UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Form 10-Q
___________
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1998 OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number 0-10030
___________
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
___________
CALIFORNIA 942404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1 Infinite Loop
Cupertino, California 95014
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (408) 996-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
___________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
133,040,579 shares of Common Stock Issued and Outstanding as of May 1, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
March 27, March 28, March 27, March 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 1,405 $ 1,601 $ 2,983 $ 3,730
Costs and expenses:
Cost of sales 1,056 1,298 2,281 3,030
Research and development 75 141 154 290
Selling, general and
administrative 223 348 457 720
In-process research and
development -- 375 -- 375
Restructuring costs -- 155 -- 155
____ _____ _____ _____
1,354 2,317 2,892 4,570
Operating income (loss) 51 (716) 91 (840)
Interest and other income
(expense), net 8 8 15 12
____ _____ _____ _____
Income (loss) before provision
for income taxes 59 (708) 106 (828)
Provision for income taxes 4 -- 4 --
____ _____ _____ _____
Net income (loss) $ 55 $ (708) $ 102 $ (828)
____ _____ _____ _____
Earnings (loss) per common share:
Basic $ 0.42 $ (5.64) $ 0.78 $ (6.62)
Diluted $ 0.38 $ (5.64) $ 0.71 $ (6.62)
Shares used in computing earnings (loss)
per common share (in thousands):
Basic 131,969 125,609 130,021 125,071
Diluted 145,915 125,609 142,769 125,071
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
2
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
<TABLE>
<CAPTION>
March 27, 1998 September 26, 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,285 $ 1,230
Short-term investments 538 229
Accounts receivable, net of allowance for
doubtful accounts of $96 ($99 at
September 26, 1997) 807 1,035
Inventories:
Purchased parts 87 141
Work in process 6 15
Finished goods 164 281
257 437
Deferred tax assets 201 259
Other current assets 125 234
______ ______
Total current assets 3,213 3,424
Property, plant, and equipment:
Land and buildings 402 453
Machinery and equipment 396 460
Office furniture and equipment 97 110
Leasehold improvements 136 172
1,031 1,195
Accumulated depreciation and amortization (616) (709)
Net property, plant, and equipment 415 486
Other assets 335 323
______ ______
$ 3,963 $ 4,233
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
March 27, 1998 September 26, 1997
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to banks $ 23 $ 25
Accounts payable 523 685
Accrued compensation and employee benefits 96 99
Accrued marketing and distribution 231 278
Accrued warranty and related 129 128
Accrued restructuring costs 113 180
Other current liabilities 269 423
______ ______
Total current liabilities 1,384 1,818
Long-term debt 953 951
Deferred tax liabilities 238 264
Shareholders' equity:
Series A non-voting convertible preferred
stock, no par value; 150,000 shares authorized,
issued and outstanding 150 150
Common stock, no par value; 320,000,000 shares
authorized; 132,991,463 shares issued and
outstanding at March 27, 1998 (127,949,220
shares at September 26, 1997) 590 498
Retained earnings 691 589
Other (43) (37)
______ ______
Total shareholders' equity 1,388 1,200
______ ______
$ 3,963 $ 4,233
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
March 27, 1998 March 28, 1997
<S> <C> <C>
Cash and cash equivalents,
beginning of the period $1,230 $1,552
Operating:
Net income (loss) 102 (828)
Adjustments to reconcile net income (loss) to
cash generated by operating activities:
Depreciation and amortization 56 55
Loss on sale of property, plant and equipment -- 31
In-process research and development -- 375
Provision for deferred income taxes 1 (45)
Changes in operating assets and liabilities, net of
effects of acquisition of NeXT:
Accounts receivable 220 356
Inventories 180 153
Other current assets 89 49
Accounts payable (162) 48
Accrued restructuring costs (60) 130
Other current liabilities (130) (123)
_____ _____
Cash generated by operating activities 296 201
Investing:
Purchase of short-term investments (941) (671)
Proceeds from sales and maturities of
short-term investments 632 678
Net proceeds from sale of property, plant,
and equipment 45 1
Purchase of property, plant, and equipment (12) (36)
Cash used to acquire NeXT -- (383)
Other 23 (25)
_____ _____
Cash used for investing activities (253) (436)
Financing:
Increase (decrease) in notes payable to banks (2) (53)
Increase (decrease) in long-term borrowings 2 1
Increases in common stock 12 8
_____ _____
Cash generated by (used for) financing activities 12 (44)
Total cash generated (used) 55 (279)
Cash and cash equivalents, end of the period $1,285 $1,273
_____ _____
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 30 $ 30
Cash paid (received) during the period for
income taxes, net $ (5) $ 24
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
5
<PAGE>
APPLE COMPUTER, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included. All adjustments are of a normal recurring nature unless
specified in a separate note included in these Notes to Condensed Consolidated
Financial Statements (Unaudited). The results for interim periods are not
necessarily indicative of results to be expected for the entire year. These
financial statements and notes should be read in conjunction with the
Company's annual consolidated financial statements and the notes thereto for
the fiscal year ended September 26, 1997, included in its Annual Report on
Form 10-K for the year ended September 26, 1997 (the "1997 Form 10-K").
Note 2 - Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." In accordance with SFAS 128, primary
earnings per share have been replaced with basic earnings per share, and fully
diluted earnings per share have been replaced with diluted earnings per share
which includes potentially dilutive securities such as outstanding options and
convertible securities. Prior periods have been presented to conform to SFAS
128; however, as the Company had a net loss in the prior periods presented,
basic and diluted loss per share are the same as the primary loss per share
previously reported.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of convertible securities is
reflected using the if-converted method. The following table sets forth the
computation of basic and diluted earnings (loss) per share (in thousands,
except net income (loss) and per share amounts):
6
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
March 27, March 28, March 27, March 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)
(in millions) $ 55 $ (708) $ 102 $ (828)
Denominator:
Denominator for basic
earnings (loss) per share
-- weighted average
shares outstanding 131,969 125,609 130,021 125,071
Effect of dilutive securities:
Convertible preferred
stock 9,091 -- 9,091 --
Dilutive options 4,855 -- 3,657 --
Dilutive potential
common shares 13,946 -- 12,748 --
Denominator for diluted
earnings per share -
adjusted weighted-average
shares and assumed
conversions 145,915 125,609 142,769 125,071
Basic earnings (loss)
per share $ 0.42 $ (5.64) $ 0.78 $ (6.62)
Diluted earnings (loss)
per share $ 0.38 $ (5.64) $ 0.71 $ (6.62)
</TABLE>
The Company has outstanding $661 million of unsecured convertible subordinated
notes (the "Notes") which are convertible by their holders into approximately
22.6 million shares of common stock at a conversion price of $29.205 per share
subject to the adjustments as defined in the Note agreement. The common
shares represented by these Notes were not included in the computation of
diluted earnings per share for the periods presented because the effect of
using the if-converted method would be anti-dilutive. For additional
disclosures regarding the outstanding preferred stock, employee stock options
and the Notes, see the 1997 Form 10-K.
7
<PAGE>
Note 3 - Restructuring Activities
In the second quarter of 1996, the Company announced and began to implement a
restructuring plan aimed at reducing costs and restoring profitability to the
Company's operations. The restructuring plan was necessitated by decreased
demand for the Company's products and the Company's adoption of a new
strategic direction. These actions resulted in a net charge of $179 million
after subsequent adjustments recorded in the fourth quarter of 1996. During
1997, the Company announced and began to implement supplemental restructuring
actions to meet the foregoing objectives of the plan. The Company recognized a
$217 million charge during 1997 for the estimated incremental costs of those
actions, including approximately $8 million of costs related to the termination
of the Company's former Chief Executive Officer. The combined restructuring
actions consist of terminating approximately 3,600 full-time employees,
approximately 3,300 of whom have been terminated from the second quarter of
1996 through March 27, 1998, excluding employees who were hired by SCI
Systems, Inc. and MCI Systemhouse, the purchasers of the Company's Fountain,
Colorado manufacturing facility and the Napa, California data center facility,
respectively; canceling or vacating certain facility leases as a result of
those employee terminations; writing down certain land, buildings and equipment
to be sold as a result of downsizing operations and outsourcing various
operational functions; and canceling contracts for projects and technologies
that are not central to the Company's core business strategy. The restructuring
actions under the plan have resulted in cash expenditures of $223 million and
noncash asset write-downs of $60 million from the second quarter of 1996
through March 27, 1998. During the third quarter of 1997 and the first and
second quarters of 1998, the Company made adjustments to the categories and
timing of expected restructure spending based on revised estimates. The
Company expects that the remaining $113 million accrued balance as of March
27, 1998 will result in cash expenditures of approximately $71 million over
the next six months and $15 million thereafter. The Company expects that most
of the contemplated restructuring actions related to the plan will be completed
during fiscal 1998 and will be financed through current working capital and,
if necessary, short-term borrowings.
