changing
market conditions. As part of its restructuring, Apple announced and opened its
on-line store, which makes available most of its products to end-users in the
U.S., in November 1997. There can be no assurance the on-line store will result
in greater sales. Apple also began manufacturing products on a build-to-order
basis in November 1997. There can be no assurance this manufacturing process
will result in decreased costs or increased gross margins. Apple is also
reducing the number of wholesale and retail channel partners, particularly in
the Americas, which places a greater volume of sales through fewer partners.
There can be no assurance that this will not adversely impact Apple. In
addition, the actions taken in connection with the
14
<PAGE>
restructuring could adversely affect employee morale, thereby damaging Apple's
ability to retain and motivate employees. Also, because Apple contemplates
relying to a greater extent on collaboration and licensing arrangements with
third parties, Apple will have less direct control over certain of its research
and development efforts, and its ability to create innovative new products may
be reduced. In addition, there can be no assurance that the technologies
acquired from NeXT will be successfully exploited, or that key NeXT employees
and processes will be retained and successfully integrated with those at Apple.
Also, the restructuring includes the winding down of Apple's Mac OS licensing
program. There can be no assurance that the winding down of this program will
result in greater sales, market share, and increased gross margins to Apple. In
addition, there can be no assurance that this action will not result in the
availability of fewer application software titles for the Mac OS, which may
result in a decrease to Apple's sales, market share and gross margins. Finally,
even if the restructuring is successfully implemented, there can be no assurance
that it will effectively resolve the various issues currently facing Apple.
Although Apple believes that the actions it is taking in connection with the
restructuring, including its acquisition of NeXT and the winding down of its Mac
OS licensing program, should help restore marketplace confidence in Apple, there
can be no assurance that such actions will enable Apple to achieve its
objectives of reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. Apple's future consolidated operating
results and financial condition could be adversely affected should it encounter
difficulty in effectively managing the restructuring and new cost structure.
PRODUCT INTRODUCTIONS AND TRANSITIONS
Due to the highly volatile nature of the personal computer industry, which
is characterized by dynamic customer demand patterns and rapid technological
advances, Apple must continuously introduce new products and technologies and
enhance existing products in order to remain competitive. Recent introductions
include certain PowerBook and Power Macintosh products, and the introduction of
Mac OS 8 in July 1997. The success of new product introductions is dependent on
a number of factors, including market acceptance, Apple's ability to manage the
risks associated with product transitions, the availability of application
software for new products, the effective management of inventory levels in line
with anticipated product demand, the availability of products in appropriate
quantities to meet anticipated demand, and the risk that new products may have
quality or other defects in the early stages of introduction. Accordingly, Apple
cannot determine the ultimate effect that new products will have on its sales or
results of operations. In addition, although the number of new product
introductions may decrease as a result of Apple's restructuring actions, the
risks and uncertainties associated with new product introductions may increase
as Apple refocuses its product offerings on key growth segments and to the
extent new product introductions are in markets that are new to Apple.
The rate of product shipments immediately following introduction of a new
product is not necessarily an indication of the future rate of shipments for
that product, which depends on many factors, some of which are not under the
control of Apple. These factors may include initial large purchases by a small
segment of the user population that tends to purchase new technology prior to
its acceptance by the majority of users ("early adopters"); purchases in
satisfaction of pent-up demand by users who anticipated new technology and, as a
result, deferred purchases of other products; and overordering by dealers who
anticipate shortages due to the aforementioned factors. These factors may be
offset by others, such as the deferral of purchases by many users until new
technology is accepted as "proven" and for which commonly used software products
are available; and the reduction of orders by dealers once they believe they can
obtain sufficient supply of products previously in backlog.
Backlog is often volatile after new product introductions due to the
aforementioned demand factors, often increasing coincident with introduction,
and then decreasing once dealers and customers believe they can obtain
sufficient supply of the new products. Apple has in the past experienced
difficulty in anticipating demand for new products, resulting in product
shortages which have adversely affected Apple's operating results.
15
<PAGE>
The measurement of demand for newly introduced products is further
complicated by the availability of different product configurations, which may
include various types of built-in peripherals and software. Configurations may
also require certain localization (such as language) for various markets and, as
a result, demand in different geographic areas may be a function of the
availability of third-party software in those localized versions. For example,
the availability of European-language versions of software products manufactured
by U.S. producers may lag behind the availability of U.S. versions by a quarter
or more. This may result in lower initial demand for Apple's new products
outside the U.S., even though localized versions of Apple's products may be
available.
The increasing integration of new or enhanced functions and complexity of
operations of Apple's products also increase the risk that latent defects or
other faults could be discovered by customers or end-users after volumes of
products have been produced or shipped. If such defects were significant, Apple
could incur material recall and replacement costs under product warranties.
Apple has announced plans for two operating systems. Apple plans to continue
to introduce major upgrades to the current Mac OS and later introduce a new
operating system (code named "Rhapsody") which is expected to offer advanced
functionality based on Apple and NeXT software technologies. However, the NeXT
software technologies that Apple plans to use in the development of Rhapsody
were not originally designed to be compatible with the Mac OS. As a result,
there can be no assurance that the development of Rhapsody can be completed at
reasonable cost or at all. In addition, Rhapsody may not be fully
backward-compatible with all existing applications, which could result in a loss
of existing customers. Finally, it is uncertain whether Rhapsody or the planned
enhancements to the current Mac OS will gain developer support and market
acceptance. Inability to successfully develop and make timely delivery of a
substantially backward-compatible Rhapsody or of planned enhancements to the
current Mac OS, or to gain developer support and market acceptance for those
operating systems, may have an adverse impact on Apple's consolidated operating
results and financial condition.
COMPETITION
The personal computer industry is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent
introduction of new products, short product life cycles, continual improvement
in product price/performance characteristics, price sensitivity on the part of
consumers, and a large number of competitors. Apple's consolidated results of
operations and financial condition have been, and in the future may continue to
be, adversely affected by industrywide pricing pressures and downward pressures
on gross margins. The industry has also been characterized by rapid
technological advances in software functionality and hardware performance and
features based on existing or emerging industry standards. Many of Apple's
competitors have greater financial, marketing, manufacturing, and technological
resources, as well as broader product lines and larger installed customer bases
than those of Apple.
Apple's future consolidated operating results and financial condition may be
affected by overall demand for personal computers and general customer
preferences for one platform over another or one set of product features over
another.
Apple is currently the primary maker of hardware that uses the Mac OS. The
Mac OS has a minority market share in the personal computer market, which is
dominated by makers of computers that run the Microsoft Windows 95 and Windows
NT operating systems. Apple believes that the Mac OS, with its perceived
advantages over Windows, and the general reluctance of the Macintosh installed
base to incur the costs of switching platforms, have been driving forces behind
sales of Apple's personal computer hardware for the past several years. Recent
innovations in the Windows platform, including those included in Windows 95 and
Windows NT, or those expected to be included in a new version of Windows to be
introduced in 1998, have added features to the Windows platform that make the
differences between the Mac OS and Microsoft's Windows operating systems less
significant. Apple is currently taking and will
16
<PAGE>
continue to take steps to respond to the competitive pressures being placed on
its personal computer sales as a result of the recent innovations in the Windows
platform. Apple's future operating results and financial condition will be
substantially dependent on its ability to maintain continuing improvements of
the Macintosh platform in order to maintain perceived functional advantages over
competing platforms.
Apple had previously entered into agreements to license its Mac OS to other
personal computer vendors (the "Clone Vendors") as part of an effort to increase
the installed base for the Macintosh platform. Apple recently determined that
the benefits of licensing the Mac OS to the Clone Vendors under these agreements
were more than offset by the impact and costs of the licensing program. As a
result, Apple agreed to acquire certain assets, including the license to
distribute the Mac OS, of Power, a Clone Vendor, and has no plans to renew its
other Mac OS licensing agreements. Although Apple believes that this winding
down of its licensing program will help reduce the adverse impact of the
licensing program on Apple's sales, market share and gross margins, there can be
no assurance that this will occur. In addition, there can be no assurance that
this winding down of the licensing program will not result in the availability
of fewer application software titles for the Mac OS, which may result in a
decrease to Apple's sales, market share and gross margins.
As a supplemental means of addressing the competition from Windows and other
platforms, Apple had previously devoted substantial resources toward developing
personal computer products capable of running application software designed for
the Windows operating systems. These products include an add-on card containing
a Pentium or 586-class microprocessor that enables users to run applications
concurrently that require the Mac OS, Windows 3.1 or Windows 95 operating
systems. Apple plans to transition the cross-platform business to third-parties
during 1998. There can be no assurance that this transition will be successful.
Apple, International Business Machines Corporation and Motorola, Inc. had
agreed upon and announced the availability of specifications for a PowerPC
microprocessor-based hardware platform (the "Platform"). These specifications
defined a "unified" personal computer architecture that would have given the
Clone Vendors broad access to the Power Macintosh platform and would have
utilized standard industry components. Apple had intended to license the Mac OS
to manufacturers of the Platform. However, Apple has decided it will no longer
support the Platform based upon its decision to wind down its Mac OS licensing
program, and because of little industry support for the Platform. The decision
not to further develop this Platform may affect Apple's ability to increase the
installed base for the Macintosh platform.
Several competitors of Apple have either targeted or announced their
intention to target certain of Apple's key market segments, including education
and publishing. Many of these companies have greater financial, marketing,
manufacturing, and technological resources than Apple.
In August 1997, Apple and Microsoft entered into patent cross licensing and
technology agreements. Under these agreements, the companies provided patent
cross licenses to each other. In addition, for a period of five years from
August 1997, Microsoft will make future versions of its Microsoft Office and
Internet Explorer products for the Mac OS, and Apple will bundle the Internet
Explorer product with Mac OS system software releases and make that product the
default Internet browser for such releases. In addition, Microsoft purchased
150,000 shares of Apple Series 'A' non-voting convertible preferred stock for
$150 million. While Apple believes that its relationship with Microsoft will be
beneficial to Apple and to its efforts to increase the installed base for the
Mac OS, the Microsoft relationship is for a limited term and does not cover many
of the areas in which Apple competes with Microsoft, including the Windows
platform. In addition, the Microsoft relationship may have an adverse effect on,
among other things, Apple's relationship with other partners. There can be no
assurance that the benefits to Apple of the Microsoft relationship will not be
offset by the disadvantages.
17
<PAGE>
SUPPORT FROM THIRD-PARTY SOFTWARE DEVELOPERS
Decisions by customers to purchase Apple's personal computers, as opposed to
Windows-based systems, are often based on the availability of third-party
software for particular applications. Apple believes that the availability of
third-party application software for Apple's hardware products depends in part
on third-party developers' perception and analysis of the relative benefits of
developing, maintaining, and upgrading such software for Apple's products versus
software for the larger Windows market. This analysis is based on factors such
as the perceived strength of Apple and its products, the anticipated potential
revenue that may be generated, and the costs of developing such software
products. To the extent Apple's recent financial losses and declining demand for
Apple's products, as well as Apple's decision to wind down its Mac OS licensing
program, have caused software developers to question Apple's prospects in the
personal computer market, developers could be less inclined to develop new
application software or upgrade existing software for Apple's products and more
inclined to devote their resources to developing and upgrading software for the
larger Windows market. Moreover, Apple's current plan to introduce a new
operating system (code named "Rhapsody") could cause software developers to stop
developing software for the current Mac OS. In addition, there can be no
assurance that software developers will decide to develop software for the new
operating system on a timely basis or at all.
Microsoft is an important developer of application software for Apple's
products. Although Apple has entered into a relationship with Microsoft, which
includes Microsoft's agreement to develop and ship future versions of its
Microsoft Office and Internet Explorer products and certain other Microsoft
tools for the Mac OS, such relationship is for a limited term and does not cover
many areas in which Apple competes with Microsoft. Accordingly, Microsoft's
interest in producing application software for the Mac OS not covered by the
relationship or upon expiration of the relationship may be influenced by
Microsoft's perception of its interests as the vendor of the Windows operating
system.
GLOBAL MARKET RISKS
A large portion of Apple's revenue is derived from its international
operations. As a result, Apple's consolidated operations and financial results
could be significantly affected by risks associated with international
activities, including economic and labor conditions, political instability, tax
laws (including U.S. taxes on foreign subsidiaries), and changes in the value of
the U.S. dollar versus the local currency in which the products are sold.
Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses could adversely affect consumer demand for Apple's product, the U.S.
dollar value of Apple's foreign currency denominated sales, the availability and
supply of product components to Apple, and ultimately Apple's consolidated
results of operations.
When the U.S. dollar strengthens against other currencies, the U.S. dollar
value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens,
the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly,
the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S.
dollar weakens and decreases when the U.S. dollar strengthens. Overall, Apple is
a net receiver of currencies other than the U.S. dollar and, as such, benefits
from a weaker dollar and is adversely affected by a stronger dollar relative to
major currencies worldwide. Accordingly, changes in exchange rates, and in
particular a strengthening of the U.S. dollar, may negatively affect Apple's
consolidated sales and gross margins (as expressed in U.S. dollars).
While Apple is exposed with respect to fluctuations in the interest rates of
many of the world's leading industrialized countries, Apple's interest income
and expense is most sensitive to fluctuations in the general level of U.S.
interest rates. In this regard, changes in U.S. interest rates affect the
interest earned on Apple's cash, cash equivalents, and short-term investments as
well as costs associated with foreign currency hedges. To mitigate the impact of
fluctuations in U.S. interest rates, Apple has entered into interest rate swap,
collar, and floor transactions.
18
<PAGE>
To ensure the adequacy and effectiveness of Apple's foreign exchange and
interest rate hedge positions, as well as to monitor the risks and opportunities
of the nonhedge portfolios, Apple continually monitors its foreign exchange
forward and option positions, and its interest rate swap, option and floor
positions both on a stand-alone basis and in conjunction with its underlying
foreign currency- and interest rate-related exposures, respectively, from both
an accounting and an economic perspective. However, given the effective horizons
of Apple's risk management activities, there can be no assurance that the
aforementioned programs will offset more than a portion of the adverse financial
impact resulting from unfavorable movements in either foreign exchange or
interest rates. In addition, the timing of the accounting for recognition of
gains and losses related to mark-to-market instruments for any given period may
not coincide with the timing of gains and losses related to the underlying
economic exposures and, therefore, may adversely affect Apple's consolidated
operating results and financial position. Apple does not engage in leveraged
hedging.
Apple's current financial condition may increase the costs of its hedging
transactions, as well as affect the nature of the hedging transactions into
which Apple's counterparties are willing to enter.
INVENTORY AND SUPPLY
Apple makes a provision for inventories of products that have become
obsolete or are in excess of anticipated demand, accrues for any cancellation
fees of orders for inventories that have been canceled, and accrues for the
estimated costs to correct any product quality problems. Although Apple believes
its inventory and related provisions are adequate given the rapid and
unpredictable pace of product obsolescence in the computer industry, no
assurance can be given that Apple will not incur additional inventory and
related charges. In addition, such charges have had, and may again have, a
material effect on Apple's consolidated financial position and results of
operations.
Apple must order components for its products and build inventory well in
advance of product shipments. Because Apple's markets are volatile and subject
to rapid technology and price changes, there is a risk that Apple will forecast
incorrectly and produce excess or insufficient inventories of particular
products. Apple's consolidated operating results and financial condition have
been in the past and may in the future be materially adversely affected by
Apple's ability to manage its inventory levels and respond to short-term shifts
in customer demand patterns.
Certain of Apple's products are manufactured in whole or in part by
third-party manufacturers, either pursuant to design specifications of Apple or
otherwise. As part of its restructuring actions, Apple sold its Fountain,
Colorado, manufacturing facility to SCI and entered into a related manufacturing
outsourcing agreement with SCI; sold its Singapore printed circuit board
manufacturing assets to NatSteel Electronics Pte., Ltd., which is expected to
supply main logic boards to Apple under a manufacturing outsourcing agreement;
entered into an agreement with Ryder Integrated Logistics, Inc. to outsource
Apple's domestic operations transportation and logistics management; and has
entered into other similar agreements to outsource Apple's European operations
transportation and logistics management. As a result of the foregoing actions,
the proportion of Apple's products produced and distributed under outsourcing
arrangements will continue to increase. While outsourcing arrangements may lower
the fixed cost of operations, they will also reduce the direct control Apple has
over production and distribution. It is uncertain what effect such diminished
control will have on the quality or quantity of the products manufactured, or
the flexibility of Apple to respond to changing market conditions. Furthermore,
any efforts by Apple to manage its inventory under outsourcing arrangements
could subject Apple to liquidated damages or cancellation of the arrangement.
Moreover, although arrangements with such manufacturers may contain provisions
for warranty expense reimbursement, Apple remains at least initially responsible
to the ultimate consumer for warranty service. Accordingly, in the event of
product defects or warranty liability, Apple may remain primarily liable. Any
unanticipated product defect or warranty liability, whether pursuant to
arrangements with contract manufacturers or otherwise, could adversely affect
Apple's future consolidated operating results and financial condition.
19
<PAGE>
Although certain components essential to Apple's business are generally
available from multiple sources, other key components (including microprocessors
and application specific integrated circuits ("ASICs") ) are currently obtained
by Apple from single sources. If the supply of a key single-sourced component
were to be delayed or curtailed, Apple's business and financial performance
could be adversely affected, depending on the time required to obtain sufficient
quantities from the original source, or to identify and obtain sufficient
quantities from an alternate source. Apple believes that the availability from
suppliers to the personal computer industry of microprocessors and ASICs
presents the most significant potential for constraining Apple's ability to
manufacture products. Some advanced microprocessors are currently in the early
stages of ramp-up for production and thus have limited availability. Apple and
other producers in the personal computer industry also compete for other
semiconductor products with other industries that have experienced increased
demand for such products, due to either increased consumer demand or increased
use of semiconductors in their products (such as the cellular phone and
automotive industries). Finally, Apple uses some components that are not common
to the rest of the personal computer industry (including certain microprocessors
and ASICs). Continued availability of these components may be affected if
producers were to decide to concentrate on the production of common components
instead of components customized to meet Apple's requirements. Such product
supply constraints and corresponding increased costs could decrease Apple's net
sales and adversely affect Apple's consolidated operating results and financial
condition.
Apple's ability to produce and market competitive products is also dependent
on the ability and desire of IBM and Motorola, the sole suppliers of the PowerPC
RISC microprocessor for Apple's Macintosh computers, to supply to Company in
adequate numbers microprocessors that produce superior price/ performance
results compared with those supplied to Apple's competitors by Intel
Corporation, and other developers and producers of the microprocessors used by
most personal computers using the Windows operating systems. The desire of IBM
and Motorola to continue producing these microprocessors may be influenced by
Microsoft's decision not to adapt its Windows NT operating system software to
run on the PowerPC microprocessor. IBM produces personal computers based on
Intel microprocessors as well as workstations based on the PowerPC
microprocessor, and is also the developer of OS/2, a competing operating system
to Apple's Mac OS. Accordingly, IBM's interest in supplying Apple with
microprocessors for Apple's products may be influenced by IBM's perception of
its interests as a competing manufacturer of personal computers and as a
competing operating system vendor. In addition, Motorola has recently announced
its intention to stop producing Mac clones. As a result, Motorola may be less
inclined to continue to produce PowerPC microprocessors.
Apple's current financial condition and uncertainties related to recent
events could affect the terms on which suppliers are willing to supply Apple
with their products. There can be no assurance that Apple's current suppliers
will continue to supply Apple on terms acceptable to Apple or that Apple will be
able to obtain comparable products from alternate sources on such terms. Apple's
future operating results and financial condition could be adversely affected if
Apple is unable to continue to obtain key components on terms substantially
similar to those currently available to Apple.
MARKETING AND DISTRIBUTION
A number of uncertainties may affect the marketing and distribution of
Apple's products. Currently, Apple distributes its products through wholesalers,
resellers, mass merchants, cataloguers and direct to education institutions
(collectively referred to as "resellers"). In addition, in November 1997 Apple
began selling many of its products directly to end users in the U.S. through
Apple's on-line store. Many of Apple's significant resellers operate on narrow
product margins. Most such resellers also distribute products from competing
manufacturers. Apple's business and financial results could be adversely
affected if the financial condition of these resellers weakened or if resellers
within consumer channels were to decide not to continue to distribute Apple's
products.
20
<PAGE>
Uncertainty over demand for Apple's products may continue to cause resellers
to reduce their ordering and marketing of Apple's products. In addition, Apple
has in the past and may in the future experience delays in ordering by resellers
in light of uncertain demand for Apple's products. Under Apple's arrangements
with its resellers, resellers have the option to reduce or eliminate unfilled
orders previously placed, in most instances without financial penalty. Resellers
also have the option to return products to Apple without penalty within certain
limits, beyond which they may be assessed fees. Apple has recently revised its
channel program, including decreasing the number of resellers and reducing
returns, price protection and certain rebate programs, in an effort to reduce
channel inventory, increase inventory turns, increase product support within the
channel and improve gross margins. In addition, in November 1997 Apple opened
its on-line store in the U.S. which makes many of Apple's products available
directly to the end-user. Although Apple believes the foregoing changes will
improve its consolidated operating results and financial condition, there can be
no assurance that this will occur.
CHANGE IN SENIOR MANAGEMENT
On July 9, 1997, Apple announced that Dr. Gilbert F. Amelio had resigned his
positions as Chairman of the Board and Chief Executive Officer and that Apple
was initiating a search for a new Chief Executive Officer. While Apple intends
to name a new Chief Executive Officer as soon as practicable, there can be no
assurance that the change in senior management and related uncertainties will
not adversely affect Apple's consolidated operating results and financial
condition during the period until a new Chief Executive Officer is hired and
afterward. In addition, certain members of Apple's senior management have been
with Apple for less than six months. There can be no assurance that new members
of the management team can be successfully assimilated, that Apple will be able
to satisfactorily allocate responsibilities or that such new members of its
management will succeed in their roles in a timely and efficient manner. Apple's
failure to recruit, retain and assimilate new executives, or the failure of any
such executive to perform effectively, or the loss of any such executive, could
have a material adverse impact on Apple's business, financial condition and
results of operations.
CHANGES TO BOARD OF DIRECTORS
Apple announced on August 6, 1997 significant changes to its Board of
Directors, replacing all but two former directors. The continuing directors are
Gareth C.C. Chang, Corporate Senior Vice President, Marketing, Hughes
Electronics and President, Hughes International, and Edgar S. Woolard, Jr.,
retired Chairman of E.I. DuPont de Nemours & Company. The new directors are
William V. Campbell, President and CEO of Intuit Corp.; Lawrence J. Ellison,
Chairman and Chief Executive Officer of Oracle Corp.; Steven P. Jobs, Chairman
and Chief Executive Officer of Pixar Animation Studios; and Jerome B. York, Vice
Chairman of Tracinda Corporation and former Chief Financial Officer of IBM and
Chrysler Corporation.
DEPENDENCE ON KEY EMPLOYEES
During the past several years, Apple has experienced significant voluntary
employee turnover as a result of employees' concerns over Apple's prospects, as
well as the abundance of career opportunities available elsewhere. Apple is
dependent on its key employees in order to achieve its business plan. There can
be no assurance Apple will be able to attract, motivate and retain key
employees. Failure to do so may have a significant effect on Apple's
consolidated operating results and financial condition.
OTHER FACTORS
Apple is in the process of identifying operating and application software
challenges related to the year 2000. While Apple expects to resolve year 2000
compliance issues substantially through normal replacement and upgrades of
software, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality or that Apple will not
incur substantial costs to avoid such
21
<PAGE>
limitations. Any failure to effectively monitor, implement or improve Apple's
operational, financial, management and technical support systems could have a
material adverse effect on Apple's business and consolidated results of
operations.
The majority of Apple's research and development activities, its corporate
headquarters, and other critical business operations, including certain major
vendors, are located near major seismic faults. Apple's operating results and
financial condition could be materially adversely affected in the event of a
major earthquake.
Production and marketing of products in certain states and countries may
subject Apple to environmental and other regulations which include, in some
instances, the requirement that Apple provide consumers with the ability to
return to Apple product at the end of its useful life, and leave responsibility
for environmentally safe disposal or recycling with Apple. It is unclear what
effect such regulations will have on Apple's future consolidated operating
results and financial condition.
Apple recently decided to replace its existing transaction systems in the
U.S. (which include order management, product procurement, distribution, and
finance) with a single integrated system as part of its ongoing effort to
increase operational efficiency. Substantially all of the transaction systems in
the European operations were replaced with the same integrated system in 1997.
Apple's future consolidated operating results and financial condition could be
adversely affected if Apple is unable to implement and effectively manage the
transition to this new integrated system.
Because of the foregoing factors, as well as other factors affecting Apple's
consolidated operating results and financial condition, past financial
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, Apple's participation in a
highly dynamic industry often results in significant volatility of Apple's
common stock price.
22
<PAGE>
THE SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is being furnished to the Power Stockholders
in connection with the solicitation of proxies by the Power Board for use at the
Special Meeting to be held on , , at 11:00 a.m., local time, at
4500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201 (Tel: (214)
978-3000) and any adjournments or postponements thereof.
This Prospectus/Proxy Statement also constitutes a prospectus of Apple with
respect to shares of Apple Common Stock to be issued in the consummation of the
Acquisition pursuant to the terms and conditions of the Acquisition Agreement.
This Prospectus/Proxy Statement, the Notice of Meeting and the accompanying
form of proxy are first being mailed to the Power Stockholders on or about
, .
PURPOSE OF THE SPECIAL MEETING
The purpose of the Special Meeting is to approve (i) the Acquisition and the
Acquisition Agreement, and (ii) the Plan of Liquidation, pursuant to which the
Liquidating Trust will be created for the benefit of the Power Stockholders
under the Trust Agreement. In addition, the Power Stockholders are asked to
approve any other business that may properly come before the Special Meeting.
THE POWER BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ACQUISITION AND
THE PLAN OF LIQUIDATION.
RECORD DATE
The Power Board has fixed the Record Date as the record date for the
determination of Power Stockholders entitled to notice of and to vote at the
Special Meeting. Accordingly, only holders of record of shares of Power Common
Stock, Power Series A Preferred Stock and Power Series B Preferred Stock at the
close of business on the Record Date will be entitled to vote at the Special
Meeting. At the close of business on the Record Date, there were outstanding
shares of Power Common Stock, 5,000,000 shares of Power Series A
Preferred Stock and 4,100,000 shares of Power Series B Preferred Stock, each of
which is entitled to one vote on each matter properly submitted to a vote at the
Special Meeting.
VOTE REQUIRED
Approval of the Acquisition and the Plan of Liquidation requires the
affirmative vote of holders of at least a majority of the Power Series A
Preferred Stock, and at least a majority of the Power Series B Preferred Stock,
each voting as a separate class, and the affirmative vote of holders of at least
a majority of the outstanding shares of Common Stock, Series A Preferred Stock
and Series B Preferred Stock of Power, all voting together as a single class,
with each holder of Power Series A Preferred Stock and Power Series B Preferred
Stock (together, "Power Preferred Stock") voting on an as converted to Power
Common Stock basis with each holder entitled to that number of votes equal to
the number of shares of Power Common Stock into which such holder's shares of
Power Preferred Stock could be converted pursuant to Power's Amended and
Restated Certificate of Incorporation ("Power's Certificate of Incorporation").
Two affiliate stockholders of Power, namely, 4C Ventures L.P. and Stephen S.
Kahng, have entered into voting agreements (the "Voting Agreements") relating to
an aggregate of approximately 4,022,500 shares of Power Common Stock, 4,337,500
shares of Power Series A Preferred Stock, and 337,500 shares of Power Series B
Preferred Stock, representing approximately 66.89% of the shares of Power Common
Stock, 86.75% of the shares of Power Series A Preferred Stock, and 8.23% of the
shares of Power Series B Preferred Stock, and 57.17% of outstanding Power Common
Stock and Power Preferred Stock voting
23
<PAGE>
together. Pursuant to these Voting Agreements, 4C Ventures L.P. and Stephen S.
Kahng have (i) agreed to vote their shares of Power Common Stock and Power
Preferred Stock in favor of the Acquisition Agreement, (ii) granted irrevocable
proxies to Apple to vote such shares accordingly, and (iii) agreed not to sell
their shares prior to the earlier of (x) the termination of the Acquisition
Agreement, or (y) the Special Meeting.
Pursuant to a Shareholder voting agreement dated April 27, 1995, as directed
by holders of at least 70% of the shares subject to such agreement, stockholders
holding an additional 1,189,160 shares of Apple's Common Stock, or approximately
20.44% of the outstanding Common Stock, as of the Record Date, 662,500 shares of
Apple's Series A Preferred Stock, or approximately 13.25% of the outstanding
Series A Preferred Stock, as of the Record Date, and 65,000 shares of Apple's
Series B Preferred Stock, or approximately 1.59% of the outstanding Series B
Preferred Stock, as of the Record Date, will also vote in favor of approving the
Acquisition.
As of the Record Date, directors and executive officers of Power and their
affiliates as a group beneficially owned 4,874,160 shares of Power Common Stock,
4,337,866 shares of Series A Preferred Stock and 910,022 shares of Series B
Preferred Stock of Power (including the 4,022,500 shares of Power Common Stock,
4,337,500 shares of Power Series A Preferred Stock and 337,500 shares of Power
Series B Preferred Stock held by certain Power Stockholders who have entered
into Voting Agreements to approve the Acquisition). All of such persons have
advised Power that they intend to vote "for" the Acquisition Agreement and the
Plan of Liquidation.
VOTING AND REVOCATION OF PROXIES
Shares of Power Common Stock, Power Series A Preferred Stock and Power
Series B Preferred Stock which are represented by a properly executed proxy
received prior to the vote at the Special Meeting will be voted at the Special
Meeting in accordance with the directions on the proxy cards, unless such
proxies are revoked in the manner set forth herein in advance of such vote.
PROPERLY EXECUTED PROXIES CONTAINING NO INSTRUCTION REGARDING ANY PARTICULAR
MATTER SPECIFIED THEREIN WILL BE VOTED FOR THE APPROVAL OF SUCH MATTER. Failure
to return a properly executed proxy card, failure to vote in person at the
Special Meeting or abstaining from voting will have the practical effect of a
vote against the approval of the Acquisition Agreement and the Plan of
Liquidation.
The giving of a proxy does not affect a stockholder's right to attend and
vote in person at the Special Meeting. Any Power Stockholder who executes and
returns a proxy has the power to revoke it at any time before it is voted. A
Power Stockholder's presence at the Special Meeting, however, will not in itself
revoke the stockholder's proxy. Power Stockholders giving a proxy pursuant to
this solicitation may revoke such proxy by delivering a written notice of
revocation bearing a later date than the proxy or a later dated proxy relating
to the same shares to the Secretary of Power at 2400 South Interstate 35, Round
Rock, Texas 78761, or by attending the Special Meeting and voting such shares in
person.
The Power Board is not currently aware of any matters to be brought before
the Special Meeting other than those described herein. If, however, other
matters are properly presented for action at the Special Meeting, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretionary authority to vote the shares represented by duly executed
proxies in accordance with their discretion and judgment as in the best
interests of Power.
SOLICITATION OF PROXIES
Power will bear its own costs of soliciting proxies, except that Apple will
pay fees incurred in connection with preparing this Prospectus/Proxy Statement.
In addition to the use of the mails, proxies may be solicited by telephone or in
person by directors, officers and selected other employees of Power who will not
be specially compensated for such services.
24
<PAGE>
HOLDERS OF SHARES OF POWER COMMON STOCK, POWER SERIES A PREFERRED STOCK AND
POWER SERIES B PREFERRED STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. POWER STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
RECOMMENDATION OF POWER BOARD OF DIRECTORS
The Power Board has unanimously approved the Acquisition Agreement and the
Plan of Liquidation, and believes that the terms of the Acquisition Agreement
and the Plan of Liquidation are fair to, and that the sales of assets pursuant
to such agreements are in the best interest of, Power and the Power Stockholders
and unanimously recommends that the Power Stockholders vote FOR approval and
adoption of the Acquisition Agreement and the Plan of Liquidation.
25
<PAGE>
THE ACQUISITION
THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED ACQUISITION AND RELATED
MATTERS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL PROVISIONS
OF THE ACQUISITION AGREEMENT AND RELATED AGREEMENTS. DETAILED TERMS OF AND
CONDITIONS TO THE ACQUISITION AND CERTAIN RELATED TRANSACTIONS ARE CONTAINED IN
THE ACQUISITION AGREEMENT, A COPY OF WHICH, TOGETHER WITH EXHIBITS, IS ATTACHED
HERETO AS ANNEX A. STATEMENTS MADE IN THIS PROSPECTUS/PROXY STATEMENT WITH
RESPECT TO THE TERMS OF THE ACQUISITION AND SUCH RELATED MATTERS ARE QUALIFIED
IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE TO THE MORE DETAILED INFORMATION SET
FORTH IN THE ACQUISITION AGREEMENT AND THE EXHIBITS THERETO.
BACKGROUND OF THE ACQUISITION
The personal computer ("PC") industry is primarily comprised of two distinct
operating platforms, Wintel computer systems, which operate using Windows
software and an Intel or compatible microprocessor, and Mac OS computer systems
(including Apple Macintosh and Macintosh-compatibles), which operate using the
Mac OS and primarily the PowerPC microprocessor (jointly developed by Apple, IBM
and Motorola).
Apple first introduced Macintosh computers in 1984. These computers are
characterized by their ease-of-use, intuitive point-and-click interface and
built-in networking, graphics and multimedia capabilities. Macintosh computer
systems were designed, developed, manufactured and marketed exclusively by Apple
until December 1994, when Apple granted Power a license to the proprietary Mac
OS and Macintosh system architecture, permitting manufacture and sale of
Macintosh-compatible systems. Apple subsequently granted licenses to other
manufacturers.
After 1994, Power became a leading manufacturer and direct marketer of
Macintosh-compatible systems. The development, manufacture, marketing and sale
of such systems has been Power's core business, and Power has derived its
revenues principally from the sale of such systems.
NEGOTIATIONS WITH APPLE AND DELIBERATIONS OF THE POWER BOARD
During the course of the license re-negotiations, in late June 1997, Power
contacted Apple to inquire whether Apple would be interested in meeting to
explore a possible acquisition of Power by Apple. Subsequently, Steve Jobs, then
a special advisor to Apple, responded during a telephone conference with Stephen
Kahng, Chairman of the Board and Chief Executive Officer of Power, that Apple
might be interested in acquiring Power.
On or about July 25, 1997, Stephen Kahng and other executives from Power met
at Apple's Cupertino headquarters with Steve Jobs and executives from Apple to
discuss Apple's position with respect to licensing issues and any proposal it
might have with respect to Power. During that meeting, Apple suggested that it
buy certain of Power's assets for $75 million to be paid 1/3 in cash and 2/3 in
Apple stock. Power responded that it might be interested in selling the entire
company to Apple but that it was not interested in selling only a portion of its
assets and that, in any event, a $75 million offer was insufficient.
On July 27, 1997, Mr. Jobs met with Mr. Kahng and indicated that Apple might
be prepared to pay more than the proposed $75 million. On July 28, 1997, Mr.
Kahng and another Power executive met with Apple CFO Fred Anderson and proposed
that Apple buy Power for $125 million on terms involving the assumption of
certain obligations of Power by Apple that would bring the total value of the
deal to Power to approximately $150 million. Thereafter, on July 29 and 30,
1997, Apple and Power managers met to discuss some of the operational aspects of
the Power business relevant to valuing the Power business from Apple's
perspective.
Thereafter, Mr. Kahng and Mr. Jobs continued to discuss various proposals in
a series of telephone conferences. Mr. Jobs proposed purchasing Power's core
Macintosh related assets, including intellectual property, customer lists and
the licenses Apple had granted Power (the "Apple Licenses") to manufacture
26
<PAGE>
and sell Macintosh-compatible systems (collectively, the "Power Assets"), for
$80 million and the assumption of certain of Power's technical support
obligations. Mr. Kahng stated that he believed that an offer of $125 million
might be acceptable to Power's Board. Subsequently, Mr. Kahng and Mr. Jobs
discussed a $100 million price for the Power Assets to be paid in the form of
Apple Common Stock.
At a meeting of the Power Board on August 14, 1997, at which all directors
were present, Mr. Kahng reported on his discussions with Mr. Jobs and the
exchange of proposals. The Power Board reviewed financial projections for Power
under various scenarios. After considering Power's then-current and projected
financial condition under various scenarios, the alternatives to continued
negotiation with Apple, including potential litigation, and other matters, the
Power Board unanimously authorized and directed Power's management to continue
negotiations with Apple.
On August 21, 1997, a meeting took place at which Apple and Power executives
and legal advisors were present. During that meeting, Apple and Power negotiated
terms of a proposed transaction providing for a payment of $100 million in Apple
Common Stock (based on a historical average price) in exchange for the Power
Assets.
From August 21 through August 29, 1997, Apple and Power negotiated terms of
proposed definitive agreements. Members of the Power Board were regularly
informed informally of the progress of these negotiations.
On August 27, 1997, Power Directors Raviola, Heller, Chidambaram and Kahng,
as well as Alexandra Piol of 4C Ventures, L.P. (Power's largest stockholder),
met with Power's management and counsel to discuss the details and implications
of the proposed Acquisition, including financial implications and the projected
cost of discontinuing operations if the proposed Acquisition were implemented.
The Power Board met on August 28, 1997. Mr. Kahng reported on the status of
negotiations with Apple and presented to the Power Board a copy of the latest
drafts of the principal agreements relating to the transaction (the "Apple
Purchase Documents"). The Power Board discussed the Apple Purchase Documents in
detail. Power's management presented schedules setting forth the financial
effect of the Acquisition on Power, and discussed potential litigation against
Apple.
After additional discussions and consideration of alternatives, the Power
Directors unanimously determined that it was in the best interests of Power and
the Power Stockholders to enter into the proposed Acquisition with Apple. The
Apple Purchase Documents were signed on August 29, 1997.
REASONS FOR THE POWER BOARD'S DECISION; FACTORS CONSIDERED
Power has shared public concern over the future of the Macintosh platform as
the market share held by Apple and Macintosh-compatible systems has
significantly declined. Microsoft's Windows '95 Operating System ("Windows 95")
enjoys widespread market acceptance and the technical advantages of the Mac OS
over Windows 95 may be perceived to be diminishing.
In February 1997, Power made aggressive pricing decisions so as to maintain
and pass on to customers a 10% to 15% price differential associated with the
direct sales model, based upon the following assumptions: (i) Power's
manufacturing, materials and distribution organization would produce savings and
efficiency that would more than offset the price reductions; (ii) Power's
significant investments in marketing and sales programs, marketing
communications, database marketing, and product management would dramatically
increase sales revenues from the $85 million level of the quarter ended December
31, 1996; and (iii) Power's investments in business operations, including
employees, consultants, new systems and enhancements to existing systems, would
provide daily management information of sufficient quality and dependability.
However, as it turned out, these initiatives, all involving significant
expenditures, did not yield the intended results.
27
<PAGE>
In addition, disagreements arose under the Apple Licenses as to certain
matters, including, among other things, the scope of the Apple Licenses, the
applicable royalty rates therein, and Apple's certification of Power's computer
designs. Apple's desire to continue its licensing program on terms acceptable to
Power became, in Power's view, increasingly uncertain.
To raise working capital as called for in Power's business plan, Power filed
a registration statement in June 1997 for an initial public offering of its
common stock. However, when Power suffered an unanticipated loss of $3.9 million
for the quarter ended June 30, 1997 and Power could not resolve to its
satisfaction certain matters regarding the Apple Licenses, Power's investment
bankers advised Power to withdraw its planned initial public offering.
Power sought alternative debt and equity financing. As a result, a bank made
a $10.0 million term loan to Power in July 1997. Stephen S. Kahng met with a
number of potential equity investors in the United States and Asia regarding
possible investments in Power, but none of these meetings developed into serious
negotiations or proposals. Without the necessary working capital or certainty as
to Power's future relationship with Apple, the Power Board was uncertain that
Power could implement its business strategy. In early summer 1997, Power
proposed to sell certain assets to Apple. See "The Acquisition--Negotiations
with Apple and Deliberations of the Power Board."
The Power Board determined that it was in the best interest of the Power
Stockholders for Power to enter into the Acquisition Agreement. See "The
Acquisition--Negotiations with Apple and Deliberations of the Power Board." The
Power Board considered, among others, the following risks, uncertainties and
possible negative consequences: (i) the risk that the benefits (including
without limitation tax benefits) sought in the Acquisition would not be
obtained, (ii) the risk that the Acquisition would not be consummated, (iii) the
effect of the public announcement of the Acquisition on Power's sales, customer
relations, operating results and ability to retain employees to consummate the
Acquisition and to wind down and dissolve, and (iv) the volatility of the
trading price of Apple Common Stock. The Power Board determined that the
potential benefits of the Acquisition outweighed the risks inherent in the
transaction.
CONSIDERATION OF OTHER FINANCING AND SALE PROPOSALS
Beginning in June 1997, Mr. Kahng met with a number of investors in the
United States and in Asia regarding a possible investment in or loan to Power.
Apart from a $10 million term loan from a bank, none of these meetings developed
into serious negotiations or proposals.
On August 21, 1997, representatives from Pacific Century Group ("PCG") met
with Power. PCG suggested that it might consider investing up to $80 million in
Power as new capital, but did not make a specific proposal. At the time, Power
advised PCG that it was already in serious negotiations with others and time was
of the essence if PCG were to make a specific proposal. At meetings on August
26, 1997, Mr. Ken Davidson of PCG suggested that PCG required three weeks of due
diligence to be completed before it could make a proposal, and presented Power
with a nondisclosure letter which provided for a "break-up" fee payable by Power
of between $1,000,000 and $5,000,000 if Power were sold to anyone else during
that time. Power declined to sign the letter, and stated that PCG had to make a
firm offer before the proposal could be taken to the Power Board.
On September 1, 1997, after it had entered into the Acquisition Agreement,
Power received a non-binding letter of intent from PCG stating that PCG intended
to purchase Power at a valuation of $10 per share (approximately $152 million
for the entire company), based on the information Power provided in the
registration statement filed with the SEC on June 26, 1997, and subject to PCG's
due diligence investigation. In the Acquisition Agreement Power agreed not to
negotiate an alternative transaction like the one tentatively proposed by PCG.
In addition, the financial information provided in Power's registration
statement was no longer current, Power's business prospects and financial
performance had deteriorated, and the Power Board considered it unlikely that
PCG would proceed with its proposal, or if it did choose to proceed, that it was
unlikely it would do so at a valuation of $10 per share.
28
<PAGE>
THE ACQUISITION AGREEMENT
ASSETS OF POWER TO BE ACQUIRED. Pursuant to the Acquisition Agreement,
Gravenstein has agreed to purchase substantially all of the assets of Power,
including:
(i) Power's rights and interests under the following license agreements: (a)
the Board Design License Agreement, dated as of December 16, 1994, between
Apple and Power, as amended; (b) the Certified Computer Manufacturing
Agreement, dated as of May 1, 1996, between Apple and Power, as amended;
(c) the Amended Mac OS License Agreement, dated as of December 27, 1996,
between Apple and Power; and (d) the OpenFirmware License Agreement dated
as of December 27, 1996, between Apple and Power;
(ii) all of Power's (a) software, including object code, source code, firmware,
data, embedded code and net lists; (b) inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, and technical data; (c) prototypes,
test fixtures, schematics, layouts, specifications, net lists,
manufacturing data, drawings and specifications, blueprints, test
equipment; devices and equipment; (d) documentation related to any of the
foregoing; and (e) Intellectual Property (as defined in the Acquisition
Agreement) in any of the foregoing, owned by Power and used by Power in
the design, development, testing, manufacture or servicing of Macintosh
computer systems;
(iii) all of Power's customer lists, contact sheets and similar information and
data related to the sale, marketing or distribution of Macintosh computer
systems, including lists of all end-users, retailers, wholesalers,
distributors and resellers, and all Intellectual Property owned by Power
in any of the foregoing; and
(iv) certain additional assets of Power to be agreed upon.
