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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-10030
------------------------
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
CALIFORNIA 942404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1 INFINITE LOOP 95014
CUPERTINO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
</TABLE>
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $16,599,375,661 as of December 10, 1999, based upon
the closing price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each executive officer and director and by each person
who beneficially owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.
161,158,987 shares of Common Stock Issued and Outstanding as of December 10,
1999
<PAGE>
PART I
THE BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K
("FORM 10K") 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" UNDER PART II, ITEM 7 OF THIS FORM 10-K.
ITEM 1. BUSINESS
GENERAL
Apple Computer, Inc.-Registered Trademark- ("Apple" or the "Company") was
incorporated under the laws of the state of California on January 3, 1977. The
Company's principal executive offices are located at 1 Infinite Loop, Cupertino,
California, 95014, and its telephone number is (408) 996-1010.
The Company designs, manufactures and markets personal computers and related
personal computing and communicating solutions for sale primarily to education,
creative, consumer, and business customers. Substantially all of the Company's
net sales to date have been derived from the sale of personal computers from its
Apple Macintosh-Registered Trademark- line of computers and related software and
peripherals. The Company manages its business primarily on a geographic basis.
The Company's geographic segments include the Americas, Europe, Japan, and Asia
Pacific. The Americas segment includes both North and South America. The
European segment includes European countries as well as the Middle East and
Africa. The Japan segment includes only Japan, while the Asia Pacific segment
includes Australia and Asia except for Japan. Each geographic operating segment
provides similar hardware and software products and similar services. Further
information regarding the Company's operating segments may be found in Part II,
Item 7 of this Form 10-K under the heading "Net Sales," and in Part II, Item 8
on this Form 10-K in the Notes to Consolidated Financial Statements at Note 9,
"Segment Information and Geographic Data," which information is hereby
incorporated by reference.
During 1998, the Company continued and essentially completed a restructuring
plan commenced in 1996 aimed at reducing its cost structure, improving its
competitiveness, and restoring sustainable profitability. The Company's
restructuring actions included the termination of employees, closure of
facilities, and cancellation of contracts. Further information regarding these
restructuring actions may be found in Part II, Item 8 on this Form 10-K in the
Notes to Consolidated Financial Statements at Note 4, "Special Charges," which
information is hereby incorporated by reference.
PRINCIPAL HARDWARE PRODUCTS
Apple Macintosh personal computers were first introduced in 1984, and are
characterized by their intuitive ease of use, innovative industrial designs and
applications base, and built-in networking, graphics, and multimedia
capabilities. The Company offers a wide range of personal computing products,
including personal computers, related peripherals, software, and networking and
connectivity products. All of the Company's Macintosh products employ
PowerPC-Registered Trademark- RISC-based microprocessors.
POWER MACINTOSH-Registered Trademark-
The Power Macintosh line of high-performance personal computers is targeted at
business and professional users and is designed to meet the speed, expansion and
networking needs of the most demanding Macintosh user. The Company's current
line of Power Macintosh systems was introduced in August 1999 and is equipped
with PowerPC G4 processors. With the addition of Apple networking software,
Power Macintosh systems can be used as workgroup servers.
POWERBOOK-Registered Trademark- G3
The PowerBook G3 family of portable computer products is specifically designed
to meet the mobile computing needs of professionals and advanced personal users.
Incorporating powerful PowerPC G3
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processors, large active-matrix displays, long battery lives, and software
designed to enhance mobile computing, the Company's PowerBook G3 family is
intended to provide professional desktop performance in a notebook computer.
iMAC-Registered Trademark-
Originally announced in May 1998, the iMac computer is targeted at the education
and consumer markets. With an innovative industrial design, easy Internet
access, and a powerful PowerPC G3 processor, iMac is suitable for a wide range
of education and consumer applications. A completely redesigned iMac was
introduced in October 1999 and is available in three models: iMac, iMac
DV-Registered Trademark- (Digital Video), and iMac DV Special Edition. Both DV
models feature Firewire ports, DVD drives, and the Company's simple-to-use
iMovie-TM- digital video editing software.
iBOOK-TM-
The iBook computer, intended to be the "iMac to Go," was introduced in
July 1999. Designed specifically for the portable computing needs of education
and consumer users, the iBook features a large active-matrix display, long
battery life, a PowerPC G3 processor, Internet-ready hardware and software
configurations, and built-in antennas for optional AirPort-TM- wireless
networking capability.
PERIPHERAL PRODUCTS
The Company sells certain associated computer peripherals, including a range of
high quality precision color monitors and AirPort wireless networking base
stations and add-in cards. Over the past three years, the Company eliminated all
of its Apple-branded printers and significantly reduced the number of its
monitor products. The Company also discontinued its
MessagePad-Registered Trademark- and eMate-Registered Trademark- product lines.
The discontinuance of these peripheral products and portable computing products
was part of the overall strategy by the Company to simplify and focus its
efforts on those products perceived as critical to the Company's future success.
PRINCIPAL SOFTWARE PRODUCTS
OPERATING SYSTEM SOFTWARE AND APPLICATION SOFTWARE
The Company's operating system software, Mac-Registered Trademark- OS, provides
Macintosh computers with an easy, consistent user interface. The current
version, Mac OS 9-Registered Trademark-, began shipping in October 1999 and
delivers Sherlock-TM- 2, the updated version of the Company's advanced Internet
search engine. Mac OS 9 includes over 50 new features, including features for
faster and more efficient Internet usage, enhanced system and network security,
and auto-updating of Apple software over the Internet. The Company plans to
continue to introduce upgrades to Mac OS 9 and later to introduce the client
version of a new operating system, Mac OS X. Mac OS X Client is expected to
offer advanced functionality based on software technologies of Apple and those
in-process technologies of NeXT-Registered Trademark- Software, Inc. (NeXT),
which the Company acquired in 1997.
In March 1999, the Company introduced Mac OS X Server, which combines the
strength of UNIX-Registered Trademark- and simplicity of the Macintosh. Mac OS X
Server is based on the Mach 2.5 microkernel and the BSD-Registered Trademark-
4.4 operating system. It provides performance and stability through full
preemptive multitasking, protected memory, and advanced virtual memory. NetBoot
is a Mac OS X server feature allowing a network of Macs to be booted and
configured from a single server. In March 1999, the Company also introduced
Darwin, the Open Source release of the Mac OS X server foundation.
The Company has two primary digital video authoring/editing software titles.
Final Cut Pro-TM-, introduced in April 1999, is video authoring software that
combines professional-quality video editing, compositing, and special effects in
one package. iMovie, introduced in October 1999, makes it easy to create home
and classroom movies. iMovie software comes pre-installed on all iMac DV and
iMac DV Special Edition models.
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The Company also develops and distributes extensions to the Macintosh system
software, such as utilities, languages, and developer tools. The Company
continues to develop QuickTime-Registered Trademark-, its market-leading cross
platform digital media technology. WebObjects-Registered Trademark-, a leading
software product in the emerging application server market, is also part of
Apple's software portfolio. Targeted at Windows NT-Registered Trademark- and
UNIX platforms, future versions will also run on Apple hardware.
FileMaker-Registered Trademark- Corporation (formerly
Claris-Registered Trademark- Corporation), a wholly owned subsidiary of the
Company, develops, publishes, and distributes database management application
software for Mac OS and Windows-based systems. Further, the Company has
developed and currently markets AppleWorks-Registered Trademark- 5, formerly
ClarisWorks-Registered Trademark-, an integrated suite of software applications
that combines word processing, database, spreadsheet, drawing and communications
capabilities in a single software package for both Mac OS and Windows.
INTERNET INTEGRATION
Apple's Internet strategy is focused on delivering seamless integration with and
access to the Internet throughout the Company's product lines. In addition to
Sherlock 2, an easy Internet Setup Assistant is an integral part of Mac OS 9,
the current version of the Macintosh operating system.
THIRD PARTY SOFTWARE DEVELOPERS
Over the past two years, particularly since the announcement of the iMac in
May 1998, software developers have demonstrated renewed interest in the
Macintosh platform. Since iMac was announced, approximately 5,000 new or revised
software titles have been announced for the Macintosh platform. Additionally,
Microsoft delivered a new version of their productivity software--Office 98:
Macintosh Edition--in early 1998.
The Company previously entered into agreements to license its Mac OS to other
personal computer vendors (the Clone Vendors) as part of an effort to increase
the installed base for the Macintosh platform. In fiscal 1997, the Company
determined the benefits of licensing the Mac OS to the Clone Vendors under these
agreements were more than offset by the impact and costs of the licensing
program. As a result, the Company discontinued the Mac OS licensing program and
acquired certain assets of Power Computing Corporation (PCC), a Clone Vendor,
including PCC's license to distribute the Mac OS. The Company does not currently
plan general licensing of the Mac OS.
Further information regarding the Company's products may be found in Part II,
Item 7 of this Form 10-K under the subheading "Competition" included under the
heading "Factors That May Affect Future Results and Financial Condition," which
information is hereby incorporated by reference.
MARKETS AND DISTRIBUTION
The Company's customers are primarily in the education, creative, consumer, and
business markets. Certain customers are attracted to Macintosh computers for a
variety of reasons, including the reduced amount of training resulting from the
Macintosh computer's intuitive ease of use, industrial design features of the
Company's hardware products, the ability of Macintosh computers to network and
communicate with other computer systems and environments, and the availability
of a wide variety of certain user-friendly application software.
Apple personal computers were first introduced to education customers in the
late 1970s. In the United States, the Company is one of the major suppliers of
personal computers for both elementary and secondary school customers, as well
as for college and university customers. The Company is also a supplier to
institutions of higher education outside of the United States.
The United States represents the Company's largest geographic marketplace. The
United States is part of the Company's Americas operating segment, which has
responsibility for the Company's sales, marketing, and support efforts in North
and South America. Approximately 45% of the Company's net sales in fiscal 1999
came from its international operations. Final assembly of products sold by the
Company is conducted
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in the Company's manufacturing facilities in California, Singapore, and Cork,
Ireland, and by external vendors in Taiwan, Korea, Mexico, and the United
Kingdom.
The Company distributes its products through wholesalers, resellers, national
and regional retailers and cataloguers, and directly to education institutions
for resale (collectively referred to as "resellers"). The Company also sells
many of its products in most of its major markets directly to end users through
its on-line store. Throughout fiscal 1998, the Company revised its distribution
channel model and related policies. As a result, the Company significantly
reduced the number of its distributors, authorized resellers, and national
retail channel partners, particularly in the United States. The Company also
revised its distribution channel policies including decreasing the price
protection and stock return privileges of its remaining distributors and
resellers.
RAW MATERIALS
Although certain components essential to the Company's business are generally
available from multiple sources, other key components (including microprocessors
and application-specific integrated circuits (ASICs)) are currently obtained by
the Company from single or limited sources. Some other key components (including
without limitation DRAM and TFT-LCD flat-panel displays), while currently
available to the Company from multiple sources, are at times subject to industry
wide availability and pricing pressures. Any availability limitations,
interruption in supplies, or price increases relative to these and other
components could adversely affect the Company's business and financial results.
In addition, new products introduced by the Company often initially utilize
custom components obtained from only one source until the Company has evaluated
whether there is a need for and subsequently qualifies additional suppliers. In
situations where a component or product utilizes new technologies, initial
capacity constraints may exist until such time as the suppliers' yields have
matured. Components are normally acquired through purchase orders, as is common
in the industry, typically covering the Company's requirements for periods from
60 to 120 days. However, the Company continues to evaluate the need for a supply
contract in each situation.
If the supply of a key component to the Company were to be delayed or curtailed
or in the event a key manufacturing vendor delays shipment of completed products
to the Company, the Company's ability to ship products in desired quantities and
in a timely manner could be adversely affected. The Company's business and
financial performance could also be adversely affected, depending on the time
required to obtain sufficient quantities from the original source or, if
possible, to identify and obtain sufficient quantities from an alternative
source. In addition to its current suppliers of DRAM and TFT-LCD flat-panel
displays, the Company believes the component suppliers and manufacturing vendors
whose loss to the Company could have a material adverse effect upon the
Company's business and financial position include, at this time: Alpha-Top
Corporation, Ambit Microsystems Corporation, ATI Technologies, Inc.,
Canon, Inc., Darfon Electronics Corporation, IBM Corporation, LG Electronics,
Matsushita, Motorola, Inc., NatSteel Electronics PTE Ltd., Philips
Semiconductors, Quanta Computer, Inc., and Samsung Electronics. The Company
attempts to mitigate these potential risks by working closely with these and
other key suppliers on product introduction plans, strategic inventories,
coordinated product introductions, and internal and external manufacturing
schedules and levels. The Company believes many of its single-source suppliers,
including most of the foregoing companies, are reliable multinational
corporations. The Company also believes most of these suppliers manufacture the
relevant components in multiple plants. The Company further believes its
long-standing business relationships with many of these and other key suppliers
are strong and mutually beneficial in nature.
The Company has from time to time experienced significant price increases and
limited availability of certain components that are available from multiple
sources. Any similar occurrences in the future could have an adverse effect on
the Company's operating results.
Further discussion relating to availability and supply of components and product
may be found in Part II, Item 7 of this Form 10-K under the subheading
"Inventory and Supply" included under the heading
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"Factors That May Affect Future Results and Financial Condition," and in
Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements at Note 8 under the subheading "Concentrations in the Available
Sources of Supply of Materials and Product," which information is hereby
incorporated by reference.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
The Company currently holds rights to patents and copyrights relating to certain
aspects of its computer systems, peripheral systems, and software. In addition,
the Company has registered, and/or has applied to register, trademarks in the
United States and a number of foreign countries for
"Apple-Registered Trademark-", the Apple silhouette logo, the Apple color logo,
"Macintosh-Registered Trademark-," and numerous other product trademarks. In
1986, the Company acquired ownership of the trademark "Macintosh" for use in
connection with computer products. Although the Company believes the ownership
of such patents, trademarks, copyrights, and licenses is an important factor in
its business and that its success does depend in part on the ownership thereof,
the Company relies primarily on the innovative skills, technical competence, and
marketing abilities of its personnel.
Because of technological changes in the computer industry, current extensive
patent coverage, and the rapid rate of issuance of new patents, it is possible
certain components of the Company's products may unknowingly infringe existing
patents of others. The Company believes the resolution of any claim of
infringements would not have a material adverse effect on its financial
condition and results of operations as reported in the accompanying consolidated
financial statements. The Company has from time to time entered into
cross-licensing agreements with other companies.
SEASONAL BUSINESS
Although the Company does not consider its business to be highly seasonal, it
has historically experienced increased sales in its first and fourth fiscal
quarters, compared to other quarters in its fiscal year, due to seasonal demand
related to the beginning of the school year and the holiday season. However,
past performance should not be considered a reliable indicator of the Company's
future net sales or financial performance.
WARRANTY
The Company offers a limited parts and labor warranty on its hardware products.
The warranty period is typically one year from the date of purchase by the end
user. The Company also offers a 90-day warranty for Apple software and for Apple
service parts used to repair Apple hardware products. In addition, consumers may
purchase extended service coverage on most Apple hardware products in all of the
Company's major markets.
SIGNIFICANT CUSTOMERS
No customer accounted for more than 10% of the Company's net sales in 1999,
1998, or 1997.
BACKLOG
In the Company's experience, the actual amount of product backlog at any
particular time is not a meaningful indication of its future business prospects.
In particular, backlog often increases in anticipation of or immediately
following new product introductions because of over ordering by dealers
anticipating shortages. Backlog often is reduced once dealers and customers
believe they can obtain sufficient supply. Because of the foregoing, backlog
should not be considered a reliable indicator of the Company's ability to
achieve any particular level of revenue or financial performance.
COMPETITION
The market for the design, manufacture, and sale of personal computers and
related software and peripheral products is highly competitive. It continues to
be characterized by rapid technological advances
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in both hardware and software development, which have substantially increased
the capabilities and applications of these products, and has resulted in the
frequent introduction of new products. The principal competitive factors in this
market are relative price/performance, product quality and reliability, design
innovation, availability of software, product features, marketing and
distribution capability, service and support, availability of hardware
peripherals, and corporate reputation. The Company is currently taking and will
continue to take steps to respond to the competitive pressures being placed on
its personal computer sales as a result of the recent innovations in the Windows
platform. The Company's future operating results and financial condition are
substantially dependent on its ability to continue to develop improvements to
the Macintosh platform in order to maintain perceived functional and design
advantages over competing platforms.
Further discussion relating to the competitive conditions of the personal
computing industry and the Company's competitive position in the marketplace may
be found in Part II, Item 7 of this Form 10-K under the subheading
"Competition," included under the heading "Factors That May Affect Future
Results and Financial Condition," which information is hereby incorporated by
reference.
RESEARCH AND DEVELOPMENT
Because the personal computer industry is characterized by rapid technological
advances, the Company's ability to compete successfully is heavily dependent
upon its ability to ensure a continuing and timely flow of competitive products
and technology to the marketplace. The Company continues to develop new products
and technologies and to enhance existing products in the areas of hardware and
peripherals, system software, networking and communications, and the Internet.
The Company's research and development expenditures, before charges for
in-process research and development, totaled $314 million, $303 million, and
$485 million in 1999, 1998, and 1997, respectively. The declines in total
expenditures for research and development in 1999 and 1998 as compared to 1997
were principally due to restructuring actions taken by the Company intended to
focus the Company's research and development efforts on those projects perceived
as critical to the Company's future success.
ENVIRONMENTAL LAWS
Compliance with federal, state, and local laws and foreign laws enacted for the
protection of the environment has to date had no material effect upon the
Company's capital expenditures, earnings, or competitive position. Although the
Company does not anticipate any material adverse effects in the future based on
the nature of its operations and the thrust of such laws, no assurance can be
given such laws, or any future laws enacted for the protection of the
environment, will not have a material adverse effect on the Company.
EMPLOYEES
As of September 25, 1999, Apple and its subsidiaries worldwide had 6,960 regular
employees, and an additional 2,776 temporary or part-time employees and
contractors.
FOREIGN AND DOMESTIC OPERATIONS AND GEOGRAPHIC DATA
Information regarding financial data by geographic segment and the risks
associated with international operations is set forth in Part II, Item 8 of this
Form 10-K in the Notes to Consolidated Financial Statements at Note 9, "Segment
Information and Geographic Data," and in Part II, Item 7 of this Form 10-K under
the subheading "Global Market Risks," included under the heading "Factors That
May Affect Future Results and Financial Condition," which information is hereby
incorporated by reference.
Margins on sales of Apple products in foreign countries, and on domestic sales
of products that include components obtained from foreign suppliers, can be
adversely affected by foreign currency exchange rate fluctuations and by
international trade regulations, including tariffs and antidumping penalties.
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ITEM 2. PROPERTIES
The Company's headquarters are located in Cupertino, California. The Company has
manufacturing facilities in Sacramento, California, Cork, Ireland, and
Singapore. As of September 25, 1999, the Company leased approximately 3 million
square feet of space, primarily in the United States, and to a lesser extent, in
Europe and the Asia Pacific region. Leases are generally for terms of five to
ten years, and usually provide renewal options for terms of up to five
additional years.
The Company owns its manufacturing facilities in Cork, Ireland, and Singapore,
which total approximately 785,000 square feet. The Company also owns a 748,000
square-foot facility in Sacramento, California, which is used as a
manufacturing, warehousing and distribution center. The Sacramento facility also
houses a customer call center. In addition, the Company owns 930,000 square feet
of facilities located in Cupertino, California, used for research and
development and corporate functions. Outside the United States, the Company owns
additional facilities totaling approximately 347,000 square feet.
The Company believes its existing facilities and equipment are well maintained
and in good operating condition. The Company has invested in internal capacity
and strategic relationships with outside manufacturing vendors, and therefore
believes it has adequate manufacturing capacity for the foreseeable future. The
Company continues to make investments in capital equipment as needed to meet
anticipated demand for its products.
Information regarding critical business operations that are located near major
earthquake faults is set forth in Part II, Item 7 of this Form 10-K under the
subheading "Other Factors" included under the heading "Factors That May Affect
Future Results and Financial Condition," which information is hereby
incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is set forth in Part II, Item 8 of this
Form 10-K in the Notes to Consolidated Financial Statements at Note 8 under the
subheading "Litigation," which information is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended September 25, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol AAPL, on the Tokyo Stock
Exchange under the symbol APPLE, and on the Frankfurt Stock Exchange under the
symbol APCD. As of December 10, 1999, there were 25,279 shareholders of record.
The Company did not pay cash dividends in either fiscal 1999 or 1998. The
Company anticipates that, for the foreseeable future, it will retain any
earnings for use in the operation of its business.
The price range per share of common stock represents the highest and lowest
prices for the Company's common stock on the Nasdaq National Market during each
quarter.
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Fiscal 1999 price range per common
share............................ $80.13-$42.38 $50.00-$33.44 $47.31-$32.00 $41.31-$28.50
Fiscal 1998 price range per common
share............................ $43.75-$28.06 $31.63-$24.69 $28.00-$12.75 $24.75-$12.94
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes thereto included in Item 8 of this Form 10-K in order to fully
understand factors that may affect the comparability of the information
presented below.
<TABLE>
<CAPTION>
FIVE FISCAL YEARS ENDED SEPTEMBER 25, 1999 1999 1998 1997 1996 1995
(In millions, except share and per share amounts) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ 6,134 $ 5,941 $ 7,081 $ 9,833 $ 11,062
Net income (loss)............................ $ 601 $ 309 $ (1,045) $ (816) $ 424
Earnings (loss) per common share:
Basic...................................... $ 4.20 $ 2.34 $ (8.29) $ (6.59) $ 3.50
Diluted.................................... $ 3.61 $ 2.10 $ (8.29) $ (6.59) $ 3.45
Cash dividends declared per common share..... $ -- $ -- $ -- $ 0.12 $ 0.48
Shares used in computing earnings (loss) per
share (in thousands):
Basic...................................... 143,157 131,974 126,062 123,734 121,192
Diluted.................................... 174,164 167,917 126,062 123,734 123,047
Cash, cash equivalents, and short-term
investments................................ $ 3,226 $ 2,300 $ 1,459 $ 1,745 $ 952
Total assets................................. $ 5,161 $ 4,289 $ 4,233 $ 5,364 $ 6,231
Long-term debt............................... $ 300 $ 954 $ 951 $ 949 $ 303
Shareholders' equity......................... $ 3,104 $ 1,642 $ 1,200 $ 2,058 $ 2,901
</TABLE>
Net gains before taxes resulting from sales of an equity investment of
$230 million and $40 million were recognized in 1999 and 1998, respectively. Net
charges related to Company restructuring actions of $27 million, $217 million
and $179 million were recognized in 1999, 1997, and 1996, respectively. In
fiscal 1997, the Company acquired NeXT, resulting in the allocation to
in-process research and development of a charge of $375 million for acquired
in-process technologies with no alternative future use.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION AND OTHER PARTS OF THIS FORM 10-K 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 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED IN ITEM 8 OF THIS FORM 10-K. ALL INFORMATION IS BASED ON THE
COMPANY'S FISCAL CALENDAR.
RESULTS OF OPERATIONS
The following table sets forth annual results of operations for fiscal years
1999, 1998, and 1997 (in millions, except unit shipment and per share amounts):
<TABLE>
<CAPTION>
1999 CHANGE 1998 CHANGE 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $6,134 3% $5,941 (16)% $ 7,081
Macintosh CPU unit sales (in thousands)...... 3,448 25% 2,763 (4)% 2,874
Gross margin................................... $1,696 15% $1,479 8% $ 1,368
Percentage of net sales...................... 28% 25% 19%
Research and development....................... $ 314 4% $ 303 (38)% $ 485
Percentage of net sales...................... 5% 5% 7%
Selling, general and administrative............ $ 996 10% $ 908 (29)% $ 1,286
Percentage of net sales...................... 16% 15% 18%
Special charges:
In-process research and development.......... $ -- $ 7 $ 375
Restructuring costs.......................... $ 27 $ -- $ 217
Termination of license agreement............. $ -- $ -- $ 75
Gains from sales of investment................. $ 230 $ 40 $ --
Interest and other income, net................. $ 87 211% $ 28 12% $ 25
Provision for income taxes..................... $ 75 275% $ 20 $ --
Net income (loss).............................. $ 601 95% $ 309 130% $(1,045)
Earnings (loss) per common share:
Basic........................................ $ 4.20 79% $ 2.34 128% $ (8.29)
Diluted...................................... $ 3.61 72% $ 2.10 125% $ (8.29)
</TABLE>
9
<PAGE>
The following table sets forth quarterly results of operations for fiscal 1999
and 1998 (in millions, except unit shipment and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 25, 1999 YEAR ENDED SEPTEMBER 25, 1998
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $1,336 $1,558 $1,530 $1,710 $1,556 $1,402 $1,405 $1,578
Macintosh CPU unit sales
(in thousands).......... 772 905 827 944 834 644 650 635
Gross margin................ $ 384 $ 427 $ 403 $ 482 $ 417 $ 360 $ 349 $ 353
Gross margin percentage... 29% 27% 26% 28% 27% 26% 25% 22%
Operating expenses.......... $ 317 $ 323 $ 315 $ 355 $ 308 $ 292 $ 298 $ 313
Special charges............. 18 -- 9 -- -- 7 -- --
Operating margin............ 49 104 79 127 109 61 51 40
Operating margin
percentage.............. 4% 7% 5% 7% 7% 4% 4% 3%
Gains from sales of
investment................ $ 42 $ 101 $ 55 $ 32 -- $ 40 -- --
Interest and other income,
net....................... $ 34 $ 24 $ 19 $ 10 $ 5 $ 8 $ 8 $ 7
Provision for income
taxes..................... 14 26 18 17 8 8 4 --
Net income.................. $ 111 $ 203 $ 135 $ 152 $ 106 $ 101 $ 55 $ 47
Earnings per common share:
Basic..................... $ 0.69 $ 1.41 $ 0.99 $ 1.12 $ 0.79 $ 0.76 $ 0.42 $ 0.37
Diluted................... $ 0.63 $ 1.20 $ 0.84 $ 0.95 $ 0.68 $ 0.65 $ 0.38 $ 0.33
</TABLE>
OVERVIEW
During 1999, the Company experienced a 25% rise in Macintosh unit sales. This
increase is primarily attributable to the success of iMac, the Company's
moderately priced desktop Macintosh system designed for the education and
consumer markets. The Company sold approximately 1.8 million iMac units in 1999,
an increase of approximately 730,000 units or 68% over unit sales of similar
products in 1998. Growth in unit sales was strong in all of the Company's
geographic operating segments, particularly in Japan and Asia Pacific due to
strong acceptance of iMac in those regions and the general economic improvements
experienced in much of Asia during the year. The Company also experienced
improved profitability in 1999. Operating income before special charges rose 44%
or $118 million to $386 million in 1999 from $268 million in 1998. Contributing
to the improvement in operating margin in 1999 was a rise in gross margin as a
percentage of net sales to 28% as compared to 25% in 1998. The impact of
improved gross margins was partially offset by planned increases in recurring
operating expenses during 1999 of 8% to a total of $1.337 billion.
Despite improved unit sales and improved profitability, the Company's net sales
rose only 3% in 1999 to $6.134 billion. Growth in net sales was negatively
impacted during the year by declines in the average revenue per Macintosh system
for both Power Macintosh and iMac systems and by a shift in unit mix towards the
lower priced iMac systems. Net sales were also negatively impacted during the
fourth quarter of 1999 due to lower than planned deliveries of PowerPC G4
processors from Motorola. The primary focus of the Company during fiscal 2000
remains achieving meaningful year-over-year growth in both unit sales and net
sales.
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 the dynamic conditions
within the highly competitive market for personal computers. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition are discussed
10
<PAGE>
throughout this Item 7, including the discussion under the heading "Factors That
May Affect Future Results and Financial Condition."
NET SALES
Net sales for geographic segments and Macintosh unit sales by geographic segment
and by product follow (net sales in millions and Macintosh unit sales in
thousands):
<TABLE>
<CAPTION>
1999 CHANGE 1998 CHANGE 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Americas net sales................................ $3,527 2 % $3,468 (5)% $3,668
Europe net sales.................................. $1,317 2 % $1,295 (16)% $1,536
Japan net sales................................... $ 858 17 % $ 731 (33)% $1,098
Asia Pacific net sales............................ $ 306 4 % $ 293 (38)% $ 472
Americas Macintosh unit sales..................... 2,021 22 % 1,655 6 % 1,568
Europe Macintosh unit sales....................... 724 23 % 588 (2)% 601
Japan Macintosh unit sales........................ 524 35 % 389 (25)% 516
Asia Pacific Macintosh unit sales................. 179 37 % 131 (31)% 189
------ ------ ------
Total Macintosh unit sales...................... 3,448 25 % 2,763 (4)% 2,874
====== ====== ======
Power Macintosh unit sales........................ 1,296 2 % 1,266 29 % 981
PowerBook unit sales.............................. 344 (19)% 427 2 % 417
iMac unit sales(a)................................ 1,802 68 % 1,070 (28)% 1,476
iBook unit sales.................................. 6 -- -- -- --
------ ------ ------
Total Macintosh unit sales...................... 3,448 25 % 2,763 (4)% 2,874
====== ====== ======
</TABLE>
- ------------------------
(a) Unit sales figures for iMac in 1998 and 1997 include sales of the Company's
previous consumer and education oriented Macintosh products.
Net sales increased $193 million or 3% to $6.134 billion in 1999 compared to
1998. The primary source of this growth was an overall 25% increase in Macintosh
unit sales, which was reflective of strong unit growth in all of the Company's
geographic operating segments. Offsetting the rise in unit shipments was a
decline in the average revenue per Macintosh system, a function of total net
sales generated by hardware shipments and total Macintosh CPU unit sales, which
fell 17% to $1,739 from $2,095 in 1998. The decline during 1999 in the average
revenue per Macintosh system is attributable to lower pricing for both iMac and
Power Macintosh products, which reflects the continuing overall industry trend
towards lower pricing. The decline is also attributable to the shift in the
Company's unit mix toward lower-priced consumer products such that iMac units
and comparable products comprised 52% of total Macintosh unit sales in 1999
versus 39% in 1998.
Net sales declined sequentially during the fourth quarter of 1999 compared to
the third quarter by $222 million or 14%, and declined $220 million or 14%
compared to the same period in 1998. Similarly, Macintosh unit sales declined
15% and 7% during the fourth quarter of 1999 compared to the third quarter of
1999 and the same period in 1998, respectively. The primary causes for these
declines in both net sales and unit sales were lower than planned deliveries of
PowerPC G4 processors from Motorola and production interruptions at vendors
supplying PowerBooks and iBooks experienced during the last week of the fourth
quarter of 1999 as a result of the earthquake in Taiwan on September 20, 1999.
The shortage of G4 processors reduced net sales by approximately $200 million
during the fourth quarter of 1999.
Net sales decreased $1.140 billion, or 16%, to $5.941 billion in 1998 compared
to 1997. The decline during 1998 in net sales is attributable to several
factors. The Company experienced a $454 million decrease in net sales of
peripheral products during 1998 compared to 1997 principally due to the
discontinuance by the
11
<PAGE>
Company of certain imaging and display products. The average revenue per
Macintosh system fell 11% during 1998 as compared to 1997 from $2,375 to $2,095,
reflecting the effect of aggressive pricing of the Company's Power Macintosh G3
systems introduced in the first quarter of fiscal 1998, the decline in net sales
from the phase out of certain peripheral products, the overall industry trend
toward lower priced products, and the Company's reentry during the fourth
quarter of 1998 into the lower-priced consumer market. Lastly, overall Macintosh
CPU unit sales for 1998 declined approximately 4% from 1997. International net
sales were particularly affected by these factors and by the economic conditions
existing in Asia during 1998.
SEGMENT OPERATING PERFORMANCE
The Company manages its business primarily on a geographic basis. The Company's
geographic segments include the Americas, Europe, Japan, and Asia Pacific. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. The Japan
segment includes only Japan, while the Asia Pacific segment includes Australia
and Asia except for Japan. Each geographic operating segment provides similar
hardware and software products and similar services. Further information
regarding the Company's operating segments may be found in Part II, Item 8 on
this Form 10-K in the Notes to Consolidated Financial Statements at Note 9,
"Segment Information and Geographic Data," which information is hereby
incorporated by reference.
AMERICAS
Net sales in the Americas segment increased 2% to $3.527 billion during 1999 as
compared to 1998, while Macintosh unit sales increased 22%. This followed a 5%
decline in net sales in the Americas between 1998 and 1997. During 1999, the
Americas segment represented approximately 57% and 59% of the Company's total
net sales and total Macintosh unit sales, respectively. The results experienced
by this segment in 1999 reflect the overall trends experienced by the Company of
growing Macintosh unit sales offset by declines in the average revenue per
Macintosh system.
EUROPE
Net sales in the Europe segment increased 2% to $1.317 billion during 1999 as
compared to 1998, while Macintosh unit sales increased 23%. This followed a 16%
decline in net sales in the Europe segment between 1998 and 1997. Like the
Americas segment, Europe's results in 1999 as compared to 1998 are indicative of
strong growth in Macintosh unit sales offset by declines in the average revenue
per Macintosh system.
JAPAN AND ASIA PACIFIC
Macintosh unit sales and net sales in Asia, particularly in Japan, recovered
during 1999 from the declines experienced in 1998. Net sales in the Japan
segment increased 17% or $127 million to a total of $858 million in 1999 as
compared to 1998. Macintosh unit sales in Japan increased 35% during 1999
compared to 1998 while Macintosh unit sales in the Asia Pacific segment
increased 37%. The increases in net sales and Macintosh unit sales in both Japan
and Asia Pacific are the result of strong iMac sales experienced by these
operating segments, strong growth in Japanese consumer sales, and the general
economic recovery experienced in the region.