The following table depicts the restructuring activity through March 27, 1998:
<TABLE>
<CAPTION>
(In millions)
Balance as of Balance as of
Category September 26, 1997 Spending Adjustments March 27, 1998
<S> <C> <C> <C> <C>
Payments to employees
involuntarily
terminated (C) $ 76 $ 41 $ (1) $ 34
Payments on canceled
or vacated facility
leases (C) 25 5 6 26
Write-down of operating
assets to be sold (N) 39 7 (5) 27
Payments on canceled
contracts (C) 40 14 -- 26
___________________________________________________
$180 $ 67 $ -- $113
(C): Cash; (N): Noncash.
</TABLE>
8
<PAGE>
Note 4 - Power Computing Asset Acquisition
On January 28, 1998, the Company completed its acquisition of certain assets
of Power Computing Corporation ("PCC"), a licensed distributor of the Mac OS
operating system. In addition to the acquisition of certain assets such as
PCC's customer database and the license to distribute the Mac OS, the Company
has the right to retain certain key employees of PCC. The agreement with PCC
also includes a release of claims between the parties. The total purchase
price was approximately $110 million, of which $75 million was expensed in the
fourth quarter of 1997 as "termination of license agreement" and $35 million
was recorded as goodwill in the second quarter of 1998. The goodwill will be
amortized over three years. The purchase price was comprised of approximately
4.2 million shares of the Company's common stock valued at $80 million,
forgiveness of $28 million of receivables due from PCC, and assumption by the
Company of $2 million of certain customer support liabilities of PCC.
Note 5 - Stock Option Exchange
In order to address concerns regarding the retention of the Company's key
employees, in December 1997 the Board of Directors approved an option exchange
program which allowed employees to exchange all (but not less than all) of
their existing options (vested and unvested) with an exercise price of greater
than $13.6875 on a one-for-one basis for new options with an exercise price of
$13.6875, the fair market value of the Company's common stock on December 19,
1997, and a new four year vesting schedule beginning in December 1997. A
total of 4.4 million options with a weighted-average exercise price of $20.01
per share were exchanged for new options as a result of this program.
Note 6 - Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and may require the Company to modify
certain aspects of its revenue recognition policies. The Company does not
expect the adoption of SOP 97-2 to have a material impact on the Company's
consolidated results of operations.
Note 7 - Contingencies
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1997 Form 10-K and in the Form 10-Q for the period
ended December 27, 1997. The Company is also subject to certain other legal
proceedings and claims which have arisen in the ordinary course of business
and which have not been fully adjudicated. The results of legal proceedings
cannot be predicted with certainty; however, in the opinion of management, the
Company does not have a potential liability related to any legal proceedings
and claims that would have a material adverse effect on its financial
condition or results of operations.
9
<PAGE>
The Internal Revenue Service ("IRS") has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made certain
prepayments thereon. The Company contested the proposed deficiencies by filing
petitions with the United States Tax Court, and most of the issues in dispute
have now been resolved. On June 30, 1997, the IRS proposed income tax
adjustments for the years 1992 through 1994. Although a substantial number of
issues for these years have been resolved, certain issues still remain in
dispute and are being contested by the Company. Management believes that
adequate provision has been made for any adjustments that may result from tax
examinations.
Note 8 - Reclassifications
Certain amounts in the 1997 Condensed Consolidated Statement of Cash Flows
have been reclassified to conform to the 1998 presentation.
Note 9 - Subsequent Events
As of March 27, 1998, the Company owned 37.4% of the outstanding stock of
ARM Holdings plc ("ARM"), a privately held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. On April 16, 1998, ARM completed an initial public offering of
its stock on the London Stock Exchange and the Nasdaq National Market. The
Company sold 18.9% of its shares in the offering for a gain before foreign
income taxes of approximately $23.4 million. This amount will be recognized
as other income in the third quarter of 1998. Foreign income taxes on this
gain are expected to be approximately $7.25 million. The Company's remaining
investment in ARM will be increased in the third quarter of 1998 by
approximately $16 million to a total of approximately $21 million to reflect
its 25.9% ownership interest in the net book value of ARM following its
initial public offering. The Company will continue to account for its
investment in ARM using the equity method.
The Company's cash and cash equivalents as of March 27, 1998 and September
26, 1997 include $161 million and $165 million, respectively, pledged as
collateral to support letters of credit primarily associated with the
Company's purchase commitments under the terms of the sale of the Company's
Fountain, Colorado, manufacturing facility to SCI. On April 24, 1998, SCI
notified the Company that certain performance measures defined within the
letter of credit agreement had been met by the Company and, that effective as
of May 29, 1998, the letter of credit and the amount pledged as collateral by
the Company to support the letter of credit will be reduced by $100 million.
Should the Company fail to meet those performance measures in the future, it
is possible that some or all of the letter of credit and supporting collateral
would have to be reestablished.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May
Affect Future Results and Financial Condition" below. The following discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q and in the
Company's 1997 Form 10-K. All information is based on the Company's
fiscal calendar.
Results of Operations
(Tabular information: Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Second Quarter Six Months Ended
March 27, March 28,
1998 1997 Change 1998 1997 Change
______________________ _________________________
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,405 $1,601 (12%) $2,983 $3,730 (20%)
Gross margin $ 349 $ 303 15% $ 702 $ 700 --%
Percentage of net sales 25% 19% 24% 19%
Research and development $ 75 $ 141 (47%) $ 154 $ 290 (47%)
Percentage of net sales 5% 9% 5% 8%
Selling, general and
administrative $ 223 $ 348 (36%) $ 457 $ 720 (37%)
Percentage of net sales 16% 22% 15% 19%
Special Charges
In-process research and
development $ -- $ 375 NM $ -- $ 375 NM
Percentage of net sales -- 23% -- 10%
Restructuring costs $ -- $ 155 NM $ -- $ 155 NM
Percentage of net sales -- 10% -- 4%
Interest and other income
(expense), net $ 8 $ 8 --% $ 15 $ 12 25%
Provision for income taxes $ 4 $ -- NM $ 4 $ -- NM
Effective tax rate 6.8% --% 3.8% --%
Net income (loss) $ 55 $ (708) 108% $ 102 $ (828) 112%
Basic earnings (loss)
per share $ 0.42 $(5.64) 107% $ 0.78 $(6.62) 112%
Diluted earnings (loss)
per share $ 0.38 $(5.64) 107% $ 0.71 $(6.62) 111%
</TABLE>
11
<PAGE>
Results of Operations - continued
(Tabular information: Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Second First
Quarter Quarter
1998 1998 Change
______________________
<S> <C> <C> <C>
Net sales $1,405 $1,578 (11%)
Gross margin $ 349 $ 353 (1%)
Percentage of net sales 25% 22%
Research and development $ 75 $ 79 (5%)
Percentage of net sales 5% 5%
Selling, general and
administrative $ 223 $ 234 (5%)
Percentage of net sales 16% 15%
Interest and other income
(expense), net $ 8 $ 7 14%
Provision for income taxes $ 4 $ -- NM
Effective tax rate 6.8% --%
Net income (loss) $ 55 $ 47 17%
Basic earnings (loss)
per share $0.42 $0.37 14%
Diluted earnings (loss)
per share $0.38 $0.33 15%
</TABLE>
NM: Not Meaningful
12
<PAGE>
Net Sales
Net sales represent the Company's gross sales net of returns, rebates and
discounts. Net sales for the second quarter and first six months of 1998 were
$1.4 billion and $3.0 billion, respectively, decreases of 12% and 20%,
respectively, over the corresponding periods in 1997. The decline in net sales
is attributable to several factors. The Company experienced a $60 million
decrease in net sales between the second quarter of 1998 and the same period
in 1997 of certain imaging products the Company is discontinuing. In addition,
between the second quarter of 1998 and the same period in 1997, there was a
$223 million decline in revenues from the sale of PowerBooks due to stronger
than usual sales of PowerBooks in the second quarter of 1997 related to new
product introductions. Net sales in Asia were adversely affected primarily by
the region's current economic problems, declining 31% or $250 million
during the first six months of 1998 compared to the same period in 1997.