CONSIDERATION. At the Closing, Gravenstein will deliver shares of Apple
Common Stock with a value of $100 million plus the value of additional assets to
be determined up to an aggregate of $25 million, less the principal amount
outstanding (and accrued interest) at the Closing on the revolving line of
credit in the amount of $25 million (the "Loan") made available by Apple to
Power upon execution of the Acquisition Agreement. See "--The Apple Loan." The
value of Apple Common Stock will be determined based on the average last sales
prices of Apple Common Stock over the five consecutive trading days ending on
the trading day two days prior to the Closing. At the Closing, Gravenstein will
assume the Loan. See "The Acquisition--The Acquisition Agreement--Termination"
for a description of the consequences of not consummating the Acquisition.
RELEASES. Contemporaneously with the execution of the Acquisition
Agreement, and as a material inducement for the execution of the Acquisition
Agreement, Power and Apple entered into mutual Releases (the "Releases"),
pursuant to which Power irrevocably released Apple (the "Power Release") from
all liability up to the date of the Releases, including any liability that Apple
might have under its license agreements with Power, and Apple irrevocably
released Power (the "Apple Release") from all liability up to the date of the
Releases.
CONDITIONS TO CLOSING. Unless waived, both Apple's and Power's obligation
to consummate the Acquisition and the transactions contemplated by the
Acquisition Agreement are conditioned on the occurrence of the following events
at or prior to the Closing:
(i) the Power stockholders must approve and adopt the Acquisition Agreement and
the Acquisition by the affirmative vote of holders of at least a majority
of the Power Series A Preferred Stock, and at least a majority of the Power
Series B Preferred Stock, each voting as a separate class, and the
affirmative vote of holders of at least a majority of the outstanding
shares of Common Stock, Series A Preferred Stock and Series B Preferred
Stock of Power, all voting together as a single class. Voting agreements
(the "Voting Agreements") from two holders of a majority of Power Common
29
<PAGE>
Stock and Power Series A Preferred Stock who are affiliates of Power were
delivered upon the signing of the Acquisition Agreement, which Voting
Agreements are sufficient to commit the required class votes for the Series
A Preferred Stock and for the vote of all classes voting together;
(ii) the SEC must declare the Apple registration statement of which this
Prospectus/Proxy Statement is a part effective, and no stop order
suspending the effectiveness of the registration statement shall have been
issued, and no proceeding for the purpose of suspending the effectiveness
of the registration statement shall have been initiated or threatened by
the SEC; and
(iii) all waiting periods under the HSR Act regarding the Acquisition must
expire.
Power's obligations to consummate the Acquisition and the transactions
contemplated by the Acquisition Agreement are also subject to the satisfaction
of each of the following conditions at or prior to the Closing:
(i) The representations and warranties of Gravenstein contained in the
Acquisition Agreement shall be true and correct in all material respects on
and as of the Closing Date;
(ii) Apple and Gravenstein in all material respects shall have performed or be
in compliance with all agreements and covenants required by the
Acquisition Agreement to be performed or complied with by them on or prior
to the Closing; and
(iii) Power shall have received a legal opinion from Wilson Sonsini Goodrich &
Rosati, counsel to Apple, as to certain matters.
Apple and Gravenstein's obligations to consummate the Acquisition and the
transactions contemplated by the Acquisition Agreement are also subject to the
satisfaction of each of the following conditions at or prior to the Closing.
(i) The representations and warranties of Power contained in the Acquisition
Agreement shall be true and correct in all material respects on and as of
the Closing Date;
(ii) Power in all material respects shall have performed or be in compliance
with all agreements and covenants required by the Acquisition Agreement to
be performed or complied with by it on or prior to the Closing;
(iii) There shall not be pending any suit, action or proceeding by any
governmental entity (a) challenging the Acquisition or any of the
transactions contemplated hereby, seeking to restrain or prohibit the
consummation of the Acquisition, or seeking to place limitations on the
ownership of the Power Assets by Apple or Gravenstein, (b) seeking to
prohibit or materially limit the ownership or operation by Apple or any
of its subsidiaries or affiliates of any portion of any of their
respective assets (including without limitation the Power Assets) or
businesses, or to compel Apple or any of its subsidiaries or affiliates
to dispose of or hold separate any portion of any of their respective
assets (including without limitation the Power Assets) or businesses, as
a result of the Acquisition, or (c) seeking to prohibit Apple or any of
its subsidiaries or affiliates from effectively controlling in any
material respect the Power Assets;
(iv) No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
or regulatory restraint or prohibition preventing the consummation of the
Acquisition shall be in effect, nor shall there be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Acquisition, which makes the consummation of the
Acquisition illegal;
(v) Apple shall have received a legal opinion from McCutchen, Doyle, Brown &
Enersen, LLP, and/or Baker & McKenzie, legal counsel to Power, as to
certain matters;
30
<PAGE>
(vi) Each of the parties identified by Power as an affiliate shall have
delivered to Apple an executed affiliate agreement (each, an "Affiliate
Agreement") which shall be in full force and effect; and
(vii) The indemnification and escrow agreement entered into by Apple,
Gravenstein, Power, 4C Ventures, L.P., and Stephen S. Kahng (the
"Indemnification and Escrow Agreement") shall be in full force and effect
and no term thereof shall have been challenged or repudiated by any of
the parties thereto.
TERMINATION. Power, Apple and Gravenstein have agreed that the Acquisition
Agreement and certain related agreements may be terminated for a variety of
reasons. If the Acquisition Agreement is terminated, the Acquisition will be
abandoned. Depending on the basis for such termination, certain other effects
would also occur, which are discussed below under "--Effects of Termination."
Apple may terminate the Acquisition Agreement if:
(i) a final nonappealable order of a foreign, federal or state court preventing
consummation of the Acquisition is in effect;
(ii) any statute, rule, regulation, or order is enacted, promulgated, issued,
or deemed applicable to the Acquisition by any governmental entity that
would (a) make consummation of the Acquisition illegal, (b) prohibit
Apple's or Gravenstein's ownership or operation of all or any portion of
the Power Assets, or (c) compel Apple or Power to dispose of or hold
separate all or a portion of the business or assets (including without
limitation the Power Assets) of Apple, any of its subsidiaries, or
affiliates as a result of the Acquisition;
(iii) there has been a material breach by Power of any covenant or agreement
contained in the Acquisition Agreement and such breach has not been cured
within 20 business days after written notice to Power;
(iv) the Acquisition has not been consummated by June 30, 1998 (and neither
Apple nor Gravenstein is in material breach of its obligations contained
in the Acquisition Agreement); or
(v) the required approvals of the Power stockholders, as contemplated by the
Acquisition Agreement, have not been obtained by reason of the failure to
obtain the required vote at a meeting of stockholders;
Power may terminate the Acquisition Agreement if:
(i) the Acquisition has not been consummated by June 30, 1998 (and Power is not
in material breach of its obligations contained in the Acquisition
Agreement); or
(ii) either Apple or Gravenstein is in material breach of any covenant or
agreement contained in the Acquisition Agreement and such breach has not
been cured within 20 business days of written notice to Apple.
EFFECTS OF TERMINATION. If the Acquisition Agreement is terminated, the
Acquisition will be abandoned. Whether or not certain other effects of the
termination of the Acquisition Agreement occur depends on the reason the
Acquisition Agreement is terminated.
(i) Certain effects will result from an "Antitrust Termination," which will be
deemed to have occurred if:
(a) the Acquisition Agreement is terminated as a result of United States
federal government anti-trust law or action or because of the failure to
expire of applicable waiting periods under the HSR Act relating to the
Acquisition, and
(b) the Acquisition Agreement has not terminated for either of the following
reasons:
(1) the occurrence of an "Interim Seller Failure Event." An Interim
Seller Failure Event shall be deemed to occur if at the time of the
termination of the Acquisition Agreement, Gravenstein's
representations and warranties set forth in the Acquisition
Agreement are true and
31
<PAGE>
correct in all material respects, Apple and Gravenstein have
materially complied with the agreements and covenants required of
them by the Acquisition Agreement, and Power has received a legal
opinion as to certain matters from Wilson Sonsini Goodrich & Rosati,
but either Power's representations and warranties set forth in the
Acquisition Agreement are not true and correct in all material
respects or Power in all material respects shall not have performed
or is otherwise not in compliance with all the agreements and
covenants required of it by the Acquisition Agreement, or Apple has
not received a satisfactory legal opinion from counsel to Power, or
any of the parties identified as an affiliate of Power has failed to
deliver an executed Affiliate Agreement, or the Indemnification and
Escrow Agreement is not in full force and effect, or Power has
failed to deliver to Apple or Gravenstein a certificate stating that
the conditions to the obligations of Apple and Gravenstein to
consummate the Acquisition have been satisfied; or
(2) the occurrence of an "Final Seller Failure Event." A Final Seller
Failure Event shall be deemed to occur if the Closing has not
occurred by June 30, 1998 because either (A) the Power shareholders
have not approved the Acquisition Agreement or (B) Gravenstein's
representations and warranties set forth in the Acquisition
Agreement are true and correct in all material respects, Apple and
Gravenstein have materially complied with the agreements and
covenants required of them by the Acquisition Agreement, and Power
has received a legal opinion as to certain matters from Wilson
Sonsini Goodrich & Rosati, but either Power's representations and
warranties set forth in the Acquisition Agreement are not true and
correct in all material respects, or Power in all material respects
shall not have performed or is otherwise not in compliance with all
the agreements and covenants required of it by the Acquisition
Agreement, or Apple has not received a satisfactory legal opinion
from counsel to Power, or any of the parties identified as an
affiliate of Power has failed to deliver an executed Affiliate
Agreement, or the Indemnification and Escrow Agreement is not in
full force and effect, or Power has failed to deliver to Apple or
Gravenstein a certificate stating that the conditions to the
obligations of Apple and Gravenstein to consummate the Acquisition
have been satisfied.
If an Antitrust Termination occurs, Apple shall deliver to Power a number of
shares of non-voting convertible Apple Preferred Stock (convertible on a 1-for-1
basis without additional consideration into shares of Apple Common Stock or any
such other property or securities into which Apple Common Stock shall have
generally been converted or transformed) equal to $100 million divided by the
average closing price of the Apple Common Stock on the five consecutive trading
days ending on the trading day two days prior to the transfer (the
"Reinstatement Payment"), and the resale of any Apple Common Stock issuable upon
conversion of such shares shall be registered by Apple in accordance with the
terms of the declarations of registration rights attached as Exhibit J to the
Acquisition Agreement (the "Registration Rights Declaration"), PROVIDED,
HOWEVER, that the Reinstatement Payment may be reduced at Apple's option by any
amount of principal outstanding and/or interest accrued or due under the Loan,
which reduction will result in a corresponding reduction in the amounts
outstanding under the Loan.
(ii) Certain effects will result from a "Trigger Event Termination," which will
be deemed to have occurred if, in the absence of an Antitrust Termination,
(a) there is no Interim Seller Failure Event and Apple terminates the
Acquisition because of the existence of (1) a final nonappealable order
of a foreign, federal or state court in effect preventing consummation
of the Acquisition; or (2) any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Acquisition
by any governmental entity that would (x) make consummation of the
Acquisition illegal; (y) prohibit Apple's or Gravenstein's ownership or
operation of all or any portion of the assets Power is selling to
Gravenstein; or (z) compel Apple or Power to dispose of or hold separate
all or a portion of the business or assets
32
<PAGE>
(including without limitation the assets Power is selling to
Gravenstein) of Apple, any of Apple's subsidiaries or affiliates as a
result of the Acquisition;
(b) there is no Interim Seller Failure Event, Power is not in material
breach of its obligations under the Acquisition Agreement, and Power
terminates the Acquisition because either Apple or Gravenstein is in
material breach of the Acquisition Agreement and such breach has not
been cured within 20 business days of written notice to Apple of the
breach; or
(c) there is no Final Seller Failure Event and either Apple or Power
terminates the Acquisition Agreement (if that party is not in material
breach of its obligations under the Acquisition Agreement (and, in the
case of Apple, that Gravenstein is also not in material breach of its
obligations under the Acquisition Agreement)) because the Closing has
not occurred before June 30, 1998.
If a Trigger Event Termination occurs, Apple may, at its sole discretion,
deliver to Power the Reinstatement Payment. Delivery of the Reinstatement
Payment to Power in accordance with the terms of the Power Release will cause
the Power Release to remain in effect as provided therein, will terminate all
rights, licenses, and benefits granted to Power under the Apple Licenses, as
amended by the Omnibus Amendment (the "Amended License Agreements"), and will
terminate all obligations and duties of Apple under the Amended License
Agreements. If, following a Trigger Event Termination, Apple does not deliver to
Power the Reinstatement Payment, Power may terminate the Power Release after
providing Apple forty-five (45) days written notice of its intention to
terminate the Power Release, PROVIDED, HOWEVER, that if, notwithstanding such
notice, Apple believes that a Trigger Event Termination has not occurred,
Power's attempt to terminate the Power Release shall not then be effective if
Apple, within such forty-five (45) day notice period provides Power with written
notice of its intention to arbitrate such issue and Apple demands arbitration to
resolve whether a Trigger Event Termination has in fact occurred, and PROVIDED
FURTHER, that in the event that Apple commences such arbitration procedures, and
such arbitration results in a determination that a Trigger Event Termination has
occurred, the Power Release shall be terminated thirty (30) days after such
determination unless Apple delivers the Reinstatement Payment prior to the end
of such thirty (30) day period.
The Power Release may not be terminated or revoked under any other
circumstances or conditions.
(iii) If the Acquisition Agreement is terminated, all rights and licenses
granted to Power under the Amended License Agreements, as well as all
obligations and duties of Apple under the Amended License Agreements,
shall terminate and be of no further force and effect, if
(a) there has been an Interim Seller Failure Event, a Final Seller Failure
Event, or the Acquisition Agreement is terminated by Apple because (1)
there has been a material breach by Power of any covenant or agreement
contained in the Acquisition Agreement; or (2) the required approvals of
the Power stockholders, as contemplated by the Acquisition Agreement,
have not been obtained by reason of the failure to obtain the required
vote upon a vote taken at a meeting of stockholders; and
(b) neither Apple nor Gravenstein is in material breach of its respective
obligations under the Acquisition Agreement.
INDEMNIFICATION AND ESCROW. Pursuant to the terms of an Indemnification and
Escrow Agreement between Apple and Power, Power will indemnify Apple for any
liability arising out of a breach of a representation or covenant of Power or
Power's failure to satisfy any liability or obligation, and any liability
accruing to Apple by operation of law arising out of any act or omission of
Power prior to the Closing. As partial security for Power's indemnification
obligation, Power will deposit in escrow, for a period of twelve months, shares
of Apple Common Stock equal to $15 million, plus the value of any additional
assets to be purchased by Apple. Such escrowed shares will be released to Power
at the rate of $3 million on the third, sixth and ninth months after the
Closing, with the balance to be released on the first anniversary of the
33
<PAGE>
Closing. In addition, Apple has the right to object to any distribution of
assets of Power, including shares of Apple Common Stock received in the
transaction, to Power's stockholders on the ground that such distribution would
leave Power unable to satisfy claims under the Indemnification and Escrow
Agreement.
CERTAIN COVENANTS. Power and its Chairman and Chief Executive Officer,
Stephen S. Kahng, have agreed not to compete with Apple in the design,
manufacture, sale or support of Macintosh-compatible systems for a period ending
on the third anniversary of the Closing. Power and Mr. Kahng have also agreed
not to target customers of Power for the replacement of Macintosh or
Macintosh-compatible systems with Wintel systems. In addition, Power and Mr.
Kahng have agreed, for a period ending on the second anniversary of the Closing,
not to solicit or hire any Apple employee or a person who was an Apple employee
within six months prior to such solicitation.
APPLE LICENSES
Concurrently with the execution of the Acquisition Agreement, Power and
Apple entered into the Omnibus Amendment to make certain adjustments to the
scope of the licenses, including the identity of products and software covered
and not covered by the licenses, the term of the licenses and royalties payable.
The Omnibus Amendment also set forth the agreement between the parties with
respect to the forgiveness of certain royalties then due to Apple, the
forgiveness of certain royalties that could become due during the period prior
to the Closing of the Acquisition, the relationship of the parties for the
period from execution of the Acquisition Agreement to the Closing, and the
relationship of the parties should the Acquisition Agreement be terminated.
In addition, Apple agreed to forgive up to $5 million of royalties then due
Apple from Power under the licenses and agreed to permit Power to sell up to
35,000 Mac computer systems without payment of royalties thereon during the
period that the Acquisition Agreement is in effect. The Omnibus Amendment also
provides for the delivery to Power of the binary files for the Mac OS 8 and
certain related software.
In the event that the Acquisition Agreement is terminated, the Omnibus
Amendment provides for either the termination, continuation or amendment of the
licenses between Apple and Power, depending upon the reasons for the
termination. If (1) a "Trigger Event Termination" (as described above) occurs,
provided that Apple pays to Power a "Reinstatement Payment" (as described
above), or (2) Power breaches certain terms of the Acquisition Agreement (and
provided Apple and Gravenstein have not breached the Acquisition Agreement), all
licenses granted to Power by Apple will terminate. If the Acquisition is
terminated as a result of an Antitrust Termination as described above, the
license agreements between Apple and Power, as amended by the Omnibus Amendment,
will continue in effect, including with respect to the royalty provisions
therein.
THE APPLE LOAN
Upon the execution and delivery of the Acquisition Agreement by Apple and
Power, Apple made available to Power the Loan in the principal amount of $25
million. Power drew down the full amount available under the Loan several days
thereafter. The proceeds of the Loan were first used to repay an outstanding
bank line of credit facility in the principal amount of $22.1 million. The
balance of the Loan was then used to repay a portion of an outstanding term loan
in the principal amount of $10 million.
The outstanding principal balance under the Note bears interest at the rate
of six percent per annum. The principal and all accrued and unpaid interest is
due and payable on the earlier of: (i) the tenth business day following the
Closing; (ii) notice to Power of termination of the Acquisition Agreement
pursuant to its terms; and (iii) Power's sale or disposition of in excess of
35,000 Macintosh-compatible computer systems after August 29, 1997. See "The
Acquisition--The Acquisition Agreement-- Termination."
34
<PAGE>
TAX CONSIDERATIONS AND RISKS
GENERAL RULE. Generally, a sale of assets by Power is taxable, and Power
will recognize gain or loss on the amount equal to the difference between its
basis in such assets and the sum of money and the fair market value of the
property received by Power from the buyer of such assets. A sale of assets
generally does not result in gain or loss directly to the Power Stockholders. If
Power distributes property (such as proceeds from its sale of assets) to the
Power Stockholders, Power will recognize gain or loss on such distribution equal
to the difference between its basis in the distributed property and the fair
market value in the distributed property at the time of the distribution.
Simultaneously, Power Stockholders will recognize either dividend income on a
non-liquidating distribution or a gain or loss on a liquidating distribution.
"C" REORGANIZATION--TAX CONSEQUENCES TO POWER. The parties intend that the
Acquisition qualify as a tax-free reorganization under Section 368(a)(1)(C) of
the Code for U.S. federal income tax purposes. If the Acquisition qualifies as a
tax-free reorganization, Power should not recognize gain or loss on the sale of
substantially all its assets to Gravenstein in exchange for Apple Common Stock
and other property (if any). If the Acquisition qualifies as a tax-free
reorganization, upon Power's liquidation, Power may distribute its Apple Common
Stock without recognizing gain or loss, but to the extent that Power distributes
assets other than Apple Common Stock, Power will recognize a gain, if any, equal
to the difference between its basis in such assets and the fair market value of
such assets.
Also, if Power sells the Apple Common Stock it receives in the Acquisition,
it will recognize gain or loss. In such instance, Power's basis in the Apple
Common Stock should equal its basis in the assets transferred to Gravenstein in
the Acquisition, but decreased by (i) the amount of cash and the fair market
value of any other property received by Power, and (ii) the amount of loss, if
any, recognized by Power, and increased by the amount of gain and dividend
income recognized by Power in the Acquisition.
"C" REORGANIZATION--TAX CONSEQUENCES TO POWER STOCKHOLDERS. Generally, when
a Power Stockholder, directly or through the Liquidating Trust, receives a
liquidating distribution from Power under the Plan of Liquidation, he or she
recognizes gain or loss equal to the difference between his or her adjusted
basis in the property and the fair market value of the property. Even if the
Acquisition qualifies as a tax-free reorganization, to the extent Power makes a
liquidating distribution of any cash or property other than the Apple Common
Stock, each Power Stockholder may be required to recognize a gain to the extent
of the amount of cash and the fair market value of any such property. However,
with respect to a liquidating distribution of Apple Common Stock to the Power
Stockholders pursuant to the Plan of Liquidation if the Acquisition qualifies as
a tax-free reorganization:
- The Power Stockholders should not recognize gain or loss upon the receipt
of the Apple Common Stock.
- The basis of the Apple Common Stock in the hands of the Power Stockholders
should equal in each case the basis of the Power Common Stock ultimately
surrendered in connection with the Acquisition and the Plan of
Liquidation, but decreased by (i) the amount of cash and the fair market
value of any other property received by such Power Stockholder, and (ii)
the amount of loss, if any, recognized by such Power Stockholder, and
increased by the amount of gain and dividend income recognized by such
Power Stockholder.
- For tax purposes, each Power Stockholder's holding period for the Apple
Common Stock received in the Acquisition should include such Power
Stockholder's holding period for the Power stock surrendered upon Power's
liquidation.
REQUIREMENTS OF A "C" REORGANIZATION. For the Acquisition to qualify as a
tax-free reorganization, among other things, (i) Power must transfer
substantially all of its assets to Gravenstein, (ii) Power must receive Apple
Common Stock equal to at least 80% of the pre-acquisition value of Power's
assets and
35
<PAGE>
(iii) Power must liquidate in connection with the Acquisition. Whether Power
transfers substantially all of its assets to Gravenstein will depend on the
relative fair market value of the assets transferred to Gravenstein in exchange
for Apple Common Stock as compared to the fair market value of the Power assets
that are not transferred to Gravenstein. Whether the Apple Common Stock received
equals at least 80% of the value of Power's assets and whether Power liquidates
in connection with the Acquisition will depend on, inter alia, the value of
Power's assets and implementation of the Acquisition and the Plan of
Liquidation.
In addition, the Acquisition may fail to qualify as a tax-free
reorganization if, at the time of the Acquisition, Power Stockholders intend to
sell, and in fact later do sell, such amount of Apple Common Stock that would
demonstrate to the IRS that there is no continuity of stockholder interest. The
Acquisition also may fail to qualify as a tax-free reorganization if Apple is
not considered to either (i) continue Power's historic business, or (ii) use a
significant portion of Power's historic business assets in a business.
While the parties intend for the Acquisition to satisfy all of the
requirements for a tax-free reorganization under Section 368(a)(1)(C) of the
Code, including those described above, the parties have not obtained a ruling
from the IRS or an opinion from counsel that the Acquisition will qualify and no
assurances can be given that the Acquisition will so qualify.
IF THE ACQUISITION DOES NOT QUALIFY AS A "C" REORGANIZATION. If the
Acquisition does not qualify as a tax-free reorganization, Power will recognize
gain or loss on the assets it transfers to Gravenstein equal to the difference
between its basis in the transferred assets and the sum of the money and the
fair market value of the Apple Common Stock received. In addition, Power will
recognize gain or loss on the distribution of the Apple Common Stock to the
Power Stockholders in connection with the Plan of Liquidation equal to the
difference between Power's basis in such Apple Common Stock and the fair market
value of the Apple Common Stock at the time of the distribution. In such an
event, Power's basis in the Apple Common Stock should equal the fair market
value of the Apple Common Stock at the time Power transfers assets to
Gravenstein in exchange for the Apple Common Stock.
If the Acquisition does not qualify as a tax-free reorganization, each Power
Stockholder will recognize gain or loss equal to the difference between such
stockholder's basis in the Power Common Stock surrendered and the sum of the
money and the fair market value of the Apple Common Stock and any other property
such stockholder receives pursuant to the Plan of Liquidation following the
Acquisition.
THE LIQUIDATION. In connection with the Plan of Liquidation, it is
anticipated that Power will distribute certain assets and a portion of the Apple
Common Stock to the Liquidating Trust to liquidate certain assets and satisfy
certain liabilities. Provided the Liquidating Trust is treated as a trust for
U.S. federal income tax purposes, a distribution to the trust will be treated as
a distribution to the Power Stockholders. For tax purposes, the amount of such
distributions to the Liquidating Trust should be reduced by the amount of the
known Power liabilities assumed by the Liquidating Trust. When the Liquidating
Trust sells assets, it will recognize gain or loss, which will flow through to
the Power Stockholders as the beneficiaries of the trust. When the trust
discharges contingent liabilities of Power, the discharge should give rise to
capital losses in the year of the discharge that should also flow through to the
Power Stockholders.
For the Liquidating Trust to be treated as a trust for U.S. federal income
tax purposes, the trust must be formed for the purpose of liquidating and
distributing the assets transferred to it, and its activities must be reasonably
necessary to, and consistent with, this purpose. If the liquidation is
unreasonably prolonged or if the liquidation purpose is so obscured by business
activities that the declared purpose of liquidation can be viewed as abandoned,
and the trust will treated as a corporation rather than a trust and it will be
subject to all of the income tax rules and regulations that apply to
corporations.
36
<PAGE>
The statements in this discussion address certain federal income tax
consequences of the Acquisition. This discussion does not address all aspects of
federal income taxation that may be relevant to certain Power Stockholders and
may not be applicable to all classes of stockholders including, without
limitation, those who are not citizens or residents of the United States or who
will acquire Apple Common Stock pursuant to the exercise or termination of
employee stock options or otherwise as compensation. The statements in this
discussion are based on current provisions of the Code, existing, temporary and
currently proposed Treasury Regulations, the legislative history of the Code,
existing administrative rulings and the practices of the Internal Revenue
Service and judicial decisions, all of which are subject to change that may be
retroactively applied. No assurances can be given that legislative, judicial or
administrative changes will not affect the accuracy of the tax considerations
described herein. Moreover, this discussion does not consider the effect of
foreign, state, local or other tax laws, and it assumes that the Power
Stockholders hold their Power Common Stock as capital assets within the meaning
of Section 1221 of the Code. EACH POWER STOCKHOLDER SHOULD CONSULT WITH HIS OR
HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE
TRANSACTION, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND
OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Acquisition will be accounted for by Power as a sale of assets.
REGULATORY APPROVALS
The consummation of the Acquisition is subject to certain regulatory
requirements, including the expiration or termination of the applicable waiting
period under the HSR Act. On September 5, 1997, Power and Apple each filed a
notification and report form under the HSR Act with respect to the Acquisition,
together with a request for early termination of the applicable 30-day waiting
period. On October 3, 1997, the Antitrust Division of the United States
Department of Justice issued a request for additional information, which
extended the original 30-day waiting period for Apple to acquire Power's assets.
On December 5, 1997, the Federal Trade Commission notified Apple and Power of
the termination of the applicable waiting period under the HSR Act.
STOCK OWNERSHIP FOLLOWING THE ACQUISITION
Stockholders of Power Common Stock and Power Preferred Stock will continue
to hold Power Common Stock and Power Preferred Stock, as the case may be,
following the consummation of the Acquisition. Except for the Escrow Shares,
Power will hold such number of shares of Apple Stock as are equivalent in value
to $100 million (based on an average historical trading price) plus the value of
additional assets to be determined up to an aggregate of $25 million, less the
principal amount outstanding (and accrued interest) at the Closing on the Loan.
See "The Acquisition--The Acquisition Agreement-- Consideration" and "--The
Acquisition Agreement--Indemnification and Escrow." Power intends to distribute
all of such Apple Shares either to the Power Stockholders or to the Liquidating
Trust after paying or making reasonable provision for all claims, obligations
and liabilities of Power.
RESALE OF APPLE COMMON STOCK
The shares of Apple Common Stock issued to Power and distributed to Power
Stockholders or the Liquidating Trust in connection with the Acquisition will
have been registered under the Securities Act. Such shares may be freely traded
without restriction by the Liquidating Trust and those Power Stockholders who
are not deemed to be "affiliates" of Power or Apple, as that term is defined in
the rules of the Securities Act.
Shares of Apple Common Stock received by Power, the Liquidating Trust and
Power Stockholders who are deemed to be affiliates of Power or Apple may be
resold as permitted by Rule 145 under the
37
<PAGE>
Securities Act or as otherwise permitted under the Securities Act. It is
expected that each affiliate of Power will agree in connection with the Closing
not to sell, transfer or otherwise dispose of any shares of Apple Common Stock
distributed pursuant to the Acquisition unless, among other conditions, (a) such
sale, transfer or other disposition of Apple Common Stock is made in conformity
with the requirements of Rule 145(d) promulgated under the Securities Act, (b)
an authorized representative of the SEC takes the position in writing to the
effect that the SEC would take no action, or that the staff of the SEC would not
recommend that the SEC take action, with respect to such sale, transfer or other
disposition, and a copy of such written position is delivered to Apple and
Power, or (c) Apple or Gravenstein receives a written opinion of counsel,
reasonably acceptable to counsel to Apple and Gravenstein in form and substance,
that such sale, transfer or other disposition is otherwise exempt from
registration under the Securities Act.
In addition, the Acquisition may fail to qualify as a tax-free
reorganization if, at the time of the Acquisition, Power Stockholders intend to
sell, and in fact later do sell, an amount of Apple Common Stock that would
demonstrate to the IRS that there is no continuity of stockholder interest. See
"The Acquisition--Tax Considerations and Risks--Requirements of a "C"
Reorganization."
LISTING
Apple Common Stock trades on Nasdaq under the symbol "AAPL." Apple intends
to apply to have the Apple Common Stock issued to Power pursuant to the
Acquisition Agreement included in the Nasdaq Stock Market upon consummation of
the Acquisition.
INTEREST OF POWER BOARD AND MANAGEMENT IN THE ACQUISITION
Stephen S. Kahng, Chairman of the Board and Chief Executive Officer of
Power, legally and beneficially owns 3,772,500 shares of Power Common Stock and
87,500 shares of Power Series B Preferred Stock. Elserino Piol and Giuliano
Raviola, members of the Power Board, are general partners of 4C Ventures, L.P.,
which legally and beneficially owns 250,000 shares of Power Common Stock,
4,337,866 shares of Power Series A Preferred Stock and 250,000 shares of Power
Series B Preferred Stock. In addition, Mr. Piol legally and beneficially owns
237,500 shares of Power Common Stock, and Mr. Raviola legally and beneficially
owns with his wife 50,000 shares of Power Common Stock. Mr. Enzo Torresi, a
Power director, legally and beneficially owns 514,160 shares of Power Common
Stock and 60,700 shares of Series B Preferred Stock. Mr. David Heller, a Power
director, legally and beneficially owns 50,000 shares of Common Stock, and an
employee profit sharing plan of which Mr. Heller serves as trustee legally and
beneficially owns 6,822 shares of Power Series B Preferred Stock. Finally, Mr.
Sada Chidambaram is a director of ASCII Corporation, which legally and
beneficially owns 500,000 shares of Power Series B Preferred Stock, and Mr.
Chidambaram is the legal and beneficial owner of 5,000 shares of Power Series B
Preferred Stock. See "Business of Power--Certain Relationships and Related
Transactions."
DISSENTERS' RIGHTS
Under the Delaware General Corporation Law, the Power Stockholders are not
entitled to appraisal, dissenters' or similar rights in connection with the
Acquisition.
THE POWER STOCKHOLDERS' VOTING AGREEMENTS
Two affiliate stockholders of Power, namely, 4C Ventures L.P. and Stephen S.
Kahng, have entered into voting agreements (the "Voting Agreements") relating to
an aggregate of approximately 4,022,500 shares of Power Common Stock, 4,337,500
shares of Power Series A Preferred Stock, and 337,500 shares of Power Series B
Preferred Stock, representing approximately 66.89% of the shares of Power Common
Stock, 86.75% of the shares of Power Series A Preferred Stock, and 8.23% of the
shares of Power Series B Preferred Stock, representing 57.17% of outstanding
Power Common Stock and Power Preferred Stock voting together. Pursuant to these
Voting Agreements, the two affiliate stockholders have (i) agreed to
38
<PAGE>
vote their shares of Power Common Stock and Power Preferred Stock in favor of
the Acquisition Agreement, (ii) granted irrevocable proxies to Apple to vote
such shares accordingly, and (iii) agreed not to sell their shares prior to the
earlier of (x) the termination of the Acquisition Agreement, or (y) the Special
Meeting.
Pursuant to a Shareholder voting agreement dated April 27, 1995, as directed
by holders of at least 70% of the shares subject to such agreement, stockholders
holding an additional 1,189,160 shares of Power Common Stock, or approximately
% of the outstanding Common Stock as of the Record Date, 662,500 shares of
Power Series A Preferred Stock, or approximately 13.25% of the outstanding
Series A Preferred Stock as of the Record Date, and 65,000 shares of Power
Series B Preferred Stock, or approximately 1.59% of the outstanding Series B
Preferred Stock as of the Record Date, will also vote in favor of approving the
Acquisition.
39
<PAGE>
PLAN OF LIQUIDATION AND THE LIQUIDATING TRUST
THE FOLLOWING IS A BRIEF SUMMARY OF THE PLAN OF LIQUIDATION AND THE
LIQUIDATING TRUST ESTABLISHED PURSUANT TO THE TRUST AGREEMENT AND CERTAIN
ASPECTS OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN OF LIQUIDATION. THIS
SUMMARY WAS PREPARED AND IS BEING FURNISHED EXCLUSIVELY BY POWER; IT DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN
OF LIQUIDATION AND THE TRUST AGREEMENT, COPIES OF WHICH ARE ATTACHED TO THIS
PROSPECTUS/PROXY STATEMENT AS APPENDICES B AND C, RESPECTIVELY, AND ARE
INCORPORATED HEREIN BY REFERENCE. POWER'S STOCKHOLDERS ARE URGED TO READ THE
PLAN OF LIQUIDATION AND TRUST AGREEMENT CAREFULLY.
THE PLAN OF LIQUIDATION
The Plan of Liquidation provides that upon the Closing (i) Power will file a
Certificate of Dissolution with the Secretary of State of Delaware, and
thereafter will not carry on the business for which it was established except as
may be necessary or incidental to the winding up of Power's affairs; (ii) Power
will enter into the Trust Agreement and establish the Liquidating Trust,
designating one or more of its directors as initial trustees (the "Trustees")
and the other directors, as initial members of the advisory committee to the
Liquidating Trust; (iii) Power or the Liquidating Trust, as the case may be,
will, pursuant to the General Corporation Law of Delaware, pay or make
reasonable provision to pay all claims and obligations, including all
contingent, conditional or unmatured contractual claims known to Power, and make
such provision as will be reasonably likely to be sufficient to provide
compensation for claims that have not been made known to Power or that have not
arisen but that, based on facts known to Power, are likely to arise or to become
known to Power prior to the expiration of applicable statutes of limitation; and
(iv) after paying Power's debts or making provision therefor as described above,
and in any event within ten months of the filing its Certificate of Dissolution,
Power will distribute all its remaining property to either the Power
Stockholders or to the Liquidating Trust in complete cancellation of all of
Power's issued and outstanding capital stock.
The value of the assets of Power to be available for distribution to the
Power Stockholders upon Power's dissolution and liquidation cannot be
ascertained at this time and will depend on, among other things (i) the market
value from time to time of the Apple Common Stock to be received by Power
pursuant to the Acquisition and held by Power or the Liquidating Trust until
distributed to Power's stockholders, (ii) the number of shares of Apple Common
Stock released from escrow after all indemnification obligations have been
satisfied and (iii) the total amount of Power's liabilities.
ASSETS, LIABILITIES AND CONTINGENCIES OF POWER
ASSETS. Upon the Closing, Power will receive Apple Common Stock valued at
approximately $100 million (based on an average historical price), less the
Escrow Shares and as adjusted for (i) additional assets received and (ii)
amounts outstanding pursuant to the Loan. In addition, Power will have certain
other miscellaneous assets, or the proceeds of sale of such assets, which are
not being sold to Apple. Power is seeking to sell its remaining assets,
including the tradename "Power Computing," and certain assets related to its
Wintel business, as a going concern. See "The Acquisition--The Acquisition
Agreement--Consideration" and "--Indemnification and Escrow."
LIABILITIES. In addition to paying or otherwise providing for its
liabilities as shown on its balance sheet, Power has incurred and will incur
material expenses in winding up its business under the Plan of Liquidation. Such
expenses include among other things severance pay for all employees, federal,
state and other income, sales, transfer and other taxes, and costs and expenses
related to legal, accounting and other services in connection with the Apple
Transaction and the implementation of the Plan of Liquidation. While Power
cannot accurately predict the extent of these costs and expenses, they could be
substantial, depending on the issues that arise in the implementation of the
Plan of Liquidation and other future events. To facilitate an orderly winding up
of Power's business and to retain key personnel for such purpose, the Power
Board has approved a bonus program for certain Power executives. See "Business
of
40
<PAGE>
Power--Executive Incentive Program." The Power Board believes such program will
ultimately reduce the overall cost of winding up Power's business. Power will
require cash to implement its Plan of Liquidation, and Power or the Liquidating
Trust may sell shares of Apple Common Stock to raise such cash.
CONTINGENCIES. On October 28, 1997, TCI Manufacturing, Ltd. ("TCI")
allegedly a former supplier of powered enclosures to Power, filed suit against
Power claiming $3.45 million of actual damages and $39.0 million of exemplary
damages for alleged breach of contract and fraud arising from the cancellation
of purchase orders that TCI claims were non-cancelable. Power believes the
claims are frivolous and invalid.
In addition, Power is currently involved in legal proceedings, the ultimate
outcome of which cannot be predicted; however, Power believes the ultimate
resolution of these matters will not have a material adverse effect on its
financial position or results of operations.
LIQUIDATION PREFERENCE
As Power liquidates and dissolves, each Power Series A Preferred Stockholder
and each Power Series B Preferred Stockholder is entitled to receive, prior and
in preference to any distribution of any of Power's assets to Power's Common
Stockholders by reason of their ownership of Power Common Stock, the amount of
$1.00 and $2.00, respectively, per share, plus all declared but unpaid dividends
on each such share. The Power Board has never declared a dividend, and the Power
Preferred Stock does not have the right to participate beyond its liquidation
preference. Therefore, after payment of the liquidation preference described in
this paragraph, a Power Preferred Stockholder will have no further right to
participate in a distribution to the Power Common Stockholders. Alternatively, a
Power Series A Preferred Stockholder or a Power Series B Preferred Stockholder
may at any time (until it surrenders its stock certificate to the Trustee of the
Liquidating Trust) convert its Power Preferred Stock into Power Common Stock,
and (i) give up its preferential but limited claim to Power's assets, and (ii)
share the entire remaining assets and funds of Power after Power has made the
payments and provisions pursuant to the Plan of Liquidation and after
distribution of the liquidation preference to any remaining Preferred
Stockholders.
TERMS OF THE TRUST AGREEMENT
Under the Trust Agreement, all remaining property and assets of Power will
be assigned or transferred to the Liquidating Trust and held as part of the
Trust Estate (as defined therein) pursuant to the Trust Agreement. The Trustees
will pay from the Liquidating Trust estate all liabilities and obligations of
the Liquidating Trust and of Power, including expenses incurred in connection
with the indemnification provided to members of the Power Board, the officers of
Power, and Trustees and members of the advisory committee and other agents of
the Liquidating Trust.
Each Holder of Power Common Stock will surrender its certificates for Common
Stock of Power to the Trustees in exchange for its proportionate share of any
remaining Trust Estate. Distributions, if any property or assets are available
for distribution, made to the Power Stockholders will be made in proportion to
the respective interests of the stockholders in the Liquidating Trust.
Distributions will be made at least once per year.
Any portion of the Trust Estate which is available for distribution but
unclaimed by any Power Stockholder will be deemed to be subject to applicable
escheat laws. The Liquidating Trust shall continue and remain effective for up
to four years from the date of establishment or until the Trust Estate has been
fully distributed under the Trust Agreement, whichever shall first occur.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For U.S. federal income tax purposes, the liquidation of Power should be
considered to be related to, and part of, the Acquisition. For a more detailed
discussion of the federal income tax consequences of the Acquisition and the
Plan of Liquidation, see "The Acquisition--Tax Considerations and Risks."
41
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF POWER COMMON STOCK
AND PREFERRED STOCK AND APPLE COMMON STOCK
THE FOLLOWING IS A SUMMARY OF CERTAIN OF THE MATERIAL DIFFERENCES BETWEEN
THE CURRENT RIGHTS OF HOLDERS OF POWER COMMON STOCK AND POWER PREFERRED STOCK
AND THE RIGHTS THEY COULD RECEIVE AS HOLDERS OF APPLE COMMON STOCK FOLLOWING THE
ACQUISITION AND ANY DISTRIBUTION OF APPLE COMMON STOCK TO THEM. SINCE POWER IS A
DELAWARE CORPORATION AND APPLE IS A CALIFORNIA CORPORATION, DIFFERENCES BETWEEN
THE RIGHTS OF HOLDERS OF POWER COMMON STOCK AND APPLE COMMON STOCK ARISE FROM
DIFFERENCES BETWEEN VARIOUS PROVISIONS OF THE CHARTER AND BYLAWS OF APPLE AND
POWER AS WELL AS FROM THE DIFFERENCES BETWEEN THE CALIFORNIA GENERAL CORPORATION
LAW ("CGCL") AND THE DELAWARE GENERAL CORPORATION LAW ("DGCL"). THE FOLLOWING
SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE RIGHTS OF HOLDERS OF
POWER COMMON STOCK, POWER PREFERRED STOCK OR APPLE COMMON STOCK, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE CGCL AND DGCL AND THE RESPECTIVE
CHARTER DOCUMENTS OF POWER AND APPLE.
SIZE OF BOARD OF DIRECTORS. The DGCL permits the board of directors of a
Delaware corporation to change the authorized number of directors by amendment
to the corporation's bylaws or in the manner provided in the bylaws, unless the
number of directors is fixed in the corporation's certificate of incorporation,
in which case a change in the number of directors may be made only by amendment
to the certificate of incorporation, which requires stockholder approval.
Power's Certificate of Incorporation does not fix the number of directors, and
its Bylaws provide that the Power Board shall consist of six directors. In
addition, as permitted by Power's Certificate of Incorporation, Power's Bylaws
provide that a majority of Power's directors present at any meeting of the Power
Board at which a quorum is present may, by affirmative vote, alter, amend or
repeal any Power Bylaw.
Under the CGCL, the board of directors of a California corporation may fix
the number of directors within a stated range set forth in the corporation's
articles of incorporation or bylaws, if the stated range has been approved by
the shareholders. The Apple Bylaws provide that the number of directors of the
Apple Board shall be not less than five in number nor more than nine, and that
the exact number of directors shall be seven, until such number is changed by an
amendment to the Apple Bylaws duly adopted by either the Apple Board or by the
Apple shareholders.
CLASSIFIED BOARD OF DIRECTORS. A classified board is one in which a certain
number, but not all, of the directors are elected on a rotating basis each year.
This method of electing directors makes a change in the composition of the board
of directors, and a potential change in control of a corporation, a lengthier
and more difficult process. The DGCL permits a classified board of directors,
but Power does not have a classified Board.
The Apple Articles of Incorporation currently provide for a classified
Board. The Apple Board has two classes of directors, which are designated as
Class I and Class II. Each class consists of one-half of the total number of
directors or as close an approximation of one-half as possible. The term of each
Class I director expires in an odd-numbered year (E.G., 1997, 1999) and the term
of each Class II director expires in an even-numbered year (E.G., 1998, 2000).