BACKLOG
In the Company's experience, the actual amount of product backlog at any
particular time is not a meaningful indication of its future business prospects.
In particular, backlog often increases in anticipation of or immediately
following new product introductions because of overordering by dealers
anticipating shortages. Backlog often is reduced once dealers and customers
believe they can obtain sufficient supply. Because of the foregoing, backlog
should not be considered a reliable indicator of the Company's ability to
achieve any particular level of revenue or financial performance. Further
information regarding the Company's backlog may be found below under the
subheading "Product Introductions and Transitions"
12
<PAGE>
included under the heading "Factors That May Affect Future Results and Financial
Condition," which information is hereby incorporated by reference.
GROSS MARGIN
Gross margin increased as a percentage of net sales during 1999 to 28% as
compared to 25% in 1998. This increase was primarily attributable to declines in
the cost of various components of the Company's products, improvements in
manufacturing efficiencies brought about by selective outsourcing of final
assembly of certain of the Company's products, improved design of products
leading to lower manufacturing and warranty costs, and relatively stable pricing
of the Company's products over the last six months of 1999. During 1999, the
Company was also able to fully realize the benefits of actions taken primarily
in 1998 and 1997 that led to improved inventory management and a more efficient
distribution model for its products. These improvements are discussed below.
Gross margin increased as a percentage of net sales during 1998 to 25% compared
to 19% in 1997. This increase was primarily the result of a shift in revenue mix
toward the Company's higher margin Power Macintosh G3 systems and newer
PowerBook G3 systems, the low volume of lower margin consumer products shipped
during the first three quarters of 1998, and the declining cost of various
components of the Company's products, particularly those sourced from Asia.
Improvements in the Company's inventory management also contributed to the
increase in gross margins. During 1998, the Company simplified its product line,
moving from approximately 15 separate individual products to three main product
families. Further, the Company attempted to use as many industry standard parts
in its newer products as possible, expanded the use of supplier hubs at
manufacturing sites, and outsourced the manufacture of printed circuit boards
and some systems assembly. These changes have allowed the Company to more
accurately forecast demand, reduce inventory carrying levels and related costs,
lessen the financial exposure resulting from inventory obsolescence and excess
inventory levels, and reduce the component cost of obtaining certain
standardized parts. The Company also made changes to its distribution model
during 1998 and 1997 that contributed to the increase in gross margins in 1998.
The Company significantly reduced the number of locations where it stages
finished goods, generally holding inventory on a regional basis rather than in
each country. Also, the Company significantly reduced the number of its
distributors, authorized resellers, and national retail channel partners,
particularly in the United States. These changes allowed the Company to reduce
inventory and related financial exposures and reduced the inventory and related
financial exposure associated with inventory held in the Company's distribution
channels. The Company has also revised its distribution channel policies by
decreasing the price protection and stock return privileges of its distributors
and resellers.
The Company anticipates that as lower priced consumer products become a larger
share of net sales and the overall industry trend toward lower-priced products
continues, gross margins will decline during fiscal 2000. The foregoing
statement is forward-looking. The Company's actual results could differ because
of several factors, including those set forth in the following paragraph and
below in the subsection entitled "Factors That May Affect Future Results and
Financial Condition."
There can be no assurance targeted gross margin levels will be achieved or
current margins on existing individual products will be maintained. In general,
gross margins and margins on individual products 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,
potential increases in the cost and availability of raw material and outside
manufacturing services, and potential changes to the Company's product mix,
including higher unit sales of consumer products with lower average selling
prices and lower gross margins. 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 anticipated changes in foreign
13
<PAGE>
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.
RESEARCH AND DEVELOPMENT
The Company recognizes focused investments in research and development are
critical to its future growth and competitive position in the marketplace and
are directly related to timely development of new and enhanced products that are
central to the Company's core business strategy. Expenditures on research and
development increased 4% or $11 million to $314 million in 1999 as compared to
1998. This followed a $182 million or 38% decline in 1998 as compared to 1997.
The overall decline in spending on research and development over the last two
years is principally due to restructuring actions taken in 1996, 1997, and 1998
intended to focus the Company's research and development efforts on those
projects perceived as critical to the Company's future success. These
restructuring actions led to significant reductions in research and development
related headcount and the cancellation of many research and development
projects.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenditures increased 10% to $996 million
in 1999 as compared to 1998 and increased to 16% of net sales in 1999 from 15%
in 1998. These increases are primarily the result of increased spending on
marketing and promotional activities throughout 1999 and a 12% increase in
combined sales, marketing, and general and administrative headcount from the end
of 1998 to the end of 1999.
Selling, general, and administrative expenditures declined $378 million or 29%
in 1998 compared to 1997 and declined to 15% of net sales in 1998 from 18% of
net sales in 1997. These decreases were primarily the result of restructuring
actions taken in 1996, 1997, and 1998, which resulted in reductions in
headcount, closing of facilities, and write-down and disposal of operating
assets during 1996, 1997, and 1998. Additionally, changes during 1998 in the
Company's distribution channel policies and business model, including
contraction and focus of the Company's product line and simplification of the
Company's internal and external distribution channels, led to a reduction in
selling expenses during 1998.
SPECIAL CHARGES
1996 AND 1997 RESTRUCTURING ACTIONS
In the second quarter of 1996, the Company announced and began to implement a
restructuring plan designed to reduce costs and return the Company to
profitability. 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 charge during 1996 of $179 million. 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. All material restructuring actions contemplated under the plan were
essentially complete at the end of fiscal 1998. The combined 1996 and 1997
restructuring actions consisted of terminating approximately 4,200 full-time
employees; 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 were not
critical to the Company's core business strategy. The restructuring actions
under the plan resulted in cash expenditures of $293 million and noncash asset
write-downs of $95 million from the second quarter of 1996 through
September 25, 1999. Of the combined 1996 and 1997 restructuring charges of
$396 million, approximately $3 million was determined to be excess during the
fourth quarter of 1999. The remaining balance of $5 million as of September 25,
1999, in accrued restructuring costs for the 1996 and 1997 restructuring actions
is comprised of payments over the next two years on leases and contracts that
had been terminated prior to fiscal 1999. The Company expects the remaining
accrual will result in cash expenditures of $5 million over the next two years.
14
<PAGE>
1999 RESTRUCTURING ACTIONS
During the fourth quarter of 1999, the Company initiated restructuring actions
resulting in a charge to operations of $21 million. The net restructuring charge
of $18 million recognized during the fourth quarter of 1999 reflects the
$3 million of excess reserves related to the 1996 and 1997 restructuring
actions. The total cost of these actions of $21 million is comprised of
$11 million for contract cancellation charges associated with the closure of the
Company's outsourced data center and $10 million for contract cancellation
charges related to supply and development agreements previously discontinued.
The Company expects these actions to result in cash expenditures of $21 million
over the next year.
During the second quarter of 1999, the Company took certain actions to improve
the flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to third-party manufacturers. These
restructuring actions resulted in the Company recognizing a charge to operations
of approximately $9 million during the second quarter of 1999, which was
comprised of $6 million for severance benefits to be paid to employees
involuntarily terminated, $2 million for the write-down of operating assets to
be disposed of, and $1 million for payments on canceled contracts. These actions
resulted in the termination of approximately 580 employees and are substantially
complete as of September 25, 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT
In May 1998, the Company acquired certain technology that was under development
and had no alternative future use. The acquisition resulted in the recognition
of $7 million of purchased in-process research and development, which was
charged to operations upon acquisition.
In February 1997, the Company acquired all of the outstanding shares of NeXT
Software, Inc. (NeXT). NeXT had developed, marketed, and supported software
enabling customers to implement business applications on the Internet/World Wide
Web, intranets and enterprise-wide client/server networks. Of the total purchase
price of $427 million, $375 million was allocated to purchased in-process
research and development and $52 million was allocated to goodwill and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other intangible assets are
being amortized on a straight-line basis over two to three years.
TERMINATION OF LICENSE AGREEMENT
In August 1997, the Company agreed to acquire certain assets of Power Computing
Corporation (PCC), a licensed distributor of the Mac OS operating system,
including PCC's customer database and its license to distribute the Mac OS. The
agreement with PCC also included a release of claims between the parties. On
January 28, 1998, the Company completed its acquisition of certain assets from
PCC. 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 is being amortized over three years.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income and expense (net) increased $59 million or 211% to
$87 million during 1999 as compared to 1998. This increase is attributable to
two primary factors. First, the Company's cash, cash equivalents, and short-term
investments increased $926 million or 40% during 1999 resulting in an increase
in interest income during 1999 of $44 million. Second, interest expense declined
$15 million during 1999, primarily as a result of the conversion of
approximately $661 million of the Company's convertible subordinated notes to
common stock during the third quarter of 1999. During 1998, the Company
experienced a $27 million increase in interest income net of interest expense,
the result of higher cash and investment balances and lower average short-term
borrowings, offset by decreased foreign exchange gains and increased other
expense.
15
<PAGE>
GAINS FROM SALES OF INVESTMENT
As of September 26, 1997, the Company owned 42.3% 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. The
Company had accounted for this investment using the equity method through
September 25, 1998. On April 17, 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 taxes
of approximately $24 million, which was recognized as other income. Foreign tax
recognized on this gain was approximately $7 million.
At the time an equity method investee sells existing or newly issued common
stock to unrelated parties in excess of its book value, the equity method
requires the net book value of the investment be adjusted to reflect the
investor's share of the change in the investee's shareholders' equity resulting
from the sale. It is the Company's policy to record an adjustment reflecting its
share of the change in the investee's shareholders' equity resulting from such a
sale as a gain or loss in other income. Consequently, the Company also
recognized in the third quarter of 1998 other income of approximately
$16 million to reflect its remaining 25.9% ownership interest in the increased
net book value of ARM following its initial public offering. As of
September 25, 1998, the carrying value of the Company's investment in ARM
carried in other assets in the consolidated balance sheet was approximately
$22 million. On October 14, 1998, the Company sold 11.6 million shares (split
adjusted) of ARM stock. As a result of this sale, the Company's ownership
interest in ARM fell to 19.7%. Consequently, beginning in the first quarter of
fiscal 1999, the Company ceased accounting for its remaining investment in ARM
using the equity method and categorized its remaining shares as
available-for-sale requiring the shares be carried at fair value, with
unrealized gains and losses net of taxes reported as a component of accumulated
other comprehensive income.
During fiscal 1999, the Company sold approximately 32.6 million shares (split
adjusted) of ARM stock for net proceeds of approximately $245 million, recorded
a gain before taxes of approximately $230 million, and recognized related income
tax of approximately $25 million. As of September 25, 1999, the Company's
remaining 16 million shares of ARM stock are valued at $226 million. The fair
value of the Company's investment in ARM is reflected in other assets as of
September 25, 1999, with an offsetting amount net of $84 million of related
deferred income taxes recognized in accumulated other comprehensive income.
PROVISION (BENEFIT) FOR INCOME TAXES
As of September 25, 1999, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $613 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
September 25, 1999, a valuation allowance of $60 million was recorded against
the deferred tax asset for the benefits of tax losses that may not be realized.
The valuation allowance relates to the operating loss carryforwards acquired
from NeXT and to tax benefits in certain foreign jurisdictions. 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. The Company's
effective tax rate for fiscal 1999 was 11% compared to the higher statutory rate
due primarily to the reversal of a portion of the previously established
valuation allowance and certain undistributed foreign earnings for which no U.S.
taxes were provided.
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 most of the issues for these years have been
resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes adequate provision has been made for any
adjustments that may result from tax examinations.
16
<PAGE>
The Company anticipates its effective tax rate for fiscal 2000 will be
approximately 25%. 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." Additionally, the actual future tax rate will be
significantly impacted by the amount of and jurisdiction in which the Company's
foreign profits are earned.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial information and statistics for
each of the last three fiscal years (dollars in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash, cash equivalents, and short-term investments.......... $3,226 $2,300 $1,459
Accounts receivable, net.................................... $ 681 $ 955 $1,035
Inventory................................................... $ 20 $ 78 $ 437
Working capital............................................. $2,736 $2,178 $1,606
Days sales in accounts receivable(a)........................ 46 56 58
Days of supply in inventory(b).............................. 2 6 31
Operating cash flow......................................... $ 798 $ 775 $ 154
</TABLE>
- ------------------------
(a) Based on ending net trade receivables and most recent quarterly net sales
for each period.
(b) Based on ending inventory and most recent quarterly cost of sales for each
period.
As of September 25, 1999, the Company had $3.226 billion in cash, cash
equivalents, and short-term investments, an increase of $926 million or 40% over
the same balances at the end of fiscal 1998. During fiscal 1999, the Company's
primary source of cash was $798 million in cash flows from operating activities.
Cash generated by operations was primarily from net income, declines in accounts
receivables and inventory resulting from improved asset management, and an
increase in accounts payable. The Company's cash and cash equivalent balances as
of September 25, 1999 and 1998, include $4 million and $56 million,
respectively, pledged as collateral to support letters of credit.
In addition to the net purchase of short-term investments of $1.081 billion, net
cash used by investing activities included $112 million for the purchase of
investments in Samsung and Akamai discussed below and $47 million for the
purchase of fixed assets. These uses of cash were partially offset by proceeds
from the sale of ARM stock of $245 million and proceeds from the sale of
equipment of $23 million. The Company expects the level of capital expenditures
in 2000 will increase moderately from 1999.
In July 1999, the Company's Board of Directors authorized a plan for the Company
to repurchase up to $500 million of its common stock. This repurchase plan does
not obligate the Company to acquire any specific number of shares or acquire
shares over any specified period of time. As of September 25, 1999, the Company
had repurchased a total of 1.25 million shares of its common stock at a cost of
$75 million.
On November 18, 1999, the Company entered into a $100 million revolving credit
agreement with Bank of America. Loans under the agreement pay interest at LIBOR
plus 1%, and the Company is required to pay a commitment fee of 0.2% of the
unused portion of the credit facility. No advances have been made against this
credit facility. This revolving credit agreement is intended to provide the
Company with an additional source of liquidity and to provide additional support
to the Company's capital position in the event of short-term liquidity
disturbances in worldwide financial markets associated with the Year 2000
crossover.
The Company believes its balances of cash, cash equivalents, and short-term
investments will be sufficient to meet its cash requirements over the next
twelve months, including any cash utilized by its stock repurchase plan.
However, given the Company's current non-investment grade debt ratings, if the
Company should need to obtain short-term borrowings, there can no assurance such
borrowings could be
17
<PAGE>
obtained at favorable rates. The inability to obtain such borrowings at
favorable rates could materially adversely affect the Company's results of
operations, financial condition, and liquidity.
OTHER LONG-TERM INVESTMENTS
As discussed above, the Company has categorized its shares in ARM as
available-for-sale requiring the shares be carried at fair value, with
unrealized gains and losses net of taxes reported as a component of accumulated
other comprehensive income. As of September 25, 1999, the Company held
16 million shares of ARM stock valued at $226 million. During the first quarter
of fiscal 2000 through December 17, 1999, the Company sold an additional
5.1 million shares of ARM stock for net proceeds of approximately $136 million
and gains before taxes of approximately $134 million. As of December 17, 1999,
the Company holds 10.9 million shares of ARM stock valued at approximately
$690 million.
During the fourth quarter of 1999, the Company invested $100 million in Samsung
Electronics Co., Ltd (Samsung) to assist in the further expansion of Samsung's
TFT-LCD flat-panel display production capacity. The investment, in the form of
three year unsecured bonds, is convertible into approximately 550,000 shares of
Samsung common stock beginning in June 2000. The bonds carry an annual coupon
rate of 2% and pay a total yield to maturity of 5% if redeemed at their
maturity.
In June 1999, the Company invested $12.5 million in Akamai Technologies, Inc.
(Akamai), a global Internet content delivery service. The investment was in the
form of convertible preferred stock that converted into 4.1 million shares of
Akamai common stock (adjusted for subsequent stock splits) at the time of
Akamai's initial public offering in October 1999. The Company is restricted from
selling more than 25% of its shares within one year after the date of the
closing of a public offering of Akamai's stock. Beginning in the first quarter
of fiscal 2000, the Company has categorized its shares in Akamai as
available-for-sale requiring they be carried at fair value with unrealized gains
and losses net of taxes reported as a component of accumulated other
comprehensive income. As of December 17, 1999, the fair value of the Company's
investment in Akamai was approximately $1.2 billion. Because Akamai is a newly
public company and its stock price has experienced significant volatility, the
fair value of the Company's investment in Akamai may fluctuate significantly in
the future.
YEAR 2000 COMPLIANCE
THE INFORMATION PRESENTED BELOW RELATED TO YEAR 2000 (Y2K) COMPLIANCE CONTAINS
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 10-K REGARDING Y2K COMPLIANCE.
YEAR 2000
The Year 2000 (Y2K) issue is the result of certain computer hardware, operating
system software and software application programs having been developed using
two digits rather than four to define a year. For example, the clock circuit in
the hardware may be incapable of holding a date beyond the year 1999; some
operating systems may recognize a date using "00" as the year 1900 rather than
2000 and certain applications may have limited date processing capabilities.
These problems could result in the failure of major systems or miscalculations,
which could have a material impact on companies through business interruption or
shutdown, financial loss, damage to reputation, and legal liability to third
parties.
Y2K PLAN
The Company's Information Systems and Technology department (IS&T) began
addressing the Y2K issue in 1996 as part of its Next Generation strategy, which
addressed the need for ongoing enhancement and replacement of the Company's
various disparate legacy information technology (IT) Systems. In 1998, the
Company established a Year 2000 Executive Steering Committee (Steering
Committee) comprised of senior executives of the Company and the Company's Year
2000 Project Management Office (PMO). The PMO reports to the Executive Vice
President and Chief Financial Officer, the Steering Committee, and the Audit and
Finance Committee of the Board of Directors.
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The PMO developed and manages the Company's worldwide Y2K strategic plan (Y2K
Plan) to address the potential impact of Y2K on the Company's operations and
business processes. In particular, the Y2K Plan addresses four principal areas
that may be impacted by the Y2K issue: Apple Branded Products; Third Party
Relationships; Non-IT Business Systems; and IT Systems. With respect to the IT
Systems and Non-IT Business Systems, the Y2K Plan consists of four separate but
overlapping phases: Phase I--Inventory and Risk Assessment; Phase
II--Remediation Cost Estimation; Phase III--Remediation; and Phase
IV--Remediation Testing. In addition, the Company has an ongoing Y2K Awareness
Program designed to keep employees informed about Y2K issues. The discussion
below reflects management's estimate of the current status of the four principal
areas of the Company's Y2K Plan. Regardless of the current status, all areas of
the Y2K Plan remain under review and subject to modification as deemed necessary
throughout the remainder of calendar 1999 through the date rollover and into
January 2000.
APPLE BRANDED PRODUCTS
The Company designs and manufactures personal computers, related peripherals,
operating system software and application software, including Macintosh personal
computers and the Mac OS, which are marketed under the "Apple" brand
(collectively "Apple Branded Products"). The Company tested certain Apple
Branded Products to determine Y2K compliance, although such testing did not
include third party products bundled with Apple Branded Products and certain
Apple Branded Products no longer distributed and/or supported by the Company.
For purposes of this discussion, Y2K compliant means a product will not produce
errors processing date data in connection with the year change from
December 31, 1999, to January 1, 2000, when used with accurate date data in
accordance with its documentation, provided all other products (including other
software, firmware and hardware) used with it properly exchange date data with
it. A Y2K compliant product will recognize the Year 2000 as a leap year.
Information about testing and Y2K compliance of Apple Branded Products is
available on the Apple corporate web site under the heading "Year 2000 Readiness
Disclosure", at www.apple.com/about/year/. Such information, which is updated on
an ongoing basis, is not to be considered part of this annual report. Because
the Company does not control the design of non-Apple Branded Products or third
party products that are bundled with Apple Branded Products, it cannot assure
such products are Y2K compliant.
Some Apple Branded Products installed at customer sites may require upgrades or
other remediation. While the Company believes its customers are responsible for
the Y2K readiness of their IT and business environments, the Company has taken
steps to assist customers in achieving their readiness goals. Apple is issuing
software updates (at no additional charge) for most, but not all, known issues
in certain Apple Branded Products.
THIRD PARTY RELATIONSHIPS
The Company's business operations are heavily dependent on third party corporate
service vendors, materials suppliers, outsourced operations partners,
distributors and others. The Company is working with key external parties to
identify and attempt to mitigate the potential risks to it of Y2K. The failure
of external parties to resolve their own Y2K issues in a timely manner could
result in a material financial risk to the Company. As part of its Y2K Plan and
to establish the state of readiness of certain third parties, the Company is
actively communicating on an ongoing basis with certain third parties whose lack
of Y2K compliance would present a high degree of risk to the Company. Based on
information obtained from various sources, the Company believes it is reasonably
possible there will be interruptions around the world in critical services such
as air traffic control, airfreight transportation, customs clearance,
telecommunications, and power utilities early in calendar year 2000 that could
result in shipping delays of raw material and finished goods. The Company also
believes it is reasonably possible that worldwide financial markets could
exhibit unusual short-term volatility and liquidity disturbances at the end of
calendar 1999 and at the beginning of calendar 2000. Such events could result in
material adverse effects on the Company's results of operations and financial
position. See further discussion regarding this issue below under the heading
"Contingency Plans." The Company has substantially completed its review of
certain third parties as of the
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end of the fourth quarter of fiscal 1999. Although numerous third parties have
advised the Company they are addressing their Y2K issues, the readiness of third
parties overall varies widely. Because the Company's Y2K compliance is dependent
on the timely Y2K compliance of third parties, there can be no assurances the
Company's efforts alone will resolve all Y2K issues. The Company continues to
communicate with and monitor the compliance efforts of key third parties. The
Company will continue these efforts with key third parties through the date
rollover and into January 2000.
IT SYSTEMS AND NON-IT BUSINESS SYSTEMS
Phase I--Inventory and Risk Assessment:
This Phase requires an inventory and assessment of the Non-IT Business Systems
used by the Company, including systems with embedded technology, building access
systems, and health and safety systems. This Phase also includes inventory and
assessment of IT Systems used by the Company, including large IS&T systems,
desktop hardware and software, and network hardware and software. Each system is
evaluated and the business risk is quantified as being High, Medium or Low Risk
to the Company's business. Systems that are High Risk are those, which if
uncorrected, would cause an interruption of or complete failure to conduct the
Company's business. Medium Risks are those that would negatively impact the
business but complete cessation could be avoided with some inconvenience. Low
Risks are those where the risk to business interruption or cessation are remote.
The Company intends that High and Medium Risk items will be remediated or
replaced, and Low Risk items will likely not be addressed prior to the Year
2000. The status of the Company's remediation efforts is discussed below. The
Company had substantially completed the Inventory and Risk Assessment Phase for
both IT Systems and Non-IT Systems by the end of the third quarter of fiscal
1999. However, the Company has and will continue to review information developed
as the result of its Y2K Plan, which could result in additional items being
added to its Y2K inventory.
Phase II--Remediation Cost Estimation:
This Phase involves the analysis of each High and Medium Risk to determine how
such risks may be remediated and the cost of such remediation. The Company has
substantially completed this Phase for both IT and Non-IT Business Systems.
Phase III--Remediation:
This Phase includes the replacement or correction of the High and Medium Risk
Non-IT Business Systems and IT Systems. The Company substantially completed this
Phase for both IT and Non-IT Business Systems during the fourth quarter of
fiscal 1999.
Phase IV--Remediation Testing:
This Phase includes the future date testing of the remediation efforts made in
Phase III to confirm that the changes made bring the affected systems into
compliance, no new problems have arisen as a result of the remediation, and new
systems that replaced noncompliant systems are Y2K compliant. The Company
substantially completed this Phase for both IT and Non-IT Business Systems
during the first quarter of fiscal 2000.
COSTS TO ADDRESS Y2K
The costs of the Y2K program are primarily costs associated with the utilization
of existing internal resources and incremental external spending. The Company's
current estimate of total incremental external spending over the life of its Y2K
plan to address those risks identified as High or Medium is approximately
$10 million of which approximately $9 million had been spent as of
September 25, 1999. As the Company's Y2K Plan continues, the actual future
incremental spending may prove to be higher. Also, this estimate does not
include the costs that could be incurred by the Company if one or more of its
significant third party vendors fails to achieve Y2K compliance. The Company is
not separately identifying
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and including in these estimates the Y2K costs incurred that are the result of
utilization of the Company's existing internal resources.
CONTINGENCY PLANS
Under the guidance and management of the PMO, the Company is in the final stages
of developing, implementing, and testing Y2K contingency plans for critical
business operations. The Company's contingency plans, which are based in part on
the assessment of the magnitude and probability of potential risks, primarily
focus on proactive steps to prevent Y2K failures from occurring, or if they
should occur, to detect them quickly, minimize their impact and expedite their
remediation. The Y2K contingency plans will supplement existing disaster
recovery and business continuity plans.
As part of its contingency plans, the Company has developed a global Incident
Management Team (IMT) to identify, escalate, and mitigate the potential impact
of various Y2K failures. The IMT is comprised of personnel from the PMO as well
as key areas of the Company's operations. The IMT will begin to monitor the date
rollover commencing with Sydney, Australia and will "follow the sun" through the
time change in the Pacific Standard Time zone. The Company's contingency
planning efforts were approximately 85% complete at the end of the fourth
quarter of fiscal 1999 and are expected to be substantially completed during the
first quarter of fiscal 2000.
The Company believes it is reasonably possible there will be interruptions in
air traffic control, airfreight transportation, customs clearance,
telecommunications, and power utilities early in calendar year 2000 that could
result in shipping delays of raw material and finished goods and other business
interruptions. The Company has developed and implemented contingency plans to
mitigate the effects of a short-term interruption in such services. However, if
the interruption in these services last for an extended period of time, or if
alternative Y2K compliant services are not readily available at reasonable cost,
there could be material adverse effects on the Company's results of operations
and financial position.
The Company also believes it is reasonably possible worldwide financial markets
could exhibit unusual short-term volatility and liquidity disturbances at the
end of calendar 1999 and at the beginning of calendar 2000. The Company has
developed and implemented contingency plans to mitigate some of the potential
short-term effects of such disturbances. However, if these disturbances in the
financial markets last for an extended period of time, or if alternative
mitigating actions are not readily available at reasonable cost, there could be
material adverse effects on the Company's results of operations and financial
position.
RISK FACTORS ASSOCIATED WITH Y2K ISSUES
The Company has substantially completed its initial assessment of reasonably
likely worst case scenarios of Non-IT Business Systems and/or IT Systems
failures and related consequences. Based on current information, the Company
believes the most likely worst case scenario is it will experience minor
malfunctions and failures of its IT Systems and Non-IT Business Systems at the
beginning of the Year 2000 not previously detected during the Company's
inventory and risk assessment and remediation activities. The Company currently
believes these malfunctions and failures will not have a material impact on its
results of operations or financial condition. However, there can be no assurance
the Y2K remediation by the Company or third parties will be properly and timely
completed, and the failure to do so could have a material adverse effect on the
Company, its business, its results of operations, and its financial condition.
In particular, the Company believes a lack of Y2K readiness by its significant
third party vendors could cause material interruptions in the Company's
operations. The identification of additional issues with respect to the Y2K
compliance of key third parties could have a material adverse effect on the
Company's results of operations. In addition, important factors that could cause
results to differ materially include, but are not limited to, the ability of the
Company to successfully identify systems and vendors that have a Y2K issue, the
nature and amount of remediation effort required to fix the affected systems,
the adequacy of such remediation efforts, the production-related contingency
plans of competitors with the Company's
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third party suppliers, and the costs and availability of labor and resources to
successfully address the Y2K issues and/or to execute on any required
contingency plans.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
COMPETITION
The personal computer industry is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent
introduction of new products, short product life cycles, continual improvement
in product price/performance characteristics, price sensitivity on the part of
consumers, and a large number of competitors. The Company's results of
operations and financial condition have been, and in the future may continue to
be, adversely affected by industry wide pricing pressures and downward pressures
on gross margins. The industry has also been characterized by rapid
technological advances in software functionality, hardware performance, and
features based on existing or emerging industry standards. Several competitors
of the Company have either targeted or announced their intention to target
certain of the Company's key market segments, including consumer, education and
publishing. Additionally, several of the Company's competitors have introduced
or announced plans to introduce products that mimic many of the unique design
and technical features of the Company's products. Many of the Company's
competitors have greater financial, marketing, manufacturing, and technological
resources, as well as broader product lines and larger installed customer bases
than those of the Company. Additionally, the Company's future operating results
and financial condition may be affected by overall demand for personal computers
and general customer preferences for one platform over another or one set of
product features over another.
The Company is currently the only maker of hardware using the Mac OS. The Mac OS
has a minority market share in the personal computer market, which is dominated
by makers of computers utilizing Microsoft Windows operating systems. The
Company believes the innovative industrial design of its products, the unique
set of features its products currently provide, the perceived advantages of the
Mac OS over Windows, and the general reluctance of the Macintosh installed base
to incur the costs of switching platforms, have been driving forces behind sales
of the Company's personal computer hardware in recent years. The Company is
currently taking and will continue to take steps to respond to the competitive
pressures being placed on its personal computer sales as a result of the recent
innovations in the Windows platform. The Company's future operating results and
financial condition are substantially dependent on its ability to continue to
develop improvements to the Macintosh platform in order to maintain perceived
design and functional advantages over competing platforms.
PRODUCT INTRODUCTIONS AND TRANSITIONS
Due to the highly volatile nature of the personal computer industry, which is
characterized by dynamic customer demand patterns and rapid technological
advances, the Company must continually introduce new products and technologies
and enhance existing products in order to remain competitive. The success of new
product introductions is dependent on a number of factors, including market
acceptance, the Company's ability to manage the risks associated with product
transitions, the availability of application software for new products, the
effective management of inventory levels in line with anticipated product
demand, the availability of products in appropriate quantities to meet
anticipated demand, and the risk that new products may have quality or other
defects in the early stages of introduction. Accordingly, the Company cannot
determine the ultimate effect that new products will have on its sales or
results of operations.
The Company plans to continue to introduce upgrades to the current Mac OS, Mac
OS 9, and later introduce a new operating system, Mac OS X Client, which is
expected to offer advanced functionality based on Apple and NeXT software
technologies. It is uncertain whether Mac OS X will gain developer support and
market acceptance. Inability to successfully develop and make timely delivery of
a substantially backward-compatible Mac OS X or of planned enhancements to the
current Mac OS, or to gain
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developer support and market acceptance for those operating systems, may have an
adverse impact on the Company's operating results and financial condition.
INVENTORY AND SUPPLY
The Company records a write-down for inventories of components and products that
have become obsolete or are in excess of anticipated demand and accrues for any
cancellation fees of orders for inventories that have been canceled. Although
the Company believes its inventory and related provisions are adequate, given
the rapid and unpredictable pace of product obsolescence in the computer
industry, no assurance can be given the Company will not incur additional
inventory and related charges. In addition, such charges have had, and may again
have, a material effect on the Company's financial position and results of
operations.
The Company must order components for its products and build inventory in
advance of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk the Company will
forecast incorrectly and produce excess or insufficient inventories of
particular products. The Company's operating results and financial condition
have been in the past and may in the future be materially adversely affected by
the Company's ability to manage its inventory levels and respond to short-term
shifts in customer demand patterns.
Many of the Company's products are manufactured in whole or in part by
third-party manufacturers. In addition, the Company has outsourced much of its
transportation and logistics management. While outsourcing arrangements may
lower the fixed cost of operations, they also reduce the Company's direct
control over production and distribution. It is uncertain what effect such
diminished control will have on the quality or quantity of the products
manufactured, or the flexibility of the Company to respond to changing market
conditions. Moreover, although arrangements with such manufacturers may contain
provisions for warranty expense reimbursement, the Company remains at least
initially responsible to the ultimate consumer for warranty service.
Accordingly, in the event of product defects or warranty liability, the Company
may remain primarily liable. Any unanticipated product defect or warranty
liability, whether pursuant to arrangements with contract manufacturers or
otherwise, could adversely affect the Company's future operating results and
financial condition.
Although certain components essential to the Company's business are generally
available from multiple sources, other key components (including microprocessors
and application specific integrated circuits ("ASICs")) are currently obtained
by the Company from single or limited sources. Some other key components
(including without limitation DRAM and TFT-LCD flat-panel displays), while
currently available to the Company from multiple sources, are at times subject
to industry wide availability and pricing pressures. If the supply of a key
component were to be delayed or constrained, the Company's business and
financial performance could be adversely affected, depending on the time
required to obtain sufficient quantities from the original source, or, if
possible, to identify and obtain sufficient quantities from an alternate source.
The Company and other producers in the personal computer industry also compete
for other semiconductor products with other industries that have experienced
increased demand for such products, due to either increased consumer demand or
increased use of semiconductors in their products (such as the cellular phone
and automotive industries). Finally, the Company uses some components that are
not common to the rest of the personal computer industry (including certain
microprocessors and ASICs). Continued availability of these components may be
affected if producers were to decide to concentrate on the production of
components other than those customized to meet the Company's requirements. Such
product supply constraints and corresponding increased costs could decrease the
Company's net sales and adversely affect the Company's operating results and
financial condition.