Lastly, the average revenue per Macintosh system, a function of total net
sales generated by hardware shipments and total Macintosh CPU unit sales, fell
18% and 5%, respectively, between the second quarter and first six months of
1998 compared to the corresponding periods in 1997 reflecting the effect of
aggressive pricing on the Company's Power Macintosh G3 systems introduced
in 1998, the decline in net sales from the phase out of certain peripheral
products, and the overall industry trend towards lower-priced products. The
effect on net sales of these decreases were partially offset by an 8% increase
in unit sales of Macintosh computer systems during the second quarter of 1998
as compared to the same period in 1997.
Net sales decreased 11% in the second quarter of 1998 compared with the first
quarter of 1998 primarily due to a decrease in the average revenue per
Macintosh system. Also, the second quarter of each fiscal year has
historically been the Company's weakest due to lower demand from its
consumer and education markets in that time frame. Unit sales of peripheral
products decreased 45% in the second quarter of 1998 compared with the prior
quarter reflecting the continuing phase-out of certain peripheral products.
The average revenue per Macintosh system decreased 13% in the second quarter
of 1998 compared with the first quarter of 1998, primarily due to lower priced
G3 Macintosh systems comprising a higher portion of total computer units
shipped, the overall decline in peripheral unit sales, and in response to
continuing industry wide pricing pressures. The effect on net sales of these
decreases was partially offset by a 2% increase in total Macintosh computer
system unit sales during the second quarter of 1998 compared to the prior
quarter. Net sales for the current quarter were also positively affected by
continued strong sales of the Company's Power Macintosh G3 systems, which
accounted for approximately 51%of computer systems shipped during the second
quarter of 1998 as compared to 21% of computer systems shipped during the
prior quarter. In addition, net sales continued to be positively impacted
through the Company's marketing of many of its products directly to end users
in the U.S. through theCompany's on-line store, which opened in November 1997.
The Company generated $16 million in revenue from its on-line store during
the second quarter of 1998.
13
<PAGE>
International sales for the three and six month periods in 1998 represented
50% of consolidated net sales in each of the periods versus 49% and 53%,
respectively, for the same periods in 1997. International net sales fell 11%
in the second quarter of 1998 compared with the same period of 1997 primarily
due to decreased revenue in the European and Japanese markets as a result of
significant decreases in the average revenue per Macintosh system and in
peripheral unit sales, partially offset by increases in unit sales of
Macintosh systems. Domestic net sales declined 13% in the second quarter of
1998 over the comparable period of 1997 also due to decreases in the average
revenue per Macintosh system and in peripheral unit sales, partially offset
by increases in unit sales of Macintosh systems
The Company does not currently anticipate significant sequential quarterly
revenue growth before the fourth quarter of fiscal 1998, and year-over-year
revenue growth is not expected before the first quarter of fiscal 1999. The
foregoing statements are forward looking. The Company's actual results could
differ because of several factors, including those set forth below in the
subsection entitled "Factors That May Affect Future Results and Financial
Condition".
Gross Margin
Gross margin increased as a percentage of sales during the second quarter and
the first six months of 1998 compared to the corresponding periods of 1997,
and increased during the second quarter of 1998 from 22% to 25% of sales
compared to the first quarter of 1998. These increases were primarily a result
of a shift in revenue mix towards the Company's higher margin Power Macintosh
G3 systems as well as benefits derived from new distribution channel policies.
The Company believes gross margins of at least 23% are sustainable through
the end of fiscal 1998. The foregoing statement is forward looking. The
Company's actual results could differ because of several factors, including
those set forth below in the subsection entitled "Factors That May Affect
Future Results and Financial Condition".
There can be no assurance that current gross margin levels will be maintained.
In general, gross margins will remain under significant downward pressure due
to a variety of factors, including continued industry wide global pricing
pressures, increased competition, compressed product life cycles, and potential
changes to the Company's product mix. In response to these downward
pressures, the Company expects it will continue to take pricing actions with
respect to its products. Gross margins could also be affected by the Company's
ability to effectively manage quality problems and warranty costs and to
stimulate demand for certain of its products. The Company's operating strategy
and pricing take into account changes in foreign currency exchange rates over
time; however, the Company's results of operations can be significantly
affected in the short term by fluctuations in exchange rates.
14
<PAGE>
Research and Development
Expenditures for research and development decreased in amount and as a
percentage of net sales during the second quarter and the first six months of
1998 compared to the corresponding periods of 1997 and decreased in amount
during the second quarter of 1998 compared with the first quarter of 1998.
These reductions are due to various restructuring actions which resulted in
reductions in headcount and cancellation of certain research and development
projects.
Selling, General and Administrative
Selling, general and administrative expenses decreased in amount and as a
percentage of net sales during the second quarter and the first six months of
1998 compared to the corresponding periods of 1997 and decreased in amount
but remained relatively comparable as a percentage of sales during the second
quarter of 1998 compared to the first quarter of 1998. These decreases are due
to various restructuring actions which resulted in reductions in headcount,
the closing of facilities, the write-down of assets, and changes to
distribution channel policies.
Special Charges
During the second quarter of 1997, the Company recognized a $375 million
charge for in-process research and development in connection with the
acquisition of NeXT and a $155 million charge for restructuring costs. For
further information regarding the Company's restructuring actions, see Note 3
to the Condensed Consolidated Financial Statements.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, is comprised of interest income on
the Company's cash and investment balances, interest expense on the Company's
debt, gains and losses recognized on investments accounted for using the
equity method, certain foreign exchange gains and losses and other
miscellaneous income and expense items.
As of March 27, 1998, the Company owned 37.4% of the outstanding stock of
ARM Holdings plc ("ARM"), a privately held company in the United
Kingdom involved in the design of high performance microprocessors and
related technology. On April 16, 1998, ARM completed an initial public
offering of its stock on the London Stock Exchange and the Nasdaq National
Market. The Company sold 18.9% of its shares in the offering for a gain before
foreign income taxes of approximately $23.4 million. This amount will be
recognized as other income in the third quarter of fiscal 1998. The Company
will continue to account for its investment in ARM using the equity method.
15
<PAGE>
Provision for Income Taxes
The Company's tax rate was 3.8% for the first six months of 1998. The tax
provision for this period consisted entirely of foreign taxes. The Company
expects to recognize in the third quarter approximately $7.25 million of
foreign income taxes associated with the gain on the sale of ARM shares.
As of March 27, 1998, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $691 million
before being offset against certain deferred tax liabilities for presentation
on the Company's balance sheet. A substantial portion of this asset is
realizable based on the ability to offset existing deferred tax liabilities.
As of March 27, 1998, a valuation allowance of $209 million was recorded
against the deferred tax asset for the benefits of tax losses which may not
be realized. Realization of approximately $85 million of the asset
representing tax loss and credit carryforwards is dependent on the Company's
ability to generate approximately $245 million of future U.S. taxable income.
Management believes that it is more likely than not that forecasted U.S.
income, including income that may be generated as a result of certain tax
planning strategies, will be sufficient to utilize the tax carryforwards prior
to their expiration in 2011 and 2012 to fully recover this asset. However,
there can be no assurance that the Company will meet its expectations of
future U.S. taxable income. As a result, the amount of the deferred tax assets
considered realizable could be reduced in the near and long term if estimates
of future taxable U.S. income are reduced. Such an occurrence could materially
adversely affect the Company's consolidated financial results. The Company
will continue to evaluate the realizability of the deferred tax assets
quarterly by assessing the need for and amount of the valuation allowance.
Liquidity and Capital Resources
The Company's total cash, cash equivalents, and short-term investments
increased to $1,823 million as of March 27, 1998, from $1,459 million as of
September 26, 1997. The Company's cash and cash equivalent balances as of
March 27, 1998 and September 26, 1997 include $161 million and $165
million, respectively, pledged as collateral to support letters of credit
primarily associated with the Company's purchase commitments under the terms
of the sale of the Company's Fountain, Colorado, manufacturing facility to SCI.
On April 24, 1998, SCI notified the Company that certain performance measures
defined within the letter of credit agreement had been met by the Company and
that effective as of May 29, 1998, the letter of credit and the amount pledged
as collateral by the Company to support the letter of credit will be reduced
by $100 million. Should the Company fail to meet those performance measures
in the future, it is possible that some or all of the letter of credit and
supporting collateral would have to be reestablished.
Cash generated by operations during the first six months of 1998 totaled $296
million. Cash generated by operations was primarily the result of positive
earnings and decreases in accounts receivable and inventories, partially
offset by decreases in accounts payable and other current liabilities and
payments related to restructuring actions.