At each annual shareholders' meeting, the shareholders elect each of the
successors to the directors of the class whose term shall have expired at that
annual meeting, for a term running until the second annual meeting next
succeeding his or her election and until his or her successor shall have been
duly elected and qualified.
In connection with its upcoming annual meeting of shareholders, Apple has
proposed eliminating the provisions of its Articles of Incorporation providing
for a classified board effective at its fiscal 1999 annual meeting. If such
proposal passes, beginning in 1999 Apple's directors will be elected for
one-year terms. If this proposal does not pass, the provisions set forth above
relating to a classified board will continue to apply.
42
<PAGE>
REMOVAL OF DIRECTORS. Under the DGCL and Power's 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.
The Apple Bylaws provide that the entire Apple Board or any individual
director may be removed without cause from office by an affirmative vote of a
majority of the outstanding shares entitled to vote, provided that, unless the
entire Apple Board is removed, no director shall be removed if the votes cast
against removal, or not consenting in writing to such removal, would be
sufficient to elect such director if voted cumulatively (without regard to
whether such shares may be voted cumulatively) at an election at which the same
total number of votes were cast, or, if such action is taken by written consent,
all shares entitled to vote were voted, and either the number of directors
elected at the most recent annual meeting of shareholders, or, if greater, the
number of directors for whom removal is being sought, were then being elected.
If any or all directors are so removed, new directors may be elected at the same
meeting or at a subsequent meeting. If at any time a class or series of shares
is entitled to elect one or more directors under authority granted by the Apple
Articles of Incorporation, the provisions recited above shall apply to the vote
of that class or series and not to the vote of the outstanding shares as a
whole.
FILLING VACANCIES ON THE BOARD OF DIRECTORS. Under the DGCL, vacancies on
the board of directors and newly created directorships may be filled by a
majority of the directors then in office (even though less than a quorum) unless
(i) otherwise provided in the certificate of incorporation or bylaws of the
corporation or (ii) the certificate of incorporation directs that a particular
class of outstanding stock is to elect such director, in which case any other
directors elected by such class, or a sole remaining director, shall fill such
vacancy. Power's Certificate of Incorporation does not make special provision
for filling vacancies. Power's Bylaws provide that unless and until filled by
the Power Stockholders, any vacancy on the Board, however occurring, including a
vacancy resulting from an enlargement of the Power Board, may be filled by vote
of a majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
Under the CGCL, any vacancy on the board of directors other than one created
by removal of a director may be filled by the board of directors. If the number
of directors then in office is less than a quorum, a vacancy may be filled by
the unanimous written consent of the directors then in office, by the
affirmative vote of a majority of such directors at a meeting held pursuant to
notice or waivers of notice, or by a sole remaining director. A vacancy created
by removal of a director may be filled by the board of directors only if so
authorized by the corporation's articles of incorporation or by a bylaw approved
by the corporation's shareholders. The Apple Bylaws provide that any vacancy,
other than a vacancy created by the removal of a director, may be filled by a
person selected by a majority of the remaining directors then in office, whether
or not less than a quorum, or by a sole remaining director. The Apple Bylaws
also provide that a vacancy created by the removal of a director may be filled
only by approval of the shareholders, and that the shareholders may elect a
director at any time to fill any vacancy not filled by the directors. In
addition, the Apple Bylaws provide that if, after the directors have filled any
vacancy, the directors then in office who have been elected by the shareholders
shall constitute less than a majority of the directors then in office, then any
holder or holders of an aggregate of five percent or more of the total number of
shares at the time outstanding having the right to vote for such directors may
call a special meeting of shareholders to be held to elect the entire board of
directors.
LIMITATIONS OF LIABILITY OF DIRECTORS. As permitted by DGCL, Power's
Certificate of Incorporation eliminates directors' personal liability to Power
and the Power Stockholders for any monetary damages for breach of fiduciary duty
as a director, except for liability of each director (i) for any breach of such
director's duty of loyalty to Power or the Power Stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL (regarding unlawful
payment of dividends or unlawful stock purchases or redemptions), or (iv) for
any transaction from which such director derived an improper personal benefit.
43
<PAGE>
The Apple Articles of Incorporation provide that the liability of the member
of the Apple board of directors for money damages shall be eliminated to the
fullest extent permitted under California law.
INDEMNIFICATION. As permitted by the DGCL, Power's Certificate of
Incorporation requires Power to indemnify to the fullest extent authorized by
law any director or officer of Power against any action or proceeding, whether
criminal, civil, administrative or investigative, and to advance defense costs
and related expenses. Power has also entered into indemnification agreements
with all of its directors and certain of its officers providing for
indemnification and advances of costs and expenses.
The Apple Bylaws provide that Apple shall, to the maximum extent and in the
manner permitted by the California Corporation Code (the "Cal. Corp. Code"),
indemnify each of its directors against expenses (as defined in Section 317(a)
of the Cal. Corp. Code), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as defined
in Section 317(a) of the Cal. Corp. Code), arising by reason of the fact that
such person is or was an agent of Apple. For purposes of the indemnification
provisions of the Apple Bylaws, "director" includes any person (i) who is or was
a director of Apple, (ii) who is or was serving at the request of Apple as a
director of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was a director of a corporation which was a predecessor
corporation of Apple or of another enterprise at the request of such predecessor
corporation.
The Apple Bylaws also state that its indemnification provisions are not
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Apple Articles of
Incorporation.
In addition, the Apple Bylaws provide that Apple shall have the power to
purchase and maintain insurance on behalf of any person who is or was an agent
of Apple against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not
Apple would have the power to indemnify him against such liability under the
indemnification provisions.
The Apple Bylaws provide, however, that no indemnification or advance shall
be made except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears (i) that it would be inconsistent with a provision
of the Apple Articles of Incorporation, the Apple Bylaws, a resolution of the
shareholders or an agreement in effect at the time of the accrual of the alleged
cause of the action asserted in the proceeding in which the expenses were
incurred or other amounts were paid, which prohibits or otherwise limits
indemnification, or (ii) that it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
ANNUAL MEETINGS. The Power Bylaws require that an annual meeting of
stockholders be held on a date and at a time designated by the Power Board. The
Apple Bylaws provide that annual meetings will be held on the last Wednesday of
January in each year, if not a legal holiday, and if a legal holiday, then on
the next succeeding business day not a holiday or at such other time in a
particular year as may be designated by resolution of the board of directors of
Apple.
SPECIAL MEETINGS. Under the DGCL, a special meeting of stockholders may be
called by the board of directors or any other person authorized to do so in the
corporation's certificate or bylaws. Power's Bylaws provide that special
meetings of stockholders may be called by the Power Board, its Chairman or
President, or by the Chairman, President or Secretary of Power upon the written
request of one or more Power Stockholders who hold in the aggregate at least ten
percent of the shares of the capital stock entitled to vote at the meeting.
Business transacted at any special meeting of Power Stockholder is limited to
matters relating to the purpose or purposes stated in the notice of the meeting.
44
<PAGE>
Under the CGCL, a special meeting of shareholders may be called by the board
of directors, the chairman of the board, the president, the holders of shares
entitled to cast not less than 10% of the votes at such meeting and such other
persons as are authorized to do so in the articles of incorporation or bylaws.
The Apple Bylaws provide that special meetings of the shareholders for any
purpose or purposes whatsoever may be called at any time by the President or by
the Board of Directors, or by two or more members thereof, or by one or more
holders of shares entitled to cast not less than ten percent of the votes on the
record date. Upon request in writing sent by registered mail to the Chief
Executive Officer, President, Vice President or Secretary of Apple, or delivered
to any such officer in person, by any person or persons entitled to call a
special meeting of shareholders, it shall be the duty of such officer, subject
to the immediately succeeding sentence, to cause notice to be given to the
shareholders entitled to vote that a meeting has been requested by the person or
persons calling the meeting, the date of such meeting, which shall be set by
such officer, to be not less than 35 days nor more than 60 days after such
request or, if applicable, determination of the validity of such request
pursuant to the immediately succeeding sentence. Within seven days after
receiving such a written request from a shareholder or shareholders of Apple,
the board of directors shall determine whether shareholders owning not less than
ten percent (10%) of the shares as of the record date established pursuant to
the Apple Bylaws for such request support the call of a special meeting and
notify the requesting party or parties of its finding.
ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS. The DGCL permits stockholders
to act by written consent in lieu of a meeting of stockholders, unless a
corporation eliminates action by written consent in its certificate of
incorporation. The Power Certificate of Incorporation does not limit the rights
of Power Stockholders to act by written consent. Power's Bylaws provide that any
action required or permitted to be taken at any annual or special meeting of
Power Stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken, is
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 on such action were present and
voted. Prompt notice of the taking of corporate action without a meeting by less
than unanimous written consent must be given to those stockholders who have not
consented in writing.
Under the CGCL, unless otherwise provided in the articles of incorporation,
any action which may be taken at any annual or special meeting of shareholders
may be taken without a meeting by written consent of shareholders having the
requisite number of votes, subject to the requirement that ten days' advance
notice of shareholder approval of certain types of transactions and matters be
given where all shareholders' consents are not solicited. The Apple Bylaws
provide that any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares 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. Within 14 days after
receiving such written consent or consents from the Apple shareholders, the
Apple board of directors shall determine whether holders of outstanding shares
as of the record date established pursuant to the Apple Bylaws having not less
than the minimum number of votes which would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted have properly consented thereto in writing and notify the
requesting party of its finding. Unless the consents of all shareholders
entitled to vote have been solicited in writing, notice of any shareholder
approval of (i) contracts between Apple and any of its directors, (ii)
indemnification of any person, (iii) reorganization of Apple or (iv)
distributions to shareholders upon winding up of Apple in certain circumstances
without a meeting by less than unanimous written consent shall be given at least
ten days before the consummation of the action authorized by such approval, and
prompt notice shall be given of the taking of any other corporate action
approved by shareholders without a meeting by less than unanimous written
consent, to those shareholders entitled to vote who have not consented in
writing. All notices given hereunder shall conform to the requirements of the
Apple Bylaws and applicable law. When written consents are given with respect to
any shares, they shall be given by and accepted from the persons in whose names
such
45
<PAGE>
shares stand on the books of Apple at the time such respective consents are
given, PROVIDED, HOWEVER, that any shareholder's proxy holder, or a transferee
of the shares, or a personal representative of the shareholder or their
respective proxy holders may revoke the consent by a writing received by Apple
prior to the time that written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary of Apple, but
may not do so thereafter. Such revocation is effective upon its receipt by the
Secretary of Apple. Notwithstanding anything to the contrary, directors may not
be elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.
ADVANCE NOTICE REQUIREMENT FOR SHAREHOLDER PROPOSAL AND DIRECTOR
NOMINATIONS. Neither Power's Certificate of Incorporation nor its Bylaws
expressly address advance notice of stockholder nominations or proposals. The
Apple Bylaws provide that notice of any meeting of shareholders shall be given
in writing not less than ten nor more than 60 days before the date of the
meeting to each shareholder entitled to vote thereat by the Secretary or an
Assistant Secretary of Apple, or other person charged with that duty, or if
there be no such officer or person, or in case of his or her neglect or refusal,
by any director or shareholder. The notice shall state the place, date and hour
of the meeting and (i) in the case of a special meeting, the general nature of
the business to be transacted, and no other business may be transacted, or (ii)
in the case of the annual meeting, those matters which the Board of Directors,
at the time of the mailing of the notice, intends to present for action by the
shareholders, but any proper matter may be presented at the meeting for such
action except that notice must be given or waived in writing of any proposal
relating to approval of contracts between Apple and any director of Apple,
amendment of the Articles of Incorporation, reorganization of Apple or winding
up of Apple. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by management for election. Written notice shall be given by Apple to
any shareholder, either (i) personally or (ii) by mail or other means of written
communication, charges prepaid, addressed to such shareholder at such
shareholder's address appearing on the books of Apple or given by such
shareholder to Apple for the purpose of notice. If a shareholder gives no
address or no such address appears on the books of Apple, notice shall be deemed
to have been given if sent by mail or other means of written communication
addressed to the place where the principal executive office of Apple is located,
or if published at least once in a newspaper of general circulation in the
county in which such office is located. The notice shall be deemed to have been
given at the time when delivered personally or deposited in the United States
mail, postage prepaid, or sent by other means of written communication and
addressed as hereinbefore provided. An affidavit of delivery or mailing of any
notice that conforms to the requirements of the Apple Bylaws, executed by the
Secretary, Assistant Secretary or any transfer agent, shall be prima facie
evidence of the giving of the notice. If any notice addressed to a shareholder
at the address of such shareholder appearing on the books of Apple is returned
to Apple by the United States Postal Service marked to indicate that the United
States Postal Service is unable to deliver the notice to the shareholder at such
address, all future notices shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of Apple for a
period of one year from the date of the giving of the notice to all other
shareholders.
VOTING REQUIREMENTS; SUPERMAJORITY APPROVAL. Unless otherwise specified in
a Delaware corporation's certificate of incorporation, an amendment to the
certificate of incorporation requires the affirmative vote of a majority of the
outstanding stock entitled to vote thereon. Further, under the DGCL, the holders
of a majority of the outstanding shares of a class are entitled to vote as a
class upon any proposed amendment to the certificate of incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
of such class, increase or decrease the par value of the shares of such class,
or alter or change the powers, preferences or special rights of the shares of
such class so as to adversely affect them.
Unless otherwise specified in a California corporation's articles of
incorporation, an amendment to the articles of incorporation requires the
affirmative vote of a majority of the outstanding shares entitled to
46
<PAGE>
vote thereon. Under the CGCL, the holders of the outstanding shares of a class
are entitled to vote as a class if the proposed amendment would (i) increase or
decrease the aggregate number of authorized shares of such class, (ii) effect an
exchange, reclassification or cancellation of all or part of the shares of such
class, other than a stock split, (iii) effect an exchange, or create a right of
exchange, of all or part of the shares of another class into the shares of such
class, (iv) change the rights, preferences, privileges or restrictions of the
shares of such class, (v) create a new class of shares having rights,
preferences or privileges prior to the shares of such class, or increase the
rights, preferences or privileges or the number of authorized shares having
rights, preferences or privileges prior to the shares of such class, (vi) in the
case of preferred shares, divide the shares of any class into series having
different rights, preferences, privileges or restrictions or authorize the board
of directors to do so, or (vii) cancel or otherwise affect dividends on the
shares of such class which have accrued but have not been paid.
Under both the DGCL and CGCL, with certain exceptions, any merger,
consolidation or sale of all or substantially all of a corporation's assets must
be approved by the corporation's board of directors and a majority of the
outstanding shares entitled to vote. In addition, the CGCL, but not the DGCL,
requires such transactions, among others, to be approved by a majority of the
outstanding shares of each class of stock (without regard to limitations on
voting rights).
Under Power's Certificate of Incorporation, the affirmative vote or written
consent of the holders of at least a majority of the then outstanding shares of
each series of Power Preferred Stock is required before Power may (i) purchase,
redeem or otherwise acquire any Power Common Stock or pay a dividend or make a
distribution on any Power Common Stock (except with respect to Power exercising
its right of repurchase under Power's 1994 Stock Option Plan, as amended), (ii)
effect any liquidation, dissolution, winding up, sale of all or substantially
all of Power's assets, (iii) change the rights, preferences or privileges of the
Preferred Stock (except that the vote or consent of a series of Power Preferred
Stock unaffected by such change is not required), (iv) increase or decrease
(other than by redemption or conversion) the total number of shares of Power
Series A Preferred Stock or Power Series B Preferred Stock, (v) authorize or
issue, or obligate itself to issue, any other equity security senior to or on a
parity with the Preferred Stock as to dividend or redemption rights, liquidation
preferences, conversion rights, voting rights or otherwise, and (vi) amend or
waive any of the above voting rights of the Power Preferred Stock.
Under Apple's Articles of Incorporation, the affirmative vote or written
consent of the holders of not less than 50% of the outstanding shares of Apple
Series A Preferred Stock is required to amend, alter, change or repeal any of
the powers, designations, preferences and rights of the Apple Series A Preferred
Stock.
AMENDING THE BYLAWS. Under the DGCL, the authority to adopt, amend or
repeal the bylaws of a Delaware corporation is held exclusively by the
stockholders unless such authority is conferred upon the board of directors in
the corporation's certificate of incorporation. Under the Power Certificate of
Incorporation, Power's Bylaws may be amended, altered or repealed as provided in
Power's Bylaws. Power's Bylaws, in turn, provide that they may be altered,
amended or repealed, and new bylaws may be adopted, by (i) the affirmative vote
of a majority of Power's directors present at any regular or special meeting of
the Power Board at which a quorum is present, or (ii) the affirmative vote of
the holders of a majority of the shares of the capital stock of Power issued and
outstanding and entitled to vote at any regular meeting of Power Stockholders,
or at any special meeting of Power Stockholders if notice of such alteration,
amendment, repeal or adoption of new bylaws has been stated in the notice of
such special meeting.
Under the CGCL, a corporation's bylaws may be adopted, amended or repealed
either by the board of directors or the shareholders of the corporation,
provided that only the shareholders may adopt a change to a fixed number of
directors or to alter an established range. The Apple Bylaws may be adopted,
amended or repealed by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote. Apple Bylaws specifying or changing a
fixed number of directors or the maximum or
47
<PAGE>
minimum number or changing from a fixed to a variable board or vice versa may
only be adopted by the shareholders; PROVIDED, HOWEVER, that an Apple Bylaw or
amendment of the Apple Articles of Incorporation reducing the number or the
minimum number of directors to a number less than five cannot be adopted if the
votes cast against its adoption at a meeting or the shares not consenting in the
case of action by written consent are equal to more than 16 2/3% of the
outstanding shares entitled to vote.
In addition, subject to the right of Apple shareholders to adopt, amend or
repeal bylaws, Apple Bylaws, other than a bylaw or amendment thereof specifying
or changing a fixed number of directors or the maximum or minimum number or
changing from a fixed to a variable board or vice versa, may be adopted, amended
or repealed by the Board of Directors. An Apple Bylaw adopted by the
shareholders may restrict or eliminate the power of the Board of Directors to
adopt, amend or repeal the Apple Bylaws.
CUMULATIVE VOTING. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A shareholder may then cast all
such votes for a single candidate or may allocate them among as many candidates
as the shareholders may choose. Without cumulative voting, the holders of a
majority of the shares present at an annual meeting or any special meeting held
to elect directors would have the power to elect all the directors to be elected
at that meeting, and no person could be elected without the support of holders
of a majority of the shares voting at such meeting. Under the DGCL, there is no
right to cumulative voting unless the charter documents provide for it. Power's
charter documents do not provide for cumulative voting.
Under the CGCL, unless a corporation's charter documents specifically
eliminate cumulative voting, shareholders have a right to cumulate their votes
in the election of directors so long as at least one shareholder has given
notice of such shareholder's intent to cumulate his or her votes at the meeting
prior to the voting. Apple's Articles of Incorporation eliminate this right.
SHAREHOLDER RIGHTS PLAN. In May 1989, Apple adopted a shareholder rights
plan and distributed a dividend of one right to purchase one share of common
stock (each of which is a "Right") for each outstanding share of common stock of
the Company. The Rights become exercisable in certain limited circumstances
involving a potential business combination transaction of Apple and are
initially exercisable at a price of $200 per share. Following certain other
events after the Rights have become exercisable, each Right entitles its holder
to purchase for $200 an amount of common stock of Apple, or, in certain
circumstances, securities of the acquiror, having a then-current market value of
two times the exercise price of the Right. The Rights are redeemable and may be
amended at Apple's option before they become exercisable. Until a Right is
exercised, the holder of a Right, as such, has no rights as a shareholder of
Apple. The Rights expire on April 19, 1999.
BLANK CHECK PREFERRED. The Apple Articles of Incorporation provide that
Apple is authorized to issue 5,000,000 shares of preferred stock, which may be
issued from time to time in one or more series. The Apple Articles of
Incorporation further provide that the Apple Board of Directors is authorized
(i) to fix the number of shares of any series of preferred stock, (ii) to
determine the designation of any such series, (iii) to determine or alter the
rights, preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of preferred stock, and, (iv) within the limits and
restrictions instituted in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of each series
outstanding) the number of shares of any such series subsequent to the issuance
of shares of that series.
As of October 31, 1997, Apple had outstanding 150,000 shares of Non-Voting
Series A Preferred Stock, no par value. Each share of Series A Preferred Stock
is convertible into Apple Common Stock at a price per share of $16.50. The Apple
Series A Preferred Stock is entitled to receive, when and as declared by the
board of directors of Apple, a dividend at the rate of 3% of the original issue
price per share of the
48
<PAGE>
Series A Preferred Stock ($1,000) per annum in preference to any payment of
dividends on Apple Common Stock.
BUSINESS COMBINATIONS/REORGANIZATIONS. A provision of the DGCL prohibits
certain transactions between a Delaware corporation and an "interested
stockholder." For purposes of this DGCL provision, an "interested stockholder"
is a stockholder that is directly or indirectly a beneficial owner of 15% or
more of the voting power of the outstanding voting stock of a Delaware
corporation (or its affiliate or associate). This provision prohibits certain
business combinations between an interested stockholder and a corporation for a
period of three years after the date the interested stockholder acquired its
stock, unless (i) prior to the date the stockholder became an interested
stockholder the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the corporation's
board of directors; (ii) the interested stockholder acquired at least 85% of the
voting stock of the corporation in the transaction in which it became an
interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and the affirmative vote of at least
two-thirds of the shares held by the disinterested stockholders. This provision
applies to Power.
The CGCL provides that, except where the fairness of the terms and
conditions of the transaction has been approved by the California Commissioner
of Corporations and except in a "short-form" merger (the merger of a parent
corporation with a subsidiary in which the parent owns at least 90% of the
outstanding shares of each class of the subsidiary's stock), if the surviving
corporation or its parent corporation owns, directly or indirectly, shares of
the target corporation representing more than 50% of the voting power of the
target corporation prior to the merger, the nonredeemable common stock of a
target corporation may be converted only into nonredeemable common stock of the
surviving corporation or its parent corporation, unless all of the shareholders
of the class consent. The effect of this provision is to prohibit a cash-out
merger of minority shareholders, except where the majority shareholder already
owns 90% or more of the voting power of the target corporation and could,
therefore, effect a short-form merger to accomplish such a cash-out of minority
shareholders.
In addition, the CGCL requires that, in connection with certain transactions
between a corporation whose shares are held of record by 100 or more persons and
an "interested party," such interested party must deliver a written opinion as
to the fairness of the consideration to the shareholders of the corporation. An
"interested party" for purposes of this CGCL provision means a person who is a
party to the transaction and (i) directly or indirectly controls the
corporation, (ii) is an officer or director of the corporation, or (iii) is an
entity in which a material financial interest is held by any director or
executive officer of the corporation.
RIGHTS OF DISSENTING SHAREHOLDERS. Under both CGCL and DGCL, a shareholder
of a corporation participating in certain mergers and reorganizations may be
entitled to receive cash in the amount of the "fair value" (Delaware) or "fair
market value" (California) of its shares, as determined by a court, in lieu of
the consideration it would otherwise receive in the transaction. In general,
shareholders of a California corporation have broader dissenters' rights than
stockholders of a Delaware corporation. Since Power Common Stock and Power
Preferred Stock are not listed on any exchange or designated as a national
market system security or an interdealer quotation system security, or held of
record by more than 2,000 holders, Power Stockholders are entitled to
dissenters' right in a merger or consolidation. However, under DGCL, Power
Stockholders are not entitled to dissenters' right in a sale of all or
substantially all of Power's assets.
Shareholders of a California corporation, the shares of which are listed on
a national securities exchange or on the over-the-counter margin stock list,
generally do not have dissenters' rights unless holders of at least 5% of the
class of outstanding shares assert dissenters' rights or there is a restriction
on transfer imposed by the corporation or by law or regulation.
49
<PAGE>
INSPECTION OF STOCKHOLDERS LIST. Both the CGCL and DGCL allow any
stockholder to inspect the stockholders list for a purpose reasonably related to
such persons' interest as a stockholder. Additionally, the CGCL provides for an
absolute right to inspect and copy the corporation's shareholder list by a
person or persons holding at least 5% in the aggregate of the corporation's
outstanding voting shares, or any shareholder or shareholders holding 1% or more
of such shares who have filed a Schedule 14B with the SEC relating to the
election of directors. The DGCL does not provide for any such absolute right of
inspection.
DIVIDENDS. Under Power's Certificate of Incorporation, (i) no dividends may
be paid on Power Common Stock during any fiscal year until dividends in the
total amount of $0.06 and $0.12 per share per annum on Power Series A Preferred
Stock and Power Series B Preferred Stock, respectively, have been paid or
declared and set apart during that fiscal year; (ii) no dividends may be paid on
any share of Power Common Stock unless a dividend (including the amount of any
preferred dividends paid as described above) is paid with respect to all
outstanding shares of Power Preferred Stock in an amount for each such share of
Power Preferred Stock equal to or greater than the aggregate amount of such
dividends for all shares of Power Common Stock into which each such share of
Power Preferred Stock could then be converted; and (iii) no dividends may be
paid on any share of Power Preferred Stock during any fiscal year of Power
unless a dividend is paid on all shares of Power Preferred Stock proportionate
to their respective annual dividend preferences up to the amount thereof.
The Apple Series A Preferred Stock is entitled to receive, when and as
declared by the board of directors of Apple, a dividend at the rate of 3% of the
original issue price per share of the Series A Preferred Stock ($1,000) per
annum in preference to any payment of dividends on Apple Common Stock.
SHAREHOLDER DERIVATIVE SUITS. Under the DGCL, a stockholder may only bring
a derivative action on behalf of the corporation if the stockholder was a
stockholder of the corporation at the time of the transaction in question or the
stock thereafter devolved upon the stockholder by operation of law. The CGCL
provides that a shareholder bringing a derivative action on behalf of the
corporation need not have been a shareholder at the time of the transaction in
question, provided that certain tests are met. The CGCL also provides that the
corporation or the defendant in a derivative suit may make a motion to the court
for an order requiring the plaintiff shareholder to furnish a security bond.
Delaware does not have a similar bonding requirement.
PREEMPTIVE RIGHTS. Stockholders of either a Delaware or a California
corporation have only such preemptive rights as may be provided in its
certificate or articles of incorporation. The Power Certificate of Incorporation
does not grant any preemptive rights to the Power Stockholders. The Apple
Articles of Incorporation do not grant any preemptive rights to the Apple
shareholders.
DISSOLUTION. Under the DGCL, a dissolution must be approved by stockholders
holding 100% of the total voting power or the dissolution must be initiated by
the board of directors and approved by the holders of a majority of the
outstanding voting shares of the corporation. Under the CGCL, shareholders
holding 50% or more of the total voting power may authorize a corporation's
voluntary dissolution, and this right may not be modified by its articles of
incorporation. Under Power's Certificate of Incorporation, a dissolution must
also be approved by each series of Power Preferred Stock, voting as a separate
class.
BOARD OF DIRECTORS MEETINGS. The DGCL imposes no requirements as to calling
board of directors meetings; such requirements are set forth in a Delaware
corporation's certificate of incorporation or bylaws. Power's Bylaws provide
that (i) regular meetings of the Power Board may be held without notice at such
time and place as determined by the Power Board, or held without notice
immediately after and at the same place as the annual meeting of the Power
Stockholders, (ii) special meetings of the Power Board may be called by the
Chairman of the Power Board, Power's President, two or more directors, or by one
director if only one director holds office.
50
<PAGE>
Under the CGCL, meetings of the board of directors of a California
corporation, unless otherwise provided in such corporation's articles of
incorporation or bylaws, may be called by the chairman of the board, the
president, any vice president, the secretary or any two (2) directors.
The Apple Bylaws provide that meetings (whether regular, special or
adjourned) of the Board of Directors shall be held at the principal office of
Apple for the transaction of business, or at any other place within or without
the State that has been designated from time to time by resolution of the Board
or that is designated in the notice of the meeting.
Regular meetings of the Apple Board of Directors shall be held after the
adjournment of each annual meeting of the shareholders (which regular directors'
meeting shall be designated the "Regular Annual Meeting") and at such other
times as may be designated from time to time by resolution of the Board of
Directors. Notice of the time and place of all regular meetings shall be given
in the same manner as for special meetings, except that no such notice need be
given if (i) the time and place of such meetings are fixed by the Board of
Directors or (ii) the Regular Annual Meeting is held on the last Wednesday of
January, if not a legal holiday, and if a legal holiday, then on the next
succeeding business day not a holiday, at the principal office of Apple, or at a
place designated either by written consent of all the shareholders or by
resolution of the Board of Directors.
Special meetings of the Apple Board of Directors may be called at any time
by the Chairman of the Board, if any, or the President or any Vice President, or
the Secretary or by any two or more directors.
Special meetings of the Apple Board of Directors shall be held upon no less
than four days notice by mail or 48 hours notice delivered personally or by
telephone or telegraph to each director. Notice need not be given to any
director who signs a waiver of notice or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the home or office of the director who
the person giving the notice has reason to believe will promptly communicate it
to the director. A notice or waiver of notice need not specify the purpose of
any meeting of the Board. If the address of a director is not shown on the
records and is not readily ascertainable, notice shall be addressed to him at
the city or place in which the meetings of the directors are regularly held. If
the meeting is adjourned for more than 24 hours, notice of any adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to all directors not present at the time of adjournment.
A majority of all Apple directors elected by the shareholders and appointed
to fill vacancies shall constitute a quorum of the Board of Directors for the
transaction of business. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board of Directors subject to provisions of law relating to interested
directors and indemnification of agents of Apple. A majority of the directors
present, whether or not a quorum is present, may adjourn any meeting to another
time and place. 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 such
meeting.
DIRECTOR VOTING. Under the DGCL, a quorum of a Delaware corporation's board
of directors is equal to a majority of the total number of authorized directors
unless the certificate of incorporation or bylaws provides for a greater number
or a lesser number (which in no case can be less than one-third (1/3) of the
total number of directors). Under the CGCL, a quorum of a California
corporation's board of directors is equal to a majority of the authorized number
of such corporation's directors unless such corporation's articles of
incorporation or bylaws provide for a lesser number; provided, however, that
such lesser number cannot be less than the larger of (i) one-third (1/3) of the
authorized number of directors or (ii) two (2). A California corporation's
articles of incorporation may require more than a majority of the authorized
number of directors (up to and including all of the directors) for a quorum.
Power's Bylaws provide that a majority of the number of directors fixed in
Power's Bylaws (which currently is six (6)) plus one
51
<PAGE>
(1) constitutes a quorum at all meetings of the Power Board; provided, however,
if there is only one (1) director then in office, one (1) director constitutes a
quorum.
The Apple Bylaws provide a majority of all the directors elected by the
shareholders and appointed to fill any vacancies shall constitute a quorum of
the Board of Directors for the transaction of business. The Apple Bylaws provide
that every act or decision done or made by a majority of the directors present
at a meeting duly held at which a quorum is present is the act of the Board of
Directors subject to provisions of law relating to interested directors and
indemnification of agents of Apple. The Apple Bylaws provide that a majority of
the directors present, whether or not a quorum is present, may adjourn any
meeting to another time or place, and that the directors present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment notwithstanding the withdrawal of enough directors to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the required quorum for such meeting.
52
<PAGE>
BUSINESS OF POWER
GENERAL
Power was incorporated in 1994 under the laws of the State of Delaware.
Power's principal executive offices are located at 2400 South Interstate 35,
Round Rock, Texas 78681, and its telephone number is (512) 246-7807.
In December 1994, Power received a license from Apple for proprietary Mac OS
and Macintosh system architecture. The principal business of Power has been to
develop, manufacture and sell custom-configured Macintosh-compatible desktop
computer systems. In October 1997, Power began marketing and selling a Wintel
notebook system. Power markets its products directly to customers through its
website, advertisements in computer trade magazines, direct mailings and Power
catalogs.
Although Power was profitable for each of the five quarters ended March 31,
June 30, September 30 and December 31, 1996, and March 31, 1997, it required
additional working capital to implement its business plan and to finance, among
other things, anticipated increases in sales of its Macintosh-compatible
products, the research, development and marketing of its Wintel products, its
acquisition of land for its planned corporate headquarters in Georgetown, Texas,
and new management information systems. To raise the necessary capital, in June
1997, Power filed a registration statement for an initial public offering
("IPO") of its securities.
Power's sales in the quarter ended June 30, 1997 were significantly below
expectations, and this, combined with expenses of Wintel product development and
corporate infrastructure, resulted in an unanticipated operating loss of $3.9
million for the quarter. In addition, Power could not resolve to its
satisfaction certain matters regarding the Apple Licenses. Power's investment
bankers advised Power to withdraw its planned initial public offering because it
would be extremely difficult, if not impossible, for Power to raise capital
through an initial public offering.
Since July 1997, Power has taken steps to reduce its operating and overhead
expenses and to conserve cash. Since entering into the Acquisition Agreement on
August 29, 1997, Power has implemented the wind-down of its Macintosh-compatible
computer business as contemplated by the Acquisition Agreement and expects to
discontinue substantially all manufacturing and sales of Macintosh-compatible
systems after December 1997. In addition, Power is seeking to sell its remaining
assets.
The Acquisition Agreement and the disposition of Power's other assets will
result in the termination of Power's business. The financial statements
contained herein do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts or
classifications of liabilities that may result from Power ceasing to be a going
concern.
PRODUCTS
Power manufactures and sells three Macintosh-compatible desktop system
product families: POWERTOWER PRO, POWERCENTER PRO and POWERBASE. In addition to
its standard systems, Power offers bundled software and hardware options with
its products that provide customers with the convenience of one-stop shopping,
complete installation and custom-configuration at the factory.
Power began to develop its Wintel products in early 1997. Beginning in
October 1997, Power marketed and sold a Wintel notebook--POWERTRIP.
MARKETING AND SALES
Power markets its products directly to customers through its website,
placing advertisements in computer trade magazines, direct mailings and Power
catalogs. Power sells its products directly to customers over the Internet
through its online store and over the telephone. In support of Power's direct
marketing strategy, Power also organizes targeted public relations activities,
maintains a high profile at
53
<PAGE>
industry conferences and prepares creative event marketing at industry trade
shows. Power's advertisements include product information and Power's toll-free
telephone numbers and website address. The success of such strategy depends in
part on the availability of capital to be invested in marketing and advertising.
MANUFACTURING
Power's manufacturing and assembly processes include component assembly,
software loading and quality control tests. Power uses its own assembly and test
facilities to manufacture its products and has designed and installed modular
manufacturing lines. Power expects to discontinue its manufacture of
Macintosh-compatible systems in December 1997.
SUPPLIER RELATIONS
Power's manufacturing processes require high volumes of quality components
that are procured from third-party suppliers. Power contracts for the
manufacture of components according to Power's specifications, but it itself
does not manufacture any components used in its products. Except for components
Power must obtain from suppliers licensed by Apple, Power purchases all of its
components on a turn-key basis directly from independent suppliers.
COMPETITION
The PC industry in general is highly competitive and characterized by the
frequent introduction of new products, short product life cycles, a large number
of competitors, continual improvement in product performance, features and price
and price sensitivity on the part of customers. The combination of an
environment of rapid technological changes, short product life cycles and
competitive pressures results in gross margins on specific products decreasing
rapidly. Accordingly, any delay in introduction of more advanced or more
cost-effective products can result in significantly lower sales and gross
margins. These factors have in the past created pricing pressures on Power's
products, downward pressures on Power's gross margins, and the need for working
capital to finance research and development. Other competitive factors include
availability of new technology, marketing and sales ability, brand recognition,
breadth of product line, ease of use and quality of customer support.
EMPLOYEES
On June 30, 1997, Power had 540 full time employees. On September 24, 1997,
Power delivered notices under the Worker Adjustment and Retraining Act ("WARN")
to its manufacturing employees. As a result of resignations and terminations, on
September 30, 1997, Power had 271 full time employees, and Power has incurred
significant severance charges in the quarter ended September 30, 1997, and will
do so again for the quarter ending December 31, 1997.
FACILITIES
Power currently maintains its headquarters in Round Rock, Texas in two
leased facilities. Power's corporate offices, sales and engineering departments
occupy a 91,300 square foot office complex while the manufacturing organization
occupies a 70,000 square foot manufacturing facility in Round Rock, Texas. Power
also leases 20,000 square feet of administrative and engineering space, mostly
used for Mac OS research and development, in Cupertino, California. In February
1997, Power entered into a lease agreement for 154 acres of industrial zoned
land whereby it would lease until December 2009 certain land and facilities in
Georgetown, Texas. Power is currently seeking to dispose of its interest in this
project, and to terminate or assign to others its leases as the need for the
space declines as Power winds down its operations. On November 24, 1997, Power
entered into a joint marketing agreement with the City of Georgetown for the
disposition of Power's interest in the site.
54
<PAGE>
LEGAL PROCEEDINGS
Power is involved in various lawsuits and proceedings arising in the normal
course of business and in connection with the discontinuation of sales of all
significant product lines. In the opinion of Power's management, the ultimate
outcome of these lawsuits and proceedings will not have a material adverse
effect on the results of operations, financial position and cash flow of Power.
Power will make reasonable provision for such claims before making liquidating
distributions to the Power Stockholders.
On October 28, 1997, TCI Manufacturing, Ltd. ("TCI"), allegedly a former
supplier of powered enclosures to Power, filed suit against Power claiming $3.45
million of actual damages and $39.0 million of exemplary damages for alleged
breach of contract and fraud arising from the cancellation of purchase orders
that TCI claims were non-cancelable. Power believes the claims are frivolous and
invalid.
55
<PAGE>
SELECTED FINANCIAL INFORMATION OF POWER
Power, Gravenstein and Apple entered into the Acquisition Agreement on
August 29, 1997, under which Gravenstein agreed to purchase substantially all of
the assets of Power, which include all Mac OS and other licenses from Apple to
Power, Power's customer list and related data, all of Power's intellectual
property related to Mac-compatible products (excluding trademarks, service
marks, trade names and Web addresses, sites and domain names) and additional
assets to be agreed upon. The Closing of the Acquisition is conditioned on,
among other things, the approval by the Power Stockholders. In addition, Power
seeks the approval of the Power Stockholders of a Plan of Dissolution and
Complete Liquidation, the implementation of which is conditioned on, among other
things, such approval and the consummation of the Acquisition. The financial
statements contained below do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of such uncertainty.
<TABLE>
<CAPTION>
INCEPTION FISCAL YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
NOV. 19, 1993) JUNE 30, MARCH 31, SEPTEMBER 30,
THROUGH JUNE -------------------- -------------------- --------------------
30, 1994 (1) 1995 1996 1996 1997 (2) 1996 1997
-------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales........................... $ -- $ 3,046 $ 131,075 $ 82,413 $ 247,207 $ 112,926 $ 161,414
Cost of goods sold.................. -- 2,059 104,408 66,563 194,495 87,959 134,658
------- --------- --------- --------- --------- --------- ---------
Gross profit...................... -- 987 26,667 15,850 52,712 24,967 26,756
Costs and expenses:
Selling, general and
administrative.................. 413 1,602 17,458 10,814 35,544 14,730 33,599
Research and development.......... 624 2,366 3,425 2,254 3,962 2,540 4,868
------- --------- --------- --------- --------- --------- ---------
Total costs and expenses........ 1,037 3,968 20,883 13,068 39,506 17,270 38,467
------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations....... (1,037) (2,981) 5,784 2,782 13,206 7,697 (11,711)
Interest income (expenses), other... 25 40 (416) (245) (853) (376) (923)
------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes... (1,012) (2,941) 5,368 2,537 12,353 7,321 (12,634)
Income taxes (benefit).............. -- -- 462 -- 4,616 2,139 (4,053)
------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ (1,012) $ (2,941) $ 4,906 $ 2,537 $ 7,737 $ 5,182 $ (8,581)
------- --------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and
common equivalent share........... $ (0.27) $ (0.57) $ 0.31 $ 0.16 $ 0.46 $ 0.32 $ (1.51)
Weighted average number of common
and common equivalent shares
outstanding....................... 3,783 5,199 15,894 15,808 16,670 16,193 5,672
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
------------------------------- MARCH 31, SEPTEMBER 30,
1994 1995 1996 1997 1997
--------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................................... $ 2,089 $ 8,096 $ 12,612 $ 12,530 $ 4,620
Total assets............................................. 2,521 11,427 49,059 73,884 73,131
Total liabilities........................................ 106 2,942 34,498 51,233 58,900
Stockholders' equity..................................... 2,415 8,485 14,561 22,651 14,231
</TABLE>
- --------------------------
(1) The Company was incorporated in November 1993 and commenced operations in
January 1994. It first shipped products in May 1995.
(2) During 1997 Power changed its fiscal year from the Sunday closest to June 30
to the Sunday closest to March 31. The change in fiscal year was effective
for the year ended March 31, 1997.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF POWER
OVERVIEW
Power is a leading manufacturer and seller of Macintosh-compatible systems.
The principal business of Power has been to develop, manufacture and sell
custom-configured Macintosh-compatible desktop computer systems. Power markets
its products directly to customers through its website, advertisements in
computer trade magazines, direct mailings and Power catalogs.
Power's net sales increased from $82.4 million for the nine months ended
March 31, 1996 to $247.2 million for the nine months ended March 31, 1997.
Power commenced operations in January 1994, and shipped its first
Macintosh-compatible products and recorded its first revenues in May 1995.
Consequently, Power has a limited operating history. Power has experienced
substantial growth in revenues relating to its Macintosh-compatible products.
In December 1994, Power received a license from Apple for the proprietary
Mac OS and Macintosh system architecture. Power has developed, manufactured,
marketed and sold Macintosh-compatible desktop computer systems under the Apple
Licenses, and has derived substantially all of its revenues from the sale of
such systems. Power's Macintosh-compatible business depends on Power's business
relationship with Apple. The Apple Licenses permit Power to manufacture and sell
certain Macintosh-compatible computer systems and reproduce and distribute the
current version of the Mac OS for specified royalties that must be prepaid to
Apple on a periodic basis.
Pursuant to an amendment to the Apple License dated as of August 29, 1997
between Apple and Power (the "Omnibus Amendment"), Apple has waived payment of
certain royalties for the period beginning August 29, 1997 for up to 35,000
Macintosh-compatible systems. In addition, Apple released Power of its
obligation to pay Apple up to $5 million in royalties that were then due but had
not been paid.
Power markets and sells its products primarily through direct sales
channels. For the nine months ended March 31, 1997, approximately 65% of Power's
Macintosh-compatible computer systems were distributed through its direct sales
channels, with the balance distributed through indirect sales channels. Power's
direct marketing strategy, which eliminates dealer markups and certain other
distribution channel expenses, generally provides Power with higher margins than
can be achieved from its indirect sales channels.
Most of Power's Macintosh-compatible computer systems have been sold
domestically, while approximately 10% of its products have been sold outside the
United States, primarily through indirect sales channels.
Power recognizes revenue, net of customer returns and customer allowances,
as of the date product is shipped to customers. Revenues from separately priced
maintenance and extended warranty agreements are recognized ratably over the
terms of the agreements.
Since Power executed the Acquisition Agreement on August 29, 1997, it has
taken steps to conserve cash by winding down its operations. As it does so, it
is difficult to predict results of operations, potential realization on sales of
assets, or the likely amount of liabilities arising from actions taken in
connection with discontinuing Power's operations. If the Acquisition is not
consummated and Power does not liquidate and dissolve, Power will not be in a
position to continue manufacturing, marketing or selling its Macintosh-
compatible products as a going concern, and may not be in a position to
manufacture, market or sell other products without obtaining significant
additional capital. See "Risk Factors--Failure to Consummate the Acquisition."
If the closing of the Acquisition is delayed, Power may have few or no assets to
distribute to the Power Stockholders upon liquidation. While Power is seeking to
sell its remaining assets, including the trade name "Power Computing," and
certain assets related to its Wintel business as a going concern, there is no
assurance that such sale can be accomplished. See "Risk Factors--Sale of
Non-Macintosh based
57
<PAGE>
Business." Even if the Acquisition is consummated, there can be no assurance as
to the timing or amount of distributions to the Power Stockholders. See "Risk
Factors--No Assurance of Distribution to Power Stockholders."