The Company's ability to produce and market competitive products is also
dependent on the ability and desire of IBM and Motorola, the sole suppliers of
the PowerPC RISC-based microprocessor for the Company's Macintosh computers, to
provide the Company with a sufficient supply of microprocessors with
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price/performance features that compare favorably to those supplied to the
Company's competitors by Intel Corporation, and other developers and producers
of microprocessors used by personal computers using the Windows operating
systems.
Further discussion relating to availability and supply of components and product
may be found in Part I, Item 1 of this Form 10-K under the heading "Raw
Materials," and in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements at Note 8 under the subheading "Concentrations
in the Available Sources of Supply of Materials and Product," which information
is hereby incorporated by reference.
MARKETING AND DISTRIBUTION
The Company distributes its products through wholesalers, resellers, national
and regional retailers and cataloguers, and directly to education institutions
for resale (collectively referred to as "resellers"). In addition, the Company
also sells many of its products in most of its major markets directly to end
users through its on-line store. Many of the Company's significant resellers
operate on narrow product margins. Most such resellers also distribute products
from competing manufacturers. The Company's business and financial results could
be adversely affected if the financial condition of these resellers weakened, if
resellers within consumer channels were to cease distribution of the Company's
products, or if uncertainty regarding demand for the Company's products causes
resellers to reduce their ordering and marketing of the Company's products.
Further information regarding risks associated with Marketing and Distribution
may be found in Part I, Item 1 of this Form 10-K under the heading "Markets and
Distribution," which information is hereby incorporated by reference.
GLOBAL MARKET RISKS
A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's operating results and financial condition
could be significantly affected by risks associated with international
activities, including economic and labor conditions, political instability, tax
laws (including U.S. taxes on foreign subsidiaries), and changes in the value of
the U.S. dollar versus the local currency in which the products are sold and
goods and services are purchased.
Countries in the Asia Pacific region, including Japan, have recently experienced
weaknesses in their currency, banking and equity markets. These weaknesses have
adversely affected and may continue to adversely affect consumer demand for the
Company's products, the U.S. dollar value of the Company's foreign currency
denominated sales, the availability and cost of product components to the
Company, and consequently the Company's results of operations.
Further information related to the Company's global market risks may be found in
Part II, Item 7A of this Form 10-K under the subheading "Foreign Currency Risk"
and may be found in Part II, Item 8 of this Form 10-K at Notes 1 and 2 of Notes
to Consolidated Financial Statements, which information is hereby incorporated
by reference.
SUPPORT FROM THIRD-PARTY SOFTWARE DEVELOPERS
Decisions by customers to purchase the Company's personal computers, as opposed
to Windows-based systems, are often based on the availability of third-party
software for particular applications. The Company believes the availability of
third-party application software for the Company's hardware products depends in
part on third-party developers' perception and analysis of the relative benefits
of developing, maintaining, and upgrading such software for the Company's
products versus software for the larger Windows market. This analysis is based
on factors such as the perceived strength of the Company and its products, the
anticipated potential revenue that may be generated, and the costs of developing
such software products. To the extent the Company's financial losses in prior
years and declining demand for the Company's products, as well as the Company's
decision to end its Mac OS licensing program, have caused
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software developers to question the Company's prospects in the personal computer
market, developers could be less inclined to develop new application software or
upgrade existing software for the Company's products and more inclined to devote
their resources to developing and upgrading software for the larger Windows
market. Moreover, the Company's current plan to introduce Mac OS X could cause
software developers to stop developing software for the current Mac OS. In
addition, there can be no assurance software developers will decide to develop
software for the new operating system on a timely basis or at all.
In August 1997, the Company and Microsoft entered into patent cross licensing
and technology agreements. In addition, for a period of five years from
August 1997, as subject to certain limitations related to the number of
Macintosh computers sold by the Company, Microsoft will make future versions of
its Microsoft Office and Internet Explorer products for the Mac OS. The Company
will bundle the Internet Explorer product with Mac OS system software releases
and make that product the default Internet browser for such releases. While the
Company believes its relationship with Microsoft has been and will continue to
be beneficial to the Company and to its efforts to increase the installed base
for the Mac OS, the Microsoft relationship is for a limited term and does not
cover many of the areas in which the Company competes with Microsoft, including
the Windows platform. Accordingly, Microsoft's interest in producing application
software for the Mac OS not covered by the relationship or following expiration
of the agreements may be influenced by Microsoft's perception of its interests
as the vendor of the Windows operating system. In addition, the Microsoft
relationship may have an adverse effect on, among other things, the Company's
relationship with other partners. There can be no assurance the benefits to the
Company of the Microsoft relationship will not be offset by the disadvantages.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro is now
traded on currency exchanges and is available for non-cash transactions. A three
year transition period began during which transactions can be made in the old
currencies.
The Company has taken steps to evaluate internal system capabilities, review the
ability of financial institution vendors to support Euro transactions, and
examine current marketing and pricing policies and strategies in light of the
Euro conversion. The cost of this effort is not expected to have a material
adverse effect on the Company's results of operations or financial condition.
There can be no assurance, however, all issues related to the Euro conversion
have been identified and that any additional issues would not have a material
effect on the Company's results of operations or financial condition. The
conversion to the Euro may have competitive implications on the Company's
pricing and marketing strategies, the impact of which are not known at this
time. Additionally, the Company is at risk to the extent its principal European
suppliers and customers are unable to deal effectively with the impact of the
Euro conversion.
OTHER FACTORS
The potential risks associated with the Company's Y2K Plan are discussed above
under the heading "Year 2000 Compliance."
The majority of the Company's research and development activities, its corporate
headquarters, and other critical business operations, including certain major
vendors, are located near major seismic faults. The Company's operating results
and financial condition could be materially adversely affected in the event of a
major earthquake.
Production and marketing of products in certain states and countries may subject
the Company to environmental and other regulations including, in some instances,
the requirement that the Company provide consumers with the ability to return to
the Company product at the end of its useful life, and leave responsibility for
environmentally safe disposal or recycling with the Company. Although the
Company does not anticipate any material adverse effects in the future based on
the nature of its operations and the thrust of such laws, no assurance can be
given such laws, or any future laws enacted for the protection of the
environment, will not have a material adverse effect on the Company.
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Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods. In addition, the Company's participation in a highly dynamic
industry often results in significant volatility of the Company's common stock
price.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
To ensure the adequacy and effectiveness of the Company's foreign exchange and
interest rate hedge positions, as well as to monitor the risks and opportunities
of the nonhedge portfolios, the Company continually monitors its foreign
exchange forward and option positions, and its interest rate swap, option and
floor positions both on a stand-alone basis and in conjunction with its
underlying foreign currency and interest rate related exposures, respectively,
from both an accounting and an economic perspective. However, given the
effective horizons of the Company's risk management activities and the
anticipatory nature of the exposures intended to hedge, there can be no
assurance the aforementioned programs will offset more than a portion of the
adverse financial impact resulting from unfavorable movements in either foreign
exchange or interest rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
operating results and financial position.
INTEREST RATE RISK
While the Company is exposed with respect to interest rate fluctuations in many
of the world's leading industrialized countries, the Company's interest income
and expense is most sensitive to fluctuations in the general level of U.S.
interest rates. In this regard, changes in U.S. interest rates affect the
interest earned on the Company's cash, cash equivalents, and short-term
investments as well as costs associated with foreign currency hedges.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investments and long-term debt obligations and
related derivative financial instruments. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company's general policy is to limit the risk of
principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be short-term
investments. As of September 25, 1999, substantially all of the Company's
investments have maturities less than 12 months.
During 1996, the Company issued $661 million aggregate principal amount of 6%
unsecured convertible subordinated notes (the Notes) to certain qualified
parties in a private placement. The Notes were sold at 100% of par. The Notes
paid interest semiannually and matured, if not converted earlier, on June 1,
2001. The Notes were convertible by their holders at any time after
September 5, 1996, at a conversion price of $29.205 per share subject to
adjustments as defined in the Note agreement. No Notes had been converted as of
September 25, 1998. The Notes were redeemable by the Company at 102.4% of the
principal amount, plus accrued interest, for the 12 month period beginning
June 1, 1999, and at 101.2% of the principal amount, plus accrued interest, for
the 12 month period beginning June 1, 2000. In addition, the Company incurred
approximately $15 million of costs associated with the issuance of the Notes.
These costs were accounted for as a deduction from the face amount of the Notes
and were being amortized over the life of the Notes.
On April 14, 1999, the Company called for redemption the Notes. Not including
approximately $7 million of unamortized debt issuance costs, debentures in an
aggregate principal amount outstanding totaled approximately $661 million as of
March 27, 1999. During the third quarter of 1999, debenture holders
26
<PAGE>
chose to convert virtually all of the outstanding debentures to common stock at
a rate of $29.205 per share resulting in the issuance of approximately
22.6 million shares of the Company's common stock.
During 1994, the Company issued $300 million aggregate principal amount of 6.5%
unsecured notes in a public offering registered with the SEC. The notes were
sold at 99.925% of par, for an effective yield to maturity of 6.51%. The notes
pay interest semiannually and mature on February 15, 2004.
The following table presents the principal (or notional) amounts and related
weighted-average interest rates for the Company's investment portfolio and its
long-term debt obligations. The long-term debt is comprised of $300 million of
unsecured notes described above, which mature in February 2004. The Company's
U.S. corporate securities include commercial paper, loan participations,
certificates of deposit, time deposits and corporate debt securities. Foreign
securities include foreign commercial paper, loan participation, certificates of
deposit and time deposits with foreign institutions, most of which are
denominated in U.S. dollars. The Company's cash equivalents and short-term
investments have generally been held until maturity. Gross unrealized gains and
losses were negligible as of September 25, 1999 and 1998.
In millions, except weighted-average interest rates
<TABLE>
<CAPTION>
SEPTEMBER 25, 1999 SEPTEMBER 25, 1998
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
CARRYING INTEREST CARRYING INTEREST
AMOUNT RATE AMOUNT RATE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash equivalents:
U.S. Treasury and Agency securities................ $ 3 5.00% $ 10 5.45%
U.S. corporate securities.......................... 517 5.16% 785 5.55%
Foreign securities................................. 636 4.94% 613 5.55%
------ ------
Total cash equivalents........................... 1,156 5.04% 1,408 5.55%
------ ------
Short-term investments:
U.S. Treasury and Agency securities................ $ 298 5.57% $ 0 N/A
U.S. corporate securities.......................... 780 5.72% 163 5.56%
Foreign securities................................. 822 5.39% 656 5.54%
------ ------
Total short-term investments..................... 1,900 5.55% 819 5.54%
------ ------
Total investment securities.......................... $3,056 5.36% $2,227 5.55%
====== ======
Debt:
Fixed rate........................................... $ 300 5.98% $ 954 6.07%
====== ======
</TABLE>
Purchased floors are options limiting the Company's exposure to falling interest
rates on its cash equivalents and short-term investments by locking in a minimum
interest rate. The Company receives a payment when interest rates fall below a
predetermined level. A purchased floor generally qualifies for hedge accounting
treatment and is reported on the balance sheet at its premium cost, which is
amortized over the life of the floor. The purchased floors are generally
designated and effective as hedges against interest rate risk on the Company's
securities classified as available-for-sale and are carried at fair value in
other current liabilities with the unrealized gains and losses recorded as a
component of accumulated other comprehensive income. Purchased floors
outstanding as of September 25, 1998, provided the Company with the option of a
weighted-average interest rate of 5.15% on the notional amount of $525 million.
There were no purchased floors outstanding as of September 25, 1999. Gains and
losses are recognized in income as a component of interest and other income
(expense), net in the same period as the hedged transaction. Unrealized gains
and losses on such contracts were immaterial as of September 25, 1998.
27
<PAGE>
During the last two years, the Company has entered into interest rate derivative
transactions, including interest rate swaps and floors, with financial
institutions in order to better match the Company's floating-rate interest
income on its cash equivalents and short-term investments with its fixed-rate
interest expense on its long-term debt, and/or to diversify a portion of the
Company's exposure away from fluctuations in short-term U.S. interest rates. The
Company may also enter into interest rate contracts that are intended to reduce
the cost of the interest rate risk management program. The Company does not hold
or transact in such financial instruments for purposes other than risk
management.
The interest rate swaps qualifying as accounting hedges generally require the
Company to pay a floating interest rate based on the three- or six-month U.S.
dollar LIBOR and receive a fixed rate of interest without exchanges of the
underlying notional amounts. These swaps effectively convert the Company's
fixed-rate 10 year debt to floating-rate debt and convert the floating rate
investments to fixed rate. The maturity date for $25 million of the asset swaps
is October 1999 with the remaining debt and asset swaps maturing in February and
September of 2001. As of September 25, 1999 and 1998, interest rate debt swaps
had a weighted-average receive rate of 6.04%. The weighted-average pay rate on
the debt swaps was 5.45% and 5.73% as of September 25, 1999 and 1998,
respectively. As of September 25, 1999, interest rate asset swaps had a
weighted-average receive rate of 5.53% and a weighted-average pay rate of 5.24%.
The unrealized gains and losses on these swaps are deferred and recognized in
income as a component of interest and other income (expense), net in the same
period as the hedged transaction. Deferred losses on such contracts totaled
approximately $5 million as of September 25, 1999, while deferred gains on such
contracts totaled $7 million as of September 25, 1998.
FOREIGN CURRENCY RISK
Overall, the Company is a net receiver of currencies other than the U.S. dollar
and, as such, benefits from a weaker dollar and is adversely affected by a
stronger dollar relative to major currencies worldwide. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S. dollar, may
negatively affect the Company's net sales and gross margins as expressed in U.S.
dollars.
The Company enters into foreign exchange forward and option contracts with
financial institutions primarily to protect against currency exchange risks
associated with existing assets and liabilities, certain firmly committed
transactions, and probable but not firmly committed transactions. The Company's
foreign exchange risk management policy requires it to hedge a majority of its
existing material foreign exchange transaction exposures. However, the Company
may not hedge certain foreign exchange transaction exposures that are immaterial
either in terms of their minimal U.S. dollar value or in terms of the related
currency's historically high correlation with the U.S. dollar. Foreign exchange
forward contracts are carried at fair value in other current liabilities. The
premium costs of purchased foreign exchange option contracts are recorded in
other current assets and marked to market through earnings.
Probable but not firmly committed transactions comprise sales of the Company's
products and purchases of raw material, sub-assemblies, and assembled finished
goods in currencies other than the functional currency. A majority of these
transactions are made through the Company's subsidiaries in Europe, Asia
(particularly Japan), Canada, and Australia. The Company purchases foreign
exchange option contracts to hedge the currency exchange risks associated with
these probable but not firmly committed transactions. The Company also sells
foreign exchange option contracts, in order to partially finance the purchase of
these foreign exchange option contracts. The term of the Company's foreign
exchange hedging instruments, whether for firmly committed transactions,
probable but not firmly committed transactions, or to partially finance the
foreign risk management program, currently does not extend beyond six months.
Gains and losses on accounting hedges of existing assets or liabilities are
generally recorded in income or shareholders' equity against the losses and
gains on the hedged transactions. Gains and losses related to qualifying
accounting hedges of firmly committed or probable but not firmly committed
transactions are deferred and recognized in income in the same period as the
hedged transactions. Gains and losses on
28
<PAGE>
accounting hedges realized before the settlement date of the related hedged
transaction are also generally deferred and recognized in income in the same
period as the hedged transactions.
Gains and losses on interest rate and foreign exchange instruments not accounted
for as hedges are recorded in income as a component of interest and other income
(expense), net. Sold interest rate and foreign exchange instruments do not
qualify as accounting hedges. Premiums associated with sold foreign exchange
option contracts are marked to market through earnings.
The following table provides information about the Company's foreign currency
derivative financial instruments outstanding as of September 25, 1999 and 1998.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated financial statements. For foreign currency exchange
contracts, the table presents the notional amount (at contract exchange rates)
and the weighted-average contractual foreign currency exchange rates. The
combined increase in Yen denominated forward contracts and options is the result
of increasing net sales in Japan and the substantial appreciation in the Yen
29
<PAGE>
during 1999. Generally, all instruments mature within 6 months. Miscellaneous
other currencies consist primarily of the Canadian and Australian dollars.
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NOTIONAL CONTRACT RATE OR NOTIONAL CONTRACT RATE OR
AMOUNT STRIKE PRICE AMOUNT STRIKE PRICE
-------- ---------------- -------- ----------------
In millions, except average contract rates and strike
prices
<S> <C> <C> <C> <C>
Foreign currency spot/forward contracts:
Japanese Yen.............................. $ 590 105.70 $ 98 139.45
British Pound Sterling.................... 86 1.62 10 1.68
Euro/German Marks......................... 177 1.05 138 1.72
Miscellaneous other currencies............ 62 49
------ ------
Total currency spot/forward contracts....... $ 915 $ 295
====== ======
Estimated fair value........................ $ (9) $ (8)
====== ======
Foreign currency purchased call options:
Japanese Yen.............................. $ 250 104.80 $ 255 130.22
British Pound Sterling.................... 0 0 75 1.68
Euro/German Marks......................... 105 1.14 180 1.71
Miscellaneous other currencies............ 55 85
------ ------
Total purchased call options............ $ 410 $ 595
------ ------
Foreign currency purchased put options:
Japanese Yen.............................. $ 860 118.31 $ 525 139.05
British Pound Sterling.................... 75 1.59 205 1.64
Euro/German Marks......................... 505 1.00 450 1.79
Miscellaneous other currencies............ 100 105
------ ------
Total purchased put options............. $1,540 $1,285
------ ------
Total foreign currency purchased options.... $1,950 $1,880
====== ======
Estimated fair value........................ $ 12 $ 22
====== ======
Foreign currency sold call options:
Japanese Yen.............................. $ 290 106.18 $ 240 128.08
British Pound Sterling.................... 25 1.69 150 1.70
Euro/German Marks......................... 120 1.09 110 1.71
Miscellaneous other currencies............ 50 180
------ ------
Total sold call options................. 485 680
------ ------
Foreign currency sold put options:
Japanese Yen.............................. 0 0 $ 135 145.46
Euro/German Marks......................... $ 75 1.00 $ 25 1.80
Miscellaneous other currencies............ 25 40
------ ------
Total sold put options.................. 100 200
------ ------
Total foreign currency sold options......... $ 585 $ 880
====== ======
Estimated fair value........................ $ (17) $ (15)
====== ======
</TABLE>
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ------------------------------------------ --------
<S> <C>
Financial Statements:
Report of KPMG LLP, Independent Auditors.................. 32
Consolidated Balance Sheets as of September 25, 1999, and
September 25, 1998...................................... 33
Consolidated Statements of Operations for the three fiscal
years ended September 25, 1999.......................... 34
Consolidated Statements of Shareholders' Equity for the
three fiscal years ended September 25, 1999............. 35
Consolidated Statements of Cash Flows for the three fiscal
years ended September 25, 1999.......................... 36
Notes to Consolidated Financial Statements................ 37
Financial Statement Schedule:
For the three fiscal years ended September 25, 1999
Schedule II--Valuation and qualifying accounts.......... 64
</TABLE>
All other schedules have been omitted, since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and Notes thereto.
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Apple Computer, Inc.:
We have audited the accompanying consolidated balance sheets of Apple
Computer, Inc. and subsidiaries as of September 25, 1999 and September 25, 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended September 25,
1999. In connection with our audits of the consolidated financial statements, we
have also audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Apple
Computer, Inc. and subsidiaries as of September 25, 1999 and September 25, 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 25, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Mountain View, California
October 11, 1999
32
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 25,1999 SEPTEMBER 25,1998
----------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $1,326 $1,481
Short-term investments.................................... 1,900 819
Accounts receivable, less allowances of $68 and $81,
respectively............................................ 681 955
Inventories............................................... 20 78
Deferred tax assets....................................... 143 182
Other current assets...................................... 215 183
------ ------
Total current assets.................................... 4,285 3,698
Property, plant, and equipment, net....................... 318 348
Other assets.............................................. 558 243
------ ------
Total assets............................................ $5,161 $4,289
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 812 $ 719
Accrued expenses.......................................... 737 801
------ ------
Total current liabilities............................... 1,549 1,520
Long-term debt.............................................. 300 954
Deferred tax liabilities.................................... 208 173
------ ------
Total liabilities....................................... 2,057 2,647
====== ======
Commitments and contingencies
Shareholders' equity:
Series A nonvoting 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;
160,799,061 and 135,192,769 shares issued and
outstanding, respectively............................... 1,349 633
Retained earnings......................................... 1,499 898
Accumulated other comprehensive income (loss)............. 106 (39)
------ ------
Total shareholders' equity.............................. 3,104 1,642
------ ------
Total liabilities and shareholders' equity.............. $5,161 $4,289
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE FISCAL YEARS ENDED SEPTEMBER 25, 1999 1999 1998 1997
- ------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
Net sales................................................... $ 6,134 $ 5,941 $ 7,081
Cost of sales............................................... 4,438 4,462 5,713
-------- -------- ---------
Gross margin................................................ 1,696 1,479 1,368
-------- -------- ---------
Operating expenses:
Research and development.................................. 314 303 485
Selling, general, and administrative...................... 996 908 1,286
Special charges:
In-process research and development..................... -- 7 375
Restructuring costs..................................... 27 -- 217
Termination of license agreement........................ -- -- 75
-------- -------- ---------
Total operating expenses.............................. 1,337 1,218 2,438
-------- -------- ---------
Operating income (loss)..................................... 359 261 (1,070)
Gains from sales of investment.............................. 230 40 --
Interest and other income, net.............................. 87 28 25
-------- -------- ---------
Total interest and other income, net........................ 317 68 25
-------- -------- ---------
Income (loss) before provision for income taxes............. 676 329 (1,045)
Provision for income taxes.................................. 75 20 --
-------- -------- ---------
Net income (loss)........................................... $ 601 $ 309 $ (1,045)
======== ======== =========
Earnings (loss) per common share:
Basic..................................................... $ 4.20 $ 2.34 $ (8.29)
Diluted................................................... $ 3.61 $ 2.10 $ (8.29)
Shares used in computing earnings (loss) per share (in
thousands):
Basic..................................................... 143,157 131,974 126,062
Diluted................................................... 174,164 167,917 126,062
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ACCUMULATED OTHER TOTAL
------------------------- ------------------------- RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
-------------- -------- -------------- -------- -------- ------------------ -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of September
27, 1996................ -- $ -- 124,497 $ 439 $ 1,634 $ (15) $ 2,058
Components of
comprehensive income
(loss):
Net loss.............. -- -- -- -- (1,045) -- (1,045)
Foreign currency
translation......... -- -- -- -- -- (22) (22)
-------
Total comprehensive
income (loss)..... (1,067)
Common stock issued
under stock option and
purchase plans and in
connection with the
acquisition of NeXT... -- -- 3,452 59 -- -- 59
Series A non-voting
convertible preferred
stock issued.......... 150 150 -- -- -- -- 150
------ ---- ------- ------ ------- ----- -------
Balances as of September
26, 1997................ 150 150 127,949 498 589 (37) 1,200
Components of
comprehensive income
(loss):
Net income............ -- -- -- -- 309 -- 309
Foreign currency
translation......... -- -- -- -- -- (2) (2)
-------
Total comprehensive
income (loss)..... 307
Common stock issued
under stock option and
purchase plans........ -- -- 3,085 41 -- -- 41
Common stock issued in
connection with the
acquisition of certain
assets of PCC......... -- -- 4,159 80 -- -- 80
Tax benefit related to
disqualifying
dispositions of stock
options............... -- -- -- 14 -- -- 14
------ ---- ------- ------ ------- ----- -------
Balances as of September
25, 1998................ 150 150 135,193 633 898 (39) 1,642
Components of
comprehensive income
(loss):
Net income............ -- -- -- -- 601 -- 601
Foreign currency
translation......... -- -- -- -- -- 3 3
Unrealized gain on
available-for-sale
securities, net of
tax................. -- -- -- -- -- 318 318
Reclassification
adjustment for gains
on
available-for-sale
securities included
in net income....... -- -- -- -- -- (176) (176)
-------
Total
comprehensive
income (loss)... 746
Common stock issued
under stock option and
purchase plans........ -- -- 4,214 86 -- -- 86
Common stock issued in
connection with the
Company's redemption
of long-term debt..... -- -- 22,642 654 -- -- 654
Common stock
repurchased........... -- -- (1,250) (75) -- -- (75)
Tax benefit related to
disqualifying
dispositions of stock
options............... -- -- -- 51 -- -- 51
------ ---- ------- ------ ------- ----- -------
Balances as of September
25, 1999................ 150 $150 160,799 $1,349 $ 1,499 $ 106 $ 3,104
====== ==== ======= ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE FISCAL YEARS ENDED SEPTEMBER 25, 1999 1999 1998 1997
- ------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents, beginning of the year............ $1,481 $1,230 $1,552
------ ------ ------
Operating:
Net income (loss)........................................... 601 309 (1,045)
Adjustments to reconcile net income (loss) to cash generated
by operating activities:
Depreciation and amortization............................. 85 111 118
Provision for deferred income taxes....................... (35) 1 (50)
Loss on sale of property, plant, and equipment............ -- -- 37
Gains from sales of investment............................ (230) (40) --
In-process research and development....................... -- 7 375
Changes in operating assets and liabilities, net of effects
of the acquisition of NeXT:
Accounts receivable....................................... 274 72 469
Inventories............................................... 58 359 225
Other current assets...................................... (32) 31 36
Other assets.............................................. (3) 83 (4)
Accounts payable.......................................... 93 34 (107)
Accrued restructuring costs............................... 2 (107) 109
Other current liabilities................................. (15) (85) (9)
------ ------ ------
Cash generated by operating activities.................. 798 775 154
------ ------ ------
Investing:
Purchase of short-term investments.......................... (4,236) (2,313) (999)
Proceeds from sales and maturities of short-term
investments............................................... 3,155 1,723 963
Purchases of long-term investments.......................... (112) -- --
Proceeds from property, plant and equipment retirements..... 23 89 47
Purchase of property, plant, and equipment.................. (47) (46) (53)
Cash used for acquisition of technology..................... -- (10) (384)
Proceeds from sales of investment........................... 245 24 --
Other....................................................... 8 (10) (73)
------ ------ ------
Cash used for investing activities...................... (964) (543) (499)
------ ------ ------
Financing:
Decrease in notes payable to banks.......................... -- (22) (161)
Proceeds from issuance of preferred stock................... -- -- 150
Proceeds from issuance of common stock...................... 86 41 34
Cash used for repurchase of common stock.................... (75) -- --
------ ------ ------
Cash generated by financing activities.................. 11 19 23
------ ------ ------
Total cash generated by (used for).......................... (155) 251 (322)
------ ------ ------
Cash and cash equivalents, end of the year.................. $1,326 $1,481 $1,230
====== ====== ======
Supplemental cash flow disclosures:
Cash paid during the year for interest.................... $ 58 $ 59 $ 61
Cash paid (received) for income taxes, net................ $ 33 $ (15) $ (11)
Noncash transactions:
Issuance of common stock for redemption of long-term
debt.................................................. $ 654 -- --
Issuance of common stock for acquisition of PCC
assets................................................ -- $ 80 --
Issuance of common stock for acquisition of NeXT........ -- -- $ 25
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Apple Computer, Inc. and its subsidiaries (the Company) designs, manufactures,
and markets personal computers and related software and peripherals for sale
primarily to education, creative, consumer, and business customers.
BASIS OF PRESENTATION AND PREPARATION
The accompanying consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been eliminated. The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these consolidated financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
During the first quarter of 1999, the Company amended its by-laws to provide
that beginning in 1999 its fiscal year would end on the last Saturday in
September rather than the last Friday. Likewise, beginning with the first fiscal
quarter of 1999 each of the Company's fiscal quarters now also end on Saturday
rather than Friday. Accordingly, one day was added to the first quarter of 1999
so that the quarter ended on Saturday, December 26, 1998. These changes did not
have a material effect on the Company's revenue or results of operations for any
quarter during fiscal 1999. Fiscal years 1999, 1998 and 1997, each 52-week
years, ended on September 25, 25, and 26, respectively. Approximately every six
years, the Company reports a 53-week fiscal year to align its fiscal quarters
with calendar quarters by adding a week to its first fiscal quarter. The next
53-week year is fiscal 2000.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate their
fair value due to the short maturities of those instruments.
INVESTMENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. Investments with
maturities between three and twelve months are considered to be short-term
investments. Investments with maturities greater than twelve months are
classified as long-term assets. Management determines the appropriate
classification of its investments in debt and marketable equity securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. The Company's debt and marketable equity securities have been classified
and accounted for as available-for-sale. These securities are carried at fair
value, with the unrealized gains and losses, net of taxes, reported as a
component of shareholders' equity. These unrealized gains or losses include any
unrealized losses and gains on interest rate contracts accounted for as hedges
against the available-for-sale securities. The cost of securities sold is based
upon the specific identification method.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the ordinary course of business and as part of the Company's asset and
liability management, the Company enters into various types of transactions that
involve contracts and financial instruments with off-balance-sheet risk. These
instruments are entered into in order to manage financial market risk, primarily
interest rate and foreign exchange risk. The Company enters into these financial
instruments with major international financial institutions utilizing
over-the-counter as opposed to exchange traded instruments. The Company does not
hold or transact in financial instruments for purposes other than risk
management.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company enters into interest rate derivative transactions, including
interest rate swaps, collars, and floors, with financial institutions in order
to better match the Company's floating-rate interest income on its cash
equivalents and short-term investments with its fixed-rate interest expense on
its long-term debt, and/or to diversify a portion of the Company's exposure away
from fluctuations in short-term U.S. interest rates. The Company may also enter
into interest rate contracts that are intended to reduce the cost of the
interest rate risk management program.
The Company enters into foreign exchange forward and option contracts with
financial institutions primarily to protect against currency exchange risks
associated with existing assets and liabilities, certain firmly committed
transactions, and probable but not firmly committed transactions. The Company's
foreign exchange risk management policy requires it to hedge a majority of its
existing material foreign exchange transaction exposures. However, the Company
may not hedge certain foreign exchange transaction exposures that are immaterial
either in terms of their minimal U.S. dollar value or in terms of the related
currency's historically high correlation with the U.S. dollar. Foreign exchange
forward contracts are carried at fair value in other current liabilities. The
premium costs of purchased foreign exchange option contracts are recorded in
other current assets and amortized over the life of the option.
Probable but not firmly committed transactions comprise sales of the Company's
products and purchases of raw material, subassemblies, and assembled finished
goods in currencies other than the functional currency. A majority of these
transactions are made through the Company's subsidiaries in Europe, Asia
(particularly Japan), Canada, and Australia. The Company purchases foreign
exchange option contracts to hedge the currency exchange risks associated with
these probable but not firmly committed transactions. The Company also sells
foreign exchange option contracts, in order to partially finance the purchase of
these foreign exchange option contracts. The term of the Company's foreign
exchange hedging instruments, whether for firmly committed transactions,
probable but not firmly committed transactions, or to partially finance the
foreign exchange risk management program currently does not extend beyond six
months.
In addition, the Company has entered into foreign exchange forward contracts to
hedge certain intercompany loan transactions. These forward contracts
effectively change certain foreign currency denominated debt into U.S. dollar
denominated debt, which better matches against the Company's U.S. dollar
denominated cash equivalents and short-term investments.
Interest rate and foreign exchange instruments generally qualify as accounting
hedges if their maturity dates are the same as the hedged transactions and if
the hedged transactions meet certain requirements. The Company monitors its
interest rate and foreign exchange positions on a regular basis based on
applicable and commonly used pricing models. The correlation between the changes
in the fair value of hedging instruments and the changes in the underlying
hedged items is assessed periodically over the life of the hedged instrument. In
the event it is determined a hedge is ineffective, including if and when the
hedged transactions no longer exists, the Company recognizes in income the
change in market value of the instrument beginning on the date it was no longer
an effective hedge.
Gains and losses on accounting hedges of existing assets or liabilities are
generally recorded in income or shareholders' equity against the losses and
gains on the hedged transactions. Gains and losses related to qualifying
accounting hedges of firmly committed or probable but not firmly committed
transactions are deferred and recognized in income in the same period as the
hedged transactions. Gains and losses on accounting hedges realized before the
settlement date of the related hedged transaction are also generally deferred
and recognized in income in the same period as the hedged transactions.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses on interest rate and foreign exchange instruments not accounted
for as hedges are recorded in income as a component of interest and other income
(expense), net. Sold interest rate and foreign exchange instruments do not
qualify as accounting hedges. Premiums associated with sold foreign exchange
option contracts are marked to market through earnings.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. If
the cost of the inventories exceeds their market value, provisions are made
currently for the difference between the cost and the market value.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and amortization
are computed by use of the declining balance and straight-line methods over the
estimated useful lives of the assets, which are 30 years for buildings, from 2
to 5 years for equipment, and the shorter of lease terms or estimated useful
lives for leasehold improvements.
