-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cm2nigMu6EjMZlMEhXhztKee1idljzLOO3rcX6h2ZenKvRD9WGwululyQUCk/CGL ZMHCGD1EHG8OWDbxx2xhew== 0000320193-97-000014.txt : 19970812 0000320193-97-000014.hdr.sgml : 19970812 ACCESSION NUMBER: 0000320193-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970627 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLE COMPUTER INC CENTRAL INDEX KEY: 0000320193 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942404110 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10030 FILM NUMBER: 97655914 BUSINESS ADDRESS: STREET 1: 1 INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961010 MAIL ADDRESS: STREET 1: ONE INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission file number 0-10030 APPLE COMPUTER, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2404110 [State or other jurisdiction [I.R.S. Employer of incorporation or organization] Identification No.] 1 Infinite Loop Cupertino California 95014 [Address of principal executive offices] [Zip Code] Registrant's telephone number, including area code: (408) 996-1010 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 [ ] 127,329,661 shares of Common Stock Issued and Outstanding as of August 1, 1997 PART I. FINANCIAL INFORMATION Item 1. Financial Statements APPLE COMPUTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in millions, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED June 27, June 28, June 27, June 28, 1997 1996 1997 1996 Net sales $1,737 $2,179 $5,467 $7,512 Costs and expenses: Cost of sales 1,389 1,776 4,419 7,055 Research and development 101 155 391 458 Selling, general and administrative 307 364 1,027 1,209 In-process research and development - - 375 - Restructuring costs - - 155 207 1,797 2,295 6,367 8,929 Operating loss (60) (116) (900) (1,417) Interest and other income, net 4 65 16 82 Loss before benefit from income taxes (56) (51) (884) (1,335) Benefit from income taxes - (19) - (494) Net loss $ (56) $ (32) $ (884) $ (841) Loss per common share $(0.44) $(0.26) $ (7.04) $ (6.81) Cash dividends paid per common share $ -- $ -- $ -- $ .12 Common shares used in the calculations of loss per share (in thousands) 126,500 123,735 125,547 123,463
1 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In millions)
June 27, 1997 September 27, (Unaudited) 1996 Current assets: Cash and cash equivalents $ 1,018 $ 1,552 Short-term investments 212 193 Accounts receivable, net of allowance for doubtfulaccounts of $100 ($91 at September 27, 1996) 1,207 1,496 Inventories: Purchased parts 175 213 Work in process 23 43 Finished goods 336 406 534 662 Deferred tax assets 307 342 Other current assets 215 270 Total current assets 3,493 4,515 Property, plant, and equipment: Land and buildings 460 480 Machinery and equipment 525 544 Office furniture and equipment 121 136 Leasehold improvements 180 188 1,286 1,348 Accumulated depreciation and amortization (746) (750) Net property, plant, and equipment 540 598 Other assets 308 251 $ 4,341 $ 5,364
2 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions)
June 27, 1997 September 27, (Unaudited) 1996 Current liabilities: Notes payable to banks $ 127 $ 186 Accounts payable 812 791 Accrued compensation and employee benefits 115 120 Accrued marketing and distribution 269 257 Accrued warranty and related 139 181 Accrued restructuring costs 167 117 Other current liabilities 281 351 Total current liabilities 1,910 2,003 Long-term debt 951 949 Deferred tax liabilities 284 354 Shareholders' equity: Common stock, no par value; 320,000,000 shares authorized; 126,559,143 shares issued and outstanding at June 27, 1997 (124,496,972 shares at September 27, 1996) 476 439 Retained earnings 750 1,634 Other (30) (15) Total shareholders' equity 1,196 2,058 $ 4,341 $ 5,364
3 APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)
NINE MONTHS ENDED June 27, 1997 June 28, 1996 Cash and cash equivalents, beginning of the period $1,552 $ 756 Operating: Net loss (884) (841) Adjustments to reconcile net loss to cash generated by (used for) operating activities: Depreciation and amortization 77 110 Net book value of property, plant, and equipment retirements 40 43 In-process research and development 375 --- Changes in assets and liabilities, net of effect of the acquisition of NeXT: Accounts receivable 297 639 Inventories 128 714 Deferred tax assets 35 (150) Other current assets 55 (26) Accounts payable 20 (403) Accrued restructuring costs 50 159 Other current liabilities (133) 119 Deferred tax liabilities (70) (252) Cash generated by (used for) operating activities (10) 112 Investing: Purchases of short-term investments (781) (244) Proceeds from sale of short-term investments 762 440 Purchases of property, plant and equipment (42) (55) Cash used to acquire NeXT (384) --- Other (32) (33) Cash generated by (used for) investing activities (477) 108 Financing: Decrease in notes payable to banks (59) (274) Increase in long-term borrowings -- 646 Increases in common stock, net of related tax benefits and effect of the acquisition of NeXT 12 25 Cash dividends -- (14) Cash generated by (used for) financing activities (47) 383 Total cash generated (used) (534) 603 Cash and cash equivalents, end of the period $1,018 $ 1,359
4 APPLE COMPUTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Interim information is unaudited; however, in the opinion of the Company's management, all adjustments necessary for a fair statement of interim results have been included. All adjustments are of a normal recurring nature unless specified in a separate note included in these Notes to Consolidated Financial Statements. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These financial statements and notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended September 27, 1996, included in its Annual Report on Form 10-K for the year ended September 27, 1996 (the "1996 Form 10-K"). 2. In the second quarter of 1996, the Company announced and began to implement a restructuring plan aimed at reducing costs and restoring profitability to the Company's operations. The restructuring plan was necessitated by decreased demand for Company products and the Company's adoption of a new strategic direction. These actions resulted in a net charge of $179 million after subsequent adjustments recorded in the fourth quarter of 1996. In the second quarter of 1997, the Company announced and began to implement supplemental restructuring actions to meet the foregoing objectives of the plan. The Company recognized a $155 million charge in the second quarter for the estimated incremental costs of those actions. The restructuring actions consist of terminating approximately 3,100 full-time employees, as adjusted, approximately 2,400 of whom have been terminated from the second quarter of 1996 through June 27, 1997, excluding employees who were hired by SCI Systems, Inc. and MCI Systemhouse, the purchasers of the Company's Fountain, Colorado manufacturing facility and the Napa, California data center facility, respectively; canceling or vacating certain facility leases as a result of those employee terminations; writing down certain land, buildings and equipment to be sold as a result of downsizing operations and outsourcing various operational functions; and canceling contracts for projects and technologies that are not central to the Company's core business strategy. The restructuring actions under the plan have resulted in cash expenditures of $135 million and noncash asset write-downs of $32 million from the second quarter of 1996 through June 27, 1997. During the third quarter of 1997, the Company made adjustments to the categories and timing of expected restructure spending based on revised estimates. The Company expects that the remaining $167 million accrued balance at June 27, 1997 will result in cash expenditures of approximately $100 million over the next twelve months and $12 million thereafter. The Company expects that most of the contemplated restructuring actions related to the plan will be completed within the next six months and will be financed through current working capital and, if necessary, continued short-term borrowings. 5 The following table depicts the restructuring accrual activity from September 27, 1996 to June 27, 1997: (In millions)
Category Net Balance at Additions Adjustments Balance at September 27, During During June 27, 1996 Q2'97 Spending Q3'97 1997 Payments to employees involuntarily terminated (C) $33 $109 $65 $(10) $67 Payments on canceled or vacated facility leases (C) 15 16 6 (5) 20 Write-down of operating assets to be sold (N) 47 20 25 13 55 Payments on canceled contracts (C) 22 10 9 2 25 $117 $155 $105 $0 $167
C: Cash; N: Noncash 3. 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 that enables customers to easily and quickly implement business applications on the Internet/World Wide Web, intranets and enterprise-wide client/server networks. The total purchase price was $425 million, as adjusted, 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 1.8 million options to purchase the Company's common stock to the NeXT optionholders valued at approximately $16 million based on the difference between the exercise price of the options and the market value of the Company's stock on the date the options were granted; cash payments of $56 million to the NeXT debtholders; and cash payments of $9 million for closing and related costs, as adjusted. The acquisition was accounted for as a purchase and, accordingly, the operating results pertaining to NeXT subsequent to the date of acquisition have been included in the Company's consolidated operating results. The purchase price, including the fair value of the net tangible liabilities assumed, was $427 million, as adjusted, of which $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 2 to 7 years. The purchase price allocation is based on preliminary estimates of the fair value of the acquired net assets and in-process research and development and may be subject to adjustment as management completes its evaluation of the technology acquired and additional information becomes available during 1997. The following unaudited proforma summary combines the consolidated results of operations of the Company and NeXT as if the acquisition had occurred at the beginning of the nine months ended June 27, 1997 and June 28, 1996, after giving effect to certain adjustments, including in-process research and development, amortization of intangible assets, lower interest income as a result of lower cash investment balances, and lower interest expense as a resultof the settlement of the NeXT debt, and related income tax effects. The proforma summary does not necessarily reflect the results of operations as they would have been had the Company and NeXT been combined as of the beginning of such periods. 6 Proforma Results of Operations (dollars in millions) Nine Months Ended June 27,1997 June 28, 1996 [S] [C] [C] Net sales $ 5,484 $ 7,544 Net loss $ (900) $(1,249) Loss per common share $ (7.14) $ (9.99) 4. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). Under the provisions of FAS 128, primary earnings per share will be replaced with basic earnings per share, and fully diluted earnings per share will be replaced with diluted earnings per share for companies with potentially dilutive securities such as outstanding options and convertible debt. FAS 128 is effective for annual and interim periods ending after December 15, 1997 and will require restatement of all comparative per share amounts. The basic loss per share will be no different than the primary loss per share as presented in the accompanying consolidated statements of operations as neither consider outstanding options or convertible debt. If and when the Company becomes profitable, it will be required to present both basic and diluted earnings per share. Basic earnings per share, which does not consider potentially dilutive securities, will be greater than the replaced primary earnings per share which did consider those securities. Diluted earnings per share will not differ materially from the replaced fully diluted earnings per share. 