RESULTS OF OPERATIONS
From inception through May 1995 Power was principally engaged in research
and product development, recruiting personnel, raising capital and creating
strategic relationships. Power shipped its first product and recorded its first
revenue in May 1995.
Since July 1997, Power has taken steps to reduce its operating and overhead
expenses and to conserve cash. Since entering into the Acquisition Agreement on
August 29, 1997, Power has taken steps to wind down its Macintosh-compatible
computer business, and expects to discontinue substantially all manufacturing
and sales of its Macintosh-compatible systems after December 1997. Additionally,
Power is seeking to sell its remaining assets, including the trade name "Power
Computing," and certain assets related to its Wintel business, as a going
concern.
The following table sets forth, for the periods indicated, certain items
from Power's consolidated statements of operations, expressed as a percentage of
net sales. The financial statements contained below do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the liquidation of Power.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, MARCH 31, SEPTEMBER 30,
-------------------- -------------------- --------------------
1995 1996 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................. 67.6 79.7 80.8 78.7 77.9 83.4
--------- --------- --------- --------- --------- ---------
Gross profit................................................. 32.4 20.3 19.2 21.3 22.1 16.6
Costs and expenses:
Selling, general and administrative.......................... 52.6 13.3 13.1 14.4 13.0 20.8
Research and development..................................... 77.7 2.6 2.7 1.6 2.3 3.0
--------- --------- --------- --------- --------- ---------
Total costs and expenses................................... 130.3 15.9 15.8 16.0 15.3 23.8
--------- --------- --------- --------- --------- ---------
Income (loss) from operations.................................. (97.9) 4.4 3.4 5.3 6.8 (7.2)
Interest income (expenses), other.............................. 1.3 (0.3) (0.3) (0.3) (0.3) (0.6)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.............................. (96.6) 4.1 3.1 5.0 6.5 (7.8)
Income taxes (benefit)......................................... -- 0.4 -- 1.9 1.9 (2.5)
--------- --------- --------- --------- --------- ---------
Net income (loss).............................................. (96.6)% 3.7% 3.1% 3.1% 4.6% (5.3)%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1997
NET SALES. Net sales increased from $112.9 million for the six months ended
September 30, 1996 to $161.4 million for the same period in 1997, an increase of
$48.5 million, or 43%. This increase was primarily attributable to Power's
timely introduction of new product offerings with competitive price/ performance
features, increased name recognition and market acceptance of Power's brand of
Macintosh-compatible computer systems, and continued growth and customer
acceptance of Power's direct sales channel.
GROSS PROFIT. Gross profit increased from $25 million for the six months
ended September 30, 1996 to $26.8 million for the same period in 1997, an
increase of $1.8 million; however gross margin decreased
58
<PAGE>
from 22.1% for the six months ended September 30, 1996 to 16.6% for the same
period in 1997. Gross profit increased for the six months ended September 30,
1997 as a result of a $5.0 million credit for royalties incurred from April 1,
1997 through August 28, 1997, granted by Apple in connection with the Omnibus
Amendment. In addition, Apple waived royalties for the period beginning August
29, 1997 for up to 35,000 Macintosh-compatible systems, thus also increasing
gross profit. Gross margins for the six-month period ended September 30, 1997
were adversely impacted by the significant volume of sales of low-end products
compared to the same period in 1996 as well as refurbished products to catalog
and international customers at low margins. Gross margins were further impacted
by liquidation of inventory of end-of-life products. After entering into the
Acquisition Agreement, Power reduced its prices in an effort to liquidate
remaining product inventories, which further reduced gross margins for the
six-month period ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $14.7 million for the six months ended September 30,
1996 to $33.6 million for the same period in 1997, an increase of $18.9 million,
or 129%. As a percentage of sales, these expenses increased from 13.0% for the
six months ended September 30, 1996 to 20.8% for the same period in 1997. During
the six-month period ended September 30, 1997, Power canceled plans for its
proposed corporate headquarters and terminated its information systems
implementation project, resulting in charges of $3.0 million and $1.7 million,
respectively. In addition, Power canceled its proposed initial public offering
and recognized $1.2 million of associated pre-paid expenses. The additional
increase in absolute spending and spending as a percentage of sales was
primarily a result of higher personnel costs and marketing demand generation
programs associated with Power's accelerated sales growth. During the six-month
period ended September 30, 1997, Power began reducing employee headcount in an
effort to reduce operating costs and incurred additional charges for severance
pay.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$2.5 million for the six months ended September 30, 1996 to $4.9 million for the
same period in 1997, an increase of $2.4 million, or 96.0%. Research and
development expenses also increased as a percentage of sales from 2.3% for the
six months ended September 30, 1996 to 3.0% for the six months ended September
30, 1997. The increase in absolute expenses and as a percentage of revenue was
primarily due to increased spending as a result of Power's expansion of its Mac
OS product offerings as well as research and development activities associated
with its new Wintel product line.
INCOME TAXES. Power recognized an income tax benefit of $4.1 million, or an
effective tax rate of 32.1%, for the six months ended September 30, 1997
compared with an income tax expense of $2.1 million, or an effective tax rate of
29.2%, for the six months ended September 30, 1996. Power had an effective tax
rate of 29.2% for the six months ended September 30, 1996 due to the utilization
of net operating loss carryforwards.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales increased from $82.4 million for the nine months ended
March 31, 1996 to $247.2 million for the same period in 1997, an increase of
$164.8 million, or 200%. This increase was primarily attributable to Power's
introduction of new products with competitive price/performance features,
increased name recognition and market acceptance of Power's brand of
Macintosh-compatible computer systems, and continued growth and customer
acceptance of Power's direct sales channel.
GROSS PROFIT. Gross profit increased from $15.9 million for the nine months
ended March 31, 1996 to $52.7 million for the same period in 1997, an increase
of $36.8 million, or 231%. Gross margin increased from 19.2% for the nine months
ended March 31, 1996 to 21.3% for the same period in 1997. Gross margin for the
nine-month period ended March 31, 1996 was decreased by the liquidation of
inventory of end-of-life products and the incurring of higher than normal
warranty costs associated with one of Power's product lines.
59
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $10.8 million for the nine months ended March 31, 1996
to $35.5 million for the same period in 1997, an increase of $24.7 million, or
229%. As a percentage of sales, these expenses increased from 13.1% for the nine
month period ended March 31, 1996 to 14.4% for the same period in 1997. The
increase in absolute spending and spending as a percentage of sales was
primarily a result of higher personnel costs and marketing demand generation
programs associated with Power's accelerated sales growth. During the nine month
period ended March 31, 1997, Power sought out and hired additional key members
of management. In addition, the increase can be partially attributed to costs
associated with Power's management information systems.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$2.3 million for the nine months ended March 31, 1996 to $4.0 million for the
same period in 1997, an increase of $1.7 million, or 73.9%. Research and
development expenses decreased as a percentage of sales from 2.7% for the nine
months ended March 31, 1996 to 1.6% for the nine months ended March 31, 1997.
The increase in absolute expenses was primarily due to increased spending as a
result of Power's expansion of its product offerings.
INCOME TAXES. Power's effective income tax rate was 37.4% for the nine
months ended March 31, 1997. Power paid no income taxes for the nine months
ended March 31, 1996. During the nine-month period ended March 31, 1996, Power
utilized net operating loss carryforwards and federal research and development
credits to eliminate its tax liability. Prior to the nine-month period ended
March 31, 1997, Power had completely utilized its net operating loss
carryforwards and federal research and development tax credit carryforwards.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
From inception through May 1995, Power was engaged principally in research
and product development, recruiting personnel, raising capital and creating
strategic relationships. Power shipped its first product and recorded its first
revenue in May 1995. For the year ended June 30, 1995 Power had net sales of
$3.0 million and gross profit of $987,000, or 32.4% of net sales. For the fiscal
year ended June 30, 1996, the first full fiscal year in which Power shipped
product, Power had net sales of $131.1 million and gross profit of $26.7
million, or 20.3% of net sales. Selling, general and administrative expenses
increased from $1.6 million for the fiscal year ended June 30, 1995 to $17.5
million for the fiscal year ended June 30, 1996. This increase was due to the
additional expenditures incurred by Power to support its rapid increase in sales
growth, expenses relating to Power's moving from a subleased property shared
with another computer manufacturer to a direct leased property, and the
expenditures to establish Power's management information systems. Research and
development expenses increased from $2.4 million for the fiscal year ended June
30, 1995 to $3.4 million for the fiscal year ended June 30, 1996. The increase
in expenses in fiscal 1996 was primarily due to increased spending as a result
of Power's beginning to expand its product offerings.
EIGHT MONTHS ENDED JUNE 30, 1994
During the eight month period ended June 30, 1994, the Company was in the
development stage. The Company was engaged principally in research and product
development, recruiting personnel, raising capital and creating strategic
relationships.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, Power had cash and cash equivalents of $5.5 million,
an increase of approximately $2.1 million from March 31, 1997. Power has
financed its operations to date primarily through revenue generated from
operations, from borrowings under its credit facilities, and the private sale of
equity securities. See "Certain Relationships and Related Party Transactions."
Cash used by operations was $6.7 million for the six months ended September 30,
1997 compared with cash generated
60
<PAGE>
from operations of $431,000 for the nine months ended March 31, 1997. Net cash
used in operations during the six months ended September 30, 1997 represents
Power's net loss for the period as well as decreasing accounts payable and
increasing inventory levels. Cash used in operations was $4.6 million, and $10.8
million for periods ended June 30, 1995 and 1996, respectively. Net cash used in
operating activities during the years ended June 30, 1995 and 1996 represents
investments in working capital, primarily increased accounts receivable and
inventory, partially offset by increases in accounts payable which were
necessary to support Power's increased volume of business.
Net cash used in investing activities was approximately $239,000, $2.4
million, $10.0 million and $4.6 million for the fiscal periods ended June 30,
1995, 1996, the nine months ended March 31, 1997, and the six month period ended
September 30, 1997, respectively, primarily for capital expenditures. The
increase in capital expenditures during the nine month period ended March 31,
1997 and the six month period ended September 30, 1997 relates primarily to the
acquisition of land and other costs for Power's proposed corporate headquarters
in Georgetown, Texas, additional administrative facilities, manufacturing line
expansion, change in Power's management information systems and for capital
expenditures consistent with the increase in Power's personnel. Cash flows from
financing activities of $10.8 million and $13.5 million for the nine months
ended March 31, 1997 and the six months ended September 30, 1997, respectively,
were primarily attributable to borrowings under Power's credit facilities.
In March 1997, Power entered into a $50 million revolving credit facility,
which was to expire in March 1998 and bore interest at the bank's base rate plus
0.5% (9% at March 31, 1997). Borrowings under this facility were subject to a
borrowing base limitation (based upon a combination of certain eligible accounts
receivable and inventory) and were collateralized by substantially all of
Power's assets. The credit facility required that Power maintain a lock box at
the financial institution for collection of its accounts receivable. Collections
via the lock box were restricted for payment of the interest and principal
balance under the facility. The facility also limited Power's annual capital
expenditures and required Power to maintain a minimum net worth and meet certain
financial ratios. In June 1997, the credit facility was amended to reduce the
revolving credit facility to $30 million, amend certain covenant requirements
and to modify the formula used to compute the borrowing base resulting in an
increased borrowing base. In September 1997, all borrowings under this credit
facility were repaid with funds advanced by Apple under the Loan, and the credit
facility has been terminated. See "The Acquisition--The Apple Loan."
In February 1997, Power entered into a lease agreement in which it agreed to
lease certain land and facilities to be constructed and located in Georgetown,
Texas until December 2009. See Note 5 to "Notes to Consolidated Financial
Statements." Monthly lease payments are set to be equal to the monthly cost
incurred by the lessor related to the leased premises, which costs will
fluctuate as land is purchased and construction costs of the facilities are
incurred. On September 25, 1997, Power gave notice of its request to exercise
its option under the lease with the City of Georgetown, Texas to acquire its
site. On November 4, 1997, the City of Georgetown declined to honor Power's
request and issued a notice to Power claiming that Power had breached the
Economic Development Agreement with the City. Subsequently, on November 24,
1997, Power entered into a verbal joint marketing agreement with the City of
Georgetown for the disposition of Power's interest in the site.
In July 1997, Power entered into a $10 million term loan agreement, for a
period of up to three years, subject to acceleration under certain
circumstances, bearing interest at 9% per annum. In addition, Power granted the
lender a warrant to purchase 133,333 shares of Power's Common Stock at $10 per
share and a warrant to purchase 133,333 shares of Power's Common Stock at $12
per share, exercisable over a three-year period. The term loan was repaid in
full on November 13, 1997, and the lender surrendered its rights to these
warrants.
Upon the execution and delivery of the Acquisition Agreement by Apple and
Power, Apple extended the Loan in the principal amount of $25.0 million to
Power. The proceeds of the Loan were first used to repay an outstanding bank
line of credit facility in the principal amount of $22.1 million. The balance of
61
<PAGE>
the Loan was used to repay a portion of an outstanding term loan with the
principal amount of $10.0 million. The outstanding principal balance under the
Loan bears interest at the rate of six percent per annum. The principal and all
accrued and unpaid interest is due and payable on the earlier of: (i) the tenth
business day following the Closing; (ii) notice to Power of termination of the
Acquisition Agreement pursuant to its terms; or (iii) Power's sale or
disposition of in excess of 35,000 Macintosh-compatible computer systems after
August 29, 1997. See "The Acquisition--The Acquisition Agreement-- Termination."
As of September 30, 1997, Power had no material commitments other than
unconditional firm purchase commitments in the ordinary course of business. In
the event that Power does not fulfill its firm purchase commitments, Power may
incur cancellation charges of approximately $2 million.
Power has not invested in derivative securities or any other financial
instrument that involves a high level of complexity or risk. In the future, cash
in excess of current requirements will be invested in investment-grade,
interest-bearing securities.
Finally, as Power is now winding down its operations, it is very difficult
to predict the results of operations, the potential realization on sales of
assets, or the likely amount of liabilities arising from actions taken in
connection with discontinuing Power's operations.
Management expects to discontinue sales of all significant product lines in
order to comply with the provisions of the Acquisition Agreement by December
1997. For the six month period ended September 30, 1997, Power used $6.7 million
of cash to support operations. Management believes it has adequate cash
resources available to fund operations through the consummation of the
Acquisition. To the extent such consummation is delayed the ability to fund
operations with existing cash resources could be adversely impacted.
The accompanying financial information has been prepared assuming that Power
will continue as a going concern. The factors identified above raise substantial
doubt about Power's ability to continue as a going concern. The financial
information does not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF POWER
Since its inception, Power has maintained business relationships and engaged
in certain transactions with affiliated companies and parties as described
below. It is the policy of Power to engage in transactions with related parties
on terms, in the opinion of the Power Board, no less favorable to Power than
could be obtained from unrelated parties.
On January 18, 1994, Power, in connection with its organization, issued
5,175,000 shares of Power Common Stock, 3,000,000 shares of Power Series A
Preferred Stock and warrants to purchase 225,000 shares of Power Common Stock.
Messrs. Kahng, Torresi, Piol and Carlton Amdahl and Olivetti Holding N.V.
("Olivetti") purchased shares pursuant to such issuances as further described
below. On the date of purchase, Messrs. Piol and Raviola were affiliates of
Olivetti.
In connection with Power's organization, on January 18, 1994, Mr. Kahng
purchased 3,400,000 shares of Power Common Stock in exchange for certain assets
valued at $300,000 and $40,000 in cash. Mr. Kahng also purchased an additional
600,000 shares of Power Common Stock, subject to a right of repurchase by Power
(the "Kahng Restricted Shares"), in exchange for a promissory note in the amount
of $60,000 at an annual interest rate of 3.98%. The promissory note was paid in
full on May 29, 1997. As of September 30, 1997, Power's right of repurchase has
lapsed as to 550,000 of the Kahng Restricted Shares. If Mr. Kahng's employment
is terminated by Power for cause or by Mr. Kahng, Power may, within 90 days
following such termination, repurchase any shares still subject to the right of
repurchase for the original purchase price
62
<PAGE>
per share paid by Mr. Kahng. Power's right of repurchase automatically lapses as
to all Kahng Restricted Shares upon Mr. Kahng's termination without cause or
upon his death.
In connection with Power's organization, on January 18, 1994, Mr. Torresi
purchased 250,000 shares of Power Common Stock for $25,000. Mr. Torresi also
purchased 225,000 shares, subject to a right of repurchase by Power (the
"Torresi Restricted Shares"), in exchange for a promissory note in the amount of
$22,500 at an annual interest rate of 3.98%. The promissory note has been paid
in full. Pursuant to a resolution of the Board of Directors, all of the Torresi
Restricted Shares were accelerated as of February 27, 1995, and such shares are
no longer subject to a right of repurchase by Power. Although Mr. Torresi is a
director of Power, he abstained from participating in the decision relating to
the acceleration of the Torresi Restricted Shares.
In connection with Power's organization, on January 18, 1994, Mr. Piol
purchased 250,000 shares of Power Common Stock for $25,000. On the same date,
Mr. Piol purchased for $2,250, two warrants to purchase a total of 225,000
shares of Power Common Stock at an exercise price of $0.10 per share. On April
24, 1995, Mr. Piol exercised one warrant with respect to 112,500 shares of Power
Common Stock.
In connection with Power's organization, on January 18, 1994, Olivetti, then
an affiliate of Messrs. Piol and Raviola, purchased 250,000 shares of Power
Common Stock for $25,000 and 3,000,000 shares of Power Series A Preferred Stock
for $2,750,000 in cash and an assignment of its rights under a Letter Agreement
dated September 10, 1993 between Olivetti and Up To Date Technology, Inc. ("Up
to Date"), valued at $250,000. Up To Date is owned by Mr. Kahng. On the same
date, Olivetti agreed to purchase an additional 2,000,000 shares of Power Series
A Preferred Stock if neither Power nor Olivetti could find additional suitable
investors to purchase such shares by May 31, 1994. On February 18, 1995,
Olivetti purchased the additional 2,000,000 shares of Power Series A Preferred
Stock for $2,000,000.
On February 27, 1995, the Board of Directors approved a grant of
non-statutory stock options to purchase 50,000 shares of Power Common Stock at
an exercise price of $0.35 per share to Mr. Raviola, vesting immediately, and
the Board removed the vesting requirement imposed on options to purchase 50,000
shares of Power Common Stock for $0.10 per share, which were previously granted
to Mr. Heller. Although Messrs. Raviola and Heller are directors of Power, each
abstained from voting on the transactions that affected them individually.
On June 26, 1995, Power issued 2,735,000 shares of Power Series B Preferred
Stock. In connection therewith, Messrs. Kahng, Torresi and Charles H. Kahng, Mr.
Kahng's father, purchased 50,000, 25,000 and 25,000 shares of Power Series B
Preferred Stock for $100,000, $50,000 and $50,000, respectively, and ASCII
purchased 500,000 shares for $1,000,000. Mr. Chidambaram is a director of ASCII
and has voting control over shares held by ASCII Corporation ("ASCII"). On
August 28, 1995, Power issued 615,000 shares of Power Series B Preferred Stock,
and in connection therewith, Messrs. Kahng and Torresi purchased 37,500 and
40,000 shares for $75,000 and $80,000, respectively.
On December 31, 1996, Olivetti sold all of its shares of Power Common Stock
and Power Series A Preferred Stock (the "Olivetti Shares") to 4C Ventures. In
connection with such transfer, the Board of Directors resolved on December 3,
1996, that it was not in the best interests of Power to exercise its right of
first refusal under the Shareholder Agreement with respect to the Olivetti
Shares. Mr. Raviola and Mr. Piol, both directors of Power at the time, formed 4C
Ventures as a venture capital fund with the backing of two major financial
institutions. Along with Alexandra Giurgiu Piol, Mr. Piol and Mr. Raviola
exercise control over 4C Ventures. Mr. Piol and Mr. Raviola did not participate
in any discussions of the Board of Directors concerning the transfer of the
Olivetti Shares.
All of the above holders are parties to, and their respective shares of
Power Common Stock and Power Preferred Stock are subject to, that certain
Investor Rights Agreement dated June 26, 1995 (the "Investor Rights Agreement"),
providing for certain preemptive rights and certain registration rights with
respect to all shares of Power Common Stock and Power Preferred Stock of such
holders. In addition, all
63
<PAGE>
of the above holders are parties to, and their respective shares are subject to,
that certain Amended and Restated Shareholder Agreement dated June 26, 1995 (the
"Shareholder Agreement"), providing for certain rights of first refusal and
placing certain selling restrictions on all of the shares of Power Common Stock
and Power Preferred Stock held by such holders.
Under a voting agreement dated June 26, 1995, Olivetti, 4C Ventures, ASCII,
Providence and Messrs. Kahng, Torresi and Piol agreed to affirmatively vote
their shares with respect to certain nominees of Olivetti, 4C Ventures, ASCII
and Mr. Kahng for Power's Board of Directors. Under a Shareholder voting
agreement dated April 27, 1995, Olivetti, Providence and Messrs. Kahng, Torresi
and Piol, and Carlton Amdahl, a former consultant to Power, agreed to vote their
shares in the manner determined by the vote of at least 70% of the voting power
of the shares subject to the agreement with respect to certain proposals that
are required to be submitted to the stockholders of Power by applicable law,
Power's charter documents or applicable agreements to be submitted for approval.
In calendar year 1994, Power's employees performed certain research and
development services for Up To Date, which is owned by Mr. Kahng, and Up To Date
paid approximately $156,000 for such services. Power no longer provides services
to Up To Date.
In October 1996, Power entered into a consulting agreement with Mr. Piol for
direction and management services in the development of Power's European
business. Pursuant to such consulting agreement, Mr. Piol received compensation
for services rendered in the amount of $10,000 per month plus pre-approved
expenses. As of September 30, 1997, Power had paid Mr. Piol $50,000 pursuant to
such consulting agreement. Beginning in February 1997 Power began paying Mr.
Piol on a purchase order basis.
In April 1996, Power entered into a Service Agreement with ASCII for
consulting services related to the development of Power's business in Japan.
ASCII, and certain employees of ASCII including Mr. Chidambaram, are
stockholders of Power and Mr. Chidambaram is ASCII's nominee to the Board of
Directors pursuant to a voting agreement. ASCII is compensated at a rate of
1,900,000 Japanese yen per month plus reasonable expenses under the terms of the
Service Agreement. This agreement was terminated in October 1997.
In January 1997, Power entered into a consulting agreement with AAK Sales
Consultants for direction and management services in the field of sales.
AnnMarie Kocher, the wife of Mr. Joel Kocher (who was then President of Power),
is a principal with AAK Sales Consultants. Pursuant to the consulting agreement,
AAK Sales Consultants receives compensation for services rendered in the amount
of $10,000 per month plus pre-approved expenses. This agreement was terminated
in August 1997. Ms. Kocher has more than twelve years of senior sales management
experience. Prior to entering into such consulting agreement with Power, Ms.
Kocher served as Director of Indirect Sales at Tivoli Systems from 1994 to 1995;
Vice President of Government, Education and Medical Sales for Dell from 1992 to
1994; and Vice President of Sales for GTSI, the largest Government GSA reseller,
from 1985 to 1992.
On March 15, 1995, the Power Board granted options to purchase 190,000
shares of Power Common Stock at $0.35 per share to Enzo Torresi, vesting over 48
months from April 1, 1995. On August 28, 1997, the Power Board vested all such
options of Mr. Torresi. Mr. Torresi did not participate in the Power Board's
decision to accelerate vesting of his options.
On March 10, 1997, the Power Board granted options to purchase 750,000
shares of Power Common Stock for $8.25 to Mr. Kahng. Mr. Kahng did not
participate in the Power Board's decision to grant such options. On May 15,
1997, the Board of Directors granted options to purchase 30,000 shares of Power
Common Stock for $7.50 to each of Messrs. Chidambaram, Heller, Piol, Raviola and
Torresi.
Power has entered into indemnification agreements with each of its directors
and officers.
64
<PAGE>
MANAGEMENT AND EXECUTIVE COMPENSATION OF POWER
DIRECTORS AND EXECUTIVE OFFICERS OF POWER
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Stephen S. Kahng..................................... 47 Chairman of the Board, Chief Executive Officer,
Director
James A. Wallace..................................... 51 Chief Operating Officer, Chief Financial Officer
John W. Teets........................................ 43 Corporate Secretary
Song S. Kim.......................................... 42 Vice President, Treasurer
Enzo N. Torresi...................................... 52 Vice Chairman of the Board, Director
Sada Chidambaram..................................... 52 Director
David Heller......................................... 52 Director
Elserino M. Piol..................................... 64 Director
Giuliano C. Raviola.................................. 65 Director
</TABLE>
STEPHEN S. KAHNG has served as Chief Executive Officer and a director of
Power since January 1994. He is also a co-founder of Power. Mr. Kahng has also
served as Chairman of the Board since November 1996. From January 1994 until
September 1995, he served as Chief Financial Officer and Secretary, and from
January 1994 until November 1996, he served as President. From 1991 to December
1993, Mr. Kahng served as President of Up To Date Technology, Inc., a technology
design and consulting company owned by him and based in San Jose, California.
From 1986 to 1991, Mr. Kahng served as Senior Vice President and General Manager
of Chips and Technologies, Inc., a leading manufacturer of ASCIs for the PC
industry.
JAMES A. WALLACE was promoted to the position of Chief Operating Officer on
August 20, 1997. Mr. Wallace has served as Chief Financial Officer and Vice
President, Finance of Power since December 1996. From 1980 until September 1996,
Mr. Wallace served in various capacities with Digital Equipment Corporation,
most recently as Vice President of Finance for its Computer Systems Division
from May 1993 to September 1996. From September 1991 to May 1993, he served as
Vice President Finance (U.S. area) and from September 1989 to September 1991, he
served as Finance Manager, Digital Services.
JOHN W. TEETS has served as Power's Corporate Secretary since March 1996.
From March 1995 to March 1996 he was a partner with Hurst & Hake, L.L.P., an
Austin, Texas, law firm. From June 1993 to February 1995, he served as a
Corporate Director with international responsibilities for Motorola, Inc. From
1986 to May 1993, he served as Senior Counsel with Motorola, Inc.
SONG S. KIM has served as Vice President since September 1, 1997. Mr. Kim
has served as Power's Treasurer since April 1997. From July 1996 to March 1997,
he served as Power's Controller. From June 1995 to June 1996, he served as
Assistant to the Chairman and as Vice President, Controller and Secretary of
Ambex Venture Group LLC, a management and investment company. From December 1991
to May 1995, he served as Controller of Diamond Multimedia Systems, a designer
and manufacturer of graphic accelerators and multimedia products for PCs.
ENZO N. TORRESI is a co-founder of Power and has served as Vice Chairman of
the Board since November 1996. Mr. Torresi has been a director of Power since
January 1994, and from January 1994 until November 1996, he served as Chairman
of the Board. From January 1989 to October 1994, he served as President and
Chief Executive Officer of NetFRAME Systems Incorporated, a computer
manufacturer that he co-founded in 1987. Since December 1996, Mr. Torresi has
been Chairman and Chief Executive Officer of ICAST Corporation, an Internet
software company. Mr. Torresi is also a director of PictureTel Inc., a leading
video conferencing company, and Santa Cruz Operation, Inc., the leading provider
of UNIX operating systems on Intel platforms.
65
<PAGE>
SADA CHIDAMBARAM has served as a director of Power since December 1996. Mr.
Chidambaram also has served as a director of ASCII Corporation, a publisher of
software and computer magazines and a manufacturer and distributor of
specialized semiconductors, since April 1996, and he has served as the President
and a director of ASCII of America, Inc., a subsidiary of ASCII, since February
1989. He also serves on the board of directors of several privately held
companies.
DAVID HELLER has served as a director of Power since January 1994. Mr.
Heller has served as the President of Pacific Technology Capital Corporation, a
financial advisory and investment banking firm of which he is a founder, since
1982. He has also served as a director of Borland International, Inc., a
computer software company, since 1982. From January 1988 to December 1993, Mr.
Heller served as a director and President of Tie Rack West, Inc., a clothing
accessory company. Since March 1995, Mr. Heller has served as a director of
America West Golf Manufacturing Company, Inc., a golf equipment manufacturer and
distributor.
ELSERINO M. PIOL has served as a director of Power since January 1994. He is
also a co-founder of Power. Since March 1995, Mr. Piol has been a partner of 4C
Ventures, L.P., a venture capital limited partnership and affiliate of Power,
and since January 1995, he has served as a Chairman of Veron S.p.A., a
manufacturer of smart card equipment. Since January 1996, Mr. Piol has also
served as a director of Docunet, Inc., a terminals products company, and since
September 1993, he has been a director of Advanced Telecommunications Modules
Ltd., a communications products company. From January 1992 until April 1997, he
served as Chairman of Olivetti Canon Industriale S.p.A., a computer peripherals
products company. From 1991 to September 1992, he served as Chief Operating
Officer of Olivetti Group Core Business, an information systems company. From
1985 to July 1996, he served as a director of Acorn Computer Group, Inc. a
computer products company. From 1987 and 1988, respectively, to July 1996, he
served as a director and as Vice Chairman of Olivetti S.p.A., an information
systems company. From February 1994 to July 1996, he served as a director of
Olivetti Research Ltd., the research arm of Olivetti S.p.A. From September 1994
to July 1996, he served as a Chairman of Olivetti Telemedia, a communications
products and services company. In 1994, Mr. Piol was elected President of
Associazione Italiana di Informatica ed il Calcolo Automatico, a professional
society of computer professionals, based in Italy.
GIULIANO C. RAVIOLA has served as a director of Power since January 1994.
Mr. Raviola has served as a Managing Director of 4C Associates, Inc., the
general partner of 4C Associates, L.P., which is the general partner of 4C
Ventures, since March 1995. From January 1991 to December 1992, he served as
President of Olivetti Advanced Technology Center, a developer of computer and
information systems. From September 1990 to December 1992, Mr. Raviola served as
President of International Technology Ventures, Inc. the investment manager of
Olivetti Partners C.V., a venture capital partnership. Mr. Raviola serves as a
director of Solopoint, Inc., a telecommunications equipment manufacturer, ZNYX,
a developer of computing network equipment, and Apogeo Software, Inc., a
software development company.
Currently all Power directors are elected annually and serve until the next
annual meeting of Power Stockholders or until the election and qualification of
their successors. Each officer serves at the discretion of the Power Board.
There are no family relationships among any of the directors or officers of
Power.
RESIGNATIONS
On August 19, 1997, Joel J. Kocher resigned as a director, President and
Chief Operating Officer of Power. On August 20, 1997, Doyle T. Baker resigned as
Power's Chief Information Officer and Vice President. On September 1, 1997,
Judith A. Bitterli resigned as Power's Vice President, Sales and Support. John
F. Ellett resigned as Power's Vice President, Worldwide Marketing on August 19,
1997. Jonathan M. Fitch resigned as Power's Vice President, Engineering on
September 26, 1997. James R. Hindmarch resigned as Power's Vice President,
Worldwide Manufacturing on August 22, 1997. On October 31, 1997, Savino Ferrales
resigned as Power's Vice President of Human Resources.
66
<PAGE>
EMPLOYMENT AGREEMENTS
On October 6, 1997 (effective date of August 14, 1997), Power entered into a
short term employment agreement with James A. Wallace which runs until December
31, 1997. Pursuant to the employment agreement, Mr. Wallace is to receive
$3,270.00 per week. Additionally, Mr. Wallace is to receive a severance benefit
payable in a lump sum of $127,500 upon termination of the agreement on December
31, 1997.
EXECUTIVE INCENTIVE PROGRAM
To facilitate an orderly wind-down of Power's business and to retain key
personnel for such purpose, the Power Board has established an executive
incentive program ("Executive Incentive Program"). The following Power executive
officers are participants in the Executive Incentive Program along with other
Power employees: Steve Kahng, Song Kim, John Teets and James A. Wallace. The
amount of funds allocated to the Executive Incentive Program depends on the
amount of working capital necessary to wind down Power's business.
67
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Power Common Stock as of September 30, 1997 by: (i) each person
known by Power to own beneficially five percent or more of the outstanding Power
Common Stock; (ii) each of Power's directors; (iii) each of Power's executive
officers; and (iv) all directors and executive officers of Power as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE OF
OWNED (1) OUTSTANDING SHARES
-------------------- ---------------------
<S> <C> <C>
4C Ventures, L.P. (2)................................................... 4,837,866 32.5%
Stephen S. Kahng (3).................................................... 3,772,500 25.3
Enzo N. Torresi (4)..................................................... 689,700 4.6
Elserino M. Piol (5).................................................... 5,095,366 34.2
David Heller (6)........................................................ 56,822 *
Giuliano C. Raviola (7)................................................. 4,887,866 33.1
Sada Chidambaram (8).................................................... 505,000 3.4
All directors and executive officers as a group (10 persons) (9)........ 10,169,388 68.3%
</TABLE>
- ------------------------------
* Represents less than 1% of the outstanding Power Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares of Common Stock beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options and warrants held by that person that are currently
exercisable or exercisable within 60 days of September 30, 1997 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person.
Percentage ownership is based on 5,789,176 shares of Power Common Stock
outstanding as of September 30, 1997 (assuming the conversion of 5,000,000
and 4,100,000 shares of Power Series A Preferred Stock and Power Series B
Preferred Stock, respectively). Except as indicated in the footnotes to this
table, the persons named in the table have sole voting and investment power
with respect to the shares of Power Common Stock shown as beneficially owned
by them, subject to community property laws where applicable.
(2) Includes 4,337,866 and 250,000 shares of Power Common Stock to be issued
upon conversion of the Power Series A Preferred Stock and Power Series B
Preferred Stock, respectively. The address of 4C Ventures, L.P. is
Queensgate Bank & Trust Ltd., Ugland House, South Church Street, P.O. Box
30464 SMB, Georgetown, Grand Cayman, Cayman Islands, B.W.I.
(3) Includes 100,000 shares of Power Common Stock subject to a right of
repurchase by Power upon the termination, under certain circumstances, of
Mr. Kahng's employment with Power. Excludes 25,000 shares held by Charles
Kahng, Mr. Kahng's father, and 315,000 shares held by Peter Kahng, Mr.
Kahng's adult son, as to all of which shares Mr. Kahng disclaims beneficial
ownership. Mr. Kahng's address is 2400 South IH35, Round Rock, Texas 78681.
(4) Includes 110,840 shares of Power Common Stock subject to options exercisable
on September 30, 1997 and 60,700 shares of Power Common Stock issuable on
conversion of the Series B Preferred Stock. Includes a total of 4,000 shares
held by Beatrice Torresi, Francesca Pappalardo Torresi, Gabriella Carciotto
Torresi and Antonio Torresi. Excludes a total of 40,000 shares held by Mr.
Torresi's sons Marco Torresi and Cristiano Torresi.
(5) Includes 4,837,866 shares held by 4C Ventures, 10,000 shares held by
Alexandra Giurgiu Piol as Custodian for Serena Piol under the Uniform Gift
to Minors Act ("UGMA") and 10,000 shares held by Alexandra Giurgiu Piol as
Custodian for Marco Piol under the UGMA. Ms. Piol is the Managing Director
of 4C Ventures.
(6) Includes 50,000 shares held by David and Etta Heller as Trustees of the
Davett Trust and 6,822 shares of Power Common Stock to be issued upon
conversion of the Power Series B Preferred Stock held by Pacific Technology
Capital Corporation Profit Sharing Plan, of which Mr. Heller is a signatory.
(7) Consists of 4,837,866 shares held by 4C Ventures and 50,000 shares held
jointly by Giuliano and Anna Raviola.
(8) Consists of 500,000 shares of Power Common Stock issuable upon conversion of
the Power Series B Preferred Stock held by ASCII, of which Mr. Chidambaram
is a signatory, and 5,000 shares of Power Common Stock issuable upon
conversion of Power Series B Preferred Stock upon conversion of the Power
Series B Preferred Stock held by Mr. Chidambaram.
(9) Includes 118,340 shares of Power Common Stock subject to options exercisable
within 60 days of June 18, 1997. Includes 205,700 shares of Power Common
Stock issuable upon conversion of Power Series B Preferred Stock.
68
<PAGE>
EXPERTS
The consolidated financial statements of Power Computing Corporation at June
30, 1996, and March 31, 1997, and for each of the two years in the period ended
June 30, 1996, and the nine months ended March 31, 1997, included in the Proxy
Statement of Power Computing Corporation, which is referred to and made a part
of this Prospectus and Registration Statement of Apple Computer Inc., have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 13 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Apple Computer, Inc.
as of September 26, 1997, and for the year then ended, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements and schedule of Apple Computer, Inc.
at September 27, 1996 and for each of the two years ended September 27, 1996
incorporated by reference in this Prospectus/Proxy Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated herein by reference, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Apple Common Stock issuable pursuant to the Acquisition
will be passed on by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Baker & McKenzie, San Francisco, California, and
McCutchen, Doyle, Brown & Enersen, LLP, San Francisco, California, are acting as
counsel for Power in connection with certain legal matters relating to the
Acquisition and the transactions contemplated thereby.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF POWER COMPUTING CORPORATION
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Power Computing Corporation
We have audited the accompanying consolidated balance sheets of Power
Computing Corporation and Subsidiaries as of June 30, 1996 and March 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended June 30, 1996 and the
nine months ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Power Computing
Corporation and Subsidiaries as of June 30, 1996 and March 31, 1997 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended June 30, 1996 and the nine months ended March 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Power
Computing Corporation will continue as a going concern. As more fully described
in Note 13, Going Concern Uncertainty, subsequent to March 31, 1997 the Company
has incurred recurring operating losses and has negative operating cash flows.
In addition, the Company has discontinued sales of all significant product lines
and is anticipating the execution of the Asset Purchase Agreement with a
subsidiary of Apple Computer, Inc. which must be approved by the shareholders as
described in Note 12 and the Company is seeking to sell its remaining assets
including the trade name "Power Computing." These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
Austin, Texas
June 26, 1997
except for the fourth paragraph above and
Note 13, as to which the date is
December 5, 1997
F-2
<PAGE>
POWER COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31 SEPTEMBER 30
1996 1997 1997
--------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 2,161 $ 3,438 $ 5,533
Accounts receivable, less allowances of $1,587, $4,243 and $8,000,
respectively..................................................... 18,842 26,117 18,924
Inventories........................................................ 23,226 28,206 31,878
Prepaid expenses and other current assets.......................... 239 1,452 885
Income taxes receivable............................................ -- -- 2,745
Deferred income taxes.............................................. 2,340 3,826 3,555
--------- ----------- -------------
Total current assets................................................. 46,808 63,039 63,520
Property and equipment, net.......................................... 2,251 10,845 9,611
--------- ----------- -------------
Total assets......................................................... $ 49,059 $ 73,884 $ 73,131
--------- ----------- -------------
--------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 20,390 $ 20,248 $ 17,566
Accrued liabilities and other...................................... 1,796 6,181 5,772
Accrued royalties payable.......................................... 3,024 3,245 3,562
Income taxes payable............................................... 986 2,152 --
Borrowings from bank............................................... 8,000 18,683 7,000
Borrowings from Apple Computer, Inc................................ -- -- 25,000
--------- ----------- -------------
Total current liabilities............................................ 34,196 50,509 58,900
Other liabilities.................................................... 302 724 --
Stockholders' equity:
Series A convertible preferred stock, $.01 par value:
Authorized 5,000,000 shares; shares issued and outstanding
5,000,000 in 1996 and as of March 31 and September 30, 1997.... 50 50 50
Series B convertible preferred stock $.01 par value:
Authorized 4,200,000 shares; shares issued and outstanding
4,100,000 in 1996 and as of March 31 and September 30, 1997.... 41 41 41
Common stock, $.01 par value:
Authorized 18,800,000 shares in 1996 and as of March 31, 1997,
and 30,800,000 shares as of September 30, 1997; shares issued
and outstanding 5,407,125 in 1996 and 5,619,113 as of March 31,
1997, and 5,789,176 as of September 30, 1997................... 54 56 59
Additional paid-in capital......................................... 13,533 13,884 14,028
Notes receivable from stockholders................................. (70) (70) --
Treasury stock..................................................... -- -- (56)
Retained earnings.................................................. 953 8,690 109
--------- ----------- -------------
Total stockholders' equity........................................... 14,561 22,651 14,231
--------- ----------- -------------
Total liabilities and stockholders' equity........................... $ 49,059 $ 73,884 73,131
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
POWER COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 MARCH 31 SEPTEMBER 30
-------------------- ---------------------- ------------------------
1995 1996 1996 1997 1996 1997
--------- --------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 3,046 $ 131,075 $ 82,413 $ 247,207 $ 112,926 $ 161,414
Cost of goods sold................. 2,059 104,408 66,563 194,495 87,959 134,658
--------- --------- ----------- --------- ----------- -----------
Gross profit....................... 987 26,667 15,850 52,712 24,967 26,756
Operating expenses:
Sales, general and
administrative................. 1,602 17,458 10,814 35,544 14,730 33,599
Research and development......... 2,366 3,425 2,254 3,962 2,540 4,868
--------- --------- ----------- --------- ----------- -----------
3,968 20,883 13,068 39,506 17,270 38,467
--------- --------- ----------- --------- ----------- -----------
Income (loss) from operations...... (2,981) 5,784 2,782 13,206 7,697 (11,711)
Other income....................... 40 46 -- 33 -- 48
Interest expense................... -- 462 245 886 376 971
--------- --------- ----------- --------- ----------- -----------
Income (loss) before income
taxes............................ (2,941) 5,368 2,537 12,353 7,321 (12,634)
Provision for income taxes
(benefit)........................ -- 462 -- 4,616 2,139 (4,053)
--------- --------- ----------- --------- ----------- -----------
Net income (loss).................. $ (2,941) $ 4,906 $ 2,537 $ 7,737 $ 5,182 $ (8,581)
--------- --------- ----------- --------- ----------- -----------
--------- --------- ----------- --------- ----------- -----------
Net income (loss) per share........ $ (0.57) $ 0.31 $ 0.16 $ 0.46 $ 0.32 $ (1.51)
--------- --------- ----------- --------- ----------- -----------
--------- --------- ----------- --------- ----------- -----------
Weighted average common and common
equivalent shares................ 5,199 15,894 15,808 16,670 16,193 5,672
--------- --------- ----------- --------- ----------- -----------
--------- --------- ----------- --------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
POWER COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1994....... 3,000,000 $ 30 -- $ -- 5,175,000 $ 52 $ 3,438
Series A preferred stock
issued......................... 2,000,000 20 -- -- -- -- 1,980
Sale of common stock............. -- -- -- -- 15,000 -- 1
Exercise of stock purchase
warrants....................... -- -- -- -- 112,500 1 10
Sale of Series B preferred
stock.......................... -- -- 3,485,000 35 -- -- 6,935
Exercise of stock options........ -- -- -- -- 50,000 1 5
Collections on receivables....... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- --- --------- --- --------- --- -----------
Balances as of June 30, 1995....... 5,000,000 50 3,485,000 35 5,352,500 54 12,369
Exercise of stock options........ -- -- -- -- 54,625 -- 11
Sale of Series B preferred
stock.......................... -- -- 615,000 6 -- -- 1,153
Net income....................... -- -- -- -- -- -- --
--------- --- --------- --- --------- --- -----------
Balances as of June 30, 1996....... 5,000,000 50 4,100,000 41 5,407,125 54 13,533
Exercise of stock options........ -- -- -- -- 211,988 2 126
Income tax benefit from stock
option exercises............... -- -- -- -- -- -- 225
Net income....................... -- -- -- -- -- -- --
--------- --- --------- --- --------- --- -----------
Balances as of March 31, 1997...... 5,000,000 $ 50 4,100,000 $ 41 5,619,113 $ 56 $ 13,884
--------- --- --------- --- --------- --- -----------
--------- --- --------- --- --------- --- -----------
<CAPTION>
RECEIVABLES
FROM RETAINED
STOCKHOLDERS EARNINGS TOTAL
--------------- ----------- ---------
<S> <C> <C> <C>
Balances as of June 30, 1994....... $ (93) $ (1,012) $ 2,415
Series A preferred stock
issued......................... -- -- 2,000
Sale of common stock............. -- -- 1
Exercise of stock purchase
warrants....................... -- -- 11
Sale of Series B preferred
stock.......................... -- -- 6,970
Exercise of stock options........ -- -- 6
Collections on receivables....... 23 -- 23
Net loss......................... -- (2,941) (2,941)
--- ----------- ---------
Balances as of June 30, 1995....... (70) (3,953) 8,485
Exercise of stock options........ -- -- 11
Sale of Series B preferred
stock.......................... -- -- 1,159
Net income....................... -- 4,906 4,906
--- ----------- ---------
Balances as of June 30, 1996....... (70) 953 14,561
Exercise of stock options........ -- -- 128
Income tax benefit from stock
option exercises............... -- -- 225
Net income....................... -- 7,737 7,737
--- ----------- ---------
Balances as of March 31, 1997...... $ (70) $ 8,690 $ 22,651
--- ----------- ---------
--- ----------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
POWER COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 MARCH 31 SEPTEMBER 30
-------------------- ---------------------- ------------------------
1995 1996 1996 1997 1996 1997
--------- --------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ (2,941) $ 4,906 $ 2,537 $ 7,737 $ 5,182 $ (8,581)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 176 581 326 968 368 1,072
Loss on write-down and disposal of property and
equipment...................................... -- -- -- 403 -- 4,710
Income tax benefit from stock option exercises... -- -- -- 225 -- --
Change in assets and liabilities:
Accounts receivable, net....................... (817) (18,025) (12,900) (7,275) (6,787) 7,193
Inventories.................................... (2,943) (20,283) (11,385) (4,980) (14,941) (3,672)
Receivable from related party.................. 59 -- -- -- -- --
Income taxes receivable........................ -- -- -- -- -- (2,745)
Deferred income taxes.......................... -- (2,340) (1,423) (1,486) (1,617) 271
Prepaid expenses and other current assets...... (1,020) 834 500 (1,213) 312 567
Accounts payable............................... 2,387 17,925 8,690 (142) 12,163 (2,682)
Accrued liabilities and other.................. 316 1,767 2,210 4,807 1,058 (409)
Accrued royalties payable...................... 146 2,878 2,260 221 1,845 (317)
Income taxes payable........................... -- 986 807 1,166 1,966 (2,152)
--------- --------- ----------- --------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... (4,637) (10,771) (8,378) 431 (451) (6,745)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment.............. (239) (2,443) (1,744) (9,965) (2,444) (4,638)
--------- --------- ----------- --------- ----------- -----------
Net cash used in investing activities.............. (239) (2,443) (1,744) (9,965) (2,444) (4,638)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock.................... 8,988 1,170 1,166 128 -- 147
Collections on notes receivables from
stockholders..................................... 23 -- -- -- -- 70
Purchase of treasury stock......................... -- -- -- -- -- (56)
Payments of capital lease obligation............... (13) -- -- -- -- --
Proceeds from issuance of note payable to bank..... -- -- -- -- -- 10,000
Proceeds from issuance of note payable to Apple
Computer, Inc.................................... -- -- -- -- -- 25,000
Payments on note payable to bank................... -- -- -- -- -- (3,000)
Draws on line of credit............................ -- 8,000 5,000 20,900 4,900 3,000
Payments on line of credit......................... -- -- -- (10,217) -- (21,683)
--------- --------- ----------- --------- ----------- -----------
Net cash provided by financing activities.......... 8,998 9,170 6,166 10,811 4,900 13,478
Net increase (decrease) in cash and cash
equivalents...................................... 4,122 (4,044) (3,956) 1,277 2,005 2,095
Cash and cash equivalents at beginning of period... 2,083 6,205 6,205 2,161 2,249 3,438
--------- --------- ----------- --------- ----------- -----------
Cash and cash equivalents at end of period......... $ 6,205 $ 2,161 $ 2,249 $ 3,438 $ 4,254 $ 5,533
--------- --------- ----------- --------- ----------- -----------
--------- --------- ----------- --------- ----------- -----------
Cash paid during the periods for:
Interest......................................... $ -- $ 425 $ 250 $ 910 $ 350 $ 900
Income taxes..................................... $ -- $ 1,816 $ 615 $ 4,711 $ 1,830 $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Power Computing Corporation (the Company) was incorporated in Delaware in
November 1993. The Company develops, manufactures, markets and supports high
performance computer systems. The Company markets its computer products and
services under the Power Computing brand name primarily through direct sales.