LONG-LIVED ASSETS
The Company reviews property, plant, and equipment and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of these
assets is measured by comparison of its carrying amount, including the
unamortized portion of any allocated goodwill, to future undiscounted cash flows
the assets are expected to generate. If property, plant, and equipment and
certain identifiable intangibles are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the assets,
including any allocated goodwill, exceeds its fair market value. The
recoverability of enterprise level goodwill is assessed whenever the facts and
circumstances suggest the asset may be impaired. The Company assesses the
recoverability of enterprise level goodwill by determining whether the
unamortized goodwill balance can be recovered through undiscounted future cash
flows. For the three years ended September 25, 1999, the Company has made no
adjustments to its long-lived assets except those made in connection with the
restructuring actions described in Note 4.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee stock-based
compensation plans using the intrinsic value method and has provided in Note 7
pro forma disclosures of the effect on net income (loss) and earnings (loss) per
share as if the fair value-based method had been applied in measuring
compensation expense.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign sales
subsidiaries at year-end exchange rates. Gains and losses from these
translations are credited or charged to "accumulated translation adjustment"
included in "accumulated other comprehensive income (loss)" in shareholders'
equity. The Company's foreign manufacturing subsidiaries and certain other
entities use the U.S. dollar as the functional currency and translate monetary
assets and liabilities at year-end exchange rates, and inventories, property,
and nonmonetary assets and liabilities at historical rates. Gains and losses
from these translations are included in the Company's results of operations and
were not significant in 1999, 1998 or 1997.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time products are shipped. Provisions are
made currently for estimated product returns, price protection, rebates, and
other sales programs. Historically, actual amounts recorded for product returns
and price protection have not varied significantly from estimated amounts.
During 1999, the Company adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition," as modified by SOP 98-9, "Modification of SOP 97-2 With Respect to
Certain Transactions". SOP 97-2 establishes standards relating to the
recognition of software revenue. SOP 97-2 was effective for transactions entered
into by the Company beginning in the first quarter of fiscal 1999. The adoption
of SOP 97-2 did not have a material impact on the Company's results of
operations.
WARRANTY EXPENSE
The Company provides currently for the estimated cost that may be incurred under
product warranties when products are shipped.
ADVERTISING COSTS
Advertising costs are charged to expense the first time the advertising takes
place. Advertising expense was $208 million, $152 million, and $143 million for
1999, 1998, and 1997, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," has not materially affected
the Company.
EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan (the Savings Plan) qualifying as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating U.S. employees may defer a portion of
their pre-tax earnings, up to the Internal Revenue Service annual contribution
limit ($10,000 for calendar year 1999). The Company matches 50% to 100% of each
employee's contributions, depending on length of service, up to a maximum 6% of
the employee's earnings. The Company's matching contributions to the Savings
Plan were approximately $13 million, $14 million, and $19 million in 1999, 1998,
and 1997, respectively.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing income available
to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common share is
computed by dividing income available to common shareholders by the
weighted-average number of shares of common stock outstanding during the period
increased to include the number of additional shares of common stock that would
have been outstanding if the dilutive potential shares of common stock 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.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 25, 1999 SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
- ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Numerator (in millions):
Numerator for basic earnings (loss) per
share--net income (loss)............... $ 601 $ 309 $ (1,045)
Interest expense on convertible debt..... 28 43 --
-------- -------- --------
Numerator for diluted earnings (loss) per
share--adjusted net income (loss)...... $ 629 $ 352 $ (1,045)
-------- -------- --------
Denominator:
Denominator for basic earnings (loss) per
share--weighted-average shares
outstanding............................ 143,157 131,974 126,062
Effect of dilutive securities:
Convertible preferred stock.............. 9,091 9,091 --
Dilutive options......................... 5,819 4,210 --
Convertible debt......................... 16,097 22,642 --
-------- -------- --------
Dilutive potential common shares........... 31,007 35,943 --
-------- -------- --------
Denominator for diluted earnings (loss) per
share--adjusted weighted-average shares
and assumed conversions.................. 174,164 167,917 126,062
======== ======== ========
Basic earnings (loss) per share............ $ 4.20 $ 2.34 $ (8.29)
======== ======== ========
Diluted earnings (loss) per share.......... $ 3.61 $ 2.10 $ (8.29)
======== ======== ========
</TABLE>
Options to purchase 1.2 million and 6.7 million shares of common stock were
outstanding at the end of 1999 and 1998, respectively, that were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the Company's common shares
for those years and, therefore, the effect would be antidilitive. No options
outstanding were included in the calculation of diluted earnings per share for
1997 because the Company had a net loss and to do so would have been
antidilutive.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," beginning
with the Company's first quarter of 1999. SFAS No. 130 separates comprehensive
income into two components, net income and other comprehensive income. Other
comprehensive income refers to revenue, expenses, gains and losses that under
generally accepted accounting principles are recorded as an element of
shareholders' equity but are excluded from net income. While SFAS No. 130
establishes new rules for the reporting and display of comprehensive income, it
has no impact on the Company's net income (loss) or total shareholders' equity.
The Company's other comprehensive income is comprised of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar as
their functional currency and from unrealized gains and losses on marketable
securities categorized as available-for-sale.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal reporting used by management for making
decisions and assessing performance as the source of the Company's reportable
segments. SFAS No. 131 also requires disclosures about products, major
customers, and geographic areas on a company-wide basis. The adoption of SFAS
No. 131 did not affect results of operations or the financial position of the
Company but did affect the disclosure of segment information.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, hedging activities, and exposure
definition. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," was issued. The statement defers the effective date of
SFAS No. 133 until the first quarter of fiscal 2001. Although the Company
continues to review the effect of the implementation of SFAS No. 133, the
Company does not currently believe its adoption will have a material impact on
its financial position or overall trends in results of operations and does not
believe adoption will result in significant changes to its financial risk
management practices. However, the impact of adoption of SFAS No. 133 on the
Company's results of operations is dependent upon the fair values of the
Company's derivatives and related financial instruments at the date of adoption.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the costs of developing computer software intended for internal
use. SOP 98-1 must be adopted by the Company effective as of fiscal 2000 and is
not expected to have a material impact on the Company's results of operations or
financial position.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS
INVESTMENTS
The following table summarizes the Company's available-for-sale securities at
amortized cost, which approximates fair value, recorded as cash and cash
equivalents or short-term investments as of September 25, 1999, and
September 25, 1998 (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 25, 1999 SEPTEMBER 25, 1998
AMORTIZED COST AMORTIZED COST
------------------ ------------------
<S> <C> <C>
U.S. Treasury securities.................... $ 3 $ 10
U.S. corporate securities................... 517 785
Foreign securities.......................... 636 613
------ ------
Total included in cash and cash
equivalents............................. 1,156 1,408
U.S. Treasury securities.................... 298 --
U.S. corporate securities................... 780 163
Foreign securities.......................... 822 656
------ ------
Total included in short-term
investments............................. 1,900 819
------ ------
Total..................................... $3,056 $2,227
====== ======
</TABLE>
As of September 25, 1999 and 1998, substantially all of the Company's
investments had maturities less than twelve months. The Company's U.S. corporate
securities include commercial paper and corporate debt securities. Foreign
securities include foreign commercial paper, loan participation and certificates
of deposit with foreign institutions, most of which are denominated in U.S.
dollars. The Company's cash equivalents and short-term investments have
generally been held until maturity. Gross unrealized gains and losses were
negligible as of September 25, 1999 and 1998. The Company's cash and cash
equivalent balances as of September 25, 1999 and 1998, include $4 million and
$56 million, respectively, pledged primarily as collateral to support letters of
credit.
TRADE RECEIVABLES
The Company distributes its products principally through third-party computer
resellers and various education and consumer channels. The Company generally
does not require collateral from its customers. However, when possible the
Company does attempt to limit credit risk on trade receivables through the use
of flooring arrangements for selected customers with third-party financing
companies and credit insurance for certain customers in Latin America and Asia.
Although none of the Company's customers accounted for more than 10% of net
sales in any of the last three fiscal years, at times considerable trade
receivables, which are not covered by collateral, are outstanding with the
Company's distribution and retail channel partners.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST RATE DERIVATIVES AND FOREIGN CURRENCY INSTRUMENTS
The following table shows the notional principal, fair value, and credit risk
amounts of the Company's interest rate derivative and foreign currency
instruments as of September 25, 1999 and 1998 (in millions).
<TABLE>
<CAPTION>
SEPTEMBER 25, 1999 SEPTEMBER 25, 1998
---------------------------------- ----------------------------------
NOTIONAL FAIR CREDIT RISK NOTIONAL FAIR CREDIT RISK
PRINCIPAL VALUE AMOUNTS PRINCIPAL VALUE AMOUNTS
--------- -------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps....................................... $ 790 $ (5) $ -- $ 340 $ 7 $ 1
Purchased floors............................ $ -- $ -- $ -- $ 525 $ 1 $ 1
Foreign exchange instruments:
Spot/Forward contracts...................... $ 730 $ (8) $ 4 $ 295 $ (8) $ --
Purchased options........................... $1,305 $ 4 $ -- $1,045 $ 14 $ 14
Transactions other than accounting hedges:
Foreign exchange instruments:
Spot/Forward contracts...................... $ 185 $ (1) $ -- $ -- $ -- $ --
Purchased options........................... $ 645 $ 8 $ 8 $ 835 $ 8 $ 8
Sold options................................ $ 585 $(17) $ -- $ 880 $(15) $ --
</TABLE>
The notional principal amounts for off-balance-sheet instruments provide one
measure of the transaction volume outstanding as of year-end, and do not
represent the amount of the Company's exposure to credit or market loss. The
credit risk amount shown in the table above represents the Company's gross
exposure to potential accounting loss on these transactions if all
counterparties failed to perform according to the terms of the contract, based
on then-current currency exchange and interest rates at each respective date.
The Company's exposure to credit loss and market risk will vary over time as a
function of interest rates and currency exchange rates.
The estimates of fair value are based on applicable and commonly used pricing
models using prevailing financial market information as of September 25, 1999
and 1998. In certain instances where judgment is required in estimating fair
value, price quotes were obtained from several of the Company's counterparty
financial institutions. Although the table above reflects the notional
principal, fair value, and credit risk amounts of the Company's interest rate
and foreign exchange instruments, it does not reflect the gains or losses
associated with the exposures and transactions that the interest rate and
foreign exchange instruments are intended to hedge. The amounts ultimately
realized upon settlement of these financial instruments, together with the gains
and losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.
The interest rate swaps, which qualify as accounting hedges, generally require
the Company to pay a floating interest rate based on the three- or six-month
U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the
underlying notional amounts. These swaps effectively convert the Company's
fixed-rate 10 year debt to floating-rate debt and convert the floating rate
investments to fixed rate. The maturity date for $25 million of the asset swaps
is October 1999 with the remaining debt and asset swaps maturing in February and
September of 2001. As of September 25, 1999 and 1998, interest rate debt swaps
had a weighted-average receive rate of 6.04%. The weighted-average pay rate on
the debt swaps was 5.45% and 5.73% as of September 25, 1999 and 1998,
respectively. As of September 25, 1999, interest rate asset swaps had a
weighted-average receive rate of 5.53% and a weighted-average pay rate of 5.24%.
The unrealized gains and losses on these swaps are deferred and recognized in
income as a
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
component of interest and other income (expense), net in the same period as the
hedged transaction. Deferred losses on such contracts totaled approximately
$5 million as of September 25, 1999, while deferred gains on such contracts
totaled $7 million as of September 25, 1998.
Purchased floors are options that limit the Company's exposure to falling
interest rates on its cash equivalents and short-term investments by locking in
a minimum interest rate. The Company receives a payment when interest rates fall
below a predetermined level. A purchased floor generally qualifies for hedge
accounting treatment and is reported on the balance sheet at its premium cost,
which is amortized over the life of the floor. The purchased floors are
generally designated and effective as hedges against interest rate risk on the
Company's securities classified as available-for-sale and are carried at fair
value in other current liabilities with the unrealized gains and losses recorded
as a component of accumulated other comprehensive income. Purchased floors
outstanding as of September 25, 1998, provided the Company with the option of a
weighted-average interest rate of 5.15% on the notional amount of $525 million.
Gains and losses are recognized in income as a component of interest and other
income (expense), net in the same period as the hedged transaction. Unrealized
gains and losses on such contracts were immaterial as of September 25, 1999 and
1998.
The foreign exchange forward contracts not accounted for as hedges are carried
at fair value in other current liabilities with the gains and losses recorded
currently in income as a component of interest and other income (expense), net.
The foreign exchange forward contracts that are designated and effective as
hedges are also carried at fair value in other current liabilities with gains
and losses recorded currently in income as a component of interest and other
income (expense), net, against the losses and gains on the hedged transactions.
As of September 25, 1999, all foreign exchange forward contracts held by the
Company mature within three months.
If the option contract is designated and effective as a hedge of a firmly
committed transaction, or a probable but not firmly committed transaction, then
any gain or loss is deferred until the occurrence of the hedged transaction.
Deferred gains and losses on such contracts were not significant as of
September 25, 1999 and 1998. If the option contract is used to hedge an asset or
liability, then the option is carried at fair value in other current liabilities
with the gains and losses recorded currently in income as a component of
interest and other income (expense), net, against the losses and gains on the
hedged transaction. As of September 25, 1999, maturity dates for purchased
foreign exchange option contracts and sold option contracts ranged from one to
four months.
The counterparties to the agreements relating to the Company's investments and
foreign exchange and interest rate instruments consist of a number of major
international financial institutions. To date, no such counterparty has failed
to meet its financial obligations to the Company. The Company does not believe
there is significant risk of nonperformance by these counterparties because the
Company continually monitors its positions and the credit ratings of such
counterparties, and limits the financial exposure and the number of agreements
and contracts it enters into with any one party. The Company generally does not
require collateral from counterparties, except for margin agreements associated
with the ten-year interest rate swaps on the Company's ten-year unsecured notes.
To mitigate the credit risk associated with these ten-year swap transactions,
which mature in 2004, the Company entered into margining agreements with its
third-party bank counterparties. These agreements require the Company or the
counterparty to post margin only if certain credit risk thresholds are exceeded.
The amounts held in margin accounts were not significant as of September 25,
1999.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT
The carrying amounts and estimated fair values of the Company's long-term debt
are as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 25,
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Ten-year unsecured notes(a)................... $300 $280 $300 $266
Convertible subordinated notes(b)............. $ -- $ -- $661 $887
</TABLE>
- ------------------------
(a) The fair value of the ten-year unsecured notes is based on their listed
market values as of September 25, 1999 and 1998.
(b) The carrying amount of the convertible subordinated notes is prior to
consideration of the related issuance costs. Their fair value is reflective
of the underlying conversion feature of the Notes.
CONVERTIBLE NOTES
During 1996, the Company issued $661 million aggregate principal amount of 6%
unsecured convertible subordinated notes (the Notes) to certain qualified
parties in a private placement. The Notes were sold at 100% of par, paid
interest semiannually, and matured on June 1, 2001 if not converted earlier. The
Notes were convertible by their holders at any time after September 5, 1996, at
a conversion price of $29.205 per share subject to adjustments as defined in the
Note agreement. No Notes had been converted as of September 25, 1998. The Notes
were redeemable by the Company at 102.4% of the principal amount, plus accrued
interest, for the twelve month period beginning June 1, 1999, and at 101.2% of
the principal amount, plus accrued interest, for the twelve month period
beginning June 1, 2000. The Notes were subordinated to all present and future
senior indebtedness of the Company as defined in the Note agreement. In
addition, the Company incurred approximately $15 million of costs associated
with the issuance of the Notes. These costs were accounted for as a deduction
from the face amount of the Notes and were being amortized over the life of the
Notes. In October 1996, the Company registered with the Securities and Exchange
Commission (SEC) $569 million of the aggregate principal amount of the Notes,
including the related shares of common stock issuable upon conversion of these
Notes.
On April 14, 1999, the Company called for redemption of the Notes. Not including
approximately $7 million of unamortized debt issuance costs, debentures in an
aggregate principal amount outstanding totaled approximately $661 million as of
March 27, 1999. During the third quarter of 1999, debenture holders chose to
convert virtually all of the outstanding debentures to common stock at a rate of
$29.205 per share resulting in the issuance of approximately 22.6 million shares
of the Company's common stock.
UNSECURED NOTES
During 1994, the Company issued $300 million aggregate principal amount of 6.5%
unsecured notes in a public offering registered with the SEC. The notes were
sold at 99.925% of par, for an effective yield to maturity of 6.51%. The notes
pay interest semiannually and mature on February 15, 2004.
EQUITY INVESTMENT AND RELATED GAINS
As of September 26, 1997, the Company owned 42.3% 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. The
Company had accounted for this investment using the equity
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
method through September 25, 1998. On April 17, 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 taxes of approximately $24 million, which was recognized as other
income. Foreign tax recognized on this gain was approximately $7 million.
At the time an equity method investee sells existing or newly issued common
stock to unrelated parties in excess of its book value, the equity method
requires the net book value of the investment be adjusted to reflect the
investor's share of the change in the investee's shareholders' equity resulting
from the sale. It is the Company's policy to record an adjustment reflecting its
share of the change in the investee's shareholders' equity resulting from such a
sale as a gain or loss in other income. Consequently, the Company also
recognized in the third quarter of 1998 other income of approximately
$16 million to reflect its remaining 25.9% ownership interest in the increased
net book value of ARM following its initial public offering. As of
September 25, 1998, the carrying value of the Company's investment in ARM
carried in other assets in the consolidated balance sheet was approximately
$22 million. On October 14, 1998, the Company sold 11.6 million shares (split
adjusted) of ARM stock. As a result of this sale, the Company's ownership
interest in ARM fell to 19.7%. Consequently, beginning in the first quarter of
fiscal 1999, the Company ceased accounting for its remaining investment in ARM
using the equity method and categorized its remaining shares as
available-for-sale requiring the shares be carried at fair value, with
unrealized gains and losses net of taxes reported as a component of accumulated
other comprehensive income.
During fiscal 1999, the Company sold a total of approximately 32.6 million
shares (split adjusted) of ARM stock for net proceeds of approximately
$245 million, recorded a gain before taxes of approximately $230 million, and
recognized related income tax of approximately $25 million. As of September 25,
1999, the Company holds 16 million shares of ARM stock valued at $226 million.
The fair value of the Company's investment in ARM is reflected in other assets
as of September 25, 1999, with an offsetting amount net of $84 million of
related deferred taxes recognized in accumulated other comprehensive income.
OTHER LONG-TERM INVESTMENTS
During the fourth quarter of 1999, the Company invested $100 million in Samsung
Electronics Co., Ltd (Samsung) to assist in the further expansion of Samsung's
TFT-LCD flat-panel display production capacity. The investment is in the form of
three year unsecured bonds, which is convertible into approximately 550,000
shares of Samsung common stock beginning in June 2000. The bonds carry an annual
coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their
maturity.
In June 1999, the Company invested $12.5 million in Akamai Technologies, Inc.
(Akamai), a global Internet content delivery service. The investment, in the
form of convertible preferred stock, is convertible into 4.1 million shares of
Akamai common stock (adjusted for subsequent stock splits). The Company is
restricted from selling more than 25% of its shares within one year after the
date of the closing of a public offering of Akamai's stock.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONSOLIDATED FINANCIAL STATEMENT DETAILS
INVENTORIES (in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Purchased parts............................................. $ 4 $32
Work in process............................................. 3 5
Finished goods.............................................. 13 41
--- ---
Total inventories........................................... $20 $78
=== ===
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT (in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land and buildings.......................................... $323 $338
Machinery and equipment..................................... 220 277
Office furniture and equipment.............................. 61 80
Leasehold improvements...................................... 125 129
---- ----
729 824
Accumulated depreciation and amortization................... (411) (476)
---- ----
Net property, plant, and equipment.......................... $318 $348
==== ====
</TABLE>
ACCRUED EXPENSES (in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued compensation and employee benefits.................. $ 84 $ 99
Accrued marketing and distribution.......................... 170 205
Accrued warranty and related costs.......................... 105 132
Other current liabilities................................... 378 365
---- ----
Total accrued expenses...................................... $737 $801
==== ====
</TABLE>
INTEREST AND OTHER INCOME (EXPENSE) (in millions)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income.......................................... $144 $100 $82
Interest expense......................................... (47) (62) (71)
Foreign currency gain (loss)............................. (4) (2) 13
Net premiums and discounts on foreign exchange
instruments............................................ (4) (1) (4)
Other income (expense), net.............................. (2) (7) 5
---- ---- ---
$ 87 $ 28 $25
==== ==== ===
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SPECIAL CHARGES
RESTRUCTURING OF OPERATIONS
1996 AND 1997 RESTRUCTURING ACTIONS
In the second quarter of 1996, the Company announced and began to implement a
restructuring plan designed to reduce costs and return the Company to
profitability. 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 charge during 1996 of $179 million. 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. All material restructuring actions contemplated under the plan were
essentially complete at the end of fiscal 1998. The combined 1996 and 1997
restructuring actions consisted of terminating approximately 4,200 full-time
employees; 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 were not
critical to the Company's core business strategy. The restructuring actions
under the plan resulted in cash expenditures of $293 million and noncash asset
write-downs of $95 million from the second quarter of 1996 through
September 25, 1999. Of the combined 1996 and 1997 restructuring charges of
$396 million, approximately $3 million was determined to be excess during the
fourth quarter of 1999 and was reversed. The remaining balance of $5 million as
of September 25, 1999 is comprised of payments over the next two years on leases
and contracts that had been terminated prior to fiscal 1999. The Company expects
the remaining accrual will result in cash expenditures of $5 million over the
next two years.
The following table depicts the restructuring activity through September 25,
1999, associated with the 1996 and 1997 restructuring actions described above
(in millions):
<TABLE>
<CAPTION>
PAYMENTS TO
EMPLOYEES PAYMENTS ON WRITE-DOWN OF PAYMENTS ON
INVOLUNTARILY CANCELED FACILITY OPERATING ASSETS CANCELED
TERMINATED(A) LEASES (A) TO BE SOLD (B) CONTRACTS (A) TOTAL
------------- ----------------- ---------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Net Additions during 1996...... $ 81 $ 19 $ 54 $ 25 $ 179
Spending during 1996........... (48) (4) (7) (3) (62)
---- ---- ---- ---- -----
Balances as of September 27,
1996......................... 33 15 47 22 117
Net Additions during 1997...... 131 19 38 29 217
Spending during 1997........... (88) (9) (46) (11) (154)
---- ---- ---- ---- -----
Balances as of September 26,
1997......................... 76 25 39 40 180
Adjustments during 1998........ 6 4 3 (13) --
Spending during 1998........... (72) (15) (42) (20) (149)
---- ---- ---- ---- -----
Balances as of September 25,
1998......................... 10 14 -- 7 31
Adjustments during 1999........ (2) (2) -- 1 (3)
Spending during 1999........... (8) (8) -- (7) (23)
---- ---- ---- ---- -----
Balances as of September 25,
1999......................... $ -- $ 4 $ -- $ 1 $ 5
==== ==== ==== ==== =====
</TABLE>
- ------------------------
(a): Cash;
(b): Noncash.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SPECIAL CHARGES (CONTINUED)
1999 RESTRUCTURING ACTIONS
During the fourth quarter of 1999, the Company initiated restructuring actions
resulting in a charge to operations of $21 million. The net restructuring charge
of $18 million recognized during the fourth quarter of 1999 reflects the
$3 million of excess reserves related to the 1996 and 1997 restructuring
actions. The total cost of these actions of $21 million, which is comprised of
$11 million for contract cancellation charges associated with the closure of the
Company's outsourced data center and $10 million for contract cancellation
charges related to supply and development agreements previously discontinued.
The Company expects these actions to result in cash expenditures of $21 million
over the next year.
During the second quarter of 1999, the Company took certain actions to improve
the flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to third-party manufacturers. These
restructuring actions resulted in the Company recognizing a charge to operations
of approximately $9 million during the second quarter of 1999, which was
comprised of $6 million for severance benefits to be paid to employees
involuntarily terminated, $2 million for the write-down of operating assets to
be disposed of, and $1 million for payments on canceled contracts. These actions
resulted in the termination of approximately 580 employees and are substantially
complete as of September 25, 1999.
TECHNOLOGY ACQUISITION
In May 1998, the Company acquired certain technology that was under development
and had no alternative future use. The acquisition resulted in the recognition
of $7 million of purchased in-process research and development, which was
charged to operations upon acquisition.
TERMINATION OF LICENSE AGREEMENT
In August 1997, the Company agreed to acquire certain assets of Power Computing
Corporation (PCC), a licensed distributor of the Mac OS operating system,
including PCC's customer database and its license to distribute the Mac OS. The
agreement with PCC also included a release of claims between the parties.
On January 28, 1998, the Company completed its acquisition of certain assets
from PCC. 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 is being 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.
NEXT ACQUISITION
On February 4, 1997, the Company acquired all of the outstanding shares of NeXT
Software, Inc. (NeXT). NeXT, headquartered in Redwood City, California, had
developed, marketed and supported software enabling customers to implement
business applications on the Internet/World Wide Web, intranets and
enterprise-wide client/server networks. The total purchase price was
$427 million and was comprised of cash payments of $319 million and the issuance
of 1.5 million shares of the Company's common stock to the NeXT shareholders
valued at approximately $25 million according to the terms of the purchase
agreement; the issuance of approximately 1.9 million options to purchase the
Company's common stock to the NeXT optionholders valued at approximately
$16 million; cash payments of $56 million to the NeXT debtholders; cash payments
of $9 million for closing and related costs, and $2 million of net liabilities
assumed. The acquisition was accounted for as a purchase; and, accordingly, the
operating results
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SPECIAL CHARGES (CONTINUED)
pertaining to NeXT subsequent to the date of acquisition have been included in
the Company's operating results. The total purchase price was allocated to
purchased in-process research and development ($375 million) and to goodwill and
other intangible assets ($52 million). The purchased in-process research and
development was charged to operations upon acquisition, and the goodwill and
other intangible assets are being amortized on a straight-line basis over two to
three years.
NOTE 5--INCOME TAXES
The provision for income taxes consisted of the following (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.................................................. $ 4 $ -- $ --
Deferred................................................. 30 -- --
--- --------- ---------
34 -- --
--- --------- ---------
State:
Current.................................................. -- -- --
Deferred................................................. 11 -- --
--- --------- ---------
11 -- --
--- --------- ---------
Foreign:
Current.................................................. 33 11 --
Deferred................................................. (3) 9 --
--- --------- ---------
30 20 --
--- --------- ---------
Provision for income taxes................................. $75 $ 20 $ --
=== ========= =========
</TABLE>
The foreign provision for income taxes is based on foreign pretax earnings
(loss) of approximately $612 million, $315 million, and $(265) million in 1999,
1998, and 1997, respectively. A substantial portion of the Company's cash, cash
equivalents, and short-term investments is held by foreign subsidiaries and is
generally based in U.S. dollar-denominated holdings. Amounts held by foreign
subsidiaries would be subject to U.S. income taxation on repatriation to the
United States. The Company's consolidated financial statements fully provide for
any related tax liability on amounts that may be repatriated, aside from
undistributed earnings of certain of the Company's foreign subsidiaries that are
intended to be indefinitely reinvested in operations outside the United States.
U.S. income taxes have not been provided on a cumulative total of $520 million
of such earnings. It is not practicable to determine the income tax liability
that might be incurred if these earnings were to be distributed. Except for such
indefinitely reinvested earnings, the Company provides for federal and state
income taxes currently on undistributed earnings of foreign subsidiaries.
Deferred tax assets and liabilities reflect the future income tax effects of
temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
are measured using enacted tax rates that apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
As of September 25, 1999 and 1998, the significant components of the Company's
deferred tax assets and liabilities were (in millions):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and inventory reserves................ $ 31 $ 87
Accrued liabilities and other reserves.................... 77 83
Basis of capital assets and investments................... 67 71
Tax losses and credits.................................... 438 447
---- ----
Total deferred tax assets................................. 613 688
Less valuation allowance.................................... 60 213
---- ----
Net deferred tax assets..................................... 553 475
---- ----
Deferred tax liabilities:
Unremitted earnings of subsidiaries....................... 442 390
Available-for-sale securities............................. 84 --
Other..................................................... 12 20
---- ----
Total deferred tax liabilities............................ 538 410
---- ----
Net deferred tax asset...................................... $ 15 $ 65
==== ====
</TABLE>
As of September 25, 1999, the Company had operating loss carryforwards for
federal tax purposes of approximately $414 million, which expire principally in
2011 and 2012. This does not include approximately $102 million of remaining
operating loss carryforwards acquired from NeXT, which expire in 2008 - 2012,
and the utilization of which is subject to certain limitations imposed by the
Internal Revenue Code. The Company also has various state and foreign tax loss
and credit carryforwards, the tax effect of which is approximately $90 million
and which expire between 2001 and 2014. Most of the remaining benefits from tax
losses and credits do not expire. As of September 25, 1999, a valuation
allowance of $60 million was recorded against the deferred tax asset for the
benefits of tax losses that may not be realized. The valuation allowance relates
to the operating loss carryforwards acquired from NeXT and to tax benefits in
certain foreign jurisdictions. The net change in the total valuation allowance
in 1999 was a decrease of $153 million. Management believes it is more likely
than not forecasted income, including income that may be generated as a result
of certain tax planning strategies, will be sufficient to fully recover the
remaining net deferred tax assets.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes, with the amount computed by
applying the statutory federal income tax rate (35% in 1999, 1998, and 1997) to
income (loss) before provision for income taxes, is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax (benefit)........................ $ 236 $115 $(366)
State taxes, net of federal effect..................... 12 10 (3)
Indefinitely invested earnings of foreign
subsidiaries......................................... (29) (15) --
Purchase accounting and asset acquisitions............. 7 8 158
Valuation allowance.................................... (153) (97) 208
Other individually immaterial items.................... 2 (1) 3
----- ---- -----
Provision for income taxes............................. $ 75 $ 20 $ --
===== ==== =====
Effective tax rate..................................... 11% 6% 0%
</TABLE>
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 most of the issues for these years have been
resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes adequate provision has been made for any
adjustments that may result from tax examinations.
NOTE 6--SHAREHOLDERS' EQUITY
STOCK REPURCHASE PLAN
In July 1999, the Company's Board of Directors authorized a plan for the Company
to repurchase up to $500 million of its common stock. This repurchase plan does
not obligate the Company to acquire any specific number of shares or acquire
shares over any specified period of time. As of September 25, 1999, the Company
had repurchased a total of 1.25 million shares of its common stock at a cost of
$75 million.
PREFERRED STOCK
In August 1997, the Company and Microsoft Corporation (Microsoft) entered into
patent cross licensing and technology agreements. In addition, Microsoft
purchased 150,000 shares of Apple Series A nonvoting convertible preferred stock
("preferred stock") for $150 million. Except under limited circumstances, the
shares of preferred stock may not be sold by Microsoft prior to August 5, 2000.
Upon any sale of the preferred stock by Microsoft, the shares will automatically
be converted into shares of Apple common stock at a conversion price of $16.50
per share, and the shares can be converted at Microsoft's option at such price
after August 5, 2000. Each share of preferred stock is entitled to receive, if
and when declared by the Company's Board of Directors, a dividend of $30.00 per
share per annum, payable in preference to any dividend on the Company's common
stock. Additionally, if the dividends per share paid on the common stock are
greater than the dividends per share paid on the preferred stock on an "as if
converted" basis, then the Board of Directors shall declare an additional
dividend such that the dividends per share paid on the preferred stock on an "as
if converted" basis, shall equal the dividends per share paid on the common
stock.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
1998 EXECUTIVE OFFICER STOCK PLAN
The Company has in effect a 1998 Executive Officer Stock Plan (the 1998 Plan),
which replaced the 1990 Stock Option Plan terminated in April 1998, the 1981
Stock Option Plan terminated in October 1990, and the 1987 Executive Long Term
Stock Option Plan terminated in July 1995. Options granted before these plans'
termination dates remain outstanding in accordance with their terms. Options may
be granted under the 1998 Plan to the Chairman of the Board of Directors,
executive officers of the Company at the level of Senior Vice President and
above, and other key employees. These options generally become exercisable over
a period of 4 years, based on continued employment, and generally expire
10 years after the grant date. The 1998 Plan permits the granting of incentive
stock options, nonstatutory stock options, stock appreciation rights, and stock
purchase rights. A total of 17,000,000 shares have been authorized for issuance
under the 1998 Plan, of which 12,038,390 shares are reserved for future issuance
as of September 25, 1999.
1997 EMPLOYEE STOCK OPTION PLAN
In August 1997, the Company's Board of Directors approved the 1997 Employee
Stock Option Plan (the 1997 Plan), for grants of stock options to employees who
are not officers of the Company. Options may be granted under the 1997 Plan to
employees at not less than the fair market value on the date of grant. These
options generally become exercisable over a period of 4 years, based on
continued employment, and generally expire 10 years after the grant date. A
total of 18,000,000 shares have been authorized for issuance under the 1997
Plan, of which 8,605,065 shares are reserved for future issuance as of
September 25, 1999.
1997 DIRECTOR STOCK OPTION PLAN
In August 1997, the Company's Board of Directors approved a Director Stock
Option Plan (DSOP), for which directors of the Company are eligible. Options
granted under the DSOP vest in three equal installments, on each of the first
through third anniversaries of the date of grant. A total of 400,000 shares have
been authorized for issuance under the DSOP, of which 220,000 shares remain
reserved for future issuance. Supplementally and separate from the DSOP, 30,000
options had been granted in total to two members of the Company's Board of
Directors, and were outstanding as of September 25, 1999.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (the Purchase Plan), under which
substantially all employees may purchase common stock through payroll deductions
at a price equal to 85% of the lower of the fair market values as of the
beginning and end of the six-month offering period. Stock purchases under the
Purchase Plan are limited to 10% of an employee's compensation, up to a maximum
of $25,000 in any calendar year. During 1999 and 1998, 540,000 and 1.1 million
shares, respectively, were issued under the Purchase Plan. As of September 25,
1999, approximately 2.96 million shares were reserved for future issuance under
the Purchase Plan.