5. In July of 1997, the Board of Directors adopted a resolution 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 by and assumed from NeXT Software, Inc.) for options having an exercise price of $13.25 and a new three year vesting period beginning in July of 1997. 6. The Internal Revenue Service ("IRS") has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although a substantial number of the issues for those years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. 7. On August 6, 1997, the Company and Microsoft Corporation ("Microsoft") announced patent cross licensing and technology agreements between the two companies. In addition, Microsoft will purchase 150,000 shares of Apple Series 'A' Non-voting 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 per share per annum, payable in preference to any dividend on the Company's common stock, plus, if the dividends per share paid on the common stock are greater than the dividends pershare paid on the Preferred Stock on an as 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 converted basis, shall equal the dividends per share paid on the common stock. 8. In August 1997, the Board of Directors adopted a resolution to reserve 5 million shares for issuance under a new stock option plan for non-officer employees of the Company. 9. The information set forth in Item 1 of Part II hereof is hereby incorporated by reference. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal calendar. (Tabular information: Dollars in millions, except per share amounts)
Results of Operations Third Quarter Nine Months Ended June 27, June 28, 1997 1996 Change 1997 1996 Change Net sales $ 1,737 $ 2,179 (20%) $ 5,467 $ 7,512 (27%) Gross margin $ 348 $ 403 (14%) $ 1,048 $ 457 129% Percentage of net sales 20.0% 18.5% 19.2% 6.1% Research and development $ 101 $ 155 (35%) $ 391 $ 458 (15%) Percentage of net sales 5.8% 7.1% 7.2% 6.1% Selling, general and administrative $ 307 $ 364 (16%) $ 1,027 $ 1,209 (15%) Percentage of net sales 17.7% 16.7% 18.8% 16.1% In-process research and development $ --- $ --- $ 375 $ --- NM Percentage of net sales --- --- 6.9% --- Restructuring costs $ --- $ --- $ 155 $ 207 NM Percentage of net sales --- --- 2.8% 2.8% Interest and other income, net $ 4 $ 65 (94%) $ 16 $ 82 (80%) Loss before benefit from income taxes $ (56) $ (51) (10%) $ (884) $(1,335) 34% Benefit from income taxes --- (19) NM (494) NM Net loss $ (56) $ (32) (75%) $ (884) $ (841) (5%) Loss per share $(.44) $ (.26) (69%) $(7.04) $ (6.81) (3%) Third Second Quarter Quarter 1997 1997 Change Net sales $ 1,737 $ 1,601 8% Gross margin $ 348 $ 303 15% Percentage of net sales 20.0% 18.9% Research and development $ 101 $ 141 (28%) Percentage of net sales 5.8% 8.8% Selling, general and administrative $ 307 $ 348 (12%) Percentage of net sales 17.7% 21.7% In-process research and development $ --- $ 375 NM Percentage of net sales --- 23.4% Restructuring costs $ --- $ 155 NM Percentage of net sales --- 9.7% Interest and other income, net $ 4 $ 8 (50%) Net loss $ (56) $ (708) 92% Loss per share $ (.44) $ (5.64) 92%
NM: Not meaningful. 8 Overview During the third quarter of 1997 the Company experienced modest increases in net sales, units shipped and estimated share of the personal computer market compared to the prior quarter. Despite these modest increases, results of all three quarters of 1997 showed significant declines in net sales, units shipped and the estimated share of the personal computer market compared to the same quarters of the prior year. In the third quarter the Company continued to effect supplemental restructuring actions it announced and began in the second quarter. The restructuring actions effected through the end of the third quarter have resulted in a decrease in operating expenses in that quarter compared to the prior quarter and the same quarter of the prior year. Although the Company believes that planned restructuring actions to be effected through the end of the fourth quarter will result in a decrease in operating expenses in that quarter compared to the prior quarter and the same quarter of the prior year, the Company does not believe it will return to profitability in the fourth quarter. Net Sales Q3 97 compared with Q3 96 Net sales decreased 20% in the third quarter of 1997 compared with the same quarter of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 17% and 27%, respectively, in the third quarter of 1997, compared with the same period of 1996, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, future prospects and the viability of the Macintosh platform, and to competitive pressures in the marketplace. The average aggregate revenue per Macintosh unit increased 8% in the third quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward the Company's newer and higher priced PowerBook(Registered Trademark) products, partially offset by continued pricing actions, including rebates, across most product lines in an effort to stimulate demand. The average aggregate revenue per peripheral product decreased 25% in the third quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward certain lower priced products and continued pricing actions, including rebates, across most product lines in an effort to stimulate demand. The average aggregate revenue per Macintosh unit and per peripheral unit will remain under significant downward pressure due to a variety of factors, including industrywide pricing pressures, increased competition, and the need to stimulate demand for the Company's products. International net sales represented 53% of total net sales in the third quarter of 1997 compared with 52% in the same period of 1996. International net sales declined 19% in the third quarter of 1997 compared with the same period of 1996. Net sales in the European markets and in Japan decreased during the third quarter of 1997 compared with the same period of 1996, as a result of decreases in Macintosh and peripheral unit sales and the average aggregate revenue per Macintosh unit, partially offset by an increase in the average aggregate revenue per peripheral unit in Japan. Domestic net sales declined 22% in the third quarter of 1997, over the comparable period of 1996, due to decreases in unit sales of Macintosh computers and peripheral products and in the average aggregate revenue per peripheral unit, partially offset by an increase in the average aggregate revenue per Macintosh unit. During the third quarter of 1997 compared with the comparable period of 1996, the Company's estimated share of the worldwide and U.S. personal computer markets declined to 3.7% from 5.1%, as adjusted, and to 4.6% from 6.5%, as adjusted, respectively, based upon market information provided by industry sources. In addition, the Company believes that its licensees' share of the worldwide personal computer market during such period increased to approximately 0.4% from approximately 0.1%. 9 Nine Months Ended June 27, 1997 compared with Nine Months Ended June 28, 1996 Net sales decreased 27% in the first nine months of 1997 compared with the same period of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 27% and 33%, respectively, in the first nine months of 1997, compared with the same period of 1996, as a result of a decline in worldwide demand for most product families, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, future prospects and the viability of the Macintosh platform, and to competitive pressures in the marketplace. In addition,Macintosh unit sales were negatively affected primarily during the first six months of 1997 as a result of the Company's inability to fulfill all purchase orders of Power Macintosh products due to the unavailability of sufficient quantities of certain components and product transition constraints. The average aggregate revenue per Macintosh and peripheral unit increased slightly in the first nine months of 1997 compared with the same period of 1996, primarily due to a shift in mix toward the Company's newer and higher priced PowerBook products, substantially offset by continued pricing actions, including rebates, across most product lines in an effort to stimulate demand. International net sales represented 53% of total net sales in the first nine months of 1997 and of 1996. International net sales declined 28% in the first nine months of 1997 compared with the same period of 1996. Net sales in European markets and Japan decreased during the first nine months of 1997 compared with the same period in 1996, as a result of decreases in Macintosh and peripheral unit sales and the average aggregate revenue per Macintosh unit, partially offset by an increase in the average aggregate revenue per peripheral unit. Domestic net sales declined 27% in the first nine months of 1997, over the comparable period of 1996, due to decreases in unit sales of Macintosh computers and peripheral products and the average aggregate revenue per peripheral unit, slightly offset by an increase in the average aggregate revenue per Macintosh unit. Q3 97 compared with Q2 97 Net sales increased 8% in the third quarter of 1997 compared with the second quarter of 1997. Total Macintosh computer unit sales increased 16% in the third quarter of 1997 compared with the prior quarter primarily as a result of the Company satisfying pent-up demand for certain of its "Flagship" line of higher-end Power Macintosh products by resolving certain product transition and component constraint issues which existed in the second quarter, partially offset by an easing of pent-up demand for new PowerBook products which were introduced in the second quarter. Unit sales of peripheral products increased slightly in the third quarter of 1997 compared with the second quarter of 1997. The average aggregate revenue per Macintosh and peripheral unit decreased slightly in the third quarter of 1997 compared with the second quarter of 1997, primarily due to continued pricing actions, including rebates, across most product lines in an effort to stimulate demand and a shift in product mix away from the Company's higher priced PowerBook products, substantially offset by a shift in product mix toward the Company's newer and higher priced "Flagship" line of Power Macintosh products. International net sales represented 53% of total net sales in the third quarter of 1997, compared with 49% in the second quarter of 1997. International net sales increased 18% in the third quarter compared with the second quarter of 1997, primarily as a result of an increase in net sales in Japan due to increases in Macintosh unit sales and the average aggregate revenue per Macintosh unit, slightly offset by decreases in peripheral unit sales and the average aggregate revenue per peripheral unit. The net sales increase in Japan was slightly offset by a decrease in the European markets. 