Its customers include major corporate, government and education accounts, as
well as small to medium-size businesses and individuals. The Company supplements
its direct marketing strategy by marketing through value-added resellers and
catalogers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
FISCAL YEAR
In 1995 and 1996, the Company reported on a fiscal year ending on the last
day in June. During 1997, the Company changed its fiscal year to a 52 or 53 week
period ending on the Sunday closest to March 31 effective for the nine month
period ended March 31, 1997. For presentation purposes, the Company refers to
its reporting period ended March 30, 1997 as ending on March 31, 1997.
INTERIM FINANCIAL INFORMATION
The interim financial information at September 30, 1997, for the nine months
ended March 31, 1996 and for the six months ended September 30, 1996 and 1997 is
unaudited. Accordingly, they do not include all the information and footnotes
required of financial statements audited in accordance with generally accepted
accounting principles. However, in the opinion of management, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for the interim
periods. The results of operations for the six months ended September 30, 1997
are not necessarily indicative of results for the full year.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories, principally component parts, are stated at the lower of cost,
determined on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the related assets
(three to five years). Leasehold improvements are
F-7
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
amortized using the straight-line method over their estimated useful lives or
the remaining lease term, whichever is less.
REVENUE RECOGNITION
The Company recognizes revenue, net of customer returns and customer
allowances, as of the date product is shipped to customers. Revenues from
separately priced maintenance and extended warranty agreements are recognized
ratably over the terms of the agreements.
WARRANTY COSTS
The Company provides currently for estimated costs which may be incurred
under its initial warranty program. Costs related to separately priced
maintenance and extended warranty costs are recognized as incurred.
ADVERTISING COSTS
The Company expenses advertising costs when incurred. Advertising costs for
the years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997
were approximately $204,000, $2,645,000 and $3,534,000, respectively. There were
no direct-response advertising costs reported as assets at June 30, 1995 and
1996 or March 31, 1997.
CONCENTRATION OF CREDIT RISK
The Company's customers include large corporations, government and education
entities, small to medium-sized businesses and individuals. Its receivables from
such parties are diversified. The Company's accounts receivable potentially
expose the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK. However, in management's opinion, no significant
concentration of credit risk exists for the Company. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Credit losses are provided for in the financial
statements and consistently have been within management's expectations. For the
years ended June 30, 1995 and 1996, and the nine months ended March 31, 1997, no
customer accounted for more than 10% of sales. Export sales to foreign customers
were $27,659,000 during the nine months ended March 31, 1997. For the years
ended June 30, 1995 and 1996, sales to foreign customers were less than 10% of
consolidated revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued and other
liabilities are stated at cost which approximates fair value due to the
short-term maturity of these instruments. The fair value of the Company's
outstanding debt, due to its variable interest rate, approximates its carrying
value.
F-8
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) No. 109, ACCOUNTING FOR INCOME TAXES. This
statement prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company adopted the disclosure option of Statement of Financial
Accounting Standards No. 123 (FAS 123), ACCOUNTING FOR STOCK-BASED COMPENSATION,
for the period ended March 31, 1997. The Company continues to apply Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its stock option plan.
As a result, no compensation expense has been recognized for options granted
with an exercise price equal to market value at the date of grant. For stock
options issued at discounted prices, the Company accrues compensation expense
over the vesting period for the difference between the exercise price and the
fair market value on the measurement date.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from convertible
preferred stock (using the if-converted method) and from stock options and
warrants (using the treasury stock method).
Primary earnings per share approximates fully diluted earnings per share for
all periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE (FAS 128), which is required to be adopted for
financial statements issued for periods ending after December 15, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements, the presentation of primary earnings per share is replaced with a
presentation of basic earnings per share, the calculation of which excludes the
dilutive effect of common stock equivalents. The adoption of FAS 128 is expected
to result in a basic earnings per share of $(0.57), $0.91 and $1.41 for the
years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997,
respectively. Compared to primary earnings per share as currently presented, the
adoption of FAS 128 results in no change for 1995 and an increase of $0.60 and
F-9
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
$0.95 for 1996 and the nine months ended March 31, 1997, respectively. There is
no impact on the fully diluted earnings per share calculation for the periods
presented.
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial
statements to conform to the 1997 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment................................................. $ 1,878 $ 3,661
Furniture and fixtures.................................................. 271 557
Computer software....................................................... 575 897
Leasehold improvements.................................................. 191 798
Construction in process................................................. -- 6,168
----------- -----------
2,915 12,081
Less accumulated depreciation and amortization.......................... (664) (1,236)
----------- -----------
$ 2,251 $ 10,845
----------- -----------
----------- -----------
</TABLE>
During the six-month period ended September 30, 1997 the Company wrote off
approximately $1.7 million of capitalized costs related to the implementation of
a new information system as this project was discontinued. Also, see the
discussion of write-offs associated with the Georgetown property at Note 6.
3. BORROWINGS FROM BANK
In November 1995, the Company entered into a $5 million revolving line of
credit available for working capital, bearing interest at the lender's prime
rate plus 2.25% (11.0% at June 30, 1996), due monthly. The line was increased to
$10 million in March 1996, and increased again to $15 million in October 1996.
Borrowings under the line were collateralized by substantially all of the
Company's assets.
In December 1996, the Company obtained a $20 million bridge line of credit
("Phase I") from a financial institution. Proceeds from the Phase I facility
were used to retire the line of credit previously in place. Borrowings under the
Phase I facility, bore interest due monthly at the financial institution's Base
Rate. The Phase I facility required the Company to meet certain financial and
reporting requirements, and was collateralized by substantially all of the
Company's assets.
In March 1997, the Company entered into a $50 million loan agreement ("the
Loan Agreement") to replace the Phase I facility. Under the terms of the Loan
Agreement, the Company may borrow up to $50 million under a revolving credit
facility ("Phase II") which matures in March 1998. Borrowings under this
facility are subject to a borrowing base limitation (based upon a combination of
certain eligible
F-10
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. BORROWINGS FROM BANK (CONTINUED)
accounts receivable and inventory), are collateralized by substantially all of
the Company's assets, and bear interest, payable monthly, at the financial
institution's Base Rate plus 0.5% (9.0% at March 31, 1997). The Company may
convert the interest rate on all or a portion of the outstanding borrowings from
the financial institution's Base Rate plus 0.5% to LIBOR. In addition, the
financial institution will issue merchandise or standby letters of credit,
subject to certain restrictions, in amounts not to exceed in the aggregate $5
million. There were no letters of credit outstanding as of March 31, 1997.
The Loan Agreement requires that the Company maintain a lock box at the
financial institution for collection of its accounts receivable. Collections via
the lock box are restricted for payment of the interest and principal balance
under the Phase II facility. The Loan Agreement limits the Company's annual
capital expenditures and requires the Company to maintain a minimum net worth
and meet certain financial ratios, including fixed charge coverage, as well as
comply with periodic reporting requirements.
At March 31, 1997, the Company was in violation of certain covenants of the
Loan Agreement, including failure to meet the minimum Fixed Charge Coverage
ratio for the three-month period ended March 31, 1997; failure to provide a
compliance certificate within 45 days after the Fiscal Quarter ended March 31,
1997; and failure to obtain the bank's written permission for commencement of
the campus real estate project in Georgetown, Texas. The Company obtained
waivers of these covenant violations from the bank.
In June 1997, the Loan Agreement was amended to reduce the revolving credit
facility to $30 million, to modify the formula used to compute the borrowing
base, to reduce the minimum quarterly Fixed Charge Coverage ratio requirement
through June 30, 1998, and to notify the Company of the bank's formal consent to
the commencement of the campus real estate project in Georgetown, Texas, subject
to maximum project cost and maximum borrowing thresholds.
Outstanding borrowings from the bank were $8,000,000 and $18,683,000 at June
30, 1996 and March 31, 1997, respectively; and, giving effect to the June 1997
amendment to the Loan Agreement, the Company had a borrowing base of
approximately $25,000,000 at March 31, 1997. The Company paid off this loan on
September 5, 1997 with proceeds from the Apple loan described below.
On July 25, 1997, the Company entered into a $10 million Term Loan Agreement
with a bank. The loan matures in three years and is subject to certain
acceleration clauses which could reduce the term to one or two years. The loan
principal is due in full upon the maturity date. The loan is unsecured and bears
interest at 9% per annum. In association with the funding of this loan, the
lender has charged a 1.5% arrangement fee. In addition, the lender was issued a
warrant to purchase 133,333 shares of the Company's common stock at $10 per
share and a warrant to purchase 133,333 shares of the Company's common stock at
$12 per share. The warrants are immediately exercisable and expire on the later
of the third anniversary of the borrowing date or the maturity date. Under this
agreement, the Company is subject to an additional fee of 1% of the loan balance
if the Company does not offer its common shares to the public in a registration
statement and that registration statement does not go effective within one year
of the borrowing date. The Company paid down this term loan by $3 million with
proceeds from the Apple loan described below. The fair market value of the
warrants issued is deemed immaterial to the financial statements. On November
13, 1997, the Company paid off the remaining balance outstanding under the
F-11
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. BORROWINGS FROM BANK (CONTINUED)
Term Loan Agreement and the bank surrendered its rights to these warrants. No
Company shares were issued to the bank.
4. BORROWINGS FROM APPLE COMPUTER, INC.
Pursuant to the Asset Purchase Agreement with Apple Computer Inc. ("Apple")
(described at Note 12, Subsequent Events), the Company entered into a $25
million Revolving Loan Promissory Note payable to Apple on September 5, 1997.
This note is due and payable upon the earlier of: (1) the tenth business day
following the close of the Agreement; (2) notice to the Company of termination
of the Agreement; or (3) the Company's sale of in excess of 35,000 Mac Computer
Systems. This loan accrues interest at 6% per annum. This note is unsecured.
5. LEASES
The Company leases certain equipment and operating facilities under
noncancelable operating leases with terms expiring through 2001. Rent expense
for the years ended June 30, 1995 and 1996 and the nine months ended March 31,
1997 under such agreements totaled approximately $103,000, $856,000 and
$959,000, respectively. Future minimum lease payments at March 31, 1997 under
the operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 1,975
1999................................................................ 1,065
2000................................................................ 756
2001................................................................ 295
---------
Total minimum lease payments........................................ $ 4,091
---------
---------
</TABLE>
6. COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS
GEORGETOWN FACILITIES
In February 1997, the Company entered into a lease agreement whereby it
would lease until December 2009 certain land and facilities to be constructed
and located in Georgetown, Texas. At any time during the lease term, the Company
has the option of purchasing the premises for a nominal amount. Monthly lease
payments are equal to the monthly costs (including interest) of the lessor
related to the leased premises. These costs will fluctuate as land is purchased
and construction costs of the facilities are incurred. Total anticipated costs
of the land purchase and facilities construction is approximately $25 million.
At March 31, 1997, approximately $4.7 million had been paid or accrued under
this agreement for the purchase of land and initial construction costs.
The Company's agreements for leasing these facilities grant it certain tax
abatements and other benefits from the City of Georgetown (the "City"). These
agreements also anticipate that the City will receive state grants and other
funds to help subsidize the costs of preparing the infrastructure for the
facilities. The Company must reimburse the City up to $8 million if the City
cannot recover their costs through grants, tax receipts, or other allowed means.
F-12
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS (CONTINUED)
The Company is capitalizing its lease obligations when incurred as
construction in process. Once the facilities are completed and placed in
service, the Company will begin depreciating the building and related assets.
During the six month period ended September 30, 1997, the Company canceled
plans for its proposed corporate headquarters in Georgetown, Texas and
recognized a $3 million charge to earnings for write-offs of capitalized
construction costs. On September 17, 1997, the Company provided notice to the
City that it wished to exercise its option to obtain legal title to its portion
of the tract. Subsequently, the City issued a notice of breach of the Economic
Development Agreement and the Company's lease due to the Company's failure to
continue the development of this site. Although the City and the Company
verbally entered into a marketing agreement to sell the tract to a third party,
the ultimate outcome of this matter cannot be predicted. Additionally, the City
has unofficially indicated that it may seek up to $1.3 million in the event it
is unable to favorably market its land in conjunction with the Company's tract.
No expenses have been accrued as of September 30, 1997 for this contingent
liability.
LEGAL MATTERS
The Company is involved in legal proceedings in connection with its
operations and the discontinuation of sales of all significant product lines. No
expenses have been accrued as of September 30, 1997 for these contingent
liabilities. The Company believes it has meritorious defenses against these
assertions, however given the early stage of these claims, the ultimate outcome
cannot be predicted. However, the Company believes that the ultimate resolution
of these matters will not have a material adverse effect on its financial
position.
CERTAIN CONCENTRATIONS
The Company purchases a number of components from single sources. In some
cases, alternative sources of supply are not available. In other cases, if the
Company believes it is advantageous to do so due to performance, quality,
support, delivery, capacity or price considerations, the Company may establish a
working relationship with a single source, even when multiple suppliers are
available. If the supply of a critical single-source material or component were
delayed or curtailed, the Company's ability to ship the related product in
desired quantities and in a timely manner could be adversely affected. Even
where alternative sources of supply are available, qualification of the
alternative suppliers and establishment of reliable supplies could result in
delays and a possible loss of sales, which could affect operating results
adversely.
FIRM PURCHASE COMMITMENTS
As of September 30, 1997, the Company had no material commitments other than
unconditional firm purchase commitments in the ordinary course of business. In
the case that the Company does not fill its firm purchase commitments, the
Company may incur cancellation charges of approximately $2 million.
Additionally, on October 28, 1997, a suit was filed against the Company
claiming $3.45 million of actual damages and $39.0 million of exemplary damages
for alleged breach of contract and fraud arising from the cancellation of
purchase orders which were allegedly non-cancelable. The Company believes it
F-13
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS (CONTINUED)
has meritorious defenses against these assertions, however, given the early
stage of this claim, the ultimate outcome cannot be predicted. However, the
Company believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position.
7. LICENSES
Since inception, the Company has developed, manufactured, marketed and sold
primarily Macintosh-compatible computer systems. The Company's Macintosh
compatible business is dependent on several license agreements with Apple that
permit the Company to manufacture or sell Macintosh-compatible computer systems
and distribute the Mac OS. All of the Company's current products and many of its
planned products are dependent on these license agreements. The Company's
licenses to manufacture Macintosh-compatible computer systems and distribute the
current Mac OS expire in May 2000 and December 2001, respectively.
Alternatively, these agreements will expire the twelfth month following the next
major release of the Mac OS, if earlier.
These licenses, among other things, allow the Company to reproduce and
distribute the current version of the Mac OS for a specified royalty, require
Apple to offer the Company a follow-on license for Apple's next major release of
the Mac OS, require that the Company's Macintosh-compatible computer systems
conform to certain technical specifications set forth by Apple and that those
systems be certified prior to shipment, and require that the Company receive
authorization from Apple before obtaining certain component parts in which Apple
holds intellectual property rights.
On August 29, 1997, the Company entered into an Asset Purchase Agreement
with a subsidiary of Apple Computer, Inc. Pursuant to this Agreement, the Apple
subsidiary agreed to purchase certain specified assets which include all OS and
other licenses from Apple to the Company and all sublicenses from IBM to the
Company. Refer to Note 12 for additional explanation of the Agreement.
The Company is also subject to ongoing royalty agreements for periods
exceeding twelve months which require cash payments. Royalty costs are accrued
at the time product is shipped and are included in cost of goods sold. See
forgiveness of royalties to Apple Computer, Inc. explained at Note 12.
8. STOCKHOLDERS' EQUITY
The Company, the Series A preferred stockholders, the Series B preferred
stockholders and certain common stockholders (collectively, the "selected
stockholders") have the right of first refusal on a pro-rata basis, should any
of the selected stockholders decide to sell shares. In addition, certain
stockholders have the right to sell their shares should certain key Series A
preferred, Series B preferred and common stockholders sell 50% or more of their
holdings.
COMMON STOCK
In January 1994, the Company issued 925,000 shares of its common stock
subject to a purchase agreement containing both vesting provisions and
repurchase rights. The shares generally vest over a four year period and require
the continuous employment of the stockholder. If the stockholder ceases
employment prior to full vesting, the Company may have the right of repurchase
for any unvested shares at
F-14
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
a price equal to that originally paid by the stockholder. There were 145,833
shares unvested at March 31, 1997.
PREFERRED STOCK
The rights, preferences and privileges of the preferred stockholders are as
follows:
DIVIDENDS
The holders of Series A and Series B convertible preferred stock are
entitled to receive noncumulative dividends at an annual rate of $0.06
and $0.12 per share, respectively, when, and if, declared by the Board of
Directors. After payment of the dividend, additional dividends declared
are to be paid pro rata to both the holders of the common stock and
preferred stock (on an "as converted basis"). No dividends have been
declared for the fiscal years ended June 30, 1995, 1996 or the nine
months ended March 31, 1997.
LIQUIDATION
Series A and Series B convertible preferred stock are not subject to
redemption. Holders of the Series A and Series B convertible preferred
stock are entitled to a preference, upon liquidation of the Company, of
$1.00 and $2.00 per share, respectively, plus declared but unpaid
dividends. After the full amounts have been paid on the Series A and
Series B preferred stock, any remaining assets will be distributed to the
common stockholders.
CONVERSION AND REGISTRATION
The Series A and Series B preferred stock is convertible, at the option
of the holder, into common stock on a one-for-one basis (subject to
certain adjustments for antidilution). Conversion of the Series A and
Series B preferred stock is automatic upon the closing of an underwritten
public offering of the Company's Common Stock at an aggregate offering
price of not less than $5,000,000 and $10,000,000, respectively, and at a
price of not less than $3.00 and $5.00 per share, respectively. In
addition, preferred stockholders have certain registration rights and the
right to participate in future issuances of the Company's stock. This
right to participate in future issuances of the Company's stock
terminates upon the closing of an underwritten public offering of the
Company's securities in an aggregate principal amount of $10,000,000 or
more.
VOTING
Each share of preferred stock is entitled to vote on an "as converted"
basis along with common stockholders.
WARRANTS
At March 31, 1997, a warrant to purchase 112,500 shares of common stock was
outstanding which expires January 15, 2001.
F-15
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In November 1995, the Company issued a warrant to a financial institution in
connection with a financing arrangement to purchase 100,000 shares of Series B
Preferred Stock at $5.00 per share. The fair value of the warrant at the date of
grant was not material. At March 31, 1997, this warrant was outstanding and
expires November 20, 2000.
On July 25, 1997, the Company issued a warrant to purchase 133,333 shares of
the Company's Common Stock at $10 per share and a warrant to purchase 133,333
shares of the Company's Common Stock at $12 per share to a financial institution
in connection with a financing arrangement. The fair market value of the
warrants issued is deemed immaterial to the financial statements. On November
13, 1997, the financial institution surrendered its rights to these warrants.
NOTES RECEIVABLE FROM STOCKHOLDERS
The Company has accepted long-term promissory notes for the issuance of
common stock. These notes incur interest at 3.98% per annum with principal and
interest due on demand, and are reflected as a reduction in stockholders' equity
in the Company's consolidated balance sheet.
STOCK OPTION PLAN
In January 1994, the Company adopted the 1994 Stock Option Plan (the Plan)
which provides for the granting of stock options to employees, directors and
consultants of the Company. The plan terminates in 2014. Under the plan,
incentive options to purchase the Company's common stock may be granted to
employees at prices not lower than fair market value, as determined by the Board
of Directors at the date of grant. Nonstatutory options (options which do not
qualify as incentive options) may be granted at prices not lower than 85% of
fair market value, as determined by the Board of Directors, at the date of
grant. The options generally expire 10 years from date of grant. Options granted
generally vest over four years, at the rate of 25% one year from the date of
grant and 1/16 each calendar quarter thereafter. Unexercised options expire 30
days after termination of employment with the Company. Stock issued under the
Plan is subject to the Company's repurchase right, at the higher of the exercise
price or the fair market value, within 90 days of termination of employment. In
addition, shares issued under the Plan are subject to the Company's right of
first refusal.
F-16
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following tables summarize stock option activity under the Plan for each
of the three fiscal years ended June 30, 1996 and the nine months ended March
31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE SHARES
SHARES EXERCISE PRICE EXERCISABLE
---------- --------------- -----------
<S> <C> <C> <C>
Outstanding at inception............................. -- $ --
Granted............................................ 210,000 0.10
Canceled........................................... -- --
Exercised.......................................... -- --
----------
Outstanding at June 30, 1994......................... 210,000 0.10 210,000
-----------
-----------
Granted............................................ 2,020,000 0.31
Canceled........................................... (710,000) 0.22
Exercised.......................................... (50,000) 0.10
----------
Outstanding at June 30, 1995......................... 1,470,000 0.33 250,000
-----------
-----------
Granted............................................ 1,479,500 3.73
Canceled........................................... (299,375) 1.92
Exercised.......................................... (45,875) 0.25
----------
Outstanding at June 30, 1996......................... 2,604,250 2.08 564,570
-----------
-----------
Granted............................................ 3,032,400 6.70
Canceled........................................... (860,627) 4.42
Exercised.......................................... (220,738) 0.60
----------
Outstanding at March 31, 1997........................ 4,555,285 4.79 652,413
---------- -----------
---------- -----------
</TABLE>
The following is additional information relating to options outstanding as
of March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE PRICE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE CONTRACTUAL
RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE LIFE (YEARS)
- ------------------- ---------- ----------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$0.25-0.50 1,190,635 $ 0.35 8.1 522,976 $ 0.34 8.0
$3.50-5.00 1,391,150 4.58 9.2 129,437 3.70 8.5
$7.00-8.25 1,973,500 7.61 9.9 -- -- --
---------- -----------
4,555,285 652,413
---------- -----------
---------- -----------
</TABLE>
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to June 30, 1995, under the fair value method prescribed by FAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with
F-17
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
the following weighted-average assumptions for the periods ended June 30, 1996
and March 31, 1997, respectively:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................... 5.8% 6.4%
Dividend yield........................................................ 0% 0%
Weighted average expected life of the options......................... 4.0 years 4.7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, this option valuation model requires the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
<S> <C> <C>
Pro form stock-based compensation expense............................... $ 105 $ 169
Pro forma net income.................................................... $ 4,801 $ 7,568
Pro forma earnings per share:
Primary and fully diluted............................................. $ 0.30 $ 0.45
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to June 30,
1995, its pro forma effect will not be fully reflected until June 30, 1998.
The effects of applying FAS 123 for pro forma disclosures are not likely to
be representative of the effects on reported net income for future years.
The exercise price of some options differed from the market price of the
stock on the grant date. The following is a summary of options granted:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1996 MARCH 31, 1997
------------------------ ------------------------
EXERCISE EXERCISE
FAIR VALUE PRICE FAIR VALUE PRICE
----------- ----------- ----------- -----------
(WEIGHTED AVERAGE)
<S> <C> <C> <C> <C>
Stock price equal to exercise price............... $ 0.82 $ 3.74 $ 1.79 $ 5.25
Stock price less than exercise price.............. -- -- 1.39 8.25
</TABLE>
F-18
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED
Common stock reserved at March 31, 1997, consists of the following (see Note
12):
<TABLE>
<S> <C>
For conversion of preferred stock................................ 9,100,000
For exercise of outstanding warrants............................. 212,500
For exercisable stock options.................................... 652,413
---------
9,964,913
---------
---------
</TABLE>
9. INCOME TAXES
Significant components of the Company's deferred taxes at June 30, 1996 and
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue...................................................... $ 115 $ 486
Reserves for doubtful accounts and returns............................ 546 1,626
Inventory and warranty reserves....................................... 1,524 1,511
Accrued liabilities................................................... 109 141
Other (net)........................................................... 46 62
----------- -----------
Net deferred tax assets................................................. 2,340 3,826
Valuation allowance..................................................... -- --
----------- -----------
Net deferred taxes...................................................... $ 2,340 $ 3,826
----------- -----------
----------- -----------
</TABLE>
The valuation allowance decreased by $1,502,000 during 1996 as the Company
generated positive operating results.
F-19
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 NINE MONTHS
ENDED MARCH
---------------------- 31,
1995 1996 1997
----- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................... $ -- $ 2,507 $ 5,641
State....................................................... -- 295 461
--- --------- ------------
Total current................................................. -- 2,802 6,102
Deferred:
Federal..................................................... -- (2,094) (1,403)
State....................................................... -- (246) (83)
--- --------- ------------
Total deferred................................................ -- (2,340) (1,486)
--- --------- ------------
$ -- $ 462 $ 4,616
--- --------- ------------
--- --------- ------------
</TABLE>
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34% to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
NINE MONTHS
-------------------- ENDED MARCH 31,
1995 1996 1997
--------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal statutory rate................................... (34.0)% 34.0% 35.0%
State taxes, net of federal benefit...................... (1.6) 1.8 2.7
Tax credits.............................................. (2.3) -- (0.5)
Changes in valuation allowance........................... 37.8 (27.9) --
Permanent items and other................................ 0.1 0.7 0.2
--------- --------- ---
--% 8.6% 37.4%
--------- --------- ---
--------- --------- ---
</TABLE>
The exercise of certain of the stock options which have been granted under
the Company's stock option plan give rise to compensation which is includable in
the taxable income of the applicable option holder and deductible by the Company
for federal and state income tax purposes. Such compensation results from
increases in the fair market value of the Company's common stock subsequent to
the date of grant of the applicable exercised stock options and, in accordance
with APB 25, such compensation is not recognized as an expense for financial
accounting purposes; however, the related tax benefits are recorded as an
addition to Additional Paid-In Capital. The compensation deductions arising from
the exercise of stock options were not material in 1995 and 1996.
F-20
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
10. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan") that covers substantially all full-time employees who are twenty-one
years of age or older. Company contributions to the 401(k) Plan are determined
at the discretion of the Board of Directors and vest ratably over six years of
service starting after the first two years. The 401(k) Plan was established in
May 1995. No contributions have been made to the 401(k) Plan by the Company for
the years ended June 30, 1995 and 1996 or the nine months ended March 31, 1997.
11. RELATED PARTY TRANSACTIONS
As of March 31, 1997, the Company has in place consulting agreements with
certain Directors and stockholders of the Company. In fiscal 1995, the Company
performed certain research and development services for a company owned by a
stockholder. Fees paid and received related to these agreements were not
significant in any periods presented. During the nine month period ended March
31, 1997, the Company paid $4,396,000 to purchase inventory from a company which
is a stockholder. The Company had no significant transactions with this
stockholder in previous periods.
12. SUBSEQUENT EVENTS
On June 26, 1997, the Company filed an amendment to the Certificate of
Incorporation increasing the authorized common stock from 18,800,000 shares to
30,800,000 shares.
During the six-month period ended September 30, 1997, the Company wrote off
deferred costs of approximately $1.2 million, capitalized in conjunction with an
initial public offering which has since been withdrawn. These costs were charged
to sales, general and administrative operating expenses.
On August 29, 1997, the Company entered into an Asset Purchase Agreement
("Agreement") with a subsidiary of Apple Computer Inc. ("Apple"). Pursuant to
this agreement, the Apple subsidiary agreed to purchase certain specified assets
which constitute the core assets of the Company, which include all OS and other
licenses from Apple to the Company, all sublicenses from IBM to the Company, the
Company's customer list and related data, all of the Company's intellectual
property related to Mac-compatible products and additional assets to be agreed
upon. At the closing of the Agreement, the Apple subsidiary will deliver Common
Stock of Apple with a value of $100 million plus the value of additional assets
to be determined, less the amount due to Apple on the $25 million Revolving
Promissory Loan (described in Note 4). Apple intends to register the shares to
be issued to the Company on Form S-4 as to be filed with the Securities and
Exchange Commission. The Agreement has been approved by the Company's Board of
Directors. The close of this Agreement is pending certain additional
contingencies such as shareholder approval by both parties.
Apple has forgiven $5 million of past due royalties from April 1, 1997
through August 29, 1997 and Apple has forgiven additional royalty accruals for
the period from August 29, 1997 through December 1, 1997 of up to 35,000 units.
The Company recognized the forgiveness of this liability for amounts due during
the period from April 1, 1997 through August 29, 1997 as a reduction to Cost of
Goods Sold in the quarter ended September 30, 1997.
F-21
<PAGE>
POWER COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, THE NINE MONTHS ENDED MARCH 31, 1996, AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
12. SUBSEQUENT EVENTS (CONTINUED)
Apple may terminate the Agreement under certain conditions. In such a
termination, Apple will deliver to the Company a reinstatement payment of such
number of shares of non-voting convertible preferred stock of Apple equal to
$100 million. In addition, the Company will still be obligated to repay the $25
million Revolving Loan Promissory Note (described at Note 4), the Company's
releases will stay in effect, and all licenses from Apple to the Company will
terminate.
Management is currently drafting a Plan of Liquidation ("Plan") for the
remaining assets and liabilities of the Company in the event of close of the
above described Agreement. Upon execution of the Plan, the remaining assets and
liabilities of the Company will be dissolved pursuant to a Liquidating Trust
Agreement. Neither this Plan of Liquidation nor the Liquidating Trust Agreement
have been approved by the shareholders of the Company.
13. GOING CONCERN UNCERTAINTY
Subsequent to March 31, 1997, the Company experienced operating losses and
negative operating cash flows. Management expects to discontinue sales of all
significant product lines in order to comply with the provisions of the Apple
Asset Purchase Agreement by December 1997. In addition, the Company is seeking
to sell its remaining assets including the trade name "Power Computing."
Management anticipates the continued use of cash resources to support operations
which may cause potential cash deficits in future periods. In connection with
the discontinuation of all significant product lines, the Company is currently
involved in legal proceedings for which the ultimate outcome cannot be
predicted. The Company currently has no available borrowing capacity from its
only remaining financing arrangement (i.e. the $25 million loan from Apple). The
Asset Purchase Agreement with Apple is contingent upon several factors including
shareholder approval by both parties. To the extent these contingencies remain
unresolved, the Company's receipt of the Apple shares could be delayed. These
factors raise substantial doubt on the Company's ability to fund interim
operating activities.
F-22
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
BY AND AMONG
PARENT CORPORATION
BUYER, INC.
AND
SELLER CORPORATION
DATED AS OF AUGUST 29, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE I--PURCHASE AND SALE OF ASSETS..................................................................... A-1
1.1 PURCHASE AND SALE............................................................................... A-2
1.2 ASSUMPTION OF LIABILITIES....................................................................... A-2
1.3 CONSIDERATION FOR ASSETS........................................................................ A-2
1.4 SALES AND USE TAXES............................................................................. A-3
1.5 CLOSING......................................................................................... A-3
ARTICLE II--CERTAIN REPRESENTATIONS AND WARRANTIES OF SELLER............................................ A-3
2.1 ORGANIZATION OF SELLER.......................................................................... A-3
2.2 AUTHORITY; CONSENTS............................................................................. A-4
2.3 TAX AND OTHER RETURNS AND REPORTS............................................................... A-4
2.4 RESTRICTIONS ON BUSINESS ACTIVITIES............................................................. A-5
2.5 ABSENCE OF LIENS AND ENCUMBRANCES............................................................... A-5
2.6 GOVERNMENTAL AUTHORIZATION...................................................................... A-5
2.7 LITIGATION...................................................................................... A-5
2.8 EMPLOYEE ARRANGEMENTS........................................................................... A-5
2.9 COMPLIANCE WITH LAWS............................................................................ A-5
2.10 SELLER FINANCIAL STATEMENTS..................................................................... A-6
2.11 INTELLECTUAL PROPERTY........................................................................... A-6
2.12 PREFERENCES; SOLVENCY........................................................................... A-7
2.13 SERVICE, SUPPORT AND WARRANTY OBLIGATIONS; CUSTOMER DATA........................................ A-7
2.14 ASSUMED BANK LIABILITIES........................................................................ A-7
2.15 REPRESENTATIONS COMPLETE........................................................................ A-7
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF BUYER....................................................... A-7
3.1 ORGANIZATION, STANDING AND POWER................................................................ A-7
3.2 AUTHORITY....................................................................................... A-7
3.3 SEC DOCUMENTS................................................................................... A-7
3.4 SHARES OF COMMON STOCK.......................................................................... A-7
ARTICLE IV--ADDITIONAL AGREEMENTS.......................................................................... A-7
4.1 CONDUCT OF BUSINESS OF SELLER................................................................... A-8
4.2 NO SOLICITATION................................................................................. A-8
4.3 SALE OF SHARES.................................................................................. A-9
4.4 STOCKHOLDER APPROVAL............................................................................ A-10
4.5 ACCESS TO INFORMATION........................................................................... A-10
4.6 CONFIDENTIALITY................................................................................. A-10
4.7 EXPENSES........................................................................................ A-10
4.8 PUBLIC DISCLOSURE............................................................................... A-10
4.9 RESPECTIVE EFFORTS.............................................................................. A-11
4.10 NOTIFICATION OF CERTAIN MATTERS................................................................. A-11
4.11 RESALE REGISTRATION............................................................................. A-11
4.12 AFFILIATE AGREEMENTS............................................................................ A-11
4.13 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES..................................................... A-11
4.14 ANTITRUST LAWS.................................................................................. A-11
4.15 COVENANT NOT TO COMPETE OR SOLICIT.............................................................. A-12
4.16 COOPERATION..................................................................................... A-13
4.17 EMPLOYEES....................................................................................... A-13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
4.18 BULK SALES...................................................................................... A-13
4.19 TAX REPORTING................................................................................... A-13
ARTICLE V--CONDITIONS TO THE ACQUISITION................................................................... A-14
5.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE ACQUISITION............................... A-14
5.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SELLER.................................................. A-14
5.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND BUYER.................................... A-14
ARTICLE VI--TERMINATION, AMENDMENT AND WAIVER........................................................... A-16
6.1 TERMINATION..................................................................................... A-16
6.2 EFFECT OF TERMINATION........................................................................... A-16
6.3 AMENDMENT....................................................................................... A-17
6.4 EXTENSION; WAIVER............................................................................... A-17
ARTICLE VII--GENERAL PROVISIONS............................................................................ A-18
7.1 SURVIVAL AT CLOSING............................................................................. A-18
7.2 SPECIFIC PERFORMANCE............................................................................ A-18
7.3 NOTICES......................................................................................... A-18
7.4 INTERPRETATION.................................................................................. A-19
7.5 COUNTERPARTS.................................................................................... A-19
7.6 ENTIRE AGREEMENT; NONASSIGNABILITY; PARTIES IN INTEREST......................................... A-19
7.7 SEVERABILITY.................................................................................... A-19
7.8 REMEDIES CUMULATIVE............................................................................. A-19
7.9 GOVERNING LAW................................................................................... A-19
7.10 RULES OF CONSTRUCTION........................................................................... A-19
</TABLE>
<TABLE>
<S> <C> <C>
INDEX OF SCHEDULES
Schedules 1.1(a) and --Description of Transferred Assets
1.1(b)
Schedule 1.2 --Description of Assumed Liabilities
Schedule 4.12 --List of Seller Affiliates
</TABLE>
<TABLE>
<S> <C> <C>
INDEX OF EXHIBITS
Exhibit A --Voting Agreement
Exhibit B --Indemnification and Escrow Agreement
Exhibit --Seller Release
C-1
Exhibit --Buyer Release
C-2
Exhibit D --Revolving Loan Promissory Note
Exhibit E --Omnibus Amendment
Exhibit F --Post-Closing Operating Agreement
Exhibit G --Assignment of Intellectual Property
Exhibit H --Private Placement Certificate
Exhibit I --Press Release
Exhibit J --Declaration of Registration Rights
Exhibit K --Affiliate Agreement
Exhibit L --Form of Legal Opinion of Counsel to Parent
Exhibit M --Form of Legal Opinion of Counsel to Seller
</TABLE>
ii
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "AGREEMENT") is made and entered into as
of August 29 1997, by and among Power Computing Corporation, a Delaware
corporation ("SELLER"), Apple Computer, Inc., a California corporation
("PARENT") and Gravenstein, Inc., a Delaware corporation and wholly-owned
subsidiary of Parent ("BUYER").
RECITALS
A. Seller has been engaged in manufacturing, selling, and supporting
personal computers.
B. Seller wishes to sell to Buyer and Buyer wishes to purchase from Seller,
on the terms and subject to the conditions set forth herein, the assets of
Seller described herein, and Seller wishes Buyer to assume certain of Seller's
liabilities, which Buyer would agree to assume, on the terms and subject to the
conditions set forth herein (such transactions together being referred to as the
"ACQUISITION"). The parties intend the Acquisition to be treated as a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "CODE").
C. The Board of Directors of each of the parties believe it is in the best
interests of its company and its shareholders that the Acquisition be
consummated and, in furtherance thereof, has approved the Acquisition.
D. In connection with the Acquisition, and as a material inducement to Buyer
to enter into this Agreement, certain stockholders of Seller are
contemporaneously entering into Voting Agreements with Buyer in the form of
EXHIBIT A hereto.
E. In connection with the Acquisition, and as a material inducement to
Buyer to enter into this Agreement, Seller and certain stockholders of Seller
are contemporaneously entering into the Indemnification and Escrow Agreement
with Buyer in the form of EXHIBIT B hereto and a Release in the form of EXHIBIT
C-1 hereto (the "SELLER RELEASE").
F. In connection with the Acquisition, and as a material inducement to
Seller to enter into this Agreement, Buyer is contemporaneously entering into
the a Release in the form of EXHIBIT C-2 hereto (the "BUYER RELEASE"; together
with the Seller Release, the "RELEASES".
G. Parent and Seller are contemporaneously entering into the Revolving Loan
Promissory Note in the form of EXHIBIT D hereto (the "PROMISSORY NOTE").
H. In connection with the Acquisition, and as a material inducement to the
parties entering into this Agreement, Seller, Buyer and Parent are
contemporaneously entering the Omnibus Amendment in the form of EXHIBIT E hereto
and the Post-Closing Operating Agreement in the form of EXHIBIT F hereto.
I. Seller and Buyer desire to make certain representations and warranties
and other agreements in connection with the Acquisition.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, intending to be
legally bound hereby, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE. On the terms and subject to the conditions set
forth in this Agreement, Seller will sell, convey, transfer, assign and deliver
to Buyer and Buyer will purchase and acquire from Seller on the Closing Date (as
defined in Section 1.5), all of Seller's right, title and interest in and to the
assets described in Schedules 1.1(a) and 1.1(b) hereto (collectively, the
"TRANSFERRED ASSETS"), free and clear of all liens, pledges, charges, claims,
security interests or other encumbrances of any sort (collectively,
A-1
<PAGE>
"Liens"). The assets described in Schedule 1.1(b) hereto are hereinafter
referred to as the "ADDITIONAL ASSETS" and the aggregate realizable value of the
assets described in Schedule 1.1(b) hereto is hereinafter referred to as the
"ADDITIONAL ASSET VALUE".