SENIOR OFFICERS RESTRICTED PERFORMANCE SHARE PLAN
In November 1997, the Company's Board of Directors issued approximately 24,000
fully vested shares and cash in settlement of shares to certain officers of the
Company under the Senior Officers Restricted Performance Share Plan (the PSP)
based upon the achievement of certain performance goals established in advance
by the Compensation Committee of the Board. Immediately after these shares were
issued, the Company's Board of Directors terminated the PSP.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
SHAREHOLDER RIGHTS PLAN
In May 1989, the Company adopted a shareholder rights plan and distributed a
dividend of one right to purchase one share of common stock (a Right) for each
outstanding share of common stock of the Company. The Rights would have become
exercisable in certain limited circumstances involving a potential business
combination transaction of the Company and would have become initially
exercisable at a price of $200 per share. Following certain other events after
the Rights had become exercisable, each Right would have entitled its holder to
purchase for $200 an amount of common stock of the Company, or, in certain
circumstances, securities of the acquiror, having a then-current market value of
two times the exercise price of the Right. The Rights expired on April 19, 1999.
STOCK OPTION ACTIVITY
A summary of the Company's stock option activity and related information for the
years ended September 25, 1999 and 1998, and September 26, 1997, follows (option
amounts are presented in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 25, 1999 SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
------------------------- ------------------------- -------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning of
year.............................. 18,694 $20.47 18,649 $17.24 14,112 $27.23
Granted (price equals FMV)........ 5,955 $38.87 13,879 $23.11 20,629 $16.91
Granted (price less than FMV)..... -- $ -- -- $ -- 1,853 $ 6.54
Exercised......................... (3,674) $16.71 (1,882) $14.35 (1,049) $13.71
Forfeited......................... (2,571) $26.02 (11,952) $19.40 (16,896) $24.19
------ ------- -------
Options outstanding--end of year.... 18,404 $26.39 18,694 $20.47 18,649 $17.24
====== ======= =======
Options exercisable at end of
year.............................. 2,733 $19.15 1,435 $15.01 1,996 $22.02
</TABLE>
The options granted in fiscal 1997 at a price less than fair market value were
to existing NeXT optionholders as part of the total purchase price paid for NeXT
(see Note 4).
The options outstanding as of September 25, 1999, have been segregated into five
ranges for additional disclosure as follows (option amounts are presented in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
SEPTEMBER 25, CONTRACTUAL LIFE EXERCISE SEPTEMBER 25, EXERCISE
1999 IN YEARS PRICE 1999 PRICE
----------------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$1.66-$13.25................... 3,296 7.68 $12.54 1,324 $12.16
$13.26-$19.75.................. 4,449 8.20 $14.95 477 $16.31
$19.76-$31.19.................. 3,446 8.79 $30.07 705 $28.99
$31.20-$34.63.................. 4,149 9.23 $34.41 81 $34.18
$34.64-$79.06.................. 3,064 9.48 $42.92 146 $36.01
------ -----
$1.66-$79.06................... 18,404 8.66 $26.39 2,733 $19.15
====== =====
</TABLE>
As of September 25, 1999, approximately 20.9 million options were reserved for
future grant under the Company's stock option plans.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
In December 1997, the Board of Directors approved an option exchange program
allowing employees to exchange all (but not less than all) of their existing
options (vested and unvested) with an exercise price 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 4.7 million options
with a weighted-average exercise price of $19.90 per share were exchanged for
new options as a result of this program.
In July 1997, the Board of Directors approved an option exchange program
allowing employees to exchange all (but not less than all) of their existing
options (vested and unvested) to purchase Apple common stock (other than options
granted and assumed from NeXT) for options having an exercise price of $13.25
and a new three year vesting period beginning in July of 1997. Approximately
7.9 million options were repriced under this program.
NOTE 7--STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its employee stock options and employee stock purchase plan
shares because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123 requires use of option valuation models that
were not developed for use in valuing employee stock options and employee stock
purchase plan shares. Under APB Opinion No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) per share is required by SFAS
No. 123 and has been determined as if the Company had accounted for its employee
stock options granted and employee stock purchase plan purchases subsequent to
September 29, 1995, under the fair value method of that statement. The fair
values for these options and stock purchases were estimated at the date of grant
and beginning of the period, respectively, using a Black-Scholes option pricing
model. The weighted-average fair value per share of options granted during 1998
and 1997 includes the excess value of the repriced options granted during those
fiscal years less the value of the related forfeited options on the date the
repriced options were granted. The assumptions used for each of the last three
fiscal years and the resulting estimate of weighted-average fair value per share
of options granted during those years are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected life of options.................... 4 years 3.5 years 3 years
Expected life of stock purchases............ 6 months 6 months 6 months
Interest rate--stock options................ 5.02% 5.54% 6.3%
Interest rate--stock purchases.............. 4.89% 5.37% 5.3%
Volatility--stock options................... 55% 78% 74%
Volatility--stock purchases................. 59% 56% 52%
Dividend yields............................. 0 0 0
Weighted-average fair value of options
granted during the year................... $19.22 $12.98 $7.49
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK-BASED COMPENSATION (CONTINUED)
Company's employee stock options and employee stock purchase plan shares have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee stock options and employee stock purchase plan shares.
For purposes of pro forma disclosures, the estimated fair value of the options
and shares are amortized to pro forma net income (loss) over the options'
vesting period and the shares' plan period. The value of the options granted to
NeXT optionholders in 1997 has been included in the total purchase price paid
for NeXT and, therefore, is not included in the adjustment to arrive at the pro
forma net loss. The Company's pro forma information for each of the last three
fiscal years follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--as reported....................... $ 601 $ 309 $(1,045)
Net income (loss)--pro forma......................... $ 528 $ 266 $(1,082)
Net income (loss) per common share--as reported
Basic.............................................. $4.20 $2.34 $ (8.29)
Diluted............................................ $3.61 $2.10 $ (8.29)
Net income (loss) per common share--pro forma
Basic.............................................. $3.69 $2.02 $ (8.58)
Diluted............................................ $3.25 $1.83 $ (8.58)
</TABLE>
As SFAS No. 123 is applicable only to options granted or shares issued
subsequent to September 29, 1995, its pro forma effect was not fully reflected
until 1999.
NOTE 8--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases various facilities and equipment under noncancelable
operating lease arrangements. The major facilities leases are for terms of 5 to
10 years and generally provide renewal options for terms of up to 5 additional
years. Rent expense under all operating leases was approximately $61 million,
$63 million, and $106 million in 1999, 1998, and 1997, respectively. Future
minimum lease payments under noncancelable operating leases having remaining
terms in excess of one year as of September 25, 1999, are as follows (in
millions):
<TABLE>
<CAPTION>
FISCAL YEARS
- ------------
<S> <C>
2000........................................................ $ 46
2001........................................................ 41
2002........................................................ 29
2003........................................................ 19
2004........................................................ 14
Later years................................................. 35
----
Total minimum lease payments................................ $184
====
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATIONS IN THE AVAILABLE SOURCES OF SUPPLY OF MATERIALS AND PRODUCT
Although certain components essential to the Company's business are generally
available from multiple sources, other key components (including microprocessors
and application-specific integrated circuits, or "ASICs") are currently obtained
by the Company from single or limited sources. If the supply of a key
single-sourced component to the Company were to be delayed or curtailed or in
the event a key manufacturing vendor delays shipments of completed products to
the Company, the Company's ability to ship related products in desired
quantities and in a timely manner could be adversely affected. The Company's
business and financial performance could also be adversely affected depending on
the time required to obtain sufficient quantities from the original source, or
to identify and obtain sufficient quantities from an alternative source. In
addition, the Company uses some components that are not common to the rest of
the personal computer industry. Continued availability of these components may
be affected if producers were to decide to concentrate on the production of
common components instead of components customized to meet the Company's
requirements. Finally, significant portions of the Company's CPUs, logic boards,
and assembled products are now manufactured by outsourcing partners. Although
the Company works closely with its outsourcing partners on manufacturing
schedules and levels, the Company's operating results could be adversely
affected if its outsourcing partners were unable to meet their production
obligations.
LITIGATION
ABRAHAM AND EVELYN KOSTICK TRUST V. PETER CRISP ET AL.
In January 1996, a purported shareholder derivative action was filed in the
California Superior Court for Santa Clara County naming the Company and its then
directors as defendants, seeking injunctive relief and damages for alleged acts
of mismanagement. Between February 1996 and October 1997, the complaint was
amended several times as a result of the Courts' rulings upon various demurrers
filed by the Company. The Third Amended Complaint was filed in October 1997, and
eliminated the class action claims and restated claims against certain directors
and former directors. In November 1997, the Company's Board of Directors
appointed a special investigation committee and engaged independent counsel to
assist in the investigation of the claims made in the Third Amended Complaint.
This matter was settled during the fourth quarter of 1999 for an amount not
material to the Company's financial position or results of operations.
LS MEN'S CLOTHING DEFINED BENEFIT PENSION FUND V. MICHAEL SPINDLER ET AL.
In May 1996, an action was filed in the California Superior Court naming as
defendants the Company and certain of its current and former officers and
directors and seeking compensatory and punitive damages for alleged
misrepresentation and omission of material facts about the Company's operations
and financial results. Between May 1996 and November 1997, the complaint was has
been amended several times as a result of the Court's rulings upon various
demurrers of the Company. In January 1998, the Company and three individual
defendants brought a motion to dismiss the third amended complaint, and, in
March 1998, the Court granted the motion to dismiss the third amended complaint
without leave to amend. The plaintiffs filed an appeal in the Sixth Appellate
District in June 1998. The Court of Appeal heard oral argument in November 1999
and has not yet ruled.
"REPETITIVE STRESS INJURY" LITIGATION
The Company was named in approximately 60 lawsuits between 1991 to 1995,
alleging plaintiffs incurred so-called "repetitive stress" injuries to their
upper extremities as a result of using keyboards and/or mouse input devices sold
by the Company. These actions are similar to those filed against other major
suppliers of
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
personal computers. All but three of the cases against the Company were
dismissed by the end of fiscal 1998. During fiscal 1999, the remaining three
cases were dismissed.
MONITOR-SIZE LITIGATION
In August 1995, the Company was named, along with 41 other entities, including
computer manufacturers and computer monitor vendors, in a putative nationwide
class action filed in the California Superior Court for Orange County, styled
Keith Long et al. v. Amazing Technologies Corp. et al. The complaint alleges
each of the defendants engaged in false or misleading advertising with respect
to the size of computer monitor screens. Also in August 1995, the Company was
named as the sole defendant in a purported class action alleging similar claims
filed in the New Jersey Superior Court for Camden County, entitled Mahendri Shah
v. Apple Computer, Inc. Subsequently, in November 1995, the Company, along with
26 other entities, was named in a purported class action alleging similar claims
filed in the New Jersey Superior Court for Essex County, entitled Maizes &
Maizes v. Apple Computer, Inc. et al.. The complaints in all of these cases seek
restitution in the form of refunds or product exchange, damages, punitive
damages, and attorneys fees. In December 1995, the California Judicial Council
ordered all of the California actions, including Long, coordinated for purposes
of pretrial proceedings and trial before a single judge. These actions were
subsequently coordinated under the name In re Computer Monitor Litigation. In
July 1996, the Court ordered all of the California cases dismissed without leave
to amend as to plaintiffs residing in California. In March 1998, the Court
granted final approval of a settlement resolving all claims and all subsequent
appeals have been dismissed.
EXPONENTIAL TECHNOLOGY INC. V. APPLE COMPUTER, INC.
Plaintiff, Exponential Technology, Inc. (Exponential), alleged the Company,
which was an investor in Exponential, breached its fiduciary duty to Exponential
by misusing confidential information and that the Company fraudulently
misrepresented the facts about allowing Exponential to sell its processors to
the Company's Mac OS licensees. The lawsuit was filed in California Superior
Court for Santa Clara County. In November 1997, the Company filed a demurrer to
portions of the complaint, which the Court granted in part. In January 1998, the
plaintiff filed an Amended Complaint. In March 1998, the Company filed a
cross-complaint for damages against Exponential alleging breach of contract,
negligent misrepresentation, and violations of the California Corporations Code.
This matter was settled during the fourth quarter of 1999 for an amount not
material to the Company's financial position or results of operations.
FTC INQUIRY--PRADO V. APPLE COMPUTER, INC. (AND RELATED ACTIONS)
In October 1997, Apple began charging all U.S. noneducation customers for live
telephone technical support beyond 90 days after purchase of Apple products. In
late 1997, the Federal Trade Commission (FTC) commenced an investigation into
customer complaints that Apple's change in technical support practices was
either unfair or contrary to earlier representations to certain customers. Four
purported class action lawsuits were filed against Apple related to this change.
During the fourth quarter of 1999, the regional and national offices of the FTC
approved a settlement with the Company, and a settlement was approved by the
Court in three of the class action suits. In November 1999, two appeals were
filed objecting to the settlement and therefore the settlement is stayed pending
resolution of the appeals. Settlement of these matters was not material to the
Company's financial position or results of operations.
MICROWARE SYSTEMS CORPORATION V. APPLE COMPUTER, INC.
Plaintiff, Microware Systems Corporation (Microware), filed this action against
the Company on September 1, 1999, in the United States District Court for the
Southern District of Iowa. Microware alleges that
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Company's current release of its Mac OS operating system, Mac OS 9,
infringes Microware's trademark for its real time operating system, OS-9.
Microware asserts claims for trademark infringement, false designation of
origin, dilution and common law trademark infringement and unfair competition.
On October 14, 1999, Microware filed a motion for preliminary injunction seeking
to enjoin the Company from using the designation "Mac OS 9" and to order the
Company to cancel and withdraw all packaging and advertisements that mention
"Mac OS 9." The Company has opposed the motion for preliminary injunction and
has filed a motion for summary judgment against all of Microware's claims. The
Court has not yet scheduled a hearing date for the motion.
OTHER LITIGATION
The Company is also subject to certain other legal proceedings and claims that
have arisen in the ordinary course of business and 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.
NOTE 9--SEGMENT INFORMATION AND GEOGRAPHIC DATA
The Company manages its business primarily on a geographic basis. The Company's
reportable segments are comprised of the Americas, Europe, and Japan. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. Other
operating segments include Asia-Pacific, which includes Australia and Asia
except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable
operating segment provides similar products and services, and the accounting
policies of the various segments are the same as those described in the Summary
of Significant Accounting Policies in Note 1.
The Company evaluates the performance of its operating segments based on net
sales and operating income. Operating income for each segment includes revenue,
cost of sales, and operating expenses directly attributable to the segment. Net
sales are based on the location of the customers. Operating income for each
segment excludes other income and expense and certain expenses that are managed
outside the reportable segment. Costs excluded from segment operating income
include various corporate expenses, income taxes, and nonrecurring charges for
purchased in-process research and development, restructuring, and acquisition
related costs. Corporate expenses include research and development,
manufacturing expenses not included in segment cost of sales, corporate
marketing expenses, and other separately managed general and administrative
expenses. The Company does not include intercompany transfers between segments
for management reporting purposes. Segment assets exclude corporate assets.
Corporate assets include cash, short-term and long-term investments,
manufacturing facilities, and intangible assets. Capital expenditures for
long-lived assets are not reported to management by segment.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SEGMENT INFORMATION AND GEOGRAPHIC DATA (CONTINUED)
Summary information by segment follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Americas:
Net Sales......................................... $3,527 $3,468 $3,668
Operating Income.................................. $ 493 $ 345 $ 57
Depreciation and Amortization..................... $ 4 $ 4 $ 6
Segment Assets (a)................................ $ 468 $ 671 $ 793
Europe:
Net Sales......................................... $1,317 $1,295 $1,536
Operating Income.................................. $ 156 $ 69 $ 0
Depreciation and Amortization..................... $ 3 $ 5 $ 9
Segment Assets.................................... $ 169 $ 262 $ 371
Japan:
Net Sales......................................... $ 858 $ 731 $1,098
Operating Income.................................. $ 173 $ 97 $ 70
Depreciation and Amortization..................... $ 2 $ 2 $ 4
Segment Assets.................................... $ 94 $ 178 $ 284
Other Segments:
Net Sales......................................... $ 432 $ 447 $ 779
Operating Income.................................. $ 82 $ 59 $ 143
Depreciation and Amortization..................... $ 3 $ 5 $ 7
Segment Assets.................................... $ 104 $ 82 $ 236
</TABLE>
- ------------------------
(a) The Americas asset figures do not include fixed assets held in the United
States. Such fixed assets are not allocated specifically to the Americas
segment and are included in the corporate assets figures below.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SEGMENT INFORMATION AND GEOGRAPHIC DATA (CONTINUED)
A reconciliation of the Company's segment operating income (loss), and assets to
the consolidated financial statements follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Segment Operating Income........................... $ 904 $ 570 $ 270
Corporate Expenses, net............................ (518) (302) (673)
In-process Research and Development................ -- (7) (375)
Restructuring...................................... (27) -- (217)
Termination of License Agreement................... -- -- (75)
------ ------ -------
Total Operating Income (loss).................... $ 359 $ 261 $(1,070)
====== ====== =======
Segment Assets..................................... $ 835 $1,193 $ 1,684
Corporate Assets................................... 4,326 3,096 2,549
------ ------ -------
Total Assets..................................... $5,161 $4,289 $ 4,233
====== ====== =======
Segment Depreciation and Amortization.............. $ 12 $ 16 $ 26
Corporate Depreciation and Amortization............ 73 95 92
------ ------ -------
Total Depreciation and Amortization............ $ 85 $ 111 $ 118
====== ====== =======
</TABLE>
A large portion of the Company's net sales is derived from its international
operations. Also, a majority of the raw materials used in the Company's products
is obtained from sources outside of the United States, and a majority of the
products sold by the Company is assembled internationally in the Company's
facilities in Cork, Ireland and Singapore or by third-party vendors in Taiwan,
Korea, Mexico, and the United Kingdom. As a result, the Company is subject to
risks associated with foreign operations, such as obtaining governmental permits
and approvals, currency exchange fluctuations, currency restrictions, political
instability, labor problems, trade restrictions, and changes in tariff and
freight charges. No single customer accounted for more than 10% of net sales in
1999, 1998, or 1997. Net sales and long-lived assets related to operations in
the United States, Japan, and other foreign countries are as follows (in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
United States....................................... $3,394 $3,287 $3,507
Japan............................................... 858 731 1,098
Other Foreign Countries............................. 1,882 1,923 2,476
------ ------ ------
Total Net Sales................................... $6,134 $5,941 $7,081
====== ====== ======
Long-Lived Assets:
United States....................................... $ 335 $ 336 $ 474
Japan............................................... 7 5 11
Other Foreign Countries............................. 62 94 188
------ ------ ------
Total Long-Lived Assets........................... $ 404 $ 435 $ 673
====== ====== ======
</TABLE>
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SEGMENT INFORMATION AND GEOGRAPHIC DATA (CONTINUED)
Information regarding net sales by product is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Power Macintosh..................................... $2,345 $2,421 $2,341
PowerBook........................................... 823 913 1,172
iMac (a)............................................ 1,905 1,528 2,158
iBook............................................... 9 -- --
Software, Service, and Other Net Sales.............. 1,052 1,079 1,410
------ ------ ------
Total Net Sales................................... $6,134 $5,941 $7,081
====== ====== ======
</TABLE>
- ------------------------
(a) Net sales figures for iMac in 1998 and 1997 include sales of the Company's
previous consumer and education oriented Macintosh products.
NOTE 10--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net sales................................ $1,336 $1,558 $1,530 $1,710
Gross margin............................. $ 384 $ 427 $ 403 $ 482
Net income............................... $ 111 $ 203 $ 135 $ 152
Earnings per common share:
Basic.................................. $ 0.69 $ 1.41 $ 0.99 $ 1.12
Diluted................................ $ 0.63 $ 1.20 $ 0.84 $ 0.95
1998
Net sales................................ $1,556 $1,402 $1,405 $1,578
Gross margin............................. $ 417 $ 360 $ 349 $ 353
Net income............................... $ 106 $ 101 $ 55 $ 47
Earnings per common share:
Basic.................................. $ 0.79 $ 0.76 $ 0.42 $ 0.37
Diluted................................ $ 0.68 $ 0.65 $ 0.38 $ 0.33
</TABLE>
Basic and diluted earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of quarterly basic and diluted per share
information may not equal annual basic and diluted earnings per share.
Net income during the fourth, third, second, and first quarters of 1999 included
after tax gains resulting from the sale of shares of the Company's investment in
ARM of $37 million, $89 million, $50 million, and $29 million, respectively.
Gains before tax on the sale of ARM shares are recognized as other income. Net
income for the fourth quarter of 1999 included a net $18 million restructuring
charge for contract cancellation charges related to previously outsourced
services and previously discontinued business. Net income for the second quarter
of 1999 included a $9 million restructuring charge resulting from actions by the
Company to improve the flexibility and efficiency of its manufacturing
operations, which included moving final assembly of certain of its products to
third-party manufacturers.
Net income for the third quarter of 1998 included after tax gains resulting from
the sale of shares of the Company's investment in ARM of $33 million. The third
quarter of 1998 also includes the recognition of
$7 million of purchased in-process research and development charged to
operations upon acquisition.
63
<PAGE>
SCHEDULE II
APPLE COMPUTER, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED TO
ALLOWANCE FOR BEGINNING COSTS AND ENDING
DOUBTFUL ACCOUNTS: BALANCE EXPENSES DEDUCTIONS(1) BALANCE
- ------------------ --------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Year Ended September 25, 1999....................... $81 $ 2 $15 $68
Year Ended September 25, 1998....................... $99 $11 $29 $81
Year Ended September 26, 1997....................... $91 $35 $27 $99
</TABLE>
- ------------------------
(1) Represents amounts written off against the allowance, net of recoveries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
64
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Listed below are the Company's directors whose terms expire at the next annual
meeting of shareholders.
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- ---- ------------------------- -------- --------------
<S> <C> <C> <C>
William V. Campbell................. Director 58 1997
Gareth C.C. Chang................... Director 55 1996
Millard S. Drexler.................. Director 55 1999
Lawrence J. Ellison................. Director 54 1997
Steven P. Jobs...................... Director and interim Chief Executive 43 1997
Officer
Edgar S. Woolard, Jr................ Director 64 1996
Jerome B. York...................... Director 60 1997
</TABLE>
WILLIAM V. CAMPBELL has been chairman of the Board of Directors of Intuit, Inc.
("INTUIT") since August 1998. Since September 1999, Mr. Campbell has been acting
as Chief Executive Officer of Intuit. From April 1994 to August 1998,
Mr. Campbell was President and Chief Executive Officer and a director of Intuit.
From January 1991 to December 1993, Mr. Campbell was President and Chief
Executive Officer of GO Corporation. Mr. Campbell also serves on the board of
directors of SanDisk Corporation and Great Plains Software.
GARETH C. C. CHANG has served as Chairman and Chief Executive Officer of STAR TV
since September 1998. Prior to joining STAR TV, Mr. Chang was President of
Hughes Electronics International and Corporate Senior Vice President of Hughes
Electronics since 1993. Previously, he was Corporate Vice President of McDonnell
Douglas Corporation. He is currently an executive director of News Corp., and a
member of the Advisory Council of Nike Inc.
MILLARD S. DREXLER has been Chief Executive Officer of Gap Inc. since 1995, and
President of the Gap, Inc. since 1987. He has also served as the Chief Executive
Officer of the Gap Division since 1987 and the Chief Executive Officer of Old
Navy Inc. since 1997. From 1993 to 1995 he served as the Chief Operating Officer
of the Gap Division and from 1988 to 1997 served as the Chief Executive Officer
of Banana Republic, Inc. Mr. Drexler is currently a director of Restoration
Hardware, Inc.
LAWRENCE J. ELLISON has been Chief Executive Officer and a director of Oracle
Corporation ("ORACLE") since he co-founded Oracle in May 1977, and was President
of Oracle until June 1996. Mr. Ellison has been Chairman of the Board of Oracle
since June 1995. Mr. Ellison is also a director of SuperGen, Inc., Liberate
Technologies, and Spring Group PLC.
STEVEN P. JOBS is one of the Company's co-founders and currently serves as its
interim Chief Executive Officer. Mr. Jobs is also the Chairman and Chief
Executive Officer of Pixar Animation Studios. In addition, Mr. Jobs co-founded
NeXT Software, Inc. ("NEXT") and served as the Chairman and Chief Executive
Officer of NeXT from 1985 until 1997 when NeXT was acquired by the Company.
Mr. Jobs is currently a director of Gap Inc.
EDGAR S. WOOLARD, JR. retired as Chairman of the Board of Directors of E. I.
DuPont de Nemours & Co. ("DUPONT") in October 1997, having served as Chariman
since 1989. He remains a director of DuPont. Previously, he held the positions
of President and Chief Executive Officer of DuPont. He is currently a director
of CITIGROUP, Inc. and DuPont.
65
<PAGE>
JEROME B. YORK is Chief Executive Officer of Harwinton Corporation, a private
investment and consulting concern he founded in 1999. Previously, he was Vice
Chairman of Tracinda Corporation from September 1995 to October 1999. In
May 1993, he joined International Business Machines Corporation ("IBM") as
Senior Vice President and Chief Financial Officer, and he served as a director
of IBM from January 1995 to August 1995. Prior to joining IBM, Mr. York served
in a number of executive positions at Chrysler Corporation, including Executive
Vice President-Finance and Chief Financial Officer from May 1990 to May 1993. He
also served as a director of Chrysler Corporation from 1992 to 1993. Mr. York is
also a director of Waste Management, Inc., MGM Grand, Inc.,
Metro-Goldwyn-Mayer, Inc. and National TechTeam, Inc.
EXECUTIVE OFFICERS
The following sets forth certain information regarding executive officers of the
Company. Information pertaining to Mr. Jobs, who is both a director and an
executive officer of the Company, may be found in the section entitled
"DIRECTORS".
FRED D. ANDERSON, Executive Vice President and Chief Financial Officer (age
55) joined the Company in April 1996. Prior to joining the Company,
Mr. Anderson was Corporate Vice President and Chief Financial Officer of
Automatic Data Processing, Inc. ("ADP"), a position he held from August 1992 to
March 1996.
TIMOTHY D. COOK, Senior Vice President, Worldwide Operations (age 39) joined the
Company in February 1998. Prior to joining the Company, Mr. Cook held the
position of Vice President, Corporate Materials for Compaq Computer Corporation
("COMPAQ"). Previous to his work at Compaq, Mr. Cook was the Chief Operating
Officer of the Reseller Division at Intelligent Electronics. Mr. Cook also spent
12 years with IBM, most recently as Director of North American Fulfillment.
NANCY R. HEINEN, Senior Vice President, General Counsel and Secretary (age
43) joined the Company in September 1997. Prior to joining the Company,
Ms. Heinen held the position of Vice President, General Counsel and Secretary of
the Board of Directors at NeXT from February 1994 until the acquisition of NeXT
by the Company in February 1997.
MITCHELL MANDICH, Senior Vice President, Worldwide Sales (age 51) joined the
Company in February 1997 upon the Company's acquisition of NeXT. Mr. Mandich has
also served the Company in the position of Vice President, North American
Business Division. Prior to joining the Company, Mr. Mandich held the position
of Vice President, Worldwide Sales and Service with NeXT from December 1995
through February 1997.
JONATHAN RUBINSTEIN, Senior Vice President, Hardware Engineering (age 43),
joined the Company in February 1997. Before joining the Company, Mr. Rubinstein
was Executive Vice President and Chief Operating Officer of FirePower Systems
Incorporated ("FIREPOWER"), from May 1993 to August 1996. Mr. Rubinstein also
serves as a member of the Board of Directors of Immersion Corporation.
AVADIS TEVANIAN, JR., PH.D., Senior Vice President, Software Engineering (age
38), joined the Company in February 1997 upon the Company's acquisition of NeXT.
With NeXT, Dr. Tevanian held several positions, including Vice President,
Engineering, from April 1995 to February 1997. Prior to April 1995,
Dr. Tevanian worked as an engineer with NeXT and held several management
positions.
SINA TAMADDON, Senior Vice President, Service & Support (age 42) joined the
Company in September 1997. Mr. Tamaddon has also served with the Company in the
position of Vice President and General Manager, Newton Group. Before joining the
Company, Mr. Tamaddon held the position of Vice President, Europe with NeXT from
September 1996 through March 1997. From August 1994 to August 1996,
Mr. Tamaddon held the position of Vice President, Professional Services with
NeXT.
66
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than ten
percent shareholders also are required by rules promulgated by the SEC to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company,
the absence of a Form 3 or Form 5 or written representations that no Forms 5
were required, the Company believes that, during fiscal year 1999, its officers,
directors and greater than ten percent beneficial owners complied with all
applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
INFORMATION REGARDING EXECUTIVE COMPENSATION
The following table summarizes compensation information for the last three
fiscal years for (i) Mr. Jobs, interim Chief Executive Officer and (ii) the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers of the Company at the end of the
fiscal year (collectively, the "NAMED EXECUTIVE OFFICERS").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS STOCK AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- ------------------ -------- -------- -------- ------------ ------------ ------------
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs...................... 1999 1 -- -- -- --
interim Chief Executive Officer 1998 1 -- -- -- --
1997 -- -- -- 30,000(1) --
Fred D. Anderson.................... 1999 605,260 -- -- 475,000 29,700(2)
Executive Vice President 1998 604,283 -- -- 250,000(3) 60,123(4)
and Chief Financial Officer 1997 520,311 -- 40,748(5) 850,000(6) 250,489(7)
Timothy D. Cook..................... 1999 401,940 -- -- 300,000 29,519(8)
Senior Vice President, 1998 223,953 500,000(9) -- 700,000 90,849(10)
Worldwide Operations 1997 -- -- -- -- --
Mitchell Mandich.................... 1999 402,941 -- -- 387,876 7,200(11)
Senior Vice President, 1998 402,253 -- -- 424,250(3) 8,118(11)
Worldwide Sales 1997 174,348 104,000 -- 565,050(6)(12) 1,730(11)
Jonathan Rubinstein................. 1999 402,200 -- -- 458,334 5,888(13)
Senior Vice President, 1998 402,095 -- -- 300,000(3) 4,804(11)
Hardware Engineering 1997 250,262 100,000 19,108(5) 700,000(6) 1,864(11)
</TABLE>
- --------------------------
(1) Mr. Jobs was granted 30,000 stock options in his capacity as a director of
the Company pursuant to the 1997 Director Stock Option Plan.
(2) Consists of $22,500 in relocation assistance and $7,200 in matching
contributions made by the Company in accordance with the terms of the
401(k) plan.
(3) Includes the replacement of 250,000, 224,250 and 300,000 options that were
previously granted to Messrs. Anderson, Mandich and Rubinstein,
respectively, and canceled pursuant to the December 1997 stock option
exchange program. Other than the replacement options, Messrs. Anderson and
Rubinstein were not granted any options during the fiscal year.
67
<PAGE>
(4) Includes $55,000 in relocation assistance and $5,123 in matching
contributions made by the Company in accordance with the terms of the
401(k) plan.
(5) For fiscal year 1997, these amounts represent the value on February 5, 1997
of the Common Stock underlying the Performance Shares earned by
Mr. Anderson and Mr. Rubinstein under the terms of the Senior Officers
Restricted Performance Share Plan.
Mr. Anderson and Mr. Rubinstein earned 2,672 and 1,253 performance shares,
respectively. No dividends were paid on the Performance Shares. As of the
last day of fiscal year 1997, Mr. Anderson and Mr. Rubistein held no other
Performance Shares or restricted stock.
(6) Includes the replacement of 500,000, 50,000 and 200,000 options that were
previously granted to Messrs. Anderson, Mandich and Rubinstein
respectively, and canceled pursuant to the July 1997 stock option exchange
program.
(7) Consists of $245,497 in relocation assistance and $4,992 in matching
contributions made by the Company in accordance with the terms of its
401(k) plan.
(8) Consists of $24,719 in relocation assistance and $4,800 in matching
contributions made by the Company in accordance with the terms of the 401
(k) plan.
(9) In connection with his employment, Mr. Cook received a one-time hiring
bonus in the amount of $500,000.
(10) Consists of $86,049 in relocation assistance and $4,800 in matching
contributions made by the Company in accordance with the terms of its
401(k) plan.
(11) Consists of matching contributions made by the Company in accordance with
the terms of its 401(k) plan.
(12) Includes 240,800 NeXT options that were converted into Apple options
during fiscal year 1997 in connection with Apple's acquisition of NeXT.
(13) Includes $3,465 from the disqualifying disposition of the sale of shares
of the Company stock acquired through the Company's Employee Stock
Purchase Plan and $2,423 in matching contributions made by the Company in
accordance with the terms of the 401 (k) plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information about option grants to the Named
Executive Officers during fiscal year 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES ASSUMED ANNUAL RATES OF
UNDERLYING PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OPTION TERM(3)
GRANTED TO EMPLOYEES IN OR BASE EXPIRATION -----------------------------
NAME (#) FISCAL YEAR(1) PRICE ($/SH)(2) DATE 5% ($) 10% ($)
- ---- ---------- ---------------- --------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs............. -- 0.00% -- -- -- --
Fred D. Anderson........... 475,000 7.98% $34.625 3/2/09 $10,343,351 $26,212,083
Timothy D. Cook............ 300,000 5.03% $34.625 3/2/09 $ 6,532,643 $16,555,000
Mitchell Mandich........... 387,876 6.51% $34.625 3/2/09 $ 8,446,185 $21,404,290
Jonathan Rubinstein........ 458,334 7.70% $34.625 3/2/09 $ 9,980441 $25,292,398
</TABLE>
- ------------------------
(1) Based on an aggregate of 5,955,586 options granted to all employees during
fiscal year 1999. Options typically vest in four equal annual installments
commencing on the first anniversary of the date of grant.