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Net cash used for the purchase of property, plant, and equipment totaled $12
million in the first six months of 1998, and consisted primarily of increases
in manufacturing machinery and equipment. The Company expects that the level
of capital expenditures in the second half of 1998 will be consistent with the
first half.
The Company believes that its existing cash, cash equivalents and short-term
investments balances, and ability, if necessary, to effect other short-term
borrowings, will be sufficient to meet its cash requirements over the next
twelve months. Expected cash requirements over the next twelve months include
an estimated $86 million to effect actions under the restructuring plan, most
of which will be effected during 1998. No assurance can be given that any
additional required financing could be obtained should the restructuring plan
take longer to implement than anticipated or be unsuccessful. If the Company
is unable to obtain such financing, its liquidity, results of operations,
and financial condition could be materially adversely affected.
Over the last two years, the Company's debt ratings have been downgraded to
non-investment grade. The company's senior and subordinated long-term debt
ratings remain B- and CCC, respectively, by Standard and Poor's Rating
Agency, and B3 and Caa2, respectively, by Moody's Investor Services. Both
rating agencies continue to have the Company on negative outlook. These
actions may increase the Company's cost of funds in future periods, require
the Company to pledge additional collateral with respect to certain of its
letters of credit and require the Company to agree to more stringent debt
covenants than in the past.
Factors That May Affect Future Results and Financial Condition
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, there are
many factors that will affect the Company's future results and business which
may cause the actual results to differ from those currently expected. The
Company's future operating results and financial condition are dependent upon
the Company'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 the Company's prospects, including the viability of
the Macintosh platform. Inherent in this process are a number of factors that
the Company must successfully manage in order to achieve favorable future
operating results and a favorable financial condition. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, among other things, continued competitive
pressures in the marketplace and the effect of any reaction by the Company to
such competitive pressures, including pricing actions by the Company; risks
associated with international operations, including economic and labor
conditions, political instability, tax laws, and currency fluctuations;
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increasing dependence on third-parties for manufacturing and other outsourced
functions such as logistics; the availability of key components on terms
acceptable to the Company; the continued availability of certain components
essential to the Company's business currently obtained by the Company from
sole or limited sources, including PowerPC RISC microprocessors developed by
and obtained from IBM and Motorola; the Company's ability to supply products
in certain categories; the Company's ability to supply products free of latent
defects or other faults; the Company'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 timely
delivery of future versions of the Mac OS; the Company's ability to
successfully integrate the technologies of NeXT Software, Inc. ("NeXT"), which
was acquired in 1997; the Company's ability to successfully implement its
strategic direction and restructuring actions, including reducing its
expenditures; the Company's ability to attract, motivate and retain employees;
the effects of significant adverse publicity; the availability of third-party
software for particular applications; the effect of year 2000 compliance
issues; the Company's ability to successfully replace its existing transaction
systems in the U.S.; and the impact on the Company's sales, market share and
gross margins as a result of the Company winding down its Mac OS licensing
program.
For a discussion of these and other factors affecting the Company's future
results and financial condition, see "Item 7 - Management's Discussion and
Analysis -- Factors That May Affect Future Results and Financial Condition"
in the Company's 1997 Form 10-K.
18
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1997 Form 10-K and in the Form 10-Q for the period
ended December 27, 1997. The Company is also subject to certain other legal
proceedings and claims which have arisen in the ordinary course of business
and which have not been fully adjudicated. The results of legal proceedings
cannot be predicted with certainty; however, in the opinion of management, the
Company does not have a potential liability related to any legal proceedings
and claims that would have a material adverse effect on its financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
a) The annual meeting of shareholders was held on April 22, 1998. All
matters voted on were approved except for the proposal to eliminate the
classification of the Board of Directors. That proposal required the
affirmative vote of a majority of the outstanding shares, but only received the
affirmative vote of 39% of the outstanding shares.
b) The following directors were elected at the meeting to serve a two-year
term as Class II directors:
For Authority Withheld
Steven P. Jobs 105,582,626 1,025,548
Lawrence J. Ellison 105,371,740 1,236,434
Edgar S. Woolard, Jr. 105,584,690 1,023,484
The following directors are continuing to serve their two-year terms as
Class I directors which will expire at the next annual meeting:
Gareth C.C. Chang
William V. Campbell
Jerome B. York
c) The other matters voted upon at the meeting and results of those votes
were as follows:
(1) Proposal to amend the Company's Restated Articles of Incorporation
to eliminate the classification of the Board of Directors and thereby
ensure each director will stand for election annually.
For Against Abstained Broker Non-Vote
51,388,074 826,313 402,664 53,991,123
(2) Approval of the Apple Computer, Inc. 1997 Director Stock Option
Plan, which provides for the issuance of up to 400,000 shares of Common
Stock to non-employee directors of the Company upon exercise of stock
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options granted under the stock option plan, and independent stock option
grants of 15,000 stock options to each of Edgar S. Woolard, Jr. and Gareth
C.C. Chang, and the reservation of 430,000 shares of Common Stock in the
aggregate for issuance pursuant to the 1997 Director Stock Option Plan and
such grants.
For Against Abstained Broker Non-Vote
92,932,645 10,804,953 1,130,607 1,739,969
(3) Approval of the 1998 Executive Officer Stock Plan and the reservation
for issuance thereunder of 17,000,000 shares of Common Stock.
For Against Abstained Broker Non-Vote
80,447,299 23,041,431 1,678,638 1,440,806
(4) Ratification of appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for fiscal year 1998.
For Against Abstained Broker Non-Vote
104,210,230 1,884,595 497,668 15,681
The matters numbered (1) - (4) above are described in detail in the
Registrant's definitive proxy statement dated March 16, 1998, for the Annual
Meeting of Shareholders held on April 22, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10.A.50 1997 Director Stock Option Plan.
10.A.51 1998 Executive Officer Stock Plan
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated January 6, 1998 to
report under Item 5 (other events) the issuance of a press release, and file
such press release as an exhibit to such report, regarding the Company's
expectation of reporting net profits for its fiscal 1998 first quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
By: /s/Fred D. Anderson
Fred D. Anderson
Executive Vice President and Chief Financial Officer
May 11, 1998
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INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
10.A.50 1997 Director Stock Option Plan. 23
10.A.51 1998 Executive Officer Stock Plan 33
27 Financial Data Schedule. 45
22
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EXHIBIT 10.A.50
Apple Computer, Inc.
1997 Director Stock Option Plan
(Effective as of August 5, 1997)
23
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Apple Computer, Inc.
1997 Director Stock Option Plan
1. Purposes. The purposes of the Plan are to retain the services
of qualified individuals who are not employees of the Company to serve as
members of the Board and to secure for the Company the benefits of the
incentives inherent in increased Common Stock ownership by such individuals
by granting such individuals Options to purchase shares of Common Stock.
2. Administration. The Administrator will be responsible for
administering the Plan. The Administrator will have authority to adopt such
rules as it may deem appropriate to carry out the purposes of the Plan, and
shall have authority to interpret and construe the provisions of the Plan and
any agreements and notices under the Plan and to make determinations
pursuant to any Plan provision. Each interpretation, determination or other
action made or taken by the Administrator pursuant to the Plan shall be final
and binding on all persons. The Administrator shall not be liable for any
action or determination made in good faith, and shall be entitled to
indemnification and reimbursement in the manner provided in the Company's
Articles of Incorporation and By-Laws as such documents may be amended from
time to time.
3. Shares Available.
Subject to the provisions of Section 7(b) of the Plan, the maximum
number of shares of Common Stock which may be issued under the Plan shall
not exceed 400,000 shares (the "Section 3 Limit"'). Either authorized and
unissued shares of Common Stock or treasury shares may be delivered
pursuant to the Plan. For purposes of determining the number of shares that
remain available for issuance under the Plan, the following rules shall apply:
(a) the number of shares of Common Stock underlying Options
shall be charged against the Section 3 Limit; and
(b) the Section 3 Limit shall be increased by (i) the number of
shares subject to an Option which lapses, expires or is otherwise terminated
without the issuance of such shares, and (ii) the number of shares, if any,
tendered to pay the exercise price of an Option.
4. Options. Each Non-Employee Director shall receive grants of
Options under the Plan as follows
(a) Option Grants.