10 Domestic net sales declined slightly in the third quarter of 1997 compared with the prior quarter, due to a decrease in the average aggregate revenue per Macintosh unit, substantially offset by increases in Macintosh and peripheral unit sales and the average aggregate revenue per peripheral unit. During the third quarter of 1997 compared with the second quarter of 1997, the Company's estimated share of the worldwide and U.S. personal computer markets increased to 3.7% from 3.2%, as adjusted, and to 4.6% from 4.2%, as adjusted, respectively, based upon market information provided by industry sources. In addition, the Company believes that its licensees' share of the worldwide personal computer market during such period increased to approximately 0.4% from approximately 0.3%. In general, the Company's resellers purchase products on an as- needed basis. Resellers frequently change delivery schedules and order rates depending on changing market conditions. Unfilled orders ("backlog") can be, and often are, canceled at will. The Company attempts to fill orders on the requested delivery schedules. The Company's backlog decreased to approximately $293 million at August 1, 1997, from approximately $409 million at May 2, 1997, primarily due to satisfying pent-up demand for the Company's "Flagship" line of Power Macintosh products as discussed above. In the Company's experience, the actual amount of product backlog at any particular time is not necessarily a meaningful indication of its future business prospects. In particular, backlog often increases in anticipation of or immediately following introduction of new products 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, as well as other factors affecting the Company's backlog, backlog should not be considered a reliable indicator of the Company's ability to achieve any particular level of revenue or financial performance. The Company believes that net sales will be below the level of the prior year's comparable periods through at least the first quarter of 1998, if not longer. Gross Margin Gross margin represents the difference between the Company's net sales and its cost of goods sold. The amount of revenue generated by the sale of products is influenced principally by the price set by the Company for its products relative to competitive products. The cost of goods sold is based primarily on the cost of components and, to a lesser extent, direct labor costs. The type and cost of components included in particular configurations of the Company's products (such as memory and disk drives) are often directly related to the need to market products in configurations competitive with other manufacturers. Competition in the personal computer industry is intense and, in the short term, frequent changes in pricing and product configuration are often necessary in order to remain competitive. Accordingly, gross margin as a percentage of net sales can be significantly influenced in the short term by actions undertaken by the Company in response to industrywide competitive pressures. Gross margin increased from 18.5% to 20.0% of sales during the third quarter of 1997 compared to the same period of 1996, primarily as a result of an increase in the gross margin percentage on the sale of the Company's PowerBook products and a shift in mix towards these products which yield a high gross margin per unit, as well as an increase in the gross margin percentage on the sale of the Company's "Value" line of Power Macintosh products (formerly generally referred to as entry level and Performa(Registered Trademark) products). Gross margin increased from 6.1% to 19.2% of sales during the first nine months of 1997 compared to the same period of 1996, primarily as a result of a $616 million charge in the second quarter of 1996 11 that related principally to the write-down of certain inventory, as well as to the cost to cancel excess component orders necessitated by significantly lower than expected demand for many of the Company's products, primarily its "Value" line of Power Macintosh products. Also, the Company separately incurred a $60 million charge in the second quarter of 1996 to reflect the estimated cost to correct certain quality problems in certain of the "Value" line of Power Macintosh products, as well as PowerBook products. In addition, gross margins in the second quarter of 1996, and to a lesser degree the first quarter of that year, were adversely affected by aggressive pricing actions in Japan in response to extreme competitive actions by other companies, as well as pricing actions in the U.S. and Europe across all product lines in order to stimulate demand. Gross margin increased from 18.9% to 20.0% of sales during the third quarter of 1997 compared with the second quarter of 1997, primarily as a result of an increase in the gross margin percentage on the sale of the Company's "Flagship" line of Power Macintosh products and a shift in mix towards these products which yield a high gross margin per unit, as well as an increase in the gross margin percentage on the sale of the Company's "Value" line of Power Macintosh products, offset in part by a reduced mix in PowerBook products. The gross margin levels in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, and in the first nine months of 1997 compared with the corresponding period of 1996, were also adversely affected by a stronger U.S. dollar relative to certain foreign currencies. This negative impact was offset by hedging gains. The Company's operating strategy and pricing take into account changes in exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in foreign currency exchange rates. There can be no assurance that the Company will be able to sustain the gross margin levels achieved in the third quarter and in the first nine months of 1997. Gross margins will remain under significant downward pressure due to a variety of factors, including continued industrywide pricing pressures around the world, increased competition, and compressed product life cycles. In response to those 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. 12
Research and Development Third Quarter Nine Months Ended June 27, June 28, 1997 1996 Change 1997 1996 Change Research and development $ 101 $ 155 (35%) $ 391 $ 458 (15%) Percentage of net sales 5.8% 7.1% 7.2% 6.1% Third Second Quarter Quarter 1997 1997 Change Research and development $ 101 $ 141 (28%) Percentage of net sales 5.8% 8.8%
Research and development expenditures decreased in amount in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, and during the first nine months of 1997 compared with the same period of 1996. The decreases are primarily due to certain restructuring actions initiated by the Company late in the second quarter of 1997. Research and development expenditures also decreased as a percentage of sales in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, primarily due to the impact of such restructuring actions, partially offset by a decrease in the level of net sales. The increase as a percentage of net sales for the first nine months of 1997 compared with the same period of 1996 resulted from a decrease in the level of net sales, partially offset by the impact of such restructuring actions. The Company believes that continued investments in research and development are critical to its future growth and competitive position in the marketplace and are directly related to continued, timely development of new and enhanced products that are central to the Company's core business strategy. The Company believes its research and development expenditures will decrease slightly in the fourth quarter of 1997 compared with the third quarter of 1997 as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan. For additional information regarding the restructuring plan, refer to Note 2 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 13
In-Process Research and Development Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 In-process research and development $ --- $ --- $ 375 $ --- NM Percentage of net sales --- --- 6.9% --- Third Second Quarter Quarter 1997 1997 Change In-process research and development $ --- $ 375 NM Percentage of net sales --- 23.4%
NM: Not meaningful. As a result of the NeXT acquisition, the Company took a substantial charge for in-process research and development during the second quarter of 1997. For additional information regarding the acquisition of NeXT, refer to Note 3 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 14
Selling, General and Administrative Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Selling, general and administrative $ 307 $ 364 (16%) $ 1,027 $ 1,209 (15%) Percentage of net sales 17.7% 16.7% 18.8% 16.1% Third Second Quarter Quarter 1997 1997 Change Selling, general and administrative $ 307 $ 348 (12%) Percentage of net sales 17.7% 21.7%
Selling, general and administrative expenditures decreased in amount in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, and during the first nine months of 1997 compared with the same period of 1996. The decreases are primarily due to certain restructuring actions initiated by the Company late in the second quarter of 1997. Selling, general and administrative expenditures also decreased as a percentage of sales in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, primarily due to the impact of such restructuring actions partially offset by a decrease in the level of net sales. The increase as a percentage of net sales for the first nine months 1997 compared with the same period of 1996 resulted from a decrease in the level of net sales, partially offset by the impact of such restructuring actions. The Company believes its selling, general and administrative expenditures will continue to decrease in the fourth quarter of 1997 compared with the third quarter of 1997, as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan, slightly offset by the amortization expense on the intangible assets the Company recognized as a result of the acquisition of NeXT. For additional information regarding the Company's restructuring actions and the acquisition of NeXT, refer to Notes 2 and 3, respectively, of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 15
Restructuring Costs Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Restructuring costs $ --- $ --- $ 155 $ 207 NM Percentage of net sales --- --- 2.8% 2.8% Third Second Quarter Quarter 1997 1997 Change Restructuring costs $ --- $ 155 NM Percentage of net sales --- 9.7%
NM: Not meaningful. For information regarding the Company's restructuring actions initiated in the second quarters of 1997 and 1996, refer to Note 2 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference.
Interest and Other Income, Net Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Interest and other income, net $ 4 $ 65 (94%) $ 16 $ 82 (80%) Third Second Quarter Quarter 1997 1997 Change Interest and other income, net $ 4 $ 8 (50%)
Interest and other income, net, decreased in the third quarter of 1997 and for the first nine months of 1997 compared with the same periods of 1996, primarily due to $69 million of realized gains on sales of available-for-sale securities realized in the third quarter of 1996. Interest and other income, net, decreased in the third quarter of 1997 compared with the second quarter of 1997 as a result of lower average cash balances, due to cash used to acquire NeXT, to fund the restructuring actions begun in the second quarter of 1997 and to fund operations. The Company expects interest income to be flat in the fourth quarter of 1997 compared with the immediate prior quarter. 16 The Company's senior and subordinated long-term debt ratings remain unchanged from the second quarter. In the second quarter of 1997, the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency and to B3 and Caa, respectively, by Moody's Investor Services. These actions could increase the Company's cost of funds in future periods.