68
<PAGE>
(2) All options were granted at an exercise price equal to the fair market value
based on the closing market value of Common Stock on the Nasdaq National
Market on the date of grant.
(3) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on SEC rules, and do not represent the Company's estimate or
projection of the price of the Company's stock in the future. Actual gains,
if any, on stock option exercises depend upon the actual future price of
Common Stock and the continued employment of the option holders throughout
the vesting period. Accordingly, the potential realizable values set forth
in this table may not be achieved.
OPTIONS EXERCISED AND YEAR-END OPTION HOLDINGS
The following table provides information about stock option exercises by the
Named Executive Officers during fiscal year 1999 and stock options held by each
of them at fiscal year-end.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS AT FISCAL YEAR-END THE-MONEY OPTIONS AT
ACQUIRED ON VALUE (#) FISCAL YEAR-END ($)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Jobs............... -- -- 20,000 10,000 838,750 419,375
Fred D. Anderson............. 95,834 2,714,134 166,666 829,166 8,614,549 32,622,361
Timothy Cook................. 175,000 3,829,359 0 825,000 0 33,900,000
Mitchell Mandich............. 179,463 5,695,545 31,717 797,979 1,713,719 33,372,127
Jonathan Rubinstein.......... 75,000 2,400,000 66,667 750,000 3,445,851 28,870,298
</TABLE>
- ------------------------
(1) Market value of underlying securities (based on the fair market value of
Common Stock on the Nasdaq National Market) at the time of exercise, minus
the exercise price.
(2) Market value of securities underlying in-the-money options at the end of
fiscal year 1999 (based on $64.9375 per share, the closing price of Common
Stock on the Nasdaq National Market on September 24, 1999), minus the
exercise price.
DIRECTOR COMPENSATION
In 1997, the Company ended its practice of paying cash retainers and fees to
directors, and approved the Apple Computer, Inc. 1997 Director Stock Option Plan
(the "DIRECTOR PLAN"). The Director Plan was approved by the shareholders in
April 1998, and 400,000 shares have been reserved for issuance under the
Director Plan. Pursuant to the Director Plan, the Company's non-employee
directors are granted an option to acquire 30,000 shares of Common Stock upon
their initial election to the Board ("INITIAL OPTIONS"). On the fourth
anniversary of a non-employee director's initial election to the Board and on
each subsequent anniversary, the director will be entitled to receive an option
to acquire 10,000 shares of Common Stock ("ANNUAL OPTIONS"). Initial Options
vest and become exercisable in equal annual installments on each of the first
through third anniversaries of the date of grant. Annual Options are fully
vested and immediately exercisable on their date of grant. As of October 31,
1999, there were options for 180,000 shares outstanding under the Director Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Board's Compensation Committee are Messrs. Woolard
and Chang, neither of whom is an employee of the Company. No person who was an
employee of the Company in fiscal year 1999 served on the Compensation Committee
in fiscal year 1999. During fiscal year 1999, no executive
69
<PAGE>
officer of the Company (i) served as a member of the compensation committee (or
other board committee performing similar functions or, in the absence of any
such committee, the board of directors) of another entity, one of whose
executive officers served on the Company's Compensation Committee, (ii) served
as a director of another entity, one of whose executive officers served on the
Company's Compensation Committee, or (iii) served as a member of the
compensation committee (or other board committee performing similar functions
or, in the absence of any such committee, the board of directors) of another
entity, one of whose executive officers served as a director of the Company.
COMPANY STOCK PERFORMANCE
The following graph shows a five-year comparison of cumulative total shareholder
return, calculated on a dividend reinvested basis, for the Company, the S&P 500
Composite Index (the "S&P 500") and the S&P Computers (Hardware) Index (the
"INDUSTRY INDEX"). The graph assumes $100 was invested in each of the Common
Stock, the S&P 500 and the Industry Index on September 30, 1994. Data points on
the graph are annual. Note that historic stock price performance is not
necessarily indicative of future stock price performance.
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON SEPTEMBER 30, 1994
WITH DIVIDENDS REINVESTED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C> <C> <C>
BASED UPON AN INITIAL INVESTMENT OF $100 ON SEPTEMBER 30,
1994
WITH DIVIDENDS REINVESTED
Apple Computer Inc. S&P 500 S&P Computers (Hardware)
30-Sep-94 $100 $100 $100
29-Sep-95 $112 $130 $143
27-Sep-96 $67 $156 $173
26-Sep-97 $64 $219 $322
25-Sep-98 $117 $246 $391
25-Sep-99 $196 $304 $633
SOURCE: GEORGESON SHAREHOLDER COMMUNICATION INC.
</TABLE>
70
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 30, 1999 (the
"TABLE DATE") with respect to the beneficial ownership of the Company's Common
Stock by (i) each person the Company believes beneficially holds more than 5% of
the outstanding shares of Common Stock; (ii) each director; (iii) each Named
Executive Officer listed in the Summary Compensation Table under the heading
"EXECUTIVE COMPENSATION" and (iv) all directors and executive officers as a
group. On the Table Date, 161,159,281 shares of Common Stock were issued and
outstanding. Unless otherwise indicated, all persons named as beneficial owners
of Common Stock have sole voting power and sole investment power with respect to
the shares indicated as beneficially owned.
SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)
- ------------------------ ----------------------
<S> <C>
Fred D. Anderson....................................... 63,836(2)
William V. Campbell.................................... 20,251(3)
Gareth C. C. Chang..................................... 22,000(3)
Timothy D. Cook........................................ 0
Millard S. Drexler..................................... 0
Lawrence J. Ellison.................................... 20,000(3)
Steven P. Jobs......................................... 20,001(3)
Mitchell Mandich....................................... 197,980(4)
Jonathan Rubinstein.................................... 77,319(5)
Edgar S. Woolard, Jr................................... 18,000
Jerome B. York......................................... 30,000(3)
All executive officers and directors as a group
(14 persons)......................................... 781,315(6)
</TABLE>
- ------------------------
(1) All amounts listed in this table represent less than 1% of the issued and
outstanding shares of Common Stock on the Table Date.
(2) Includes 62,500 shares of Common Stock which Mr. Anderson has the right to
acquire by exercise of stock options.
(3) Includes 20,000 shares of Common Stock which Messrs. Campbell, Chang,
Ellison, Jobs and York each have the right to acquire by exercise of stock
options.
(4) Constitutes 197,980 shares of Common Stock which Mr. Mandich has the right
to acquire by exercise of stock options.
(5) Includes 75,000 shares of Common Stock which Mr. Rubinstein has the right to
acquire by exercise of stock options.
(6) Represents shares of Common Stock held by 14 executive officers and
directors and options held by such individuals that were exercisable at the
Table Date or within 60 days thereafter.
ITEM 13. ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company entered into an employment agreement with Mr. Anderson effective
April 1, 1996, pursuant to which he serves as Executive Vice President and Chief
Financial Officer of the Company. Pursuant to his agreement, Mr. Anderson is
entitled to an annual base salary of no less than $500,000. If Mr. Anderson's
employment is terminated by the Company without "Cause" at any time during the
five-year period following April 1, 1996, he will be entitled to receive a lump
sum severance payment equal to the sum of his annual base salary and target
bonus, if any. Mr. Anderson's agreement generally defines
71
<PAGE>
"Cause" to include a felony conviction, willful disclosure of confidential
information or willful and continued failure to perform his employment duties.
In February 1998, Mr. Cook joined the Company as Senior Vice President,
Worldwide Operations. Under the terms of his employment, he is entitled to an
annual base salary of no less than $400,000. In addition, Mr. Cook received a
one-time hiring bonus in the amount of $500,000 and a stock option grant with a
sell-back provision. The sell-back provision provides that during the five-day
period starting on the second anniversary of his commencement of employment, he
may elect to sell all of his remaining vested and unvested options and shares
(obtained through the exercise of such options) back to the Company for the sum
of $3 million less any profits Mr. Cook has realized to date through the
exercise and sale of such options (the "Sell-back Option"). During fiscal 1999,
Mr. Cook realized net profits from the exercise and sale of his options in
excess of $3 million. The Sell-back Option has no future effect. If Mr. Cook's
employment is terminated by the Company without "Cause" during the first two
years of his employment, he will be entitled to receive an amount equal to
$800,000 minus the total base salary he has received since the start of his
employment.
CHANGE IN CONTROL ARRANGEMENTS--STOCK OPTIONS
In the event of a "change in control" of the Company, all outstanding options
under the Company's stock option plans, except the Director Stock Option Plan,
will, unless otherwise determined by the plan administrator, become exercisable
in full, and will be cashed out at an amount equal to the difference between the
applicable "change in control price" and the exercise price. The Director Stock
Option Plan provides that upon a "change in control" of the Company, all
unvested options held by non-employee directors will automatically become fully
vested and exercisable and will be cashed out at an amount equal to the
difference between the applicable "change in control price" and the exercise
price of the options. A "change in control" under these plans is generally
defined as (i) the acquisition by any person of 50% or more of the combined
voting power of the Company's 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.
In addition, options granted to Timothy D. Cook, Nancy R. Heinen, Mitchell
Mandich and Sina Tamaddon provide that in the event there is a "change in
control", as defined in the Company's stock option plans, and if in connection
with or following such "change in control", their employment is terminated
without "Cause" or if they should resign for "Good Reason", those options
outstanding that are not yet vested and exercisable as of the date of such
"change in control", shall become fully vested and exercisable. Generally,
"Cause" is defined to include a felony conviction, willful disclosure of
confidential information or willful and continued failure to perform his or her
employment duties. "Good Reason" includes resignation of employment as a result
of a substantial diminution in position or duties, or an adverse change in title
or reduction in annual base salary.
CHANGE IN CONTROL ARRANGEMENTS--RETENTION AGREEMENTS
The Company was a party to retention agreements (the "RETENTION AGREEMENTS")
with three executive officers (Messrs. Anderson, Rubinstein and Tevanian)
providing for certain cash payments in the event of a termination of employment
following a change in control of the Company. In March, 1999, Messrs. Anderson,
Rubinstein and Tevanian agreed to waive any rights they may have under the
Retention Agreements. In exchange, all options previously granted to
Messrs. Anderson, Rubinstein and Tevanian were amended to include a "change in
control" provision similar to the provision contained in option grants to
Messrs. Cook, Mandich, Tamaddon and Ms. Heinen.
72
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's use of aircraft to transport its executive
officers, the Company paid approximately $102,865 during fiscal year 1999 to
Wing & A Prayer, a company wholly-owned by Lawrence J. Ellison.
73
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the Compensation
Committee of the Board of Directors (the "COMMITTEE"). The role of the
Committee, which is comprised of two outside non-employee directors, is to
review and approve the base salaries, bonuses, stock options and other
compensation of the executive officers and management-level employees of the
Company. The Committee also administers the Company's stock option plans and
makes grants to executive officers under the 1998 Executive Officer Stock Plan
(the "1998 Plan").
The Company's executive compensation program utilizes Company performance,
individual performance and an increase in stockholder value over time as
determinants of executive pay levels. These principles are intended to motivate
executive officers to improve the financial position of the Company, to hold
executives accountable for the performance of the organizations for which they
are responsible, to attract key executives into the service of the Company and
to create value for the Company's shareholders. The compensation for executive
officers is based on two elements: Cash compensation and equity-based
compensation.
CASH COMPENSATION
The Company reviews executive compensation surveys in both the computer industry
and general industry to ensure that the total cash compensation provided to
executive officers and senior management remains at a competitive level to
enable the Company to attract and retain management personnel with the talents
and skills required to meet the challenges of a highly competitive industry. The
compensation of executive officers, other than Mr. Jobs, interim Chief Executive
Officer, is reviewed annually by the Committee.
BONUSES
For fiscal year 1999, the Compensation Committee approved the FY99 Vice
Presidents and Directors Incentive Bonus Plan (the "BONUS PLAN"), under which
cash bonuses for employees at the level of director and above were determined
based on specified revenue, unit shipments and profit targets for the Company.
Because the Company did not achieve the metrics specified in the Bonus Plan, no
payments were made thereunder. Executive officers and members of the Board of
Directors are not eligible to participate in the Bonus Plan.
EQUITY-BASED COMPENSATION
In fiscal year 1999, the Compensation Committee emphasized equity-based
compensation, principally in the form of options, as the cornerstone of the
Company's executive compensation program. Equity awards are typically set by the
Compensation Committee based on industry surveys, each officer's individual
performance and achievements, market factors and the recommendations of
management. In fiscal year 1999, executive officers were eligible to receive
grants of stock options under the 1998 Plan. In addition, executive officers
were eligible to participate in the Company's Employee Stock Purchase Plan.
During fiscal year 1999, all of the executive officers of the Company received
new option grants under the 1998 Plan. The Options granted under the 1998 Plan
were at an exercise price equal to the fair market value of the Common Stock on
the date of grant and generally vest in unequal increments over a five-year
period after grant, subject to the participant's continued employment with the
Company. All options granted under the 1998 Plan expire ten years from the date
of grant, unless a shorter term is provided in the option agreement or the
participant's employment with the Company ends before the end of such ten-year
period.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Jobs, the Company's interim Chief Executive Officer, received $1 for the
services he performed for the Company in fiscal year 1999.
74
<PAGE>
SECTION 162(m)
The Company intends that options granted under the Company's stock option plans
be deductible by the Company under Section 162(m) of the Internal Revenue Code
of 1986, as amended.
MEMBERS OF THE COMPENSATION COMMITTEE
Edgar S. Woolard, Jr. (Chairman) Gareth C.C. Chang
75
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Items Filed as Part of Report:
1. Financial Statements
The financial statements of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this
Form 10-K are hereby incorporated by reference.
2. Financial Statement Schedule
The financial statement schedule of the Company as set forth in the Index
to Consolidated Financial Statements under Part II, Item 8 of this
Form 10-K is hereby incorporated by reference.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this
Form 10-K.
(b) Reports on Form 8-K
A current report on form 8-K dated September 3, 1999, was filed by the
Registrant with the Securities and Exchange Commission to report under Item
5 thereof the press release issued to the public on September 3, 1999,
regarding the Company's settlement of a shareholder derivative action.
A current report on form 8-K dated July 16, 1999 was filed by the Registrant
with the Securities and Exchange Commission to report under Item 5 thereof
the press release issued to the public on July 14, 1999, reporting the
Company's plan to repurchase shares of its common stock.
A current report on form 8-K dated December 23, 1998 was filed by the
Registrant with the Securities and Exchange Commission to report under Item
8 thereof the amendment to the Company's fiscal year end. The Company's
fiscal calendar was amended to move the fiscal year end from the last Friday
in September to the last Saturday in September.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<C> <C> <S>
2 97/1Q Agreement and Plan of Merger Among Apple Computer, Inc.,
Blackbird Acquisition Corporation and NeXT Software, Inc.,
dated as of December 20, 1996.
3.1 88-S3 Restated Articles of Incorporation, filed with the Secretary
of State of the State of California on January 27, 1988.
3.2 99/2Q Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of the State of California on
February 5, 1990.
3.3 99K By-Laws of the Company, as amended through October 6, 1999.
4.1 89-8A Common Shares Rights Agreement dated as of May 15, 1989
between the Company and the First National Bank of Boston,
as Rights Agent.
4.1.1 96-S3/A Indenture, dated as of June 1, 1996, between the Company and
Marine Midland Bank, as Trustee, relating to the 6%
Convertible Subordinated Notes due June 1, 2001.
4.2 94/2Q Indenture dated as of February 1, 1994, between the Company
and Morgan Guaranty Trust Company of New York (the
"Indenture").
4.2.1 96-S3/A Form of the 6% Convertible Subordinated Notes due June 1,
2001 included in Exhibit 4.1.1.
4.3 94/2Q Supplemental Indenture dated as of February 1, 1994, among
the Company, Morgan Guaranty Trust Company of New York, as
resigning trustee, and Citibank, N.A., as successor trustee.
</TABLE>
- ------------------------
* Notes appear on pages 80-81.
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<C> <C> <S>
4.3.1 96-S3/A Specimen Certificate of Common Stock of Apple
Computer, Inc. (Incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-3 (file
no. 33-62310) filed with the Securities and Exchange
Commission on May 6, 1993.).
4.4 94/2Q Officers' Certificate, without exhibits, pursuant to
Section 301 of the Indenture, establishing the terms of the
Company's 6 1/2% Notes due 2004.
4.5 94/2Q Form of the Company's 6 1/2% Notes due 2004.
4.8 96-S3/A Registration Rights Agreement, dated June 7, 1996 among the
Company and Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated.
4.9 97K Certificate of Determination of Preferences of Series A
Non-Voting Convertible Preferred Stock of Apple
Computer Inc.
4.10 97K Registration Rights Agreement, dated as of August 11, 1997,
between Apple Computer, Inc. and Microsoft Corporation.
10.A.1 93/3Q** 1981 Stock Option Plan, as amended.
10.A.2 91K** 1987 Executive Long Term Stock Option Plan.
10.A.3 91K** Apple Computer, Inc. Savings and Investment Plan, as amended
and restated effective as of October 1, 1990.
10.A.3-1 92K** Amendment of Apple Computer, Inc. Savings and Investment
Plan dated March 1, 1992.
10.A.3-2 97/2Q** Amendment No. 2 to the Apple Computer, Inc. Savings and
Investment Plan.
10.A.5 98/1Q** 1990 Stock Option Plan, as amended through November 5, 1997.
10.A.6 99K** Apple Computer, Inc. Employee Stock Purchase Plan, as
amended through October 6, 1999.
10.A.7 96/1Q** 1996 Senior/Executive Incentive Bonus Plan.
10.A.8 91K** Form of Indemnification Agreement between the Registrant and
each officer of the Registrant.
10.A.15-1 93K-10A.15** 1993 Executive Restricted Stock Plan.
10.A.25 96/1Q** Summary of Principal Terms of Employment between Registrant
and Gilbert F. Amelio.
10.A.26 96/2Q** Employment Agreement dated February 28, 1996, between
Registrant and Gilbert F. Amelio.
10.A.26-1 97/3Q** Amendment to Employment Agreement, dated May 1, 1997,
between Apple Computer, Inc. and Gilbert F. Amelio.
10.A.27 96/2Q** Employment Agreement dated February 26, 1996, between
Registrant and George M. Scalise.
</TABLE>
- ------------------------
(3) Notes appear on pages 80-81.
** Represents a management contract or compensatory plan or arrangement.
77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<C> <C> <S>
10.A.28 96/2Q** Employment Agreement dated March 4, 1996, between Registrant
and Fred D. Anderson, Jr.
10.A.29 96/2Q** Retention Agreement dated March 4, 1996, between Registrant
and Fred D. Anderson, Jr.
10.A.30 96/2Q** Employment Agreement dated April 2, 1996, between Registrant
and John Floisand.
10.A.31 96/2Q** Employment Agreement dated April 3, 1996, between Apple
Japan, Inc. and John Floisand.
10.A.32 96/3Q** Employment Agreement dated June 13, 1996, between Registrant
and Robert M. Calderoni.
10.A.33 96/3Q** Employment Agreement dated June 25, 1996, between Registrant
and Ellen M. Hancock.
10.A.34 96/3Q** Retention Agreement dated June 25, 1996, between Registrant
and Ellen M. Hancock.
10.A.35 96/3Q** Retention Agreement dated June 27, 1996, between Registrant
and George M. Scalise.
10.A.36 96/3Q** Airplane Use Agreement dated June 27, 1996, among
Registrant, Gilbert F. Amelio and Aero Ventures.
10.A.40 96K** Employment Agreement effective June 3, 1996, between
Registrant and G. Frederick Forsyth.
10.A.41 97/1Q** Employment Agreement effective December 2, 1996, between
Registrant and John B. Douglas III.
10.A.42 97/2Q** Senior Officers Restricted Performance Share Plan, as
amended through March 25, 1997.
10.A.43 97/2Q** NeXT Computer, Inc. 1990 Stock Option Plan, as amended.
10.A.44 97/2Q** Non-Employee Director Stock Plan.
10.A.45 97/3Q** Retention Agreement dated May 1, 1997 between Apple
Computer, Inc. and Fred D. Anderson.
</TABLE>
- ------------------------
* Notes appear on pages 80-81.
** Represents a management contract or compensatory plan or arrangement.
78
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES*
------- ------ DESCRIPTION
<C> <C> <S>
10.A.46 97K** Resignation Agreement dated September 22, 1997 between
Registrant and Gilbert F. Amelio.
10.A.47 97K** Retention Agreement dated May 1, 1997 between Registrant and
Jon Rubenstein.
10.A.48 97K** Retention Agreement dated May 1, 1997 between Registrant and
Avie Tevanian.
10.A.49 99K** 1997 Employee Stock Option Plan, as amended through October
6, 1999.
10.A.50 98/2Q** 1997 Director Stock Option Plan.
10.A.51 99K** 1998 Executive Officer Stock Plan, as amended through
October 6, 1999.
10.B.1 88K-10.1 Master OEM Agreement dated as of January 26, 1988 between
the Company and Tokyo Electric Co. Ltd.
10.B.7 91-8K-7 Know-how and Copyright License Agreement (Power PC
Architecture) dated as of September 30, 1991 between IBM and
the Registrant.
10.B.8 91-8K-8 Participation in the Customer Design Center by the
Registrant dated as of September 30, 1991 between IBM and
the Registrant.
10.B.9 91-8K-9 Agreement for Purchase of IBM Products (Original Equipment
Manufacturer) dated as of September 30, 1991 between IBM and
the Registrant.
10.B.11 91K Agreement dated October 9, 1991 between Apple Corps Limited
and the Registrant.
10.B.12 92K Microprocessor Requirements Agreement dated January 31, 1992
between the Registrant and Motorola, Inc.
10.B.13 96/2Q Restructuring Agreement dated December 14, 1995, among
Registrant, Taligent, Inc. and International Business
Machines Corporation.
10.B.14 96/2Q Stock Purchase Agreement dated April 4, 1996 between
Registrant and SCI Systems, Inc.
10.B.16 96/3Q Fountain Manufacturing Agreement dated May 31, 1996 between
Registrant and SCI Systems, Inc.
10.B.17 97K Preferred Stock Purchase Agreement, dated as of August 5,
1997, between Apple Computer, Inc. and Microsoft
Corporation.
21 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(4) Notes appear on pages 80-81.
** Represents a management contract or compensatory plan or arrangement
79
<PAGE>
<TABLE>
<CAPTION>
NOTES
-----
<C> <S>
88K Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1988 (the "1988 Form 10-K").
88-S3 Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (file no. 33-23317) filed
July 27, 1988.
88K-10.1 Incorporated by reference to Exhibit 10.1 to the 1988
Form 10-K. Confidential treatment as to certain portions of
these agreements has been granted.
89-8A Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed with the Securities
and Exchange Commission on May 26, 1989.
90/2Q Incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 30, 1990.
91K Incorporated by reference to the exhibit of that number in
the Company's Annual Report on Form 10-K for the fiscal year
ended September 27, 1991 (the "1991 Form 10-K").
91-8K-7 Incorporated by reference to Exhibit 7 to the October 1991
Form 8-K.
91-8K-8 Incorporated by reference to Exhibit 8 to the October 1991
Form 8-K.
91-8K-9 Incorporated by reference to Exhibit 9 to the October 1991
Form 8-K.
92K Incorporated by reference to the exhibit of that number in
the Company's Annual Report on Form 10-K for the fiscal year
ended September 25, 1992 (the "1992 Form 10-K").
93K-10.A.15 Incorporated by reference to Exhibit 10.A.15 to the 1993
Form 10-K.
93/3Q Incorporated by reference to Exhibit 10.A.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 25, 1993.
94/2Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended April 1, 1994.
96/1Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 29, 1995.
96/2Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1996.
96/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1996.
<CAPTION>
NOTES
-----
96-S3/A-4.1.1, Incorporated by reference to the exhibit 4.1, 4.2, 4.3, and 4.8, respectively, in the
<C> <S>
-4.2.1, -4.3.1, Company's Registration Statement on Form S-3/A (file no. 333-10961) filed October 30,
-4.8 1996.
96K Incorporated by reference to the exhibit of that number in the Company's Annual Report
on Form 10-K for the fiscal year ended September 27, 1996 (the "1996 Form 10-K").
97/1Q Incorporated by reference to the exhibit of that number in the Company's Quarterly
Report on Form 10-Q for the quarter ended December 27, 1996.
97/2Q Incorporated by reference to the exhibit of that number in the Company's Quarterly
Report on Form 10-Q for the quarter ended March 28, 1997.
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
NOTES
-----
<C> <S>
97/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1997.
97K Incorporated by reference to the exhibit of that number in
the Company's Annual Report on Form 10-K for the fiscal year
ended September 26, 1997 (the "1997 Form 10-K").
98/1Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 26, 1997.
98/2Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 27, 1998.
99/2Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 27, 1999.
99/3Q Incorporated by reference to the exhibit of that number in
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 26, 1999.
99K Filed as an exhibit to this Annual Report on Form 10-K for
the fiscal year ended September 25, 1999.
</TABLE>
- ------------------------
(d) Financial Statement Schedule
See Item 14(a)(2) of this Form 10-K.
81
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 21st day of
December 1999.
<TABLE>
<S> <C> <C>
APPLE COMPUTER, INC.
By: /s/ FRED D. ANDERSON
-----------------------------------------
Fred D. Anderson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven P. Jobs and Fred D. Anderson, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
interim Chief Executive
/s/ STEVEN P. JOBS Officer and Director
------------------------------------------- (Principal Executive December 21, 1999
STEVEN P. JOBS Officer)
Executive Vice President
/s/ FRED D. ANDERSON and Chief Financial
------------------------------------------- Officer (Principal December 21, 1999
FRED D. ANDERSON Financial Officer)
/s/ WILLIAM V. CAMPBELL
------------------------------------------- Director December 21, 1999
WILLIAM V. CAMPBELL
/s/ GARETH C.C. CHANG
------------------------------------------- Director December 21, 1999
GARETH C.C. CHANG
/s/ MILLARD S. DREXLER
------------------------------------------- Director December 21, 1999
MILLARD S. DREXLER
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ LAWRENCE J. ELLISON
------------------------------------------- Director December 21, 1999
LAWRENCE J. ELLISON
/s/ EDGAR S. WOOLARD, JR.
------------------------------------------- Director December 21, 1999
EDGAR S. WOOLARD, JR.
/s/ JEROME B. YORK
------------------------------------------- Director December 21, 1999
JEROME B. YORK
</TABLE>
83
<PAGE>
Exhibit 3.3
BY-LAWS
OF
APPLE COMPUTER, INC.
(a California corporation)
(as amended through October 6, 1999)
Article I
OFFICES
SECTION 1.1: PRINCIPAL OFFICE. The principal executive office for the
transaction of the business of this corporation shall be 1 Infinite Loop,
Cupertino, California 95014. The Board of Directors is hereby granted full
power and authority to change the location of the principal executive office
from one location to another.
SECTION 1.2: OTHER OFFICES. One or more branch or other subordinate
offices may at any time be fixed and located by the Board of Directors at such
place or places within or without the State of California as it deems
appropriate.
Article II
DIRECTORS
SECTION 2.1: EXERCISE OF CORPORATE POWERS. Except as otherwise provided
by these By-Laws, by the Articles of Incorporation of this corporation or by the
laws of the State of California now or hereafter in force, the business and
affairs of this corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors.
SECTION 2.2: NUMBER. The number of directors of the corporation shall be
not less than five (5) nor more than nine (9). The exact number of directors
shall be seven (7) until changed within the limits specified above, by a by-law
amending this section, duly adopted by the Board of Directors or by the
shareholders. The indefinite number of directors may be changed, or a definite
number fixed without provision for an indefinite number, by a duly adopted
amendment to the Articles of Incorporation or by an amendment to this by-law
duly adopted by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its adoption at a
meeting of the shareholders, or the shares not consenting in the case of action
by written consent, are equal to more than 16-2/3% of the outstanding shares
entitled to vote. No amendment may change the stated maximum number of
authorized directors to a number greater than two times the stated minimum
number of directors minus one.
SECTION 2.3: NEED NOT BE SHAREHOLDERS. The directors of this corporation
need not be shareholders of this corporation.
SECTION 2.4: COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any director from serving this corporation in any
other capacity and receiving compensation therefor.
SECTION 2.5: ELECTION AND TERM OF OFFICE. Through and until immediately
prior to the annual meeting of shareholders to be held in fiscal year 2000, the
directors shall be divided into two classes, designated Class I and Class II,
each consisting of one-half of the directors or as close an approximation as
possible, and each director shall serve for a term running until the second
annual meeting of shareholders succeeding his or her election and until his or
her successor shall have been duly elected and qualified; provided, however,
that the terms of all directors shall expire at the annual meeting of
shareholders to be held in fiscal year 2000. Commencing at the annual meeting of
shareholders to be held in fiscal year 2000, each director shall be elected to
serve until the annual meeting of shareholders held in the following fiscal year
or until his or her successor shall have been duly elected and qualified.
SECTION 2.6: VACANCIES. A vacancy or vacancies on the Board of Directors
shall exist in case of the death, resignation or removal of any director, or if
the authorized number of directors is increased, or if the shareholders fail, at
any annual meeting of shareholders at which any director is elected, to elect
the full authorized number of directors to be voted for at that meeting. The
Board of Directors may declare vacant the office of a director if he or she is
declared of unsound mind by an order of court or convicted of a felony or if,
within 60 days after notice of his or her election, he or she does not accept
the office. Any vacancy, except for a vacancy created by removal of a director
as provided in Section 2.7 hereof, may be filled by a
-1-
<PAGE>
person selected by a majority of the remaining directors then in office,
whether or not less than a quorum, or by a sole remaining director.
Vacancies occurring in the Board of Directors by reason of removal of
directors shall be filled only by approval of shareholders. The shareholders
may elect a director at any time to fill any vacancy not filled by the
directors. Any such election by written consent requires the consent of a
majority of the outstanding shares entitled to vote. If, after the filling of
any vacancy by the directors, the directors then in office who have been
elected by the shareholders shall constitute less than a majority of the
directors then in office, any holder or holders of an aggregate of 5% or more
of the total number of shares at the time outstanding having the right to
vote for such directors may call a special meeting of shareholders to be held
to elect the entire Board of Directors. The term of office of any director
shall terminate upon such election of a successor. Any director may resign
effective upon giving written notice to the Chairman of the Board, if any,
the Chief Executive Officer, the President, the Secretary or the Board of
Directors of this corporation, unless the notice specifies a later time for
the effectiveness of such resignation. Ifthe resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective. A reduction of the authorized number of directors shall
not remove any director prior to the expiration of such director's term of
office.
SECTION 2.7: REMOVAL. The entire Board of Directors or any individual
director may be removed without cause from office by an affirmative vote of a
majority of the outstanding shares entitled to vote; provided that, unless the
entire Board of Directors is removed, no director shall be removed when the
votes cast against removal, or not consenting in writing to such removal, would
be sufficient to elect such director if voted cumulatively (without regard to
whether such shares may be voted cumulatively) at an election at which the same
total number of votes were cast, or, if such action is taken by written consent,
all shares entitled to vote were voted, and either the number of directors
elected at the most recent annual meeting of shareholders, or if greater, the
number of directors for whom removal is being sought, were then being elected.
If any or all directors are so removed, new directors may be elected at the same
meeting or at a subsequent meeting. If at any time a class or series of shares
is entitled to elect one or more directors under authority granted by the
Articles of Incorporation of this corporation, the provisions of this Section
2.7 shall apply to the vote of that class or series and not to the vote of the
outstanding shares as a whole.
SECTION 2.8: POWERS AND DUTIES. Without limiting the generality or
extent of the general corporate powers to be exercised by the Board of Directors
pursuant to Section 2.1 of these By-Laws, it is hereby provided that the Board
of Directors shall have full power with respect to the following matters:
(a) To purchase, lease, and acquire any and all kinds of property,
real, personal or mixed, and at its discretion to pay therefor in money, in
property and/or in stocks, bonds, debentures or other securities of this
corporation.
(b) To enter into any and all contracts and agreements which in its
judgment may be beneficial to the interests and purposes of this corporation.
(c) To fix and determine and to vary from time to time the amount or
amounts to be set aside or retained as reserve funds or as working capital of
this corporation or for maintenance, repairs, replacements or enlargements of
its properties.
(d) To declare and pay dividends in cash, shares and/or property out
of any funds of this corporation at the time legally available for the
declaration and payment of dividends on its shares.
(e) To adopt such rules and regulations for the conduct of its
meetings and the management of the affairs of this corporation as it may deem
proper.
(f) To prescribe the manner in which and the person or persons by
whom any or all of the checks, drafts, notes, bills of exchange, contracts and
other corporate instruments shall be executed.
(g) To accept resignations of directors; to declare vacant the office
of a director as provided in Section 2.6 hereof; and, in case of vacancy in the
office of directors, to fill the same to the extent provided in Section 2.6
hereof.
(h) To create offices in addition to those for which provision is
made by law or these By-Laws; to elect and remove at pleasure all officers of
this corporation, fix their terms of office, prescribe their powers and duties,
limit their authority and fix their salaries in any way it may deem advisable
which is not contrary to law or these By-Laws; and, if it sees fit, to require
from the officers or any of them security for faithful service.