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(i) Initial Grants. Non-Employee Directors who were members
of the Board on the day prior to the Effective Date shall be granted an
Initial Option to purchase 15,000 shares of Common Stock as of August
14, 1997 ("Initial Grant Date"), provided that such individual continues to
serve as a Non-Employee Director through the Initial Grant Date. Non-
Employee Director who were elected or appointed to the Board on the
Effective Date an Initial Option to purchase 30,000 shares of Common
Stock on the Initial Grant Due, provided that such individual continues to
serve as a Non-Employee Director through the Initial Grant Date. Non-
Employee Directors who are elected or appointed to the Board after the
Effective Date shall be granted an Initial Option to purchase 30,000 shares
of Common Stock as of the date of their election or appointment to the
Board. The provisions of this Section 4(a)(i) shall not apply to any
member of the Board who first becomes a Non-Employee Director by
reason of such member's ceasing to be an employee of the Company and
its Subsidiaries.
(ii) Annual Grants. Each Non-Employee Director shall receive
an Annual Option to purchase 10,000 shares of Common Stock on the
fourth anniversary of the Non-Employee Director's initial election or
appointment to the Board and on each subsequent anniversary thereof,
provided that the individual has remained in continuous service as a
director of the Company through such anniversary date and is a Non-
Employee Director on the applicable anniversary date.
(b) Exercise Period. The per share exercise price of each Option
shall be the Fair Market Value of a share of Common Stock as of the date of
grant of the Option determined in accordance with the provisions of the Plan.
(c) Vesting. Initial Options shall vest and become exercisable in
annual installments on each of the first through third anniversaries of the
date of grant, provided that the Non-Employee Director has remained in
continuous service as a director of the Company through each such anniversary
date. Annual Options shall be fully vested and immediately exercisable on their
date of grant.
(d) Term of Options.
(i) Ten-Year Term. Each Option shall expire ten (10) years from
its date of grant, subject to earlier termination as provided herein.
(ii) Exercise Following Termination of Service Due to Death. If
a Non-Employee Director ceases to be a member of the Board by reason of
such Non-Employee Director's death, the Options granted to such Non-
Employee Director may be exercised by such Non-Employee Director's
Beneficiary, but only to the extent the Option was exercisable at the time
of the Non-Employee Director's death, at any time within three (3) years
alter the date of such termination of service, subject to the earlier
expiration of such Options as provided for in Section 4(d)(i) above. At the
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end of such three-year period, the vested portion of the Option shall
expire. The unvested portion of the Option shall expire on the date of the
Non-Employee Director's death.
(iii) Termination of Options if a Non-Employee Director is
Removed from the Board for Cause. In the event a Non-Employee
Director is removed from the Board for "cause," all Options granted to
such Non-Employee Director (whether or not then vested and
exercisable) shall immediately terminate and be of no further force and
effect as of the effective date of such removal from the Board. Whether a
Non-Employee Director is removed by the Board for "cause" shall be
determined by the Board in accordance with the By-Laws of the
Company.
(iv) Exercise Following Other Terminations of Service. If a Non-
Employee Director ceases to be a member of the Board for any reason
other than death or removal from the Board for cause, the Options
granted to such Non-Employee Director may be exercised by such Non-
Employee Director, but only to the extent the Option was exercisable at
the time of the Non-Employee Director's termination, at any time within
ninety (90) days after the date of such termination of service, subject to the
earlier expiration of such Options as provided for in Section 4(d)(i) above.
At the end of such ninety-day period, the vested portion of the Option
shall expire. The unvested portion of the Option shall expire on the date
of the Non-Employee Director's termination of service with the Board.
(e) Time and Manner of Exercise of Options.
(i) Notice of Exercise. Subject to the other terms and conditions
hereof, a Non-Employee Director may exercise any Option, to the extent
such Option is vested, by giving written notice of exercise to the
Company; provided, however, that in no event shall an Option be
exercisable for a fractional share. The date of exercise of an Option shall
be the later of (A) the date on which the Company receives such written
notice and (B) the date on which the conditions provided in Section
4(e)(ii) are satisfied.
(ii) Method of Payment. The consideration to be paid for the
shares to be issued upon exercise of an Option may consist of (A) cash, (B)
check, (C) other shares which have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the shares as to which
the Option shall be exercised and which have been owned by the Non-
Employee Director for at least six (6) months at the time of exercise, (D)
delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount
of proceeds required to pay the exercise price, or (E) any combination of
the foregoing methods of payment.
(iii) Stockholder Rights. A Non-Employee Director shall have
no rights as a stockholder with respect to any shares of Common Stock
issuable upon exercise of an Option until a certificate evidencing such
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shares shall have been issued to the Non-Employee Director pursuant to
Section 4(e)(v), and no adjustment shall be made for dividends or
distributions or other rights in respect of any share for which the record
date is prior to the date upon which the Non-Employee Director shall
become the holder of record thereof.
(iv) Limitation on Exercise. No Option shall be exercisable
unless the Common Stock subject thereto has been registered under the
Securities Act and qualified under applicable state "blue sky" laws in
connection with the offer and sale thereof, or the Company has
determined that an exemption from registration under the Securities Act
and from qualification wider such state "blue sky" laws is available.
(v) Issuance of Shares. Subject to the foregoing conditions, as
soon as is reasonably practicable after its receipt of a proper notice of
exercise and payment of the exercise price of the Option for the number of
shares with respect to which the Option is exercised, the Company shall
deliver to the Non-Employee Director (or following the Non-Employee
Director's death, the Beneficiary entitled to exercise the Option), at the
principal office of the Company or at such other location as may be
acceptable to the Company and the Non-Employee Director (or such
Beneficiary), one or more stock certificates for the appropriate number of
shares of Common Stock Issued in connection with such exercise. Shares
sold in connection with a "cashless exercise" described in clause C of
Section 4(e)(ii) shall be delivered to the broker referred to therein in
accordance with the procedures established by the Company from time to
time.
(f) Restrictions on Transfer. An Option may not be transferred,
pledged, assigned, or otherwise disposed of, except by will or by the laws of
descent and distribution; provided, however, that an Option may be
transferred to a Non-Employee Director's family members or to one or more
trusts established in whole or in part for the benefit of one or more of such
family members. The Option shall be exercisable, during the Non-Employee
Director's lifetime, only by the Non-Employee Director or by the individual or
entity to whom the Option has been transferred in accordance with the previous
sentence. No assignment or transfer of the Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, except by will or the laws of descent and distribution, shall vest
in the assignee or transferee any interest or right in the Option, but
immediately upon any attempt to assign or transfer the Option the same shall
terminate and be of no force or effect.
5. Designation of Beneficiary.
(a) Beneficiary Designations. Each Non-Employee Director
may designate a Beneficiary to exercise an Option upon the Non-Employee
Director's death by executing a Beneficiary Designation Form.
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<PAGE>
(b) Change of Beneficiary Designation. A Non-Employee
Director may change an earlier Beneficiary designation by executing a later
Beneficiary Designation Form and delivering it to the Administrator. The
execution of a Beneficiary Designation Form and its receipt by the
Administrator will revoke and rescind any prior Beneficiary Designation Form.
6. Change in Control.
Anything in the Plan to the contrary notwithstanding, in the event
of a Change in Control of the Company, the following provisions shall apply:
(a) Any Options outstanding as of the date such Change in
Control is determined to have occurred that are not yet exercisable and vested
on such date shall become fully exercisable and vested.
(b) The value of all outstanding Options (to the extent not
previously exercised) shall be cashed out on the date of the Change in
Control. The amount at which such Options shall be cashed out shall be equal
to the excess, if any, of (i) the Change in Control Price over (ii) the
exercise price of the Common Stock covered by the Option. The cash-out
proceeds shall be paid to the Non-Employee Director or, in the event of death
of the Non-Employee Director prior to payment, to the Beneficiary thereof.
(c) If the Administrator shall receive an opinion from a nationally
recognized firm of accountants to the Company that the cash-out provisions in
Section 6(b) above with respect to Options will prohibit the utilization of
"pooling of interests" accounting in connection with the transaction resulting
in the Change in Control of the Company, then the following shall apply, but
only to the extent necessary to permit such accounting treatment: (i) the
provisions of Section 6(b) shall not apply to the Options, (ii) each such
Option shall become immediately vested and exercisable as of the date such
opinion is received by the Administrator, and (iii) the Administrator shall
promptly inform each Non-Employee Director of such opinion and of the
accelerated vesting and exercisability of the Option sufficiently prior to the
anticipated date of the Change in Control, so as to permit the Option to be
exercised prior to the date of the Change in Control.