Income Tax Benefit Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Benefit from income taxes -- $ (19) NM -- $ (494) NM Effective tax rate -- 37% -- 37% Third Second Quarter Quarter 1997 1997 Change Benefit from income taxes -- -- NM Effective tax rate -- --
NM: Not meaningful. At June 27, 1997, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $591 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. In the first nine months of 1997, a valuation allowance of $174 million was recorded against the deferred tax asset for the benefits of tax losses which may not be realized. Realization of approximately $85 million of the asset is dependent on the Company's ability to generate approximately $245 million of future U.S. taxable income. Management believes that it is more likely than not that the asset will be realized based on forecasted U.S. income. However, there can be no assurance that the Company will meet its expectations of future U.S. income. As a result, the amount of the deferred tax assets considered realizable could be reduced in the near and long term if estimates of future taxable U.S. income are reduced. Such an occurrence could materially adversely affect the Company's financial results. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. 17 Factors That May Affect Future Results and Financial Condition Overview The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns, and its ability to effect a change in marketplace perception of the Company's prospects, including the viability of the Macintosh platform. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and a favorable financial condition. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, without limitation, continued competitive pressures in the marketplace and the effect of any reaction by the Company to such competitive pressures, including pricing actions by the Company; the availability of key components on terms acceptable to the Company; the Company's ability to supply products in certain categories; the Company's ability to supply products free of latent defects or other faults; the Company's ability to make timely delivery to the marketplace of technological innovations, including its ability to continue to make timely delivery of planned enhancements to the current Macintosh operating system ("Mac(Registered Trademark) OS") and to make timely delivery of a new and substantially backward-compatible OS; the Company's ability to successfully integrate NeXT technologies, processes and employees with those at Apple; the Company's ability to successfully implement its strategic direction and restructuring actions, including reducing its expenditures; the Company's ability to attract, motivate and retain employees, including a new Chief Executive Officer; the effects of significant adverse publicity; and the availability of third-party software for particular applications. The Company expects that it will not return to profitability in the fourth quarter of 1997. Restructuring of Operations and New Business Model During 1996, the Company began to implement certain restructuring actions aimed at reducing its cost structure, improving its competitiveness, and restoring sustained profitability. In the second quarter of 1997, the Company announced and began to implement supplemental restructuring actions, including significant headcount reductions, to meet the foregoing objectives. There are several risks inherent in the Company's efforts to transition to a new cost structure. These include the risk that the Company will not be able to reduce expenditures quickly enough to restore sustained profitability and the risk that cost-cutting initiatives will impair the Company's ability to innovate and remain competitive in the computer industry. As part of its restructuring effort, the Company has been implementing a new business model. Implementation of the new business model involves several risks, including the risk that by simplifying and modifying its product line the Company will increase its dependence on fewer products, potentially reduce overall sales, and increase its reliance on unproven products and technology. Another risk of the new business model is that by increasing the proportion of the Company's products to be manufactured under outsourcing arrangements, the Company could lose control of the quality or quantity of the products manufactured, or lose the flexibility to make timely changes in production schedules in order to respond to changing market conditions. In addition, the new business model could adversely affect employee morale, thereby damaging the Company's ability to retain and motivate employees. Also, because the new business model contemplates that the Company will rely to a greater extent on collaboration and licensing arrangements with third parties, the Company will have less direct control over certain of its research and development efforts, and its ability to create innovative new products may be reduced. In addition, the new business model now includes the acquisition of NeXT. There can be no assurance that the technologies acquired from NeXT will be successfully exploited, or that key NeXT employees and processes will be retained and successfully integrated with those at Apple. Also, the new business model now includes the "spin-out" of the Company's Newton(Registered Trademark) unit into a 18 separate but wholly-owned subsidiary named Newton, Inc. There can be no assurance that Newton, Inc. will be successful as a separate entity. Finally, even if the new business model is successfully implemented, there can be no assurance that it will effectively resolve the various issues currently facing the Company. Although the Company believes that the actions it is taking and will take under its new business model, including its restructuring plan, its acquisition of NeXT, and its "spin-out" of Newton, Inc., should help restore marketplace confidence in the Company, there can be no assurance that such actions will enable the Company to achieve its objectives of reducing its cost structure, improving its competitiveness, and restoring sustained profitability. The Company's future operating results and financial condition could be adversely affected should it encounter difficulty in effectively managing the transition to the new business model and cost structure. For information regarding the Company's restructuring actions and the acquisition of NeXT, refer to Notes 2 and 3, respectively, of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 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 frequently introduces new products and product enhancements, including the recent introductions of certain PowerBook and Power Macintosh products, and the introduction of Mac OS 8 in July of 1997. 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. In addition, although the number of new product introductions may decrease under the Company's new business model, the risks and uncertainties associated with new product introductions may increase as the Company refocuses its product offerings on key growth segments and to the extent new product introductions are in markets that are new to the Company. The rate of product shipments immediately following introduction of a new product is not necessarily an indication of the future rate of shipments for that product, which depends on many factors, some of which are not under the control of the Company. These factors may include initial large purchases by a small segment of the user population that tends to purchase new technology prior to its acceptance by the majority of users ("early adopters"); purchases in satisfaction of pent-up demand by users who anticipated new technology and, as a result, deferred purchases of other products; and overordering by dealers who anticipate shortages due to the aforementioned factors. These factors may be offset by others, such as the deferral of purchases by many users until new technology is accepted as "proven" and for which commonly used software products are available; and the reduction of orders by dealers once they believe they can obtain sufficient supply of products previously in backlog. Backlog is often volatile after new product introductions due to the aforementioned demand factors, often increasing coincident with introduction, and then decreasing once dealers and customers believe they can obtain sufficient supply of the new products. The measurement of demand for newly introduced products is further complicated by the availability of different product configurations, which may include various types of built-in peripherals and software. Configurations may also require certain localization (such as language) for various markets and, as a result, demand in different geographic areas may be a function of the availability of third-party software in those localized versions. For example, the availability of European-language versions of software products 19 manufactured by U.S. producers may lag behind the availability of U.S. versions by a quarter or more. This may result in lower initial demand for the Company's new products outside the United States, even though localized versions of the Company's products may be available. The increasing integration of functions and complexity of operations of the Company's products also increase the risk that latent defects or other faults could be discovered by customers or end-users after volumes of products have been produced or shipped. If such defects were significant, the Company could incur material recall and replacement costs under product warranties. The Company has announced plans for two operating systems. The Company plans to continue to introduce major upgrades to the current Mac OS and later introduce a new OS (code named "Rhapsody") which is expected to offer advanced functionality based on Apple and NeXT software technologies. However, the NeXT software technologies that the Company plans to use in the development of Rhapsody were not originally designed to be compatible with the Mac OS. As a result, there can be no assurance that the development of Rhapsody will be successful. In addition, Rhapsody may not be fully backward-compatible with all existing applications, which could result in a loss of existing customers. Finally, it is uncertain whether Rhapsody or the planned enhancements to the current Mac OS will gain developer support and market acceptance. Inability to successfully develop and make timely delivery of a substantially backward-compatible Rhapsody or of planned enhancements to the current Mac OS, or to gain developer support and market acceptance for those operating systems, may have an adverse impact on the Company's operating results and financial condition. Competition The personal computer industry is highly competitive and is characterized by aggressive pricing practices, downward pressure on gross margins, frequent introduction of new products, short product life cycles, continual improvement in product price/performance characteristics, price sensitivity on the part of consumers, and a large number of competitors. The Company's results of operations and financial condition have been, and in the future may continue to be, adversely affected by industrywide pricing pressures and downward pressures on gross margins. The industry has also been characterized by rapid technological advances in software functionality and hardware performance and features based on existing or emerging industry standards. Many of the Company's competitors have greater financial, marketing, manufacturing, and technological resources, broader product lines and larger installed customer bases than those of the Company. 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 primary maker of hardware that uses the Mac OS. The Mac OS has a minority market share in the personal computer market, which is dominated by makers of computers that run the MS-DOS and Microsoft Windows operating systems. The Company believes that the Mac OS, with its perceived advantages over MS-DOS and Windows, has been a driving force behind sales of the Company's personal computer hardware for the past several years. Recent innovations in the Windows platform, including those included in Windows 95 and Windows NT, or those expected to be included in Windows 98, have added features to the Windows platform which make the differences between the Mac OS and Microsoft's Windows operating systems less significant. 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 may be affected by its ability to maintain and increase the installed base for the Macintosh platform. 20 As part of its efforts to increase the installed base for the Macintosh platform, the Company announced the licensing of the Mac OS to other personal computer vendors in 1995 and 1996. Several vendors currently sell products that utilize the Macintosh operating system, many of which have licensing arrangements with the Company. As a result of licensing its operating system, the Company competes with other companies producing Mac OS- based computer systems. The benefits to the Company from licensing the Mac OS to third parties may be more than offset by the disadvantages of competing with them. The Company is currently in discussions concerning the nature of such licensing arrangements going forward, including whether or not to extend such arrangements. There can be no assurance that the Company's Mac OS licensing strategy will prove successful or will financially benefit the Company or, if the Company decides to alter its strategy, that it will be able to modify its existing licensing arrangements to pursue such a strategy. As a supplemental means of addressing the competition from MS- DOS and Windows, the Company has devoted substantial resources toward developing personal computer products capable of running application software designed for the MS-DOS or Windows operating systems ("Cross-Platform Products"). These products include the RISC-based PowerPC(TradeMark) microprocessor and either include the Pentium or 586-class microprocessor or can accommodate an add-on card containing a Pentium or 586-class microprocessor. These products enable users to run concurrently applications that require the Mac OS, MS-DOS, Windows 3.1, or Windows 95 operating systems. The Company has supplied customers who purchase Cross-Platform Products with Windows operating system software under licensing agreements with certain Microsoft distributors. The Company's ability to market Cross-Platform Products could be adversely affected if such Microsoft distributors were unwilling to continue to supply the Company with Windows operating system software on the terms of such licensing agreements. The Company, International Business Machines Corporation ("IBM") and Motorola, Inc. ("Motorola") have agreed upon and announced the availability of specifications for a PowerPC microprocessor-based hardware reference platform. These specifications define a "unified" personal computer architecture that gives access to both the Power Macintosh platform and the PC environment and utilizes standard industry components. The Company's future operating results and financial condition may be affected by its ability to continue to implement this agreement and to manage the risk associated with the transition to this new hardware reference platform. Microsoft Corporation ("Microsoft") recently announced that it would no longer adapt its Windows NT operating system software, which is being used more by corporations, to run on the PowerPC microprocessor. This decision may adversely affect revenues derived from this new hardware reference platform. Several competitors of the Company have either targeted or announced their intention to target certain of the Company's key market segments, including education and publishing. Many of these companies have greater financial, marketing, manufacturing, and technological resources than the Company. On August 6, 1997, the Company and Microsoft announced patent cross licensing and technology agreements between the two companies. Under these agreements, the companies provided patent cross licenses to each other. In addition, Microsoft will make future versions of its Microsoft Office and Internet Explorer products for the Mac OS, and 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. The Company also announced that Microsoft will purchase 150,000 shares of Apple Series 'A' Non-voting Convertible Preferred Stock for $150 million. While the Company believes that its relationship with Microsoft will 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. In addition, the Microsoft relationship may have an adverse effect on, but not limited to, the Company's relationship with other partners. There can be no assurance that the benefits to the Company of the Microsoft relationship will not be offset by the disadvantages. 