1.2 ASSUMPTION OF LIABILITIES. On the terms and subject to the conditions
set forth in this Agreement, at the Closing, Buyer shall assume the liabilities
of Seller described Schedule 1.2 hereto (I.E. the obligation of the Promissory
Note, referred to herein as the "ASSUMED LIABILITIES"). Buyer shall not assume
any liabilities or obligations of Seller except for those liabilities and
obligations which Buyer expressly assumes pursuant to this Section 1.2. Buyer
expressly is not assuming any obligations or liabilities, whether accrued,
absolute, contingent, matured, unmatured or other, of Seller or any other person
or entity, except for the Assumed Liabilities. Seller will indemnify and hold
Buyer harmless from and against any and all losses, costs, expenses, claims,
liabilities, deficiencies, judgments and damages incurred or suffered by Buyer
or Parent or any of their respective successors or affiliates related to or
arising out of any liabili-ties or obligations of Seller or any of Seller's
stockholders, affiliates or successors, except for those obligations expressly
assumed by Buyer in this Section 1.2. Without limiting the foregoing, it is
expressly agreed that Buyer shall not assume or have any responsibility with
respect to any of the following liabilities or obligations and the following
liabilities and obligations shall not constitute Assumed Liabilities: (1) any
liability or obligation for any Taxes (as defined in Section 2.3) incurred or
accrued by Seller for any period or any liability for Taxes of any person or
entity attributable to the Transferred Assets for any period or portion of any
period ending on or prior to the Closing; (2) any liability or obligation of
Seller as a result of any legal or equitable action or judicial or
administrative proceeding initiated at any time in respect of anything done,
suffered to be done, or omitted to be done by the Seller or any of its
directors, officers, employees, or agents, except for Assumed Liabilities; or
(3) any liability or obligation of Seller relating to or in connection with any
product liability or warranty matters relating to Seller's products, or the
return of Seller's products from customers or any other person or entity.
1.3 CONSIDERATION FOR ASSETS. On the terms and subject to the conditions
set forth in this Agreement, as full payment for the transfer of the Transferred
Assets by Seller to Buyer and the other transactions contemplated hereby, Buyer
shall transfer to Seller at the Closing a number of shares of Parent Common
Stock equal to the "Aggregate Number". The "AGGREGATE NUMBER" shall be equal to
the quotient obtained by dividing (x) the sum of $100,000,000 plus the
Additional Asset Value less any amount of principal outstanding and/or interest
due or accrued under the Promissory Note (such principal and interest, the "LOAN
AMOUNT") by (y) the Average Price (and shall be appropriately adjusted to
reflect any split or combination in shares of Parent Common Stock after the date
hereof and prior to the Closing). The "AVERAGE PRICE" shall be defined (and
shall be appropriately adjusted to reflect any split or combination in shares of
Parent Common Stock after the date hereof) as the average last sales price of
one share of Parent Common Stock over the five consecutive trading days ending
on the trading day 2 days prior to, but not including, the date of transfer to
Seller of such shares (which in the case of the Closing shall be deemed to be
the Closing Date), as reported on the Nasdaq National Market. At the Closing,
Buyer shall deliver certificates representing the Aggregate Number of shares of
Parent Common Stock (the "PURCHASE SHARES") as follows:
(a) Buyer shall deliver to Seller certificates representing a number of
shares of Parent Common Stock equal to the quotient obtained by dividing (x)
the difference between $85 million and the Loan Amount by (y) the Average
Price (the "IMMEDIATE SHARES");
(b) Buyer shall deposit into escrow in accordance with the
Indemnification and Escrow Agreement attached as EXHIBIT B hereto
certificates representing a number of shares of Parent Common Stock equal to
the quotient obtained by dividing $15 million by the Average Price (the
"PRIMARY ESCROW SHARES"); and
(c) Buyer shall deposit into escrow in accordance with the
Indemnification and Escrow Agreement certificates representing a number of
shares of Parent Common Stock equal to the quotient
A-2
<PAGE>
obtained by dividing Additional Asset Value by the Average Price (the
"ADDITIONAL ASSET ESCROW SHARES"; together with the Primary Escrow Shares,
the "ESCROW SHARES").
1.4 SALES AND USE TAXES. Seller shall bear and pay any sales, use, and
transfer taxes arising out of the transfer of the Transferred Assets (the
"TRANSFER TAXES"). To the extent permitted by law, Buyer shall cooperate fully
with Seller in minimizing Transfer Taxes. To the extent a taxing authority
provides notice to Buyer of an audit of the Transfer Taxes, Buyer shall promptly
notify Seller and Seller shall assume responsibility for such audit and shall
bear and pay when due any additional Transfer Taxes (plus interest and
penalties) ultimately assessed with respect to the transfer contemplated by this
Agreement.
1.5 CLOSING.
(a) CLOSING DATE. Unless this Agreement is earlier terminated pursuant
to Section 6.1, the Closing of the transactions contemplated by this
Agreement (the "CLOSING") shall be held at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304, at 10:00 a.m. on
the date which is two business days following satisfaction or waiver of the
last of the conditions to Closing as set forth in the Article V hereof, or
on such other time and/or date as the parties agree (the actual date on
which the Closing occurs is referred to herein as the "CLOSING DATE").
(b) DELIVERY AT CLOSING. In addition to satisfaction or waiver of the
other conditions to the respective parties' obligations to consummate the
Acquisition, at the Closing:
(i) Seller shall deliver to Buyer all bills of sale, endorsements,
assignments, consents to assignments to the extent obtained and other
instruments and documents as Buyer may reasonably request to sell,
convey, assign, transfer and deliver to Buyer good title to all the
Transferred Assets free and clear of any and all Liens;
(ii) Buyer shall deliver the Immediate Shares to Seller and deliver
the Escrow Shares into escrow in accordance with the terms of the
Indemnification and Escrow Agreement; and
(iii) Seller and Buyer shall deliver an executed Assignment of
Intellectual Property having substantially the form of EXHIBIT G, which
will become effective upon the Closing.
(c) TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after
the Closing, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Buyer with full right, title and
possession to all Transferred Assets free and clear of all Liens, the
officers and directors of Seller are fully authorized in the name of Seller
or otherwise to take, and will take all such lawful and necessary and/or
desirable action (including obtaining any required consents or approvals).
ARTICLE II
CERTAIN REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer, subject to such exceptions as are
specifically disclosed in the disclosure letter supplied by Seller to Buyer (the
"SELLER DISCLOSURE LETTER") dated as of the date hereof, as follows:
2.1 ORGANIZATION OF SELLER. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Seller has the corporate power to own its property and to carry on its business
as now being conducted. Seller is duly qualified to do business and in good
standing in each jurisdiction in which the failure to be so qualified would
result in a Material Adverse Effect on the Transferred Assets. (For the purposes
of this Agreement, a "MATERIAL ADVERSE EFFECT ON THE TRANSFERRED ASSETS" shall
mean any (1) material adverse effect on the Transferred Assets or Buyer's
interest therein or use thereof following the Closing or (2) Losses of or to an
Indemnified Party (as such terms are defined in the Indemnification and Escrow
Agreement) including, without limitation, Losses resulting from any Lien on the
Transferred Assets resulting from the transactions contemplated hereby.)
A-3
<PAGE>
2.2 AUTHORITY; CONSENTS. Seller has all requisite corporate power and
authority to enter into this Agreement, and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
(subject to shareholder approval) by all necessary corporate action on the part
of Seller. The vote of the holders of a majority of each of Seller's Common
Stock, Series A Preferred Stock and Series B Preferred Stock is required for
approval of this Agreement and the transactions contemplated hereby. The proxies
granted to Parent pursuant to the Voting Agreements delivered in connection
herewith, if voted in favor of this Agreement and the transactions contemplated
hereby are sufficient to permit Parent to unilaterally cause the holders of
Seller's Common Stock and Series A Preferred Stock to approve this Agreement and
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Seller and constitutes the valid and binding obligation of Seller,
enforceable in accordance with its terms. The execution and delivery of this
Agreement by Seller does not, and, as of the Closing, the consummation of the
transactions contemplated hereby will not, materially conflict with, or result
in any material violation of, or material default under (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or loss of any benefit under (any such event,
a "CONFLICT") (i) any provision of the Certificate of Incorporation or Bylaws of
Seller (ii) any mortgage, indenture, lease, contract or other agreement or
instrument or (iii) any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Seller or its
properties or assets in the case of clause (ii), other than as would not have a
Material Adverse Effect on the Transferred Assets. No consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other federal, state, county,
local or foreign governmental authority, instrumentality, agency or commission
having jurisdiction over Seller ("GOVERNMENTAL ENTITY") or any third party, is
required by or with respect to Seller in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, other than whose absence would not have a material adverse effect on the
ability of Seller, Buyer or Parent to effectuate the transactions contemplated
hereby.
2.3 TAX AND OTHER RETURNS AND REPORTS.
(i) DEFINITION OF TAXES. For the purposes of this Agreement, "TAX"
or, collectively, "TAXES", means any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts and any obligations under any
agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
(ii) TAX RETURNS AND AUDITS. Other than as would not have a Material
Adverse Effect on the Transferred Assets, Seller has filed within the time
period for filing or any extension granted with respect thereto all federal,
state, local, foreign and other returns, estimates and reports ("TAX
RETURNS") which it is required to file and each such Tax Return is true and
correct and has been completed in accordance with applicable law. Other than
as would not have a Material Adverse Effect on the Transferred Assets,
Seller has paid all Taxes required under applicable law to be paid and has
withheld with respect to its employees and paid to the appropriate taxing
authority all federal, state and local income taxes, FICA, FUTA and any
other Taxes required to be withheld. There are (and as of immediately
following the Closing there will be) no Liens (other than statutory liens
securing amounts not yet due or payable) on the Transferred Assets relating
to or attributable to Taxes. Without limiting any other provision hereof,
Buyer will not be responsible for the payment of any Taxes as a result of
any of the transactions contemplated hereby, including without limitation,
the payment of any sales, use or similar taxes by virtue of any state law
providing for the liability of any successor in interest, or any similar law
or regulation.
A-4
<PAGE>
2.4 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement,
commitment, judgment, injunction, order or decree binding upon Seller or the
Transferred Assets which has or could reasonably be expected to have the effect
of prohibiting or impairing any use by Buyer of the Transferred Assets following
the Closing or otherwise would result in a Material Adverse Effect on the
Transferred Assets.
2.5 ABSENCE OF LIENS AND ENCUMBRANCES. Seller has and at Closing will have
good and valid title to all of the Transferred Assets, free and clear of any
Liens. Seller has full corporate right and corporate power to (and at the
Closing will) sell, convey, assign, transfer and deliver to Buyer good title to
all the Transferred Assets, free and clear of all Liens.
2.6 LITIGATION. Except as would not result in a Material Adverse Effect on
the Transferred Assets, there is no action, suit or proceeding of any nature
pending or, to Seller's knowledge, threatened against Seller, the Transferred
Assets or any of its officers or directors in their respective capacities as
such, nor, to the knowledge of Seller, is there any basis therefor that is
reasonably likely to be asserted and that would result in a Material Adverse
Effect on the Transferred Assets. Except as would not result in a Material
Adverse Effect on the Transferred Assets, there is no investigation pending or
to Seller's knowledge threatened against Seller, its properties or assets, or
any of its officers or directors (nor, to the knowledge of Seller, is there any
basis therefor) by or before any Governmental Entity.
2.7 EMPLOYEE ARRANGEMENTS. No employee of Seller is subject to any
agreement or other arrangement with Seller that would preclude the employment by
Parent or Buyer of such individual, or result in any payments by Parent or Buyer
in connection with such employment if any such employee is hired by Parent or
Buyer within the scope of this Agreement.
2.8 COMPLIANCE WITH LAWS. To the extent that noncompliance would have a
Material Adverse Effect on the Transferred Assets, Seller has complied with and
has not received any notices of violation with respect to, any federal, state or
local statute, law or regulation, domestic or foreign.
2.9 SELLER FINANCIAL STATEMENTS.
(a) Seller's audited balance sheet as of March 31, 1997 and the related
audited statements of operations, stockholders' equity and cash flows for the
nine months then ended, copies of which are included in the Seller Disclosure
Letter, fairly present the financial condition and operating results of Seller
as of the date and during the period indicated therein, in accordance with
generally accepted accounting principles.
(b) Seller's unaudited pro-forma statements of operations and cash flows for
the 3-month periods ending June 29, September 28 and December 28, 1997, copies
of which are included in the Seller Disclosure Letter, taken together, present
fairly the bona fide estimate of Seller's management of Seller's results of
operations for the 9-month period ending December 28, 1997, giving effect to the
transactions contemplated hereby and treating the Velocity program as a separate
line item. Seller's unaudited pro-forma balance sheet as of December 28, 1997, a
copy of which is included in the Seller Disclosure Letter, presents fairly the
bona fide estimate of Seller's management of Seller's financial condition as of
December 28, 1997, giving effect to the transactions contemplated hereby and
treating the Velocity program as a separate line item. The estimates referred to
in this Section 2.9(b) are based upon assumptions which are reasonable in the
judgment of Seller's management, it being understood that estimates are based
upon future events which may or may not occur and there is no guarantee that
such estimates will be realized or that the actual results of operations or
financial condition will not be materially different.
A-5
<PAGE>
2.10 INTELLECTUAL PROPERTY.
(a) DEFINITIONS. For the purposes of this Agreement, the following terms
have the following definitions:
"INTELLECTUAL PROPERTY" means any or all of the following and all rights in,
arising out of, or associated therewith: (i) all United States and foreign
patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof;
(ii) all inventions (whether patentable or not), invention disclosures,
improvements, trade secrets, proprietary information, know how, technology,
technical data and customer lists, and all documentation relating to any of
the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor and all other rights corresponding thereto throughout
the world; (iv) all mask works, mask work registrations and applications
therefor; (v) all industrial designs and any registrations and applications
therefor throughout the world; (vi) all databases and data collections and
all rights therein throughout the world; (vii) all computer software
including all source code, object code, firmware, development tools, files,
records and data, all media on which any of the foregoing is recorded;
(viii) any similar, corresponding or equivalent rights to any of the
foregoing and (ix) all documentation related to any of the foregoing. In no
event shall "Intellectual Property" include any trade names, logos, common
law trademarks and service marks, trademark and service mark registrations
and applications therefor and all goodwill associated therewith throughout
the world, or any Web addresses, sites or domain names.
"TRANSFERRED INTELLECTUAL PROPERTY" means all Intellectual Property owned by
Seller that is embodied by, necessary to, or that would (absent a license
from Seller) be infringed by, the copying, making, using, selling,
distribution or other exploitation of the Transferred Assets.
(b) Section 2.10 of Seller Disclosure Letter lists all Transferred
Intellectual Property that is the subject of an application, certificate,
filing, registration or other document issued by, filed with, or recorded by,
any state, government or other public legal authority, including (i) patents,
patent applications (including provisional applications); and (ii) registered
copyrights and applications for copyright registration.
(c) Except as set forth in Section 2.10 of Seller Disclosure Letter, Seller
has not transferred ownership of, or granted any license with respect to, any
Intellectual Property that is or was Transferred Intellectual Property, to any
other person. No Transferred Intellectual Property or Transferred Asset is the
subject of any proceeding or outstanding decree, order, judgment, agreement or
stipulation that restricts or would restrict in any manner the use, transfer or
licensing thereof by Buyer or may affect the validity, use or enforceability of
such Transferred Intellectual Property.
(d) Seller has not received notice from any person claiming that the
Transferred Assets or any conduct of Seller related to the Transferred Assets
infringes or misappropriates the Intellectual Property of any person or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
2.11 PREFERENCES; SOLVENCY. The following statements are, after giving
effect to the Acquisition, and upon each distribution of any contemplated assets
of Seller to its liquidating trust or stockholders, each of the following will
be, true and correct:
(a) The aggregate value of all assets of Seller or such liquidating
trust at their respective then present fair saleable values exceeds the
amount of all the debts and liabilities (including, without limitation,
contingent, subordinated, unmatured and unliquidated liabilities) of Seller
or such liquidating trust. Seller understand that, in this context, "present
fair saleable value" means the amount which may be realized within a
reasonable time through a sale within such period by a capable and diligent
businessman from an interested buyer who is willing to purchase under
ordinary selling conditions. In determining the present fair saleable value
of Seller's contingent liabilities (such as litigation, guarantees and
pension plan liabilities), Seller has considered such liabilities that could
possibly become actual or matured liabilities.
A-6
<PAGE>
(b) Seller is not insolvent as such term is used in Section 548 of the
Bankruptcy Code and the Uniform Fraudulent Transfers Act as adopted in the
State of California and all other applicable fraudulent transfer or
fraudulent conveyance laws, statutes, rules or regulations applicable to
Seller.
(c) The consideration received by Seller in connection with the
Acquisition constitutes reasonably equivalent consideration for its entering
into the transactions contemplated by this Agreement.
2.12 REPRESENTATIONS COMPLETE. There is no fact, circumstance or condition
of any kind or nature whatsoever known to Seller which reasonably would be
expected to result in a Material Adverse Effect on the Transferred Assets which
has not been set forth in Seller Disclosure Letter.
2.13 NO OTHER REPRESENTATIONS. Except as expressly stated in this Article
II (including without limitation Section 2.12 hereof), Seller makes no other
representations or warranties to Buyer or Parent with respect to the Transferred
Assets, express or implied.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT
Buyer and Parent jointly and severally represent and warrant to Seller,
subject to such exceptions as are specifically disclosed in the disclosure
letter supplied by Buyer and Parent to Seller (the "BUYER AND PARENT DISCLOSURE
LETTER") dated as of the date hereof, as follows:
3.1 ORGANIZATION, STANDING AND POWER. Buyer and Parent each is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization. Buyer and Parent each has the corporate
power to own its properties and to carry on its business as now being conducted.
3.2 AUTHORITY. Buyer and Parent each has all requisite corporate power and
authority to enter into this Agreement, and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of each of Buyer and Parent. This
Agreement has been duly executed and delivered by each of Buyer and Parent and
constitutes the valid and binding obligation of each of Buyer and Parent,
enforceable in accordance with its terms.
3.3 SEC DOCUMENTS. Parent has made available to Seller true and complete
copies of all reports or registration statements filed by it with the Securities
and Exchange Commission (the "SEC") from December 31, 1996, all in the form so
filed (all of the foregoing being collectively referred to as the "PARENT SEC
DOCUMENTS"). As of their respective filing dates, the Parent SEC Documents
complied in all material respects with the requirements of the Securities Act of
1933 (the "SECURITIES ACT") or the Securities Exchange Act of 1934 (the
"EXCHANGE ACT"), as the case may be, and, unless superseded by a subsequently
filed Parent SEC Document, none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
3.4 SHARES OF COMMON STOCK. The Purchase Shares, when issued and delivered
to Seller in accordance with this Agreement, will be duly authorized, validly
issued, fully paid and nonassessable.
3.5 NO OTHER REPRESENTATIONS. Except as expressly stated in this Article
III, neither Buyer nor Parent makes any other representations or warranties to
Seller with respect to the Purchase Shares, express or implied.
A-7
<PAGE>
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 CONDUCT OF BUSINESS OF SELLER. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
and the Closing, Seller agrees not to take any actions that would constitute a
breach of any of the Ancillary Agreements (defined as the Indemnification and
Escrow Agreement, the Seller Release, the Promissory Note and the Amended
Agreements (as defined in the Omnibus Amendment dated as of the date hereof by
and between Parent and Seller), encumber in any manner the Transferred Assets
(other than any encumbrance which will be released at Closing), impair its
intellectual property rights with respect to the Transferred Assets or
negatively impact its ability to perform its obligations hereunder. In addition,
Seller shall not, without prior written consent of Parent, during the period
from the date of this Agreement and continuing until the earlier of the Closing
Date and the termination of this Agreement:
(a) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of Seller, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock (or options, warrants or other rights exercisable
therefor);
(b) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to its
business;
(c) Sell, lease, license, or otherwise dispose of or encumber any of the
Transferred Assets;
(d) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (c) above, or any other action that
would prevent Seller from performing or cause Seller not to perform its
covenants hereunder.
4.2 NO SOLICITATION. Until the earlier of the Closing Date and the date of
termination of this Agreement pursuant to the provisions hereof, Seller will not
(nor within the power and authority of Seller will Seller permit any of Seller's
officers, directors, stockholders, agents, representatives or affiliates (any of
the foregoing, a "SELLER REPRESENTATIVE")) to directly or indirectly, take any
of the following actions with any party other than Buyer and its designees: (a)
solicit, initiate, entertain, or encourage any proposals or offers from, or
conduct discussions with or engage in negotiations with, any person relating to
any possible acquisition of Seller or any of its subsidiaries (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise), any portion
of its or their capital stock or of the Transferred Assets) or any equity
interest in Seller or any of its subsidiaries, (b) provide information with
respect to it to any person, other than Buyer and its designees, relating to, or
otherwise cooperate with, facilitate or encourage any effort or attempt by any
such person with regard to, any possible acquisition of Seller or any of its
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise), any portion of its or their capital stock or the
Transferred Assets or any equity interest in Seller or any of its subsidiaries,
(c) enter into an agreement with any person, other than Buyer and its designees,
providing for the acquisition of Seller or any of its subsidiaries (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise), any
of its or their capital stock or the Transferred Assets or any other equity
interest in Seller or any of its subsidiaries, or (d) make or authorize any
statement, recommendation or solicitation in support of any possible acquisition
of Seller or any of its subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), any portion of its or their
capital stock or the Transferred Assets or any other equity interest in Seller
or any of its subsidiaries by any person, other than Buyer and its designees.
The taking of any action described in clauses (a) through (d) above by any
Seller Representative shall be deemed a material breach by Seller of this
Agreement. Seller shall, to
A-8
<PAGE>
the extent of its power and authority, immediately cease and cause to be
terminated any such contacts or negotiations with third parties relating to any
such transaction or proposed transaction. In addition to the foregoing, if
Seller receives prior to the Closing or earlier the termination of this
Agreement any offer or proposal relating to any of the above, Seller shall
immediately notify Parent thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other information
related thereto as Parent may reasonably request. The restrictions set forth in
this Section 4.2 shall not apply to sales of newly created subsidiaries of
Seller that neither own any interest in nor have any rights to use any
Transferred Assets, which subsidiaries are created solely for the purpose of
transferring assets of Seller that are not Transferred Assets.
4.3 SALE OF SHARES.
(a) As promptly as practicable after the execution of this Agreement, Buyer
shall determine, in consultation with counsel, whether it will issue the shares
of Parent Common Stock that comprise the consideration for the Transferred
Assets by (i) relying on an exemption from registration (the "PRIVATE PLACEMENT
EXEMPTION") pursuant to Section 4(2) and/or Rule 506 or similar exemptions under
the Securities Act; or (ii) registering the offer and sale of the shares
pursuant to a Registration Statement on Form S-4 or similar form (the "S-4")
filed with the SEC. To the extent that the Private Placement Exemption is
available under applicable law for such issuance, as reasonably determined by
Buyer (based in part on an opinion of outside counsel for Seller), Buyer shall
transfer the shares relying upon the Private Placement Exemption. Upon
determining whether to pursue a Private Placement Exemption or to file an S-4,
Buyer shall notify Seller of its determination and, as promptly as practicable,
Seller and Parent shall complete the preparation of and file with the SEC (to
the extent required) the necessary documentation to satisfy the relevant
securities law requirements of such determination. To the extent a determination
is initially made to file an S-4, Buyer shall consult with Seller and Seller's
outside counsel for a period of at least 5 business days after such
determination regarding the potential availability of the Private Placement
Exemption.
(b) In the event that the parties rely on the Private Placement Exemption,
the certificates for shares of Parent Common Stock to be issued in the
Acquisition pursuant to the Private Placement Exemption shall bear appropriate
legends to identify such privately placed shares as being restricted securities
under the Securities Act, to comply with applicable state securities laws and,
if applicable, to notice the restrictions on transfer pursuant to the Affiliate
Agreements (as defined below). It is acknowledged and understood that in order
for Buyer to rely upon the Private Placement Exemption from registration under
the Securities Act, Parent and Buyer will be required to rely upon certain
representations made by each stockholder of Seller, including, but not limited
to, representations regarding resales.
(c) In the event that the parties rely on the S-4 registration process,
Parent shall prepare and file with the SEC the S-4 as promptly as reasonably
practicable. Seller shall provide to Parent and its counsel for inclusion in the
S-4, in form and substance reasonably satisfactory to Parent and its counsel,
such information concerning Seller, its operations, capitalization, technology,
share ownership and other material as Parent or its counsel may reasonable
request. Each of Parent and Seller shall use its reasonable efforts to respond
to any comments of the SEC, to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing and to cause the
proxy statement contained within the S-4 to be mailed to Seller's stockholders
at the earliest practicable time. Each party will notify the other parties
hereto promptly of the receipt of any comments from the SEC or its staff and of
any request by the SEC or its staff for amendments or supplements to the S-4 or
for additional information and will supply the other party with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff, on the other hand, with respect to the S-4.
Whenever any event occurs which should be set forth in an amendment or
supplement to the S-4, Parent or Seller, as the case may be, shall promptly
inform the other of such occurrence and cooperate in filing with the SEC or its
staff.
A-9
<PAGE>
4.4 STOCKHOLDER APPROVAL. Seller shall promptly submit this Agreement and
the transactions contemplated hereby to its stockholders for approval and
adoption as provided by Delaware Law, its Certificate of Incorporation and
Bylaws and such other documents necessary in order to satisfy the requirements
of applicable law, including (if Parent pursues the Private Placement Exemption)
Section 4(2) of the Securities Act and Regulation D thereunder (if available) in
connection with the issuance and sale of the Parent Common Stock in the
Acquisition. Seller shall use its reasonable best efforts to obtain the consent
of its stockholders sufficient to approve the Acquisition and this Agreement and
to enable the Closing to occur as promptly as practicable as well as a
certificate from each stockholder of Seller in the form of EXHIBIT H hereto (the
"PRIVATE PLACEMENT CERTIFICATES"). The materials submitted to Seller's
stockholders shall have been subject to review and approval by Buyer and include
information regarding Seller, the terms of the Acquisition and this Agreement
and the unanimous recommendation of the Board of Directors of Seller in favor of
the Acquisition and this Agreement (subject to applicable fiduciary duties), and
such other information reasonably determined by Buyer to satisfy the Private
Placement Exemption, if applicable.
4.5 ACCESS TO INFORMATION. Seller shall afford Buyer and its accountants,
counsel and other representatives, reasonable access during normal business
hours to (a) all of Seller's properties, books, contracts, commitments and
records (including without limitation Tax records) relating to the Transferred
Assets, Buyer's or Parent's risks relating to the holding or use thereof or
liability therefor or relating to Seller's obligations under this Agreement or
the Ancillary Agreements, (b) all other information concerning the business,
properties and personnel (subject to restrictions imposed by applicable law) of
Seller as Buyer may reasonably request in order to carry out the transactions
contemplated hereby and (c) all key employees of Seller as identified by Buyer.
Seller agrees to provide to Buyer and its accountants, counsel and other
representatives copies of internal financial statements (including supporting
documentation) promptly upon request. No information or knowledge obtained in
any investigation pursuant to this Section shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Acquisition. Buyer shall be
entitled to copies of all books and records of Seller related to Taxes
(including without limitation work papers) reasonably required by Buyer or
Parent for purposes of complying with their respective Tax filing, compliance
and reporting obligations.
4.6 CONFIDENTIALITY. Each of the parties hereto hereby agrees to keep the
terms of this Agreement (except to the extent contemplated hereby) and such
information or knowledge obtained in any investigation pursuant to Section 4.5,
or pursuant to the negotiation and execution of this Agreement or the
effectuation of the transactions contemplated hereby, confidential; provided,
however, that the foregoing shall not apply to information or knowledge which
(a) a party can demonstrate was already lawfully in its possession prior to the
disclosure thereof by the other party, (b) is generally known to the public and
did not become so known through any violation of law, (c) became known to the
public through no fault of such party, (d) is later lawfully acquired by such
party without confidentiality restrictions from other sources, (e) is required
to be disclosed by order of court or government agency with subpoena powers
(provided that such party shall have provided the other party with prior notice
of such order and an opportunity to object or take other available action) or
(f) which is disclosed in the course of any litigation between any of the
parties hereto.
4.7 EXPENSES. Whether or not the Acquisition is consummated, all fees and
expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
4.8 PUBLIC DISCLOSURE. Upon the execution of this Agreement, the parties
shall release the press release regarding the public announcement of the
transactions contemplated hereby attached as EXHIBIT I. Unless otherwise
required by law (including, without limitation, foreign, federal and state
corporate and
A-10
<PAGE>
securities laws) and, as to Parent, by the rules and regulations of the Nasdaq
Stock Market, Inc., prior to the Closing, no public disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by any party hereto (or their directors or officers) unless approved by Parent
and Seller prior to release, provided that such approval shall not be
unreasonably withheld.
4.9 RESPECTIVE EFFORTS. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable best efforts
to ensure that its representations and warranties remain true and correct in all
material respects, and to take promptly, or cause to be taken, all reasonable
actions, and to do promptly, or cause to be done, all reasonable things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, to obtain
all necessary waivers, consents and approvals, and to effect all necessary
registrations and filings, and to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to the
parties hereto the benefits contemplated by this Agreement; provided that
neither Parent nor Buyer shall not be required to agree to any divestiture by
Parent or Buyer or any of Parent's other subsidiaries or affiliates of shares of
capital stock or of any business, assets (including without limitation, the
Transferred Assets) or property of Parent or its subsidiaries or affiliates, or
the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise unrestricted control of such
assets, properties and stock.
4.10 NOTIFICATION OF CERTAIN MATTERS. Seller shall give prompt notice to
Buyer, and Buyer shall give prompt notice to Seller, of (i) the occurrence or
non-occurrence of any event which is likely to cause any representation or
warranty of Seller and Buyer, respectively, contained in this Agreement to be
untrue or inaccurate at or prior to the Closing Date and (ii) any failure of
Seller or Buyer, respectively, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section shall not
limit or otherwise affect any remedies available to the party receiving such
notice.
4.11 RESALE REGISTRATION. Parent shall comply with the terms and
conditions set forth in the Declaration of Registration Rights (the
"REGISTRATION RIGHTS DECLARATION") attached hereto as EXHIBIT J.
4.12 AFFILIATE AGREEMENTS. The Seller Disclosure Letter sets forth those
persons who, in Seller's reasonable judgment, are "affiliates" of Seller within
the meaning of Rule 145 (each such person an "AFFILIATE") promulgated under the
Securities Act ("RULE 145"). Seller shall provide Parent such information and
documents as Parent shall reasonably request for purposes of reviewing such
list. Seller shall use reasonable efforts to deliver or cause to be delivered to
Parent, promptly following the execution of this Agreement (and in any case
prior to the Closing) from each of the Affiliates of Seller, an executed
Affiliate Agreement in the form attached hereto as EXHIBIT K, each of which will
be in full force and effect as of the Closing.
4.13 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. After Closing, each
party hereto, at the reasonable request of the other party hereto, shall execute
and deliver such other instruments and do and perform such other acts and things
as may be necessary or desirable for effecting completely the consummation of
this Agreement and the transactions contemplated hereby.
4.14 ANTITRUST LAWS. As promptly as practicable following the execution of
this Agreement, Parent Buyer and Seller shall make all filings and submissions
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR ACT") and any other applicable antitrust regulations, foreign or domestic,
as may be reasonably required to be made in connection with this Agreement and
the transactions contemplated hereby, and each party hereto agrees to respond as
promptly as practicable to any request for additional information that may be
made by any Governmental Entity in connection therewith. Subject to the
confidentiality provisions hereof, Seller will furnish to Parent and Buyer, and
Parent and Buyer will furnish to Seller, such information and assistance as the
other may reasonably request in connection with the preparation of any such
filings or submissions. Subject to the confidentiality
A-11
<PAGE>
provisions hereof, Seller will provide Parent and Buyer, and Parent and Buyer
will provide Seller, with copies of all correspondence, filings or
communications (or memoranda setting forth the substance thereof) between such
party or any of its representatives, on the one hand, and any governmental
agency or authority or members of their respective staffs, on the other hand,
with respect to this Agreement and the transactions contemplated hereby, except
to the extent that Parent or Seller is advised by independent counsel that the
provision of such information would be inadvisable under applicable antitrust
laws.
4.15 COVENANT NOT TO COMPETE OR SOLICIT.
(a) For a period commencing on the Closing Date and ending on the third
anniversary of the Closing Date (the "NON-COMPETITION PERIOD"), except as
expressly permitted by the Post-Closing Operating Agreement, Seller (and its
successors and assigns) shall not (nor shall it permit any of Steven Kahng, any
company in which Mr. Kahng is an officer, director or 5% or greater investor or
any company controlled by any of them) (Seller or any such person or entity, a
NON-COMPETING PARTY") directly or indirectly, without the prior written consent
of Buyer (i) engage anywhere in the United States, Europe, Australia or Asia
(the "GEOGRAPHIC SCOPE") in any capacity (whether as an employee, agent,
consultant, advisor, independent contractor, proprietor, partner, officer,
director or otherwise) in a Mac-compatible Business, (ii) have any ownership
interest in (except for ownership of one percent (1%) or less of any entity
whose securities are publicly traded), a Mac-compatible Business, (iii)
participate in the financing, operation, management or control of, any firm,
partnership, corporation, entity or business (other than Buyer) that engages or
participates in a Mac-compatible Business, or (iv) license or transfer to any
firm, partnership, corporation, entity or business that engages or participates
in a Mac-compatible Business any Seller trade names, logos, common law,
trademarks, service marks, web addresses, sites or domain names. The term
"MAC-COMPATIBLE BUSINESS" shall mean any business which includes the design,
development, manufacture, sale, or support of computer systems which include the
Mac OS and/or Mac OS Toolbox or add-on processor cards for such systems, except
that computer systems incorporating only Intel x86 or compatible processors are
expressly excluded. The existence of the Mac OS License Agreement, effective as
of March 1, 1997 by and between International Business Machines Corporation and
Seller shall not affect the foregoing restrictions.
(b) For a period commencing on the date hereof and ending on the second
anniversary of the Closing, or if the Closing does not occur, two years
following the date hereof (the "NON-SOLICITATION PERIOD"), the Non-Competing
Parties shall not solicit, encourage, take any other action which is intended to
induce or encourage, or has the effect of inducing or encouraging any employee
of Parent to terminate his or her employment with Parent. Furthermore, during
the Non-Solicitation Period, the Non-Competing Parties shall not solicit or
encourage any employee of Parent or any person who had been an employee of
Parent within six months prior to the solicitation or encouragement (any such
employee or prior employee, "PARENT PERSONNEL") to accept employment with Seller
or any other Non-Competing Party; and, to the extent permitted by applicable
law, the Non-Competing Parties shall not continue to employ any of the
Designated Persons (as defined in Section 4.18) at any time after 60 days
following the designation by Parent as such, nor hire any Parent Personnel.
(c) The covenants contained in paragraph (a) shall be construed as a series
of separate covenants, one for each county, city, state and country of the
Geographic Scope. Except for geographic coverage, each such separate covenant
shall be deemed identical in terms to the covenant contained in paragraph (a).
If, in any judicial proceeding, a court refuses to enforce any of such separate
covenants (or any part thereof), then such unenforceable covenant (or such part)
shall be eliminated from this Agreement to the extent necessary to permit the
remaining separate covenants (or portions thereof) to be enforced. In the event
that the provisions of this Section are deemed to exceed the time, geographic or
scope limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time, geographic or scope limitations, as the case may
be, permitted by applicable laws.
(d) Seller acknowledges that (i) the goodwill associated with the
Transferred Assets, including without limitation the customer data and
relationships comprising a part thereof is reflected in the
A-12
<PAGE>
consideration for the Acquisition to be received by Seller and (ii) Seller's
agreements as set forth herein are necessary to preserve the value of the
Acquisition to Buyer and Parent. Seller also acknowledges that the limitations
of time, Geographic Scope and scope of activity agreed to in this Agreement are
reasonable because, among other things, (x) Seller and Buyer are engaged in a
highly competitive industry, (y) management of Seller has unique access to, and
will continue to have access to, the trade secrets and know-how of Seller,
including without limitation the plans and strategy (and, in particular, the
competitive strategy) of Seller and (iii) Seller is receiving significant
consideration in connection with the Acquisition.
(e) Seller agrees that it would be impossible or inadequate to measure and
calculate Buyer's damages from any breach of the covenants set forth in this
Section 4.15. Accordingly, Seller agrees that if it breaches any provision of
this Section 4.15, Buyer will have available, in addition to any other right or
remedy otherwise available, the right to obtain an injunction from a court of
competent jurisdiction restraining such breach or threatened breach and to
specific performance of any such provision of this Agreement. Seller further
agrees that no bond or other security shall be required in obtaining such
equitable relief, nor will proof of actual damages be required for such
equitable relief. Seller hereby expressly consents to the issuance of such
injunctive relief, whether in the form of a temporary restraining order or
otherwise, and to the ordering of such specific performance.
4.16 WINTEL MARKETING. Following the Closing, until the second anniversary
thereof, Non-Competing Parties shall not solicit former customers of Seller to
replace Mac-compatible computers.
4.17 COOPERATION. Seller will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate of Seller from maintaining the same (or
similar) business relationships with Buyer after the Closing as it maintained
with Seller prior to the Closing. Seller will refer all sales inquiries relating
to the Mac-compatible Business to the Buyer from and after December 31, 1997 or,
if later, the date of the Closing.
4.18 EMPLOYEES. Seller agrees that following the date hereof, Buyer and
Parent shall have the right to hire up to 25 employees (which employees have any
history of working in the fields of Mac engineering, direct sales, marketing or
build-to-order manufacturing) of Seller, to be selected by Parent (the
"DESIGNATED PERSONS"). Parent shall give advance notice to Seller of the
identity of the Designated Persons and Seller shall use all reasonable efforts
to assist and encourage the transition of employment of the Designated Persons
from Seller to Buyer or Parent. Seller will not assert a claim (of tortious
interference, theft of trade secrets or otherwise) as a result of Buyer's or
Parent's recruitment of employees or former employees of Seller as of the date
hereof. Except for the Designated Persons, Parent's recruiting efforts will be
limited as mutually agreed in order to protect Seller's ability to conduct its
business, including its Wintel business.
4.19 TAX REPORTING. Buyer and Seller shall report the Acquisition as a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and shall
not take any position inconsistent with this characterization except in the
event of a contrary final determination by the Internal Revenue Service. If any
party receives notice of any contrary position by the Internal Revenue Service,
Seller may, at its option and sole expense, contest such position, in which
event Buyer and Parent shall cooperate with such contest as reasonably requested
by Seller.
4.20 BUYER PERFORMANCE. Parent will cause Buyer to perform Buyer's
obligations under this Agreement.
A-13
<PAGE>
ARTICLE V
CONDITIONS TO THE ACQUISITION
5.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE
ACQUISITION. The respective obligations of each party to this Agreement to
effect the Acquisition shall be subject to the satisfaction at or prior to the
Closing of the following conditions:
(a) SELLER STOCKHOLDER APPROVAL. This Agreement and the Acquisition
shall have been approved and adopted by the stockholders of Seller by the
requisite vote under applicable law and Seller's Certificate of
Incorporation;
(b) SECURITIES LAW COMPLIANCE. The transfer of the Parent Common Stock
in the Acquisition shall have been registered or shall be exempt from the
registration requirement of the securities laws of the United States and
shall have been qualified or shall be exempt under all applicable state
securities laws. In the event that the transfer of the Parent Common Stock
in the Acquisition shall be registered under U.S. securities laws, the SEC
shall have declared the registration statement filed in connection therewith
effective and no stop order suspending the effectiveness of such
registration statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened in
writing by the SEC; and
(c) HSR ACT. All waiting periods, if any, under the HSR Act relating
to the transactions contemplated hereby shall have expired or terminated
early.
5.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of
Seller to consummate the Acquisition and the transactions contemplated by this
Agreement shall be subject to the satisfaction at or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by Seller:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct in all material respects as of
such date), with the same force and effect as if made on and as of the
Closing Date;
(b) AGREEMENTS AND COVENANTS. Parent and Buyer in all material
respects shall have performed or be in compliance with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Closing Date, including, without limitation,
delivery at the Closing of the items set forth in Section 1.5 required to be
delivered by them;
(c) LEGAL OPINIONS. Seller shall have received a legal opinion from
Wilson Sonsini Goodrich & Rosati as to the matters set forth in EXHIBIT L;
and
(d) CERTIFICATE OF PARENT AND BUYER. Seller shall have been provided
with a certificate executed on behalf of Parent and Buyer to the effect
that, as of the Closing the conditions set forth in this Section 5.2 have
been satisfied.
5.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND BUYER. The
obligations of Parent and Buyer to consummate the Acquisition and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, by Parent and Buyer:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Seller contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct in all material respects as of
such date), with the same force and effect as if made on and as of the
Closing Date; provided, however, that the condition set forth in this
Section
A-14
<PAGE>
5.3(a) shall be deemed satisfied as of the Closing Date (and no termination
right will exist under Section 6.1(e) on account of asserted breach of such
representations and warranties) if the assets of Seller net of its
liabilities (contingent or other) after the Closing would be, as far as
could then be reasonably foreseen, reasonably sufficient to satisfy all
liabilities and obligations (contingent or other) of Seller, including
without limitation the indemnity obligations of Seller as contained in the
Indemnification and Escrow Agreement;
(b) AGREEMENTS AND COVENANTS. Seller in all material respects shall
have performed or be in compliance with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing, including, without limitation, delivery at the Closing
of the items set forth in Section 1.5 required to be delivered by it;
(c) NO GOVERNMENTAL LITIGATION. There shall not be pending any suit
by, action by or proceeding by any Governmental Entity, (i) challenging the
Acquisition or any of the transactions contemplated hereby, seeking to
restrain or prohibit the consummation of the Acquisition, or seeking to
place limitations on the ownership of the Transferred Assets by Parent or
Buyers (ii) seeking to prohibit or materially limit the ownership or
operation by Parent or any of Parent's subsidiaries or affiliates of any
portion of any of their respective assets (including without limitation the
Transferred Assets) or businesses, or to compel Parent or any of Parent's
subsidiaries or affiliates to dispose of or hold separate any portion of any
of their respective assets (including without limitation the Transferred
Assets) or businesses, as a result of the Acquisition or (iii) seeking to
prohibit Parent or any of its subsidiaries or affiliates from effectively
controlling in any material respect the Transferred Assets;
(d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Acquisition shall be in
effect, nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Acquisition, which makes the consummation of the Acquisition illegal;
(e) LEGAL OPINION. Parent shall have received a legal opinion from
McCutchen, Doyle, Brown & Enersen, LLP, and/or Baker & McKenzie, legal
counsel to Seller, as to the matters set forth in EXHIBIT M;
(f) AFFILIATE AGREEMENTS. Each of the parties identified by Seller in
the Seller Disclosure Letter as being an Affiliate of Seller shall have
delivered to Parent an executed Affiliate Agreement which shall be in full
force and effect;
(g) PRIVATE PLACEMENT CERTIFICATES. If Parent shall have relied upon
the Private Placement Exemption, each stockholder of Seller shall have
delivered to Parent an executed Private Placement Certificate, to the extent
reasonably required in order to establish the Private Placement Exemption;
(h) INDEMNIFICATION AND ESCROW AGREEMENTS. The Indemnification and
Escrow Agreement shall be in full force and effect and no term thereof shall
have been challenged or repudiated by any of the parties thereto (other than
Parent and Buyer); and
(i) CERTIFICATE OF SELLER. Parent and Buyer shall have been provided
with a certificate on behalf of Seller to the effect that, as of the
Closing, the conditions set forth in this Section 5.3 have been satisfied.
5.4 EXCLUSIVE CONDITIONS. The conditions set forth in this Article V shall
be the sole conditions to the Closing.