(i) To designate some person to perform the duties and exercise the
powers of any officer of this corporation during the temporary absence or
disability of such officer.
(j) To appoint or employ and to remove at pleasure such agents and
employees as it may see fit, to prescribe their titles, powers and duties, limit
their authority, and fix their salaries in any way it may deem advisable which
is not contrary to law or these By-Laws; and, if it sees fit, to require from
them or any of them security for faithful performance.
-2-
<PAGE>
(k) To fix a time in the future, which shall not be more than 60 days
nor less than 10 days prior to the date of the meeting nor more than sixty (60)
days prior to any other action for which it is fixed, as a record date for the
determination of the shareholders entitled to notice of and to vote at any
meeting, or entitled to receive any payment of any dividend or other
distribution, or allotment of any rights, or entitled to exercise any rights in
respect of any other lawful action; and in such case only shareholders of record
on the date so fixed shall be entitled to notice of and to vote at the meeting
or to receive the dividend, distribution or allotment of rights or to exercise
the rights, as the case may be, notwithstanding any transfer of any shares on
the books of this corporation after any record date fixed as aforesaid. The
Board of Directors may close the books of this corporation against transfers of
shares during the whole or any part of such period.
(l) To fix and locate from time to time the principal office for the
transaction of the business of this corporation and one or more branch or other
subordinate office or offices of this corporation within or without the State of
California; to designate any place within or without the State of California for
the holding of any meeting or meetings of the shareholders or the Board of
Directors, as provided in Sections 10.1 and 11.1 hereof; to adopt, make and use
a corporate seal, and to prescribe the forms of certificates for shares and to
alter the form of such seal and of such certificates from time to time as in its
judgment it may deem best, provided such seal and such certificates shall at all
times comply with the provisions of law now or hereafter in effect.
(m) To authorize the issuance of shares of stock of this corporation
in accordance with the laws of the State of California and the Articles of
Incorporation of this corporation.
(n) Subject to the limitation provided in Section 14.2 hereof, to
adopt, amend or repeal from time to time and at any time these By-Laws and any
and all amendments thereof.
(o) To borrow money and incur indebtedness on behalf of this
corporation, including the power and authority to borrow money from any of the
shareholders, directors or officers of this corporation, and to cause to be
executed and delivered therefor in the corporate name promissory notes, bonds,
debentures, deeds of trust, mortgages, pledges, hypothecations, or other
evidences of debt and securities therefor, and the note or other obligation
given for any indebtedness of this corporation, signed officially by any officer
or officers thereunto duly authorized by the Board of Directors shall be binding
on this corporation.
(p) To designate and appoint committees of the Board of Directors as
it may see fit, to prescribe their names, powers and duties and limit their
authority in any way it may deem advisable which is not contrary to law or these
By-Laws.
(q) Generally to do and perform every act and thing whatsoever that
may pertain to the office of a director or to a board of directors.
Article III
OFFICERS
SECTION 3.1: ELECTION AND QUALIFICATIONS. The officers of this
corporation shall consist of a Chief Executive Officer, a President, one or
more Vice Presidents, a Secretary, a Chief Financial Officer and such other
officers, including, but not limited to, a Chairman of the Board of
Directors, a Treasurer, and Assistant Secretaries and Assistant Treasurers as
the Board of Directors shall deem expedient, who shall be chosen in such
manner and hold their offices for such terms as the Board of Directors may
prescribe. Any two or more of such offices may be held by the same person.
Any Vice President, Assistant Treasurer or Assistant Secretary, respectively,
may exercise any of the powers of the Chief Executive Officer, the President,
the Chief Financial Officer, or the Secretary, respectively, as directed by
the Board of Directors, and shall perform such other duties as are imposed
upon him or her by the By-Laws or the Board of Directors.
SECTION 3.2: TERM OF OFFICE AND COMPENSATION. The term of office and
salary of each of said officers and the manner and time of the payment of such
salaries shall be fixed and determined by the Board of Directors and may be
altered by said Board from time to time at its pleasure, subject to the rights,
if any, of an officer under any contract of employment. Any officer may resign
at any time upon written notice to this corporation, without prejudice to the
rights, if any, of this corporation under any contract to which the officer is a
party. If any vacancy occurs in any office of this corporation, the Board of
Directors may elect a successor to fill such vacancy.
Article IV
CHAIRMAN OF THE BOARD
SECTION 4.1: POWERS AND DUTIES. The Chairman of the Board of Directors,
if there be one, shall have the power to preside at all meetings of the Board of
Directors and shall have such other powers and shall be subject to such other
duties as the Board of Directors may from time to time prescribe.
-3-
<PAGE>
Article V
CHIEF EXECUTIVE OFFICER
SECTION 5.1: POWERS AND DUTIES. The powers and duties of the Chief
Executive Officer are:
(a) To act as the general manager and chief executive officer of this
corporation and, subject to the control of the Board of Directors, to have
general supervision, direction and control of the business and affairs of this
corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board or if there be no Chairman, at all meetings
of the Board of Directors.
(c) To call meetings of the shareholders and meetings of the Board of
Directors to be held at such times and, subject to the limitations prescribed by
law or by these By-Laws, at such places as he or she shall deem proper.
(d) To affix the signature of this corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which, in the judgment of the Chief Executive Officer, should be
executed on behalf of this corporation; to sign certificates for shares of stock
of this corporation; and, subject to the direction of the Board of Directors, to
have general charge of the property of this corporation and to supervise and
control all officers, agents and employees of this corporation.
Article VA
PRESIDENT
SECTION 5A.1: POWERS AND DUTIES. The powers and duties of the President
are:
(a) To act as the general manager of this corporation and, subject to
the control of the Board of Directors, to have general supervision, direction
and control of the business and affairs of this corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board and the Chief Executive Officer or if there
be no Chairman or Chief Executive Officer, at all meetings of the Board of
Directors.
(c) To affix the signature of this corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which, in the judgment of the President, should be executed on
behalf of this corporation; to sign certificates for shares of stock of this
corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of this corporation and to supervise and control
all officers, agents and employees of this corporation.
SECTION 5A.2: PRESIDENT PRO TEM. If neither the Chairman of the
Board, the Chief Executive Officer, the President, nor any Vice President is
present at any meeting of the Board of Directors, a President pro tem may be
chosen to preside and act at such meeting. If neither the Chief Executive
Officer, the President nor any Vice President is present at any meeting of the
shareholders, a President pro tem may be chosen to preside at such meeting.
-4-
<PAGE>
Article VI
VICE PRESIDENT
SECTION. 6.1: POWERS AND DUTIES. The titles, powers and duties of the
Vice President or Vice Presidents shall be prescribed by the Board of
Directors. In case of the absence, disability or death of the Chief Executive
Officer, the President, the Vice President, or one of the Vice Presidents,
shall exercise all his or her powers and perform all his or her duties. If
there is more than one Vice President, the order in which the Vice Presidents
shall succeed to the powers and duties of the Chief Executive Officer or
President shall be as fixed by the Board of Directors.
Article VII
SECRETARY
SECTION 7.1: POWERS AND DUTIES. The powers and duties of the Secretary
are:
(a) To keep a book of minutes at the principal executive office of
this corporation, or such other place as the Board of Directors may order, of
all meetings of its directors and shareholders with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings and the proceedings
thereof.
(b) To keep the seal of this corporation and to affix the same to all
instruments which may require it.
(c) To keep or cause to be kept at the principal executive office of
this corporation, or at the office of the transfer agent or agents, a record of
the shareholders of this corporation, giving the names and addresses of all
shareholders and the number and class of shares held by each, the number and
date of certificates issued for shares and the number and date of cancellation
of every certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of this corporation,
to fill in all certificates issued, and to make a proper record of each such
issuance; provided that so long as this corporation shall have one or more duly
appointed and acting transfer agents of the shares, or any class or series of
shares, of this corporation, such duties with respect to such shares shall be
performed by such transfer agent or transfer agents.
(e) To transfer upon the share books of this corporation any and all
shares of this corporation; provided that so long as this corporation shall have
one or more duly appointed and acting transfer agents of the shares, or any
class or series of shares, of this corporation, such duties with respect to such
shares shall be performed by such transfer agent or transfer agents, and the
method of transfer of each certificate shall be subject to the reasonable
regulations of the transfer agent to which the certificate is presented for
transfer and, also, if this corporation then has one or more duly appointed and
acting registrars, subject to the reasonable regulations of the registrar to
which a new certificate is presented for registration; and provided, further,
that no certificate for shares of stock shall be issued or delivered or, if
issued or delivered, shall have any validity whatsoever until and unless it has
been signed or authenticated in the manner provided in Section 12.3 hereof.
(f) To make service and publication of all notices that may be
necessary or proper and without command or direction from anyone. In case of
the absence, disability, refusal or neglect of the Secretary to make service or
publication of any notices, then such notices may be served and/or published by
the Chief Executive Officer, the President or a Vice President, or by any person
thereunto authorized by either of them or by the Board of Directors or by the
holders of a majority of the outstanding shares of this corporation.
(g) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
Article VIII
CHIEF FINANCIAL OFFICER
SECTION 8.1: POWERS AND DUTIES. The powers and duties of the Chief
Financial Officer are:
(a) To supervise and control the keeping and maintaining of adequate
and correct accounts of this corporation's properties and business transactions,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus and shares. The books of account shall at all
reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidences of
indebtedness and other valuable documents of this corporation and, at his or her
discretion, to cause any or all thereof to be deposited for the account of this
corporation with such depository as may be designated from time to time by the
Board of Directors.
-5-
<PAGE>
(c) To receive or cause to be received, and to give or cause to be
given, receipts and acquittances for moneys paid in for the account of this
corporation.
(d) To disburse, or cause to be disbursed, all funds of this
corporation as may be directed by the Chief Executive Officer, the President or
the Board of Directors, taking proper vouchers for such disbursements.
(e) To render to the Chief Executive Officer, the President or to the
Board of Directors, whenever either may require, accounts of all transactions as
Chief Financial Officer and of the financial condition of this corporation.
(f) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
Article VIIIA
APPOINTED VICE PRESIDENTS, ETC.
SECTION 8A.1: APPOINTED VICE PRESIDENTS, ETC.; APPOINTMENT, DUTIES, ETC.
The Chief Executive Officer of the corporation shall have the power, in the
exercise of his or her discretion, to appoint additional persons to hold
positions and titles such as vice president of the corporation or a division of
the corporation or president of a division of the corporation, or similar such
titles, as the business of the corporation may require, subject to such limits
in appointment power as the Board may determine. The Board shall be advised of
any such appointment at a meeting of the Board, and the appointment shall be
noted in the minutes of the meeting. The minutes shall clearly state that such
persons are non-corporate officers appointed pursuant to this Section 8A.l of
these By-laws.
Each such appointee shall have such title, shall serve in such
capacity and shall have such authority and perform such duties as the Chief
Executive Officer of the corporation shall determine.
Appointees may hold titles such as "president" of a division or other
group within the corporation, or "vice president" of the corporation or of a
division or other group within the corporation. However, any such appointee,
absent specific election by the Board as an elected corporate officer, (i) shall
not be considered an officer elected by the Board of Directors pursuant to
Article III of these By-Laws and shall not have the executive powers or
authority of corporate officers elected pursuant to such Article III, (ii) shall
not be considered (a) an "officer" of the corporation for the purposes of Rule
3b-2 promulgated under the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (collectively, the "Act") or an
"executive officer" of the corporation for the purposes of Rule 3b-7 promulgated
under the Act, and similarly shall not be considered an "officer" of the
corporation for the purposes of Section 16 of the Act (as such persons shall not
be given the access to inside information of the corporation enjoyed by officers
of the corporation) or an "executive officer" of the corporation for the
purposes of Section 14 of the Act or (b) a "corporate officer" for the purposes
of Section 312 of the California Corporation Code (the "Code"), except in any
such case as otherwise required by law, and (iii) shall be empowered to
represent himself or herself to third parties as an appointed vice president,
etc., only, and shall be empowered to execute documents, bind the corporation or
otherwise act on behalf of the corporation only as authorized by the Chief
Executive Officer or the President of the Corporation or by resolution of the
Board of Directors.
An elected officer of the corporation may also serve in an appointed
capacity hereunder.
Article IX
EXECUTIVE COMMITTEE
SECTION 9.1: APPOINTMENT AND PROCEDURE. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors, appoint
from among its members an Executive Committee of two or more members. The
Executive Committee may make its own rules of procedure subject to Section 11.9
hereof, and shall meet as provided by such rules or by a resolution adopted by
the Board of Directors (which resolution shall take precedence). A majority of
the members of the Executive Committee shall constitute a quorum, and in every
case the affirmative vote of a majority of all members of the Committee shall be
necessary to the adoption of any resolution by such Committee.
SECTION 9.2: POWERS. During the intervals between the meetings of the
Board of Directors, the Executive Committee, in all cases in which specific
directions shall not have been given by the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of this corporation in such manner as the
Committee may deem best for the interests of this corporation, except with
respect to:
(a) any action for which California law also requires shareholder
approval,
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<PAGE>
(b) the filling of vacancies on the Board of Directors or in the
committee,
(c) the fixing of compensation of the directors for serving on the
Board of Directors or on any committee,
(d) the amendment or repeal of By-Laws or the adoption of new
By-Laws,
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable,
(f) a distribution to the shareholders of this corporation, except at
a rate or in a periodic amount or within a price range determined by the Board
of Directors,
(g) the appointment of other committees of the Board of Directors or
the members thereof.
-7-
<PAGE>
Article X
MEETINGS OF SHAREHOLDERS
SECTION 10.1: PLACE OF MEETINGS. Meetings (whether regular, special or
adjourned) of the shareholders of this corporation shall be held at the
principal executive office for the transaction of business of this corporation,
or at any place within or without the State which may be designated by written
consent of all the shareholders entitled to vote thereat, or which may be
designated by resolution of the Board of Directors. Any meeting shall be valid
wherever held if held by the written consent of all the shareholders entitled to
vote thereat, given either before or after the meeting and filed with the
Secretary of this corporation.
SECTION 10.2: ANNUAL MEETINGS. The annual meeting of the shareholders
shall be held at the hour of 10:00 a.m. on the last Wednesday in January in each
year , if not a legal holiday, and if a legal holiday, then on the next
succeeding business day not a legal holiday or at such other time in a
particular year as may be designated by written consent of all the shareholders
entitled to vote thereat or which may be designated by resolution of the Board
of Directors. Such annual meetings shall be held at the place provided pursuant
to Section 10.1 hereof. Said annual meetings shall be held for the purpose of
the election of directors, for the making of reports of the affairs of this
corporation and for the transaction of such other business as may come before
the meeting.
SECTION 10.3: SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes whatsoever may be called at any time by the President or
by the Board of Directors, or by two or more members thereof, or by one or more
holders of shares entitled to cast not less than ten percent (10%) of the votes
on the record date established pursuant to Section 10.8. Upon request in
writing sent by registered mail to the Chief Executive Officer, President, Vice
President or Secretary, or delivered to any such officer in person, by any
person or persons entitled to call a special meeting of shareholders (such
request, if sent by a shareholder or shareholders, to include the information
required by Section 10.13), it shall be the duty of such officer, subject to the
immediately succeeding sentence, to cause notice to be given to the shareholders
entitled to vote that a meeting will be requested by the person or persons
calling the meeting, the date of which meeting, which shall be set by such
officer, to be not less than 35 days nor more than 60 days after such request
or, if applicable, determination of the validity of such request pursuant to the
immediately succeeding sentence. Within seven days after receiving such a
written request from a shareholder or shareholders of the corporation, the Board
of Directors shall determine whether shareholders owning not less than ten
percent (10%) of the shares as of the record date established pursuant to
Section 10.8 for such request support the call of a special meeting and notify
the requesting party or parties of its finding.
SECTION 10.4: NOTICE OF MEETINGS. Notice of any meeting of shareholders
shall be given in writing not less than 10 nor more than 60 days before the date
of the meeting to each shareholder entitled to vote thereat by the Secretary or
an Assistant Secretary, or other person charged with that duty, or if there be
no such officer or person, or in case of his or her neglect or refusal, by any
director or shareholder. The notice shall state the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transacted, or (ii) in
the case of the annual meeting, those matters which the Board of Directors, at
the time of the mailing of the notice, intends to present for action by the
shareholders, but any proper matter may be presented at the meeting for such
action except that notice must be given or waived in writing of any proposal
relating to approval of contracts between the corporation and any director of
this corporation, amendment of the Articles of Incorporation, reorganization of
this corporation or winding up of this corporation. The notice of any meeting
at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for election.
Written notice shall be given by this corporation to any shareholder, either (i)
personally or (ii) by mail or other means of written communication, charges
prepaid, addressed to such shareholder at such shareholder's address appearing
on the books of this corporation or given by such shareholder to this
corporation for the purpose of notice. If a shareholder gives no address or no
such address appears on the books of this corporation, notice shall be deemed to
have been given if sent by mail or other means of written communication
addressed to the place where the principal executive office of this corporation
is located, or if published at least once in a newspaper of general circulation
in the county in which such office is located. The noice shall be deemed to
have been given at the time when delivered personally or deposited in the United
States mail, postage prepaid, or sent by other means of written communication
and addressed as hereinbefore provided. An affidavit of delivery or mailing of
any notice in accordance with the provisions of this Section 10.4, executed by
the Secretary, Assistant Secretary or any transfer agent, shall be prima facie
evidence of the giving of the notice. If any notice addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation is returned to this corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice to the shareholder at such address, all future notices shall be
deemed to have been duly given without further mailing if the same shall be
available for the shareholder upon written demand of the shareholder at the
principal executive office of this corporation for a period of one year from the
date of the giving of the notice to all other shareholders.
SECTION 10.5: CONSENT TO SHAREHOLDERS' MEETINGS. The transactions of any
meeting of shareholders, however called and noticed, and wherever held, are as
valid as though had at a
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meeting duly held after regular call and notice, if a quorum is present
either in person or by proxy, and if, either before or after the meeting,
each of the shareholders entitled to vote, not present in person or by proxy,
signs a written waiver of notice or a consent to the holding of such meeting
or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance of a person at a meeting shall constitute
a waiver of notice of such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened and except that attendance at a
meeting is not a waiver of any right to object to the consideration of
matters required by law to be included in the notice but not so included, if
such objection is expressly made at the meeting. Neither the business to be
transacted at nor the purpose of any regular or special meeting of
shareholders need be specified in any written waiver of notice, except as to
approval of contracts between this corporation and any of its directors,
amendment of the Articles of Incorporation, reorganization of this
corporation or winding up the affairs of this corporation.
SECTION 10.6: QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of shareholders
shall constitute a quorum for the transaction of business. Shares shall not be
counted to make up a quorum for a meeting if voting of such shares at the
meeting has been enjoined or for any reason they cannot be lawfully voted at the
meeting. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum.
SECTION 10.7: ADJOURNED MEETINGS. Any shareholders' meeting, whether or
not a quorum is present, may be adjourned from time to time by the vote of a
majority of the shares, the holders of which are either present in person or
represented by proxy thereat, but, except as provided in Section 10.6 hereof, in
the absence of a quorum, no other business may be transacted at such meeting.
When a meeting is adjourned for more than 45 days or if after adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at a
meeting. Except as aforesaid, it shall not be necessary to give any notice of
the time and place of the adjourned meeting or of the business to be transacted
thereat other than by announcement at the meeting at which such adjournment is
taken. At any adjourned meeting the shareholders may transact any business
which might have been transacted at the original meeting.
SECTION 10.8: VOTING RIGHTS. Only persons in whose names shares entitled
to vote stand on the stock records of this corporation at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held or, if some other day be fixed for the
determination of shareholders of record pursuant to Section 2.8(k) hereof, then
on such other day, shall be entitled to vote at such meeting. In the absence of
any contrary provision in the Articles of Incorporation or in any applicable
statute relating to the election of directors or to other particular matters,
each such person shall be entitled to one vote for each share.
In order that the corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting or request a special
meeting of the shareholders pursuant to Section 10.3, the Board of Directors may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than fourteen (14) days after the date upon which
the resolution fixing the record date is adopted by the Board of Directors. Any
shareholder of record seeking to have the shareholders authorize or take
corporate action by written consent or request a special meeting of the
shareholders pursuant to Section 10.3 shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in no event later than twenty eight (28) days after the date
on which such request is received, adopt a resolution fixing the record date.
SECTION 10.9: ACTION BY WRITTEN CONSENTS. Any action which may be taken
at any annual or special meeting of shareholders may be taken without a meeting
and without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Within fourteen (14) days after receiving such written consent or
consents from shareholders of the corporation, the Board of Directors shall
determine whether holders of outstanding shares as of the record date
established pursuant to Section 10.8 having not less than the minimum number of
votes which would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted have properly
consented thereto in writing and notify the requesting party of its finding.
Unless the consents of all shareholders entitled to vote have been solicited in
writing, notice of any shareholder approval of (i) contracts between this
corporation and any of its directors, (ii) indemnification of any person, (iii)
reorganization of this corporation or (iv) distributions to shareholders upon
winding up of this corporation in certain circumstances without a meeting by
less than unanimous written consent shall be given at least 10 days before the
consummation of the action authorized by such approval, and prompt notice shall
be given of the taking of any other corporate action approved by shareholders
without a meeting by less than unanimous written consent, to those shareholders
entitled to vote who have not consented in writing. All notices given hereunder
shall conform to the requirements of Section 10.4 hereto and applicable law.
When written consents are given with
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respect to any shares, they shall be given by and accepted from the persons
in whose names such shares stand on the books of this corporation at the time
such respective consens are given, or any shareholder's proxy holder, or a
transferee of the shares or a personal representative of the shareholder or
their respective proxy holders, may revoke the consent by a writing received
by this corporation prior to the time that written consents of the number of
shares required to authorize the proposed action have been filed with the
Secretary of this corporation, but may not do so thereafter. Such revocation
is effective upon its receipt by the Secretary of this corporation.
Notwithstanding anything to the contrary, directors may not be elected by
written consent except by unanimous written consent of all shares entitled to
vote for the election of directors.
SECTION 10.10: ELECTIONS OF DIRECTORS. In any election of directors, the
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected; votes against the directors and votes withheld with
respect to the election of the directors shall have no legal effect. Elections
of directors need not be by ballot except upon demand made by a shareholder at
the meeting and before the voting begins.
SECTION 10.11: PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or such person's duly
authorized agent and filed with the Secretary of this corporation. No proxy
shall be valid (1) after revocation thereof, unless the proxy is specifically
made irrevocable and otherwise conforms to this Section 10.11 and applicable
law, or (2) after the expiration of eleven months from the date thereof, unless
the person executing it specifies therein the length of time for which such
proxy is to continue in force. Revocation may be effected by a writing
delivered to the Secretary of this corporation stating that the proxy is revoked
or by a subsequent proxy executed by, or by attendance at the meeting and voting
in person by, the person executing the proxy. A proxy is not revoked by the
death or incapacity of the maker unless, before the vote is counted, a written
notice of such death or incapacity is received by this corporation. A proxy
which states that it is irrevocable is irrevocable for the period specified
therein when it is held by any of the following or a nominee of any of the
following: (1) a pledgee, (2) a person who has purchased or agreed to purchase
or holds an option to purchase the shares or a person who has sold a portion of
such person's shares in this corporation to the maker of the proxy, (3) a
creditor or creditors of this corporation or the shareholder who extended or
continued credit to this corporation or the shareholder in consideration of the
proxy if the proxy states that it was given in consideration of such extension
or continuation of credit and the name of the person extending or continuing the
credit, (4) a person who has contracted to perform services as an employee of
this corporation, if a proxy is required by the contract of employment and if
the proxy states that it was given in consideration of such contract of
employment, the name of the employee and the period of employmet contracted for,
(5) a person designated by or under a close corporation shareholder agreement or
a voting trust agreement. In addition, a proxy may be made irrevocable if it is
given to secure the performance of a duty or to protect a title, either legal or
equitable, until the happening of events which, by its terms, discharge the
obligation secured by it. Notwithstanding the period of irrevocability
specified, the proxy becomes revocable when the pledge is redeemed, the option
or agreement to purchase is terminated or the seller no longer owns any shares
of this corporation or dies, the debt of this corporation or the shareholder is
paid, the period of employment provided for in the contract of employment has
terminated or the close corporation shareholder agreement or the voting trust
agreement has terminated. In addition, a proxy may be revoked, notwithstanding a
provision making it irrevocable, by a purchaser of shares without knowledge of
the existence of the provision unless the existence of the proxy and its
irrevocability appears on the certificate representing such shares. Every form
of proxy or written consent, which provides an opportunity to specify approval
or disapproval with respect to any proposal, shall also contain an appropriate
space marked "abstain", whereby a shareholder may indicate a desire to abstain
from voting his or her shares on the proposal. A proxy marked "abstain" by the
shareholder with respect to a particular proposal shall not be voted either for
or against such proposal. In any election of directors, any form of proxy in
which the directors to be voted upon are named therein as candidates and which
is marked by a shareholder "withhold" or otherwise marked in a manner indicating
that the authority to vote for the election of directors is withheld shall not
be voted either for or against the election of a director.
SECTION 10.12: INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the Chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request
of one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
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(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
SECTION 10.13: ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Shareholders may nominate one or more persons for election as
directors at a meeting of shareholders or propose business to be brought before
a meeting of shareholders, or both, only if such shareholder has given timely
notice in proper written form of such shareholder's intent to make such
nomination or nominations or to propose such business. To be timely, a
shareholder's notice must be received by the Secretary of the Corporation not
later than 60 days prior to such meeting; provided, however, that in the event
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. To be in proper written form a shareholder's notice to
the Secretary shall set forth (i) the name and address of the shareholder who
intends to make the nominations or propose the business and, as the case may be,
of the person or persons to be nominated or of the business to be proposed, (ii)
a representation that the shareholder is a holder of record of stock of the
Corporation that intends to vote such stock at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice, (iii) if applicable, a description of all
arrangements or understandings between the shareholder and each nominee or any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder, (iv) such other
information regarding each nominee or each matter of business to be proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to Regulation 14A promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 had the nominee been nominated,
or intended to be nominated, or the matter been proposed, or intended to be
proposed, by the Board of Directors of the Corporation and (v) if applicable,
the consent of each nominee as director of the Corporation if so elected. The
chairman of a meeting of shareholders may refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedure.
Article XI
MEETINGS OF DIRECTORS
SECTION 11.1: PLACE OF MEETINGS. Meetings (whether regular, special or
adjourned) of the Board of Directors of this corporation shall be held at the
principal office of this corporation for the transaction of business, as
specified in accordance with Section 1.1 hereof, or at any other place within or
without the State which has been designated from time to time by resolution of
the Board or which is designated in the notice of the meeting.
SECTION 11.2: REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held after the adjournment of each annual meeting of the
shareholders (which regular directors' meeting shall be designated the "Regular
Annual Meeting") and at such other times as may be designated from time to time
by resolution of the Board of Directors. Notice of the time and place of all
regular meetings shall be given in the same manner as for special meetings,
except that no such notice need be given if (l) the time and place of such
meetings are fixed by the Board of Directors or (2) the Regular Annual Meeting
is held at the principal place of business provided at Section 1.1 hereof and on
the date specified in Section 10.2 hereof.
SECTION 11.3: SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, if any, or
the President, or any Vice President, or the Secretary or by any two or more
directors.
SECTION 11.4: NOTICE OF SPECIAL MEETINGS. Special meetings of the Board
of Directors shall be held upon no less than four days' notice by mail or 48
hours' notice delivered personally or by telephone or telegraph to each
director. Notice need not be given to any director who signs a waiver of notice
or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the home or office of the director who the person giving the notice
has reason to believe will promptly communicate it to the director. A notice or
waiver of notice need not specify the purpose of any meeting of the Board. If
the address of a director is not shown on the records and is not readily
ascertainable, notice shall be addressed to him at the city or place in which
the meetings of the directors are regularly held. If the meeting is adjourned
for more than 24 hours, notice of any adjournment to another time or place shall
be given prior to the time of the adjourned meeting to all directors not present
at the time of adjournment.
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SECTION 11.5: QUORUM. A majority of all directors elected by the
shareholders and appointed to fill vacancies as provided in Section 2.6 hereof
shall constitute a quorum of the Board of Directors for the transaction of
business. Every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present is the act of the
Board of Directors subject to (a) provisions of law relating to interested
directors, (b) indemnification of agents of this corporation and (c) Section
12.9 hereof. A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. A meeting at which
a quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, if any action taken is approved by at least a
majority of the required quorum for such meeting.
SECTION 11.6: CONFERENCE TELEPHONE. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all directors participating in such meeting
can hear one another. Participation in a meeting pursuant to this Section 11.6
constitutes presence in person at such meeting.
SECTION 11.7: WAIVER OF NOTICE AND CONSENT. The transactions of any
meeting of the Board of Directors, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum is present, and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, a consent to
holding such meeting or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
SECTION 11.8: ACTION WITHOUT A MEETING. Any action required or permitted
by law to be taken by the Board of Directors may be taken without a meeting, if
all members of the Board of Directors shall individually or collectively consent
in writing to such action. Such written consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors. Such action by written
consent shall have the same force and effect as the unanimous vote of such
directors.
SECTION 11.9: COMMITTEES. The provisions of this Article XI apply also to
committees of the Board of Directors and action by such committees, mutatis
mutandis.
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Article XII
SUNDRY PROVISIONS
SECTION 12.1: INSTRUMENTS IN WRITING. All checks, drafts, demands for
money and notes of this corporation, and all written contracts of this
corporation, shall be signed by such officer or officers, agent or agents, as
the Board of Directors may from time to time designate. No officer, agent, or
employee of this corporation shall have the power to bind this corporation by
contract or otherwise unless authorized to do so by these By-Laws or by the
Board of Directors.
SECTION 12.2: SHARES HELD BY THE CORPORATION. Shares in other
corporations standing in the name of this corporation may be voted or
represented and all rights incident thereto may be exercised on behalf of the
corporation by any officer of this corporation authorized so to do by resolution
of the Board of Directors.
SECTION 12.3: CERTIFICATES OF STOCK. There shall be issued to every
holder of shares in this corporation a certificate or certificates signed in the
name of this corporation by the Chairman of the Board of Directors, if any, or
the Chief Executive Officer or the President or a Vice President and by the
Chief Financial Officer or an Assistant Chief Financial Officer or the Secretary
or any Assistant Secretary, certifying the number of shares and the class or
series of shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by this corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.
SECTION 12.4: LOST CERTIFICATES. Where the owner of any certificate for
shares of this corporation claims that the certificate has been lost, stolen or
destroyed, a new certificate shall be issued in place of the original
certificate if the owner (l) so requests before this corporation has notice that
the original certificate has been acquired by a bona fide purchaser, (2) files
with this corporation an indemnity bond in such form and in such amount as shall
be approved by the Chief Executive Officer, the President or a Vice President of
this corporation, and (3) satisfies any other reasonable requirements imposed by
this corporation. The Board of Directors may adopt such other provisions and
restrictions with reference to lost certificates, not inconsistent with
applicable law, as it shall in its discretion deem appropriate.
SECTION 12.5: CERTIFICATION AND INSPECTION OF BY-LAWS. This corporation
shall keep at its principal executive or business office the original or a copy
of these By-Laws as amended or otherwise altered to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours.
SECTION 12.6: ANNUAL REPORTS. The making of annual reports to the
shareholders is dispensed with and the requirement that such annual reports be
made to shareholders is expressly waived, except as may be directed from time to
time by the Board of Directors or the President.
SECTION 12.7: FISCAL QUARTERS. Each fiscal quarter of the Corporation
shall be comprised of 13 weeks each of which shall end at midnight on Saturday
of such week, and the fiscal months in any one calendar quarter shall be
comprised of at least four consecutive calendar weeks with one week to be added,
at management's discretion, to any one month during such fiscal year.
SECTION 12.8: OFFICER LOANS AND GUARANTIES. If the corporation has
outstanding shares held of record by 100 or more persons on the date of approval
by the Board of Directors, the corporation may make loans of money or property
to, or guarantee the obligations of, any officer of the corporation or its
parent or subsidiaries, whether or not the officer is a director, upon the
approval of the Board of Directors alone. Such approval by the Board of
Directors must be determined by a vote of a majority of the disinterested
directors, if it is determined that such a loan or guaranty may reasonably be
expected to benefit the corporation. In no event may an officer owning 2% or
more of the outstanding common shares of the corporation be extended a loan
under this provision.
SECTION 12.9: APPROVAL OF CERTAIN TRANSACTIONS. In addition to Section
11.5. Quorum hereof, the affirmative vote of a majority of the disinterested
outside directors shall be required to (a) approve any merger or acquisition
transaction for which the approval of the Company's shareholders is necessary
for consummation of the transaction and (b) .approve or ratify any related party
transaction (or aggregation of similar transactions) involving a director of the
Company and having an annualized value in excess of $10,000.
Article XIII
CONSTRUCTION OF BY-LAWS WITH
REFERENCE TO PROVISIONS OF LAW
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SECTION 13.1: BY-LAW PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO PROVISIONS
OF LAW. All restrictions, limitations, requirements and other provisions of
these By-Laws shall be construed, insofar as possible, as supplemental and
additional to all provisions of law applicable to the subject matter thereof and
shall be fully complied with in addition to the said provisions of law unless
such compliance shall be illegal.