7. Recapitalization or Reorganization.
(a) Authority of the Company and Shareholders. The existence
of the Plan shall not affect or restrict in any way the right or power of the
Company or the shareholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the Company,
any issue of stock or of options, warrants or rights to purchase stock or of
bonds, debentures, preferred or prior preference stocks whose rights are
superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
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(b) Change in Capitalization. Notwithstanding any other
provision of the Plan, in the event of any change in the outstanding Common
Stock by reason of a stock dividend, recapitalization, reorganization, merger,
consolidation, stock split, combination or exchange of shares (a "change in
Capitalization"), (i) such proportionate adjustments as may be necessary (in
the form determined by the Administrator in its sole discretion) to reflect
such change shall be made to prevent dilution or enlargement of the rights of
Non-Employee Directors under the Plan with respect to tile aggregate number of
shares of Common Stock authorized to be awarded under the Plan, the number
of shares of Common Stock covered by each outstanding Option and the
exercise prices in respect thereof and the number of shares of Common Stock
covered by future Option grants and (ii) the Administrator may make such
other adjustments, consistent with the foregoing, as it deems appropriate in
its sole discretion.
(c) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Option will vest
and become exercisable on a date prior to the consummation of the proposed
action that is reasonably sufficient to enable the Non-Employee Directors to
exercise their Options.
8. Termination and Amendment of the Plan.
(a) Termination. The Plan shall terminate on the tenth
anniversary of the Effective Date, Following such date, no further grants of
Options shall be made pursuant to the Plan.
(b) General Power of Board. Notwithstanding anything herein
to the contrary, the Board may at any time and from time to time terminate,
modify, suspend or amend the Plan in whole or in part; provided, however, that
no such termination, modification, suspension or amendment shall be effective
without shareholder approval if such approval is required to comply with any
applicable law or stock exchange rule; and provided further, that the Board
may not, without shareholder approval, increase the maximum number of shares
issuable under the Plan except as provided in Section 7(b) above.
(c) When Non-Employee Directors' Consents Required. The
Board may not alter, amend, suspend, or terminate the Plan without the consent
of any Non-Employee Director to the extent that such action would adversely
affect his or her rights with respect to Options that have previously been
granted.
9. Miscellaneous.
(a) No Right to Reelection. Nothing in the Plan shall be deemed
to create any obligation on the part of the Board to nominate any of its
members for reelection by the Company's stockholders, nor confer upon any
Non-Employee Director the right to remain a member of the Board for any
period of time, or at any particular rate of compensation
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(b) Securities Law Restrictions. The Administrator may require
each Non-Employee Director purchasing or acquiring shares of Common Stock
pursuant to the Plan to agree with the Company in writing that such Non-
Employee Director is acquiring the shares for investment and not with a view
to the distribution thereof. All certificates for shares of Common Stock
delivered under the Plan shall be subject to such stock transfer orders and
other restrictions as the Administrator may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange
Commission or any exchange upon which the Common Stock is then listed,
and any applicable federal or state securities law, and the Administrator may
cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions. No shares of Common Stock shall be
issued hereunder unless the Company shall have determined that such
issuance is in compliance with, or pursuant to an exemption from, all
applicable federal and state securities laws.
(c) Expenses. The costs and expenses of administering the Plan
shall be borne by the Company.
(d) Applicable Law. Except as to matters of federal law, the Plan
and all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
conflicts of law principles.
(e) Effective Date. The Plan shall be effective as of the Effective
Date, subject to the approval thereof by the stockholders of the Company by no
later than the next Annual Meeting to occur after the Effective Date. If such
stockholder approval is not obtained by the date of such Annual Meeting, all
prior Option grants shall be void ab initio and of no further force and
effect.
10. Definitions. Capitalized words not otherwise defined in the
Plan have the meanings set forth below:
"Administrator" means the Chief Executive Officer of the Company
or the individual appointed by the Chief Executive Officer of the
Company to administer the Plan.
"Annual Meeting" means an annual meeting of the Company's
stockholders.
"Annual Option" means an Option granted to a Non-Employee
Director pursuant to Section 4(a)(ii) of the Plan.
"Beneficiary" or "Beneficiaries" means an individual or entity
designated by a Non-Employee Director on a Beneficiary Designation
Form to exercise Options in the event of the Non-Employee Director's
death; provided, however, that, if no such individual or entity is designated
or if no such designated individual is alive at the time of the Non-
Employee Director's death, Beneficiary shall mean the Non-Employee
Director's estate.
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"Beneficiary Designation Form" means a document, in a form
approved by the Administrator to be used by Non-Employee Directors to
name their respective Beneficiaries. No Beneficiary Designation Form
shall be effective unless it is signed by the Non-Employee Director and
received by the Administrator prior to the date of death of the Non-
Employee Director.
"Board" means the Board of Directors of the Company.
"Change in Control" means the happening of any of the following:
(i) When any "person", as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than the Company, a
Subsidiary or a Company employee benefit plan, including any
trustee of such plan acting as trustee) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The occurrence of a transaction requiring shareholder
approval, and involving the sale of all or substantially all of the
assets of the Company or the merger of the Company with or into
another corporation.
"Change in Control Price" means, as determined by the
Administrator, (i) the highest Fair Market Value at any time within the
sixty-day period immediately preceding the date of determination of the
Change in Control price by the Administrator (the "Sixty-Day Period"), or
(ii) the highest price paid or offered, as determined by the Administrator,
in any bona fide transaction or bona fide offer related to the Change in
Control of the Company, at any time within the Sixty-Day Period.
"Code," means the Internal Revenue Code of 1986, as amended,
and the applicable rules and regulations promulgated thereunder.
"Common Stock" means the common stock of the Company, no par
value per share.
"Company" means Apple Computer, Inc., a California corporation,
or any successor to substantially all of its business.
"Effective Date" means, subject to Section 9(e), August 5, 1997.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the applicable rules and relations promulgated thereunder.
"Fair Market Value" means the value of Common Stock determined
as follows:
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(i) If the Common Stock is listed on any established stock
exchange or a national market system (including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value
shall be the closing sales price for such stock or the closing bid if no sales
were reported, as quoted on such system or exchange (or the exchange
with the greatest volume of trading in the Common Stock) for the date of
determination or, if the date of determination is not a trading day, the
immediately preceding trading day, as reported in The Wall Street Journal
or such other source as the Administrator deems reliable.
(ii) If the Common Stock is regularly quoted on the NASDAQ
System (but not on the National Market System) or quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high and low asked prices
for the Common Stock on the date of determination or, if there are no
quoted prices on the date of determination, on the last day on which there
are quoted prices prior to the date of determination.
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
"Initial Option" means an Option granted to a Non-Employee Director
pursuant to Section 4(a)(i) of the Plan.
"Non-Employee Director" means a member of the Board who is not an
employee of the Company or any of its Subsidiaries.
"Option "means an option to purchase shares or Common Stock awarded to
a Non-Employee Director pursuant to the Plan and includes Initial Options and
Annual Options.
"Plan" means the Apple Computer, Inc. 1997 Director Stock Option Plan.
"Section 3 Limit " shall have the meaning set forth in Section 3 of the Plan.
"Subsidiary" means any corporation which is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code with respect to the Company.
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EXHIBIT 10.A.51
APPLE COMPUTER, INC.
1998 EXECUTIVE OFFICER STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
to attract and retain the best available personnel for positions of
substantial responsibility,
to provide additional incentive to the Chairman and/or Executive
Officers, and
to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options (as defined
under Section 422 of the Code) or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant. Stock appreciation rights ("SARs") may
be granted under the Plan in connection with Options or independently of
Options. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Agreement" means an agreement between the Company and an Optionee
evidencing the terms and conditions of an individual Option, SAR or Stock
Purchase grant. The Agreement is subject to the terms and conditions of
the Plan.
(c) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options, SARs
or Stock Purchase Rights are, or will be, granted under the Plan.
(d) "Board" means the Board of Directors of the Company.
(e) "Chairman" means the Chairman of the Board.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
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(h) "Common Stock" means the common stock of the Company.
(i) "Company" means Apple Computer, Inc., a California corporation.
(j) "Continuous Status as Chairman" unless determined otherwise by the
Administrator, means the absence of any interruption or termination as
Chairman of the Board with the Company. Continuous Status as Chairman
shall not be considered interrupted in the case of medical leave, military
leave, family leave, or any other leave of absence approved by the
Administrator, provided, in each case, that such leave does not result in
termination as Chairman with the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to
constitute status as "Chairman" by the Company.