A-15
<PAGE>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
6.1 TERMINATION. Except as provided in Section 6.2 below, this Agreement
may be terminated and the Acquisition abandoned at any time prior to the
Closing:
(a) by mutual consent of Seller, Buyer and Parent;
(b) by Parent if: (i) there shall be a final nonappealable order of a
foreign, federal or state court in effect preventing consummation of the
Acquisition; or (ii) there shall be any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Acquisition by
any Governmental Entity that would make consummation of the Acquisition
illegal;
(c) by Seller or Parent if such party (and, in the case of Parent,
Buyer) is not in material breach of its obligations under this Agreement and
if the Closing has not occurred before 5:00 p.m. (California time) on June
30, 1998 (the "FINAL DATE");
(d) by Parent if there shall be any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Acquisition, by
any Governmental Entity, which would: (i) prohibit Parent's or Buyer's
ownership or operation of all or any portion of the Transferred Assets or
(ii) compel Parent or Seller to dispose of or hold separate all or a portion
of the business or assets (including without limitation the Transferred
Assets) of Parent, any of its subsidiaries or affiliates as a result of the
Acquisition;
(e) by Parent if neither it nor Buyer is in material breach of its
obligations under this Agreement and there has been a material breach of any
covenant or agreement contained in this Agreement on the part of Seller and
such breach has not been cured within 20 business days after written notice
to Seller; PROVIDED, HOWEVER, that, no cure period shall be required for a
breach which by its nature cannot be cured;
(f) by Seller if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any covenant or
agreement contained in this Agreement on the part of Parent or Buyer and
such breach has not been cured within 20 business days after written notice
to Parent; PROVIDED, HOWEVER, that, no cure period shall be required for a
breach which by its nature cannot be cured;
(g) by Parent if the required approvals of the stockholders of Seller
contemplated by this Agreement shall not have been obtained by reason of the
failure to obtain the required vote upon a vote taken at a meeting of
stockholders, duly convened therefor or at any adjournment thereof.
Where action is taken to terminate this Agreement pursuant to this Section
6.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
6.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section
6.1, this Agreement shall forthwith become void and there shall be no liability
or obligation on the part of Parent, Buyer or Seller, or their respective
officers, directors or stockholders, provided that each party shall remain
liable for any breaches of this Agreement prior to its termination; and provided
further that, the provisions of Sections 1.2(b), 4.6 and 4.15(b), this Section
6.2 and Article VII of this Agreement shall remain in full force and effect and
survive any termination of this Agreement.
(b) If as a result of United States federal government anti-trust law or
action or because of the failure to expire of applicable waiting periods under
the HSR Act relating to the transactions contemplated hereby this Agreement is
terminated pursuant to Section 6.1(b) or 6.1(d) and there is no Interim Seller
Failure Event (as defined below) or pursuant to Section 6.1(c) and there is no
Final Seller Failure Event
A-16
<PAGE>
(as defined below), then as promptly as practicable following such termination
(an "ANTITRUST TERMINATION"), Parent shall deliver to Seller, in compliance with
applicable securities laws, certificates representing a number of shares of
non-voting convertible Parent Preferred Stock (convertible on a 1-for-1 basis
without additional consideration into shares of Parent Common Stock or any such
other property or securities into which Parent Common Stock shall have generally
been converted or transformed) equal to $100,000,000 divided by the Average
Price (the "REINSTATEMENT PAYMENT"). The resale of any Parent Common Stock
issuable upon conversion of such shares shall be registered by Parent in
accordance with the terms of the Registration Rights Declaration.
(c) Following the occurrence of a Trigger Event, Parent may, at its sole
discretion, deliver to Seller the Reinstatement Payment. Delivery of the
Reinstatement Payment to Seller in accordance with the terms of the Seller
Release will cause without any further action by any person the Seller's Release
to remain in effect as provided therein and will cause all rights, licenses and
benefits granted to Seller and all obligations and duties of Parent under the
Amended Agreements to terminate and be of no further force or effect as provided
in the Omnibus Amendment.
(d) CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(1) A "TRIGGER EVENT" shall be deemed to occur if this Agreement is
terminated (x) by Parent pursuant to Section 6.1(b) or 6.1(d) and there is
no Interim Seller Failure Event, (y) by Parent or Seller pursuant to Section
6.1(c) and there is no Final Seller Failure Event, or (z) by Seller pursuant
to Section 6.1(f) and there is no Interim Seller Failure Event; provided,
however, that if there is an Antitrust Termination, no Trigger Event shall
be deemed to have occurred.
(2) A "FINAL SELLER FAILURE EVENT" shall be deemed to occur if the
Closing has not occurred by the Final Date because any condition imposed by
Section 5.1(a) or 5.3 (other than 5.3(c) and 5.3 (d)) shall not have then
been satisfied while all of the conditions set forth in Section 5.2 are then
satisfied.
(3) An "INTERIM SELLER FAILURE EVENT" shall be deemed to occur if at the
time of termination of this Agreement any condition imposed by Section 5.3
(other than 5.3(c) and 5.3 (d)) shall not have then been satisfied while all
of the conditions set forth in Section 5.2 are then satisfied.
(e) REDUCTION OF REINSTATEMENT PAYMENT. Notwithstanding anything to the
contrary contained in this Agreement, the Reinstatement Payment may be reduced
at Parent's option by any amount of principal outstanding and/or interest due or
accrued under the Promissory Note. To the extent of any such reduction, amounts
outstanding under the Promissory Note shall be correspondingly reduced.
6.3 AMENDMENT. Except as is otherwise required by applicable law after the
stockholders of Seller approve this Agreement, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
6.4 EXTENSION; WAIVER. At any time prior to the Closing, Parent and Buyer,
on the one hand, and Seller, on the other hand, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations of
the other party hereto, (ii) waive any inaccuracies in the representations and
warranties made to such party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
A-17
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
7.1 SURVIVAL AT CLOSING. The representations, warranties and agreements
set forth in this Agreement shall survive the Closing.
7.2 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
Moreover, each party's obligation under this Agreement is unique. If any party
should default in its obligations under this Agreement, the parties each
acknowledge that it would be extremely impracticable to measure the resulting
damages. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the U.S. or any
state having jurisdiction, this being in addition to any other remedy to which
they are entitled in law or in equity.
7.3 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Seller to:
Power Computing Corporation
2400 South IH-35
Round Rock, TX 78681
Attention: Chief Executive Officer
Facsimile No.: (512) 248-7429
Telephone No.: (512) 388-6868
with a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
Three Embarcadero Center
San Francisco, CA 94111-4067
Attention: Bartley C. Deamer, Esq.
Facsimile No.: (415) 393-2286
Telephone No.: (415) 393-2000
(b) if to Parent or Buyer, to:
Apple Computer, Inc.
One Infinite Loop
Cupertino, CA 95014
Attention: Chief Financial Officer
General Counsel
Facsimile No.: (408) 974-2023
Telephone No.: (408) 974-9700
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Larry W. Sonsini, Esq.
Marty Korman, Esq.
Facsimile No.: (650) 493-6811
Telephone No.: (650) 493-9300
A-18
<PAGE>
7.4 INTERPRETATION. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "INCLUDE,""INCLUDES" and "INCLUDING" when used
herein shall be deemed in each case to be followed by the words "WITHOUT
LIMITATION." The phrase "MADE AVAILABLE" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
7.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
7.6 ENTIRE AGREEMENT; NONASSIGNABILITY; PARTIES IN INTEREST. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits and the
Schedules, (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms; (b) are not intended to confer upon any
other person or entity (including without limitation any stockholder, affiliate
or creditor of Seller) any rights or remedies hereunder; and (c) shall not be
assigned by operation of law or otherwise except as otherwise specifically
provided, except that the rights and obligations of Seller may be transferred to
Seller's liquidating trust, provided that the liquidating trust assumes all of
Seller's obligations hereunder and under all related agreements, including
without limitation, the Indemnity Escrow Agreement.
7.7 SEVERABILITY. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
7.8 REMEDIES CUMULATIVE; ATTORNEYS' FEES. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive, of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. In the event of any
action arising out of this Agreement, a court may award (but shall not be
required to award) the prevailing party reimbursement of reasonable attorney's
fees.
7.9 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California regardless of the laws that
might otherwise govern under applicable principles of conflicts of law. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of any
court located within the State of California, in connection with any matter
based upon or arising out of this Agreement or the matters contemplated herein,
agrees that process may be served upon them in any manner authorized by the laws
of the State of California for such persons and waives and covenants not to
assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
7.10 RULES OF CONSTRUCTION. The parties agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
A-19
<PAGE>
IN WITNESS WHEREOF, Seller, Parent and Buyer have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized, all as of the date first written above.
<TABLE>
<S> <C>
APPLE COMPUTER, INC.
By: /s/ STEVEN P. JOBS
-------------------------------------
Name: Steven P. Jobs
----------------------------------
Title:
-----------------------------------
GRAVENSTEIN, INC.
By: /s/ STEVEN P. JOBS
-------------------------------------
Name: Steven P. Jobs
----------------------------------
Title:
-----------------------------------
POWER COMPUTING CORPORATION
By: /s/ STEPHEN S. KAHNG
-------------------------------------
Name: Stephen S. Kahng
----------------------------------
Title:
-----------------------------------
</TABLE>
*****ASSET PURCHASE AGREEMENT*****
A-20
<PAGE>
EXHIBIT B TO ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEMNIFICATION AND ESCROW AGREEMENT
AMONG
APPLE COMPUTER, INC.,
GRAVENSTEIN, INC.
POWER COMPUTING CORPORATION
AND
THE PERSONS LISTED ON SCHEDULE A HERETO
AUGUST 29, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I INDEMNIFICATION......................................................... 1
1.1 INDEMNIFICATION BY SELLER AND PRINCIPAL STOCKHOLDERS.................. 1
1.2 LIMITATION ON INDEMNIFICATION LIABILITY OF PRINCIPAL STOCKHOLDERS..... 2
1.3 JOINT AND SEVERAL LIABILITY........................................... 2
1.4 INDEMNIFICATION PROCEDURE............................................. 2
ARTICLE II ESCROW FUND............................................................ 3
2.1 ESCROW FUND........................................................... 3
2.2 ESCROW PERIOD......................................................... 4
2.3 CLAIMS UPON ESCROW FUND............................................... 4
2.4 OBJECTIONS TO CLAIMS.................................................. 4
2.5 RESOLUTION OF CONFLICTS; ARBITRATION.................................. 5
2.6 CERTAIN ADJUSTMENTS TO THE ESCROW FUND................................ 5
2.7 EXCULPATORY PROVISIONS; INDEMNIFICATION............................... 6
2.8 FEES.................................................................. 7
ARTICLE III ADDITIONAL AGREEMENTS OF SELLER AND THE PRINCIPAL STOCKHOLDERS........
8
3.1 LIQUIDATION AND DISSOLUTION OF SELLER................................. 8
3.2 TRANSFER AND ENCUMBRANCE.............................................. 8
3.3 RELEASE............................................................... 8
3.4 NO SHOP............................................................... 8
3.5 COVENANT NOT TO COMPETE............................................... 8
ARTICLE IV GENERAL PROVISIONS..................................................... 9
4.1 SPECIFIC PERFORMANCE.................................................. 9
4.2 NOTICES............................................................... 9
4.3 INTERPRETATION........................................................ 10
4.4 COUNTERPARTS.......................................................... 10
4.5 NONASSIGNABILITY...................................................... 10
4.6 SEVERABILITY.......................................................... 10
4.7 REMEDIES CUMULATIVE................................................... 10
4.8 GOVERNING LAW......................................................... 10
4.9 RULES OF CONSTRUCTION................................................. 10
</TABLE>
i
<PAGE>
INDEMNIFICATION AND ESCROW AGREEMENT
This INDEMNIFICATION AND ESCROW AGREEMENT (the "AGREEMENT") is made and
entered into as of August 29, 1997 among Apple Computer, Inc., a California
corporation ("PARENT"), Gravenstein, Inc., a Delaware corporation and
wholly-owned subsidiary of Parent ("BUYER"), Power Computing Corporation, a
Delaware corporation ("SELLER"), each of the persons listed on Schedule A
hereto, which persons are stockholders of the Seller (such persons being
hereinafter referred to collectively as the "PRINCIPAL STOCKHOLDERS" and
individually as a "PRINCIPAL STOCKHOLDER"), and [Escrow Agent] (the "ESCROW
AGENT") (as to the provisions of Article II hereof only). Capitalized terms used
herein without definition have their respective meanings specified in the Asset
Purchase Agreement dated as of the date hereof between Buyer and Seller (the
"ASSET PURCHASE AGREEMENT").
RECITALS
A. Buyer and Seller are entering into the Asset Purchase Agreement which
provides for the purchase by Buyer of the Transferred Assets from Seller.
B. Pursuant to the Asset Purchase Agreement, the Escrow Shares are to be
deposited into an escrow fund to be governed by the indemnification and escrow
provisions of this Agreement.
C. As a condition to Closing, the Asset Purchase Agreement contemplates,
among other things, that Parent, Buyer, Seller and the Principal Stockholders
will have entered into this Agreement concurrently with the Asset Purchase
Agreement.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein and in the Asset Purchase Agreement, intending to be legally bound
hereby and for other good and valuable consideration, the parties agree, if and
only if the Closing under the Asset Purchase Agreement occurs, as follows:
ARTICLE I
INDEMNIFICATION
1.1 INDEMNIFICATION BY SELLER AND PRINCIPAL STOCKHOLDERS. The Seller and
each of the Principal Stockholders (such persons being hereinafter referred to
collectively as the "INDEMNIFYING PARTIES" and individually as an "INDEMNIFYING
PARTY"), hereby covenant and agree, jointly and severally, to indemnify, defend
and hold harmless Parent and Buyer, and the directors, officers, agents,
representatives and affiliates of each of Parent and Buyer (such persons being
hereinafter referred to collectively as the "INDEMNIFIED PARTIES" and
individually as an "INDEMNIFIED PARTY"), from and against, and pay or reimburse
each of the Indemnified Parties for, any liabilities, obligations, losses,
claims, royalties, fines, deficiencies, damages, costs or expenses incurred
(whether absolute, accrued or otherwise and whether or not resulting from third
party claims), including any interest and penalties with respect thereto and
reasonable out-of-pocket expenses and reasonable attorneys' and accountants'
fees and expenses incurred in the investigation or defense of any of the same
(individually and collectively, "LOSSES") as a result of (i) any inaccuracy in
or breach of a representation or warranty of Seller contained in this Agreement,
the Asset Purchase Agreement, the Post-Closing Operating Agreement, the Omnibus
Amendment or any other Ancillary Agreement, (ii) any failure of Seller to
perform or comply with any agreement or covenant (including without limitation
any agreement or covenant to indemnify any Indemnified Party) contained in this
Agreement, the Asset Purchase Agreement, the Post-Closing Operating Agreement,
the Omnibus Amendment or any other Ancillary Agreement, (iii) any failure of
Seller to satisfy any liability or obligation of Seller that is not an Assumed
Liability, (iv) the non-collection of any Additional Assets when due (in which
case Losses shall be deemed to be at least the amount of any such uncollected
asset), (v) without limiting the generality of the foregoing, any liability or
obligation arising by operation of law which liability or obligation (a) is not
an Assumed Liability and (b) arises from Seller's acts or omissions prior to
Closing or
AB-1
<PAGE>
is inconsistent with Seller's representations and warranties in the Asset
Purchase Agreement, and (vi) any liability or obligation arising under any bulk
transfer law of any jurisdiction or under any common law doctrine of DE FACTO
merger or successor liability. The Indemnifying Parties shall have no obligation
to the Indemnified Parties for expenses incurred by such party in connection
with the negotiation of the Asset Purchase Agreement and the Exhibits thereto.
1.2 LIMITATION ON INDEMNIFICATION LIABILITY OF PRINCIPAL STOCKHOLDERS.
The obligation of any Principal Stockholder to indemnify an Indemnified
Party pursuant to this Agreement shall be limited to an amount equal to the
amount of any payment, dividend, distribution or other transfer subsequent to
the date hereof of Purchase Shares or other assets or property from Seller to
such Principal Stockholder or such Principal Stockholder's affiliates or
partners (whether or not such payment, dividend, distribution or other transfer
is made to such Principal Stockholder, affiliate or partner in his/its capacity
as a stockholder of Seller), PLUS, in the case of the Principal Stockholder
listed under Category II on Schedule A hereto, an amount equal to $5,000,000 in
excess of any such payment, dividend, distribution or other transfer.
1.3 JOINT AND SEVERAL LIABILITY. Each of the Principal Stockholders, as
between himself or herself and the other Principal Stockholders, shall be
jointly and severally liable for the performance of all of the obligations of
Seller under this Agreement, except as such liability shall be expressly limited
as set forth in Section 1.2, as if each of the Principal Stockholders had solely
undertaken Seller's obligations under the Agreement.
1.4 INDEMNIFICATION PROCEDURE. All claims for indemnification under this
Agreement (individually, a "CLAIM" and collectively, "CLAIMS") shall be asserted
and resolved as follows:
(a) In the event that any Claim for which an Indemnifying Party could be
liable to an Indemnified Party hereunder is asserted against an Indemnified
Party, the Indemnified Party shall notify the Indemnifying Party of such
Claim, specifying the nature of such Claim and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be used
as evidence with respect to, nor shall it be conclusive of, the final amount
of such Claim) (the "CLAIM NOTICE"). The Indemnifying Party shall have 30
days from the date of the Claim Notice (the "NOTICE PERIOD") to notify the
Indemnified Party whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with
respect to such Claim. If the Indemnifying Party does not notify the
Indemnified Party within 45 days from the date of such Claim Notice that the
Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. The
Indemnified Party shall have the right, at the cost and expense of the
Indemnifying Party, to defend any claim by a 3rd party for which
indemnification may be sought hereunder (a "3rd Party Claim") by appropriate
proceedings, which proceedings shall be diligently settled or prosecuted by
the Indemnified Party to a final conclusion; PROVIDED THAT the Indemnifying
Party shall have the right to approve of the selection of counsel for the
Indemnified Party, which approval shall not unreasonably be withheld, it
being understood and agreed that each Indemnifying Party hereby approves of
the selection of counsel for Buyer and Parent listed in Section 4.2 hereof
for such purpose; and PROVIDED FURTHER that, unless the Indemnifying Party
otherwise consents in writing, which consent shall not be unreasonably
withheld, any monetary settlement by the Indemnified Party shall not be
conclusive of the amount of any indemnification obligation hereunder. The
Indemnified Party shall be entitled to recover from the Indemnifying Party
the amount of any settlement effected in accordance with the immediately
preceding sentence or any judgment and, on an ongoing basis, all
indemnifiable costs and expenses of the Indemnified Party with respect
thereto, including interest from the date such costs and expenses were
incurred.
(b) The Indemnified Party's failure to give reasonably prompt notice to
the Indemnifying Party of any actual, threatened or possible claim or demand
that may give rise to a right of indemnification hereunder shall not relieve
the Indemnifying Party of any liability which the Indemnifying Party may
AB-2
<PAGE>
have to the Indemnified Party unless the failure to give such notice
materially and adversely prejudiced the Indemnifying Party.
(c) Notwithstanding the foregoing, the Indemnifying Party shall have the
right to defend and control the settlement of any 3rd Party Claim if each of
the following conditions are satisfied:
(i) the Indemnifying Party is the Seller.
(ii) the 3rd Party Claim seeks only monetary damages and does not
seek any injunction or other equitable relief against the Indemnified
Party;
(iii) the 3rd Party Claim does not involve a governmental agency or
entity, whether foreign or domestic, federal, state or local, except that
if Seller would not be prejudiced or adversely affected during the
pendency of such 3rd Party Claim, this condition need not be satisfied;
(iv) the Indemnifying Party unconditionally acknowledges in writing,
in a notice of election to contest or defend the 3rd Party Claim given to
the Indemnified Party within ten (10) days after the Indemnifying Party
first receives notice of the 3rd Party Claim, that the Indemnifying Party
is obligated to indemnify the Indemnified Party in full with respect to
the 3rd Party Claim.
(v) the Indemnifying Party is not then in default with respect to
any of its other obligations under this Agreement or the Post-Closing
Operating Agreement;
(vi) the counsel chosen by the Indemnifying Party is reasonably
acceptable to the Indemnified Party;
(vii) the Indemnifying Party provides evidence reasonably
satisfactory to the Indemnified Party that the Indemnifying Party has
assets net of its liabilities (contingent or other) that would be, as far
as could then be reasonably foreseen, reasonably sufficient to satisfy
all liabilities and obligations (contingent or other) of Seller,
including without limitation the indemnity obligations of Seller
contained herein; and
(viii) Parent and Buyer are permitted upon request to participate in
the defense, settlement and proceedings related to the 3rd Party Claim at
their own expense.
ARTICLE II
ESCROW FUND
2.1 ESCROW FUND.
(a) As partial security for the indemnification provided for in Article
I hereof, and as security for the collection of the Additional Assets, on
the Closing Date, Seller will be deemed to have received and deposited with
the Escrow Agent the Escrow Shares (plus any additional shares as may be
issued upon any stock split, stock dividend or recapitalization effected by
Parent after the Closing Date) without any act of Seller. As soon as
practicable after the Closing Date, but in any event within five (5)
business days thereafter, the Escrow Shares, without any act of any Seller,
shall be registered in the name of, and be deposited with the Escrow Agent,
such deposit to constitute an escrow fund (the "ESCROW FUND") and to be
governed by the terms set forth herein.
(b) The Escrow Fund shall be available to compensate Parent, Buyer and
their respective directors, officers and affiliates for any Losses
contemplated by Section 1.1 hereof; PROVIDED that (i) Parent and Buyer may
seek any available remedy to enforce the indemnity obligations of Seller set
forth in Article I hereof and resort to the Escrow Fund shall be only one
such remedy and (ii) the Additional Asset Escrow Shares shall be used as
security for the collection of the Additional Assets and shall not be held
in escrow to secure indemnification for other Losses or Claims hereunder.
AB-3
<PAGE>
(c) The Escrow Agent shall, upon written instructions from the Seller,
sell any Escrow Shares and hold the proceeds from such sale in escrow on the
same terms and conditions as the Escrow Shares hereunder.
2.2 ESCROW PERIOD. The period of time during which the Escrow Fund shall
be in existence (the period during which any Escrow Shares are actually held in
escrow being herein referred to as the "ESCROW PERIOD") shall commence
immediately following the Closing Date and shall terminate in accordance with
the provisions set forth below:
(i) with respect to the Primary Escrow Shares, $3.0 million of Primary
Escrow Shares shall be released from the Escrow Fund and delivered to Seller
on the last day of each of the third, sixth and ninth month following the
Closing Date, and the remaining Primary Escrow Shares shall be released from
the Escrow Fund and delivered to Seller on the date that is one (1) year
after the Closing Date; and
(ii) with respect to the Additional Asset Escrow Shares, an amount of
Additional Asset Escrow Shares equal to the amount of Additional Assets
actually collected by Parent shall be released from the Additional Asset
Escrow Fund and delivered to Seller on the seventh business day of the month
following the month in which Parent actually collects such Additional
Assets;
PROVIDED, HOWEVER, that a portion of the Escrow Shares, which, in the reasonable
judgment of Parent, subject to the objection of Seller and the subsequent
arbitration of the matter in the manner provided in Section 2.5 hereof, are
necessary to satisfy any unsatisfied claims specified in any Officer's
Certificate thereto-fore delivered to the Escrow Agent prior to termination of
the Escrow Period shall remain in the Escrow Fund until such claims have been
resolved. As soon as all such claims have been resolved, the Escrow Agent shall
deliver to Seller the portion of the Escrow Fund then due to be released and not
required to satisfy such claims. For the purpose of determining the number of
Escrow Shares to be released from the Escrow Fund as contemplated in this
Section 2.2, the Escrow Shares held in the Escrow Fund shall be valued at the
Average Price.
2.3 CLAIMS UPON ESCROW FUND.
(a) Upon receipt by Escrow Agent on or before the last day of the Escrow
Period of a certificate signed by any officer of Parent or Buyer (an "Officer's
Certificate") specifying in reasonable detail any Losses incurred or reasonably
likely to be incurred by Parent or Buyer, or any 3rd Party Claims made against
Parent or Buyer, as to which indemnification is or would reasonably be likely to
be available pursuant to the terms of this Agreement, the Escrow Agent shall, if
no objection shall have been made in the time period and manner set forth in
Section 2.4 hereof, deliver to Parent or Buyer, as the case may be, out of the
Escrow Fund, Escrow Shares or other property held in the Escrow Fund having a
value equal to such Losses.
(b) For the purpose of compensating Parent or Buyer, as the case may be, for
its Losses pursuant to this Agreement, the Escrow Shares held in the Escrow Fund
shall be valued at the Average Price; PROVIDED that if any Escrow Shares have
been converted to cash, the Escrow Agent shall deliver cash to the Parent or
Buyer in an amount equal to such Losses.
2.4 OBJECTIONS TO CLAIMS.
(a) At the time of sending of any Officer's Certificate to the Escrow Agent,
a duplicate copy of such Officer's Certificate shall be sent to Seller, and, for
a period of thirty (30) days after the date of such Officer's Certificate, the
Escrow Agent shall make no delivery of Escrow Shares or other property pursuant
to Section 2.3 hereof unless the Escrow Agent shall have received written
authorization from Seller to make such delivery. After the expiration of such
thirty (30) day period, the Escrow Agent shall make delivery of the Escrow
Shares or other property in the Escrow Fund in accordance with Section 2.3
hereof, provided that no such payment or delivery may be made if Seller shall
object in a written statement
AB-4
<PAGE>
to the claim made in the Officer's Certificate, and such statement shall have
been delivered to the Escrow Agent and to Parent and Buyer prior to the
expiration of such thirty (30) day period.
(b) Notwithstanding the foregoing, upon written request to the Escrow Agent,
Parent and Buyer, at their sole discretion, shall be entitled to immediate
delivery of Additional Asset Escrow Shares from the Escrow Fund in an amount
equal to any Additional Assets that the Parent or Buyer have undertaken
reasonable efforts to collect for a period of 90 days from the Closing Date, but
which Parent and Buyer shall have been unable to collect in full ("Uncollected
Additional Assets"). Upon receipt of any Additional Asset Escrow Shares for any
Uncollected Additional Assets, Parent or Buyer, as the case may be, shall assign
its rights to such Uncollected Additional Assets to Seller. In the event and to
the extent Parent or Buyer subsequently collects any such Additional Assets,
Buyer shall transfer to Seller shares of Parent Common Stock having a value
(based on the Average Price) equal to such subsequently collected Additional
Assets.
2.5 RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case Seller shall object in writing to any claim or claims by Parent
or Buyer made in any Officer's Certificate, Parent or Buyer, as the case may be,
shall have thirty (30) days to respond in a written statement to the objection
of Seller. If after such thirty (30) day period there remains a dispute as to
any claims, Seller, Parent and Buyer shall attempt in good faith for thirty (30)
days to agree upon the rights of the respective parties with respect to each of
such claims. If Seller, Parent and Buyer should so agree, a memorandum setting
forth such agreement shall be prepared and signed by all parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any
such memorandum and shall distribute the Escrow Shares or other property from
the Escrow Fund in accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation, either
Parent and Buyer or Seller may, by written notice to the other, demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or all parties agree to arbitration;
and in either such event the matter shall be settled by arbitration. The parties
shall undertake reasonable efforts to mutually agree upon a single arbitrator.
If the parties are unable to mutually agree upon a single arbitrator within ten
(10) days after such written notice, the arbitration shall be conducted by three
arbitrators, and within five (5) additional days following the expiration of the
initial ten (10) day period, Parent and Buyer on the one hand and Seller on the
other shall each select one arbitrator, and thereafter the two arbitrators so
selected shall select a third arbitrator. The parties shall undertake reasonable
efforts to ensure that the arbitration is concluded within ninety (90) days
following the selection of the arbitrator or arbitrators, as the case may be.
The decision of the single arbitrator (in the event a single arbitrator has been
appointed by mutual agreement), or the decision of a majority of the arbitrators
(in the event three arbitrators have been appointed) as to the validity and
amount of any claim in such Officer's Certificate shall be binding and
conclusive upon the parties to this Agreement, and notwithstanding anything in
Section 2.4 hereof, the Escrow Agent shall be entitled to act in accordance with
such decision and make or withhold payments out of the Escrow Fund in accordance
therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Santa Clara
County, California under the commercial rules then in effect of the American
Arbitration Association. The non-prevailing party to an arbitration shall pay
its own expenses, the fees of each arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including without
limitation, attorneys' fees and costs, incurred by the other party to the
arbitration.
AB-5
<PAGE>
2.6 CERTAIN ADJUSTMENTS TO THE ESCROW FUND.
(a) Any Escrow Shares or other equity securities issued or distributed
(including shares issued upon a stock split) ("NEW SHARES") in respect of Escrow
Shares in the Escrow Fund which have not been released from the Escrow Fund
shall be added to the Escrow Fund and become a part thereof. New Shares issued
in respect of Escrow Shares which have been released from the Escrow Fund shall
not be added to the Escrow Fund but shall be distributed to the recordholders
thereof. Cash dividends on Escrow Shares shall not be added to the Escrow Fund
but shall be distributed to the recordholders thereof.
(b) Seller shall have voting rights with respect to the Escrow Shares
contributed to the Escrow Fund by Seller (and on any voting securities added
to the Escrow Fund in respect of such Escrow Shares).
2.7 EXCULPATORY PROVISIONS; INDEMNIFICATION.
(a) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein, and as set forth in any additional
written escrow instructions which the Escrow Agent may receive after the date of
this Agreement which are signed by an officer of Parent and Buyer and approved
by the Escrow Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(b) The Escrow Agent is hereby expressly authorized to comply with and obey
orders, judgments or decrees of any court. In case the Escrow Agent obeys or
complies with any such order, judgment or decree of any court, the Escrow Agent
shall not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
(c) The Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents or papers
deposited or called for hereunder.
(d) The Escrow Agent shall not be liable for the expiration of any rights
under any statute of limitations with respect to this Agreement or any documents
deposited with the Escrow Agent.
(e) In performing any duties under the Agreement, the Escrow Agent shall not
be liable to any party for damages, losses, or expenses, except for negligence
or willful misconduct on the part of the Escrow Agent. The Escrow Agent shall
not incur any such liability for (i) any act or failure to act made or omitted
in good faith, or (ii) any action taken or omitted in reliance upon any
instrument, including any written statement or affidavit provided for in this
Agreement that the Escrow Agent shall in good faith believe to be genuine, nor
will the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected in any
act taken, suffered, or permitted by him/her in good faith in accordance with
the advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(f) If any controversy arises between the parties to this Agreement, or with
any other party, concerning the subject matter of this Agreement, its terms or
conditions, the Escrow Agent will not be required to determine the controversy
or to take any action regarding it. The Escrow Agent may hold all documents and
shares of Parent Common Stock and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent
AB-6
<PAGE>
may be required, despite what may be set forth elsewhere in this Agreement. In
such event, the Escrow Agent will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all documents and shares of Parent Common Stock held in escrow, except
all cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(g) The parties and their respective successors and assigns agree jointly
and severally to indemnify and hold Escrow Agent harmless against any and all
losses, claims, damages, liabilities, and expenses, including reasonable costs
of investigation, counsel fees, and disbursements that may be imposed on Escrow
Agent or incurred by Escrow Agent in connection with the performance of his/her
duties under this Agreement, including but not limited to any litigation arising
from this Agreement or involving its subject matter.
(h) The Escrow Agent may resign at any time upon giving at least thirty (30)
days written notice to the parties; provided, however, that no such resignation
shall become effective until the appointment of a successor escrow agent which
shall be accomplished as follows: the parties shall use their best efforts to
mutually agree on a successor escrow agent within thirty (30) days after
receiving such notice. If the parties fail to agree upon a successor escrow
agent within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of California. The
successor escrow agent shall execute and deliver an instrument accepting such
appointment and it shall, without further acts, be vested with all the estates,
properties, rights, powers, and duties of the predecessor escrow agent as if
originally named as escrow agent. The Escrow Agent shall be discharged from any
further duties and liability under this Agreement.
(i) Each of the parties hereto acknowledges and agrees that Escrow Agent (A)
shall not be responsible for any of the agreements referred to herein but shall
be obligated only for the performance of such duties as are specifically set
forth in this Escrow Agreement; (B) shall not be obligated to take any legal or
other action hereunder which might in its judgment involve any expense or
liability unless it shall have been furnished with acceptable indemnification;
(C) may rely on and shall be protected in acting or refraining from acting upon
any written notice, instruction, instrument, statement, request or document
furnished to it hereunder and reasonably believed by it to be genuine and to
have been signed or presented by the proper person, and shall have no
responsibility for determining the accuracy thereof, and (D) may consult counsel
satisfactory to it, including in-house counsel, and the opinion of such counsel
shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in accordance with
the opinion of such counsel.
(j) Seller agrees to assume any and all obligations imposed now or hereafter
by any applicable tax law with respect to the payment of the Escrow Fund under
this Agreement, and to indemnify and hold Escrow Agent harmless from and against
any taxes, additions for late payment, interest, penalties and other expenses
that may be assessed against Escrow Agent, or any such payment or other
activities under this Agreement. Seller undertakes to instruct the Escrow Agent
in writing with respect to the Parent's responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting in connection this Agreement. Seller agrees to indemnify
and hold the each of Parent and Escrow Agent harmless from any liability on
account of taxes, assessments or other governmental charges, including without
limitation the withholding or deduction or the failure to withhold or deduct
same, and any liability for failure to obtain proper certifications or to
properly report to governmental authorities, to which Parent or Escrow Agent may
be or become subject in connection with or which arises out of this Agreement,
including costs and expenses (including reasonable legal fees), interest and
AB-7
<PAGE>
penalties. Notwithstanding the foregoing, no distributions will be made from the
Escrow Fund unless each of Parent and Escrow Agent is supplied with an original,
signed W-9 form or its equivalent prior to distribution.
2.8 FEES.
All fees of the Escrow Agent for performance of its duties hereunder shall
be paid by Seller. It is understood that the fees and usual charges agreed upon
for services of the Escrow Agent shall be considered compensation for ordinary
services as contemplated by this Agreement. In the event that the conditions of
this Agreement are not promptly fulfilled, or if the Escrow Agent renders any
service not provided for in this Agreement, or if the parties request a
substantial modification of its terms. If any controversy arises, or if the
Escrow Agent is made a party to, or intervenes in, any litigation pertaining to
this escrow or its subject matter, the Escrow Agent shall be reasonably
compensated by the non-prevailing party for such extraordinary services and
reimbursed for all costs, attorney's fees, and expenses occasioned by such
default, delay, controversy or litigation.
ARTICLE III
ADDITIONAL AGREEMENTS OF SELLER AND THE PRINCIPAL STOCKHOLDERS
3.1 LIQUIDATION AND DISSOLUTION OF SELLER.
(a) Seller agrees that, prior to distributing any of the Purchase Shares or
other assets or property of Seller to the stockholders of Seller (in their
capacity as stockholders of Seller or otherwise) or any of their respective
affiliates or partners, it will notify Parent and Buyer of such intended
distribution. Seller further agrees that it will not make any such distribution
to which Parent or Buyer reasonably objects in writing within thirty (30) days
following receipt of such notice on the grounds that the assets of the Seller or
the Seller's liquidating trust net of its liabilities (contingent or other)
after such distribution would not be, as far as could then be reasonably
foreseen, reasonably sufficient to satisfy all obligations of Seller (contingent
or other), including without limitation the indemnity obligations set forth
herein. In case Parent or Buyer shall so object in writing to any such
distribution, Seller shall have thirty (30) days to respond in a written
statement to the objection of Parent or Buyer, as the case may be. If after such
thirty (30) day period there remains a dispute as to the distribution, Seller,
Parent and Buyer shall attempt in good faith for thirty (30) days to agree upon
the rights of the respective parties with respect to the distribution. If no
agreement can be reached after good faith negotiation, the parties hereto agree
that the matters in dispute shall be resolved in the manner described in Section
2.5 of this Agreement.
(b) Seller agrees that upon effecting a dissolution it will create for the
benefit of creditors of Seller (including the Indemnified Parties) a trust with
assets of not less than an amount satisfactory to satisfy all claims and
potential claims against it from creditors, Indemnified Parties or otherwise.
Such trust will expressly assume the undertakings, obligations and limitations
of Seller set forth in this Agreement.
3.2 TRANSFER AND ENCUMBRANCE. No transfer, sale, distribution, exchange,
pledge, or disposition of any Seller Common Stock shall be effective unless the
transferee is bound by this Agreement under the same obligations, terms, and
conditions that bind the Principal Stockholder who undertakes such transfer,
sale, distribution, exchange, pledge, or disposition.
3.3 RELEASE. Each of the Principal Stockholders hereby acknowledges and
agrees to the terms of the release of claims set forth in the Seller Release
dated the date hereof between Parent and Seller attached as Exhibit C-1 to the
Asset Purchase Agreement.
3.4 NO SHOP. Each of the Principal Stockholders hereby acknowledges and
agrees to be bound by the terms of Section 4.2 of the Asset Purchase Agreement.
3.5 COVENANT NOT TO COMPETE. Each Principal Stockholder listed under
Category II on Schedule A hereto hereby acknowledges and agrees to be bound by
the terms of Section 4.15 of the Asset Purchase
AB-8
<PAGE>
Agreement and each Principal Stockholder listed under Category I on Schedule A
hereto hereby acknowledges and agrees to be bound by the terms of Sections
4.15(a), (c), (d) and (e) of the Asset Purchase Agreement, in each case as
though such Principal Stockholder were a Non-Competing Party.
ARTICLE IV
GENERAL PROVISIONS
4.1 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
Moreover, each party's obligation under this Agreement is unique. If any party
should default in its obligations under this Agreement, the parties each
acknowledge that it would be impracticable to measure the resulting damages. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the U.S. or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled in law or in equity.
4.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Parent or Buyer, to:
Apple Computer, Inc.
One Infinite Loop
Cupertino, CA 95014
Attention: Chief Financial Officer
General Counsel
Facsimile No.: (408) 974-2023
Telephone No.: (408) 974-9700
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Larry W. Sonsini, Esq.
Marty Korman, Esq.
Facsimile No.: (650) 493-6811
Telephone No.: (650) 493-9300
(b) if to Seller to:
Power Computing Corporation
2400 South IH-35
Round Rock, TX 78681
Attention: Chief Executive Officer
Facsimile No.: (512)
Telephone No.: (512) 388-6868
AB-9
<PAGE>
with a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
Three Embarcadero Center
San Francisco, CA 94111-4067
Attention: Bartley C. Deamer, Esq.
Facsimile No.: (415) 393-2286
Telephone No.: (415) 393-2000
(c) if to Principal Stockholder, to the address of such Principal
Stockholder set forth on Schedule A hereto.
4.3 INTERPRETATION. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
4.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
4.5 NONASSIGNABILITY. This Agreement shall not be assigned by Seller by
operation of law or otherwise except as otherwise specifically provided.
4.6 SEVERABILITY. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect, and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
4.7 REMEDIES CUMULATIVE. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive, of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not preclude
the exercise of any other remedy.
4.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California regardless of the laws that
might otherwise govern under applicable principles of conflicts of law. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of any
court located within the State of California, in connection with any matter
based upon or arising out of this Agreement or the matters contemplated herein,
agrees that process may be served upon them in any manner authorized by the laws
of the State of California for such persons, and waives and covenants not to
assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
4.9 RULES OF CONSTRUCTION. The parties agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
------------------------
AB-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered, all as of the date first written above.
ESCROW AGENT POWER COMPUTING CORPORATION
By:
------------------------------------ By: /s/ STEPHEN S. KAHNG
------------------------------------
Name:
--------------------------------- Name: Stephen S. Kahng
---------------------------------
Title: Title:
- -------------------------------------- --------------------------------------
APPLE COMPUTER, INC. 4C VENTURES, L.P.
By: /s/ STEVEN P. JOBS By: 4C Associates, L.P.,
------------------------------------ its General Partners
Name: Steven P. Jobs
---------------------------------
By: 4C Associates, Inc.,
Title: its General Partners
- --------------------------------------
By: /s/ ALEXANDRA GIURGIU
-----------------------------
Managing Director
/S/ STEPHEN S. KAHNG
GRAVENSTEIN, INC. ---------------------------------------
STEPHEN S. KAHNG
By: /s/ STEVEN P. JOBS
------------------------------------
Name: Steven P. Jobs
---------------------------------
Title:
- ---------------------------------
**INDEMNIFICATION AND ESCROW AGREEMENT**
AB-11
<PAGE>
SCHEDULE A
CATEGORY I
4C Ventures, L.P.
Queensgate Bank & Trust Ltd.
Ugland House
South Church Street
P.O. Box 30464 SMB
Georgetown, Grand Cayman
Cayman Islands, B.W.I.
CATEGORY II
Stephen S. Kahng
2400 South IH 35
Round Rock, Texas 78681
AB-12
<PAGE>
ANNEX B
POWER COMPUTING CORPORATION
LIQUIDATING TRUST
THIS AGREEMENT AND DECLARATION OF TRUST made and entered into this day of
, 1997, by and between POWER COMPUTING CORPORATION, a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
and and , directors of the Company as Trustees, has reference to
the following facts:
At a special meeting of the shareholders of the Company on , 1997,
the shareholders of the Company adopted and approved a Plan of Liquidation and
Dissolution (the "Plan"). Paragraph 3 of the Plan authorizes the Company's Board
of Directors (i) to create this liquidating trust to facilitate the complete
liquidation of the Company by providing a repository to which all of its assets
might be transferred and assigned for the respective use and benefit of the
"Shareholders" as defined herein, and (ii) to designate one or more of the
Directors as Trustees, and the remaining Directors as the members of the
Advisory Committee provided for herein.
The Company's Board of Directors authorized the execution and delivery of
this Trust Agreement by resolutions adopted , 1997.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in order to declare the terms and provisions upon and subject to which the
Trustees are to receive, hold, administer and dispose of the assets, properties,
property rights and agreements now or hereafter granted and conveyed to them,
the Company has granted, assigned, transferred and conveyed and hereby does
grant, assign, transfer and convey unto the Trustees, and their successor or
successors in trust for the benefit of "Shareholders" as defined herein all of
the right, title, benefit and interest of the Company in and to the assets and
properties set forth in the list attached as Exhibit A to this Trust Agreement
and made a part hereof, subject, however, to all liabilities, debts and
obligations of the Company, absolute, contingent, known or unknown.
TO HAVE AND TO HOLD the aforesaid assets, properties, claims and rights,
together with all rights, benefits, covenants and agreements appertaining or
appurtenant thereto, unto the Trustees upon and subject to the terms and
provisions as follows:
ARTICLE 1
NAME AND DEFINITIONS
1.1 The trust created by this Trust Agreement shall be known as the Power
Computing Corporation Liquidating Trust (the "Trust").
1.2 For purposes of the Trust, unless the context otherwise requires:
a. "Trust Agreement" shall mean this instrument, as originally executed
by the parties hereto, or as amended from time to time in the manner
provided in Article 2 herein.
b. "Common Stock" or "Shares of Common Stock" shall mean the common
stock of the Company, $0.01 par value, issued and outstanding as of 5:00
p.m. Austin, Texas time, on , 1997 (the "Trust Record Date").
c. "Preferred Stock" or "Shares of Preferred Stock" shall mean the
convertible preferred stock of the Company, either Series A or Series B or
both, $0.01 par value, issued and outstanding as of 5:00 p.m. Austin, Texas
time, on the Trust Record Date.