SECTION 13.2: BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH
PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence,
clause or phrase of these By-Laws which, upon being construed in the manner
provided in Section 13.1 hereof, shall be contrary to or inconsistent with any
applicable provision of law, shall not apply so long as said provisions of law
shall remain in effect, but such result shall not affect the validity or
applicability of any other portions of these By-Laws, it being hereby declared
that these By-Laws, and each article, section, subsection, subdivision,
sentence, clause, or phrase thereof, would have been adopted irrespective of the
fact that any one or more articles, sections, subsections, subdivisions,
sentences, clauses or phrases is or are illegal.
Article XIV
ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS
SECTION 14.1: BY SHAREHOLDERS. By-Laws may be adopted, amended or
repealed by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote. By-Laws specifying or changing a fixed
number of directors or the maximum or minimum number or changing from a fixed
to a variable board or vice versa may only be adopted by the shareholders;
provided, however, that a By-Law or amendment of the Articles of Incorporation
reducing the number or the minimum number of directors to a number less than
five cannot be adopted if the votes cast against its adoption at a meeting or
the shares not consenting in the case of action by written consent are equal to
more than 16-2/3% of the outstanding shares entitled to vote.
SECTION 14.2: BY THE BOARD OF DIRECTORS. Subject to the right of
shareholders to adopt, amend or repeal By-Laws, By-Laws, other than a By-Law or
amendment thereof specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa, may be adopted, amended or repealed by the Board of Directors. A By-Law
adopted by the shareholders may restrict or eliminate the power of the Board of
Directors to adopt, amend or repeal By-Laws.
Article XV
RESTRICTIONS ON TRANSFER OF STOCK
SECTION 15.1: SUBSEQUENT AGREEMENT OR BY-LAW. If (a) any two or more
shareholders of this corporation shall enter into any agreement abridging,
limiting or restricting the rights of any one or more of them to sell, assign,
transfer, mortgage, pledge, hypothecate or transfer on the books of this
corporation any or all of the shares of this corporation held by them, and if a
copy of said agreement shall be filed with this corporation, or if (b)
shareholders entitled to vote shall adopt any By-Law provision abridging,
limiting or restricting the aforesaid rights of any shareholders, then, and in
either of such events, all certificates of shares of stock subject to such
abridgments, limitations or restrictions shall have a reference thereto endorsed
thereon by an officer of this corporation and such certificates shall not
thereafter be transferred on the books of this corporation except in accordance
with the terms and provisions of such agreement or ByLaw, as the case may be;
provided, that no restriction shall be binding with respect to shares issued
prior to adoption of the restriction unless the holders of such shares voted in
favor of or consented in writing to the restriction.
Article XVI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
SECTION 16.1: INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation
shall, to the maximum extent and in the manner permitted by the Code, indemnify
each of its directors and officers against expenses (as defined in Section
317(a) of the Code), judgments, fines, settlements, and other amounts actually
and reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Article XVI, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
SECTION 16.2: INDEMNIFICATION OF OTHERS. The corporation shall have the
power, to the extent and in the manner permitted by the Code, to indemnify each
of its employees and agents
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(other than directors and officers) against expenses (as defined in Section
317(a) of the Code), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that
such person is or was an agent of the corporation. For purposes of this
Article XVI, an "employee" or "agent" of the corporation (other than a
director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or
agent of a corporation which was a predecessor corporation of the corporation
or of another enterprise at the request of such predecessor corporation.
SECTION 16.3: PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in
defending any civil or criminal action or proceeding for which indemnification
is required pursuant to Section 16.1 or for which indemnification is permitted
pursuant to Section 16.2 following authorization thereof by the Board of
Directors, shall be paid by the corporation in advance of the final disposition
of such action or proceeding upon receipt of an undertaking by or on behalf of
the indemnified party to repay such amount if it shall ultimately be determined
that the indemnified party is not entitled to be indemnified as authorized in
this Article XVI.
SECTION 16.4: INDEMNITY NOT EXCLUSIVE. The indemnification provided by
this Article XVI shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office, to the extent that such additional rights to indemnification are
authorized in the Articles of Incorporation.
SECTION 16.5: INSURANCE INDEMNIFICATION. The corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or was
an Agent of the corporation against any liability asserted against or incurred
by such person in such capacity or arising out of such person's status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article XVI.
SECTION 16.6: CONFLICTS. No indemnification or advance shall be made
under this Article XVI, except where such indemnification or advance is mandated
by law or the order, judgment or decree of any court of competent jurisdiction,
in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
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Exhibit 10.A.6
APPLE COMPUTER, INC.
EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED THROUGH 10/6/99)
The following constitute the provisions of the Employee Stock Purchase
Plan (herein called the "Plan") of Apple Computer, Inc. (herein called the
"Company").
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its subsidiaries with an opportunity to purchase Common Stock of the
Company through payroll deductions. It is the intention of the Company to have
the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the
Internal Revenue Code of 1986. The provisions of the Plan shall, accordingly,
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "COMMON STOCK" shall mean the Common Stock, no par value,
of the Company.
(c) "COMPANY" shall mean Apple Computer, Inc., a California
corporation.
(d) "COMPENSATION" shall mean all regular straight time
earnings, payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses and commissions (except to the extent that the
exclusion of any such items is specifically directed by the Board or its
committee).
(e) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which
have been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(f) "EMPLOYEE" shall mean:
(1) any person, including an officer, who is customarily
employed for at least twenty (20) hours per week and more than five (5) months
in a calendar year by the Company or one of its Designated Subsidiaries.
(2) Notwithstanding subsection (1), a different rule shall
apply to an individual during any period (A) he or she receives compensation
which is not initially treated by the Company as "wages": for payroll tax
purposes, (i.e. payments to such individual are not initially subjected by the
Company to income tax, FICA tax, or other withholdings applicable to wages), if
(B) he or she is ultimately determined to have been a common law employee of the
Company during the period, although initially reported as an independent
contractor or treated as employed by a payroll agency for the period in
question.
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In that case, to the extent Section 423 requires such individual to be treated
as retroactively eligible to have participated in the Plan, such individual
shall be treated as an "Employee" during an offering period only to the extent
that he or she satisfies the criteria set forth in the next sentence as of the
start of the offering period. The two criteria are that: (A) the individual
must be employed by the Company at least two years and (B) the individual is not
a "highly compensated employee" within the meaning of Section 414(q) of the
Internal Revenue Code of 1986. For the purpose of computing years of service,
all service prior to a break in service shall be ignored to the extent permitted
by Section 423. For the purpose of determining an individual's status as a
"highly compensated employee", the rules in the Company's Savings and Investment
Plan shall apply.
(g) "PLAN" shall mean this Employee Stock Purchase Plan.
(h) "SECTION 16 PERSON" shall mean any person participating in
the Plan who has been designated by the Board of Directors as having authority
to carry out policy-making functions such that the person is subject to the
reporting and short-swing profit regulations of Section 16 of the Securities
Exchange Act of 1934.
(i) "SUBSIDIARY" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(j) "1934 ACT SECTION 16" shall mean Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder.
3. ELIGIBILITY.
(a) Any Employee as defined in Section 2 who shall be employed
by the Company or one of its Designated Subsidiaries on the date his or her
participation in the Plan is effective shall be eligible to participate in the
Plan, subject to the limitations imposed by Section 423(b) of the Internal
Revenue Code of 1986, as amended.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) if, immediately after
the grant, such Employee would own shares and/or hold outstanding options to
purchase stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of shares of the Company or of any Subsidiary of
the Company, or (ii) which permits his or her rights to purchase shares under
all employee stock purchase plans of the Company and its Subsidiaries to accrue
at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the fair
market value of the shares (determined at the time such option is granted) for
each calendar year in which such stock option is outstanding at any time.
4. OFFERING DATES. The Plan shall be implemented by one offering
during each six-month period of the Plan, commencing on or about January 1, 1981
and continuing thereafter until terminated in accordance with Section 19 hereof.
The Board
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of Directors of the Company shall have the power to change the duration of
offering periods with respect to future offerings without shareholder approval
if such change is announced at least fifteen (15) days prior to the scheduled
beginning of the first offering period to be affected.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions on the
form provided by the Company and filing it with the Company's payroll office
prior to the applicable offering date. Once filed, the subscription agreement
shall remain effective for all subsequent offering periods until the participant
withdraws from the Plan as provided in Section 10 hereof or files another
subscription agreement.
(b) Payroll deductions for a participant shall commence on the
first payroll following the commencement offering date and shall continue at the
same rate until such time as the participant withdraws from the Plan as provided
in Section 10 hereof or another subscription agreement is filed which changes
the rate of payroll deductions.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each payday
during subsequent offering periods at a rate not exceeding ten percent (10%) of
the Compensation which he or she received on such payday, and the aggregate of
such payroll deductions during any offering period shall not exceed ten percent
(10%) of his or her aggregate Compensation during said offering period.
(b) All payroll deductions made by a participant shall be
credited to his or her account under the Plan. A participant may not make any
additional payments into such account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10, or may lower, but not increase, the rate of
his or her payroll deductions (within the limitations set forth in
subsection (a) above) during an offering period by completing and filing with
the Company a new authorization for payroll deductions. The change in rate
shall be effective within fifteen (15) days following the Company's receipt of
the new authorization.
(d) A participant may increase his or her rate of payroll
deductions (within the limitations set forth in subsection (a) above) to be
effective for the next offering period by completing and filing with the Company
a new authorization for payroll deductions at least fifteen (15) days before the
beginning of said offering period.
7. GRANT OF OPTION.
(a) At the beginning of each six-month offering period, each
eligible Employee participating in the Plan shall be granted an option to
purchase (at the per
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share option price) up to a number of shares of the Company's Common Stock
determined by dividing the Employee's accumulated payroll deductions (not to
exceed an amount equal to ten percent (10%) of his or her Compensation during
the applicable offering period) by the lower of (i) eighty-five percent (85%) of
the fair market value of a share of the Company's Common Stock on the date of
the commencement of said offering period, or (ii) eighty-five percent (85%) of
the fair market value of a share of the Company's Common Stock on the date of
the expiration of the offering period, subject to the limitations set forth in
Sections 3(b) and 12 hereof, and subject to the following limitation: The
number of shares of the Company's Common Stock subject to any option granted to
an Employee pursuant to this Plan shall not exceed two hundred percent (200%) of
the number of shares of the Company's Common Stock determined by dividing an
amount equal to ten percent (10%) of the Employee's semi-annual Compensation as
of the date of the commencement of the applicable offering period by eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the date of the commencement of said offering period. Fair market value of a
share of the Company's Common Stock shall be determined as provided in Section
7(b) herein.
(b) The option price per share of such shares shall be the
lower of: (i) 85% of the fair market value of a share of the Common Stock of
the Company at the commencement of the six-month offering period; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company at the time
the option is exercised at the termination of the six-month offering period.
The fair market value of the Company's Common Stock on a given date shall be the
mean of the reported bid and asked prices for that date, or if the Common Stock
is listed on an exchange or quoted on the Nasdaq National Market, the closing
sale price on such exchange or quotation system for that date.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan
as provided in Section 10, his or her option for the purchase of shares will be
exercised automatically at the end of the offering period, and the maximum
number of full shares subject to option will be purchased for him or her at the
applicable option price with the accumulated payroll deductions in his or her
account. During his or her lifetime, a participant's option to purchase shares
hereunder is exercisable only by him or her.
9. DELIVERY; ROLL-OVER OF FRACTIONAL SHARE INTERESTS.
As promptly as practicable after the termination of each offering,
the Company shall arrange for the delivery to each participant, as appropriate,
of a certificate representing the number of full shares purchased upon exercise
of his or her option. No fractional shares shall be issued. Any cash remaining
to the credit of a participant's account under the Plan after a purchase by him
or her of shares at the termination of each offering period which is
insufficient to purchase a full share of Common Stock of the Company subject to
option shall remain in such participant's account and shall be applied to the
next succeeding offering period unless the participant has withdrawn as to
future offering periods, in which case such cash shall be returned to said
participant. Any cash attributable to shares in excess of the number of shares
subject to option to the participant (as determined in accordance with
Section 7(a) hereof) shall be returned to the participant.
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10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account under the Plan at any time
prior to the end of the offering period by giving written notice to the Company.
All of the participant's payroll deductions credited to his or her account will
be paid to him or her promptly after receipt of his or her notice of withdrawal
and his or her option for the current period will be automatically terminated,
and no further payroll deductions for the purchase of shares will be made during
the offering period.
(b) Upon termination of the participant's employment prior to
the end of the offering period for any reason, including retirement or death,
the payroll deductions credited to his or her account will be returned to him or
her or, in the case of his or her death, to the person or persons entitled
thereto under Section 14, and his or her option will be automatically
terminated.
(c) In the event an Employee fails to remain in the continuous
employ of the Company or one of its Designated Subsidiaries for at least twenty
(20) hours per week during the offering period in which the employee is a
participant, he or she will be deemed to have elected to withdraw from the Plan
and the payroll deductions credited to his or her account will be returned to
him or her and his or her option terminated.
(d) Except as provided in Section 3(a) with respect to Section
16 Persons, a participant's withdrawal from an offering will not have any effect
upon his or her eligibility to participate in a succeeding offering or in any
similar plan which may hereafter be adopted by the Company. However, a new
subscription agreement will have to be filed in such case.
11. NO INTEREST. No interest shall accrue on the payroll deductions
of a participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be fifteen million
(15,000,000) shares, subject to adjustment upon changes in capitalization of the
Company as provided in Section 18. The shares to be sold to participants under
the Plan may, at the election of the Company, be either treasury shares or
shares authorized but unissued. If at the termination of any offering period
the total number of shares which would otherwise be subject to options granted
pursuant to Section 7(a) hereof exceeds the number of shares then available
under the Plan (after deduction of all shares for which options have been
exercised or are then outstanding), the Company shall promptly notify the
participants, and shall, in its sole discretion (i) make a pro rata allocation
of the shares remaining available for option grant in as uniform a manner as
shall be practicable and as it shall determine to be equitable, (ii) terminate
the offering period without issuance of any shares or (iii) obtain shareholder
approval of an increase in the number of shares authorized under the Plan such
that all options could be
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exercised in full. The Company may delay determining which of (i), (ii) or
(iii) above it shall decide to effect, and may accordingly delay issuances of
any shares under the Plan, for such time as is necessary to attempt to obtain
shareholder approval of any increase in shares authorized under the Plan. The
Company shall promptly notify participants of its determination to effect (i),
(ii) or (iii) above upon making such decision. A participant may withdraw all
but not less than all the payroll deductions credited to his or her account
under the Plan at any time prior to such notification from the Company. In the
event the Company determines to effect (i) or (ii) above, it shall promptly upon
such determination return to each participant all payroll deductions not applied
towards the purchase of shares.
(b) The participant will have no interest or voting right in
shares covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will
be registered in the name of the participant or in the name of the participant
and the spouse of the participant.
13. ADMINISTRATION. The Plan shall be administered by a committee of
members of the Board of Directors, which committee shall be appointed by the
Board. The administration, interpretation or application of the Plan by such
committee shall be final, conclusive and binding upon all participants. Members
of the committee shall not be permitted to participate in the Plan.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may indicate in his or her subscription
agreement, or may file a written designation of beneficiary with respect to, a
person who is to receive any shares and cash, if any, from the participant's
account under the Plan in the event of such participant's death subsequent to
the end of the offering period but prior to delivery to him or her of such
shares and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan in the event of such participant's death prior to the end of the offering
period.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in
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Section 14 hereof) by the participant. Any such attempt at assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance with
Section 10.
16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees semi-annually within a reasonable period of time following the stock
purchase date, which statements will set forth the amounts of payroll
deductions, the per share purchase price, the number of shares purchased, the
amount of cash rolled over into the next offering period and the remaining cash
balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each option under the Plan which has not yet been
exercised and the number of shares of Common Stock which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split or the payment of a stock
dividend (but only on the Common Stock) or any other increase or decrease in the
number of 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 issue by the Company of shares of stock of any class, or
securities convertible into or exercisable for 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.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option under the Plan, in
the event that the Company effects one or more reorganizations,
recapitalizations, rights offerings or other increases or reductions of shares
of its outstanding Common Stock, and in the event of the Company being
consolidated with or merged into any other corporation.
19. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of any
participant under any option theretofore granted without his or her consent.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
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approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, or with Section 423 of the Internal Revenue Code of 1986, as amended
(or any successor statute or rule or other applicable law, rule or regulation),
such shareholder approval to be obtained in such a manner and to such a degree
as is required by the applicable law, rule or regulation.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect options already granted hereunder and
such options shall remain in full force and effect as if this Plan had not been
amended or terminated.
20. NOTICES. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof. All
notices or other communications to a participant by the Company shall be deemed
to have been duly given when sent by the Company by regular mail to the address
of the participant on the human resources records of the Company or when posted
on AppleLink or any substitute general electronic messaging and bulletin board
system utilized by the Company.
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or automated quotation system upon which the shares may
then be listed or quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
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EXHIBIT 10.A.49
APPLE COMPUTER, INC.
1997 EMPLOYEE STOCK OPTION PLAN
(AS AMENDED THROUGH 10/06/99)
1. PURPOSES OF THE PLAN. The purposes of this 1997 Employee Stock
Option Plan are to assist the Company in attracting and retaining high quality
personnel, to provide additional incentive to Employees who are not Directors or
Officers of the Company and to promote the success of the Company's business.
Options granted under the Plan shall be Nonstatutory Stock Options. SARs
granted under the Plan may be granted in connection with Options or
independently of Options.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
"ADMINISTRATOR" means the Board or any of its Committees, as shall
be administering the Plan from time to time pursuant to Section 4 of the Plan.
"AFFILIATED COMPANY" means a corporation which is not a Subsidiary
but with respect to which the Company owns, directly or indirectly through one
or more Subsidiaries, at least twenty percent of the total voting power, unless
the Administrator determines in its discretion that such corporation is not an
Affiliated Company.
"APPLICABLE LAWS" shall have the meaning set forth in Section 4 of
the Plan.
"BOARD" means the Board of Directors of the Company.
"CHANGE IN CONTROL" shall have the meaning set forth in Section 10
of the Plan.
"CHANGE IN CONTROL PRICE" shall have the meaning set forth in
Section 12 of the Plan.
"COMMON STOCK" means the common stock, no par value, of the
Company.
"COMPANY" means Apple Computer, Inc., a California corporation, or
its successor.
"COMMITTEE" means a Committee, if any, appointed by the Board in
accordance with Section 4(a) of the Plan.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
"CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of the employment relationship with the Company or
any Subsidiary or Affiliated Company. 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 or Affiliated
Company, as the case may be, under the terms of the respective Company policy
for such leave; however, vesting may be tolled while an employee is on an
approved leave of absence 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, its successor or its Affiliated
Companies;
<PAGE>
"DIRECTOR" means a member of the Board.
"EMPLOYEE" means any person, employed by and on the payroll of the
Company, any Subsidiary or any Affiliated Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FAIR MARKET VALUE" means 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 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.
"NONSTATUTORY STOCK OPTION" means an Option that is not intended
to be an incentive stock option within the meaning of Section 422 of the Code.
"OFFICER" means any individual designated by the Board as an
elected officer of the Company.
"OPTION" means an option granted pursuant to the Plan.
"OPTIONED STOCK" means the Common Stock subject to an Option or
SAR.
"OPTIONEE" means an Employee who receives an Option or SAR.
"PARENT" corporation shall have the meaning defined in Section
424(e) of the Code.
"PLAN" means this Apple Computer, Inc. 1997 Employee Stock Option
Plan.
"SAR" means a stock appreciation right granted pursuant to Section
9 below.
"SECTION 3 LIMIT" shall have the meaning set forth in Section 3 of
the Plan.
"SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
<PAGE>
"SIXTY-DAY PERIOD " shall have the meaning set forth in Section
12(f) of the Plan.
"SUBSIDIARY" corporation has the meaning defined in Section 424(f)
of the Code.
"TAX DATE" shall have the meaning set forth in Section 9 of the
Plan.
3. STOCK SUBJECT TO THE PLAN.
(a) LIMIT. Subject to the provisions of Section 12 of the
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan or for which SARs may be granted and exercised is 18,000,000
Shares (the "SECTION 3 LIMIT"). 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.
(b) RULES APPLICABLE TO THE CALCULATION OF THE SECTION 3 LIMIT.
In calculating the number of Shares available for issuance under the Plan, the
following rules shall apply:
(i) The Section 3 Limit shall be reduced by the number of
Shares of Optioned Stock subject to each outstanding Option or
freestanding SAR.
(ii) The Section 3 Limit shall be increased by the number of
Shares of Optioned Stock subject to the portion of an Option or SAR that
expires unexercised or is forfeited for any reason.
(iii) The Section 3 Limit shall be increased by the number of
Shares tendered to pay the exercise price of an Option or the number of
Shares of Optioned Stock withheld to satisfy an Optionee's tax liability
in connection with the exercise of an Option or SAR.
(iv) Option Stock subject to both an outstanding Option and SAR
granted in connection with the Option shall be counted only once in
calculating the Section 3 Limit.
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR. The Plan may be administered
by (i) the Board or (ii) a Committee designated by the Board, which Committee
shall be constituted in such a manner as to satisfy the applicable securities
laws, California corporate law and the Code (collectively, "APPLICABLE LAWS").
Once a Committee has been appointed pursuant to this
Section 4(a), such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies (however caused) and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and, in the case of the Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion: (i) to determine the Fair Market Value of the
Common Stock in accordance with the Plan; (ii) to determine, in accordance with
Section 8(a) of the Plan, the exercise price per Share of Options and SARs to be
granted; (iii) to determine the Employees to whom, and the time or times at
which, Options and SARs shall be granted and the number of Shares to be
represented by each Option or SAR (including, without limitation, whether or not
a corporation shall be excluded
<PAGE>
from the definition of Affiliated Company); (iv) to construe and interpret
the provisions of the Plan and any agreements or certificates issued under or
in connection with the Plan; (v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option or SAR granted
hereunder (including, but not limited to, any restriction or limitation, or
any vesting acceleration or waiver of forfeiture restrictions regarding any
Option or SAR or the Shares relating thereto, based in each case on such
factors as the Administrator shall determine, in its sole discretion); (vi)
to approve forms of agreement for use under the Plan; (vii) to prescribe,
amend and rescind rules and regulations relating to the Plan; (viii) to
modify or amend each Option or SAR or accelerate the exercise date of any
Option or SAR; (ix) to reduce the exercise price of any Option or SAR to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option or SAR shall have declined since the date the Option
or SAR was granted; (x) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option or SAR
previously granted by the Administrator; and (xi) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
(c) EFFECT OF DECISIONS BY THE ADMINISTRATOR. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY. The Administrator may grant Options and SARs only to
individuals who are Employees or who are consultants to the Company, or a
Subsidiary or Affiliated Company. In no event may an Option or SAR be granted
to any individual who, at the time of grant, is an Officer or Director. An
Employee who has been granted an Option or SAR may, if he or she is otherwise
eligible, be granted an additional Option or Options, SAR or SARs. Each Option
shall be evidenced by a written Option agreement, which shall be in such form
and contain such provisions as the Administrator shall from time to time deem
appropriate. Without limiting the foregoing, the Administrator may, at any
time, or from time to time, authorize the Company, with the consent of the
respective recipients, to issue new Options or Options in exchange for the
surrender and cancellation of any or all outstanding Options, other options,
SARs or other stock appreciation rights.
Neither the Plan nor any Option or SAR agreement shall confer upon any
Optionee any right with respect to continuation of employment by the Company (or
any Parent, Subsidiary or Affiliated Company), nor shall it interfere in any way
with the Optionee's right or the right of the Company (or any Parent, Subsidiary
or Affiliated Company) to terminate the Optionee's employment at any time or for
any reason.
If an Option or SAR is granted to an individual who is a consultant to
the Company or any Subsidiary or Affiliate, all references in the Plan to
"Employee" shall be deemed to include the term "consultant" and all references
in the Plan to "employment," "Continuous Status as an Employee" and
"termination of employment" shall be deemed to refer to the individual's
consultancy or status as a consultant.
6. TERM OF PLAN. The Plan shall become effective upon its adoption
by the Board. It shall continue in effect for a term of ten years unless sooner
terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
Option agreement.
8. EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the
Shares issuable pursuant to an Option shall be such price as is determined by
the
<PAGE>
Administrator, but shall in no event be less than 100% of the Fair Market
Value of Common Stock, determined as of the date of grant of the Option. In
the event that the Administrator shall reduce the exercise price, the
exercise price shall be no less than 100% of the Fair Market Value as of the
date of that reduction.
(b) METHOD OF PAYMENT. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator and may consist of (i) cash, (ii)
check, (iii) promissory note, (iv) 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 said Option shall be exercised, (v) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale or loan proceeds required to pay the
exercise price, or (vi) any combination of the foregoing methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. 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:
(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 an SAR is exercised, the related Option, to the extent
surrendered, shall no longer be exercisable.
(iii) An 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.
(iv) An 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 an SAR.
(ii) SARs shall be exercisable, in whole or in part, at such times as
the Administrator shall specify in the Optionee's SAR agreement.
<PAGE>
(c) FORM OF PAYMENT. The Company's obligation arising upon the
exercise of an 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 an SAR shall be valued at their
Fair Market Value as of the date of exercise.
10. METHOD OF EXERCISE.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any
Option or SAR granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator and as shall be permissible
under the terms of the Plan.
An Option or SAR shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option or SAR by the person entitled to exercise the Option or SAR
and full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by the
Administrator and permitted by the Option agreement, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, 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. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 12 of the Plan. An Option
or SAR may not be exercised with respect to a fraction of a Share.
(b) 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 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) DEATH OF OPTIONEE. In the event of the death of an
Optionee:
(i) Who is at the time of death an Employee and who shall have been in
Continuous Status as an Employee since the date of grant of the Option,
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 days after the termination of Continuous Status as
an Employee, 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 had accrued at the date of 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.
<PAGE>
(d) STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS.
When an Optionee incurs tax liability in connection with the exercise of an
Option or SAR, 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, 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.
11. NON-TRANSFERABILITY OF OPTIONS. Options and SARs 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 I of the
Employee Retirement Income Security Act, or the rules thereunder; PROVIDED,
HOWEVER, that the Administrator may grant Nonstatutory Stock Options that are
freely transferable. The designation of a beneficiary by an Optionee or holder
of an SAR does not constitute a transfer. An Option or an SAR may be exercised,
during the lifetime of the Optionee or SAR holder, only by the Optionee or SAR
holder or by a transferee permitted by this Section 11.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the number of Shares covered by each
outstanding Option and SAR, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options or SARs have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option or SAR, as well as the price per Share covered by each such
outstanding Option or SAR, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares 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 aggregate number of issued
Shares 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 Administrator, 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 subject to an Option or SAR.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, all outstanding Options and SARs will
terminate immediately prior to the consummation of such proposed action, unless
<PAGE>
otherwise provided by the Administrator. The Administrator may, in the
exercise of its sole discretion in such instances, declare that any Option or
SAR shall terminate as of a date fixed by the Administrator and give each
Optionee the right to exercise his or her Option or SAR as to all or any part
of the Optioned Stock or SAR, including Shares as to which the Option or SAR
would not otherwise be exercisable.
(c) SALE OF ASSETS OR MERGER. Subject to the provisions of
Section 12(d), in the event of a proposed sale of all or substantially all of
the assets of the Company, or the merger of the Company with or into another
corporation, each outstanding Option and SAR shall be assumed or an equivalent
option or stock appreciation right shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Administrator determines, in the exercise of its sole discretion and in lieu of
such assumption or substitution, that the Optionee shall have the right to
exercise the Option or SAR as to all of the Optioned Stock, including Shares as
to which the Option or SAR would not otherwise be exercisable. If the
Administrator makes an Option or SAR fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Company shall
notify the Optionee that the Option or SAR shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option or SAR
will terminate upon the expiration of such period. For purposes of this
paragraph, an Option granted under the Plan shall be deemed to be assumed if,
following the sale of assets or merger, the Option confers the right to
purchase, for each Share of Optioned Stock subject to the Option immediately
prior to the sale of assets or merger, the consideration (whether stock, cash or
other securities or property) received in the sale of assets or merger by
holders of Common Stock for each Share held on the effective date of the
transaction (and if such 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 sale of
assets or merger was not solely Common Stock of the successor corporation or its
parent, the Administrator may, with the consent of the successor corporation and
the participant, provide for the per share consideration to be received upon
exercise of the Option 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 sale of assets or merger.
(d) CHANGE IN CONTROL. In the event of a "Change in Control"
of the Company, as defined in Section 12(e), 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 and SARs 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 and SARs shall, unless
otherwise determined by the Administrator at or after grant, be
cashed-out. The amount at which such Options and SARs 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 or SAR. 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 or SAR by bequest or inheritance.
(e) "DEFINITION OF "CHANGE IN CONTROL". For purposes of this
Section 12, a "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
<PAGE>
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.
(f) CHANGE IN CONTROL PRICE. For purposes of this Section 12,
"Change in Control Price" shall be, 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.
<PAGE>
13. TIME OF GRANTING OPTIONS AND SARS. The date of grant of an Option
or SAR shall, for all purposes, be the date on which the Administrator makes the
determination granting such Option or SAR. Notice of the determination shall be
given to each Employee to whom an Option or SAR is so granted within a
reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend or terminate the Plan, as it may deem advisable.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment,
alteration, suspension or termination of the Plan shall not impair the rights of
any Optionee or SAR holder under any grant theretofore made without his or her
consent. Such Options and SARs shall remain in full force and effect as if this
Plan had not been amended or terminated.
15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an Option or SAR unless the exercise of such Option or SAR and
the issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or quotation system upon
which the Shares may then be listed or quoted, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option or SAR or the issuance
of Shares upon exercise of an Option or SAR, the Company may require the person
exercising such Option or SAR to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
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 non-issuance or sale of
such Shares as to which such requisite authority shall not have been obtained.
16. 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.
<PAGE>
Exhibit 10.A.51
APPLE COMPUTER, INC. 1998
EXECUTIVE OFFICER STOCK PLAN
(AS AMENDED THROUGH 10/06/99)
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 other key employees; 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 Right 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.
(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
1
<PAGE>
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; however, vesting may be
tolled while an employee is on an approved leave of absence 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
Nonstatutory 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 (k) 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, 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
2
<PAGE>
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) "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.
(z) "SAR" means a stock appreciation right granted pursuant to
Section 10 below.
(aa) "SECTION 16(b)" means Section 16(b) of the Exchange Act.
(bb) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 15 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 15 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
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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, 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.
(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
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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 17(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 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, Executive Officers and other key employees 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 and other key employees.
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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 or Chairman of 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 or SARs to purchase more than 17,000,000 Shares;
(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 21 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
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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; or
(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;
(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
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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:
(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 a 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
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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 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 Agreement in
order for the SAR to qualify for the maximum exemption provided by Rule 16b-3.
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 15 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
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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.
(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
Optionee in writing or electronically, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
Optionee shall be entitled to purchase, the price to be paid, and the time
within which the Optionee 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
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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.
(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 15 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.
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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
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
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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 succesor 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
15, a "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.
(f) CHANGE IN CONTROL PRICE. For purposes of this Section 15, "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
13
<PAGE>
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, SARs or
Stock Purchase Rights 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
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.
14
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF
APPLE COMPUTER, INC*
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
Apple Computer, Inc. Limited................................ Ireland
Apple Computer Limited...................................... Ireland
Apple Computer International................................ Ireland
Apple Japan, LLC............................................ Japan
Apple Computer B.V.......................................... Netherlands
Apple Computer (UK) Ltd..................................... United Kingdom
A C Real Properties, Inc.................................... United States
</TABLE>
- ------------------------
* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other
subsidiaries of Apple Computer, Inc. are omitted because, considered in the
aggregate, they would not constitute a significant subsidiary as of the end
of the year covered by this report.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Apple Computer, Inc.
We consent to incorporation by reference in the registration statements
(Nos. 2-70449, 2-77563, 2-85095, 33-00866, 33-23650, 33-31075, 33-40877,
33-47596, 33-57092, 33-57080, 33-53873, 33-53879, 33-53895, 33-60279, 33-60281,
333-07437, 333-23719, 333-23725, 333-60455 and 333-82603) on Forms S-8 and
registration statements (No. 33-23317, 33-29578, 33-62310, 333-10961 and
333-28191) on Forms S-3 and (Nos. 333-10961 and 333-28191) on Forms S-3/A of
Apple Computer, Inc. of our report dated October 11, 1999, relating to the
consolidated balance sheets of Apple Computer, Inc. and subsidiaries as of
September 25, 1999 and September 25, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended September 25, 1999, and the related
schedule, which report appears in the September 25, 1999 annual report on
Form 10-K of Apple Computer, Inc.
/s/ KPMG LLP
Mountain View, California
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-END> SEP-25-1999
<CASH> 1,326
<SECURITIES> 1,900
<RECEIVABLES> 749
<ALLOWANCES> 68
<INVENTORY> 20
<CURRENT-ASSETS> 4,285
<PP&E> 729
<DEPRECIATION> 411
<TOTAL-ASSETS> 5,161
<CURRENT-LIABILITIES> 1,549
<BONDS> 300
150
0
<COMMON> 1,349
<OTHER-SE> 106
<TOTAL-LIABILITY-AND-EQUITY> 5,161
<SALES> 6,134
<TOTAL-REVENUES> 6,134
<CGS> 4,438
<TOTAL-COSTS> 4,438
<OTHER-EXPENSES> 1,337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> 676
<INCOME-TAX> 75
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-BASIC> 4.20
<EPS-DILUTED> 3.61
</TABLE>