(k) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship with the
Company or any Subsidiary. Continuous Status as an Employee shall not be
considered interrupted in the case of (i) medical leave, military leave,
family leave, or any other leave of absence approved by the Administrator,
provided, in each case, that such leave does not result in termination of
the employment relationship with the Company or any Subsidiary, as the
case may be, under the terms of the respective Company policy for such
leave; or (ii) in the case of transfers between locations of the Company or
between the Company, its Subsidiaries, or its successor. For purposes of
Incentive Stock Options, no such leave may exceed ninety days, unless
reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved
by the Company is not so guaranteed, on the 91st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Non-
statutory Stock Option. Neither service as a Chairman nor as a Director
nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Director" means a member of the Board.
(m) "Employee " means any person employed by the Company or any Parent
or Subsidiary of the Company subject to (i) above.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Executive Officer" means any person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
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its Fair Market Value shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange or
system, on the date of determination or, if the date of determination is
not a trading day, the immediately preceding trading day, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid and
low asked prices for the Common Stock on the date of determination or, if
there are no quoted prices on the date of determination, on the last day on
which there are quoted prices prior to the date of determination, as
reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Administrator.
(q) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder and is expressly designated by the
Administrator at the time of grant as an incentive stock option.
(r) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Optioned Stock" means the Common Stock subject to an Option, SAR
or Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option, SAR or Stock
Purchase Right.
(v) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1998 Executive Officer Stock Plan.
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 12 of the Plan.
(y) "SAR" means a stock appreciation right granted pursuant to Section 10
below.
(z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(aa) "Section 16(b)" means Section 16(b) of the Exchange Act.
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(bb) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 14 of the Plan.
(cc) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 12 of the Plan, as evidenced by an Agreement.
(dd) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan or for which SARs or Stock Purchase Rights may be granted and
exercised is 17,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
In the discretion of the Administrator, any or all of the Shares
authorized under the Plan may be subject to SARs issued pursuant to the Plan.
If an Option, SAR or Stock Purchase Right issued under the Plan should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares which were subject thereto shall become available
for other Options, SARs or Stock Purchase Rights under this Plan (unless the
Plan has terminated); however, should the Company reacquire Shares which were
issued pursuant to the exercise of an Option or SAR, such Shares shall not
become available for future grant under the Plan. If Shares of Restricted
Stock are repurchased by the Company at their original purchase price, such
shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3
promulgated under the Exchange Act or any successor rule thereto, as in
effect at the time that discretion is being exercised with respect to the
Plan ("Rule 16b-3"), and by the legal requirements of the Applicable Laws
relating to the administration of stock plans such as the Plan, if any, the
Plan may (but need not) be administered by different administrative bodies
with respect to (A) Directors who are not Employees, (B) Directors who are
Employees, (C) Officers who are not Directors and (D) Employees who are
neither Directors nor Officers.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options or SARs granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of
the Code, the Plan shall be administered by a Committee of two or more
"outside directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3.
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(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by
the Board to such Committee, the Administrator shall have the authority,
in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the person(s) to whom Options, SARs and Stock Purchase
Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option, SAR or Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option, SAR or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the date of grant, the time or times when Options, SARs or
Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any Option, SAR or Stock
Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion,
shall determine;
(vi) to reduce the exercise price of any Option, SAR or Stock
Purchase Right to the then current Fair Market Value if the Fair Market
Value of the Common Stock covered by such Option, SAR or Stock Purchase
Right shall have declined since the date the Option, SAR or Stock Purchase
Right was granted;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(ix) to modify or amend each Option, SAR or Stock Purchase Right
(subject to Section 16(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options
longer than is otherwise provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
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exercise of an Option, SAR or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld.
The Fair Market Value of the Shares to be withheld shall be determined on
the date that the amount of tax to be withheld is to be determined. All
elections by an Optionee to have Shares withheld for this purpose shall be
made in such form and under such conditions as the Administrator may deem
necessary or advisable;
(xi) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option, SAR or Stock
Purchase Right previously granted by the Administrator; and
(xii) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options, SARs or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options, SARs and Stock Purchase Rights
may be granted to the Chairman and Executive Officers or to such other
individuals as determined by the Administrator whom the Company has offered a
position of Chairman or Executive Officer. Incentive Stock Options may be
granted only to Executive Officers.
6. Limitations.
(a) Each Option shall be designated in the Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 6(a), Incentive Stock Options shall be taken
into account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(b) Neither the Plan nor any Option, SAR or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the
Optionee's relationship as an Employee with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right to
terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options and SARs:
(i) No participant shall be granted, in any fiscal year of the
Company, Options to purchase more than 17,000,000 Shares.
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(ii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 15.
(iii) If an Option or SAR is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a
transaction described in Section 15), the canceled Option will be counted
against the limits set forth in subsections (i) above. For this purpose,
if the exercise price of an Option or SAR is reduced, the transaction will
be treated as a cancellation of the Option or SAR and the grant of a new
Option or SAR.
7. Term of Plan. Subject to Section 20 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Agreement.
In the case of an Incentive Stock Option, the term shall be ten (10) years from
the date of grant or such shorter term as may be provided in the Agreement.
Moreover, in the case of an Incentive Stock Option granted to an Optionee who,
at the time the Incentive Stock Option is granted, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter
term as may be provided in the Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per
Share exercise price shall be no less than 100% of the Fair Market Value
per Share on the date of grant.
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(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant as determined by the Administrator or pursuant to a
merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the Administrator
shall determine the acceptable form of consideration at the time of grant.
Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Stock Appreciation Rights.
(a) Granted in Connection with Options. At the sole discretion of the
Administrator, SARs may be granted in connection with all or any part of an
Option, either concurrently with the grant of the Option or at any time
thereafter during the term of the Option. The following provisions apply to
SARs that are granted in connection with Options:
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(i) The SAR shall entitle the Optionee to exercise the SAR by
surrendering to the Company unexercised a portion of the related Option.
The Optionee shall receive in exchange from the Company an amount equal
to the excess of (x) the Fair Market Value on the date of exercise of the
SAR of the Common Stock covered by the surrendered portion of the related
Option over (y) the exercise price of the Common Stock covered by the
surrendered portion of the related Option. Notwithstanding the foregoing,
the Administrator may place limits on the amount that may be paid upon
exercise of an SAR; provided, however, that such limit shall not restrict
the exercisability of the related Option;
(ii) When a SAR is exercised, the related Option, to the extent
surrendered, shall no longer be exercisable;
(iii) A SAR shall be exercisable only when and to the extent that
the related Option is exercisable and shall expire no later than the date
on which the related Option expires; and
(iv) A SAR may only be exercised at a time when the Fair Market
Value of the Common Stock covered by the related Option exceeds the
exercise price of the Common Stock covered by the related Option.
(b) Independent SARs. At the sole discretion of the Administrator, SARs
may be granted without related Options. The following provisions apply to
SARs that are not granted in connection with Options:
(i) The SAR shall entitle the Optionee, by exercising the SAR, to
receive from the Company an amount equal to the excess of (x) the Fair
Market Value of the Common Stock covered by exercised portion of the
SAR, as of the date of such exercise, over (y) the Fair Market Value of
the Common Stock covered by the exercised portion of the SAR, as of the
date on which the SAR was granted; provided, however, that the
Administrator may place limits on the amount that may be paid upon
exercise of a SAR; and
(ii) SARs shall be exercisable, in whole or in part, at such times as
the Administrator shall specify in the Optionee's SAR agreement.
(c) Form of Payment. The Company's obligation arising upon the exercise
of a SAR may be paid in Common Stock or in cash, or in any combination of
Common Stock and cash, as the Administrator, in its sole discretion, may
determine. Shares issued upon the exercise of a SAR shall be valued at their
Fair Market Value as of the date of exercise.
(d) Rule 16b-3. SARs granted hereunder shall contain such additional
restrictions as may be required to be contained in the plan or SAR agreement in
order for the SAR to qualify for the maximum exemption provided by Rule 16b-3.
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11. Exercise of Option or SAR.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option or SAR
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Agreement. An Option may not be exercised for a fraction
of a Share.
An Option or SAR shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the terms of
the Option or SAR) from the person entitled to exercise the Option or SAR, and
(ii) full payment for the Shares with respect to which the Option is
exercised. Full payment may consist of any consideration and method of payment
authorized by the Administrator and permitted by the Agreement and the Plan.
Shares issued upon exercise of an Option shall be issued in the name of the
Optionee or, if requested by the Optionee, in the name of the Optionee and his
or her spouse. Until the Shares are issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the Shares are issued, except as provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised. Exercise
of a SAR in any manner shall, to the extent the SAR is exercised, result in a
decrease in the number of Shares which thereafter shall be available for
purposes of the Plan, and the SAR shall cease to be exercisable to the extent
it has been exercised.