21 Support from Third-Party Software Developers Decisions by customers to purchase the Company's personal computers, as opposed to MS-DOS or Windows-based systems, are often based on the availability of third-party software for particular applications. The Company believes that 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 MS-DOS and 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 recent financial losses and declining demand for the Company's product have caused 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 MS-DOS and Windows market. Microsoft is an important developer of application software for the Company's products. Although the Company has entered into a relationship with Microsoft, which includes Microsoft's agreement to develop and ship future versions of its Microsoft Office and Internet Explorer products and certain other Microsoft tools for the Mac OS, such relationship is for a limited term and does not cover many areas in which theCompany competes with Microsoft. Accordingly, Microsoft's interest in producingapplication software for the Company's products not covered by the relationship or upon expiration of the relationship may be influenced by Microsoft's perception of its interests as the vendor of the Windows operating system. Global Market Risks A large portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in the value of the United States dollar versus the local currency in which the products are sold. When the U.S. dollar strengthens against other currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens, the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, 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 consolidated sales and gross margins (as expressed in U.S. dollars). To mitigate the short-term impact of fluctuating currency exchange rates on the Company's non-U.S. dollar-based sales, product procurement, and operating expenses, the Company regularly hedges its non-U.S. dollar-based exposures. Specifically, the Company enters into foreign exchange forward and option contracts to hedge its assets, liabilities and firmly committed transactions. Currently, hedges of firmly committed transactions do not extend beyond one year. The Company also purchases foreign exchange option contracts to hedge certain other probable but not firmly committed transactions. Hedges of probable but not firmly committed transactions currently do not extend beyond one year. To reduce the costs associated with these ongoing foreign exchange hedging programs, the Company also regularly sells foreign exchange option contracts and enters into certain other foreign exchange transactions. All foreign exchange forward and option contracts not accounted for as hedges, including all transactions intended to reduce the costs associated with the Company's foreign exchange hedging programs, are carried at fair value and are adjusted on each balance sheet date for changes in exchange rates. While the Company is exposed with respect to fluctuations in the interest rates of many of the world's leading industrialized countries, the Company's interest income and expense is most 22 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 interest paid on its notes payable to banks and long-term debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest rate swap, collar, and floor transactions. Certain of these transactions are intended to better match the Company's floating-rate interest income on its cash, cash equivalents, and short-term investments with the fixed-rate interest expense on its long-term debt. The Company also enters into these transactions in order to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. These instruments may extend the Company's cash investment horizon up to a maximum duration of three years. 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, there can be no assurance that the aforementioned programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and financial position. The Company generally does not engage in leveraged hedging. The Company's current financial condition is expected to increase the costs of its hedging transactions, as well as affect the nature of the hedging transactions into which the Company's counterparties are willing to enter. Inventory and Supply The Company provides reserves against any inventories of products that have become obsolete or are in excess of anticipated demand, accrues for any cancellation fees of orders for inventories that have been canceled, and accrues for the estimated costs to correct any product quality problems. Although the Company believes its inventory and related reserves are adequate, no assurance can be given that 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 well in advance of product shipments. Because the Company's markets are volatile and subject to rapid technology and price changes, there is a risk that 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. Certain of the Company's products are manufactured in whole or in part by third-party manufacturers, either pursuant to design specifications of the Company or otherwise. As part of its restructuring actions, the Company has sold its Fountain, Colorado, manufacturing facility to SCI Systems, Inc. ("SCI") and entered into a related manufacturing outsourcing agreement with SCI; sold its Singapore printed circuit board manufacturing assets to NatSteel Electronics Pte., Ltd. who will then supply main logic boards to the Company under a manufacturing outsourcing agreement; entered into an agreement with Ryder Integrated Logistics, Inc. to outsource the Company's domestic operations transportation and logistics management, and has entered into other similar 23 agreements to outsource the Company's European operations transportation and logistics management. As a result of the foregoing actions, the proportion of the Company's products produced and distributed under outsourcing arrangements will continue to increase. While outsourcing arrangements may lower the fixed cost of operations, they will also reduce the direct control the Company has over production. 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. Furthermore, any efforts by the Company to manage its inventory under outsourcing arrangements could subject the Company to liquidated damages or cancellation of the arrangement. 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 raw materials, processes and components essential to the Company's business are generally available from multiple sources, other processes and key components (including microprocessors and application specific integrated circuits ("ASICs") ) are currently obtained by the Company from single sources. If the supply of a key single-sourced material, process or component were to be delayed or curtailed, 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 to identify and obtain sufficient quantities from an alternate source. The Company believes that the availability from suppliers to the personal computer industry of microprocessors and ASICs presents the most significant potential for constraining the Company's ability to manufacture products. Some advanced microprocessors are currently in the early stages of ramp-up for production and thus have limited availability. 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 common components instead of components 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 suppliers of the PowerPC RISC microprocessor for certain of the Company's products, to supply to the Company in adequate numbers microprocessors that produce superior price/performance results compared with those supplied to the Company's competitors by Intel Corporation, the developer and producer of the microprocessors used by most personal computers using the MS-DOS and Windows operating systems. In addition, the desire of IBM and Motorola to continue producing these microprocessors may be influenced by Microsoft's decision not to adapt its Windows NT operating system software to run on the PowerPC microprocessor. IBM produces personal computers based on Intel microprocessors as well as workstations based on the PowerPC microprocessor, and is also the developer of OS/2, a competing operating system to the Company's Mac OS. Accordingly, IBM's interest in supplying the Company with microprocessors for the Company's products may be influenced by IBM's perception of its interests as a competing manufacturer of personal computers and as a competing operating system vendor. The Company's current financial condition and uncertainties related to recent events could effect the terms on which suppliers are willing to supply the Company with their products. There can be no assurance that the Company's current suppliers will continue to supply the Company on terms acceptable to the Company or that the Company will be able to obtain comparable products from alternate sources on such terms. The Company's future operating results and financial condition could be adversely affected if the Company is unable 24 to continue to obtain key components on terms substantially similar to those currently available to the Company. Marketing and Distribution A number of uncertainties may affect the marketing and distribution of the Company's products. Currently, the Company's primary means of distribution is through third-party computer resellers. Such resellers include consumer channels such as mass-merchandise stores, consumer electronics outlets, and computer superstores. The Company's business and financial results could be adversely affected if the financial condition of these resellers weakened or if resellers within consumer channels were to decide not to continue to distribute the Company's products. Uncertainty over demand for the Company's products may cause resellers to reduce their ordering and marketing of the Company's products. Under the Company's arrangements with its resellers, resellers have the option to reduce or eliminate unfilled orders previously placed, in most instances without financial penalty. Resellers also have the option to return products to the Company without penalty within certain limits, beyond which they may be assessed fees. The Company has experienced a reduction in ordering from historical levels by resellers due to uncertainty concerning the Company's condition and prospects. Change in Senior Management On July 9, 1997, the Company announced that Dr. Gilbert F. Amelio had resigned his positions as Chairman of the Board and Chief Executive Officer and that the Company was initiating a search for a new Chief Executive Officer. While the Company intends to name a new Chief Executive Officer as soon as practicable, there can be no assurance that the change in senior management and related uncertainties will not adversely affect the Company's operating results and financial condition during the period until a new Chief Executive Officer is hired and afterward. Changes to Board of Directors The Company announced on August 6, 1997 significant changes to its Board of Directors, replacing all but two former directors. The continuing directors are Gareth Chang and Edgar Woolard. The new directors are William Campbell, President and CEO of Intuit Corp.; Lawrence Ellison, Chairman and CEO of Oracle Corp.; Steve Jobs, Chairman and CEO of Pixar Animation Studios; and Jerome York, former CFO of IBM and Chrysler Corporation. Other Factors 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 which include, 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. It is unclear what effect such regulation will have on the Company's future operating results and financial condition. The Company recently evaluated replacing its existing transaction systems (which include order management, product procurement, distribution, and finance) with a single integrated system, but has decided to continue 25 to use its existing transaction systems for the foreseeable future. The Company's future operating results and financial condition could be adversely affected if the Company is unable to effectively manage its existing transaction systems. 