B-1
<PAGE>
d. "Shareholders" shall mean those shareholders of the Company listed
in Exhibit B to this Agreement, being all of the shareholders of record of
Common Stock or Preferred Stock as of 5:00 p.m., Austin, Texas time, on the
Trust Record Date, and any permitted transferees.
e. "Trust Estate" shall mean the aggregate of the assets, properties,
claims and rights hereinabove described or referred to, and hereby or
hereafter transferred, assigned and conveyed unto the Trustees, together
with all property rights and agreements, and all other rights, benefits or
privileges, otherwise appertaining or appurtenant thereto and the Trust
Receipts (as defined in Section 1.2(g) below).
f. "Trust Liabilities" shall mean all expenses of the Trust, including
taxes; all of the Company's unpaid or undischarged liabilities, debts and
obligations, whether known or unknown, absolute or contingent, including the
Company's obligations to indemnify, defend or hold harmless Directors,
officers and other agents of the Company, the Trust's obligation to
indemnify, defend or hold harmless Trustees, members of the Advisory
Committee, or other agents of the Trust, and in each case to pay their
expenses, including attorneys' fees and costs.
g. "Trust Receipts" shall mean all rents, royalties, income, proceeds,
and other receipts of or from the Trust Estate, including, without
limitation, payments received on notes, dividends received on stock,
interest on any moneys or securities, or proceeds from the sale of any
property or assets held by the Trustees as part of the Trust Estate pursuant
to this Trust Agreement.
h. "Trustees" shall mean the Trustees originally constituted hereunder
or their successor or successors appointed pursuant to Article 9 herein.
ARTICLE 2
PURPOSE AND LIMITATIONS OF THE TRUST AND THE TRUST AGREEMENT
2.1 The Trust has been organized for the purpose of liquidating and
distributing the Trust Estate in an expeditious and efficient manner and its
activities shall be limited to those reasonably necessary to, and consistent
with, the accomplishment of such purpose. The Trust shall not be an organization
having as its purpose the carrying on of the business for which the Company was
organized. The Trust Agreement shall not create, or be interpreted to create, an
association, partnership, joint venture or any other profit-making business.
Consistent therewith, the Trust is intended to (i) serve as a repository for
assignment of all of the assets, properties, claims and rights of the Company
which are not reasonably susceptible of distribution among the Shareholders;
(ii) provide for the sale or other disposition of the assets comprising the
Trust Estate which are not to be distributed in kind by the Trustees to the
Shareholders; (iii) provide for the payment of Trust Liabilities; (iv) provide
for such action as may be necessary or expedient to prosecute or collect any
claim or contingent right comprising a part of the Trust Estate; (v) provide for
the distribution to the Shareholders of their respective interests in all
distributable property comprising the Trust Estate; and (vi) hold a portion of
the property comprising the Trust Estate for the benefit of the Shareholders of
the Company who may not be located (if any) or who shall otherwise fail to
surrender their certificates of Common Stock (if any) to the Company, pending
appropriate transfer to the official then authorized by the applicable state to
receive unclaimed property.
2.2 In no event shall any part of the Trust Estate revert or be distributed
to the Company or to any shareholder of the Company, as such, other than a
Shareholder entitled thereto under the terms of this Trust. Any unclaimed part
of the Trust Estate shall be subject to disposition in accordance with
applicable laws.
2.3 The Trustees shall take only such action as may be reasonably necessary
to continue operations of the assets and properties constituting the Trust
Estate for the purpose of its preservation pending sale or other disposition or
distribution to the Shareholders, and in no event shall the Trustees otherwise
have power or authority to enter into or carry on any business in respect of the
Trust Estate.
B-2
<PAGE>
2.4 No part of the Trust Estate or the Trust Receipts shall be used or
disposed of by the Trustees for any purpose other than (i) the purposes for
which this Trust was created as set forth in Section 2.1 hereof, including
without limitation, the payment of, and the creation of reserves for the payment
of, Trust Liabilities; and (ii) the distribution of the Trust Estate and Trust
Receipts to the Shareholders in accordance with the terms of this Trust. Except
as may be necessary to operate, preserve or protect the Trust Estate pending
sale or other disposition or distribution thereof, the Trustees shall not invest
any moneys forming a part of the Trust Estate, except in demand and time
deposits in banks or savings institutions, or in temporary investments such as
short-term certificates of deposit or Treasury bills, or in such other
investments as may be allowed by statute, or by the rules and regulations of the
Internal Revenue Service.
ARTICLE 3
TRANSFER TO TRUSTEES
3.1 The Trustees agree to accept the Trust and the property and assets
constituting the Trust Estate, subject to the liabilities, debts and obligations
of the Company, contingent, known or unknown. The Trustees, however, shall be
responsible only for the property delivered to them registered in their name and
shall have no duty to make, nor incur any liability for failing to make, any
search for unknown property. The Trustees shall be responsible for only those
liabilities of which they are informed, and shall have no duty to make, nor
incur any liability for failing to make, any search for unknown liabilities. The
Trustees shall hold the Trust Estate without provision for or the payment of any
interest thereon to any Shareholder, except that interest earned on any assets
of the Trust (specifically including any assets held for distribution to
specific Shareholders) shall become a part of the Trust Estate and shall be
distributed accordingly.
3.2 The Company and such persons as shall have the right, authority, and
power to do so after the dissolution of the Company shall, upon reasonable
request of the Trustees, execute, acknowledge, and deliver such further
instruments and documents, and do such further acts as may be reasonably
necessary or proper to effectively carry out the purposes of this Trust
Agreement, to transfer any property intended to be conveyed hereunder, and to
vest in the Trustees or their successor or successors, the property, powers,
instruments, or funds in trust hereunder.
3.3 If any claim is asserted against the Trustees as recipient of the
property transferred to the Trustees hereunder, on account of any claimed
liability of or through the Company, the Trustees may use such part of the Trust
Estate as may be reasonable for contesting any such liability and in payment
thereof, including reasonable attorneys' fees incurred in connection therewith.
ARTICLE 4
ESTABLISHMENT OF THE TRUST ESTATE AND THE
PAYMENT OF LIABILITIES AND EXPENSES
4.1 Subject to Section 3.1, all property and assets of the Company
comprising the Trust Estate shall be collected by the Trustees and held as a
part of the Trust Estate pursuant to this Trust Agreement.
4.2 The Trustees shall pay from the Trust Estate, or otherwise discharge or
provide for, all expenses, charges, liabilities, and obligations of the Trust,
and of the Company, including without limitation, interest, taxes, assessments,
judgments, insurance costs, charges of every kind, and the costs, charges, and
expenses incurred in connection with or arising out of the indemnification
provided to the members of the Board of Directors and officers of the Company
pursuant to the provisions of Section 7.2(b) herein and the execution or
administration of this Trust, and such other payments and disbursements as are
provided for in this Trust Agreement or which the Trustees, in their sole
discretion, determine to be a proper charge against the Trust Estate. The
Trustees may, in their sole discretion, make provisions by reserve or otherwise
B-3
<PAGE>
out of the Trust Estate, for such amount as the Trustees may determine to be
necessary to meet Trust Liabilities. All Trust Liabilities shall be paid in full
and any such provision for payment shall be made in full if there are sufficient
assets in the Trust Estate. If there are insufficient assets in the Trust
Estate, such Trust Liabilities shall be paid or provided for according to their
priority, and among Trust Liabilities of equal priority, ratably to the extent
of assets in the Trust Estate legally available therefor.
ARTICLE 5
DISTRIBUTION TO SHAREHOLDERS
5.1 Each Shareholder shall surrender his certificates for Common Stock and
Preferred Stock of the Company to the Trustees for the purpose of receiving in
exchange therefor his proportionate share of the Trust Estate. Each Shareholder
of Preferred Stock wishing to convert all or any portion of such Preferred Stock
into Common Stock shall deliver with the certificate for such Preferred Stock a
written election to convert such Preferred Stock into Common Stock, and in the
absence of any such written election such Shareholder shall be presumed not to
have elected to convert such Preferred Stock into Common Stock.
5.2 After presentation and surrender to the Trustees of the certificates
for Common Stock and Preferred Stock, the Trustees may from time to time, in
their sole discretion, distribute and pay, or cause to be distributed and paid,
to the Shareholders on a date set by the Trustees, but not less than once per
year, all or part of the Trust Receipts as of the close of business on such date
that remain after payment of, or provision for, Trust Liabilities and after the
withholding of the taxes or charges, if any, as provided herein. Such
distributions may be in cash or in kind or both and shall be made in proportion
to the respective interests of the Shareholders in the Trust, giving effect to
the liquidation preferences of Preferred Stock as specified in the Company's
Amended and Restated Certificate of Incorporation. Distributions in kind of
Apple Computer, Inc. common stock may be made in a manner so that Shareholders
receive cash in lieu of fractional shares. In determining whether to make, or
the amount of, any distribution, the Trustees may rely upon the advice and
opinion of counsel and of independent certified public accountants and other
advisors, as they deem appropriate.
5.3 In the event the Trustees, pursuant to the powers granted them herein,
shall sell all or part of the assets or property comprising the Trust Estate,
the Trustees shall in their absolute discretion and in the manner determined by
them distribute from time to time to the Shareholders on the date fixed by the
Trustees for distribution, pro rata, the net proceeds of such sale according to
the respective interests of the Shareholders in the Trust on said date, giving
effect to the liquidation preferences of Preferred Stock as specified in the
Company's Amended and Restated Certificate of Incorporation. Such distributions
shall be made at least annually, as provided in Section 5.2. The term "net
proceeds" as used in this Section means the proceeds of such sale, whether in
cash or other property, less (i) expenses of the sale, (ii) such amounts as may
be necessary to discharge or provide for Trust Liabilities, and (iii) such other
amounts as the Trustees in their absolute discretion deem reasonable to retain.
Sales and redemptions of securities and other investment instruments held in the
Trust Estate, in the ordinary course of administering the Trust Estate, shall
not be considered sales for the purpose of this Section 5.3.
5.4 In the event of the termination of the Trust pursuant to Article 6
herein, the Trustees shall use their best efforts to convert the Trust Estate
into cash or other readily distributable property promptly. Thereafter, the
Trustees shall distribute the net proceeds to the Shareholders pro rata
according to their respective interests in the Trust, giving effect to the
liquidation preferences of Preferred Stock as specified in the Company's Amended
and Restated Certificate of Incorporation, on the date fixed by the Trustees for
distribution of such net proceeds. As used in this Section, the term "net
proceeds" means the total cash or other property received by the Trustees upon
conversion of the Trust Estate to cash or other property less amounts necessary
to discharge or provide for Trust Liabilities. If the Trustees are unable to, or
determine, in their sole discretion, that it is not in the best interest of the
Shareholders to convert part or
B-4
<PAGE>
all of the Trust Estate into cash or other readily distributable property, the
Trustees may effect the distributions in kind.
5.5 All distributions hereunder shall be made to the Shareholders as of the
close of business on the date fixed by the Trustees for such distribution at the
address for each such Shareholder shown in the records maintained by the
Trustees.
5.6 If any Shareholder shall fail to surrender his certificates for Common
Stock or Preferred Stock of the Company in accordance with the terms and
provisions hereof, the Trustees shall, subject to the provisions of Section 5.8
hereof, hold (without the payment of interest) the share or portion of the Trust
Estate to which such Shareholder shall be entitled until such time as his
certificates for Common Stock or Preferred Stock are so surrendered; provided,
however, in the case of the alleged loss, theft, or destruction of any
certificate for shares of Common Stock or Preferred Stock, no distribution shall
be made with respect thereto, unless and until the Trustees have been furnished
with an appropriate indemnity bond issued by such surety, or such other
security, in the form and amount as shall be satisfactory to the Trustees, and
as they shall deem appropriate to indemnify them fully.
5.7 If any conflicting claims or demands are made or asserted as to any
shares of Common Stock or Preferred Stock, or as to any interest of any
Shareholder herein, of if there should be any disagreement between the
transferees, assignees, heirs, representatives, or legatees succeeding to all or
a part of the interest of any Shareholder resulting in adverse claims or demands
being made in connection with such interest, then, in any such events, the
Trustees shall be entitled, in their absolute discretion, to refuse to comply
with any such conflicting claims or demands. In so refusing, the Trustees may
elect to make no payment or distribution to the interest represented by the
Common Stock or Preferred Stock involved, or any part thereof, and in so doing
the Trustees shall not be or become liable to any of such parties for their
failure or refusal to comply with any of such conflicting claims or demands, nor
shall the Trustees be liable for interest on any funds which they may so
withhold. The Trustees shall be entitled to refrain and refuse to act until (i)
the rights of the adverse claimants have been adjudicated by a final judgment of
a court of competent jurisdiction, or (ii) all differences have been adjusted by
valid written agreement between all of such parties, and the Trustees shall have
been furnished with an executed counterpart of such agreement. The Trustees may,
in their absolute discretion, require that they be furnished with an appropriate
indemnity bond issued by such surety, or such other security, in the form and
amount as shall be satisfactory to the Trustees, and as they shall deem
appropriate to indemnify them fully as between all conflicting claims or
demands.
5.8 Any portion of the Trust Estate which shall be available to but
unclaimed by any Shareholder of the Company shall be deemed to be subject to
applicable escheat laws, and the Trustees are expressly authorized to pay and/or
deliver such portion of the Trust Estate at such time or times as may be
consonant with such laws and in accordance with the provisions thereof.
5.9 The Trustees shall make an annual report in writing to each of the
Shareholders. Such report shall be for a calendar year and shall he made with
reasonable promptness after the end of each such year. Each report shall include
a statement of all property on hand at the end of such year, of all receipts and
disbursements during such year, and of such other data as may be necessary to
furnish each Shareholder with adequate information as to the condition of the
Trust Estate and each Shareholder's share of the distributable net income (or
loss) of the Trust for federal income tax purposes.
5.10 The Trustees are hereby authorized, but not required to send other and
additional notices to the Shareholders, or their respective transferees,
assignees, heirs, representatives, and legatees. If the Trustees receive
evidence, satisfactory to them and their counsel, that a person or persons other
than a Shareholder is entitled to receive a distribution of the Trust Estate,
then the Trustees shall, in accordance with the terms and provisions of this
Trust Agreement, make distribution to the person or persons who the Trustees
have determined is entitled to the same.
B-5
<PAGE>
5.11 The Trustees may withhold from time to time from the Trust Receipts
distributable to Shareholders such sums as may be sufficient to pay any taxes or
other charges which have been or may be imposed on the Shareholders under the
income tax laws or other laws of the United States or any state or political
subdivision by reason of distributions which have been or will be made to the
Shareholders, and the Trustees may, in their discretion, enter into agreements
with taxing or other authorities for the payment of such amounts as may be
withheld in accordance with the provisions of this Section.
ARTICLE 6
TERM AND TERMINATION
6.1 The Trust shall continue and remain effective until: (a) the Trust
Estate has been fully distributed or expended in accordance with the terms and
provisions of this Trust Agreement; or (b) the expiration of four (4) years from
the date hereof, whichever shall first occur, at which time the Trust shall
terminate.
6.2 After the termination of the Trust, and for the purpose of liquidating
and winding up the affairs of the Trust, the Trustees shall continue to act as
such until their duties have been fully performed. Upon the distribution of all
of the Trust Estate to the Shareholders and the payment and discharge of Trust
Liabilities, the Trustees shall have no further duties or obligations hereunder.
6.3 Upon termination of the Trust, the Trustees may retain the books,
records, Shareholder lists, Common Stock certificates, and files which shall
have been delivered to or created by the Trustees. At the Trustees' discretion,
they may destroy all of such records and documents at any time after six (6)
years from the date of termination of this Trust.
ARTICLE 7
POWERS OF THE TRUSTEES
7.1 The Trustees shall have the power to hold, and shall hold, the legal and
equitable title to all assets and property which at any time constitute the
Trust Estate, and the Trustees shall hold and administer such assets and
property in trust, pursuant to the terms of this Trust Agreement.
7.2 Subject to the limitations imposed by Article 2 and Article 12 herein,
the Trustees shall have the following specific powers:
a. To sell, transfer, assign, invest, or otherwise dispose of the Trust
Estate or any part thereof. The Trustees are authorized to determine which
assets of the Trust Estate should be sold or otherwise disposed of and which
assets should be distributed in kind to the Shareholders. As to any assets
of the Trust Estate which the Trustees determine should be sold, the
Trustees shall have the power to sell such assets at public auction or at
private sale for cash, or upon credit (either secured or unsecured as the
Trustees shall determine), to make a gift of, or sell in a bargain sale,
such assets, subject to the approval of the Advisory Committee or a majority
in interest of the Shareholders, or to otherwise dispose of such assets. The
Trustees shall have full power and authority to execute and deliver any
conveyances, assignments, contracts, stock or security transfer powers, or
any other written instrument of any character appropriate to any of the
powers or duties conferred upon the Trustees.
b. To collect and receive any and all property and assets due to or
owing or belonging to the Company or the Trust, to give full discharge and
release therefor, and to receipt for such property and assets and in
connection therewith to provide indemnification to the members of the Board
of Directors of the Company and officers of the Company equivalent to that
provided to them pursuant to the Delaware General Corporation Law and the
Company's Bylaws, and any such other indemnity as the Trustees deem
appropriate.
B-6
<PAGE>
c. To collect, liquidate, or otherwise convert into cash all property,
assets, and rights in the Trust Estate, and to pay, discharge, and satisfy
all Trust Liabilities, with the right to prosecute and defend litigation,
and enter into settlements and compromises in connection therewith.
d. To retain or receive on behalf of, and for the benefit of, those
Shareholders who have not been located or who have not surrendered their
stock certificates for cancellation in accordance with the Plan of
Liquidation, all liquidating distributions, unclaimed dividends, and other
payments to which they may be entitled hereunder, and to make disposition
thereof in accordance with applicable laws.
e. To do and perform any acts or things reasonable or appropriate for
the continued operation and the conservation, protection, and orderly
administration of the Trust Estate, and in connection therewith to employ
such agents, attorneys, and counsel, and to confer upon them such authority
as the Trustees may deem expedient, and to pay reasonable compensation
therefor.
f. The Trustees are authorized to sue for and defend the Trust Estate,
or any part thereof as at any time constituted, and to sue for and defend
the Trust; and the Trustees are authorized to compromise, settle, and adjust
claims in favor of and against the Trust Estate, or any part thereof, or
against the Trust. The Trustees are authorized to abandon property and
release claims, with or without consideration therefor, which the Trustees
deem worthless or when the Trustees deem such action to be in the best
interests of the Shareholders.
g. If any of the property which is or may become a part of the assets
of the Trust Estate is situated in any state or other jurisdiction in which
the Trustees are not qualified to act as Trustees, the Trustees are
empowered to nominate and appoint an individual or corporate trustee
qualified to act in such state or other jurisdiction in connection with the
property situated in that state or other jurisdiction as trustee of such
property and require from such trustee such security as may be designated by
the Trustees. The trustee so appointed shall have all the rights, powers,
privileges, and duties and shall be subject to the conditions and
limitations of this Trust, except as modified or limited by the Trustees,
and except where the same may be modified by the laws of such state or other
jurisdiction (in which case, the laws of the state or other jurisdiction in
which such trustee is acting shall prevail to the extent necessary). Such
trustee shall be answerable to the Trustees herein appointed for all moneys,
assets, and other property which may be received by it in connection with
the administration of such property. The Trustees hereunder may remove such
trustee, with or without cause, and appoint a successor trustee at any time
by the execution by the Trustees of a written instrument declaring such
trustee removed from office and specifying the effective date and time of
removal.
h. The exercise of any discretionary power vested in the Trustees shall
be final and conclusive upon all Shareholders hereunder and upon all persons
whomsoever.
i. The Trustees shall, to the extent necessary, prepare and file
appropriate federal and state income tax returns and other returns and
reports required by applicable law on behalf of the Trust.
j. The Trustees shall not be under any duty to reinvest such part of
the Trust Estate as may be in cash, or as may be converted into cash, nor
shall the Trustees be chargeable with interest thereon (except to the extent
that interest may be paid to Trustees on such cash amount on deposit) during
such time as the prevailing interest rates or other conditions shall make it
undesirable, in the opinion of the Trustees, to otherwise reinvest such
funds pending distribution to the Shareholders.
k. Pending sale or other disposition or distribution, the Trustees in
their sole discretion are authorized to retain all or any part of the assets
constituting the Trust Estate, including shares of common stock of Apple
Computer, Inc., regardless of whether or not such assets are (or may become)
underproductive, unproductive or a wasting asset, or whether such assets, if
considered to be investments, might be considered to be speculative or
extraordinarily hazardous.
B-7
<PAGE>
l. The Trustees are authorized in their absolute discretion to offer to
redeem the interest of any Shareholder in the Trust if the Trustees
determine that it is in the best interests of the Trust and the Shareholders
to eliminate the cost of administering a small Shareholder account, and in
connection therewith to offer to any such Shareholder an immediate
distribution of cash or other property or both in such amounts as the
Trustees in their absolute discretion shall determine.
The enumeration of powers in this Section shall not be considered in any way
to limit or control the power of the Trustees to act as specifically authorized
by any other Section or provision of this Agreement and to act in such manner as
the Trustees may in their absolute discretion deem reasonable or appropriate to
conserve, protect and administer the Trust Estate or to confer on the
Shareholders the benefits intended to be conferred upon them by this Trust
Agreement.
ARTICLE 8
DUTY OF CARE AND LIABILITIES OF TRUSTEES
8.1 Each Trustee hereby agrees to accept and undertake to discharge the
Trust created by this Trust Agreement, upon the terms and conditions hereof. In
so doing he shall act in all matters in his absolute discretion and shall be
liable only for his own gross negligence or his own willful misconduct. Without
prejudice to the generality of the aforegoing provisions of this Section 8, it
is further provided that:
a. No successor Trustee shall be in any way responsible for the acts or
omissions of any Trustee in office prior to the date on which he became a
Trustee.
b. No Trustee shall be deemed bound by any duties or obligations other
than those specifically set forth in this Agreement, and no implied
covenants or obligations shall be read into this Trust Agreement against the
Trustee.
c. In the absence of bad faith or gross negligence on the part of the
Trustee, the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee.
d. No Trustee shall be liable for any error of judgment made in good
faith, unless it shall be proved that such Trustee was grossly negligent in
ascertaining or failing to ascertain the pertinent facts.
e. If any controversy arises between the parties hereto or with any
third person with respect to the subject matter of this Trust Agreement or
its terms or conditions, the Trustee shall not be required to determine the
same or take any action, but may await the settlement of any such
controversy by final appropriate legal proceedings or otherwise as may be
reasonably required by him.
8.2 Except as otherwise provided in Section 8.1:
a. The Trustees may rely and shall be protected in acting upon any
notice, resolution, certificate, credential, statement, instrument, opinion,
report, notice, request, consent, order, or other paper or document believed
by them to be genuine and to have been signed or presented by the proper
party or parties.
b. The Trustees shall have the right to rely upon and shall be fully
protected in acting upon the advice or opinion of any attorney, auditor, or
other expert at any time employed by them in connection with any matter
concerning the Trust or the Trust Estate.
c. Persons dealing with the Trustees shall look only to the Trust
Estate to satisfy any liability incurred by the Trustees to such person in
carrying out the terms of this Trust, and the Trustees shall have no
personal individual obligation to satisfy any such liability.
8.3 No bond shall be required of the Trustees.
B-8
<PAGE>
8.4 Subject to the foregoing provisions of this Section 8, each Trustee
shall be indemnified by and receive reimbursement from the Trust Estate against
and for any and all loss, liability, expense, or damage, including without
limitation their attorneys' fees and costs, which such Trustee may incur or
sustain in the exercise and performance of any of the powers and duties of such
Trustee under this Trust Agreement. The Trustees may in their absolute
discretion require of any one or more of the Shareholders agreements of
indemnity for the Trustees, members of the Advisory Committee, and/or the
Directors and Officers of the Company and may condition the delivery of
distributions from the Trust Estate to those Shareholders from whom such
agreements are required, upon the execution and delivery of such agreements.
ARTICLE 9
TRUSTEES AND SUCCESSOR TRUSTEES
9.1 Except during such periods when there exists a vacancy as provided in
Section 9.4 herein, there shall at all times be two (2) Trustees of this Trust.
and shall serve as initial Trustees. If either of them
is unable or unwilling to serve as Trustee, a successor Trustee shall be
appointed in accordance with the terms and conditions of Section 9.6 of the
Agreement.
9.2 All action required or permitted to be taken by the Trustees, in their
capacity as Trustees, shall be taken or authorized (i) at a meeting at which
both Trustees are present in person or by telephone conference call, duly called
by one or more of the Trustees and held on at least three (3) days' written
notice or one (1) day's telecopier notice to all of the Trustees then in office,
or (ii) by a written vote, resolution, or other action in writing without a
meeting signed by all the Trustees then in office. Except where this Trust
Agreement otherwise provides, all action taken at such a meeting shall be by
vote or resolution of the Trustees. If both Trustees cannot agree upon such
action, such action shall be submitted to either the Advisory Committee or the
Shareholders, and may be approved by the Advisory Committee or a majority in
interest of the Shareholders, as the case may be. The Trustees may adopt such
additional rules and procedures as they deem appropriate to govern their conduct
and to further the orderly administration of the Trust.
9.3 A Trustee may resign and be discharged from the Trust hereby created by
giving written notice to the Advisory Committee or the Shareholders; such
resignation shall become effective thirty (30) days thereafter or upon the
appointment of such Trustee's successor and such successor's acceptance of such
appointment, whichever first occurs. A Trustee may be removed by the Advisory
Committee or a majority in interest of the Shareholders; such removal shall be
effective upon delivery of written notice thereof to such removed Trustee.
9.4 If a Trustee shall resign or be removed, or shall die, or shall be
adjudged a bankrupt, incompetent or insolvent, a vacancy shall be deemed to
exist in the office of such Trustee, and a successor shall be appointed by the
remaining Trustee, if any, or if none, pursuant to Section 9.6. Pending the
appointment of a successor Trustee, the remaining Trustee then in office may
take any action required or permitted of a Trustee under this Trust Agreement.
9.5 Any successor Trustee appointed hereunder shall execute counterparts of
this Trust Agreement and shall deliver one such counterpart, to the other
Trustee, if any, and in case of a resignation, to the resigning Trustee, if
practicable. Thereupon such successor Trustee shall, without any further act, be
deemed to have accepted his appointment, and become vested with all the estates,
properties, rights, powers, trusts, and duties of his or its predecessor in the
Trust hereunder with like effect as if originally named therein; but the
retiring Trustee shall nevertheless, when requested in writing by the successor
Trustee and upon payment of any expenses in connection therewith, execute and
deliver an instrument or instruments conveying and transferring to such
successor Trustee upon the trusts herein expressed, all the estates, properties,
rights, powers, and trust of such retiring Trustee arising hereunder, and shall
duly assign, transfer, and deliver to such successor Trustee all property and
money held by him hereunder.
B-9
<PAGE>
9.6 If all the offices of Trustee are vacant by reason of a resignation or
declination to act by those persons specified in Section 9.1 of this Agreement,
a Trustee or Trustees may be appointed by the Advisory Committee or a majority
in interest of the Shareholders.
9.7 Any Trustee is authorized to execute on behalf of the Trustees any
documents, including, but not limited to, deeds, notes, deeds of trust,
documents of purchase or sale, applications to governmental agencies, and
contracts of any kind on behalf of all or any of the Trustees. Any third party
dealing with the Trust may rely entirely upon the Trustee's authority to execute
on behalf of all the Trustees any document, including, but not limited to,
deeds, notes, deeds of trust, documents of purchase or sale, applications to
governmental agencies, and contracts of any kind, without inquiring as to
whether both of the Trustees have consented thereto, and in all such cases any
Trustee's signature shall bind the Trust.
ARTICLE 10
COMPENSATION AND EXPENSES OF TRUSTEES AND ADVISORY COMMITTEE
10.1 The Trustees shall be entitled to reasonable compensation for their
services hereunder, payable first out of Trust Receipts and then out of the
Trust Estate. Reasonable compensation payable hereunder shall he fixed or
approved by the Advisory Committee or a majority in interest of the Shareholders
and shall be paid to said Trustees quarterly.
10.2 The Trustees shall be reimbursed monthly first from the Trust Receipts
and then from the Trust Estate for all expenses reasonably incurred by them in
the exercise of powers or in the performance of their duties in accordance with
the Trust Agreement.
ARTICLE 11
AMENDMENT OF TRUST AGREEMENT
11.1 This Trust Agreement may be amended without a vote of Shareholders (i)
for the purpose of qualifying or continuing to qualify the Trust as a
"liquidating trust" as distinguished from an "association" for purposes of the
Internal Revenue Code of 1986, as amended from time to time, and (ii) for the
purpose of avoiding registration and qualification of the interests of
Shareholders in the Trust Estate under the federal and applicable state
securities laws, as amended from time to time.
11.2 If it is deemed necessary to amend the Trust Agreement for the
purposes specified in Section 11.1 above, the Trust Agreement may be amended by
the Board of Directors of the Company at any time prior to dissolution of the
Company and thereafter by the Trustees.
11.3 All other amendments of the Trust Agreement shall be adopted by the
Trustees and approved by the Advisory Committee or a majority in interest of the
Shareholders.
ARTICLE 12
ADVISORY COMMITTEE
12.1 The Company, upon constituting this Trust, and thereafter a majority
in interest of the Shareholders, may at any time appoint an Advisory Committee
consisting of one or more members as the Company or such Shareholders may from
time to time specify in making any such appointment. The appointment of members
of the Advisory Committee shall be by written notice from the Company or a
majority in interest of the Shareholders to the Trustees, accompanied by the
written acceptance of such appointment by such member. Any member of the
Advisory Committee may resign at any time by written notice to the Trustees.
12.2 At such time or times as an Advisory Committee is serving hereunder,
such Advisory Committee, acting by unanimous written consent or by majority vote
taken at a meeting at which not less than
B-10
<PAGE>
seventy-five percent (75%) of such members are present in person or by telephone
conference call, shall have the powers specified herein.
12.3 The Advisory Committee shall meet with the Trustees not less
frequently than semiannually to review and discuss the condition of the Trust
Estate and the administration of the Trust.
12.4 At such time as an Advisory Committee is serving hereunder, the
Trustees shall not engage in any transaction in which a Trustee has an interest
adverse to that of the Trust, directly or indirectly, without the approval of
the Advisory Committee.
ARTICLE 13
MISCELLANEOUS
13.1 This Trust shall be under the laws of the State of Delaware, and this
Trust Agreement and the validity thereof shall be governed by and construed in
accordance with the laws of that State.
13.2 If any provision of this Trust Agreement or the application thereof to
any person or in any circumstances shall be finally determined by a court of
proper jurisdiction to be invalid or unenforceable to any extent, the remainder
of this Trust Agreement, or the application of such provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each remaining provision of this Trust
Agreement shall be valid and enforced to the fullest extent permitted by law.
13.3 (a) Any notice required or provided for in this Trust Agreement shall
be in writing and be deemed to have been given five (5) days after being
deposited in a United States Post Office or letter box, first class postage
prepaid, or when delivered by telecopier, receipt confirmed electronically, or
personally delivered.
(b) Any written notice or other written communication pursuant to the
terms of this Trust Agreement shall be deemed to have been sufficiently
given, for all purposes, if given as provided in Section 13.3(a) above and
addressed to such person at his address as shown on the records of the
Trustees.
13.4 No person dealing with the Trustees shall be responsible for, or be
required to see to, the subsequent application by Trustees of any money or other
thing of value paid to or delivered to the Trustees. The receipt of the Trustees
shall be a full discharge to the extent of the property delivered to Trustees.
13.5 A Shareholder's interest in the Trust and/or the Trust Estate shall
not be evidenced by any certificate of interest whatsoever. Each Shareholder's
interest in the Trust and/or the Trust Estate, and his rights thereto, shall not
be assignable or transferable in any manner, except by will, intestate
succession, or operation of law without the written consent of the Trustees.
13.6 The Trustees shall not be responsible for the validity hereof, the
validity of the transfer to the Trustees of the Trust Estate or any part
thereof, or the authority of the Company to make and execute this Trust
Agreement.
13.7 Except as provided in Article 11 above, the Trust created hereunder
shall be irrevocable and no person shall have the right or power, whether alone
or in conjunction with others, in whatever capacity, to alter, amend, revoke, or
terminate this Trust, or any of the terms of this Trust Agreement, in whole or
in part, or to designate the persons who shall possess or enjoy the trust
property or the income therefrom.
13.8 For the purposes of this Trust Agreement, unless the context shall
indicate or require otherwise, words of the masculine gender shall be deemed and
construed to include correlative words of the feminine and neuter gender, words
of the neuter gender shall be deemed and construed to include correlative words
B-11
<PAGE>
of the masculine and feminine gender, and words of the singular shall be deemed
and construed to mean words of the plural and vice versa.
13.9 This Trust Agreement may be executed in any number of counterparts,
each of which shall be an original, but such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Trustees have executed this Trust
Agreement on the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
Attest: POWER COMPUTING CORPORATION
By:
- --------------------------------------- ---------------------------------------
John W. Teets, SECRETARY Stephen S. Kahng, CHAIRMAN
---------------------------------------
------------------------------------, TRUSTEE
---------------------------------------
------------------------------------, TRUSTEE
</TABLE>
B-12
<PAGE>
EXHIBIT A
[SCHEDULE OF TRANSFERRED ASSETS]
B-13
<PAGE>
EXHIBIT B
POWER COMPUTING CORPORATION
SHAREHOLDERS
AS OF
, 1997
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
- --------------------------------------- ---------------------------------------
<S> <C>
</TABLE>
B-14
<PAGE>
ANNEX C
POWER COMPUTING CORPORATION
PLAN OF DISSOLUTION AND COMPLETE LIQUIDATION
Upon the consummation of the sale by Power Computing Corporation, a Delaware
corporation (the "Company"), of substantially all of its assets to Gravenstein,
Inc., a Delaware corporation wholly owned by Apple Computer, Inc., a California
corporation:
1. The officers of the Company will file a Certificate of Dissolution
with the Secretary of State of Delaware.
2. After the filing of the Certificate of Dissolution, the Company will
not carry on the business for which it was established except as may be
necessary or incidental to the winding up of the Company's affairs.
3. The Company will enter into that certain Agreement and Declaration
of Trust (the "Trust Agreement"), substantially in the form attached hereto
as Exhibit A with such changes as the Company's Board of Directors shall
approve, to establish the Power Computing Corporation Liquidating Trust (the
"Trust") for the benefit of the Company's stockholders, designating one or
more of the Company's directors as initial trustees, and designating the
other directors of the Company as initial members of the advisory committee
provided for in the Trust Agreement, and transfer to the Trust all assets
and liabilities of the Company.
4. The Company or the Trust, as the case may be, will, pursuant to the
Delaware General Corporation Law, (i) pay or make reasonable provision to
pay all claims and obligations, including all contingent, conditional, or
unmatured contractual claims known to the Company, and (ii) make such
provision as will be reasonably likely to be sufficient to provide
compensation for claims that have not been made known to the Company or that
have not arisen but that, based on facts known to the Company, are likely to
arise or to become known to the Company prior to the expiration of
applicable statutes of limitation. Such claims shall be paid in full and any
such provision for payment made shall be made in full if there are
sufficient funds. If there are insufficient funds, such claims and
obligations shall be paid or provided for according to their priority and,
among claims of equal priority, ratably to the extent of funds legally
available therefor.
5. After paying the Company's debts, or making provision therefor as
aforesaid, and in any event within 10 months of the filing of the
Certificate of Dissolution, the Company shall distribute all the remaining
property of the Company, as applicable, to the Company's stockholders or to
the Trust in complete cancellation of all of the Company's issued and
outstanding capital stock.
C-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporations Law (the "CGCL")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers who are parties or are threatened to be made
parties to any proceeding (with certain exceptions) by reason of the fact that
the person is or was an agent of the corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation. Section 204 of the CGCL provides that this limitation on liability
has no effect on a director's liability (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (ii) for acts
or omissions that a director believes to be contrary to the best interests of
the corporation or its shareholders or that involve the absence of good faith on
the part of the director, (iii) for any transaction from which a director
derived an improper personal benefit, (iv) for acts or omissions that show a
reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of a serious injury to the corporation or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, (vi)
under Section 310 of the CGCL (concerning contracts or transactions between the
corporation and a director) or (vii) under Section 316 of the CGCL (directors'
liability for improper dividends, loans and guarantees). Section 317 does not
extend to acts or omissions of a director in his capacity as an officer.
Further, Section 317 has no effect on claims arising under federal or state
securities laws and does not affect the availability of injunctions and other
equitable remedies available to the Company's shareholders for any violation of
a director's fiduciary duty to the Company or its shareholders. Although the
validity and scope of the legislation underlying Section 317 have not yet been
interpreted to any significant extent by the California courts, Section 317 may
relieve directors of monetary liability to the Company for grossly negligent
conduct, including conduct in situations involving attempted takeovers of the
Company.
In accordance with Section 317, the Restated Articles of Incorporation, as
amended (the "Articles"), of the Company limit the liability of a director to
the Company or its shareholders for monetary damages to the fullest extent
permissible under California law. The Articles further authorize the Company to
provide indemnification to its agents (including officers and directors),
subject to the limitations set forth above. The Articles and the Company's
By-Laws further provide for indemnification of corporate agents to the maximum
extent permitted by the CGCL.
Pursuant to the authority provided in the Articles, the Company has entered
into indemnification agreements with each of its officers and directors,
indemnifying them against certain potential liabilities that may arise as a
result of their service to the Company, and providing for certain other
protection.
The Company also maintains insurance policies which insure its officers and
directors against certain liabilities.
The foregoing summaries are necessarily subject to the complete text of the
statute, the Articles, the By-Laws and the agreements referred to above and are
qualified in their entirety by reference thereto.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement by and among Apple Computer Inc., Gravenstein, Inc. and
Power Computing Corporation dated as of August 29, 1997. (See Annex A of
Prospectus/Proxy Statement).
2.2 Plan of Dissolution and Complete Liquidation of Power Computing Corporation.
(See Annex B of Prospectus/Proxy Statement).
3.1A Restated Articles of Incorporation, as amended, of Registrant.+
3.1B Amendment to Restated Articles of Incorporation dated February 5, 1990.++
3.1C Bylaws of Registrant.+++
4.1 Common Share Rights Agreement dated as of May 15, 1989.++++
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
to Registrant, regarding the legality of the securities to be issued.*
21.1 Subsidiaries of Registrant.+++
23.1 Consent of KPMG Peat Marwick LLP, independent auditors of the Registrant.
23.2 Consent of Ernst & Young LLP, independent auditors of the Registrant.
23.3 Consent of Ernst & Young LLP, independent auditors of Power Computing
Corporation.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
to the Registrant (included in Exhibit 5.1).*
24.1 Power of Attorney of Registrant (see page II-4).
27 Financial Data Schedule
</TABLE>
- ------------------------
+ Incorporated by reference from Registrant's Registration Statement on Form
S-3 (file no 33-23317).
++ Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1990.
+++ Incorporated by reference from Registrants Annual Report on Form 10-K for
the year ended September 26, 1997.
++++ Incorporated by reference from Registrant's Registration Statement on Form
8-A filed with the Commission on May 26, 1989.
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned Registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is
II-2
<PAGE>
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(I) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(4) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(7) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 10th day of
December 1997.
<TABLE>
<S> <C> <C>
APPLE COMPUTER, INC.
By: /s/ FRED D. ANDERSON
------------------------------------------
Fred D. Anderson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven P. Jobs and Fred D. Anderson and
each of them, jointly and severally, as his attorneys-in-fact, each with full
power of substitution for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Interim Chief Executive
/s/ STEVEN P. JOBS Officer and Director
- ------------------------------ (Principal Executive December 10, 1997
Steven P. Jobs Officer)
Executive Vice President
/s/ FRED D. ANDERSON and Chief Financial
- ------------------------------ Officer (Principal December 10, 1997
Fred D. Anderson Accounting and Financial
Officer)
/s/ WILLIAM V. CAMPBELL
- ------------------------------ Director December 10, 1997
William V. Campbell
/s/ GARETH C.C. CHANG
- ------------------------------ Director December 10, 1997
Gareth C.C. Chang
/s/ LAWRENCE J. ELLISON
- ------------------------------ Director December 10, 1997
Lawrence J. Ellison
/s/ EDGAR S. WOOLARD, JR.
- ------------------------------ Director December 10, 1997
Edgar S. Woolard, Jr.
/s/ JEROME B. YORK
- ------------------------------ Director December 10, 1997
Jerome B. York
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement by and among Apple Computer Inc., Gravenstein, Inc. and Power Computing
Corporation dated as of August 29, 1997. (See Annex A of Prospectus/Proxy Statement).
2.2 Plan of Dissolution and Complete Liquidation of Power Computing Corporation. (See Annex B of
Prospectus/Proxy Statement).
3.1A Restated Articles of Incorporation, as amended, of Registrant.+
3.1B Amendment to Restated Articles of Incorporation dated February 5, 1990.++
3.1C Bylaws of Registrant.+++
4.1 Common Share Rights Agreement dated as of May 15, 1989.++++
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to Registrant,
regarding the legality of the securities to be issued.*
21.1 Subsidiaries of Registrant.+++
23.1 Consent of KPMG Peat Marwick LLP, independent auditors of the Registrant.
23.2 Consent of Ernst & Young LLP, independent auditors of the Registrant.
23.3 Consent of Ernst & Young LLP, independent auditors of Power Computing Corporation.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Registrant
(included in Exhibit 5.1).*
24.1 Power of Attorney of Registrant (see page II-4).
27 Financial Data Schedule
</TABLE>
- ------------------------
+ Incorporated by reference from Registrant's Registration Statement on Form
S-3 (file no 33-23317).
++ Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1990.
+++ Incorporated by reference from Registrants Annual Report on Form 10-K for
the year ended September 26, 1997.
++++ Incorporated by reference from Registrant's Registration Statement on Form
8-A filed with the Commission on May 26, 1989.
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Apple Computer, Inc.
We consent to the use of our report incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the Propectus/Proxy
Statement.
KPMG Peat Marwick LLP
San Jose, California
December 4, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Apple Computer, Inc.
for the registration of shares of its common stock and to the incorporation by
reference therein of our report dated October 14, 1996, with respect to the
consolidated financial statements and schedule of Apple Computer, Inc. as of
September 27, 1996, and for the two years then ended included in its Annual
Report (Form 10-K) for the year ended September 26, 1997, filed with the
Securities and Exchange Commission.
Ernst & Young LLP
San Jose, California
December 4, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 26, 1997, except for Note 13 for which the date
is December 5, 1997, included in the Proxy Statement of Power Computing
Corporation that is made a part of the Registration Statement (on Form S-4) and
Prospectus of Apple Computer Inc. for the registration of its common stock.
Ernst & Young LLP
Austin, Texas
December 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 MAR-31-1997 MAR-31-1998
<PERIOD-START> JUL-01-1995 JUL-01-1996 APR-01-1997
<PERIOD-END> JUN-30-1996 MAR-31-1997 SEP-30-1997
<CASH> 2,161 3,438 5,533
<SECURITIES> 0 0 0
<RECEIVABLES> 20,429 30,360 26,924
<ALLOWANCES> (1,587) (4,243) (8,000)
<INVENTORY> 23,226 28,206 31,878
<CURRENT-ASSETS> 46,808 63,039 63,520
<PP&E> 2,915 12,081 12,009
<DEPRECIATION> (664) (1,236) (2,398)
<TOTAL-ASSETS> 49,059 73,884 73,131
<CURRENT-LIABILITIES> 34,196 50,509 58,900
<BONDS> 0 0 0
91 91 91
0 0 0
<COMMON> 54 56 59
<OTHER-SE> 14,416 22,504 14,081
<TOTAL-LIABILITY-AND-EQUITY> 49,059 73,884 73,131
<SALES> 131,075 247,207 161,414
<TOTAL-REVENUES> 131,075 247,207 161,414
<CGS> 104,408 194,495 134,658
<TOTAL-COSTS> 20,883 39,506 38,467
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 462 886 971
<INCOME-PRETAX> 5,368 12,353 (12,634)
<INCOME-TAX> 462 4,616 (4,053)
<INCOME-CONTINUING> 4,906 7,737 (8,581)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,906 7,737 (8,581)
<EPS-PRIMARY> 0.31 0.46 (1.51)
<EPS-DILUTED> 0.31 0.46 (1.51)
</TABLE>