(b) Termination of Continuous Status as Chairman. Upon termination of
an Optionee's Continuous Status as Chairman (other than termination by reason
of the Optionee's death), the Optionee may, but only within ninety (90) days
after the date of such termination, exercise his or her Option or SAR to the
extent that it was exercisable at the date of such termination.
Notwithstanding the foregoing, however, an Option or SAR may not be exercised
after the date the Option or SAR would otherwise expire by its terms due to
the passage of time from the date of grant.
(c) Termination of Continuous Employment. Upon termination of an
Optionee's Continuous Status as Employee (other than termination by reason of
the Optionee's death), the Optionee may, but only within ninety (90) days
after the date of such termination, exercise his or her Option or SAR to the
extent that it was exercisable at the date of such termination.
Notwithstanding the foregoing, however, an Option or SAR may not be exercised
after the date the Option or SAR would otherwise expire by its terms due to
the passage of time from the date of grant.
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(d) Death of Optionee. If an Optionee dies (i) while an Employee or
Chairman, the Option or SAR may be exercised at any time within six (6) months
(or such other period of time not exceeding twelve (12) months as determined
by the Administrator) following the date of death by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and terminated his or her employment
six (6) months (or such other period of time not exceeding twelve (12) months
as determined by the Administrator) after the date of death; or (ii) within
ninety (90) days after the termination of Continuous Status as an Employee or
Chairman, the Option or SAR may be exercised, at any time within six (6)
months (or such other period of time not exceeding twelve (12) months as
determined by the Administrator) following the date of death by the Optionee's
estate or by a person who acquired the right to exercise the Option or SAR by
bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination. If the Option or SAR is not so
exercised within the time specified herein, the Option or SAR shall terminate,
and the Shares covered by such Option or SAR shall revert to the Plan.
Notwithstanding the foregoing, however, an Option or SAR may not be
exercised after the date the Option or SAR would otherwise expire by its terms
due to the passage of time from the date of grant.
(e) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares an Option or SAR previously granted based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
12. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
offeree shall be entitled to purchase, the price to be paid, and the time
within which the offeree must accept such offer. The offer shall be accepted
by execution of an Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Agreement shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's service with the
Company for any reason (including death or Disability). The purchase price for
Shares repurchased pursuant to the Agreement shall be the original price paid
by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
(c) Other Provisions. The Agreement shall contain such other terms,
provisions and conditions not inconsistent with the Plan as may be determined
by the Administrator in its sole discretion.
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(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 14 of the Plan.
13. Transferability of Options, SARs and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option, SAR or Stock Purchase
Right may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent or
distribution or pursuant to a qualified domestic relations order as defined by
the Code or Title 1 of the Employee Retirement Income Security Act, and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option, SAR or Stock Purchase Right transferable, such
Option, SAR or Stock Purchase Right shall contain such additional terms and
conditions as the Administrator deems appropriate.
14. Stock Withholding to Satisfy Withholding Tax Obligations. When an
Optionee incurs tax liability in connection with the exercise of an Option,
SAR or Stock Purchase Right, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation (including, at the election of the
Optionee, any additional amount which the Optionee desires to have withheld in
order to satisfy in whole or in part the Optionee's full estimated tax in
connection with the exercise) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option, or the Shares to be
issued upon exercise of the SAR or Stock Purchase Right, if any, that number
of Shares having a Fair Market Value equal to the amount required to be
withheld (and any additional amount desired to be withheld, as aforesaid). The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall
be subject to the following restrictions:
(i) the election must be made on or prior to the applicable Tax
Date; and
(ii) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because
no election is filed under Section 83(b) of the Code, the Optionee shall
receive the full number of Shares with respect to which the Option, SAR or
Stock Purchase Right is exercised but such Optionee shall be
unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
44
<PAGE>
15. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, SAR or Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options, SARs or Stock Purchase Rights have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, SAR or Stock Purchase Right, as well as the price per share of Common
Stock covered by each such outstanding Option, SAR or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option, SAR or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, all outstanding Options, SARs and Stock Purchase
Rights will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Administrator. The Administrator
may, in the exercise of its sole discretion in such instances, declare that
any Option, SAR or Stock Purchase Right shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her
Option, SAR or Stock Purchase Right as to all or any part of the Optioned
Stock, including Shares as to which the Option, SAR or Stock Purchase Right
would not otherwise be exercisable.
(c) Merger or Asset Sale. Unless otherwise determined by the
Administrator, in the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company,
each outstanding Option, SAR and Stock Purchase Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option, SAR or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option, SAR or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option, SAR or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option, SAR or Stock Purchase Right shall be fully
45
<PAGE>
vested and exercisable for a period of thirty (30) days from the date of such
notice, and the Option, SAR or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option,
SAR or Stock Purchase Right shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option, SAR or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received
in the merger or sale of assets by holders of Common Stock for each Share held
on the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets is not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent
of the successor corporation, provide for the consideration to be received
upon the exercise of the Option, SAR or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option, SAR or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
(d) Change in Control. In the event of a "Change in Control" of the
Company, as defined in paragraph (e) below, unless otherwise determined by the
Administrator prior to the occurrence of such Change in Control, the following
acceleration and valuation provisions shall apply:
(i) Any Options, SARs and Stock Purchase Rights outstanding
as of the date such Change in Control is determined to have occurred that
are not yet exercisable and vested on such date shall become fully
exercisable and vested; and
(ii) The value of all outstanding Options, SARs and Stock Purchase
Rights shall, unless otherwise determined by the Administrator at or after
grant, be cashed-out. The amount at which such Options, SARs and Stock
Purchase Rights shall be cashed out shall be equal to the excess of (x)
the Change in Control Price (as defined below) over (y) the exercise price
of the Common Stock covered by the Option, SAR or Stock Purchase Right.
The cash-out proceeds shall be paid to the Optionee or, in the event of
death of an Optionee prior to payment, to the estate of the Optionee or to
a person who acquired the right to exercise the Option, SAR or Stock
Purchase Right by bequest or inheritance.
(e) Definition of "Change in Control". For purposes of this Section 14,
a "Change in Control" means the happening of any of the following:
(i) When any "person", as such term is used in Sections 14(d)
and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a
Company employee benefit plan, including any trustee of such plan acting
as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities; or
46
<PAGE>
(ii) The occurrence of a transaction requiring shareholder approval,
and involving the sale of all or substantially all of the assets of the
Company or the merger of the Company with or into another corporation.
(f) Change in Control Price. For purposes of this Section 14, "Change in
Control Price" shall be, as determined by the Administrator, (i) the highest
Fair Market Value at any time within the 60-day period immediately preceding
the date of determination of the Change in Control Price by the Administrator
(the "60-Day Period"), or (ii) the highest price paid or offered, as determined
by the Administrator, in any bona fide transaction or bona fide offer related
to the Change in Control of the Company, at any time within the 60-Day Period.
16. Date of Grant. The date of grant of an Option, SAR or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option, SAR or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the determination
shall be provided to each Optionee within a reasonable time after the date of
such grant.
17. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to
exercise the powers granted to it hereunder with respect to Options, SAR or
Stock Purchase Right granted under the Plan prior to the date of such
termination.
18. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option, SAR or Stock Purchase Right unless the exercise of such
Option, SAR or Stock Purchase Right and the issuance and delivery of such
Shares shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option, SAR or Stock Purchase Right, the Company may require the person
exercising such Option, SAR or Stock Purchase Right to represent and warrant
at the time of any such exercise that the Shares are being purchased only for
47
<PAGE>
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required.
19. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
20. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
21. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
48
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-END> MAR-27-1998
<CASH> 1,285
<SECURITIES> 538
<RECEIVABLES> 903
<ALLOWANCES> 96
<INVENTORY> 257
<CURRENT-ASSETS> 3,213
<PP&E> 1,031
<DEPRECIATION> 616
<TOTAL-ASSETS> 3,963
<CURRENT-LIABILITIES> 1,622
<BONDS> 953
<COMMON> 590
0
150
<OTHER-SE> 648
<TOTAL-LIABILITY-AND-EQUITY> 3,963
<SALES> 2,983
<TOTAL-REVENUES> 2,983
<CGS> 2,281
<TOTAL-COSTS> 2,281
<OTHER-EXPENSES> 611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 106
<INCOME-TAX> 4
<INCOME-CONTINUING> 102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.71
49
<PAGE>