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. Liquidity and Capital Resources The Company's financial position with respect to cash, cash equivalents, and short-term investments, net of notes payable to banks, decreased to $1,103 million at June 27, 1997, from $1,559 million at September 27, 1996. The Company's financial position with respect to cash, cash equivalents, and short-term investments decreased to $1,230 million at June 27, 1997, from $1,745 million at September 27, 1996. The Company's cash and cash equivalent balance at June 27, 1997 and September 27, 1996, includes $176 million and $177 million, respectively, pledged as collateral to support letters of credit primarily associated with the Company's purchase commitments under the terms of the sale of the Company's Fountain, Colorado, manufacturing facility to SCI. Cash used by operations during the first nine months of 1997 totaled $10 million, primarily due to the Company's net loss, adjusted for non-cash expenses such as in-process research and development, and a decrease in certain current liabilities, as well as restructuring costs, partially offset by a decrease in accounts receivable and inventories. The Company expects to use cash to fund operations over at least the next quarter. Cash used to acquire NeXT totaled $384 million in the second quarter of 1997. The Company expects no additional cash expenditures related to the NeXT acquisition. Cash used for the purchase of property, plant, and equipment totaled $42 million in the first nine months of 1997, and consisted primarily of increases in manufacturing machinery and equipment. The Company expects that the level of capital expenditures for the remainder of 1997 will be comparable to the same period of 1996. The Company's debt ratings remain unchanged from the second quarter of 1997, when the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency and to B3 and Caa, respectively, by Moody's Investor Services. The Company was also placed on negative credit watch by Moody's Investor Services. These actions may increase the Company's cost of funds in future periods. In addition, the Company may be required to pledge additional collateral with respect to certain of its borrowings and letters of credit and to agree to more stringent covenants than in the past. The Company believes that its balances of cash and cash equivalents and short-term investments, including proceeds from the August 1997 sale of Apple Series A Non-voting Convertible Preferred Stock to Microsoft, and continued short-term borrowings from banks, will be sufficient to meet its cash requirements over the next 12 months. In addition to funding an expected net loss for at least the next quarter, expected cash requirements over the next twelve months include an estimated $100 million to effect actions under the restructuring plan, most of which will be effected over the next six months. Also, the notes payable to banks all become due prior to September 30, 1997. No assurance can be given that short-term borrowings from banks can be continued, or that any additional required financing could be obtained should the restructuring plan take longer to implement than anticipated or be unsuccessful. If the Company is unable to obtain such financing, its liquidity, results of operations, and financial condition would be materially adversely affected. The Internal Revenue Service ("IRS") has proposed federal income tax deficiencies for the years 26 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although a substantial number of the issues for these years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to page 45 of the Company's 1996 Annual Report on Form 10-K under the subheading "Litigation" for a discussion of certain consumer class actions relating to "repetitive stress injury" claims. In July 1997, the Court in the case styled Abraham and Evelyn Kostick Trust v. Peter Crisp et. al. granted in part and denied in part the Company's motion to strike most of the substantive allegations of the second amended complaint. The Court had previously sustained the demurrer to plaintiffs' class claims but overruled the demurrer to the shareholder derivative claims. The Company intends to make additional motions to dispose of the case on the pleadings, including filing a demurrer to any amended complaint that plaintiffs may elect to serve. On July 8, 1997, the Court in the case styled LS Men's Clothing Defined Benefit Pension Fund v. Michael Spindler et. al. sustained the Company's demurrer dismissing the amended complaint with leave to amend. On July 28, 1997, plaintiff served a second amended complaint. In March 1997, the Court in the case styled In re Computer Monitor Litigation preliminarily approved a proposed settlement to which the Company and all but three of the other defendants in the action would be parties and provisionally certified a nationwide settlement class with respect thereto. A hearing regarding final approval of the proposed settlement was held on June 30, 1997 and the Court's decision is pending. If approved, the Company does not anticipate its obligations pursuant to the proposed settlement will have a material adverse effect on its financial condition as reported in the accompanying financial statements. In June 1997, the Federal Trade Commission and the Company agreed to a consent decree regarding the Company's past processor upgrade practices. The terms of this decree would include an upgrade offer to customers and an agreement to some terms about future activities by the Company. The consent decree is pending court approval. The Company has various other claims, lawsuits, disputes with third parties, investigations and pending actions involving allegations of false or misleading advertising, product defects, discrimination, infringement of intellectual property rights, and breach of contract and other matters against the Company and its subsidiaries incident to the operation of its business. The liability, if any, associated with these matters was not determinable as of the date of this filing. The Company believes the resolution of the matters cited above will not have a material adverse effect on its financial condition as reported in the accompanying financial statements. However, depending on the amount and timing of any unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially affected in a particular period. 28 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Note Description 10.A.26-1 Amendment to Employment Agreement, dated May 1, 1997, between Apple Computer, Inc. and Gilbert F Amelio 10.A.45 Retention Agreement dated May 1, 1997, between Apple Computer, Inc. and Fred D. Anderson 27 Financial Data Schedule. (b) Reports on Form 8-K Current reports on Form 8-K, dated April 10, 1997 and April 25, 1997, respectively, were filed by Registrant with the Securities and Exchange Commission to report under Item 5 thereof the press releases issued to the public on March 14, 1997 regarding the Registrant's restructuring plan and expected second quarter revenue and the press release issued to the public on April 16, 1997 regarding the Registrant's second quarter results. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLE COMPUTER, INC. (Registrant) By: /s/Fred D. Anderson Fred D. Anderson Executive Vice President and Chief Financial Officer August 11, 1997 30 INDEX TO EXHIBITS Exhibit Index Number Note Description Page 10.A.26-1 Amendment to Employment Agreement, dated May 1,1997, between Apple Computer, Inc. and Gilbert F. Amelio. 32 10.A.45 Retention Agreement dated May 1, 1997, between Apple Computer, Inc. and Fred D. Anderson. 34 27 Financial Data Schedule. 47 EX-10 2 EXHIBIT 10.A.26.1 Apple Computer, Inc. 1 Infinite Loop Cupertino, CA 95014 May 1, 1997 Dr. Gilbert F. Amelio Chairman and Chief Executive Officer Apple Computer, Inc. 1 Infinite Loop Cupertino, CA 95014 Amendment to Employment Agreement Dear Dr. Amelio: Reference is made to the Employment Agreement, dated February 2, 1996 (the "Employment Agreement"), between Apple Computer, Inc. (the "Company") and you. This will confirm our agreement that the grant and award of performance shares pursuant to Section 4(b) of the Employment Agreement for fiscal years of the Company after the 1996 fiscal year shall be governed by the terms and provisions of the Apple Computer, Inc. Senior Officers Restricted Performance Share Plan (the "Performance Share Plan"). In the event of any conflict between the terms of the Performance Share Plan and the Employment Agreement with respect to awards of performance shares for fiscal years afterthe 1996 fiscal year, the terms of the Performance Share Plan shall govern. In addition, this letter will confirm our agreement that the definition of "Good Reason" in the Employment Agreement is hereby amended by adding at the end thereof the following: "For purposes of clause (i), a meaningful and detrimental alteration shall exist if, on or after the Change in Control Date, without limitation, any of the following occurs: (A) at any time you do not hold the position of the senior most executive officer of the Company (or the surviving entity resulting from the merger or consolidation (through one or more related transactions) of the Company with another entity (the "Surviving Entity")); (B) at any time you do not hold the position of the senior most executive officer of any entity that beneficially owns a majority of the voting stock of the Company (or the Surviving Entity) or that has the power to elect a majority of the Board (or the board of directors of the Surviving Entity) (the "Controlling Entity"); (C) at any time you do not report directly to the Board (or the board of directors of the Surviving Entity) and to the board of directors of any Controlling Entity; (D) at any time you do not have regular direct access to the Board (or the board of directors of the Surviving Entity) and to the board of directors of any Controlling Entity or (E) any similar adverse change on or after the Change in Control Date in your position, titles, responsibilities or reporting responsibilities." 32 This letter constitutes an amendment to your Employment Agreement within the meaning of Section 10(a) of the Employment Agreement. Please indicate your agreement by signing the attached copy of this letter and returning to the undersigned on behalf of the Company. APPLE COMPUTER, INC. By: John B. Douglass III Title: Senior Vice President, General Counsel and Secretary ACCEPTED AND AGREED /s/Dr. Gilber F. Amelio Dr. Gilbert F. Amelio May 19, 1997 Date 33 EX-10 3 EXHIBIT 10.A.45 Apple Computer, Inc. 1 Infinite Loop Cupertino, CA 95014 May 1, 1997 Fred Anderson 1 Infinite Loop Cupertino, CA 95014 Retention Agreement Dear Fred: Apple Computer, Inc., a California corporation (the "Company"), considers it essential to the best interests of its stockholders to take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the "Board") recognizes that the uncertainty and questions which might arise among management in the context of a change in control of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined, therefore, that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from any possible change in control of the Company. In order to induce you to remain in the employ of the Company, the Company has determined to enter into this letter agreement (this "Agreement") which addresses the terms and conditions of your employment in the event of a change in control of the Company. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 8 of this Agreement. 1. Term of Employment Under the Agreement. The term of your employment under this Agreement shall commence on the Change in Control Date and shall continue until the second anniversary of the Change in Control Date (the "Term"). 2. Employment During the Term. During the Term, the following terms and conditions shall apply to your employment with the Company: (a) Titles; Reporting and Duties. Your position, titles, nature and status of responsibilities and reporting obligations shall be no less favorable to you than those that you enjoyed immediately prior to the Change in Control Date. (b) Salary and Bonus. Your base salary and annual bonus opportunity may not be reduced, and your base salary shall be periodically reviewed and increased in the manner commensurate with increases awarded to other similarly situated executives of the Company. (c) Incentive Compensation. You shall be eligible to participate in each long-term incentive plan or arrangement established by the Company for its executive employees, in accordance with the terms and provisions of such plan or arrangement and at a level consistent with the Company's practices applicable to you prior to the Change in Control Date. 34 (d) Benefits. You shall be eligible to participate in all pension, welfare and fringe benefit plans and arrangements that the Company provides to its executive employees in accordance with the terms of such plans and arrangements, which shall be no less favorable to you, in the aggregate, than the terms and provisions available to other executive employees of the Company. (e) Location. You will continue to be employed at the business location at which you were employed prior to the Change in Control Date and the amount of time that you are required to travel for business purposes will not be increased in any significant respect from the amount of business travel required of you prior to the Change in Control Date. 3. Involuntary Termination During the Term. (a) Severance Payment. In the event of your Involuntary Termination during the Term, the Company shall pay you within 5 days of the date of such Involuntary Termination the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect at the time of the Notice of Termination, plus a cash payment (calculated on the basis of your Reference Salary) for all unused vacation time which you may have accrued as of the Date of Termination. The Company shall also pay you within 5 days of the Date of Termination a pro rata portion of the annual bonus for the year in which your Involuntary Termination occurs, calculated on the basis of your target bonus for that year and on the assumption that all performance targets have been or will be achieved. In addition, the Company shall pay you in a cash lump sum, within 8 days following the date of your execution of the release described in the last sentence of this Section 3(a) (or on the Date of Termination, if later), an amount (the "Severance Payment") equal to the sum of (i) three times your Reference Salary and (ii) three times your Reference Bonus. The Severance Payment shall be in lieu of any other severance payments which you are entitled to receive under any other severance pay plan or arrangement sponsored by the Company and its subsidiaries. Your right to the Severance Payment shall be conditioned upon your execution of a release in favor of the Company in substantially the form of the release required for the receipt of severance payments under the Severance Plan (as in effect on the date of this Agreement) which is not revoked by you within the seven-day revocation period specified therein. (b) Benefit Payment. In the event of your Involuntary Termination during the Term, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period (as hereinafter defined) in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination on the same terms and conditions in effect for you and your dependents immediately prior to such Involuntary Termination. For purposes of the previous sentence, "Benefit Continuation Period" means the period beginning on the Date of Termination and ending on the earlier to occur of (i) the second anniversary of the Date of Termination and (ii) the date that you and your dependents are eligible and elect coverage under the plans of a subsequent employer which provide substantially equivalent or greater benefits to you and your dependents. (c) Date and Notice of Termination. Any termination of your employment by the Company or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "Notice of Termination"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company and its subsidiaries (the "Date of Termination") shall be determined as follows: (i) if your employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (ii) if your employment is terminated by the Company in an Involuntary Termination, five (5) days after the date the Notice of Termination is received by you and (iii) if your employment is terminated by the Company for Cause, the later of the 35 date specified in the Notice of Termination or ten (10) days following the date such notice is received by you. If the basis for your Involuntary Termination is your resignation for Good Reason, the Date of Termination shall be ten (10) days after the date your Notice of Termination is received by the Company. The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the applicable notice, which shall be no earlier than ten (10) days after the date such notice is received by the Company. (d) No Mitigation or Offset. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer or by pension benefits paid by the Company or another employer after the Date of Termination or otherwise except as specifically provided in clause (ii) of the last sentence of Section 3(b). 4. Additional Payment. (a) Gross-Up Payment. Notwithstanding anything herein to the contrary, if it is determined that any Payment would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as an "Excise Tax"), then you shall be entitled to an additional payment (a "Gross-Up Payment") in an amount that will place you in the same after-tax economic position that you would have enjoyed if the Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment shall be determined by the Accounting Firm in accordance with the formula {(E x (1 - M)/(1 - T)) -E} (or such other formula as the Accounting Firm deems appropriate which is intended to achieve the same result), where E equals the Payments which are determined to be "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code; M equals the sum of the highest marginal rates (to be expressed in up to three decimal places. For example, a combined federal, state and local marginal rate of 56% would be expressed as .560) for Taxes applicable to you at the time of the Payment; and T equals M plus the rate of Excise Tax applicable to the Payment. No Gross-Up Payments shall be payable hereunder if the Accounting Firm determines that the Payments are not subject to an Excise Tax. (b) Determination of Gross-Up Payment. Subject to the provisions of Section 4(c), all determinations required under this Section 4, including whether a Gross-Up Payment is required, the amount of the Payments constituting excess parachute payments, and the amount of the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to you and the Company within fifteen days of the Change in Control Date, your Date of Termination or any other date reasonably requested by you or the Company on which a determination under this Section 4 is necessaryor advisable. The Company shall pay to you the initial Gross-Up Payment within 5 days of the receipt by you and the Company of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you, the Company shall cause the Accounting Firm to provide you with an opinion that the Accounting Firm has substantial authority under the Code and Regulations not to report an Excise Tax on your federal income tax return. Any determination by the Accounting Firm shall be binding upon you and the Company. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is ultimately determined to be owing by you with respect to any Payment (hereinafter an "Underpayment"), the Company, after exhausting its 36 remedies under Section 4(c) below, shall promptly pay to you an additional Gross-Up Payment in respect of the Underpayment. (c) Procedures. You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notice shall be given as soon as practicable after you know of such claim and shall apprise the Company of the nature of the claim and the date on which the claim is requested to be paid. You agree not to pay the claim until the expiration of the thirty-day period following the date on which you notify the Company, or such shorter period ending on the date the Taxes with respect to such claim are due (the "Notice Period"). If the Company notifies you in writing prior to the expiration of the Notice Period that it desires to contest the claim, you shall: (i) give the Company any information reasonably requested by the Company relating to the claim; (ii) take such action in connection with the claim as the Company may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably acceptable to you; (iii) cooperatewith the Company in good faith in contesting the claim; and (iv) permit the Company to participate in any proceedings relating to the claim. You shall permit the Company to control all proceedings related to the claim and, at its option, permit the Company to pursue or forgo any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim. If requested by the Company, you agree either to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine; provided, however, that, if the Company directs you to pay such claim and pursue a refund, the Company shall advance the amount of such payment to you on an after-tax and interest-free basis (the "Advance"). The Company's control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and you shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or other taxing authority. If the Company does not notify you in writing prior to the end of the Notice Period of its desire to contest the claim, the Company shall pay to you an additional Gross-Up Payment in respect of the excess parachute payments that are the subject of the claim, and you agree to pay the amount of the Excise Tax that is the subject of the claim to the applicable taxing authority in accordance with applicable law. (d) Repayments. If, after receipt by you of an Advance, you become entitled to a refund with respect to the claim to which such Advance relates, you shall pay the Company the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by you of an Advance, a determination is made that you shall not be entitled to any refund with respect to the claim and the Company does not promptly notify you of its intent to contest the denial of refund, then the amount of the Advance shall not be required to be repaid by you and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to you. (e) Further Assurances. The Company shall indemnify you and hold you harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by you with respect to the exercise by the Company of any of its rights under this Section 4, including, without limitation, any Losses related to the Company's decision to contest a claim or any imputed income to you resulting from any Advance or action taken on your behalf by the Company hereunder. The Company shall pay all legal fees and expenses incurred under this Section 4, and shall promptly reimburse you for the reasonable expenses incurred by you in connection with any actions taken by the Company or required to be taken by you hereunder. The Company shall also pay all of the fees and expenses of the Accounting Firm, including, without limitation, the fees and expenses related to the opinion referred to in Section 4(b). (f) Combined Payments. Anything in this Section 4 to the contrary notwithstanding, the Company shall have no 37 obligation to pay you a required Gross-Up Payment under this Section 4 if the aggregate amount of all Combined Payments has, at the time such payment is due, exceeded the Limit. If the amount of a Gross-Up Payment to you under this Section 4 would result in the Combined Payments exceeding the Limit, the Company shall pay you only the portion, if any, of the Gross-Up Payment which can be paid to you without causing the aggregate amount of all Combined Payments to exceed the Limit. In the event that you are entitled to a Gross-Up Payment under this Section 4 and other employees or former employees of the Company are also entitled to gross-up payments under the corresponding provisions of the applicable Combined Arrangements and the aggregate amount of all such payments would cause the Limit on Combined Payments to be exceeded, the Company shall allocate the amount of the reduction necessary to comply with the Limit among all such payments in the proportion that the amount of each such gross-up payment or Gross-Up Payment bears to the aggregate amount of all such payments. Nothingin this Section 4(f) shall require you to repay to the Company any amount that was previously paid to you under this Section 4. 5. Other Provisions. (a) Vesting and Exercise. All Equity Awards granted to you under the Equity Plans shall vest and become exercisable in the event of your Involuntary Termination on or following the Change in Control Date. If you are employed by the Company on the date of the Equity Plan Change in Control, your Equity Awards will vest and become exercisable as of such date. (b) Effect of 30-Day Alternative. In accordance with the terms of the Equity Plans, upon an Equity Plan Change in Control, Equity Awards which are options or stock appreciation rights are "cashed out," unless the Administrator in its discretion determines not to do so. In the event that the Administrator elects not to cash out such Equity Awards, the Administrator has the discretion in the context of a merger or sale of all or substantially all of the assets of the Company either (i) to cause such Equity Awards to be assumed or an equivalent option or stock appreciation right granted by the successor corporation to the Company or a parent or subsidiary of such successor corporation, or (ii) to provide that your Equity Awards will remain outstanding for a thirty-day period beginning on the date that you are so notified of such action by the Administrator and that such Equity Awards will expire to the extent not exercised at the end of such thirty-day period (the "30-Day Alternative"). If the Administrator determines to utilize the 30-Day Alternative, the Company shall pay you with respect to each such Equity Award the excess, if any (the "Additional Amount"), of the Change in Control Price you would have received had the Equity Award been cashed out on the date of the Equity Plan Change in Control over the value of the consideration actually received by you in settlement of such awards (determined as of the date such consideration is received by you). Further, in the event of your Involuntary Termination on or after the Change in Control Date but on or prior to the date of the Equity Plan Change in Control, the Company shall pay you the Additional Amount as if your employment had continued through the date of the Equity Plan Change in Control. In either case, the payment of the Additional Amount shall be made within 5 days following the determination by the Administrator of the Change in Control Price. (c) General. Anything in this Agreement to the contrary notwithstanding, in no event shall the vesting and exercisability provisions applicable to you under the terms of your Equity Awards be less favorable to you than the terms and provisions of such awards in effect on the date hereof. 38 6. Legal Fees and Expenses. The Company shall pay or reimburse you on an after-tax basis for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action or proceeding (i) arising out of your termination of employment during the Term, (ii) contesting, disputing or enforcing any right, benefits or obligations under this Agreement or (iii) arising out of or challenging the validity, advisability or enforceability of this Agreement or any provision thereof; provided, however, that the amount of the payments and reimbursements under this Section 6 shall not exceed $2 million. 7. Successors; Binding Agreement. (a) Assumption by Successor. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to yourdevisee, legatee or other designee or, if there is no such designee, to your estate. 8. Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "Accounting Firm" shall mean KPMG Peat Marwick LLP or, if such firm is unable or unwilling to perform such calculations, such other national accounting firm as shall be designated by agreement between you and the Company. To the extent reasonably practicable, one such accounting firm shall be designated to perform the calculations in respect of the Combined Arrangements. "Administrator" shall mean the "Administrator" as defined in the applicable Equity Plan or, if no such term is defined in the Equity Plan, the Board. 39 "Cause" shall mean a termination of your employment during the Term which is a result of (i) your felony conviction, (ii) your willful disclosure of material trade secrets or other material confidential information related to the business of the Company and its subsidiaries or (iii) your willful and continued failure substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure resulting from a resignation by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, and which performance is not substantially corrected by you within 10 days of receipt of such demand. For purposes of the previous sentence, no act or failure to act on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4ths) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (i), (ii) or (iii) of the first sentence of this section and specifying the particulars thereof in detail. "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; provided, however, that, anything in this Agreement to the contrary notwithstanding, a Change in Control shall be deemed to have occurred if: (i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "Incumbent Directors"), cease for any reason to constitute a majority thereof; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Transaction"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company or other corporation resulting from such Transaction; (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; or 40 (v) there is a "change in control" or a "change in the effective control" of the Company within the meaning of Section 280G of the Code and the Regulations. "Change in Control Date" shall mean the earliest of (i) the date on which the Change in Control occurs, (ii) the date on which the Company executes an agreement, the consummation of which would result in the occurrence of a Change in Control, (iii) the date the Board approves a transaction or series of transactions, the consummation of which would result in a Change in Control and (iv) the date the Company fails to satisfy its obligations to have this agreement assumed by any successor to the Company in accordance with Section 7(a) of this Agreement. If the Change in Control Date occurs as a result of an agreement described in clause (ii) of the previous sentence or as a result of the approval of the Board described in clause (iii) of the previous sentence and the Change in Control to which such agreement or approval relates (the "Contemplated Change in Control") subsequently does not occur, then the Term shall expire on the sixtieth day (the "Reset Date") following the date the Board certifies by resolution duly adopted by three-fourths (3/4ths) of the Incumbent Directors then in office that the Contemplated Change in Control is not reasonably likely to occur; provided, however, that this sentence shall not apply if (A) an Involuntary Termination of your employment with the Company has occurred on and after the Change in Control Date and on or prior to the Reset Date or (B) the Contemplated Change in Control subsequently occurs within three months of the Reset Date. Following the Reset Date, the provisions of this Agreement shall remain in effect and a new Term shall commence upon the occurrence of a subsequent Change in Control Date. Notwithstanding the first sentence of this definition, if your employment with the Company terminates prior to the Change in Control Date and it is reasonably demonstrated that your termination of employment (i) was at the request of the third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then "Change in Control Date" shall mean the date immediately prior to the date of your termination of employment. "Change in Control Price" shall mean the "Change in Control Price" as defined in the applicable Equity Plan and determined by the Administrator as of the date of the Equity Plan Change in Control, whether or not the Administrator is required under the terms of the applicable Equity Plan to determine such price as of such date. "Combined Arrangements" shall mean this Agreement, the Retention Agreements entered into as of the date first set forth above between the Company and certain of its executive officers, any Retention Agreement entered into after the date hereof which is specifically designated by the terms thereof as one of the Combined Arrangements and the Supplement to the Severance Plan. "Combined Payments" shall mean the aggregate cash amount of (i) severance payments made to you under Section 3(a) of this Agreement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement, (ii) severance payments made under Sections 2(e) and 2(f) of the Supplement or the corresponding provisions of the applicable Combined Arrangement, (iii) Gross-Up Payments made to you under Section 6 of this Agreement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement, (iv) fees and expenses which are paid or reimbursed to you under Section 6 of this Agreement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement, (v) payments made to you under Section 5 of this Agreement or to any other employee or former employee under the corresponding provisions of the applicable Combined Arrangement and (vi) costs incurred by the Company in respect of any employee or former employee under Section 2(d) of the Supplement or the corresponding provisions of the applicable Combined Arrangement. 41 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "Common Stock" shall mean the common stock of the Company. "Disability" shall mean (i) your incapacity due to physical or mental illness which causes you to be absent from the full-time performance of your duties with the Company for six (6) consecutive months and (ii) your failure to return to full-time performance of your duties for the Company within thirty (30) days after written Notice of Termination due to Disability is given to you. Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. "ELTSOP" shall mean the Apple Computer, Inc. 1987 Executive Long Term Stock Option Plan, as amended, and any successor plan thereto. "Equity Awards" shall mean options, restricted stock, bonus stock or other grants or awards which consist of, or relate to, equity securities of the Company and which have been granted to you under the Equity Plans. For purposes of this Agreement, Equity Awards shall also include any securities acquired upon the exercise of an option, warrant or similar right that constitutes an Equity Award. "Equity Plan Change in Control" shall mean a change in control of the Company as defined in the applicable Equity Plan. "Equity Plans" shall mean the Stock Option Plan, the ELTSOP, and any other equity-based incentive plan or arrangement adopted by the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor provisions thereto. "Good Reason" shall mean a resignation of your employment during the Term as a result of any of the following: (i) A meaningful and detrimental alteration in your position, your titles, or the nature or status of your responsibilities (including your reporting responsibilities) from those in effect immediately prior to the Change in Control Date. For purposes of this clause (i), a meaningful and detrimental alteration shall exist if, on or after the Change in Control Date, without limitation, any of the following occurs: (A) at any time you do not hold the position of the senior most financial officer of the Company (or the surviving entity resulting from the merger or consolidation (through one or more related transactions) of the Company with another entity (the "Surviving Entity")); (B) at any time you do not hold the position of the senior most financial officer of any entity that beneficially owns a majority of the voting stock of the Company (or the Surviving Entity) or that has the power to elect a majority of the Board (or the board of directors of the Surviving Entity) (the "Controlling Entity"); (C) at any time you do not report directly to the chief executive officer of the Company (or the Surviving Entity) and to the chief executive officer of any Controlling Entity; (D) at any time you do not have regular direct access to the chief executive officer of the Company (or the Surviving Entity) and to the chief executive officer of any Controlling Entity or (E) any similar adverse change on or after the Change in Control Date in your title, position or reporting responsibilities; 42 (ii) A reduction by the Company in your annual base salary as in effect immediately prior to the Change in Control Date or as the same may be increased from time to time thereafter; a failure by the Company to increase your salary at a rate commensurate with that of other key executives of the Company; or a reduction in your target annual bonus (expressed as a percentage of base salary) below the target in effect for you prior to the Change in Control Date; (iii) The relocation of the office of the Company where you are employed immediately prior to the Change in Control Date (the "CIC Location") to a location which is more than fifty (50) miles away from the CIC Location or the Company's requiring you to be based more than fifty (50) miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with your customary business travel obligations in the ordinary course of business prior to the Change in Control Date); (iv) The failure by the Company to continue in effect any compensation plan in which you participated prior to the Change in Control Date or made available to you after the Change in Control Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change in Control, or the failure by the Company to continue your participation therein on at least as favorable a basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed on the Change in Control Date; (v) The failure by the Company to continue to provide you with benefits at least as favorable in the aggregate to those enjoyed by you under the Company's pension, savings, life insurance, medical, health and accident, disability, and fringe benefit plans and programs in which you were participating immediately prior to the Change in Control Date; or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control; (vi) The failure of the Company to obtain an agreement reasonably satisfactory to you from any successor to assume and agree to perform this Agreement, as contemplated in Section 7(a) hereof or, if the business for which your services are principally performed is sold at any time after a Change in Control, the failure of the Company to obtain such an agreement from the purchaser of such business; (vii) Any termination of your employment which is not effected pursuant to the terms of this Agreement; or (viii) A material breach by the Company of the provisions of this Agreement; provided, however, that an event described above in clause (i), (ii), (iv), (v) or (viii) shall not constitute Good Reason unless it is communicated by you to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to you (including full retroactive correction with respect to any monetary matter) within 10 days of the Company's receipt of such written notice from you. "Involuntary Termination" shall mean (i) your termination of employment by the Company and its subsidiaries during the Term other than for Cause or Disability or (ii) your resignation of employment with the Company and its subsidiaries during the Term for Good Reason. 43 "Limit" shall mean the dollar amount determined in accordance with the formula [A x B x C], where A equals 0.02; B equals the number of issued and outstanding shares of Common Stock of the Company immediately prior to the Change in Control Date; and C equals the greater of (i) (A) if the Common Stock is listed on any established stock exchange or national market system (including, without limitation, the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), the highest closing sale price (or closing bid price, if no sales are reported) of a share of Common Stock, or (B) if the Common Stock is regularly quoted on the NASDAQ System (but not on a national market system) or quoted by a recognized securities dealer but selling prices are not reported, the highest mean between the high and low asked prices for the Common Stock, in each case, on any day during the ninety-day period ending on the Change in Control Date, and (ii) the highest price paid or offered, as determined by the Accounting Firm, in any bona fide transaction or bona fide offer related to the Change in Control. "Payment" means (i) any amount due or paid to you under this Agreement, (ii) any amount that is due or paid to you under any plan, program or arrangement of the Company and its subsidiaries (including, without limitation, the Equity Plans) and (iii) any amount or benefit that is due or payable to you under this Agreement or under any plan, program or arrangement of the Company and its subsidiaries not otherwise covered under clause (i) or (ii) hereof which must reasonably be taken into account under Section 280G of the Code and the Regulations in determining the amount the "parachute payments" received by you, including, without limitation, any amounts which must be taken into account under the Code and Regulations as a result of (A) the acceleration of the vesting of any option, restricted stock or other equity award granted under the Equity Plans or otherwise, (B) the acceleration of the time at which any payment or benefit is receivable by you or (C) any contingent severance or other amounts that are payable to you. "Reference Bonus" shall mean the greater of (i) the target annual bonus applicable to you for the year in which your Involuntary Termination occurs and (ii) the highest target annual bonus applicable to you in any of the three years ending prior to the Change in Control Date. "Reference Salary" shall mean the greater of (i) the annual rate of your base salary from the Company and its subsidiaries in effect immediately prior to the date of your Involuntary Termination and (ii) the annual rate of your base salary from the Company in effect at any point during the three-year period ending on the Change in Control Date. "Regulations" shall mean the proposed, temporary and regulations under Section 280G of the Code or any successor provision thereto. "Severance Plan" means the Apple Computer, Inc. Executive Severance Plan, as amended. "Stock Option Plan" shall mean the Apple Computer, Inc. 1990 Stock Option Plan, as amended, and any successor plan thereto. 44 "Supplement" means the amendment to the Severance Plan adopted as of the date of this Agreement and any future amendment thereto. "Taxes" shall mean the federal, state and local income taxes to which you are subject at the time of determination, calculated on the basis of the highest marginal rates then in effect, plus any additional payroll or withholding taxes to which you are then subject. "Transaction Date" shall mean the date described in clause (i) of the definition of Change in Control Date. 9. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Board of Directors, Apple Computer, Inc., 1 Infinite Loop, M/S: 381, Cupertino, CA 95014, with a copy to the General Counsel of the Company, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10. Miscellaneous. (a) Amendments, Waivers, Etc. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof including, without limitation, the prior Retention Agreement between you and the Company; provided, however, that, except as expressly set forth herein, this Agreementshall not supersede the terms of Equity Awards previously granted to you. (b) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (c) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (d) No Contract of Employment. Nothing in this Agreement shall be construed as giving you any right to be retained in the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to the commencement of the Term hereof. (e) Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes. (f) Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. You will have no right, title or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the 45 Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (g) Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. (h) Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California applicable to contracts entered into and performed in such State. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, APPLE COMPUTER, INC. By: /S/ Gilbert F. Amelio Name: Gilbert F. Amelio Title: Chief Executive Officer Agreed to as of this 20th day of May, 1997 /s/ Fred Anderson Fred Anderson 46 EX-27 4 ART. 5 FDS FOR FY97 FORM 10-K WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000,000 6-MOS SEP-26-1997 JUN-27-1997 1,018 212 1,307 100 534 3,493 1,286 746 4,341 1,910 951 476 0 0 720 4,341 5,467 5,467 4,419 4,419 1,948 0 56 (884) 0 (884) 0 0 0 (884) (7.04) (7.04) 47 -----END PRIVACY-ENHANCED MESSAGE-----